August 2015 Questions & Answers
- So my question is, is it better to buy a house and build equity, or is it better to put what we're not spending on a house into a TFSA and RRSP?
- How does one go about setting one up a trust fund for a third party and what information/consideration are needed when setting one up? Taxes?
- Not having training in finances I've never been that sure how best to proceed. I was so happy to discover your TV shows and your website.
- I am about to come into some money from my grandparents, and my family is pressuring me to buy a house. I don't understand the reasoning behind why this is a good idea.
- She has not paid rent in over 3 years and just spends her money on make up and crap! In those 3 years she had her salary plus $10,000 twice and pissed it all away! She needs a wake up call!!!!
- If I contribute big bucks to this (his) home and any of my 'what if's' come true-I'll be up a creek with no money to get anywhere! How do I protect myself financially without coming across as though I don't want to contribute to our future?
- I have the worst credit ever. Would it be better for my credit rating to make the payments on time for the next year, or to pay it in full now? What else can I do to build it?
- I am wondering if I should establish an emergency fund for my Mother. I believe an emergency fund is primarily to cover expenses in the event of a total or partial loss of income. This should never be an issue for my mother....
A Wrote: My husband is dead set on owning a house (Condo is not an option for him, it has to be a house), but with maintenance, property tax, and utilities on top of mortgage payments, I just don't think that's realistic in Toronto, with what we make now (Just under 70k net). And moving away from the city really isn't an option, since I don't drive, and buying a cheaper house outside Toronto means we'd be spending $500+ a month extra on a second car, which kinda cancels out any money we'd save by leaving the city.
My husband seems to be obsessed with building equity, and sees not owning a house as a failure. I think that continuing to rent (We currently spend less than 25% of our income on rent) and putting what we're not spending on property tax, utilities, and maintenance in a TFSA is a much better alternative to building equity in a house we can't afford.
So my question is, is it better to buy a house and build equity, or is it better to put what we're not spending on a house into a TFSA and RRSP?
Gail Says: Putting what we're not spending on a house into a TFSA and RRSP is a great way to build assets. You don't need to own real estate to accumulate a positive and strong net worth. But rather than talking about this theoretically with our mate I suggest you do the actual math and show him how much of your income would be going to home ownership. So ask him to pick a house he thinks you could afford from the MLS listings. Then:
1. Work out what the mortgage payment would be using an online mortgage calculator
2. Using the listing, budget in how much you'll have to set aside a month for property taxes
3. Then there are utilities: heating, hydro, water/sewer tax; figure out a monthly amount
4. Don't forget about home insurance, ask family/friends what they pay for similar home in similar area
5. Add in some money for maintenance; I recommend 3% of the house value (from insurance) but feel free to start with as little as $300 a month for your calculation
6. Add it all up
7. Can you actually afford it? What % of your income is your shelter eating up? Will you have money for the other things you want to do in your life?
L Wrote: OK Gail, I think I did this right. I searched through all the blogs and the site. I've also found very little info online about this. I think this is a new one and I'm desperate for your advice. It's also kind of your fault: Thanks to your advice my wife and I are now in a situation where we can "give back" whenever we see a valid need, this often makes us feel good, though this particular situation has hit hard and close to home.
Last month a colleague I went to grad school with passed away after his battle with cancer took a turn for the worse. Like me he's a young guy, recently married and a new dad. He was still studying when he passed away. His wife is also a grad student at another institution; we've only met a few times.
Most grad students I know don’t carry much (if any) life insurance, and pre-existing conditions are often disqualifying for such plans. Some of us would like to anonymously set up and contribute to a small account for his wife and young son, to draw upon as she sees fit. Would this still be called a trust fund? How does one go about setting one up for a third party and what information/consideration are needed when setting one up? Taxes? I want to do all my homework and make this account easily accessible for both those who want to contribute and for his wife. The last thing I want is to have to pester her repeatedly for information at a very difficult time.
Gail Says: I'm sorry to hear about the death of your friend and the family he has left behind. To create a formal trust fund will likely cost more than you want to spend.
I suggest that if all you want to do is help and she's going to use the money as she wishes anyway without restrictions no trust is really necessary. If you are the point guy together you can set up a high-interest savings account in her name to which you make the deposits and she has the control. Or you could set up an account in your name, to which everyone can make their contributions as they wish, and then you could simply mail her a cheque or bank draft once a quarter. You are a kind man. I'm glad you've found a meaningful way to give back.
J Wrote: This is not a question but a thank you for all the information you provide! I work as a couple’s psychotherapist and money is an issue that I like to address with couples as it is so fundamental. However, not having training in finances I've never been that sure how best to proceed. I was so happy to discover your TV shows and your website. I have been referring people to your show and to the worksheets and articles on your website. What a great learning opportunity for both myself and my clients.
Gail Says: Thanks hon, it's wonderful to hear that the tools are helping.
J Wrote: I have written to you before and you have been very helpful. I changed my life using your books and TV shows and now I have another question. I am about to come into some money from my grandparents, and my family is pressuring me to buy a house. I don't understand the reasoning behind why this is a good idea. In a perfect economy where I could afford both a house and savings, maybe, but I live in Toronto and the market is crazy here. It seems like most people have the house OR the retirement account but not both. My sister-in-law has a house and spends every dime on it; she has no free money to travel (as we do, putting $50 a month into a jar and saving up for it) and no free money to indulge in hobbies or go to restaurants (as we do) and is not putting into an RRSP. But she keeps saying it's all okay because when she retires, she will sell the house, have a big chunk of money and be just grand.
But meanwhile, we are both putting money into our retirement savings. So she will retire after a life of relative poverty, sell her house, have a big chunk of money and then have to pay rent and budget the rest of it. We will retire after a life of relative comfort and predictability as renters, not have a house to sell but get a big chunk of money when we cash in the RRSPs, have to pay rent (as we have been all along, but anyway) and budget the rest of it. I really don't understand how she is coming out ahead. What am I missing here?
Gail Says: You're a smart chick. Don't let anyone push you around. The "Home Ownership Dream" has turned into a delusional action for many. If you're happy doing what you're doing, invest your money and have a great life.
A Wrote: I am 37 and doing kinda fine. It’s my 31 year old sister I am worried about. She has just recently moved in with me rent free. She makes $1345 bi-weekly. She is always broke. I agreed to her living with me as long as she gets out of debt. $13,000 line of credit, $4,000 on her car, and like $2000 outstanding bills. She just told me last night she is going to consolidate her debt for a monthly payment of $500 or so a month to pay it back. I got quite agitated that she can’t do this on her own and pay $1345 to debt every month and forget about a third party because she can do this on her own. I don't want her living with me forever. She has not paid rent in over 3 years and just spends her money on make up and crap! In those 3 years she had her salary plus $10,000 twice and pissed it all away! She needs a wake up call!!!! Please let me know if she should consolidate or just suck it up like a big girl and get out of debt on her own. I think it will teach her better how to control and appreciate her money...please help desperately seeking something to tell her!
Gail Says: I get quite a few letters like yours. It's sad when you try to help someone you love and they take advantage of your good nature. You have turned from "helping" to "enabling" and only you can take the steps to fix this problem. This will not be easy.
Sit down with your sister and make it clear that:
a) she will focus all her money (less 10% for her pocket) on debt repayment, or
b) she will start paying rent at $1076 a month to cover her share of housing, utilities and food, or
c) she'll find somewhere else to live.
Give her one week to make her decision. If she chooses A or B it begins immediately and to prove A she must show you her repayment to her debt every time month. If she fails to make the repayment without a rock-solid reason, she has 30 days' notice to find a new place to live. If she chooses C she has 30 days to find a new place to live.
I know you love your sister and you're trying to help. If she follows plan A she'll be out of debt in less than 8 months. It'll be tough, but it'll be done. And she'll have learned to make careful choices since she'll only have about $270 a month to spend on her "wants" … remember, all her "needs" are being dealt with (or you'll adjust what she's giving you to reflect any needs I may not know about.) As long as you keep on "letting" her take advantage of you, she will.
M Wrote: My common-law partner and I live in his 40 year old bungalow. Although I pay half the bills each month my name in not on the mortgage, title etc. The house needs several thousands in updates (finish a basement, new windows, bathroom and kitchen).
I'm 32, have recently doubled my annual income, and am in the process of paying off all my debt this year, and really do want to contribute to updating our living space. However, my concern is the "what if":
What if we break-up? What if he dies? What if we sell the house?
If I contribute big bucks to this (his) home and any of my 'what if's' come true-I'll be up a creek with no money to get anywhere! How do I protect myself financially without coming across as though I don't want to contribute to our future?
Gail Says: A lot of people do not realize that common-law is not the same as married everywhere in Canada except BC where they've brought in new laws to protect common-law partners in the event of relationship breakdown. It's fine that you pay half the bills; you'd have to put a roof over your head somewhere, and if you were renting you wouldn't see a penny of that money back, right?
But when it comes to putting big bucks into a property that is not yours, you are very smart to think twice. You could solve the problem by adding your name to the title of the home. Or you could get your partner to sign a promissory note (make sure you both have independent legal advice so it holds up in court) for any amounts you "put into" his home. That way, if the relationship ends, the home is sold or he dies, you have recourse to recover your money. If you want that "investment" in his home to grow, you would add an interest rate that reflects current lending rates to the promissory note.
L Wrote: I have the worst credit ever. Honestly. I am trying to turn it around and we have a 3 year plan to get out of debt for everything but our mortgage. We are using a snowball plan. I have 2 credit cards that I am planning to pay off. On the first card I have a balance of $1200 with a 27.99% APR. This card has been closed for many years and I have just been paying the minimum. On my new plan, I will be paying $115 per month on it which will pay it off in a year. I will be getting a tax return this year that will cover the whole amount if I choose to pay it. Here is my question: would it be better for my credit rating to make the payments on time for the next year, or to pay it in full now? What else can I do to build it?
Gail Says: This is a perfect example of focusing on wrong thing. You already have crappy credit, and you're adding the pain of a 28% interest rate. Of course you should use your refund to pay off the credit card balance and get rid of the 28% albatross! I have articles/blogs on my website dealing with rebuilding your credit. Go read 'em.
K Wrote: After my dad passed away last year, I've taken over primary management of my mother's finances. My dad always managed the money but slowly I am teaching my mom how to budget, pay her bills and otherwise manage her money.
She is on a fixed income (her portion of my dad's teacher's pension + government benefits). She also has a paid off home, and some investments. I am wondering if I should establish an emergency fund for her. I believe an emergency fund is primarily to cover expenses in the event of a total or partial loss of income. This should never be an issue for my mother. On the other hand, it's possible she will run into a situation where the fridge breaks down and without some sort of liquid savings, she'd have to cash in investments to pay for it.
Gail Says: Clearly your mom does not need the emergency fund we traditionally talk about now that she's retired on a fixed income. But as you rightly point out, things pop up. I suggest a curveball account - a high interest savings account- for just such expenses. You'll have to decide how much is enough? I'd recommend about $3,000 if she can afford that. If not, then work with what you have.