October 2015 Questions & Answers

 


K Wrote:  I have recently bought a house and maxed out my RRSP savings to do so. I know that I have a year before having to start paying back. Would you save and sink all your RRSP funds into the repayment - getting rid of it ASAP, or would you split the money into repayment and savings? 

Gail Says:  You should NOT sacrifice current contributions to your RRSP for the sake of getting that home buyers' plan loan paid back faster. Make your 1/15 repayment each year and use the rest of the money to make a regular contribution. You can use your tax savings to a) boost next year's RSP contribution, b) pay down your mortgage, c) make a TFSA contribution. Just do something useful with it.

 

M Wrote:  I have many questions about insurance:

  • Can you explain what a whole life policy is?
  • Is it a good investment?
  • Is a term policy better?
  • Do I need a term life policy in addition to mortgage insurance?
  • Or should we have a term life policy on each other (hubby and myself) which would cover the outstanding amount on the mortgage?

Thanks in advance.  And thanks to you, I understand money and debt and am hoping you can explain insurance in your easy-to-understand way!

Gail Says:  Term insurance provides protection for a predetermined period of time (perhaps 5, 10, or 20 years) or until a certain age. If you’re looking for longer-term protection, term insurance won’t cut it. When the term of the contract expires your coverage ends unless you renew the term. Each time the term is renewed, the premium is adjusted upwards.

Think of term insurance as an expense, like rent. While it will give you comfort and peace of mind, it accumulates no residual value. If you want coverage to last your lifetime or want to use insurance to build assets, term insurance isn’t the right choice.

Whole life and universal life insurance are permanent, remaining in place until death. The premium is generally the same for the life of the policy, so the annual cost can be low if taken early in life (when the risk of death is low), or very high if taken late in life. If term insurance is rent, then permanent insurance is a mortgage payment; in the early years there isn’t a lot of asset accumulation, but over the long term the pot will grow nicely.

When you compare term insurance with permanent on a dollar-for-dollar basis at any age, term is cheaper than permanent insurance, but that’s because the statistics are in favour of the insurance company with term insurance. With permanent insurance the company is going to have to pay out, it’s only a matter of when.  So the trick is to buy your permanent insurance when you're young and healthy and the premiums are lower.

Private insurance -- permanent or term -- is way better than mortgage life insurance. If you go with term, make sure the policy will live as long as the mortgage. And a private term policy will likely cost you 1/3 of what you're paying for mortgage life insurance, which BTW isn't guaranteed to pay out since they don't underwrite until you make a claim (at which time you may be SOL if they uncover something that let's them welch!)

 

H Wrote:  I am a woman in my early 30’s who is in a relationship with a man in his late 30’s. I consider myself to be very financially responsible and while my partner, in the past was a spendthrift, he now has a handle on his finances and his only debt is a student loan which he is currently paying off.

The problem is that my partner's parents are complete money morons. They are in their mid to late 60s, have gone bankrupt twice, and still continue to live well beyond their means. They themselves do not seem to care about this situation-the level of denial is unbelievable. I think that they believe that they will work until the day that they die.

My partner and I do not have the funds to be helping his parents out financially, nor do I believe that it is our responsibility to pay for the financial idiocy of others.

My partner is a wonderful man and I love him dearly but I am afraid that in the future, that we will be forced to make the hard decisions that his parents are incapable of making and may have to pay bills and potentially shelter them. What to do?

Gail Says:  You and your husband had best have this conversation NOW before the story unfolds so you both know where you stand. I get that children think they are responsible for their parents, but I don't believe it's true for parents who have wasted resources in the belief that their children will "take care of them."

You might want to sit down with your husband's parents and have a conversation making it very clear that you're ready, willing and able to help them create their own healthy future, but you're in no way going to step in to "save them" later. Get it on the table now. Make it clear where you stand. Then there can be no discussion down the road of borrowing or bale-outs.

I'm sorry this is your reality. Your husband has clearly made great strides and is to be congratulated for overcoming his history. Having learned the lessons, this must be very distressing for him to watch. Have a chat with your in-laws and see if they can appreciate how their behaviour is impacting their son in terms of his concern and stress.

 

A Wrote:  I set up automatic payments with all of my bills every month and never have a problem. I sometimes also set up payments to come out automatically in addition to those mentioned above (like credit cards because there isn't a consistent balance) I have never missed a payment on anything in my life. I also transfer the "savings" I have at the end of each month from my chequing to savings accounts.

Twice in the last three months something has gone wrong with my PC account where a payment was scheduled but PC charged me an NSF fee because something went wrong (obviously a lack of funds to be NSF) but the problem was in the technology, because the money was always there, it just didn't transfer properly. Once was a contribution to my RRSP and the other was a credit card payment that was cancelled because I wanted to pay it three days later but the first payment went through somehow which resulted in an NSF. I paid that bill three days later, before it was due.

Both times PC financial refunded my NSF fee because something went wrong on their end. Because they refunded it does this now mean that the NSF code has been removed from my credit history? I am wondering what affect these two NSFs have had on my credit rating, if any affect at all, since they were both refunded.

Gail Says:  You should get a copy of your credit history to see if the NSF was reported and then fixed on your credit report. Send a written request to one of the two major credit bureaus in Canada: Equifax Canada Inc. or Trans Union of Canada Inc. More information can be found online at www.equifax.ca and www.transunion.ca. There is no charge for this service if you ask for your record by mail. If you’re into instant gratification, you’ll have to pay a fee.

BTW why are you still banking with PC financial if they keep screwing up your money management? Don't you get tired of the mix-ups? Is "free" keeping you there?

 

S Wrote:  I've written to you before and I enjoy watching your career continue to blossom on TV! Since then, we're debt free (posted a success post), we have 20K emergency fund, I'm saving for my degree tuition (yep, going back to school), and we have a 7 month old baby! All on cash!!! I bought your Money Rules book which ended up being a huge assignment with Excel sheets +++ and I'm only on rule #15!

Here's my new situation. There's an expectation that when grandma dies, we'll look after my mother-in-law. We're the responsible ones in the family. My mother-in-law is 57 and a Princess (since you did the show!). She's addicted to pills for 25+ yrs and uses any and all ailments to prevent working, cleaning, cooking and yes, her mother enables her by letting her live with her and cleaning her room, cooking and paying everything for her. But grandma refuses to turn her back on her daughter or talk about a will or do a will. She’s petrified of dying. I've sent her links and links on wills, creating a trust (which would be ideal since her daughter burns through money).

So I used to get really upset at this expectation but now I'm wondering what I can do to be pro-active and mitigate the situation. My husband says, we'll look after her but not in the way she expects us to (e.g. send her money) but doesn't know how that will play out. Can you help me with this? I don't want to die of stress and I don't want to expose my son to this toxic situation.

Thanks Gail, you rock, glad I tuned into your show 6 yrs ago!

Gail Says:  You're going to have to convince your grandma to make a will. Point out to her that if she dies without a will her daughter will not be protected. Only by making a willing and taking the right steps can she be sure her daughter doesn't end up destitute. You're right; she needs to set up a trust for her. Make it clear that while your mother-in-law can count on you for some -- and that's just some -- financial support, she may not live with you. And that financial support may be in the form of bill payment, but it will not be cash or money directly in her hands so grandma had best take steps to protect her Princess's independence.

Failing that, tell your mother-in-law that while you love and would never want to see her destitute, you're not prepared to put your own family at risk (or see your children go without) for her sake. As an adult woman, she must be responsible for herself. If she cannot be, then she best make sure her mom has set her up so she doesn't end up without a penny to her name.

If your grandmother ends up dying without a will, her estate will be divided equally amongst her children. If one of her children has died, but has children, those grands will get that parent's share. But dying without a will is a tiresome process and can take months if not years to settle. So unless grandma wants her daughter to have NO MONEY at all, while the estate is being settled, she'd best make a will PDQ.

 

J Wrote:  We're almost there Gail and I blame you! Or rather I say THANK YOU!  My spouse and I had dug a deep hole of debt and after 2 years of buckling down we're 3 months away from being debt free! We've been putting approx $1000-$2000 dollars a month on the debt and it's not been too much of a struggle, just had to sacrifice a few things that we didn't need anyway. Your advice has really helped us!

We both have ample RRSP and TFSA room which I plan to start filling up once the debt is gone. My employer offers a DC plan, I put 11% in and they give 7%. They also offer a Share purchase plan (non registered) that I can contribute up to 10% of my income with a 10% discount (match) from the employer, each share pays $0.6 in dividends monthly and are reinvested into the plan, current share price today is $14.66, it's been going up and down since I started but not dramatically, my vested value has always been much higher than the book value. I am maxing out my DC contributions to get the max amount from my employer and putting 5% into the SPP, once the debt is completely gone I'm considering moving that 5% to the max 10%, The 10% discount is free money, it doesn't make sense not to, right? I've been able to make all the contributions (16% of my income) whilst still paying down the debt by $1000-$2000 per month
Unfortunately my spouse’s employer does not offer a pension plan.

We are DINKS - Double Income No Kids - and plan to stay that way. I'm a couple days shy of 37 and my spouse turned 40 a couple months ago. We live in Toronto and make a combined gross income of $78,000. We do not own property and have no plans to ever own, at least not in Toronto. I would like to retire at 55.  My spouse is content to work till at least 65 if not longer depending on his career path.  He may want to open his own business one day. My goal is $1,000,000 once we have that much saved I'm allowing myself to retire.

My real question to you is how should we invest the approx $1000-$2000 monthly that we will have free once the debt is gone? I'm content to have the funds in a higher risk investment till I'm 45ish, this is how I have my DC plan set up right now and it's growing nicely. The employer 7% match I get is set up as risky as it can be and half of my 11% is going into risky the other half not as risky. Can you give me some investment tips? Maybe some good funds? Or should we go the stock route and live off the dividends in our golden years? What does your portfolio look like?

Gail Says:  I am SO glad to hear you are doing so well and that you've come to grips with the debt. It's great that you're almost debt free. You say you're taking advantage of your company pension plan and that's great. Do you also have an emergency fund set up? That should be part of your plan. And since your husband does not have a company pension plan an RRSP is a good idea for him to save for retirement. Since you are getting a 100% match on your company stock, it is a great idea. But be careful of becoming overweighed in that single asset. If you have the option of cashing out the vested stock from time to time you should consider reducing your exposure and rebalancing your overall investment portfolio.

I do not make investment recommendations. I have a broker who advises me on the markets (I don't have the time to stay that close to what's going on). And you can't use my portfolio as a guide for yours. You are much younger with a longer term investment horizon. I am in my capital preservation stage so I use things like preferred shares which do not grow dramatically but offer steady income.

My only caution as you're investing is to make sure you understand what you're buying so you're prepared for any ups and downs.

 

J Wrote:  I am fortunate enough to have a fabulous husband who is a fantastic father and likes to save money like myself, we are both 30. I am lucky to have a job that provides a defined benefit pension that will replace 70 percent of my ending salary. I max out my TFSA as well. My husband maxes out his TFSA each year and puts away between 10 and 12 percent of his gross income into an RRSP. We have no debt and our mortgage will be paid off in 4 years. My question is should we be contributing more? My thought has been not to put anything into my personal RRSP as it just creates a tax liability when I retire and my pension will be a significant amount. Is it better to contribute our extras at the end of the year to a non-registered account in my name? Or should the extra go into my husband's RRSP?

Gail Says:  Wow, look how strong your personal economy is! Well done. You don't mention if you have an emergency fund. If you have money designated for emergencies, great, if not, I'd get busy building up a stash of cash just in case. You're right to use the TFSA to supplement your DBP, that's a good strategy. You could build a non-registered investment portfolio if you want to keep building assets. Alternatively, you could assume a larger share of the household costs so your husband has more money to max out his RRSP/TFSA. You're doing well in the savings department and in eliminating your debt. Please also make sure you've covered your risks: emergencies, life and disability insurance.

 

J Wrote:  A few months ago you talked about why it is not a good idea to have mortgage insurance and I tried to Google it, but it will not open. Could you send me the article?

Gail Says:  Mortgage life insurance: If you have a mortgage you’ve no doubt been offered mortgage life insurance by your lender. Don’t buy it. It’s expensive. It’s single-purpose. And it can be denied down the road, since it isn’t “approved” until you try to make a claim, which is not when you want to find out you aren’t covered.

Instead, make sure you take your mortgage balance into account when you’re buying your regular life insurance. If you don’t have enough life insurance to take care of your new whopper of a mortgage, look into term insurance, as opposed to buying the dumb policy your lender is offering you.  Ditto creditor insurance.