September 2015 Questions & Answers

 


A Wrote:  My stepmother is 62, recently divorced and on long term disability. The company paying her disability has sent her paperwork to apply for CPP. Is this a good idea for her? 
 
Gail Says:  No, by applying for CPP early, she will reduce the benefits she gets. When she does get CPP, the insurance company can reduce the amount they pay her by a similar amount, but they'll stop completely at some point (65 I think, but you have to check her contract) at which point, having taken CPP early she may get far less money to live on.

 

H Wrote:  This both a question and a success post.

After seeing your show Til Debt Do Us Part, I bought a couple of your books and switched our finances to match your suggestions. Now we currently do not carry any consumer debt. When we do purchase something on a credit card (major purchases we have saved for) we pay the balance by the end of the month. The jar system has worked miracles for our finances (as well as my wife and my relationship.)  It has been a long process, but ultimately worthwhile. We work much better as a team on financial matters now. The emergency fund and savings were instrumental when my son was born. He required 2 months of hospitalization and due to the savings and emergency fund my wife and I were able to be there every day for him. (Thank you so much for that). Now we have rebuilt the emergency fund and are looking forward to the future. The only negative was when we reviewed our expenses and decided cable was not a necessity, and after it was removed we could no longer watch your show.

I have two questions I could not find answers to in your book. I am reviewing our long term finances and this is where my fist question comes from. I am in a pension plan matched by my employer. I contribute 9% and my employer matches the contribution. How does this work into the 10% saving you suggest for savings. We do save money, about 7% of our income (split between vacation, the kid’s university fund and home improvement fund). We were previously using the 15% debt repayment to rebuild our emergency fund. Now I was thinking to use the 15% debt repayment to pay off our truck and then roll it over into extra mortgage payments. My wife would like to leave the payments alone and split it between extra retirement savings and add a bit extra to our life spending as it currently sits lower than the 25%. As we always do when we have a budget impasse we review the books and your website. We couldn't find anything on whether or not the pension plan should or should not be included in savings calculations. So in your opinion is it better to build additional retirement savings or payoff debts such as trucks and mortgage? Does the 18% put into my pension plan play any part in the savings calculations?

Question 2.
This is more of a curiosity question as you have stated in books and on the show if you are over somewhere you make it up else where. (We do that by having lower housing and life categories).  Living in more rural area my transportation costs are much higher than the 15% suggest by the books. In addition I have a disabled son who requires weekly (quite often more if he has specialist appointments) appointments 1.5 hrs away. I currently have a truck payment, 2 insurance payments (2 trucks). We currently spend $700 a month on fuel; $400 a month for medical. Is it acceptable to consider some of the transportation costs as medical expenses?

Your show and books have helped me be there for my son (I wouldn't have been able to afford it prior to getting the finances in order) and probably have something to with my wife and still being married (we haven't had a money fight in years).

Gail Says:  I'm going to deal with Q2 first. Did you know that if you have to travel at least 40 kilometers (one way) from your home to obtain medical services, you may be able to claim the expenses you paid as medical expenses? And if you had to travel at least 80 kilometers (one way) from your home to obtain medical services, you may be able to claim accommodation, meal, and parking expenses in addition to your transportation expenses as medical expenses. To claim transportation and travel expenses, the following conditions must be met:

  • equivalent medical services aren't available near your home;
  • you took a direct travelling route; and
  • it is reasonable, under the circumstances, for you to have travelled to that place for those medical services.

 

That being said, when it comes to putting it on your budget, it goes under transportation. Don't worry about being over the 15% recommended; the point is for the budget to balance, not to stay strictly inside the percentages.

Now Q1. Your company plan means you're saving 18%, which is great. You don't say if your wife also has a plan, but between the two of you, you should be saving about 20% (if you're in your 30’s). If your wife is not working, you're doing fine.

Vacation money set aside isn't savings, its planned spending. Saving is money for the long-term. But you're doing pretty well; just don't call it "savings." The fact that you've built up an emergency fund is terrific.

You don't say what the interest rate is on your truck, and since your transportation costs are high, if the interest rate is over 3 or 4% I'd focus on getting rid of this debt. Don't worry about the mortgage, as long as you're debt-free by retirement, you'll be fine.

Have you applied for the disability tax credit for your son? And have you considered opening a RDSP (registered disability savings plan) for him. I'd suggest you look into that too. 

 

M Wrote:  I was watching a "Til Debt Do Us Part" show today and saw a pie chart come up. It recommended allocating 10% of income to savings and 15% of income to debt repayment. We manage to save $12000 a year and put it into RRSPs. We have no debt other than a car loan of $30,000 at 2% interest and our mortgage of $300,000 split between two interest rates of 2.25% variable and 3.95% fixed. What should we do with our extra cash? Lets say an extra $10000. Pay down the mortgage or put more into savings? Our financial advisor says hands down RRSP due to our tax bracket and the low interest rate of the mortgage. But I would love to see our mortgage go down (we still have 20 years left on it). Here's some extra info. We are in our early 30's and have two sons aged 6 and 7 and aren't planning to have anymore kids. I am a stay at home mom and my husband makes $90,000/year but has no company pension or benefits. We have an RRSP of mutual funds worth around $110,000.

Gail Says:  What are you currently doing, the tax savings you're getting from your RRSP contributions? And what would you do with the tax savings on the additional $10,000 you might save? And are you currently setting aside money of the kids using an RESP to grab the free grant money available?

If you use your tax savings to pay down your mortgage you achieve both ends, right? You save for the future and you eat away at the mortgage. With the time you have until retirement if you stay the course you will be mortgage free before you retire, which is the goal. In the mean time, you can build a healthy nest egg for the future. And since neither you nor your husband will have a pension, you will need those savings.

 

L Wrote:  My fiancé and I are late 20's and make 120k combined. We have no debt as our education was paid for and we were both given cars as gifts. We currently pay $1750/month in rent for a beautiful condo, and with all of our expenses we are able to put away $2000 per month in savings. We are planning to save for a down payment and will have to do it ourselves so we know we will have to save somewhere between 60-80k depending on how much we want to put down (5-20%), and figure this will take about 3-5 years. My question is: how beneficial is it really to enter the real estate market today? Prices are as inflated as ever, and if we want to even consider being able to afford a townhouse one day we will have to move far away from our families, friends, jobs, and the lifestyle we love. On top of that, there are constant maintenance and repairs that need to be done to a house (let alone furnishing it), plus the amount you pay in interest over the years that doesn't even go towards paying down the house. We just feel that we are able to live without compromising our overall lifestyle and are still able to save significant amounts by renting, so I feel that there is no rush to buy. Still, I have that nagging thought that real estate is an "investment", but I know that by buying a house we would be putting more money down the drain that we would never see again, and likely be totally house poor with no room for lifestyle, savings, or travel. I feel like I answered my own question while writing this, however I would love to hear your thoughts on this topic.

Gail Says:  What you're talking about is "opportunity cost." You're trying to balance the potential upside of real estate -- the opportunity for your investment to grow -- with the downside of a correction in the markets (and the subsequent loss of assets). It's a tough call.

First, you should not go into the markets with less than 20% down. If you can't save enough for a healthy downpayment that side-steps CMHC insurance, you're not ready.

Second, if you're buying for the long term, it doesn't matter when you get into the markets (as long as YOU are ready) since over time things will go up and down and up again. But home ownership isn't a short-term decision, so you buy and plan to stay put.

If you are happy living your current lifestyle why screw it up? Sock away your savings. If you decide to buy down the road, you'll have a healthy downpayment. If you decide you like the renter's lifestyle better, you'll have a whack of money to put into investing to grow your assets (as you would if your home were appreciating.) Either way you win.

Take it slowly. Don't do anything you don't want to because of all the blah-blah-blah you hear. Stay sensible.

 

M Wrote:  I've fallen off the spending wagon and am having trouble writing down my purchases again. Where do you start if you've messed up your spending plan?

Gail Says:  People beat themselves up far too much for falling off track. The mistake isn't falling off; it's not getting back on. So I applaud you for recognizing your misstep and wanting to returns to the path.

It's almost March. Turn to a new page in your spending journal on March 1. Put your bank balance at the top of the page and go from there. As for your budget, since you've fallen off track, I suggest you enter your spending journal entries against your budget at the end of each week to make sure you're staying on track.

 

S Wrote:  My husband and I run a small business that is a sole proprietorship that is only in his name. All drawings from the business are done in his name and I do not take any form of pay for the work that I do (invoicing, payroll, banking, etc.). I do have signing authority on all accounts and money isn't the issue but I am wondering if it would be in my best interest to take some sort of pay each week. I would then have to pay CPP and WSIB on my earnings and I'm wondering if it would be worth it.

Gail Says:  Your accountant should be advising you on this. This is not a theoretical exercise; you have to crunch the numbers. Splitting the income between you both could reduce your tax rate but would incur costs, as you mention, so you have to do the math.

 

T Wrote:  I have always been a fan of your shows they are very helpful but I am very stressed out. My husband and I have bought a house in 2011 and from 2011 until today, we have gotten married, had a baby and I am now expecting again in mid July. This of course, was never our plan to move this fast but things happen and we dealt with it the best we could. My husband is an electrician so we deal with a lot of lay off's at times but unfortunately for us, we do not have any savings or RRSP's/investments. He purchased a new car back in 2012 which has helped with gas consumption for his daily long commute but it came at a pretty penny. We got a consolidation loan but since then have racked up the credits cards (I wish he would have listened and cut them up as I had just finished paying a $10,000.00 consolidation loan when we got the new loan) we now owe around $33,000.00 just in credit cards and 1 loan. I feel like I am at my breaking point and feel lost. I have missed payments and so has he. I just want the best advice. I know things will be more difficult with 2 kids come July.

Gail Says:  It sounds to me like you're flying by the seat of your pants. You need to slow down, take two deep breaths and put some process in your money and you life. Your first step is to figure out where all your money has been going. Don't say, "I know" unless you've done a six month spending analysis. One you know your monthly spending average by category, your second step is to throw all those numbers on a budget and compare what you've been spending with what you've been making. Then you have to balance the two.

As for your partner's layoffs, you know this is going to happen; it's the name of his game. So you need to set some money aside in good months to deal with the drier months.

As for a home, new car and two babies in less than 3 years, girlfriend, it's no wonder you're feeling stressed. Might I suggest that these things didn't just "happen?" Every action has a consequence. Every choice leads down a particular road. If you're feeling battered by the winds of life, you have to decide if you want to continue to be at the whim of whatever comes next, or if you want to strap down and take control.

 

I Wrote:  My father is retired, living on pension income, and has made some bad financial choices over the years. I'm trying to help him sort them out now. About 3 years ago he put around $40,000 on a line of credit he couldn’t afford to pay back. As far as I understand, the bank hounded him for payments, and then sent the account on to a collection agency. The collection agency eventually stopped calling him, and he says he hasn't heard anything about this debt for over a year. He said the last time they spoke; they told him they would settle for $10,000 of it. I don't know the interest rate on this account but I think it's between 5 and 10%.

He has a functioning bank account and in the short term everything is normal, but I am worried about that debt. What are the implications if he (a) doesn't do anything about it at all, (b) calls them and tries to set up a payment plan?

Some possibly relevant factors: (a) he has enough income to make regular payments of maybe $500/mo, (b) he may wish to sell his house & move at some point in the next 5 years, (c) he is not in good health and if it continues to deteriorate he may need health workers, or to move into some sort of assisted living, over a 5-10 year horizon (d) we (my wife and I) should be able to help him with payments if he does decide to pay.

Gail Says:  I am getting letters like yours more and more often as adult children come to the point where they must get involved in their parents' financial affairs.

First, if he's gone to collections his credit history is already in ruins. It sounds like the account couldn't be collected and they're not sure what to do next. I'd wait for the next call and then offer $7,500 to settle the debt. If they agree, get their agreement in writing before you send a penny. Keep in mind that "debt" cannot be inherited. If your father dies in debt, those debts will be paid out of his estate. If there is not enough money to pay the debt, the lender has to eat the loss.

You don't say whether your father has any equity in his home. If he does, then you'll want him to gift you some money to a) get it out of his hands before you seek an assisted living situation since his income/assets may affect his ability/cost to get into a space and b) have it available to use by you for his care. I would not recommend this willy-nilly since some children can be quite selfish, but if your intention is to help him with payments anyway; getting that money to you for his future needs may be a good thing.

There is no gift tax in Canada if your father wants to give you a gift of cash (as per Revenue Canada Agency Miscellaneous Receipts NO: IT-334R2 section 4)  so amounts received as gifts, are not subject to tax in your hands (as long as you're not a spouse or a minor child).

Okay, onto the care issues. Provincial governments provide in-home care through a regional health agency like the “health authorities” in B.C. or “community care access centers” in Ontario. You’ll need a referral from his doctor or you can contact your local health agency directly. They’ll send a case manager to assess your father’s needs but you shouldn’t expect more than 2 hrs a day in help. If you intend to pay for a personal care worker for your dad, it’ll cost you $20-$28/hr if you go through an agency. Full-time help can $1,800-$3,000/mo plus room & board (or add another $1,500 to $2,000 a month if you don’t provide room & board.) These costs will add up fast, so make sure you’re prepared before you take this route.

If your father agrees to sell and move, then you’re looking at a retirement home. He can have his own space but will share meals, housekeeping help and social activities with other residents. Costs associated with “assisted living” help – help with bathing, taking medicine and the like – are substantially higher. Private retirement/assisted living resources can run from about $1,800-$7000 a month. The difference in cost is the difference in facilities, location and services provided. Publicly subsidized assisted living services are charged based on income and vary by province. For those whom the rate would cause serious financial hardship, reduced rates are possible.

Since facilities and costs vary dramatically from region to region (even within a province) you’re going to have to do some legwork. Start by researching the assisted living facilities in the area you want your father to live. Get recommendations from friends/family/co-workers. The internet (here’s a place to start: http://www.thecareguide.com ) is a great place to gather basic info, but won’t give you a feel for the place. For that you’ll need to do a visit. Pay attention to things like cleanliness and how the staff seems to be interacting with residents. Do the rooms look comfortable? Try to go for a visit around mealtime so you can see the quality of the food.