Gails Blog

As usual, I’m working with a family that’s spending a ton of money on STUFF. Most people do this unconsciously, never giving a thought to how much of their life’s energy is going into the purchase. This is a concept I learned from the book, Your Money or Your Life. (Another one of those books that changed my life. I am so grateful to Gutenberg.) I’ve put it to work personally, and I’ve put it to work with my fams, and it has a big impact

Let’s say you decide you just HAVE to have the newest cell phone that spits nickels and whistles Dixie while calculating how far you haven’t walked this week.  It runs for $379.99.

Now let’s say you have a great job. You earn $75,000 a year GROSS, which means you take home approximately $50,000 NET. That translates into a net hourly income (assuming 50 weeks and 40/hrs a week for work) of $25. Yup. You make a whopping 25 bucks an hour after taxes.

But that’s NOT your disposable income. You have to cover stuff like rent, car payments, debt repayment (for the last phone and all those dinners out), savings, and the like. Okay, let’s say your Essential Expenses – rent, food, and all the other things you MUST pay to keep body and soul together – add up to $3,300 a month. That’s breaks down to $19.80 per hour. (3300 x 12 / 50 / 40)

Are you still with me?

So your actual disposable income is your net monthly income of $25 less your Essential Expenses of $19.80, which leaves a whopping $5.20 an hour.

Now here comes the really PAINFUL part.

Take whatever you’re thinking of buying, and divide the cost by your Hourly Disposable Income (HDI) to see how much of your life’s energy you have to swap for that handy-dandy new device. In the case of that Phat Phone, you’d have to work for about 73 hours. Yup. Almost two weeks.

Hmmm.

If you really want the phone, and you have the money set aside to pay the bill right off the bat, you should buy it. But you should also do this exercise since its useful for putting things in perspective. 

If you really want the phone and you’re going to put it on credit, then you have to add in the interest you’ll pay to come up with the right number of hours of your life you’ll be swapping for it.

Want to work out your Hourly disposable income?

1. Take your net pay and divide it by the number of hours you work a year. I find dividing by 40 (for hours worked in a week) and then by 50 (for weeks worked in a year) works great. This is your Net Hourly Income.
2. Then calculate your monthly Essential Expenses. Multiply that number by 12 and divide it by 40 and then by 50.
3. Subtract your Essential Expenses hourly cost from your Net Hourly Income. You’re left with your HDI.

Now, whenever your trying to decide if a purchase is really worth it, divide your purchase price by your HDI to see how many hours you’ll have to work to pay for the item.

Of course, you’d be a maniac to do this every time you’re considering buying something. Com’on. You don’t want to be OBSESSIVE or anything. But if you even give a second’s thought to the question, “Should I?” when it comes to buying something, do this calculation. Then stick the money you would have spent in your savings account. You were going to blow it on STUFF anyway, so you can consider it SPENT. 

In the pilot of Til Debt Do Us Part, we worked with a couple named Bill and Tasia – a lovely couple who were having some trouble coping with all the changes that families have to go through as they grow and change. One of the big questions they were grappling with was whether Tasia, home with two children, would go back to work since they were clearly in a financial mess. She wanted to stay home with the kids. And they’d agreed to that when they’d gotten together. But Bill was feeling a lot of pressure being the only breadwinner and was losing his resolve.

I’m about to begin working with another couple facing this dilemma. Lots of people face it. You’ve heard me say it makes no sense to go into pregnancy with your eyes closed, clueless as to how you’ll cope financially. Well, the same goes for making the decision to stay home with the kids or go back to work. It shouldn’t be a guess. It should be based on the black and red of your situation.

I am NOT making a case for or against staying home with the kids. I’m telling you to make your own best case based on having thought it out ON PAPER based on the numbers. Yup. Another math lesson.

So what numbers will you be working with? Hmmm. Let’s see…

TAXES. A lot of the income you will make will be eaten up by taxes. If you’re returning to an existing job, you need only look at an old pay stub or last year’s tax return. If you’re looking for a new job, you’ll need to figure how just how much tax you’ll pay. Here is a terrific and easy-to-use calculator.

CHILD CARE. The next biggie is paying someone to do at least part of the job you’d be doing if you stayed home. You can hire a nanny, pay for out-of-home childcare or, if you’re really lucky, rope your parents into being all things to your kids while you’re off in the mines. There’s a cost to it all, and you’ve got to figure out what that cost will be for your family.

TRANSPORTATION. You’ll have to be able to get to and from work. If you live further than walking distance to where you work, it could be as inexpensive as public transportation, or as expensive as a plane-ride. (I know a woman who lived on the west coast and commuted to Toronto to work for two years!) If you’re driving, you’ll have to not only figure out the cost of gas, but the additional wear and tear on the car, resulting in a higher maintenance costs. Don’t forget the additional trips to and from your childcare provider.

CLOTHES. If you have to maintain a “professional” appearance at work, what’s it going to cost to keep you shod? If you’re carrying a lot of baby-weight, are you going to need a whole new work wardrobe? After I had Alex, I went from being a size 8 to a 14. My feet grew two sizes, my head grew two sizes. NOTHING fit. And I took no pleasure from having to spend a ton of money to have a new set of clothes in my cupboard.

DRYCLEANING. Yup, if you’re wearing a Power Suit to work, it’ll have to be cleaned once in a while.

FOOD. I know, I know, you’ll take your lunch to work. But you should also budget for the occasional lunch out, the occasional coffee with the chicks at work, the occasional birthday celebration. That stuff happens. If you pretend it doesn’t, it’ll bite you in the budget.

GIFTS. Speaking of birthdays, let’s not forget the presents you’ll be chipping in on, or the charitable donations you may be expected to make as part of belonging to that work community.

HOUSEKEEPING. If you’re both back to work full time with a new s’mebody to look after, will you need to hire someone to do the vacuuming? Even if it’s twice a month, it’s an expense for which you need to budget.

LOST WAGES. If you’re both working, someone’s going to have to take time off if baby gets sick. Will one or the other of you get docked if you have to take the occasional day off to stay home with a sick child?

Okay, that’s the money. But there’s another equation you have to think about… the happiness equation. If you love the work you do, that’ll go in the pro column. If you’re doing a job just for the money, your motivation to leave your baby will be very low. If you’ve worked out the money thang, and it says GO BACK but you hate your job, you hate your boss, you hate your commute, you hate… well, you get my drift, it may be time to think about making money some other way.

There are lots of people who change careers, develop new skills (while off with baby in that first year), upgrade their skills. There are people who find ways to work a full week in three days, so they’re home four days with baby. There are couples who work off-shift, so one or the other parent is home with the kids. There are tons of ways to have the life you want. But you have to think about it. You have to plan.

When I had my kids I hired a nanny to come into my home. Miss Sharon was FABULOUS. My kids loved her to death and she stayed with us for seven years while I worked from home. When the kids were in school, she’d help around the house. She made my life very comfortable. But there were times when I was working only to pay Miss Sharon… there wasn’t much else left. Since I knew I couldn’t be completely out of the workforce and ever hope to work again, this was the price I paid. Willingly. With foreknowledge and a plan for the future.

That’s what you want to do… create the foreknoweldge so whatever you do, you do willingly and with a plan for the future. It’s a big decision. Good luck with it.

Back in 1883 when Chancellor Otto Von Bismarck of Germany introduced the concept of retirement at the magical age of 65, hardly anyone lived to collect. The world’s changed a lot since then. According to Statistics Canada, 82.5 years for women and 77.7 years for men. Increased life expectance is one reason retirement planning is such a Big Idea. In 2006, 1,167,310 people were aged 80 years and over, up 25% from 2001.

The struggle to balance building retirement assets for tomorrow against today’s very real demands for cash means that often the Big Idea is pushed to the side. Ooops. There goes the Big Idea, hidden behind “not enough money”, “paying down the mortgage” and “coughing up for university.”

It’s human nature to find overwhelming reasons not to change course. So starting something new, putting the Big Idea into action, takes more effort than not. Curiously, the effort is smallest when the need is furthest away.

A young person starting out can sing the popular tune, “I’ve got no money.” And it’s true. With lower incomes, student debt to pay off and retirement thirty-five or forty years away, who needs the extra pressure? The thing is the pressure never lets up, and recognizing that fact early on can mean establishing a strategy that seeks to create a balance between the present and the future.

Implementing the Big Idea when you’re young has significant benefits. First, spring chickens can set aside a significantly smaller percentage of their income to grow their retirement nest-egg. More importantly, perhaps, with a long, long, long term investment horizon, there are far more investment options available that will do the trick. Want to compensate for a small monthly contribution? Look for an investment that produces a higher-than-average rate of return. Worried that your conservative approach to investing might be limiting your growth? Don’t be. With so much time on your side, conservatism isn’t a dirty word. You can afford to make like the tortoise.

Resist the urge to dip in as you move along life’s path. Going back to school, time spent between jobs and mounting debt can all be tempting reasons to cash in retirement funds. How to overcome temptation? Have a plan.

Plan and stick to a budget that includes an emergency-only cash account, vacation savings account, and the like.

Make sure you’re covered by the right kind of insurance so your retirement assets don’t become your emergency fund.

Establish an automatic investment program.

Plan for big expenses: returning to school, a down-payment on a home, that new car.

It’s one of life’s big jokes that as we earn more money we seem to have less money at our disposal. Like a gas expanding to fill a container, our expenses grow in proportion to our increased incomes. We want to have a family. We need a bigger house. It’s time to trade the compact for a mini-van. But wait! What if you got a raise and the first thing you did was set aside a portion of that raise for the future? Before the Devil Expenses could get their hands on your money, you whisked it away into an investment program.

Here are some tips to stay on track with your plan:

Ignore the “all or nothing” message. You do not have to forgo a life in order to implement the Big Idea. The idea is to balance today’s needs with tomorrows.

Don’t make your plan so grand that you end up defeating yourself with unrealistic expectations. Start small, grow your investments over time, keep your perspective.

Pay off your consumer debt. Every dollar you pay in interest is a dollar lost to your investment portfolio.

Watching the kids go off to university or college can be frightening for parents. Empty Nest Syndrome is a well-documented stress. So, too, is the realization that you may be running out of time. You’ve got to get the mortgage paid off, buy a new car, eliminate that credit card debt, get the kids through university, all while putting together that retirement portfolio you’ve deferred for so many years.

Relax. The nice thing about retirement is you have control over when you do it. The institutionalization of age 65 as the retirement age is simply a holdover of Otto’s idea. Since then we’ve moved many of the sign-posts of life further along the road — we have children later, go to school longer, and live healthily for many more years. So we can also move forward the signpost for retirement to 70, 75, or even later. Escape the mindset that says retirement at 65 is “normal” and you can not only build more accomplishment into your life, you can further feather your nest. Extending your working life also extends your investment horizon, allowing you to maintain your investment strategy.

Things to watch for:

You’re prime filling for the sandwich between your kids’ educational needs and the help your parents may need. Consider the impact of elder-care on your investment portfolio and take the steps to mitigate that impact.

Consider government pensions to be the gravy in your retirement income. While younger Canadians have already come to terms with the fact that they will be responsible for themselves, those of us who have grown up with the security offered to our parents may be less willing to emotionally forgo our “rights.”

Hold your assets wisely: keep your interest-bearing investments inside your RRSP and hold your equities outside to take full advantage of the beneficial tax treatment on capital gains.

Over and over I meet families who are spending thousands of dollars a year eating out. And over and over I challenge them to give up buying lunches and coffees and substitute food made at home. It’s often a hard sell. I’m not sure why since I love my own cooking much more than the food I can buy in a fast-food joint, though there are times when I have a hankering for something I don’t make particularly well (like Chinese hot and sour soup that I’m still trying to master). But, on a day-to-day basis, my food is waaay better than what one of my fams referred to as, “outside”food.

A couple or so ago, I handed a chick a lunch box with my face on it and told her to use it. While her hubby was the primary cook in the family and would often make her lunch, she’d leave it behind spending between $8 and $12 a day on food at work. Hello! $12 a day, multiplied by 5 days a week, multiplied by 50 weeks a year equals $3,000 a year. That’s right, THREE THOUSAND DOLLARS.

Creating a lunch for work does take some time and planning. The first thing out of most people’s mouth is, “I don’t have time in the mornings!” Really? Then get up earlier you Lazy! Are you telling me it’s not worth $3,000 a year to you (in after-tax dollars) to get up 15 minutes earlier in the morning? Give your head a shake.

Ken and I pack lunches for the kids  – yes, I still do this for my children even though they’re old enough to do it for themselves because I LIKE TO DO IT! We get up at 6 a.m. so we have time to shower, pack the kids’ lunches, and make Malcolm pancakes before school. I want to make sure they both have a healthful lunch, which brings me to my next point.

Another great reason for bringing your own lunch to work is so that you get to make healthier choices about what you eat. You control the ingredients. You control the freshness. You can be as creative as you want to be. One of our favorite salads is lettuce, red pepper, watermelon, and feta cheese. No dressing needed because the watermelon is so juicy. Yum! You’d be hard-pressed to find a more healthy or delicious salad.

Then, of course, there’s always the sandwich. My daughter hates soggy sandwiches so we end up packing each ingredient separately so she can assemble it at lunchtime. My son is mad about fruit so we pack him two or three different fruits every day. To keep everything cold we either freeze a juice box for the lunch bag or include a cold pack. In the summer, I fill a water bottle half way up and freeze it, then add fresh water to the top before adding it to the lunch bag. You can do this with homemade ice tea or iced-coffee too.

Salads and sandwiches, of course, are easy. But there are lots of people who want a hot lunch but don’t have a microwave at work or are on the road.

Hey, ever heard of this marvelous invention called a thermos? They’re brilliant. Soups, fried rice, chili, lasagna, just about anything can go into a thermos, so you can make extra at dinner and pack the leftovers for your next-day’s lunch. Alex used to complain that the food wasn’t really hot so I now pre-heat my thermos by pouring boiling water in first for a few minutes, then dumping the water out and adding the food that I’ve reheated really well. No more complaints.

Some people say they buy lunch because they love the social aspect of eating out. Hey, I’m as social as the next guy. But being social and going broke is DUMB. So pick one day of the week when you’ll eat out with friends and give yourself something to look forward to. Maybe you’ll choose Wednesday (hump day), or Friday to celebrate the end of the week. Whatever day you choose, lunching out once a week instead of five will cut your spending a ton.

Better yet, start a Lunch Club at work and pick one day a week when you each bring something to contribute to a group lunch. Or challenge each other to find the cheapest good food in your area, and take advantage of the Lunch Special. All-day breakfasts at $2.99 can’t be beat for value.

Be creative. The idea is to have a great life and save some money, at least until you’re debt free. Hey, if you don’t owe nobody nuttin’, then you can swallow your money to your heart’s desire. But if you’re in hock, then you owe it to yourself to use all the tricks at your disposal to get back into the black.

I can’t believe the number of people who pay outrageous fees, or settle for next-to-no interest, on their bank accounts. Whazzup with that? Many of us keep our money in a Big Six Bank, earning a pittance in interest and paying liberally for service. And then we make matters worse by not managing our money properly, so we’re in overdraft, bouncing cheques, or using banking machines that not our own and paying BIGTIME for it.

One of the main reasons people won’t switch accounts is laziness. Yup, plain and simple. It takes work. And not a small amount of work either. If you have pre-authorized debits, it can feel like torture trying to get them all switched over. But if all that’s standing between you and an account that pays decent interest without exorbitant fees is laziness, you need to give your head a shake.

Start by making a list of the things you actually need on your account. Do you write cheques anymore? How often do you go to the banking machine? (If you’re going more than once a week, you’re using the ATM as a wallet. Stop.) How many swipes of your debit card do you do in a month? Do you travel a lot requiring easy, cheap access to your money when you’re on the road?

Once you know the services you need, it’s time to go shopping to compare prices and features. You can hit the pavement, let your fingers do the walking, or head on over to the Financial Consumer Agency of Canada’s website and use the interactive tool to narrow down the alternatives

Here are five easy steps to make the switch once you’ve found your new account home

Step 1. Open the new account and get all the information you’ll need like the account number, your branch number, and the like. If you’re using cheques, order some.

Step 2. List your auto-transactions. What’s being automatically deposited or withdrawn from your old account? Look over your past few statements and make your list

Step 3. Reconcile your account. You have to account for every penny so you don’t have any nasty surprises during the transition. Those six post-dated cheques to the music teacher will bounce sky high if you close the account without telling her and replacing her cheques.

Step 4. First switch over all deposits and then switch over the withdrawals. That way there will be money in the new account when withdrawals start.

Step 5. Leave the old account open for about two months with some money in it to catch any missing deposits or withdrawals. Don’t worry about the balance in the old account is just sitting there wasting time. It’s protecting you from the aggravation caused by a poor memory. Be patient and when there’s been no activity for a month, consider yourself in the clear and close the old account.

 

Some people are of the opinion that if they have a dollar in their pocket they should spend it. In the old days, people talked about money “burning a hole in their pockets.” So this isn’t a new problem. But as we’ve become more financially sophisticated introducing new products and services, we’ve made it easier and easier to people to put a dollar in their pockets to burn a hole.

I’m just finishing up the paperwork for a fam who have, at the ripe old age of 20-something, run up $100,000 in consumer debt. Yup. You read right. They’ve spent and spent and spent. And their various suppliers of credit have helped them by giving them access to over $130,000 in credit on a income that doesn’t come close to that. Whazzup with that?

They have no idea where their money is going. And I can only tell them a part of the story since they’re withdrawing gobs of cash and keeping no records. Bank machines may be convenient, but they’re also deadly.

Once upon a time there were a few, then we demanded more. Banks discovered that bank machines were way cheaper than bodies, and that they could eliminate the bodies completely in some places. Branches closed and were replaced by machines. According to the Canadian Bankers Association, we did over 667,000,000 cash withdrawals from banking machines in 2007. Wow!

Did you know that the world’s first banking machine was installed in a branch of Barclays in Enfield, north London, in 1967? In a little over 40 years, they’ve become synonymous with “convenience.” In fact, the CBA says, “ABMs are the primary means of banking for 34 per cent of Canadians.”

The USA was the country with the most cash machines — 405,000 — in use at the end of 2006. By comparison, Canada had 16,190 machines spitting out cash in 2006.

Since we don’t have to wait for the branch to open to get our money, and since we don’t even have to go to our own bank machine - we can get at our money everywhere from our local corner store to the gas station to the casino — we’re putting more money into our pockets to burn that proverbial hole.

As if that’s not bad enough, the money in our accounts isn’t the only money we’re spending. Nope. We’re also spending money on our credit cards (and other forms of credit), sometimes even taking cash advances - more cash in our pockets - so we can do whatever we want whenever we want. And when one card fills up, we just sign up for another, and run that card to the limit.

We’re committing financial suicide and we don’t even realize it.

As if it isn’t bad enough that we’re spending money we haven’t yet earned - yes, when you use credit, you’re spending money you’re going to earn in the future… if you’re lucky - we’re also ruining our credit scores, making it more difficult and expensive to borrow for something important like, let’s say, a home.

Whenever you use all the credit you’ve been given on a credit card, the credit scoring agencies shake their heads and say, “tut tut”, and then adjust your credit score DOWN. And the closer you get to your limit, the more they shake and tut and subtract from your score. In fact, you’d do well to type up the following and stick it to the back of your card: Danger: Your credit limit is $___________ (half of what your statement says it is) and you have $_________ (how much) ROOM LEFT!

Of course, as far as I’m concerned, you shouldn’t be carrying any balance on your credit card. If you do have a balance, put your card away so you can’t use it until the balance is completely paid off. Once you get back to zero, here’s how you manage your credit use so you don’t run into trouble again.

First, get yourself a notebook or a chequebook register (available at your bank).

• Write the current balance in your bank account at the top of the page.
• Each time you use your credit or debit card, write a cheque, or take a cash withdrawal, enter the amount you have spent and minus it from your balance.
• Every time you make a deposit, add it to your balance.

There now, you have a real-time balance that shows how much money you really have to spend, and you can’t spend money you’ve already used elsewhere (like on a cheque that hasn’t cleared, or on a credit card that hasn’t come due).

Don’t forget to debit the automatic withdrawals that come out of your account: your mortgage or rent payments, car loan, pay-yourself-first-savings, retirement account deposit, utilities, car insurance, and the like.

Finally, when your credit card bill comes in, check the transactions against your list in your notebook. If there’s something on your statement that’s not your doing, call the credit card company right away and identify the wayward transaction.

There now. You have the means to stay in the black.

The question is this: Do you have the will?

 

I frequently get requests from people who want to try and figure out how well they are doing financially, but don’t know where to go to find benchmarks against which to measure themselves. There are figures available from places like Stat Canada, but they are very general. It’s okay to use them when we’re talking about what we spend on average or when we’re comparing what we spend on what category to another, but I’d never use them to measure an individual’s “progress.”

CR wrote:

I love your book, A Woman of Independent Means, –so full of commonsense, practical advice. I first found it in the library, and then went on quite a hunt to track down a copy for my own collection. You are pretty nearly the only financial writer who engages the renting-versus-buying a home in a fair and equal-handed way! And I thoroughly enjoy the compassionate but realistic way you advise people on “Till Debt Do Us Part”. Kudos!

My question is this. How can one go about benchmarking how well or badly one is doing? I’m an aggressive saver with a tidy portfolio, no debt (except monthly rent/utilities and a credit card I pay off in full every month), but have no idea whether I’m doing well enough, and have never been able to find any standard against which to gauge my progress. (Obviously, by not providing figures, I’m tying your hands about evaluating my own situation, but I suspect that there are quite a few others out there, all in widely differing situations, who are asking similar questions.)

CR, you’re absolutely correct. I get this question often. And I often don’t answer because the answer is “It depends,” which most people find very unsatisfying. It depends on what you want from your life. It depends on how much you make. It depends on where you live (some places are more expensive than others.) And it depends on how greedy you are.

Let’s do Question 1 first: What do you want? If you want a simple life full of shared activities, the amount you’ll need is very different than the family who wants to travel every year and drive a new car every two years. (Hey, as long as you have the money and you’re not whining, I don’t care how you spend your money.)

So, are you happy doing what you’re doing, or are there other things you need or want to do, and would more money make those things possible?

On to Question 2: How much do you make? The person who makes $100,000 a year can’t compare herself with the person who makes $50,000 a year in terms of lifestyle or accumulation of assets. Nor should she. In fact, the very problem I have with benchmarks is that there ‘s no way to compare apples to apples realistically. And what makes one person feels like soaring success will make another feel like a pathetic failure. So it’s not really about comparisons; it about following the rules. Are you doing the detail, keeping a budget, saving enough to make sure your future is comfortable, covered by the right kind of insurance, paying your bills on time, and all the rest? If you are, then by any standard you should be fine.

Question 3: Where do you live? If you’re in a big city, your costs will be different from another person living in a rural community. More importantly, where will you live when you plan to start using your stash of cash. If you’re going to remain in the same location, will you have enough to continue meeting your needs? Or will you move so that your money will go further? If you plan to move for family or lifestyle reasons, are you familiar with the costs in your new community?

Finally, Question 4: How greedy are you? Or put another way, How Much is ENOUGH? I’ve watched people sacrifice their Present to make sure they were “comfortable” in their Future. They sometimes made it hard for themselves. They sometimes made it hard for others around them. Saving for the future is a good thing, but not when it means that you have no joy in the present. I’m not talking about Shopping Joy here – so all you shop-a-holics reading this shouldn’t go off half cocked saying, “Gail says if shopping makes me happy I should shop!” What I’m trying to say is that the accumulation of assets as the only goal in life leaves one with a lot of money and not much in the way of anything else.

I will tell you that in the corporate world there’s a thing called “financial forecasting”, which is what advisors try to do when they ask people to think about what they want from their futures and how they’ll pay for it. But it’s really an individual exercise.

It’s a matter of figuring out what your personal balance sheet looks like today – is your budget balanced, how much debt do you have, and how much do you have accumulated in assets. It’s also taking a look at how much income you’ll need later, when you retire, and you’ll be counting on those assets to provide your with grocery money.

Some people who have had a bad experience with a financial adviser don’t believe they can add value to your life. But those who have a GREAT adviser know the benefits of having some else looking over a plan, listening to dreams and desires, and help you figure out priorities.

Why not check around with family and friends, bosses and co-workers, to see if you know anyone with a GREAT advisor you can chat with. Don’t settle for less than GREAT.

When was the last time you went through your bills? I don’t mean just paying them. I mean sitting down and reading them to see what you’re spending your money on. I can’t believe the number of people with whom I work who don’t have Clue One where they’re spending their money. Man, we work so hard for it you’d think we’d take better care of it. But we’re lazy. We fall into habits and then never look for ways to break them, even when they’re bleeding us dry.

Buying newspapers is a habit. Sure, you need something to read on the way to work. Borrow a book from the library. Picking up magazines at the check-out counter is another habit. Again, go to the library, or, at the very least, subscribe and save 50%. Better yet, split your subscription with a friend and save 75%.

Okay, so we all have habits, and not reading your bills is one of the worst. People don’t read their check-out bills at the supermarket and spend a lot they don’t even know they’re spending when there’s an error. And they don’t read their bills at home either. They just pay them. Blindly.

When was the last time you looked over your phone bill? Yet you’re prepared to lay out hundreds of dollars a year on your land line. Never mind what you’re spending on your cell phone. Ditto your electrical bills, your gas bills, your credit card statements, your bank statement. I’m willing to bet you dogs to donuts right now that you can’t tell me what you paid in service charges on all your bank accounts last month.

Here’s today’s challenge: Spend one hour going over ALL your bills so you’re completely familiar with where your money is going. That’s right, gather them all up, get yourself a highlighter pen and start familiarizing yourself with where your money’s going. If you find places where you’re surprised at what you’ve been shelling out, it may be time to re-evaluate what you’re getting for what you’re spending.

Keep in mind that if you have auto payments set up, you may have to go online to get the itemized bill to see where you racked up those charges. Don’t wuss-out. Do it.

Are you paying to have movies piped in, but never seem to watch? Axe it.

Are you buying services at a premium? Move to a lower level of service.

Paying for membership at a gym that you haven’t visited in six months? Lose it.

Paid even $1 in banking machine fees? Stop it!

Got a renewal for a magazine subscription you never have time to read? Don’t just automatically renew it out of habit.

Look for all the things you pay for, but seldom use, and as you chop, trim, slice and dice, make a list of the money you’re saving.

Eliminate just $50 worth of monthly spending, and you’ll have $600 to add to your savings this year. Take that $600, invest it in an RRSP at an average return of 5%, and REINVEST your tax refund every year to make your RRSP contribution grow and in:

20 years you’ll have $29,610
25 years you’ll have $37,485
30 years you’ll have $45,360
35 years you’ll have $53,235
40 years you’ll have $95,424

… all from a measly little $50 a month. Can you imagine what you could do with $100?

Can’t find anything to trim? Really? Did you look really hard? Well good for you. It means you’re running a tight ship.

Okay, I’ve done it. A Woman of Independent Means has been updated, edited, uploaded…

and now it’s ready to be purchased. You asked for it, so BUY IT!

Home ownership is The Big Dream for many people. According to the Stats Man, income is the determining factor in terms of whether or not a body will own a home. No surprise, really. After all, home ownership is a big financial commitment and without enough income there’s no way to swing the dream into reality. How much income is dependent on where a person wants to buy a home.

According to the Stats Man, families with a household income between $50,000 and $80,000 are getting into homes of their own, mostly in rural areas or small towns where 71% of people between the ages of 25 and 39 owned their own digs. Again, no big surprise, since the cost of buying a home in a major city has gone through the stratosphere. In Toronto, about 53% of people in this same age group owned; in Montreal the number was 48%, and in Vancouver 54%.

Ultimately, the amount you earn will dictate how much home you can afford to buy. The other factor that will influence how much home you can afford is the amount of the downpayment you’ve managed to accumulate. For people who want to use the RRSP Home Buyer’s Plan, read this so you know what’s what.

Zero down has become all the rage, but it isn’t a smart financial decision since the more money you put down the house the less money you will have to finance. And since less than 20% down means mortgage insurance, your no-downpayment strategy can be really expensive.

The interest rate you get on your mortgage can make a huge difference in terms of how much your home ends up costing you. The lower your interest rate, the lower your payment and, ultimately, the lower the overall cost of your home. How interest rates affect your costs isn’t just affected by market conditions and the current economic climate; it’s also affected by the type of mortgage you choose, your payment frequency, and by your credit score.

The next thing you’ll have to decide is what you will buy and where it will be. Will you live in the city, in suburbia, in the bush? Will it be a condo, a townhouse, a semi-detached or a mansion? There are almost as many options as there are people to buy them, and what floats one guy’s boat will sink another’s.

It makes sense, before you enter into what will likely be the most expensive purchase of your life, that you get some help. There are lots of people waiting to take your money in exchange for your sage advice. Who will you choose to help you?

Have you got your closing and incidental costs covered? Some experts say to estimate 1.5% of the value of your home for closing costs. Others say more. You need to know what to expect so you can make a budget that’s realistic.

The prospect of home ownership is very exciting. But it can also make your tummy flip and your head swoon. Being prepared is the best way to sleep at night while you wait for moving day.

Okay, I’ve done it. A Woman of Independent Means has been updated, edited, uploaded…

and now it’s ready to be purchased. You asked for it, so BUY IT!

 

When I started this website a half-year ago, I promised I’d answer one of your questions every week. I’ve been inundated with questions, and have been responding to two a week. But there are times when I’ve got so many great questions that need to be answered, that I just take a couple of hours and fire-through them. Here’s what I have for you today.

rinkrat_hockeymom wrote:

One of my employers is not taking enough tax from my paycheck. I have been having an extra $50 a pay taken out to cover this since the beginning of the year. I was telling a friend about this, and he suggested it would be more beneficial to take that $50 and put it into an RRSP and I would get thed same result, plus be able to save my own money instead of lending it to the government for a year. Is he correct?

Not quite. While every dollar you put in your RRSP is not taxable, you’d have to put the entire income you’re earning from your second employer into an RRSP to achieve the result your friend is suggesting. I’m all for that… but I don’t think that’s what you’re trying to achieve. So you’re doing the right thing.

If you want to calculate your tax exactly, you can go to Taxtips for a really thorough calculator. If that one makes your head spin, here’s a simpler one that will give you a basic of idea of how much tax you should pay.

 

L from B.C. wrote:

I have just come into to some money — $35,000.00 — and I am wondering what I should do with this money. I currently don’t own my place (renting) and just finished paying off my line of credit ($25,000.00) at the bank as well as my credit card ($25,000.00). I have been working as a cashier for six months at $10.00 an hour. I am looking for a better paying job right now. Can you give me any advice for this $35,000.00. Should I invest this money or maybe put the money into an ING Direct account at 4.5%? I don’t think I am eligible for a mortgage just yet…?

I get a lot of notes like this with people asking for advice on what they should do with a lump of money that’s just fallen into their laps. I like to tell people to:

1. Take care of past mistakes,

2. Have some fun in the present, and

3. Plan for the future.

So, L, on the Take Care of Past Mistakes front, congrats on getting all that debt paid off! Wow! You’re one determined young woman. You’re in a much better place now and you should be very proud of your accomplishment.

On the Plan for the Future front, you’re right when you say you aren’t ready for a mortgage yet, particularly in your neck of the woods.  But you are ready to set up an emergency fund, start an RRSP, even with just a couple of thousand bucks, and begin building your downpayment. As for where to invest the money for your downpayment to grow, you’ll need a financial guide for that. Ask friends/family for a referral to their GREAT financial advisor. Don’t settle for anything less than GREAT!

Using a high-interest account is smart. Making sure you know what you want to accomplish with the money is smart too. So ask yourself what’s important to you and by when you’d like to achieve that goal. Plan from there.

As for my number 2 point: have some fun in the present, don’t go nuts, but take some of your money and treat yourself and someone you love to a Nicey: Dinner out, a fun weekend of movies, a new piece of furniture you’ve been wanting, or a lovely new dress. Or you could decide to set up a Mad Money Account, putting $500 or $600 aside that you can spend on anything you want whenever you want, just for the hell of it.  Have a ball.

 

On a similar theme, K wrote:

I have an inheritance if 60,000 and wondered if I should double up on my mortgage payments each week (that is the maximum allowed) or wait put the money in a high interest account until the mortgage is up for renewal this December 2008 to bay off a chunk of the 120,000 principle?

The faster you put the money to work against the mortgage, the more you’ll save in interest. And any interest you earn is taxable, but the interest you save is not. So double-up and then use whatever is left to make the principal pre-payment at the end.

 

Carman wrote:

What is your opinion for a person to use RRSP savings to pay down debt? We have enough RRSP savings to pay off our debt (excluding Mortgage). Thanks for all you teach on your show, I think everyone could learn something.

I’ve answered this one before, but I’m going to answer it one last time since I get this question every week. Really.

The answer is: DON’T DO IT! I know there are some people who say this is a good idea, but it’s a terrible idea. A really terrible idea. First, there’s the tax you’ll end up paying on the withdrawal from the RRSP, and then there’s the tax you’ll owe because the amount withheld won’t have been enough.

If you’re determined to get rid of your debt, then you’re going to have to bite the bullet, tighten your belt and put your shoulder to the grindstone. If that’s not enough metaphors for you, I have plenty more!

 

T wrote:

hi gail i watch your show all the time and i was just wondering i am 17 and still going to school and planning to go to university soon i am extremely good with money and saving and i have about 7000.00 in my bank account right now. would u recommand when i turn 18 to get a credit card and always pay it off in order to get my credit rating started. i would never spend more than what i have or even come close to spending all i got so i dont think it wud be a problem but just asking for ur advice.

T, if you swear on your Mom’s head that you’ll never spend more money than you have, then I say getting a credit card to build a credit history is a good idea. I’ve seen a lot of kids (and elders) start out with the best intentions and then fall into the carrying-a-balance trap. But if you promise not to be one of the dopes, then I’d say go for the card, Bud, and build yourself a fabulous financial history.

 

Sarah wrote:

My husband and I love your show - yes I said both of us - you’ve got us talking about our finances - YAY! Our question is in regards to student loan debt. I’m in the process of finishing my PhD and my husband and I each have 3 degrees. Our combined students debt is $62,000 (not bad considering) and we have a new mortgage of $120,000. So many of our friends have just followed the plan offered by the bank/government - but 12 years to pay it off??  We gross $76K a year but we’re going to be starting a family soon and our plan right now was to add $200/month as a prepayment to our mortgage. What do you suggest - balance pre-payments and extra student loan payments? Should we make one a priority over the other (student loan interest is prime +1, mortgage 6.3 locked for 10 years)?  We would really appreciate your advice - the bank always says “follow the plan, then you have more disposable income” - yes and they make more money in interest! love your show and your kick-butt attitude.

Ah, yes, there are those Pesky Bankers again, telling you to keep more disposable income so they can rake in more interest. Hmmm. Is it any wonder Canadian’s don’t trust their advisors?

Sarah, leave your mortgage payments as they are, and use all your extra money to pay off your student loans, which is your more expensive debt. Once that is paid off, you can balance mortgage prepayment with long-term saving. As for starting a fam soon, have a great time with that. And while you’re preggers, live on the one income you’ll have during your mat leave so that you

a) get used to having a smaller income, and

b) have a nice pool of savings set aside for when baby gets here.

 

Kerry wrote:

I am a 21 year old full time worker. I graduated with a 2-year diploma in Bus Adm (major accounting) and have taking Intro to Financial Planning as well. After graduating from college with WAY MORE DEBT than I ever imagined from 2 years of school, I have got myself back on track by my own means and would like to offer a credit/debt counseling service outside of my full time job (which I love). I want to educate people before they make the same mistakes I did, and/or repair the mistakes already made. Only problem I have found in my plan is, how do you charge a fee when your clients are already living paycheque to paycheque? PS your show and outstanding way of making the obvious PAINFULLY obvious has changed my life and influenced my (hopefully!) future career path immensely!

Hey, Kerry, that’s a darned good question. Some people who work in debt management affiliate themselves with a company that will allow them to do debt-counseling. Credit counselors, for example, are often not-for-profit organizations that help clients consolidate their debt and set-up repayment plans. And I do know of at least one private company that builds their fee into the “consolidation” loan. You might want to look at that as an option.

So, all you debtors out there, what would you be willing to pay to have someone dig you out of a hole, and how would you come up with the moolah?

 

Mercedes wrote:

I am a 24 year old university student living on my own and paying all of my bills yet have still managed to save about 15000.00 in the past 2 years. I have no debts and am wondering what to do with this money to make it grow for the future. I feel as though it’s just sitting there. How much should I set aside for a rainy day/emergency fund? Thanks!

Okay, all you student debtors who tell me you can’t possibly save any money while going to school, heads up to this.

Mercedes, you are a shining light. Congrats!

As to what to do with the money, set side at least $5,000 in a high interest account for emergencies. Ultimately, you want to have 3-6 months’ worth of living expenses covered. As for the rest, it’s time to learn to invest. Read about investing. Choose a couple you think might work for you and watch them for a while to develop a comfort level. When you think you’re ready, take the plunge. Don’t be too aggressive too quickly. And never invest in anything you can pronounce or don’t understand.

 

Carrie wrote:

I am currently on mat leave with 2nd baby. We figured out if I return to work I will be contributing 2/3 of my take home pay to working expenses and only contributing 1/3 of my take home pay to the household. Does this make it worthwhile for me to return to work? Or is the smart thing to try to find a part time job to make up the money we are short? Or, with only about 6 years left on our mortgage, should we reduce our mortgage payments in order to live, until I can return full time in about 5 years?

You seem like a clear-thinking girl. You’ve certainly outlined your options well. Here are my answers

Does this make it worthwhile for me to return to work? Yes, if you need the 1/3 to make ends meet.

Or is the smart thing to try to find a part time job to make up the money we are short? Really? This is a question? Work less to make the same? Where’s the question?

Or, with only about 6 years left on our mortgage, should we reduce our mortgage payments in order to live, until I can return full time in about 5 years? This, too, is an option, if you’re prepared for the extra interest cost over the life of the mortgage. You don’t say how old you are, but how old could you be with a second baby just here? So you have lots of time to get this mortgage paid off.

Now, the question is, what do YOU think you should do?

 

S wrote:

I work part time as a nurse, so I actually bring home more money per hour with my liue of benefits. Is it better for me to work full time and “bring home” less money, but have job security, sick time and vacation? I am 41 married with two school age children. Thanks and I love your show-your sense of humour really makes it!

It’s hard to answer this question when I don’t know how much less you’d be bringing home, or how that would impact your cash flow. Assuming you don’t NEED the extra for essentials, then the security of full-time with benefits would be a huge blessing, particularly with young kids. However, if the extra money you’re bringing in is essential to your budget, then maybe not. What do you think?

 

Erin wrote

On your show, you give your clients an “office in a box” with all kinds of file folders and coloured tabs. I tried making my own and it doesn’t look as nearly detailed or full as yours. What categories do you have in your box?

Go read 12 Steps to Getting Financially Organized and the blog Paper Chase.

 

For Lynn who wrote:

How long should you keep your paperwork, such as bill statements, payments and income tax forms

Ditto

 

A wrote:

If I have a defined benefit pension plan with my employer, do I really need to contribute to an RRSP? Also, how do I figure out my “tax bracket” as I am planning to withdraw $10,000 from my RRSP to pay down debt - if the withholding tax is 30% then how do I estimate the additional tax I will pay next April - my gross income is about $60,000…

A, you likely don’t need an RRSP if you have a defined benefit plan. I’d be very surprised if you have much contribution room at all. If you do, then I would use it up, but not break your neck to do so. As for writhdrawing money from your RRSP to pay off debt: DON’T DO IT!

 

Tammy wrote:

I have 2 children: a son who is 20 and has finished 3 years of university and a daughter 19 who has finished 1 year of college. We have paid for the tuition and book for the 3 years for my son and paid the 1st year of college for my daughter and have enough to pay for her 2nd year, her course is 2 years long. I do not want my kids to finish school and owe money but my husband and I find that most of our money goes to the kids and there is none left over for us. We have been putting a lot of things for them on our line of credit and it just keeps going up, I know I need to stop but I don’t want to see them acquire any debt but I just feel that my husband and I are sinking further and further into debt and we have been arguing over the money spend on the kids. If you any suggestions on how we can work this out I would really appreciate it.

It’s nice that you don’t want your kids to graduate with debt, but you’re accumulating debt and that’s no good either. I hope your kids are contributing to their own education. If they are not, that’s the first place to start. There is no such thing as a free ride in life, and 19 and 20 are plenty old enough to start dealing with life’s realities. Help your kids. That’ great. Don’t do yourself damage in the process. That’s dumb!

 

Victoria wrote:

Hello. Congratulations with the show. I have been watching it daily for some time now. I have put my husband on a $200 a month budget. This money includes his gas and extra spending. We have been using the jars for three weeks now. So far so good. I am currently on maternity leave and working one day a week that I am allowed. I am making $430 every two weeks. I am trying to save this for our vacation at Christmas. Do you think it would be better to put this money onto the line of credit and then take it back out when we need it? Also, we just did a balance transfer on our one credit card. We have an interest rate of 1.9% until November. Should we penny pinch and put every last cent on it so it is paid off by then? Thanks so much and keep up the great work.

First the credit card question: Absolutely pinch every penny so the card is paid off before your great rate expires in November.

Now the line of credit question: Yes you should put it to the line first, and then take it back off when you need to, to minimize your interest costs. But I don’t think a fam on mat leave with a balance outstanding on their line of credit should be prioritizing a holiday over debt repayment. Once you return to work full time, I can see saving the money for a holiday. But while you’re living on a reduced income, and have debt, your focus should be on getting out of the red.

Are you sorry you asked?

 

M wrote:

My husband says that it’s not smart to start a RRSP because I owe $50,000 in student loans, which I am paying the minimum right now. I work part time as a RN and I have 2 kids. I’m 38 years old and I feel that I have to get started. What should I do?

You should get started, you’re right. But your husband is right too. Since you’re only working part time, your marginal tax rate isn’t high, and paying only the minimum on a $50K student loan is stupid. You’ll pay way too much in interest. So:

1. Up your student loan repayment amount to an amount that’ll have you debt free in five years or less, and

2. Start contributing $200 a month to an RRSP.

If you don’t have enough to do both, you’re going to have to find a way to make more money.

 

S wrote:

I would like to know if there is a way to save money on a disability pension.

I’m surprised by how often I get this (or a similar) question. There are a lot of people out there trying to make do on disability income, which should be a heads-up for all the people who don’t yet have disability insurance. As for this question, the answer is quite simple: If you have extra money after all your basic needs are met, you can save some. If you don’t, you can’t.

I’m sorry that there seem to be so many people living a marginal life on less income than they need. It’s a tough haul and you have my admiration for making a go of it.

 

Another M wrote:

My wife and I are a one-income family and even with a very tight budget our expenses are always more than our costs every month. I have mentioned taking some of the equity from our home (either re-mortgaging or a straight loan) to ease some of the expenses until my wife gets back to work. So, I was wondering, is it ever a good idea to take a home equity loan?

You don’t say why your wife is off work, or how long it may be until she’s fully employed again, and that affects the answer. If this is a short-term thing, then I’d say do the refinance and un-strap your budget. If it’s a long-term thing, you may have to sell your home to make it through. Good luck.

 

Karen wrote:

My relationship with my boyfriend of 8 years is strained to say the least because of this debt and not knowing how to budget. We have thought of calling it quits. I think the icing on the cake was when I was offered a job but would have to take a 14k cut in pay for 2 years from what I am making now, but then would make over 100k a year after that. I had to turn it down because each month I am going further and further into debt AND with a 14k a year cut in that!??! How would I make ends meet? Help! Please point me in the right direction.

I don’t often say this, but are you sure you’re in the right relationship? After all, is this the way you want to spend the rest of your life: giving up your hopes and dreams because your partner can’t get outside himself long enough to stop going into debt for crap? If you’re determined to stay in the relationship, then I’d separate the money - yes, you heard me say “separate the money” - and make the Boy Man responsible for himself. If he can’t do it, then either reconcile yourself to a life of misery with him, or get the hell out!

 

RC wrote:

What is the best way to invest money that I am intending to use toward the purchase of a home/condo, in one years’ time. I would be a first time buyer.

Since your time horizon is very short, you need to stick with something that has no volatility at all. Go with a term deposit, GIC, high-interest savings account… wherever you can get the best rate for one year.

 

Carol wrote:

I am 55 years old and will retire at age 64 with a good Omers Hydro pension. I was a single mother raising 3 children for most of their lives, so savings and retirement planning were not a priority. However, as my children are now grown I have more disposable income. Is it too late to start RSP’s or should I concentrate on paying off my mortgage?

Since you’re over 50 and have a good pension, I’d focus on paying off that mortgage so you’re retiring mortgage free. If you still have money left over, you can take me out for dinner.

 

Cynthia wrote:

I watch your show all the time and I noticed that you always talk in terms of household income and don’t discuss the differences in the amount each person makes. My boyfriend and I recently purchased a home, but we still have totally seperate finances, we live like roommates, simply splitting the common expenses in half and then we each pay our own credit cards etc. I would like us to be a more equal partnership, but he still thinks in terms of “your money” and “my money.” Is there a proper way to start combining finances?

Girl, you and your honey need to get on the same page. Go and read To Consolidate or Not to Consolidate and So You’re Getting Married even if you’re not.

 

Brett wrote:

My wife and I have recently realized that our parents are in rough financial shape, planning on relying solely on a single pension in retirement (no RRSPS). How can we approach them to talk about it and get them doing something about it? We feel as if we will be burdened by our parents within the next 15 years, and need help to get this situation under control!

Sorry Brett, it might already be too late if they have not been planning and are pretty close to retirement, with not enough money. Do they have assets they can liquidate to provide an income? Can they move to a less expensive community to cut costs? In terms of just approaching them about the issue, read Aging Parents: Talking about the Money. 

 

Okay, that’s it. My brain is mush and my fingers are cold from the breeze created as they’re flying across the keyboard! Ha! 

 

BTW: I’m planning to put up a series of articles on home buying. Are there any special topics y’all want me to cover? Speak now.