Globe and Mail - Report on Business
Published: February 2, 2009
Keeping your head above water in a recession
Personal finance guru and host of the TV show, Til Debt Do Us Part, Gail Vaz-Oxlade took your questions on how to adjust your budget to a downturn
We've all heard the old adage that the key to staying out of debt is to learn to live within our means – to make a budget based on our income and stick to it, hard as that may be. But as Canada sinks deeper into recession, the means of many Canadian families are changing. Thousands of Canadians are losing their jobs every week, and many more are facing pay cuts, unpaid time off and very little job security.
How can we live within our means if we don't know what our means will be from one week to another? How should we change our family budgets during the worst global recession since the Great Depression? Is there anything we can do to prepare for a job loss? What do we need to know about Employment Insurance, and did the Conservatives announce anything in the budget that might help?
Every week on her television show, Til Debt Do Us Part, personal finance guru Gail Vaz-Oxlade helps couples figure out what it means to live within their means. Gail is also the author of the book, A Woman of Independent Means.
Gail says that money is the number one cause of failed marriages. Rare is the couple that agrees on how the pot should be divided and the bills paid. Most families are in debt, and with debt come family arguments, tears, tantrums and marriages on the verge of divorce. Gail blogs daily on her website.
Gail Vaz-Oxlade joined us for an online discussion about keeping your head above water in a recession.
Thanks to all those who submitted questions.
Claire Neary, Reportonbusiness.com: Hi Gail. Thanks so much for joining us today. As we push our way into the second month of 2009 with no signs of the global recession retreating, many Canadians are very, very worried about how they'll stay afloat. Our readers have flooded us with questions on topics from declaring personal bankruptcy, to how to create a family budget to how to keep a relationship from falling apart along with your finances.
I can tell that you've got a lot of fans of your no nonsense approach to personal finance out there because many of them have sent in very personal, honest, and sometimes very difficult questions about their financial situations. I think many of our readers will be able to relate to these situations as the financial crisis pushes us to reassess our finances.
Let's start with an extremely personal and urgent question that touches on many of the themes you discuss with couples on your show.
Christina Hodgins from Ottawa: My husband and I (27 years ) have an appointment today at 3 p.m. with a credit counsellor to see if we have any equity in our home to repay debts, or to determine if we should go bankrupt. Maternity leave (son is 22 months), hubby's 4 WSIB [Worker Safety and Insurance Board] accidents (off for nearly 4 months), saw things fall behind, I was in no state to deal on my own and he had no idea how to cope.
We were constantly fighting about money and started counselling to save our once wonderful relationship - to the tune of $1,000 a month. I returned to work and was laid off in September 2008. We bought our home 2 years ago and it kills me to think that we may lose our home. We are behind on the mortgage and bills, taxes, credit card, etc. Mortgage is not with our bank and the line of credit is with another bank. Our bank cannot help us as they really don't have anything to lose or gain from us. We may have some but not enough equity in the house to cover ALL debts, and we have no idea who else to turn to or where to go! We have other debts and are only beginning to make ends meet month to month again.
I really don't want to seek bankruptcy. But what else can we do with what seems like no time to turn things around? The line of credit is pressing as it WILL go to litigations (no idea if we should settle or pay in full) and they will garnish his wages. Hubby stepped up and asked his family for $10,000 but it's not enough to wipe our total debt and I'm not sure I am ok with the loan. We have been working DAILY for the last 3 weeks to turn things around and figure this out. I have opened a home daycare in the last month so earnings are coming in again.
Do we take the personal loan to put out the pressing fires of the line of credit (do we settle or pay in full?) and the mortgage arrears and then develop a plan to pay off other debts and keep fires at bay...or do we see if we can remortgage (unlikely I think) or go (gulp) bankrupt? My parent's advice in this? Call Gail ask her what to do. I have jars, budget, calendar...
Gail Vaz-Oxlade: Christina: I am so sorry that you're having to live through so much right now. Sometimes it seems that it never rains, it pours! But don't give up hope, you have options.
Skip the credit counselling meeting; I think you need to go and see a bankruptcy trustee instead. I can see you sitting there shaking your head at the idea of bankruptcy, and I want you to stop. Bankruptcy was created for people just like you: people who through adversity and disaster find themselves unable to cope. Bankruptcy will hurt, but it'll put you back on the right path. And when your bankruptcy is finally discharged, you'll be able to rebuild your life.
You haven't said what your total debt is, but based on what you have said, I think you may be past digging yourself out, especially in light of the fact that you and your husband both having income constraints. The home you bought two years ago has very likely lost a bit of value with the downturn in the market, but you would be able to stay in your home if your mortgage were up-to-date and you had virtually no equity. So bankruptcy might work for you, providing you can get your mortgage back in the black and can keep your home. Perhaps that loan from your family would solve the problem. If it does, take it. That's what family is for. Then promise yourself that you will do whatever it takes to repay the kindness: clean their house; make their meals; repay what's owed as soon as you are in a position to.
As for the fighting, you two need to pull together and stop picking at each other. I know there's a lot of stress, but adding to it by bickering and yelling won't get your into the black any faster. So don't play The Blame Game. You're a team, and you now have to prove it.
When you go to the bankruptcy trustee, make sure you get a good one. Like everything else in life, there are good alternatives and not-so-good alternatives, and you don't want bad advice to set you back even further. So deal with a reputable firm, not the guy with the loudest ad!
Finally, you MUST make a budget and learn to live within your means. If your means are meagre, you can either live like paupers or find a way to make more money. Those are your choices.
I know you can do this. I know you can take step up to the plate, pull together and make this work. You have a beautiful son, and he deserves your best effort, so DO IT!
hugs, g
Claire Neary, Reportonbusiness.com: Thanks, Gail. Next we have a question about your famous budget jars. On your show, you make people get rid of their credit cards and stick to a strict cash budget. You divide the cash into weekly jars, so people can see how much they're allowed to spend on each of their variable expenses. One of our readers has a question about exactly how these jars work.
Janelle Kopytko from Winnipeg: Hi Gail! I absolutely love your show! My question is this: What are the percentage amounts for each jar? In other words, what is the percentage of each variable expense. For example, should I have 15% of my income to pay for groceries, 10% for entertainment, etc.
Also, would you consider running a seminar, in Winnipeg, regarding how women can be more financially set and knowledgeable. Thanks for all the advice, and keep up the great work!
Gail Vaz-Oxlade: Janelle, the percentages are on the interactive budget provided on my website beside the s/b (for "should be") so you can see how your numbers compare to a balanced Life Pie. The percentages are 35% for housing (mortgage/taxes, rent, utilities, insurance, maintenance), 15% for transportation, 10% for saving, 15% for debt repayment (if you have a ton of debt, it may be more but then you have to find money from the other categories), 25% for life (everything from groceries, to entertainment, to medical, to child care... In fact, everything that's not in the other four categories.)
As for how much you should spend on individual budget lines like "groceries" or "entertainment", it depends on how much you make and how much you're spending elsewhere. If you have no debt, and your company is contributing to a pension plan on your behalf — taking care of most of your saving — then you'll have more to spend on Life. If debt is eating your income, or if you're living in a house that's gobbling up more than 35% of your net, then you'll have to cut way back on the Life category, or Make More Money.
Claire Neary, Reportonbusiness.com: How did you develop this interactive budget and decide on the percentages? I know from watching your show that many couples don't use a budget at all, and they're absolutely shocked when you break down their spending. Why do you think so few people think to make a budget in the first place?
Gail Vaz-Oxlade: The interactive budget came about because a lot of the people who watch the show wanted to know how to do this for themselves. I am always being stopped and asked if I'll do their budget... Well, there just aren't enough hours in the day, so I created the budget (along with instructions for how to use it) so people would be able to help themselves.
I'm not sure how many people use budgets, but a budget is THE most integral part of any financial management system. If you don't have a budget, you're winging it. The reason people are shocked when I show them what they're spending on the show is because they don't have Clue One where their money is going. And the reason they don't make a budget is because they are lay-zee!
Claire Neary, Reportonbusiness.com: Is it possible to budget for a layoff in the family?
Gail Vaz-Oxlade:If you suspect you may end up being out of work because of the mess our economy is in, doing a budget for the tough times is the only way you can see where you have to cut back, and what you might have to do (earn money on the side) to make ends meet.
Jim S from Etobicoke Canada: Hi Gail. I love your show! Here's my situation: I'm 27, single with no kids and in a stable job where my salary will continue to grow for the next 7 years. I have about $35K in debt - credit card, line of credit and student loans. I'm living frugally - following your advice about living off of cash - and am not making any major purchases. My monthly expenses are nearly all of my monthly income, including minimum payments on the above mentioned horrors of the Visa card, bank payments and paying back the government. Am I able to consolidate my debts? Should I try and increase my line of credit to pay off my credit card (with certainly a much better interest rate, but not by much.
Gail Vaz-Oxlade: Since you're only making minimum payments on your debt, it's going to take a loooong time to get clear. You could consolidate to lower your interest costs, or increase your line with the same goal. But in all likelihood, you'll need to get another job to pay for all the stuff you bought that you now have to pay for. Good luck, g
Ted Laursen from Langley, Canada: I am in the process of renewing my mortgage, question is, keep the payment the same and with the lower rates it will take 9 years off the amort of my mortgage...or...keep the amort the same, take the reduced payment and pay off the 3,500 I owe on my credit cards, and then tackle the remainder of my student loans? My wife likes option one...I like option two...the discussion is explosive. Thanks.
Gail Vaz-Oxlade: Ted, if it were my money, I'd get rid of the credit card debt and the student loans first, since the interest on those forms of credit are higher than on the mortgage. Once they were gone, I'd take the money I'd been using to pay them off and slap half against the mortgage (if you can increase your monthly payment) or accumulate it for an annual prepayment. The other half would go to savings/emergency fund and FUN!
ed king from HANOVER, Canada: GAIL - With regards to Financial Planners for the average family . Do most people need one or can you educate yourself to survive in the financial world? thanks.
Gail Vaz-Oxlade: Ed, I think most people need to take personal responsibility for their own financial well-being. I'm all for seeking help when you hit a wall and don't know what to do, but if you give over the decision-making and the responsibility for your money to someone else, you're a dope. So, learn the rules (they aren't hard), follow them, and then let your "experts" educate you as they help you decide how to deal with specific issues relevant to your individual financial plan.
Claire Neary, Reportonbusiness.com: About those rules. Besides making a budget and sticking to it, what are the most important rules to keep in mind? Do they change during a recession? Which rules are hardest for people to follow?
Gail Vaz-Oxlade: The rules are simple: Don't spend more money than you make AND save something. It doesn't matter whether you're living through a recession or high off the hog, you can't spend more money than you make or you'll be in trouble. And if you don't save something, you won't have anything as a buffer when the crap hits the fan.
People start becoming confused about he rules when they are mislead about, for example, what constitutes and emergency fund. Some "Spurts" (my word for "experts" for obvious reasons) say a line of credit can be used as an emergency fund. A line of credit is NOT an emergency fund. It's credit. An emergency fund is money you can use to fill gaps so you don't have to use credit.
Things like insurance confuse the heck out of people. The Spurts who claim "term" is the way to go, fighting with the Spurts who say "permanent insurance" is the thing to have, make the waters so muddy that people just don't buy insurance... Of any kind. Witness all the people who aren't sufficiently covered, who then become sick, disabled or dead — creating havoc in the lives around them.
Patrick Lawrence from Canada: My wife and I sold our house last summer and are now renting in lieu of a relocation move coming this summer. We have approx. $70,000 in debt, reconsolidated when the house sold. We have saved $15,000 for a down payment towards the purchase of a house this summer.
Should we continue to rent for the short term and work towards eliminating the debt or continue with our plans to buy a house this summer?
Gail Vaz-Oxlade: Patrick, it sounds like after the proceeds of the sale, you're still $70K in the hole. While I wouldn't presume to tell you when to buy or not buy a home, the questions you have to ask are: How much debt can you manage? Would you even qualify for a mortgage with the existing debt load you're carrying? And with the added expense of home-ownership, how do you plan to become debt free quickly? There are a whole bunch more questions, like "Do you have a healthy emergency fund?" and "What's your current net worth?". I think you need to go see someone who can help you work through the figures, if you don't know where to begin yourself. Good luck.
David Guy from Canada: Gail, there are a number of books out there for women who want advice on how to handle their personal finances (including, I believe, one of your own). Is it that much of a gender issue, though? Are the principles of good personal finance not the same for men and women?
Gail Vaz-Oxlade: David: the reason there's a gender issue associated with money is because there are still differences in women's and men's issues. For example, women often earn less than men, so a greater percentage of their income must be spent on keeping a roof over their heads and food in their bellies. And since women still live longer than men (though maybe not for much longer), our assets have to last longer during retirement. I know it's politically correct to say money knows no gender, but that's not true. Since life insurance premiums are not gender neutral, whether you're a girl or a guy has an impact. Ditto borrowing since many women who have diligently managed the family's finances for years find themselves without a credit history because they were not the first to sign on the credit application. Really!
janda maci from Toronto: Hi Gail - I have about $185,000 coming in soon from the sale of a second property. I owe a mortgage of $250,000 on my primary residence. y thinking is to put it all on my mortgage and triple my monthly retirement contribution with what I'll no longer be paying on mortgage. Given the current economic climate, what is your recommendation on what to do with that money - balancing paying down debt and retirement planning? Thank you!
Gail Vaz-Oxlade: Janda: I like your plan and my only proviso would be to make sure you have a big fat emergency fund available just in case.
Lee-Ann Gibbs from Toronto: Hi Gail, thanks for taking questions. Now that interest rates are so low, do you think it is better to focus on having a positive net worth by saving and investing, rather than aggressively paying down debt?
Gail Vaz-Oxlade: Lee-Ann: I think we need to balance debt repayment with setting aside something for the future. Whatever interest you're paying on consumer debt is too much interest, and that has to be a priority, regardless of where interest rates are. But no one should sacrifice their long-term savings and emergency fund to debt repayment. Balance is the key.
Frank Smith from Ontario: Hi Gail, I watch your show and enjoy it. I understand the budgeting principle that you advance with the jars. However, the budget jars make no allowance for the biggest difficulty we have in our household budget which are the unpredictable and sometimes significant unbudgeted costs (e.g. car repairs, furnace repairs etc.). I anticipate that your advice will be to have savings set aside for such things but establishing a significant savings account is very difficult when you are focusing any extra money on debt repayment. It seems to me that significant debt repayment should wait for a little while until you have established a savings account to give you some flexibility to deal with significant unbudgeted costs. Do you agree?
Gail Vaz-Oxlade: Frank: The single biggest reason why people can't live on a budget is their failure to plan for inevitable expenses. Sometimes people refer to these as "unexpected" expenses - I'm not sure why, since some of the things they include as "unexpected" aren't unexpected at all, just irregular. "Unexpected" is often just another way of saying, "I don't want to have to think about it."
The biggest problem with focusing too tightly on debt repayment and not having an emergency fund is that when the caca does hit the fan you're going to go into debt, or deeper into debt. So an emergency fund is also a safety net against more debt. And an emergency fund can help you smooth out your budgeting because when unexpected expenses hit your doorstep, you don't have to constantly be re-jigging your budget to make it to the end of the month.
Susan Cook from Toronto: Gail: I am not currently employable as I am off work with a disability. I do have some LTD income from work until I am 65. I'm 55 years of age and my home is unfortunately going to have to generate most of my retirement income at some point. I am living in it now - a 2 bedroom condo type apartment in Toronto. We're not talking a lot of money here - maybe $200-250K net.
Assuming I find other accommodation with a friend, please help me work through this process. I am considering this move at some point in the next 1.5 to 4 years. The carrying cost of the condo is just over $700 per month including condo fees, maintenance, taxes, heat, digital cable, laundry, parking and locker. Hydro is extra averaging $45 per month. However, the building is old and we often see large ($200 - 500 per month) special assessment for 12 - 24 months at a time as we are currently. This seems to rule out keeping it and renting it out, correct?
I wonder what I should consider doing with the proceeds of any sale to generate the most secure but highest yielding investment possibilities. I need to do some fix ups to make the apartment more saleable and I would like all of the items to be ones that the Home Renovation Tax Credit will allow me to use as deductions. I may need a tiny $1 or 2K renovation. Does it seem like a plan to get this done before February 2010 for the deduction?
I truly appreciate your advice, Gail. You are a fabulous woman! Thank you...Susan.
Gail Vaz-Oxlade: Susan: I need about a week with you! First, if you're planning to do renos to make your place more saleable, then taking advantage f the new HRTC makes sense. But you should check with a real estate agent so you do things that make sense in the market we're in, and don't over-commit on the reno front. As for what to live on when your LTD income ends in 10 years, you need to start looking into what's available from the existing government programs to fill the gap. CPP has a disability payout that you may qualify for. But you have to work out the math to see where the gaps are.
I agree that the condo fees may rule out keeping the place long term, so you need to see how much it's worth on the market right now (again, call a good real estate agent for help). As for what to do to generate income, for that you need an investment expert, which I am not. I have my own investment advisor, and take his counsel when it comes to choosing where to put my money. I recommend you do the same. Good luck and kisses girl. You're walking a tough road with a brave face! G
Marie-Eve Fournier from Mississauga: Hello Gail, I love your straight forward no-nonsense approach to family finance. My husband and I are both in our mid-thirties and we have 2 small children in daycare. Our combined family salary is $150k/yr, however we live like a family that makes half that amount. We only have 1 family car, reside in a townhouse and don't purchase any big ticket items. My husband has a $15k line of credit and my student loan debt of $35k. We moved in this townhouse in 2005 in the hopes of saving money to be able to get a good down payment on a fully detached house in our neighbourhood. Our townhouse is worth $215k and the fully detached we are interested in are approximately $350k- $450k. We just can't seem to save and I just don't understand where the money goes.
Is there anything you could suggest on what would be the best way we could save for a down payment and hopefully be able to purchase our dream home? My hopeful timeline is 2 years for the move. Thank you in advance for taking the time to read this and help in any way possible.
Gail Vaz-Oxlade: Marie-Eve: You need to figure out where the holes in your budget are. You can do it one of two ways. The thorough way is to gather up three to six months' worth of all your statements and add up where the money went. The easier way is to track your spending — every single penny — for the next two months and then see where the money is going. You're going to have to plug those holes if you want to have that money for the new house in two years. Good luck, g
stephanie kirkpatrick from Canada: Hi Gail, I listen to your advice all the time and I love your show.
We have about $10,000 in our savings (thanks to you, in part!) and we want to take the most advantageous use of the money. We want to put it into an RRSP and then use the tax refund to pay down on our mortgage. The question that keeps us up at night is, with the financial state of the world right now, is this a good time to be buying into mutual funds? Would we be better off applying all the money to the mortgage this year and waiting to see some recovery before investing in RRSP's next year? Thanks, Stephanie.
Gail Vaz-Oxlade: Stephanie, you're asking me if I think market timing is a good idea and my answer is absotively, posolutely NOT!
Since the markets are down, the money you put in now will actually buy you more units of the mutual fund of your choice than it would have a year or two ago. And that's the beauty of a commitment to regular investing. You don't have to worry about timing the market, you can focus on just doing the right thing. Your plan to maximize your RRSP and use your refund to pay down your mortgage is a good one. Go with it. If the markets scare you, consider an index linked GIC that will tie your return to a positive move in the market, but keep your principal safe. Good luck. G
Jessica Lovejoy from Canada: Hi Gail, I was recently laid off so things are tight for my husband and I. We seem to be going through stages of getting our budget in order, then thinking 'we're fine' and forgetting all about the budget for a month or so. We don't go way over budget, as we are generally conservative spenders, but we don't pay as close attention to our spending as we should be. We are also putting off non-essential purchases until I get a job.
I am worried that once I am receiving a regular paycheque, that we will again assume the world is good and our money situation is free and clear - without actually knowing the details.
My question is a two-parter: 1. Do you have any tips on how to monitor spending on a more regular basis? One that both my husband and I can follow together without one of us having to keep track of the other.
2. Right now we don't use any financial management software. I have heard that there are some good ones online (and free!) but I am worried about security. Anything you can suggest? Do we even need it? Thanks, ~ J.L.
Gail Vaz-Oxlade: Jessica, you can use a software package to help you monitor your spending, or you can simply open up an spreadsheet, create a budget and then track every penny you spend. That's what I do. And while it takes a little getting used to, once you're into the routine of seeing where your money is going, you'll wonder how you ever lived any other way. g
Cassy Montgomery from Kanata, Canada: We have $40, 000 on LOC and approx $22, 000 van lease. I was thinking of combining all that debt on our mortgage with a blended rate, as we cannot break our current mortgage until Oct 2010. PC is offering us 4.4% on the extra amount, less that the LOC interest rate. With the extra $ we would have every month we could then contribute to the kids RESPs to get the government portion. I would also like to put more aside for an emergency fund, and have a lump sum to put on the mortgage when it is time to renew.
My question is whether this is the best solution. I feel like putting the debt on the mortgage just hides it away. However, my oldest is 14 and will be out of high school in just 3 years and getting money from the government is great too. I'd like to know Gail's thoughts on my scenario. Thank you, Cassy Montgomery.
Gail Vaz-Oxlade: Cassy, If you swear that you won't put a single penny on a credit card or line of credit again (that you don't pay off immediately) then I'd say to go ahead and do the consolidation to your mortgage. Your rationale makes sense to me, and I'm only concerned about your commitment to staying debt free. If you say you're committed, then get busy with your plan. G
Steve v from Toronto: What is the best savings/investment approach for a couple that are planning on getting married and buying a house within the next 24 months? We have some student debt (hers) and a good downpayment saved for the house (both, but mainly him!). Should we be investing in TFSAs for the wedding fund? Or should we stick with high interest savings accounts? Money market or GICs? What do you do when the interest rates are so low?
Gail Vaz-Oxlade: Steve, The TFSA is a great place to save up some money. Whatever you take out for the wedding can be put back at a later date. You should also be working hard to get rid of that debt. If he can come up with money for the downpayment, she should bust her butt to come up with the money to get that debt paid off. As for the return on the TFSA, shop around since my TFSA is paying more than my high interest savings account right now on promotion. Happy wedding! Happy life! G
Heather Macleod from Ottawa: Hi Gail, I work for the federal government and have a great pension plan. Currently, I put most of my 'extra' money into my mortgage, and only put a small amount into RSP's. Do I really need to put the money into RSP's if my pension is already going to be quite good? And if not, where do you suggest I allocate that money? I have only a small amount of student loan debt left (should be paid off by the end of this year), and no other consumer debt. I am single income, no kids.
Gail Vaz-Oxlade: Heather, if the pension is taking care of your "save 10%", then you should use your money to a) build up a nice fat emergency fund, and b) have some fun! Don't be so focused on the money that you don't have a life too. What kinds of things do you want to do? Travel? Build or buy a home? Go back to school? Make sure you're taking care of tomorrow AND today! g
Northern Dancer from Outside of Toronto: Hi. How do I determine the cheaper means of financing? The 2 choices I am evaluating — Scure Line of Credit or a Mortgage.
Gail Vaz-Oxlade: Northern Dancer: Te cost of borrowing depends on two things a) the actually interest rate you're paying, and b) how long you choose to repay the debt. Obviously, you want to go with the lowest possible interest rate. But you should also look at getting the debt paid off as fast as possible to save over the long term.
skelly from toronto: 1) I am a regular viewer of your show and regular visitor to your site. On the show you often advise couples than when trying to balance their budget, they should either reduce variable expenses, earn more money, or both. My variable expenses are modest. So, think I need to look at earning 'more money'.
In these difficult economic times, where jobs are being cut, what do I suggest I do to increase my income. I am employed in marketing/advertising - an area that is hit hardest by a recession.
2) In this economic downturn, I am concerned about my investments. I am 47. Husband is 50. We have two teenage children. We have approx. $20,000 in RSPs. And 32,000 in RESPs. I have my RSP in mutual funds that have been consistently showing losses. Should I take my RSPs out of a mutual fund and put them in something that is subject to less volatility. A money market fund, perhaps?
Gail Vaz-Oxlade: Sarah: Lots of people get really creative when it comes to making more money. People walk dogs, teach piano, or turn a baking hobby into a small business, supplying local stores with their goods. You'll have to look at your interests and strengths to come up with what works for you.
As for your investments, you actually haven't lost anything until your sell and make those losses real. I'd just leave things alone and let them be. You still have a long term investment horizon (over ten years) so you should be fine. Stick to the plan.
RIGHT IS CORRECT from Canada: Gail, Love your show! But when you tell folks (that seem to make a lot less than me) that be saving, say $100/mo, they'll have x (eg 8) hundred thousand at retirement, what assumptions are you using?
I am a well paid engineer, putting the max RRSP in every yr (18K), and, after 22 yrs, I have only $300K to show for it! And I think I am a fairy good investor (diversified, etc etc). Your assumptions? and are they realistic given demographic slowdown, and other headwinds?
Gail Vaz-Oxlade: Right: My assumptions for growing their long-term savings are a) a annual average return of 7%, b) the reinvestment of the tax benefit derived from making the RRSP contribution, and c) the magic of compounding over time. Many of the people I work with are in their early 20's or 30's and have loads of time on their side. And that makes all the difference in the world.
meredith Hepburn from Toronto: Hi Gail, A few questions for you! Have you noticed an increase in people looking into the new Tax Free Savings Account? What's your take on it? Do you see people looking at both the TSFA and the RRSP? Do you think people really understand it?
I'm wondering if the current economy will allow for people to look at they spend but also if it will show the issue of the benefits. It seems that the people who need it most have none, while the jobs with some of the most security, have good benefits. Do you see this changing in the face of an upheaval of the finance sector?
In terms of Toronto, have you seen a change in the current standard of living? Do you think many are basically just making 'ends meet?' Do you think its a case of living beyond their means or, is it because the of the high cost of living due to rising prices? Thanks!
Gail Vaz-Oxlade: Meredith: I love the TFSA. I think it's a great way to save your emergency fund. As for who is using it, I'm trying to get everyone to.
As for what's happening in the economy, Equifax Canada recently did a press release showing that bankruptcies were up 9% or over 109,000 new bankruptcies — in November 2008 over November 2007. There are probably plenty more coming given that things have only gotten worse since last fall.
Paul XXX from Canada: Hi Gail, Great forum for discussion and so timely. What is a good guideline for an 'Emergency Fund' amount? Once you hit your target and have no consumer debt what is the next step? Thanks.
Gail Vaz-Oxlade: Paul, the rule of thumb is to have between three and six months' worth of expenses socked away somewhere save like the new TFSA. People sometimes cringe when I tell them this because it seems like soooo much money. So I often suggest you start by figuring out what your Essential Emergency Expenses — the stuff that has NO fat, just keeps body and soul together — and work on saving up six months' worth.
Claire Neary, Reportonbusiness.com: Gail, thanks so much for taking the time to answer so many timely and personal questions. One of our readers has sent us a response to your recommendation that Christina, who sent in our first question, should seek bankruptcy counselling instead of credit counselling.
Anne Vanidour from Coquitlam, BC: Gail, I disagree with sending people straight to a bankruptcy trustee instead of credit counselling. In my business as a mortgage specialist, what I find most is the lack of education about personal finance. I review credit bureaus on a daily basis and from that I share my knowledge to clients how to strengthen and improve their credit scores.
MOST people say, why don't they teach this in school... if only I had known what to avoid... Young or old, most people learn something new when I review their bureau with them. I have sat down with credit councillors and asked them what people are missing... their number one request is that they wish people would visit them BEFORE filing for bankruptcy! One great reason, debt consolidation stays on your bureau for 3 years and a bankruptcy 7 years! There are so many limitations placed on people after filing for bankruptcy over and above the stigma of it.
GO to your BANK arrange something with them about modifying your mortgage payments. They can't help you if they don't know. If when you purchased your home and you paid additional fees for an insured mortgage through CMHC or Genworth call them and talk about mortgage restructuring. Remember banks and mortgage insurers want to avoid bankruptcy for you too. GO to a credit councillor before bankruptcy you may discover how to avoid filling and how to avoid repeating the same mistakes next time around. BANKRUPTCY is a last resort not the first step in debt reduction!
Gail Vaz-Oxlade: Anne: I am NOT a fan of credit counselling for two reason. First, if people were getting an education then I'd feel better about the whole process. But many of them are not. What they're getting is a "debt consolidation." But they're no better off in terms of learning how to manage their money.
The second reason is that the debt consolidation stays on your credit history for three years AFTER you are paid off. If it takes you five years to get out of credit counselling, which is pretty standard, that's on your record for 8 years — longer than a bankruptcy. I only recommend bankruptcy to people who cannot find a way to make their payments and eat. For all others, I recommend a consumer proposal which will turn off the interest clock, negotiate down the settlement and relieve the stress. But I do NOT recommend credit counselling. g
Claire Neary, Reportonbusiness.com: Thanks, Gail. Christina, herself, has sent us a response to your advice on her dilemma.
Christina Hodgins from Ottawa, ON: Thank you so so so much for your input, Gail. I am sitting here, tears streaming down my face, but all the same, I feel there is hope. We CAN be a team... thank you for reminding us of the priorities.
The debt load we carry is about 35K. If we take a family loan and they can cover off our debt load, we will suck it up and do this, otherwise we will do what we have to do and declare bankruptcy.
I have swallowed my pride and just want this done with. I need my sanity and want nothing more than the best life for my family, if I have to start over I will.
The people we are seeing today are debt counsellors and trustees in bankruptcy who came by recommendation from a good friend. After speaking with them over the phone for nearly 45 minutes last week I feel they are a good company to work with.
We have committed to scaling waaaaay back (as far as cutting off tv and excess expenditures while making a plan to earn more money. We cannot depend on the economy for a great job opportunity right now, but we will not give up and get creative if we have to - yes, we have to, so already I am jotting ideas on how to do this! I appreciate your honesty and your input. Hugs (and thank you), Christina & Jeff
Gail Vaz-Oxlade: Christina: You are most welcome. I love it when people recognize they have the power to create the lives they want.
Yes, sometimes it takes hard work. And sometimes it means giving up something to get something else. But we all have the ability to make our lives work if we are determined to do whatever it takes.
I send you loads of hugs, and hope that you and Jeff can find your way back to all that love you had before the crap hit the fan. Whenever you waver, just look at the baby's face and think of how much future you can have together.
Claire Neary, Reportonbusiness.com: Gail, thanks once again for taking the time to respond to our readers' questions. We were overwhelmed with questions and comments on this incredibly timely and important topic today, and I apologize to anyone who's questions we didn't have time for. And thanks especially, to Christina, and all of our readers who shared their deeply personal stories with us today.
Gail Vaz-Oxlade: I wish you all well. The next year will not be an easy one. People are going to lose their jobs. Some may lose their homes. Family and friends will be important in helping us all maintain our sense of balance. Be kind to each other. Help each other learn how to be better with money. And smile. There's light at the end of the tunnel... And, no, it's not a train!
Anyone interested in purchasing the Til Debt Do Us Part Life Planner — part day-timer, part financial management tool — should make their way to Frantic Films.com ASAP. We're almost done with this year's sales.
Hugs to y'all. Gail