January 2008 Questions & Answers

 


I had a RRSP and a pension plan with a company I just left after 9 years. It was a matching program and I hated the company (Sunlife) that managed it. Their statements were difficult to read and they never seemed to do what you wanted unless you hounded them. I benefited from stock options, which are in a US account at the bank. I received large bonuses, which I tucked away in ING (They are awesome you forget you money is there and it keeps growing and they NEVER BUG YOU) I am now with another company (oil and gas) where I have a savings plan (10% they match 10%) with 2 other financial institutions (Manulife & Scotia McLeod (company shares). What I am thinking is I need to consolidate all of this. Do you think this is a good idea???

Name withheld

I do think that consolidating is a good idea when:
It makes your life simpler, and
You’re not sacrificing any return on your investment.

So, look carefully at where you’re planning to move the money to see if your return will match or exceed the returns you’re earning on your existing plan. I know past performance is no predictor of future performance, but year-over-year averages are a good thing to look at to see how the plan has been doing.

 

I am getting part of my inheritance ($100,000) before my father passes away. Our small business has some outstanding debts and a mortgage (68,000) and we also have a vehicle loan ($35,000).

My husband wants to pay off the outstanding debts and mortgage but since it is his business I am reluctant to. I would like to put some money against an RRSP, pay off the vehicle and put some money towards an RV trailer and have some savings.
What do you suggest?

Name withheld

So you want me to wade into a “discussion” between a husband and wife about the best way to blow $100,000? Hmmm.
Here’s my two cents:

If you don’t own any part of the business, do not put a cent in unless you are given an IOU or ownership of some sort in the biz. If it isn’t a business with shares that you can prove ownership in, stay out of the business. This is your husband’s and he won’t want you telling him what to do (which you’ll think you have the right to do when you give him “your” money.) Nor will he want you asking him questions, (which you’ll think you have the right to do when you give him “your” money.)

If you haven’t been making RRSP contributions, and have income against which to claim the deductions, that’s a good idea. If you aren’t working (you don’t say) and have no income, then don’t bother with the RRSP if you’re over 45. Instead, set up a non-registered investment portfolio.

If you have any debt, that should be your first priority. And, sure, you should have some fun too, but don’t go nuts. Designate about 20% for play, and put the rest of the money to work.

 

I really like your online worksheets. I was just wondering what you would suggest to do with the 15% used for debt reduction after the debt is gone?

Holly

What a good question, and one I'm really going to enjoy answering.

If you aren't maximizing your savings, make sure you up that amount so that you're socking some money away for the future. Ditto your emergency fund.

Use some of the money to give your budget some wiggle-room: A little more in food, some more in entertainment, a little more in clothing and gifts. Don't go nuts. Just add a little more to each category.

Review your goals for the future and start planning ahead. If you're going to have to replace your car in the next two years, start saving some money toward that now… I call this "planned spending". If you're going to start a family, start planning financially for baby's arrival.

There are lots of things that require some financial foresight, and if you set aside some money ahead of time, then you won't go into debt again. Think new home, vacation, kids' education. If you can imagine it, you should be planning financially for it.

 

How much do you need to retire? My husband and I currently have about $300,000 in investments and about another $300,000 in equity in our house. We will most likely not have a corporate pension (my husband is self employed and I am a stay at home mom - for now). Do we really need to keep saving other than RESP's for our - soon to be - 2 kids??

Name withheld

This is a very BIG question.
First off, I don't know how old you are and how long you have until you retire. The further you are from retirement, the more time your $300K has to grow, and the less need there is for you to supplement it with hefty contributions. The closer you are to retirement, the sooner you'll need the money and the more likely it is you should still be socking money away. Go to www.fiscalagents.com and use their Retirement Income and Savings Calculator to help project what your retirement income/savings needs will be.

It also sounds as if you're about to start a family - a very expensive time of life. If it turns out that you must suspend retirement savings for a while as you cope with the changes in your cash flow, that's part of life. It's silly to think your life will change so dramatically with no impact on your budget. Just don't fall into the trap of never getting back to savings. Even if you're setting aside a small amount each month, it'll add up and make a big difference when it comes time to retire.

Remember, too, that there will be two of you counting on your retirement savings and, as a woman, you can expect to live till your late 80's. Be old is bad enough. Being old and POOR is horrible. Don't go there girl.

 

I'm single, 43-years old, make an excellent salary and have no debt other than a mortgage of @ $172,000 amortized over another 18 years at 5%. My payments are about 750.00 every two weeks and then add strata fees it's about 38% of my annual salary. I max my RRSP's every year (about 5000.00 as I pay into a municipal plan through work - no choice there). Should I be putting any additional savings into my mortgage? Does even a 2 - 3,000 a year make sense or does it make more sense to invest this money elsewhere?
many thx          

Name withheld     
     

What a good girl you are. Well focused. No bad debt. Saving as much as you can. You should be very proud of yourself.
Some things to watch for:

a) You're housing costs are running a smidge high… shouldn't be more than about 35% of your total income. However, since you have no debt repayment costs, you sound like you're fine.

b) Do you have an emergency fund… between three and six months' worth of expenses in a very liquid investment (like a savings account or short-term deposit)? If not, that should be a focus.

Now, to your question: Will a $2500 prepayment against your mortgage make a difference? Sure it will. Anything you put against your principal knocks time of your repayment and money of the interest cost. In your case, done annually, that $2500 would knock between 4 and 5 years off your amortization and would save you over $15,000 in interest.

As for whether you should invest that money instead of using it to pay down your mortgage, it depends on the return you're getting on your investment. But you're already maximizing your savings at work and through an RRSP and so I'd say why not have some fun with that $2,500 a year. Life is not just about making ends meet… it's also about having a great time.

Assuming you've already got that covered, since you're 48 and want to be debt-free at retirement, I'd work on paying down the mortgage.

 

We are a pair of 48 year old renters who need to decide if we should take our small savings and buy a house, or if we should improve our retirement home. My husband can retire in 7 years and our income then will be approximately the same as it is now.

Sandi McLaren

Sorry Sandi, I don't have enough information to answer this question for you, but I want to try and help. So repost the question and include the following information:

How much of a downpayment do you have?
How much are you planning to spend on a home?
What is your joint income?
What are you currently paying in rent?
What other home costs are you paying? Utilities? Etc.


I found this website: www.dinkytown.net/java/CASavings.html with a savings goal calculator. They use an interest rate of 8.00% with an inflation rate of 3.1%. Is that realistic?

Name withheld          

Over the past 40 years, Canada's average annual inflation rate has varied from a high of 12.4 per cent in 1981. The annual inflation rate was 2.7 per cent in 2000. Monetary policy in Canada is guided by an inflation-control target and the current target range is 1 to 3 per cent. So the 3% used on this calculator would take the Bank of Canada's high end, which is good. As for the interest rate, according to Cannex.com the most you can get on a savings account (w/o Jan 5, 2008) is about 4.1% while the interest paid on one-five year GICs wasn't much better, topping out at about 5.25%, well below the 8% on the calculator. That being said, if you have an investment that averages 8%, by all means use this figure. Otherwise, change the return the calculator uses to something that reflects the return you'll actually earn so the projection is realistic.


I am a huge fan of the show. I find myself a little obsessed over money, banking, making changes to do with money. I am constantly checking my account balances. I would say that every two days is the norm for me. I always have scraps of paper on the counter, running all kinds of numbers with how much money we have and where it can go. My husband thinks I am crazy. But looks forward to his allowance. I have made a list of 5 major things that I am saving for this year and how much I should put away each month, which is about $300 a month. Do you think it would be better to keep it in a savings account or put it towards my line of credit? And then take it out when needed. Also my ten-year plan is to pay off my mortgage and line of credit. I have increased the mortgage 10% which took off about 4 years. Do you have any other suggestions? Any advice would be greatly appreciated. Thank you.

Victoria       
  

Whoa girl, slow down. I can practically feel you racing through life.

First, I'm glad you like the show and that you've take the advice to heart.

As for checking everything every couple of days, I'm with your husband: you're nuts. The point of planning like a pessimist is so you can live like an optimist. If you're obsessing (which I think you may be), you're just going to wear yourself, and everyone else, out.

I'm glad you're setting goals for yourself and planning your spending. Setting aside money to buy things is the way to go.
But then there's the whole outstanding line of credit thing. You should not be buying one more thing until that line is PAID OFF!

Say it with me, Victoria: "I will not buy anything until my line of credit is paid off!"

That's my advice.


Hi, we are big fans of your show. We record absolutely every one to watch together so it can give us tips on where we can economize. One question we have though is concerning transportation expenses. It seems as though everyone around us is paying $400+ per vehicle on a lease plus insurance, parking, etc. We make $125K gross annually, and are currently paying $328 per month on a finance contract of 60 months for a Yaris (ie. it's no frills, but all the safety features available). We currently have a lease of $115 per month that is coming due soon and need a new vehicle. My husband drives 96km round trip daily (he also works downtown and has to pay $115 taxes in, in parking)and I drive 50 km daily. What would you consider to be a reasonable monthly expense? Thanks a bunch : )

Diane         

The general rule is that you shouldn't spend more than 15% of your net family income on transportation: lease/loan payments, gas, insurance, repairs, taxi, public transportation - anything that gets you from here to there on a regular basis.

If you're making $124K gross annually, I'm going to estimate your family income at about $90K net (I don't know your family circumstances, so I'm guessing), which would make your monthly net about $7,500. You can confirm this by looking at what you deposited in pay over the last month. And 15% of that is $1,125. So that's what's reasonable for you to spend, assuming every thing else in your budget is in line.


I have started a budget just using an Excel spreadsheet, and this morning as I was tweaking it I noticed that in 10 DAYS I spent $1273 on stuff!!!! And it was mostly stuff for me! I do have a savings account, and I also pay my bills on time. I have no credit card anymore it has been paid off after 4 years. My question is how do I stop from overspending? How do I budget accordingly for clothing, and entertainment? Should I be doing it by percentage or dollar? Because now that I look at the spreadsheet I'm thinking "where did all the money go" and "did I really need a spring jacket when its still winter?"

Thanks in advance. I love your show.

Jill Irwin       
  

I applaud you for getting on a budget and tracking your expenses. It's a real eye-opener, isn't it?

Life - which includes everything from food to clothes to entertainment - should use up only about 25% of your budget. I encourage you to try Gail's Interactive Budget, which will not only help you see the various categories and how much is going into each (which you can adjust until you've got the formula right) but also puts the money into the jar categories.

Yes, my girl, I'm going to tell you to get thee on cash. Uh-huh. That's what you need to do until you've created a new set of realizations about money and the fact that you only have so much to spend.

One of the things my fams say is that living on the jars makes them way more aware of what they are spending on. I expect you could use that lesson too.

You can still use your excel spreadsheet to keep track; just transfer the numbers you've worked out on Gail's Interactive Budget to the spreadsheet and start from there.

Let me know how you do.