This & That: Good Questions Edition

We are on a tight budget. I shop at a few grocery stores for the best prices, I plan meals on a weekly basis, I buy no name brands, I even eat a lot of meat alternatives as they're cheaper. And we rarely ever eat out (once every 2 months). There are 2 adults and a 3 year old and a one year old in our household (in Nova Scotia). We spend about $670 per month on groceries.

Do you know what the average household spends on groceries? Is this a reasonable amount and do you have any other ideas or tips on how to save on groceries? Thank you very much! I've learned a lot from you!

Gail says:  According to Stats Can, on average, households spent $7,310 on food in 2007, which is the last year for which they've published numbers. But food costs have been on the rise, so you can expect that number to have gone up a bit. If it has risen to $8000 a year per family in the last three years that would be monthly cost of $667, which is pretty close to what your family of four is spending.

I lost my husband suddenly 3 months ago and was left with 2 kids and the task of managing the finances and planning for our future. After paying off the mortgage with some of the life insurance money I am lost and unsure how to invest the remaining funds. I have been trying to put the pieces of our life back together and find this aspect of it foreign to me. Please give me some advice or contacts.  I am a loyal fan and look forward to hearing from you. Thank you for your time and help.  Lost in life, love and finances…

Gail says:  I am very sorry for your loss and for your sense of confusion. The most important thing right now is to chill a little. Stick the money in a high interest savings account or short-term deposits and give yourself some time to breathe. And educate yourself. Go to my website and read the articles under Saving & Investing to start. I also have lots of blogs on investing.  I do not make recommendations to advisors.

Matty wrote:  I am enthralled with your show, and I just finished two of your books. I wish you would come lay a smackdown on me and my family.

I am a 23 year old who just convocated from university and started my first career job. I finished with $50 000 (5.0%) in a student line of credit, and $7000 (5.5%) in government student loans. I have no consumer debt. My net income is approximately $42 000 a year and only have monthly fixed costs of $200 since I plan to live at home for the next 3 years. So, here are my questions.

I have been aggressively paying off my line of credit debt for the past few months by putting $1500 payments of my $3000 monthly income into it. I now have to start paying back my student loans as my 6 month period is up, but the minimum payments are only $82. I also pay $150 into RRSPs and $200 dollars into my TFSA for saving for a downpayment, and my emergencies. The remainder gets used for cashflow and short term savings.

You often suggest that 15% is a good amount for debt repayment, but right now I am paying 50%. Is this too much?

Also, I am having a hard time deciding if I should be paying more into my gov't student loans as I paying a lot of interest over the long amortization period and could kill that debt pretty fast. I don't have to make payments (other than the interest) on the line of credit until next year. Is it true you can claim your gov't student loan interest on your income tax?

I guess I just feel lost in general as to what my budget should be for the next 3 years since I really have a lot of freedom in terms of what I am paying vs what I am saving.

Gail says:  The 15% debt rule actually says if you have to pay more than 15% you have too much debt. It's not meant to limit your debt repayment. You are on the right track and I'm very impressed with your determination and focus.

As for your student loan interest, students can claim a non-refundable tax credit for the interest paid on a student loan.  However, to be eligible, the loan must have been obtained under the Canada Student Loans Act or similar provincial act. There are both federal and provincial non-refundable tax credits which are calculated by multiplying the lowest federal, provincial, or territorial tax rate by the amount of the loan interest (except in Québec, where the rate of 20% is used).

Unused interest amounts can be carried forward for 5 years so if you do not need to claim the student loan interest because your taxes are already zero, save it to claim in a future year.

BTW: A non-refundable tax credit can only be used to reduce federal or provincial/territorial taxes to zero.  It will not generate a payment from the government if no taxes are payable.

To decide how best to apply your payments, look at the interest rates you are paying on your various loans, and the comfort level you feel making those payments. My advice is always to attack the loan with the highest interest rate first. Having eliminated that debt, you can then roll that amount to your next most expensive debt. You'll have to do some math to see if the non-refundable tax credit is worth the higher interest rate you're likely paying on your government student loans (the Feds don't cut students any slack on interest once the interest clock clicks on.)

QUESTION:  I have two related questions: (a) what's your opinion on having sinking funds to cover your expenses? and (b) if you have set up that you regularly withdraw a planned amount of your averaged expenses to put in the sinking fund, and you have balances in your sinking fund to cover lots, do you need an emergency fund? Or do you need as high an amount in an emergency fund if you have plenty of sinking funds liquid in a high-interest savings account?  Thank you for answering so many of these questions, and in a casual, easily understood register.

Gail says:  I'm a big proponent of sinking funds (The idea of a sinking fund is to save money in regular increments to pay for a large purchase down the road) but I call it Planned Spending. My budget worksheets ask you to take the amount you spend annually on anything from clothing to car insurance and divide by 12 so that you're setting aside some money every month. I tend to move this money to a separate savings account for storage and then move it back to my current account when I need to spend it. Since the sinking fund is money you intend to spend… be it on your home insurance or on a holiday… it is NOT a replacement for an emergency fund, which is money you save in the event of having no income: sickness, job loss, some other type of horrible emergency.

Christina wrote:  Thank you for all the help that you offer everyone. Your shows and your website offer so much to so many people. I did not originally intend to write you but I am anyway. If I'm lucky, I will start to be able to answer my own question by taking the time to write it to you. If I'm really lucky, you might be able to offer some insight as well.  A bit about me…I have a steady job as a teacher and musician and I live a simple life in country. I'm in my early thirties and on my own after a thirteen year relationship (which ended about 3 years ago). I was responsible for the finances during the relationship but I didn't manage very well (lets just say that there was a lot of room for improvement). Now, I have to take complete responsibility for myself and I guess I struggle with the weight of that at times.

I've been working hard to become better at managing my daily finances and but I am still working on how to manage my savings and investments. More accurately, I need to find a way to feel more comfortable with it. I find myself using the cash in my pocket and the total in my bank account as a bit of a security blanket.

Knowing that I have so many options available to me with the money in my account seems to make me hesitate to act on those options. I research investment options and information about all things financial, but I have trouble feeling secure about my money. There seems to be a gap between what I know and how I feel about it.

Being specific money wise…I still owe about $100 000 on my house, I have no other debts, I have about $18 000 saved in an RSP, I've let my bank accounts build up to about $33 000. (I had some extra income this year).

I know I can make my money work better for me and I will be setting up a tax free saving account this week. I will be putting a lump sum against my mortgage when I can in March and more into my RSP. I feel like my plans are all reasonable, but somehow I still get worked up over it. I never actually feel on top of things. Perhaps I just need to have a chat with a counsellor to learn how to chill out, but I was wondering if you have any thoughts on this.

Gail says:  If you are looking at your pool of cash as security — as in the more I have the safer I am — that may cause you to hesitate when you think of doing anything else with your money. You haven't mentioned any goals to me: things that are important to you that you are trying to achieve. Nor have you mentioned having thought about your core values.  This is something I go into detail on in Debt-Free Forever (yes, the book is more than a map to get out of debt). Figuring out your core values is meant to help you figure out what's really, really important to you so that you can prioritize and choose. What matters to you?  What do you want? What do you dream? What makes you happy? What is the thing you feel defines who you are? Who do you respect, and why? Where do you wish you were in your life? What do you think the future holds?

You also need to make a commitment to following the rules of money:  not spending more than you make (check), paying off all your consumer debt (check), saving something (check), mitigating your risk… which may be something you need to look at again. Do you have six months' worth of essential expenses saved as an emergency fund in case the worst should happen? As a teacher, you have a good pension plan, and good insurance coverage, but that emergency fund is still important so you don't go into debt waiting for your benefits to kick in.

As far as the plan you've outlined goes, I think it is sound. Maximize your TFSA, set aside your emergency money, pay down your mortgage. It's all good. But none of it will bring you the peace you are seeking unless you're sure this is what you want.

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