This & That: Making Progress Edition

The questions I get are so often fraught with stress and pain. It's lovely to focus on the people who are making progress, turning things around, taking control.

Kate Wrote:  My current situation is as follows: I do not have a mortgage (I rent), I don't have a car payment (no car), I don't have any TFSA's but I do have $30,000 in RRSP's and $8,000 in savings. I also have about $6,000 in consumer debt. The consumer debt has been negotiated at 0% interest until May 2012 and, since I am making $600 monthly payments, I anticipate that I can pay it off without incurring interest.

I work for the Federal Government and we've recently signed a contract that discontinues our severance package. We will not lose any of the severance we have already earned, but will not receive any future benefits. We've been offered a number of choices with regards to our current severance earnings. My severance package is worth approximately $22,000. (1) I can opt to receive my severance when I cease to be employed by the Federal Government. If I choose this option, my package will earn approximately 1.5% per year. I am 15 years away from retirement. (2) I can cash-out the amount, either in full or in part.

I am leaning towards the cash-out because I may be able to get a better interest rate if I self-manage the money, though I would love to hear you opinion.

As a Federal employee, I have a pension that will pay 70% of my salary when I retire. With 70% of my income, I will remain in my current tax bracket after retirement. The standard advice by experts — that your RRSP's will be taxed at a lower rate when you start withdrawing from them — will not apply to me. If I were to cash out my severance benefit, I am unsure as to whether I should transfer it to my RRSP's to avoid tax right now (I currently have $24,000 in unused RRSP contributions), or whether I should pay the taxes now and transfer the remaining balance to a TFSA so that I'm not taxed on future growth. Gail, which option do you think would be more advantageous?

If I cash-out the severance, I need to ensure that I have 3 months of expenses available to me immediately upon retirement, as I'm told it can take months before you begin to receive your pension.

Wow, with writing this question, it suddenly occurs to me how far I've come. Three years ago, before I start watching your shows and reading your books, my finances were a nightmare, my net worth was in the negative, I had no savings and I was having trouble paying my bills. Woot-woot, look at me now!!

Gail says:  A 1.5% return isn't much, particularly over the very long term. I'd take the money and roll as much as I could to an RRSP. Then I'd manage my taxable income carefully, taking just a little each year from the RRSP to trigger as little tax as possible and moving it to a TFSA.

You have come a very long way. You should be very proud of yourself. I certainly applaud your focus and your commitment. Well done.

J Wrote:  I am 30 and my wife of three years is 28, and as of May 31st we will be completely debt free. House paid for and the whole thing!  Well we have known for some time that this day was coming and for the past 5-6 months have been wondering what now?  So Gail, what now? We both make decent livings and all of the normal "trappings" of life, such as kids, stay at home mom, retirement, charitable giving, are all well within reach. We need a new financial goal.  Thanks in advance for any advice you can give.

Gail says:  Wow, that's quite an accomplishment. Well done! Clearly you were both focused and working together. Okay, so what's next?

Hey, this may be the perfect time to do those things that bring you joy, teach you something new, or let you share with someone you love.  Using your money to strengthen bonds with family and friends is a great way to increase your happiness quotient. Studies have shown that close relationships have a lot to do with how happy we feel. So maybe it's time to spring for a trip to see your old high-school chums or university roommate. Or you could offer to bring your sister and her family to your place for visit. I find saying, "My treat" let's people who are themselves financially strapped consider doing things that they'd love but simply couldn't afford.

Using your money to reduce your stress is also a good "investment." If you and your partner are working hard, busy with the kids, and can't find time to do the vacuuming, maybe spending a little of that extra money to come home to a clean house will be worth it to you. And if you're tired of yelling at your mate to get the garage, the basement, the shed cleaned up, hiring someone to do the dirty would eliminate the need to nag.

You could also take some of that money and spend it on someone else.  Making other people happy has this fabulous rebound effect. If you could help ease someone else's burden, or just bring a little unexpected joy to another's very difficult life, the gift you give will be returned to you in spades. Would you child's teacher appreciate a gift of some new books? Would the elderly in the local home appreciate a bunch of new movies to wile away their countless hours?  How about building a treat basket for less well-advantaged neighbours and leaving it on the doorstep with a note that says, "I'm having a great day, hope you have one too!"

If you're looking specifically for a financial goal, I suggest you and your wife sit down and brainstorm some of the things you both have on your Bucket List. Do you want to travel? Are you interested in owning a holiday home (personally, I don't get the two-house thing). What are your dreams and wishes? Then pick one and start a planned spending account to accumulate the money to make your dream come true.

E Wrote:  My husband and I love your show! We like to watch your show because it makes saving and budgeting cool. We are in our early 30's and we have a 2 year old daughter. My husband works and I stay at home with her, although I occasionally do consulting work from home when a project comes my way. We pay very close attention to our spending and saving, and we have no consumer debt besides a car loan.

Our monthly spending fits well within your budgeting guidelines (per your spreadsheet: housing is about 29%, transportation cost is about 11% to 13% depending on how much gas we use). Additionally, we both have generous life insurance and my husband has disability policies, both long term and short term. All in all, our monthly expenses are low, and we're not a family that requires a lot of frills to be happy.

We believe our savings are in good shape. We currently have 11 months of net income cash saved for emergencies. Every month we save 16% of our gross income for retirement, and we've already saved about $300,000 with 30 years to go before retirement. We are saving $600 per month toward our daughter's college education. We bought our house 2 years ago with a 30-year fixed rate mortgage at 4.79%, and we have about 25% equity. We own one 3 year old car outright, but we bought a 2nd car 6 months ago with a loan. We could probably sell the car for around $25,000 and we currently owe $19,000 on a fixed 4.9% 5-year loan.

Our question to you is this: We would really like to remodel our kitchen for approximately $17,000. By about March of next year, we will have $17,000 cash while still achieving all of the other savings we mentioned. We are wondering if we should instead pay off the car loan first and wait yet another year to redo our kitchen. We had planned to take a family trip to Disney World that year 2 years from now, but I guess we'd have to put that off too. Car loans fit squarely in the transportation category, but you also point out on the show that they're debt. We know we're spending about $49 a month on interest, although that decreases every month. Are we being reckless to remodel when we should be paying off debt? Also, if we spend the $17,000 on our kitchen next year, we won't be able to add any to our emergency fund. Does that seem reasonable? It seems a little unclear to us how you classify car debt. Can you give us some more information about that?

Gail says:  My, you've got all your i's dotted and your t's crossed, haven't you? If your car fits into your transportation budget (as it seems to) then don't sweat it. While debt-free is the ultimate goal, you're doing fine and don't have to put everything else in your life on hold. The fact that you'll have saved the money for the kitchen means you're very serious about keeping yourself out of the red. I would not call you reckless. If you feel that you've got everything in balance and want to go ahead with the reno, then that's what you should do. If you're going to kick yourself in the pants for not paying off the car first, then make that your priority. I'm not going to make the call for you because it's your money and your life.

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