This & That: Doin’ Fine Edition

S Wrote: I’m a twenty-seven year old female with about $20,000 of debt. Most of my debt is student loans, and a co-signed car loan with my boyfriend. I make all my full scheduled payments on time, and I have a good credit score, but I want to make it as high as possible, so that sometime in the future I can qualify for a mortgage at the best rate possible.

My question was on how best to use my credit card. Right now I put a couple hundred on it every month (a few dollars a couple days a week for parking at school, some iTunes purchases here and there, my Netflix gets automatically charged every month). When I get my statement at the end of the month, I pay the entire balance straight away. I’ve heard you say that when you charge something to your credit card, you should go home and pay it that day. Since most of my charges are only a few dollars at a time, I haven’t bothered with this, and wait for my statement to come. Does paying it off that way negatively affect my credit score in any way? Would my score be a little higher if I paid the balances off daily, or weekly? Does that even make a difference?

Gail Says: What you’re doing is fine and will in no way affect you negatively. The advice you’re referring to is for people who a) are afraid of credit or b) have seriously messed up their credit. Keep on truckin’ babe.

 

R Wrote: My husband and I are both mid 30’s have 2 kids and both work full time. We have next to nothing in consumer debt. The debts we have are the usual, mortgage and vehicle. We have money set aside every month for the kid’s education funds. We do get to the end of the month in the green, but we always hear friends and co-workers buying this and that and going on trips here and there and we can not afford these things, we are always asking ourselves what are we doing wrong, as we know they do not make as much as we do combined. When you get to the end of the month and all bills etc are paid and there is say $300 left at the end of the month do you just keep it in the account and keep rolling it over to the next month it hopes you don’t spend it or should I be moving any extra cash at the end of the month whether it be $5 or $500 to my money master?? And starting fresh again at the beginning of the month.

Gail Says: Those people who seem to have and do everything also have a lot of debt you can’t see. It’s a shame really, that we don’t walk around with a flashing sign on our foreheads showing our level of indebtedness since that would make those of us who choose to live sensible, balanced financial lives deal with the “WTF” that pops into our minds. If you can’t afford those trips and purchases, and you make the same as they do, then clearly they can’t afford them either which means they’re putting it on credit.

As for what to do with the cash left over at the end of the month, I’d do as you suggest and move it, accumulating it for a special purpose. Assuming you’ve established your emergency fund and are doing what you should for retirement, then why not open up a “vacation” savings account and move the money there so you can watch it accumulate and anticipate your family trip… or whatever it is you want to do as a family.

Keep on keeping on the straight and narrow. I’m going to work hard this year to spread the word about financial literacy and celebrate the people doing the right things. I’m glad to hear you’re one of them.

 

H Wrote: I have question – like so many do! – about retirement planning.

 

I will have all my student loan debt paid off in just three more months! I’ve been very dedicated about paying it down the last couple years, so I am very excited

After that, my goal is to build up my emergency fund to $10, 000 – 6 months of my basic living expenses. I am doing this within my TFSA, and should take me about 5 months (I can just divert what I was paying on my loan to my TFSA). I currently have $6000 in my TFSA.

Then I have to figure out what to do about retirement planning. I opened an RRSP almost a year ago, and I only put in $100/month because I am focused on debt repayment. But once my debt is paid and my EF is where I want it, I need to get more aggressive about retirement saving.

I am not sure if I should be putting most of my eggs into the RRSP basket, or focusing on my TFSA – I have a lot of contribution room that has built up there. Both accounts are basic savings account, so the return is very small. I know I need a better return, but I am a conservative saver – I’ve lived pay cheque to pay cheque and been unemployed before so I am scared to lose the money I have! I have no idea about investing – something I definitely need to put some research into while I am finishing up debt repayment and emergency fund building. I am 33 and earn $61,500 before taxes.

 

Gail Says: So far you’re doing a great job! Wow! I love getting letters like this one. You’ve got your priorities in order and I’m happy to say I don’t have any “corrections” to suggest. As for using the RRSP vests the TFSA, the benefit of the RRSP is the tax-deferred contribution resulting in the tax savings. At your income, your marginal tax rate is about 31%. If you contribute $5000 to an RRSP you’ll reduce your taxes by $1,550. You can then take that $1,550 and put it in a TFSA so instead of putting $5,000 into savings; you’ll have put $6,550 into savings, all for the same $5,000 from your cash flow. Don’t try to catch up too much of your RRSP contribution room at once because you don’t want to reduce your taxes to the point where you’re barely benefitting from the tax deduction. You’re eligible to make a contribution of up to about $11,000 based on the income you described. If you make that contribution you’ll reduce your taxes from $12,277 to $8,850 for a tax savings of $3,427. If you claimed another $3,000 of unused room, you’d reduce your taxes to $7,916, for another $934 in tax savings.

Keep in mind you do not need to be saving that much. Saving is good but you should have a life too. My general rule of thumb is that if you start saving in your 30’s you need to be socking away 10% of your income, in your case sticking about $6,000 away a year. If you can do more comfortably, go ahead. But you have to balance today’s needs and wants with tomorrow’s so don’t go overboard and then end up having a crappy life, k?

 

J Wrote: We’re almost there Gail and I blame you! Or rather I say THANK YOU! My spouse and I had dug a deep hole of debt and after 2 years of buckling down we’re 3 months away from being debt free! We’ve been putting approx $1000-$2000 dollars a month on the debt and it’s not been too much of a struggle, just had to sacrifice a few things that we didn’t need anyway. Your advice has really helped us!

 

We both have ample RRSP and TFSA room which I plan to start filling up once the debt is gone. My employer offers a DC plan, I put 11% in and they give 7%. They also offer a Share purchase plan (non registered) that I can contribute up to 10% of my income with a 10% discount (match) from the employer, each share pays $0.6 in dividends monthly and are reinvested into the plan, current share price today is $14.66, it’s been going up and down since I started but not dramatically, my vested value has always been much higher than the book value. I am maxing out my DC contributions to get the max amount from my employer and putting 5% into the SPP, once the debt is completely gone I’m considering moving that 5% to the max 10%, The 10% discount is free money, it doesn’t make sense not to, right? I’ve been able to make all the contributions (16% of my income) whilst still paying down the debt by $1000-$2000 per month

Unfortunately my spouse’s employer does not offer a pension plan.

 

We are DINKS – Double Income No Kids – and plan to stay that way. I’m a couple days shy of 37 and my spouse turned 40 a couple months ago. We live in Toronto and make a combined gross income of $78,000. We do not own property and have no plans to ever own, at least not in Toronto. I would like to retire at 55. My spouse is content to work till at least 65 if not longer depending on his career path. He may want to open his own business one day. My goal is $1,000,000 once we have that much saved I’m allowing myself to retire.

My real question to you is how should we invest the approx $1000-$2000 monthly that we will have free once the debt is gone? I’m content to have the funds in a higher risk investment till I’m 45ish, this is how I have my DC plan set up right now and it’s growing nicely. The employer 7% match I get is set up as risky as it can be and half of my 11% is going into risky the other half not as risky. Can you give me some investment tips? Maybe some good funds? Or should we go the stock route and live off the dividends in our golden years? What does your portfolio look like?

Gail Says: I am SO glad to hear you are doing so well and that you’ve come to grips with the debt. It’s great that you’re almost debt free. You say you’re taking advantage of your company pension plan and that’s great. Do you also have an emergency fund set up? That should be part of your plan. And since your husband does not have a company pension plan an RRSP is a good idea for him to save for retirement. Since you are getting a 100% match on your company stock, it is a great idea. But be careful of becoming overweighed in that single asset. If you have the option of cashing out the vested stock from time to time you should consider reducing your exposure and rebalancing your overall investment portfolio.

I do not make investment recommendations. I have a broker who advises me on the markets (I don’t have the time to stay that close to what’s going on). And you can’t use my portfolio as a guide for yours. You are much younger with a longer term investment horizon. I am in my capital preservation stage so I use things like preferred shares which do not grow dramatically but offer steady income.

My only caution as you’re investing is to make sure you understand what you’re buying so you’re prepared for any ups and downs.

 

 

J Wrote: I am fortunate enough to have a fabulous husband who is a fantastic father and likes to save money like myself, we are both 30. I am lucky to have a job that provides a defined benefit pension that will replace 70 percent of my ending salary. I max out my TFSA as well. My husband maxes out his TFSA each year and puts away between 10 and 12 percent of his gross income into an RRSP. We have no debt and our mortgage will be paid off in 4 years. My question is should we be contributing more? My thought has been not to put anything into my personal RRSP as it just creates a tax liability when I retire and my pension will be a significant amount. Is it better to contribute our extras at the end of the year to a non-registered account in my name? Or should the extra go into my husband’s RRSP?

Gail Says: Wow, look how strong your personal economy is! Well done. You don’t mention if you have an emergency fund. If you have money designated for emergencies, great, if not, I’d get busy building up a stash of cash just in case. You’re right to use the TFSA to supplement your DBP, that’s a good strategy. You could build a non-registered investment portfolio if you want to keep building assets. Alternatively, you could assume a larger share of the household costs so your husband has more money to max out his RRSP/TFSA. You’re doing well in the savings department and in eliminating your debt. Please also make sure you’ve covered your risks: emergencies, life and disability insurance.