This & That: Good Question Edition

C Wrote: I have a specific question regarding calculating my family income. My husband works season work, 8+ months out of the year, the remainder of which he receives unemployment benefits. Since there is a significant drop in income for those 4 remaining months I don’t know how to come up with an accurate monthly amount. Please help!

Gail Says: Add the year’s income together. Divide by 12. That’s your average monthly income. So if in the good months he makes $3,000 a month that would be 3,000 x 8 = $24,000. In the other 4 months if he makes $1000 a month, that would be 1000 x 4 = $4,000. Added together that makes $28,000. Divided by 12 = $2,333 a month. So you would base your budget on an income (I always work in what goes into the bank, so after tax income) of $2,333 a month. In the good months, you would put the difference ($3,000 – 2,333 = $667) in the bank for use during the lower-income months. Doing this evens out your cash flow so that you can plan more productively. And you’re always living within your means instead of feasting and then fasting.

 

K Wrote: What is capital gain and should I take it now or later? I have owned a profitable rental property for approx. 3 years now. Other then the mortgage on my residence and on the rental property I do not have any debt. I have regularly paid into RSP’s for years as I have no pension plan and I save a little cash every pay.

Gail Says: A capital gain is the increase in value of capital. So if you buy a stock or a piece of property for $1,000 and sell it for $1,050, you’ll have a profit — or capital gain — of $50. Typically you get a capital gain when you sell your investment, so you can’t just “take it.”

 

M Wrote: My common-law partner and I live in his 40 year old bungalow. Although I pay half the bills each month my name in not on the mortgage, title etc. The house needs several thousands in updates (finish a basement, new windows, bathroom and kitchen). I’m 32, have recently doubled my annual income, and am in the process of paying off all my debt this year, and really do want to contribute to updating our living space. However, my concern is the “what if”: What if we break-up? What if he dies? What if we sell the house?  If I contribute big bucks to this (his) home and any of my ‘what if’s’ come true-I’ll be up a creek with no money to get anywhere! How do I protect myself financially without coming across as though I don’t want to contribute to our future?

Gail Says: A lot of people do not realize that common-law is not the same as married everywhere in Canada except BC where they’ve brought in new laws to protect common-law partners in the event of relationship breakdown. It’s fine that you pay half the bills; you’d have to put a roof over your head somewhere, and if you were renting you wouldn’t see a penny of that money back, right?

But when it comes to putting big bucks into a property that is not yours, you are very smart to think twice. You could solve the problem by adding your name to the title of the home. Or you could get your partner to sign a promissory note (make sure you both have independent legal advice so it holds up in court) for any amounts you “put into” his home. That way, if the relationship ends, the home is sold or he dies, you have recourse to recover your money. If you want that “investment” in his home to grow, you would add an interest rate that reflects current lending rates to the promissory note.

 

H Wrote: This both a question and a success post. After seeing your show Til Debt Do Us Part, I bought a couple of your books and switched our finances to match your suggestions. Now we currently do not carry any consumer debt. When we do purchase something on a credit card (major purchases we have saved for) we pay the balance by the end of the month. The jar system has worked miracles for our finances (as well as my wife and my relationship.) It has been a long process, but ultimately worthwhile. We work much better as a team on financial matters now. The emergency fund and savings were instrumental when my son was born. He required 2 months of hospitalization and due to the savings and emergency fund my wife and I were able to be there every day for him. (Thank you so much for that). Now we have rebuilt the emergency fund and are looking forward to the future. The only negative was when we reviewed our expenses and decided cable was not a necessity, and after it was removed we could no longer watch your show.

I have two questions I could not find answers to in your book. I am reviewing our long term finances and this is where my fist question comes from. I am in a pension plan matched by my employer. I contribute 9% and my employer matches the contribution. How does this work into the 10% saving you suggest for savings. We do save money, about 7% of our income (split between vacation, the kid’s university fund and home improvement fund). We were previously using the 15% debt repayment to rebuild our emergency fund. Now I was thinking to use the 15% debt repayment to pay off our truck and then roll it over into extra mortgage payments. My wife would like to leave the payments alone and split it between extra retirement savings and add a bit extra to our life spending as it currently sits lower than the 25%. As we always do when we have a budget impasse we review the books and your website. We couldn’t find anything on whether or not the pension plan should or should not be included in savings calculations. So in your opinion is it better to build additional retirement savings or payoff debts such as trucks and mortgage? Does the 18% put into my pension plan play any part in the savings calculations?

Question 2: This is more of a curiosity question as you have stated in books and on the show if you are over somewhere you make it up else where. (We do that by having lower housing and life categories). Living in more rural area my transportation costs are much higher than the 15% suggest by the books. In addition I have a disabled son who requires weekly (quite often more if he has specialist appointments) appointments 1.5 hrs away. I currently have a truck payment, 2 insurance payments (2 trucks). We currently spend $700 a month on fuel; $400 a month for medical. Is it acceptable to consider some of the transportation costs as medical expenses?

Your show and books have helped me be there for my son (I wouldn’t have been able to afford it prior to getting the finances in order) and probably have something to with my wife and still being married (we haven’t had a money fight in years).

Gail Says: I’m going to deal with Q2 first. Did you know that if you have to travel at least 40 kilometers (one way) from your home to obtain medical services, you may be able to claim the expenses you paid as medical expenses? And if you had to travel at least 80 kilometers (one way) from your home to obtain medical services, you may be able to claim accommodation, meal, and parking expenses in addition to your transportation expenses as medical expenses. To claim transportation and travel expenses, the following conditions must be met:

equivalent medical services aren’t available near your home;
you took a direct travelling route; and
it is reasonable, under the circumstances, for you to have travelled to that place for those medical services. 

That being said, when it comes to putting it on your budget, it goes under transportation. Don’t worry about being over the 15% recommended; the point is for the budget to balance, not to stay strictly inside the percentages.

Now Q1. Your company plan means you’re saving 18%, which is great. You don’t say if your wife also has a plan, but between the two of you, you should be saving about 20% (if you’re in your 30’s). If your wife is not working, you’re doing fine.

Vacation money set aside isn’t savings, its planned spending. Saving is money for the long-term. But you’re doing pretty well; just don’t call it “savings.” The fact that you’ve built up an emergency fund is terrific.

You don’t say what the interest rate is on your truck, and since your transportation costs are high, if the interest rate is over 3 or 4% I’d focus on getting rid of this debt. Don’t worry about the mortgage, as long as you’re debt-free by retirement, you’ll be fine.

Have you applied for the disability tax credit for your son? And have you considered opening a RDSP (registered disability savings plan) for him. I’d suggest you look into that too.

 

M Wrote: I’ve fallen off the spending wagon and am having trouble writing down my purchases again. Where do you start if you’ve messed up your spending plan?

Gail Says: People beat themselves up far too much for falling off track. The mistake isn’t falling off; it’s not getting back on. So I applaud you for recognizing your misstep and wanting to returns to the path.

Turn to a new page in your spending journal. Put your bank balance at the top of the page and go from there. As for your budget, since you’ve fallen off track, I suggest you enter your spending journal entries against your budget at the end of each week to make sure you’re staying on track.

 

K Wrote: I have recently bought a house and maxed out my RRSP savings to do so. I know that I have a year before having to start paying back. Would you save and sink all your RRSP funds into the repayment – getting rid of it ASAP, or would you split the money into repayment and savings?

Gail Says: You should NOT sacrifice current contributions to your RRSP for the sake of getting that home buyers’ plan loan paid back faster. Make your 1/15 repayment each year and use the rest of the money to make a regular contribution. You can use your tax savings to a) boost next year’s RSP contribution, b) pay down your mortgage, c) make a TFSA contribution. Just do something useful with it.

 

M Wrote: I have many questions about insurance:

Can you explain what a whole life policy is?
Is it a good investment?
Is a term policy better?
Do I need a term life policy in addition to mortgage insurance?
Or should we have a term life policy on each other (hubby and myself) which would cover the outstanding amount on the mortgage?

Thanks in advance. And thanks to you, I understand money and debt and am hoping you can explain insurance in your easy-to-understand way!

Gail Says: Term insurance provides protection for a predetermined period of time (perhaps 5, 10, or 20 years) or until a certain age. If you’re looking for longer-term protection, term insurance won’t cut it. When the term of the contract expires your coverage ends unless you renew the term. Each time the term is renewed, the premium is adjusted upwards.

Think of term insurance as an expense, like rent. While it will give you comfort and peace of mind, it accumulates no residual value. If you want coverage to last your lifetime or want to use insurance to build assets, term insurance isn’t the right choice.

Whole life and universal life insurance are permanent, remaining in place until death. The premium is generally the same for the life of the policy, so the annual cost can be low if taken early in life (when the risk of death is low), or very high if taken late in life. If term insurance is rent, then permanent insurance is a mortgage payment; in the early years there isn’t a lot of asset accumulation, but over the long term the pot will grow nicely.

When you compare term insurance with permanent on a dollar-for-dollar basis at any age, term is cheaper than permanent insurance, but that’s because the statistics are in favour of the insurance company with term insurance. With permanent insurance the company is going to have to pay out, it’s only a matter of when. So the trick is to buy your permanent insurance when you’re young and healthy and the premiums are lower.

Private insurance — permanent or term — is way better than mortgage life insurance. If you go with term, make sure the policy will live as long as the mortgage. And a private term policy will likely cost you 1/3 of what you’re paying for mortgage life insurance, which BTW isn’t guaranteed to pay out since they don’t underwrite until you make a claim (at which time you may be SOL if they uncover something that lets them welch!)