This & That: Heads Up Edition

J Wrote: I have a car loan with Scotia Dealer Advantage at a high interest rate (not sure what it is but something ridiculous like 17%). I purchased car in 2010. I currently pay just under $400.00/mth and have $14,611.51 owing on the vehicle. If I continue as is – vehicle will be paid off in February 2017. I currently have this amount in the bank and can pay this debt off but then my savings will be completely depleted. I want to be rid of this debt but afraid of having absolutely no buffer in case of an emergency as I am a single mother with 2 children and a baby living with me. What is the best course of action for me to take? Pay off car debt and have no savings or continue as is and hang on to my savings? HELP!

PS – this is the last of my debts. I will be completely debt free when this loan is paid off.

Gail Says: If you keep on as you are, about $200 of your $400 payment is going to interest, but the interest is calculated on a “declining balance” so over time more and more of your payment will go to pay off the car. Over the remaining loan, you’ll pay somewhere in the vicinity of $4-5,000 in interest.

If you were to take half the current money in your savings and put towards your car loan without changing your payment your car loan would be paid off much faster. You could then take the money you were using for your car loan and re-boost your savings.  

I’m not a fan of depleting emergency savings to pay down debt, but at 17% you are paying through the nose! You’ll have to decide what you think will work best for you.

 

A Wrote: I am a doctor working in the UK, divorced and a mother of one child. I am simply can not manage my money. I save and spend it. I have an overdraft; I pay it off and use it again. I am in a cycle and this is increasing my stress level, I feel depressed. I earn a decent amount of money, but I don’t have a car and it has been more than 1 year since I traveled because I can’t afford it.

I want to be a better person for my sake and my child. I need clear guidance with steps that I have to follow. I tried doing it myself by reading books, tips from websites. But because I am very busy with my job and life I think I need an expert to just tell me exactly what I should do.

Gail Says: What you have to do to manage your money is less about time and more about discipline. I’m incredibly busy and I still make the time to do my spending journal and to post those entries into my cash flow budget. That’s The Gail Way. All the tools are at your fingers. Get a copy of Debt-Free Forever and follow the steps. If you don’t have the wherewithal to make your own excel spreadsheet, buy The Gail Way and USE IT. If you’re serious about taking control, making better choices for your child’s sake and being able to enjoy things like travel again, you’ll step up and do the work. Initially it will take you a few hours to do the spending analysis. You’ll make the time. If you don’t, you’ll be pulling numbers out of the air and that’s why your budget won’t work. All the tools are at your disposal. Now you have to find the gumption to follow through.

 

C Wrote: Just recently, in May, I graduated from University (an art university) but had to pay my way through using both a hefty student loan and a nearly as hefty line of credit. The line of credit currently totals $21,000 and the student loan I’m sure must be close to 50 grand.

My question is related to a challenge brought up in your ‘Debt Free Forever’ book. I’m trying to make the list of debts, their minimum payments and their interest rates in order to make an accurate plan to pay the debt off.

However, because I am not quite paying off my student loan yet, as it’s barely been a month out of school, I’m having trouble figuring out what my interest rate will be. The best answer I can find is ‘prime plus 5%’ for Canada student loans, and ‘prime plus 2.5%’ for Saskatchewan student loans.

So question one – how do you figure out this ‘prime’ thing? I think it may be 3% but really I can’t find a straight answer. And question two – do I need to add both of these together to find my interest rate? (Am I paying just one, or both?)

Really appreciate the help! And I’ll be posting in a year as I plan to pay off the line of credit in a year, and hopefully most of the student loan too!

Gail Says: Currently the prime rate being used for the student loans system is 3.875% and, yes, you would add it to the 5% mark-up for a total rate of 8.875%. Canlearn.ca is a great site that can help you figure out what your payments will look like.

 

J Wrote: We currently have a home buyer’s repayment of $75/mth for the next 10 years, a $15,000 loan to my mom and 4% (paying $100/mth) and our mortgage. We are at a point that we have an extra $300/mth to put towards one of these. I am thinking it should go towards to HBP to get it paid back and starting to compound interest. However, others have told me this shouldn’t be looked at as debt and I shouldn’t be in a rush to pay it back. I’m confused! I also have TD shares worth $3,000 and I am wondering if I should cash them out to put towards the debt or transfer them into an RRSP?

Gail Says: The HBP is most certainly a debt, but it’s interest free. You should get rid of all debt with interest first before fast-tracking your HBP. And you should NOT fast track the HBP repayment at the cost of current RRSP contributions. You can contribute your TD shares to your RRSP (or your TFSA) as long as you have a self-directed plan (which has higher admin fees, so be aware). The date you transfer the shares to your RRSP/TFSA, the tax man considers you to have “sold” the share, so you’ll owe capital gains if the shares have increased in value, (or you can take the loss if the share have decreased in value and you have other gains against which to claim the loss). Note that neither a capital gain nor a capital loss occurs inside a registered plan so it’s all treated the same as interest — no special tax benefit.

 

S Wrote: I am currently looking to move out of my family home and would like to purchase a home (townhome) on my own. I have zero debt, net 75,000/year, own my own car and have about 60,000 for a down payment. I’m wondering how much I should spend on a new home? I realize this is a loaded question but I just want to make sure I don’t overextend myself and end up in a financial crisis.

Gail Says: It’s not a loaded question at all m’love. It’s a good question. And here’s how you go about figuring out the answer. First, there’s the cost to buy your home. That’ll include a down payment and closing costs, as well as the cost of setting up your home like curtains, pots and pans, and the like. My rule of thumb is to put down 20% of the purchase price. But you’ll have to allocate some of that money you’ve saved to closing costs/purchasing stuff. So let’s say you set aside $15,000 to cover those costs, that’ll leave you with $45,000 as a down payment. If that’s 20%, then the purchase price of the home would be (45,000 ÷ 20 x 100 = ) $225,000. That’s part 1.

Part 2 involves figuring out the carrying costs of your home. There’s the mortgage payment, taxes, insurance, utilities and maintenance, all of which should add up to no more than 35% of your net take home pay. Since you net $75K, that works out to $6,250 a month, and 35% of that is $2,187. So you should buy anything that eats more than $2,187 of the cash flow when you include all the things I’ve listed above. For arguments sake, let’s say you allocate $350 a month to property taxes, $100 to insurance, $250 to utilities (heat, hydro, water, sewage) and $400 to maintenance and upkeep. That’s a total of $1,100 in carrying costs. Now we have to add the mortgage payment. (BTW, I’ve given you my numbers on my little house because that’s what I know, you’ll have to figure out what the numbers are for your area).

If you buy a $225,000 house and put $45,000 down, you’ll need a mortgage of $180,000 to cover the purchase. If you took a fixed mortgage for 5 years at 5% with a 25-year amortization and paid monthly, your payment would be $1,047 a month. Add your $1047 mortgage to your $1,100 in carrying costs and, violá, you’ve got your monthly payment of $2,147, which comes in just under the 35% mark!

 

C Wrote: I have read some of your books (thanks for great tips about crossed cheques, assigning a contingent subscriber for the RESP, and inching into the market via ETF’s). Which of your books would recommend for my mom? I have recently discovered (your rule about making sure your parents affairs are in order) that she is in serious financial difficulty. My mom is 73, working in retail to make ends meet, and has $49 000 in consumer debt on credit cards and a line of credit. She has a comfortable, cared for home (paid for but now I worry), and is a compassionate and generous person. She has always resisted dealing with financial matters. Her generous nature and her insistence that she does not have a brain for finances are, I think, what have led her into problems. I need to get her to take action. I’ve been reminding her to begin with the spending diary. I thought your latest book was a way to start because she could just read one rule at a time without becoming overwhelmed. But for someone who needs a plan, it is not really the right format.

I really love reading your books; I’m already ‘on your page’ but all the extras I’ve learned are fantastic. When my son sees me coming with your book in hand, he looks like a cornered deer! He’s a good money manager but he knows he’s in for some more financial advice from this stranger named Gail!

Gail Says: If the future is to look any brighter, in all likelihood your mom will have to sell her home, pay off her debt, move to something smaller, or rent and use her money from the home sell to supplement her income through retirement. I’m not sure how she’d get $49K paid off in any other way since she still has to work retail “to make ends meet.”

She will clearly have to learn to live within her means. Will she listen to you enough for you to help her make a plan? If so, get a copy of debt-free forever which not only talks about getting out of debt but how to live out of debt long-term. You’ll need to work through all the exercises with her. If she won’t take your advice then gird yourself for the day when the crap hits the fan.

 

E Wrote: I will be retiring in January and will receive approximately $90,000 in a severance/buyout pkg. I have an indexed pension that provides me with a reasonable income, so does my husband who is already retired. My husband is a member of Omers and we would like to contribute this extra money into their AVC fund. Since I am not a member of Omers the only way we can do it is if I put my money into a Spousal account and then transfer into Omers under his plan. As we make comparable pension amounts is this a good idea? I have approximately 100 thousand dollars of room I can contribute into a RRSP.

Gail Says: Why would you transfer $90K in retirement assets to your husband when you will very likely live longer? How much of his pension will you be entitled to? If it is less than 85% of his benefits it does not serve you well to give up that money. By all means use an RRSP but keep the assets in your name.

 

A Wrote: My boyfriend and I just started living together. He is in the process of filing bankruptcy. Will this affect me if we get married? Meaning will my credit be affected by his bankruptcy married or not? And how long does it take to be considered common law? Help…this may determine whether there will be a walk down the aisle.

Gail Says: Your partner’s bankruptcy can affect you in 2 ways. First, he won’t be able to get credit at a reasonable cost for pretty close to a decade. That puts you on the hook for a mortgage, car loan or anything else you may need. Second, if he doesn’t change his behaviour, his future irresponsibility will definitely make your life a living hell. If he has cleaned up his act and the bankruptcy is a formality to get to the next stage, so be it. But if you have any doubts about how serious he now is when it comes to living within his means, why the hell would you get married. Common-law happens after 1 year or the birth of a child. We may not be able to help whom we fall in love with, but we certainly don’t have to compound the problem by hitching our wagons to a horse headed into a ditch. Keep your separate addresses, continue to love him, and when he’s proved he’s serious about a life together and being a real man, then you can hook up.

 

C Wrote: I have been battling RBC for a month now and I am getting no where. I have a line of credit account that was 5.83% and they raised it to 12% and gave me some lame reason. I have never missed a payment on this account. In the past I was terrible with money, now I have a balanced budget and live within my means and I have been very serious about getting out of debt. I have gone up the corporate ladder at RBC and got nowhere. I have a binder with all emails, calls, and letters I have with RBC. I did not make the payment to the account last month and told them I was doing this to protest them trying to pry every cent from me. Like I told them I have no problems paying my debt, but not when it’s unfair like this. RBC has been calling me everyday even though I’m not even 30 days late yet and they are very rude. I even spoke with the Ombudmans man for RBC and they basically said RBC can charge whatever they want. I refused to make payment so they sent me a letter saying they cancelled my credit card and to cut it up even though I have not missed a payment. RBC refuses to negotiate with me and said it’s their rate or nothing. I said I want to pay them then close the account, lets work out a deal and they declined they made one offer of 11.97%.

I have set up an escrow account to show I have every intent to pay RBC. I have put the last payment into this account. I know this might damage my credit, but I will not be pushed around by RBC. I have contacted the Financial Consumer Agency of Canada and they will not help me either. I noticed after I started closing my accounts and made a complaint about a rude employee I have been getting treated different. RBC also refused to let me speak with their CEO Gordon Nixon. They intercepted my letter to him and said he would not be getting it.

My question is this what would you do next?

Thanks Gail because of your books I am getting out of debt, but it seems companies are trying harder to get me down.

Gail Says: Technically RBC can charge you whatever they want. Both a line of credit and a credit card are “callable” and “revolving” credit which means they can demand full repayment at any time, and they can bloody well do as they please in terms of setting the interest rate. THAT’s why I tell people to get the hell out of debt. You do not have a leg to stand on. Pay them. Then blow them the hell off and get a new bank. Sadly, they all have the right to do whatever they please. Yours is a cautionary tale for others. I’m sorry this is happening to you. I know you’re mad. Make it right and then get the hell out of debt as fast as possible.