This & That: Great Questions Edition

K Wrote: I have a cousin who’s in need of some financial help. He is 19; living with his parents, doesn’t have a car, and is not attending any sort of college or university. Because of this, he has no debt, but at the same time he doesn’t really have any money saved up.

He recently got a job at a local Tim Hortons and is making minimum wage. While he’s making enough to get by (for now), he has a bad habit of spending what he makes, especially on useless junk. He is willing to get help, but he doesn’t know where to start.

I’ve always been very good when it comes to saving my money, but I don’t know how to help him apart from saying. “Don’t spend money for like a year.” I was wondering if there’s any advice that you could give as to what he should do.

Gail Says: What a great question. You’re a good friend to ask. Okay, so if dude came to me and asked this question, here’s what I would say:

If you’re living rent free now, then you need to start putting some money away for when you do move out. For every dollar you make, put 35¢ in a savings account for move out day, whenever that comes. You’ll have to pay rent eventually, this is the time to practise, while you stock up on the money you’ll need for 1st and last months’ rent, hook-up fees, furniture, that first grocery shop and the like. So you take the amount you bring home per pay, multiply it by 35 and then divide by 100. If you bring home $385 you would put (385 x 35 / 100 = ) $134.74 in your moving out savings account.


Eventually you’re going to have to buy food, cover your medical costs, and the like. So this is the best time to start learning a) how to budget (so you plan where your money is going and b) how to track your spending (using a spending journal), so you keep up-to-date in real time with how much money you have left to spend.


Figure out what you want to do with the rest of your life. Yah, yah, a big question, I know. But you should at least be thinking about it. Do you think you’ll go to school to learn to do something so you’re not swilling coffee forever? I’m not suggesting that working at Tim Hortons isn’t a good job since loads of people do it. But earning minimum wage is a hard way to make a life. So if there are things you think you would be good at and all you need is some training/experience then a) save some money to go back to school and/or b) volunteer somewhere to pick up some experience. Test the waters to see if you still love it when you have to do it every day.

 

M Wrote: I don’t have the problem of spending too much—it’s quite the opposite—I can’t bring myself to spend money and it is having an impact on my relationships and mental health. My husband and I have been very good with our money (thank you Gail!). We are 35, own a car and home in High Park have $300k in retirement and have about $10k set aside for our girl’s school (they are 3 and 1). We have done it all ourselves too.

My issue is that I have been very conservative my whole life. Now that we have everything we’ve ever wanted (house, kids, a lot of retirement money saved up), I feel SICK at the thought of splurging on anything that isn’t an RRSP contribution or a need. It is causing major issues in our marriage as my husband is totally fine spending money on whatever he wants (I’ve been in charge of the finances obviously). I am also ashamed to say that I feel very jealous of my friends who spend money on the things that I want to spend money on but can’t bring myself to doing it (e.g., nice vacation, spa, big reno on the house, etc.).

In terms of getting help for this problem, would you recommend seeing a financial advisor who could tell me that it is okay to spend money on the things that I want? Or should I see a counsellor of some sort, to deal with my issues that clearly stem back to my parents being super tight with money and fighting all the time about it? How would I go about finding the right person either way (financial advisor or counsellor)? Thank you for any direction you can give on this. I do plan to speak with my usual investment advisor on this matter, but I do value going into those discussions with plenty of research.

Gail Says: Your inability to enjoy the fruits of your labour are just as dangerous as someone else’s overspending. Here’s what I suggest. Sit with your mate and make a budget that includes a category for your clothes and one for your pleasures. Allocate a specific amount to each of these budget lines. It might be $25 a month. It might be $200 a month. It has to be a number you both agree on. Once that number is in the budget, you must spend it. What you’re going to do is learn to spend the money.

Years ago after I left my last husband and blew through my entire emergency fund, I too had trouble spending money since all I was focused on was rebuilding my emergency fund. When I caught myself, I put a line of “pleasures” into my budget and allocated $200 a month. I had to spend the money. I bought myself flowers or yarn to knit with or saw a movie. Over time, my resistance to spending went down.

Try it. If you have to start small and then work up to a larger number (review your budget/spending every three months with your mate) so be it.

 

J Wrote: I was reading your Blog today regarding Debt Fatigue and Credit Card Debt. Wondering if could please post a blog regarding your thoughts on Debt Fatigue and paying off a mortgage. I wrote to you last fall to share the story about our Car and Emergency Fund. We are the family who are working our way to paying off our mortgage.

I live in Surrey, BC and we have a nice home in the Vancouver Lower Mainland Area. Our mortgage started at $555K (at 2.35% variable interest rate) and we come up to the end of our 5 year term this Aug.2015. Today the mortgage sits at $185K.Once the interest expense is added in, we figure the overall payment back to the bank would be approx. $602K (principal and interest over 6 years). We are working hard pay it off in the next 6 years, e.g. $600K paid back to the bank in 6 years. There are days when I feel our clip level of $100K per year paid back to the bank is pretty fast. And then there are other days when I am getting tired and try hard to stay motivated.

We are in our mid 40’s (45 and 46). We are debt adverse so taking on this lovely home has been our dream home / accomplishment and when I am tired due to debt fatigue I wonder if the “expensiveness” is worth it. One plus is that it is close to my daughter’s school and we have a lovely yard. We have not been living solely for the house though and have had some home maintenance / improvement projects and nice vacations along the way since we have had this mortgage and lived here.

I think paying off $100K/year out of our net income is pretty good. It represents 42% of our Net Household income but we also have no other loans to pay. I figure it’s in the ballpark of the 30% housing + 15% repayment of other debts guideline. So after 4.5 years, how do I get over this Debt Fatigue? Thought I would ask you to see if there are ways paying off a mortgage can be similar to paying off consumer debt.

Our Net Worth is currently $1.365M and not all of it is in the house (like most folks assume is the case because we are in the Vancouver area). Of our Net Worth, we have about $482K of that in investments (TSFA + RRSP are approx. $375K and my work DCPP is approx $107K.) We also have a separate RESP already setup for our daughter with $43K in it today so she should have about $60K when we are done contributing. She has 5 more years of secondary school before going to university.

Once the house is paid off, we will be redirecting all the mortgage payments to the RRSPs/TSFAs as we have lots of contribution left there. Being conservative in nature, I am a bit freaked out that we will need $3.2M before we can hang up the boots at work as a couple. I look at that high net worth required total and figure we are about half way so things are not so bad.

My questions are:

What do you do about Debt Fatigue when paying off the mortgage?
Do we really need $3.2M to retire?

When it comes down to it, we are not flashy people. If we were I don’t think we would be able to put so much towards our mortgage payments each year. I am hesitant to post this type of question to the blog pages as I fear I will be panned in the comments. I realize our situation is one of being in a very blessed position and that I should have no complaints or concerns at all. However, I wanted to let you know that there are regular followers of your blog like me (high net worth, unassuming millionaire next door types)… and we also experience Debt Fatigue. We have also used your tips and teaching to get is to where we are today.

Gail Says: The “debt fatigue” you may be feeling paying off your mortgage may have come about because our society has unrealistic expectations about when a mortgage should be paid off. The rush (real or imagines) to pay it off may be putting too much pressure on you. The word mortgage actually means “gage” commitment until “mort” death. If you will have your mortgage paid off before your retirement, that’s good enough. And paying off the mortgage should NEVER come before paying off more expensive debt.

As for whether you’ll need $3.2 M to retire, I don’t know. How much are you living on now? Deduct your mortgage payment (it’ll be gone, right?) and figure out what your expenses really are, and how many of them you’ll take into retirement or get rid of before you hang up your spurs.

You might want to pick up a copy of Never Too Late and work your way through it. That could help you see more clearly where you are now and where you’ll be when you retire.

 

J Wrote: My husband and I are in our early 50’s and have 3 daughters ranging from 13 to 23. Two in university. We have parents that have a little money and assets and the need to redo their will. We also need to redo our will. I know this needs to be done by a lawyer. I am looking for resources on inheritance taxes and where we should put our money and what we should suggest to our parents that are floundering with the use of financial advisors.

Gail Says: There are no inheritance taxes in Canada. When you croak, your estate pays the taxes owed for any income earned during the year and the remaining money goes to your beneficiaries. There are probate fees, which varies by province. You can avoid these fees if assets are passed directly — they don’t go through the will. So an insurance policy with a named beneficiary would have no probate fee. Neither would RRSP/RRIF assets where a beneficiary designation has been made on the plan and the assets pass to a beneficiary spouse. If the assets go to your estate, the whole shebang is considered income and will be taxed. Ditto if the money is going to adult children. 

You do need a lawyer, one with estate experience. The language of estates is complicated and you need to make sure you’ve got the i’s dotted and the t’s crossed. 

As for your parents floundering with the use of financial advisors, I’m not quite sure what you mean. My best advice is to ask friends and family who they trust. Failing that, find a fee-based planner… someone who works for an hourly rate and is not affiliated with any one company. 

 

N Wrote: I am in my mid-twenties and live with my parents. I lived on my own for a few years with my now ex but the break up and financial issues brought me back home. I finally paid off my credit card and I’m just left with the car payment. I currently owe $16000 on it. I really want to pay this car off and I want to move out. My current monthly payments are $50 TSFA, $96 insurance, $297 car payment, $50 cell phone, and $20 internet. Should I work really hard to pay off my car than start saving to move out or can I do both? I was thinking of saving $500 per month and use $300 of that towards car payments (making double the car payment) and $200 for moving out. I make $15 per hour and work 37.5 hour weeks. Gail I could really use your help on this one. Please help.

Gail Says: So you’re making about $28K a year, which means you’ll pay about $3,500 in taxes, giving you take home of about just under $2,000 a month, when EI and CPP are deducted. Let’s assume your take home is $1,800 a month. 

Income $1,800

Car payment: $297
Insurance: $96
Cell: $50
Internet: $20

Total: $463, leaving you with $1,337 a month. When you move out you’re going to have to pay for:

Rent
Food
Utilities
Gas/Repairs

You should estimate what these costs will be (reasonably, don’t underestimate) and then slap all that money against that car loan to get it paid off as fast as possible at least for the next 6 months. You’ll accomplish two things: you’ll get used to living on the disposable income you’ll have when you move out AND you’re get the loan reduced substantially.

I know you want to move out as soon as possible, but you don’t want to end up boomeranging back again. Having paid a whack off your car loan, you can go back to the $297 when you move out. You should have at a bare minimum:

1st/last month’s rent
$$ for your first big grocery shop
$$ for whatever you’ll need to buy for your new home (bed, dresser, couch, dishes, etc.)
at least 3 months’ worth of essential expenses socked away in an emergency fund