This & That: Do The Math Edition
L Wrote: I need your help because I feel so overwhelmed with my finances since I bought my house last year. This is the first time in my life that I have found myself in a financial mess and don’t know how to handle it. I am earning a net $1400.00 twice a month. I am currently paying a bi-weekly mortgage of $563.00 and a monthly maintenance fee of $417.00. I have a life insurance of $200,000 with a monthly premium of $120.00. When I bought the house I made a lot of renovations to house because it was sort of outdated. The house cost me $195.000 with renovations of about $20,000. Now after going through the renovations and the moving process, I have ended up with the amount of $6,000 in credit card debt from Home Depot, about $7,000 worth of credit card debt on my Mastercard and about $2,000 on my Line of Credit. I am really struggling to pay my debt. My variable expenses tend to fluctuate a lot and I am really having a hard time seeing the possibilities of paying my debt because most of the time I can barley make it to the end of the month. Before buying my house, I was paying rent of about $970.00 monthly without utilities that I did pay separately, but yet still I was able to put aside an amount of $350.00 every month in my savings account. Presently, I find it very difficult to save 10 cents.
I am a single mom with a little child so the possibility of me finding another job right now is so slim because I have to be with my daughter in the evening. I also thought of renting one of my rooms to help me pay off my debt faster but on several occasions renters don’t want to rent because it’s about an hour from downtown Toronto. I spoke to one yesterday who was interested when she saw the ad on Kijiji but then cancelled the appointed to see the room because it is far from downtown (about 55 minutes by public transport). I have a 3 bedroom apartment.
Is there any advice you can give me to help me out of this debt? Do you have any idea how I can raise some more money in order to get rid of those debts on my card because they are making me sick. Do you know of any online part time jobs that I could do at home in the evening in order to get some extra cash to help me out?. There is so much I have to say but it’s going to be too long for you to go through it all.
Gail Says: Have you taken the time to add up the numbers? A mortgage of $563 x 2 = $1126. Add maintenance of $417 and it comes to $1,543. That’s more than half your monthly income. And that doesn’t include things like utilities and home insurance. If we add on another $150 for those, you’re looking at $1693 a month, which is 60% of your income. As if that’s not bad enough, you decided to renovate using credit, so you add another crush to your alright tight budget. It’s no wonder you’re finding it hard to make ends meet.
You say you were paying $970 for rent and could save $350 a month. Add them together: $1,320… that’s still less than your current housing is costing you.
Sell the house. Go back to renting and saving. Hopefully you’ll get enough from the sale to also get rid of that debt you’ve accumulated.
A Wrote: I have a 7k student loan. How much do I have to pay every month in order for me to get out debt in 1 year?
Gail Says: First you figure out the principal repayment: $7,000 ÷ 12 (months) = $583.33. Then you add the interest; you haven’t given me your interest rate so I’m going to show you how here assuming an interest rate of 6%: 7000 x 6 (percent) ÷ 100 ÷ 12 (per month) = $35.
Add them together: $583.33 + $35 = $618.33 per month.
J Wrote: My girlfriend is reading one of your books and keeps talking about her PSR. What is it exactly, how do I calculate, and what should it be?
Gail Says: Your PSR is your Personal Savings Rate. It’s the money you’re not spending every month. And it’s a good way to determine if you are saving enough because it helps to put your income and your expenses into perspective.
You calculate your PSR by taking your net monthly income (what’s going into the bank) and subtracting your monthly spending. Notice I didn’t say, “monthly expenses” since very often our spending exceeds the “expenses” on our budget. So this means you actually have to track your spending to see how much is going out. If you have $1453 a month going into the bank, and you spend $1371, you’d have a difference of $82.
Now take the amount you are NOT spending – that’s the $82 – and divide it by your monthly income and multiply by 100. So 82 ÷ 1453 x 100 = 5.6%. So that’s your PSR: 5.6%.
As for what your PSR should be, well, that depends. It depends on how old you are and how long you have until retirement. It depends on how much you have already saved. And it depends on what you want to have accumulated when it comes time to hang up your spurs. It’s all covered in my latest book, Never Too Late, which you should borrow from your girlfriend!
M Wrote: We are trying to save for down payment for a house. When speaking to mortgage broker she advised to contribute more a month to RRSP and also when tax time comes around to get RRSP loan, buy RRSP when get refund to pay the loan back right away and put the rest of refund back to RRSP. My concerns are the numbers she used. She basically said for ex get loan of $3000, we will get refund of $6000, pay off $3000 loan and then deposit the remaining $3000 back to RRSP. Does this sound correct or accurate?
Gail Says: This is a “general” calculation; it is very much based on the specifics of your circumstances. I would need to know what your income is since the refund is based on your marginal tax rate. What are the exact numbers you’re working with? Your before tax (gross) income. How much you’ve each contributed to RSP or company pension plans this year? If you haven’t yet made any contribution, how much you’ve saved to contribute for this year? How much you plan to borrow, for how long, at what interest rate? Any unused RSP contribution room you might each have?
M Wrote: I will give you last year’s numbers. ON my 2014 taxes. Gross income was $48,805. RRSP contribution was $2,017.17 from March 2014-December 2014 then $391.99 from January 2015-March 2015. I want to borrow enough to maximize my contribution. I am trying to use my RRSP for my down payment on a house as a first time home buyer. The broker advised to basically double my refund so that I can pay back the loan as soon as I get my refund then put other half back to RRSP.
Gail Says: With last year’s income at $48,800, you’re eligible to make a contribution of $8784 in 2015. If you do so, and claim the full contribution, if you live in Ontario you’ll lower your taxes from $8,199 to $5,827, saving yourself $2,362 in taxes. If you take those tax savings and apply them to your RSP loan, you’ll reduce it to $6422, which will cost you about $560 a month is loan payments, assuming interest at 5% and you pay it off in about one year. So the question you have to answer is this: do you want to be making $560 monthly payments to repay that loan? Since you couldn’t save $560 a month for your RSP (right now you’re averaging a little over $100 a month in savings), where will you find the money in your cash flow to make this work? I’m not sure why your advisor told you you’d get a refund of $6,000, because that’s not true based on the numbers you’ve given me.
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