This & That: Think It Through Edition

E Wrote: I am ready to throw up with stress about a mortgage decision and I am hoping for your advice. I have watched you for years and I saw you speak in Milton last spring – you are my financial guru!

We live in a wonderful home in GTA suburbia and are very happy, but want to make the move closer to downtown for the walkability lifestyle that comes with an inner-city move. As it stands, our current mortgage payments are very comfortable, and we would be taking on a considerably larger amount of mortgage debt to move. We have a huge down payment (lots of equity in our current home) though; we’d be putting $410K down and spending $875K on a house, meaning we’d end up with a $465 mortgage. Our combined annual income is $166K, and our monthly mortgage/property tax/home insurance, gas, and hydro would be $3100/month. We fall within all of your “can we afford this” guidelines, but I feel SICK to my stomach about having a $465K mortgage. Should I just be focusing on the monthly housing costs rather than this huge looming number with the bank???

Gail Says: If you want to be comfortable with this decision you actually have to work through the math. You haven’t told me your individual incomes (it makes a difference in your taxes) so I split the income 50/50 and see that you have an joint income of about $11,000 a month, which should be more than enough to deal with your mortgage. You haven’t said how old you are so I don’t know how much time you have until retirement. But you should be aiming to be mortgage free by then. Also, what have you been doing with all the income you’ve been making (without this mortgage payment) up until now? Taking on more debt will mean changing your priorities in terms of spending. If you dot all those i’s and cross all those t’s, you’ll feel better about your decision.

 

J Wrote: Gail, I think you’re amazing and I love watching you help so many people with money issues. The thing is, my husband and I don’t really have an issue. He makes an incredible salary, I make a very good salary, and we have nearly no debt. The problem is, when we compare our annual income to the money in our bank accounts, there seems to be a lot missing. How are we unable to save when we should be saving a LOT??

 

Gail Says: You have no idea where your money is going so you should start by doing a spending analysis. Grab your last month’s bank statement(s), credit card statement(s), and line of credit statement(s). Now, break every transaction into one of the following categories:

shelter (mortgage, rent, hydro, heat, taxes, maintenance)
services (cable, telephone, security, home-cleaning, cell, internet, childcare, health, pets)
food (everything you put in your mouth and swallow, including restaurants)
shopping (any STUFF you bought for yourself and anyone else — EVERYTHING)
transportation (car payment, gas, repairs, highway tolls, taxis, bus, train)
entertainment (movies, books, magazines, hobbies, gym, club, sports)
bank fees (service charges, ATM fees, NSF fees, DON’T INCLUDE INTEREST)
interest costs (from everywhere)
debt repayment (don’t worry about splitting out interest and principal, just add all your debt repayment amounts together)
savings

In the best of all worlds, you’ll do this for six months’ worth of your paperwork since a half-year is just about enough time to catch all the things that only pop up periodically. Less than six months will give you some insight, but not clearest picture.

Now add it all up. Take and average and plop those numbers in a budget.



Once you know where your money is going, you’re in a much better position to decide how you want to spend it. Decide where you want to trim so you’re saving as much as you want to be saving. 

 

K Wrote: My husband and I are debt-free except for our $300k mortgage on our home (comps in our neighbourhood are valued at $650k). We have three savings goals: to save for retirement (we have about $75,000 saved right now), to save for either a move or a renovation to our current home in 5 years when our mortgage term is up (we have a 3 year old and another on the way!), and to pay off our mortgage early (we have 14 years to go and we would like it done in 10). Though we’re excited and motivated, I’m a little concerned that we have too much that we’re trying to do at once, and that we might be better off concentrating on one goal, then moving to the next, and then the next. We have 6 months of expenses saved, and we pay in cash for our major expenditures around our house and so on. What would you suggest? We are 34 and 35, both working.

Gail Says: You are sending conflicting messages. Clearly you are conservative and want to have your i’s dotted and t’s crossed. But your goals are working at cross purposes: to save for retirement, to pay your mortgage off early are asset building objectives. To move or renovate will like deplete assets. So you have to figure out what is most important to you.

People have a tendency to say one thing and then do another when they do understand their core values. So I suggest you think about what weighs most heavily on your mind when it comes to what you want from your life. Is it that bigger/renovated home or is it money in the bank and being debt free? It might be a timing thing: you can have it all, just not all at the same time. It might be a priorities thing: the larger home is a necessity because of a growing family, but the idea of being mortgage free is just so tantalizing. You and your buddy should sit down a make a list of what’s most important to each of you, compare your lists, prioritize them, and then set some goals based on what comes out of the exercise. I have a whole chapter on figuring out your core values and getting started setting goals in Debt-Free Forever. Grab a copy from the library and do the exercise. 

 

S Wrote: I am about to start the process of a separation after 8 long years of financial disagreements. Pre-partner I was debt free, and had enough equity in my townhome to avoid CMHC when I purchased it! Eight years later, I am $40,000 in debt and as we prepare to sell our home we will walk away with very little, maybe nothing once the debt is paid off. Of course, my partner did not believe in savings, RRSP, budgets or planned spending. Now with three kids in tow, I am leaving and am actually looking forward to starting over. I’ll have nothing but I won’t have debt and I will have full control of my finances. I have started a job where I will accumulate a pension (public sector), I have upped my RRSP contribution to a whopping $50 biwkly and had started a TFSA but had to deplete it for the separation so will be contributing to that soon at hopefully $50 biwkly. Now I feel pretty good about this fresh start but I am in my mid-thirties and am basically starting with nothing. Should I go for a higher risk investment as I will have time to let the money sit and try and get me back on track? Also, a friend’s husband has started with World Financial Group. I know they are tied to life insurance. Is this an avenue that is safe to explore? Would it replace the contribution to mutual funds offered through the bank? You’re the only financial person I trust out there. Everyone seems to mislead you to make their targets and push something on you. Thanks for telling it like it is. I can’t wait to write you with my success story!

Gail Says: I’m sorry you’re having a tough time of it right now, but I know you will be fine. You are a sensible woman and I’m happy to hear that you’re looking forward to your new beginning. Good job getting a pension plan, that’s going to help a lot. And coming out debt-free (even if you are starting over) is a bonus too.   

To your questions:

When you ask should you go for a higher risk investment it makes me wonder how much investment experience you have and how comfortable you are with investing? I have a rule for investing: you’re not allowed to buy what you can’t explain to a 12-year-old. If you don’t understand what you’re buying, then you’re not “buying” you’re being “sold” and that’s not a good thing. While a potential higher return will mean your money may grow faster, it comes with the downside of a potential loss. So you have to ask yourself is getting 8% return worth losing 25% of my money? Please read these blogs:   http://gailvazoxlade.com/blog/archives/1649 and  http://gailvazoxlade.com/blog/archives/1633


Should you buy from a friend’s husband? NO. Never. Unless you don’t care to keep the friend. I disagree wholeheartedly with the sales systems that prospect friends and family because it’s often a sign that the product/service is weak and is counting on the relationships of the salespeople to make it go. If you are going to buy mutual funds, it should not be from a friend, but after significant time doing research and making a choice based on the holdings in the mutual funds, the management’s history and your objectives in buying.  


I have some basic information on investing on my blog. You can start there. Buy a couple of books, read some magazine articles, get comfortable. Then “pretend” invest for a while until you think you have a good feel for what you’re looking at. Then dive in.