This & That: Cringe Edition

S Wrote: My husband and I just won a lotto of $340 000, paid off our line of credit $89,000 and have a mortgage of $121,000. We would like to max our TFSA, and pay off our mortgage, however our financial advisor at the bank wants us to use our line of credit of $100,000 for leverage, and then invest $100,000 cash on top. Our ages are 57 and 54. I am working and make $55,000/year after taxes. I am concerned about borrowing to invest. Do you think this is a good idea at our age?

Gail Says: When I get letters like yours it makes my stomach lurch as I think about all the people getting — and taking — bad financial advice. Unless you are a very sharp investor who knows the ins and outs of leveraging, you definitely should NOT be borrowing to invest. The only person who will win in this scenario regardless of what happens next is the advisor who gave you this crappy advice.

Do what you plan: pay off your line and your mortgage, max your TFSAs. You’ll have to decide what you’re going to invest that TFSA money in, and you need to follow the rules of investing so you don’t get scorched:

Only buy what you can explain to a 12 year old,
Match your investment time horizon with your investments… in other words, if you plan to use that money in 10 years or less, you cannot put it into the equities market because you don’t have enough time. Go to my blog and search “time horizon” and read what comes up, and
Only buy what matches your risk profile. Again, there’s stuff on my blog about this.

You could also grab a copy of my book, Never Too Late, from the library and read that. It’ll help.

 

E Wrote: I have been working towards buying my first house, but I still have a lot of debt (including student loans and consumer debt). I have been making more than my minimum payments to my debt plus I have been putting savings into a TFSA and RRSP’s (which I am planning to use to buy a house). My question is should I use the money I have accumulated in my TFSA to help pay down my consumer debt first?

Gail Says: ABSOLUTELY. You should NOT take on more debt (a mortgage) and more financial responsibility (a home of your own) until you have gotten rid of your consumer debt. And you should not be on the 10-year plan for your student loans either. Home ownership is a big deal…it’s expensive and it’s unpredictable. You need to have a solid financial foundation before you think about it.

Home ownership is much more than just getting into the house; it’s paying the taxes, the utilities, the insurance and the upkeep. I’m going to suggest you “practice” living on the reduced cash flow you’ll likely have once you finally do get into a home of your own and use the money you’re setting aside to get your debt paid off lickety-split.

First, you think about how much home you’re buying and what your monthly mortgage payment will be. You can go online and use a calculator to figure that out. For the sake of this example, let’s say you’re buying a $250,000 with 20% down, at 4% amortized over 25 years. Your monthly mortgage payment will be $1052.05.

Now the other costs. If your property taxes are $3000 a year, that’s $250 a month. And you’ll have to pay house insurance: estimate at $100 a month. And utilities, which we’ll estimate at $300 a month. And maintenance: we’ll plan on about $400 a month. For a grand total of $2,102.05 a month, which is what it’ll cost you to actually live in that new home.

If you’re currently paying $1200 a month rent, you take your housing cost ($2102.05) and subtract your current rent ($1200) to come up with your monthly savings: $902.05.

Hey, I’m not talking about if you can THEORETICALLY come up with the money. I’m talking about taking that money and using it to pay down your debt. Once it’s gone you can use that $900 a month to keep saving for your down payment.

You’ll learn to live on less disposable income, which you better start practicing before you buy your home so you’re ready for the adjustment in your lifestyle. Loads of people buy a home and then keep on spending like they did before they became homeowners going into debt on their lines of credit or credit cards.

If you can do that, then you’re ready for home ownership.

 

S Wrote:   I have 2 jobs, live on my own and plan to go back to school. Here’s the problem. For the past few years I have been borrowing money from Money Mart, Cash Money, etc. Every time I think it’s my last time, but then by the time I pay it off I will not have enough for rent so I borrow again. I’m already working 7 days a week but with low pay and cannot afford school. How can I get out of this?

Gail Says: What in heaven’s name were you thinking when you went into that pay advance store? I can’t believe our government even lets these places exist. With all the blah blah blah about wanting to protect Canadians’ futures, you’d think loan-sharking would be the first thing our leaders would be out-lawing.

The reason you can’t make any progress is that the interest and fees you’re paying are outrageous… sometimes the equivalent of 700%…and that leaves so little room for wiggling out once you’ve been trapped.

But you have to. And only you can do it. There’s no way you can go back to school if it’s taking 2 jobs and a pay advance loan to keep you afloat. So you’ll have to decide how important school is to you. Then you’ll have to do whatever it takes to pay off the pay advance loan AND NOT TAKE ANOTHER.

You say you’re working seven days a week now, so you may have to do this by cutting your expenses to the bone. Get ready to live on soup girlfriend. No spending on anything you don’t absolutely NEED. If you have a special day coming up where people give you gifts tell ’em you want $20 instead…debt-free is the best gift ever. Failing that, you’re going to have to sell some stuff or find a way to make more money. There are no easy answers to this.

 

M Wrote: What can I do if I’m in a lot of debt but own a condo? I’m locked into my mortgage till 2017 and will have to pay a penalty if I sell early. My Line of Credit and Visa are almost maxed out. Can you please help me?

Gail Says: I’m not sure what you’re expecting me to say. Do you think I have some kind of magic wand that I can wave and make this go away? About 20% of the letters I get from people are like yours, so you’re not alone. But you shouldn’t take too much comfort from that since it speaks to just how unwilling people are to take responsibility for their own mistakes and fix them. Did you do any research before you decided to leap into home ownership? Why are you spending more money than you make, which you clearly are because of your debt? At what point are you going to decide you’ve had enough of living on borrowed money and you’re going to do whatever it takes to fix the mess you have made. Whether that involves renting out your condo and moving into really cheap digs until you can sell, or getting a second or third job, or spending half what you’re used to spending so you can get your debt paid off, the only way to fix this mess is to do something differently.

I would love to be able to help all the people who need help. And I try. But sometimes, when I get a letter like this, I just want to throw my arms up in the air and run screaming from the room.

You are the author of your life. You control how you perceive things, what you do, and what you make of the time you’ve been given on this earth. You can feel helpless. You can act helpless. Or you can take the bull by the horns and figure out a plan.

There’s loads of info on my website and in my books. You just have to have the gumption to be willing to do the hard stuff to get from here to where you want to be next.