This & That: Blessed Edition

C Wrote: I have read and used both your get out of debt book and your retirement book and feel that we are on track for a decent retirement. We do have some RRSP savings and my husband will be receiving a pension but I will not receive any, other than OAS and CPP, since we have moved too often for me to build a pension where I have been employed. Our story is that my husband is military and we were posted (to Alberta) for what was to be a two year posting. At that time we decided to rent out our home (in Nanaimo) to people that we knew, I took a two year leave of absence from my job and we chose to rent at our new location because of the short length of time we would be living there. The two year posting has turned to four, our tenants have purchased a home and I could not further extend my leave. Our dilemma is: should we continue to rent the home, but through a property rental agency since we live in another province, or should we sell the home and invest the profits. Our financial planner has put together a low risk portfolio that would provide us with interest dividends very close to the amount we would receive from rent. My husband must retire from the military in two years but we are unsure of where we would like to live when that happens, back to this home or to another area closer to family (family that did live in Nanaimo have moved but we still have many friends there). The house will be paid off next year. We have thought that we could use the rent we receive after he retires to offset rent in a location that we might want to try to live in until we make a decision and still have a place to go back to if we choose to. If we sell we should not have to pay capital gains because we filled out a Revenue Canada Subsection 45(2) form with our taxes. Financially, what is the best option? We have to make the keep/sell decision in a few weeks. I don’t want to make any decision that will negatively affect our retirement and would value your opinion. I hope I have given you enough information. I feel that in many ways we are in an enviable position but don’t want to “mess” that up.

Gail Says: You are blessed and you are smart to count your blessings and want to keep them flowing. If you rent the home and use the income to offset your own rental, keep in mind that the income you derive from renting is taxable but that the money you pay in rent isn’t fully deductible so there want be an even wash. You’ll end up more out of pocket than your plan makes it sound. If you had the money invested and used the income to rent, you would still have to pay taxes on the income you earn, but it would likely be at a lower rate.

You’ll have to weigh the pull of friends who still live where the house is against the desire to move closer to family and you have about a year to do it since that’s when you’re free and clear to do with the house what you wish (though if you have a prepayment option on your mortgage, if you sold now and applied the prepayment option, I bet you wouldn’t see much in the way of a penalty.)

Have you calculated what the rental company costs would be as a percentage of the rent you’ll be receiving if you keep the home and rent it out again? (It would be a deduction against the income for tax purposes.) You should.

Some of this feels like an emotional decision (where to live, closer to friends or fam?) and some of it is straight math (will we get enough rent to cover house costs and our own rental costs elsewhere?) Do the math first. Then make a pro/con list for the emotional stuff.

 

A Wrote: Gail, this is both a success post, and a question post. I grew up in a single-parent household financed by a below poverty income. I have a healthy respect for the power and pitfalls of money, and more importantly, what it feels like to not have enough of it. I had a loving parent, and the best home she could provide and that was enough to give me the resilience for what lay ahead.

My success story: When I left for University I did it with meager savings and, not-surprisingly, no financial support. I financed, concurrently, a BA and a B.Ed. to the tune of $40,450 is OSAP debt, despite working summers and minimizing my expenses. When I graduated I made a promise to myself that I would pay off that debt in

I accomplished a $100,000 education with only $50,000 of non-credit card debt (costing me $2100 in interest) which I paid off in a combined 5 years. I was fortunate to have never experienced the hell of credit card debt. I did all of this while saving an almost equal amount. No job was ever too menial; if it paid, I’d do it. Have you ever worked on a sewage truck? #funnotfun. I don’t live a life of excess or flash (case in point: I drive a low km 2006 white Toyota Corolla that I paid cash for). I’ve been both lucky in my jobs and tenacious in my goals and it has worked for me. Mostly…

Question: Gail, money scares me. It is a genuine source of anxiety as a result of my childhood and teenage experiences. That anxiety has proven useful. It helped me control my spending. Respect the consequences of debt and motivated me to eliminate it. But, now what? I really would love to buy a house one day, but I’m single and in the Toronto market where I live I feel like I will never, EVER be able to afford a home. With my debt gone I’m now saving $2000/month (on top of the maxed out $700/month in employer matched pension I contribute to.) I look around at my friends who all have brand-new things (cars, TV’s, clothes, furniture, homes etc.) and here I am renting a room in someone else’s house with a 10 year-old car, a 6 year-old laptop and not much else. I feel like I’ll never be able to afford a home in this market despite being a money earning, debt eliminating, saving-smart machine. Also, frankly, I don’t know how other people are able to buy homes and cars and stuff like they do. I know other people have their own stories, and they have no bearing on my own but what good is debt-free, financial restraint when it doesn’t seem to get me anywhere, or anything?

Eliminating debt was, for me, relatively easy, though plenty painful; though my anxiety worked in my favor. Now, all I feel is anxiety that my attitude, towards minimizing-debt and maximizing savings, is just keeping me from being able to set the post-debt goal and being able to start living a life that actually feels good, instead of a constant financial slog.

So, with those feelings in mind, how do I set a ‘spending’ goal without feeling totally discouraged at my prospects of achieving it? Especially when my money-spending anxiety says ‘don’t take on financial risks or debt’. Help?

Gail Says: Darling, how great is it that you’ve achieved what you’ve achieved. Well done. As for your future, you get to live somewhere in the middle of the two worlds you’ve described. You don’t have to take on the responsibility of home ownership right now in a market that is over-heated and very, very expensive. Nor do you have to live in a room on someone’s house. You can make your own home. Yes, you’ll have to spend some more money on rent, and you’ll have to make it cozy and ‘yours’, but that’s totally manageable if you’re able to sock away $2,000 a month right now. So you should ask yourself, what do I want my life to look like?

Take some time to think about it. Where would you like to live? What would you like your living space to look like? What would you like to be able to do? Then set about creating the life you want.

Often when we get into “debt repayment” mode, it’s hard to loosen the purse strings. But if you’re debt free, it’s time to start thinking about what you want your money to do for you.

 

K Wrote: I am 25 years old. I have a DC Pension Plan at my work. My employer contributes an automatic 3%, I can contribute up to 5% (which I do) and they will match half of that. That equals 10.5% of my salary being contributed to my pension plan each month. How much extra retirement saving would you suggest someone of my age do to supplement this (through RRSPs, etc.)?

Gail Says: You’re doing great on the retirement front so now you should focus on making sure you have an emergency fund. That means setting aside six months’ worth of essential expenses just in case. So look at your budget. Figure out what it will cost a month to keep body and soul together and then save six months’ worth. You can start using a TFSA and then accumulate any more you need in a high interest savings account. Once that’s done, try to keep maximizing your TFSA.