Money Matters

#MoneyMasterClass Recap-Week 46

This week Gail continued to answer participant questions and also delved into a couple of small topics, such as money set points.

Deprivers and Classic Debtors

Last week, Gail talked about Misers, Spenders, and Avoiders. Misers hang onto money at all costs, spenders are rabid shoppers, and avoiders turn a blind eye to all things financial. This week she brought up Deprivers and Classic Debtors.

Money Set Point

Gail introduced the concept of a Money Set Point in Week 16. It’s kind of like a tolerance level–that point when you reach a certain dollar amount in your savings and you stop paying attention to spending. Or when you get your debt under a certain amount and stop being as serious about paying it all off.

Adulthood and Responsibility

Live Your Best Life

November Questions

As with last week, I’ll transcribe the questions and answers from this week’s participant questions below the embedded tweet so they are easier to read.

Question:

My husband and I have a lot of debt and a big mortgage! Next month, my husband will inherit a large sum when his late father’s house closes. His inheritance will be enough to pay off all of our loans, credit card/line of credit debt. Re: our mortgage. There will be enough left over to pay the full annual prepayment amount that we are allowed to pay directly on the principal. I really want to pay that before the end of the calendar year. Then in January, we will have enough to pay 2021 prepayment amount directly on the mortgage. I really want to do that. We are thinking about moving in the next 1-2 years. So my husband thinks we should not pay the prepayment and leave the money in the bank because we are going to move and he thinks we could put that straight on the next house. I hate that idea.

Gail, we are in our early 50s and have a huge mortgage. And we are not good with money. this is our last chance to get a handle on our finances. I really think our goal once the debt is paid off, is to focus on getting this mortgage paid down. If we move, Fine! But I am all about paying off the mortgage. My husband and I have steady jobs as teachers, and a great pension plan. But my goal for retirement is to be mortgage free. Do you agree? If so, I need to convince my husband!!

Gail’s Answer:

Your thinking is sound and I agree with you about applying hte money now instead of letting it sit earning taxable income in an account, while you continue to pay higher interest on your mortgage. Very often people get caught thinking of their money in pools and they want to protect one pool because it feels good. Acknowledge that. “Honey, I know it feels good to have this money sitting here. But it’s not doing the work it could be doing for us.” Figure out how much you’re currently paying in interest on your mortgage per year ad compare it to the interest you’ll earn. “So if we put this money in a GIC or HISA we’ll earn $2500 in interest but we’ll have to pay tax on that. In the meantime we’ll pay $6500 in interest on our mortgage. Does that make sense to you?”

Failing that, you can suggest that this is something that is really, really important to you, and that if he wants to honor that, he should consider your plan carefully before dismissing it. Convincing another is not always easy. But I’m sure you’ve had to convince him of things before…

For the context of this question: “An educational assistance payment (EAP) is the amount paid to a beneficiary (a student) from an RESP to help finance the cost of post-secondary education.” Government of Canada Website

Question:

Could you please explain the difference between contribution and EAP? It looks like the beneficiary includes one and not the other in their income.

Gail’s Answer:

The contributor is the person who puts the money in (usually a parent or grandparent). The beneficiary is the child(ren) named in the plan. The contributor owns the money in the plan until the child has been accepted to a qualifying school (not all RESPs are completely flexible on this) at which point the money paid out is done in the form of the EAP. Wise people ask that the EAP be paid from income in the RESP before touching the principal. And the gvmt threw a twist in to try and stop scoundrels from grabbing grant money and then absconding without going to school. The twist: you can only take $5,000 from the RESP as an EAP in the first 13 weeks of school (so $5,000 from non-contribution money). After that, as long as your annual EAP requests are under $20K a year, you don’t have to provide any documentation to show your expenses for school are “reasonable.”

Question:

Which one is better to keep RRSP? Bank or insurance company? I’m 51 and got laid off and had a group retirement through the employer and now thinking about transferring to TD, but not sure if a good idea.

Gail’s Answer:

This is a far more complex Q than just “bank or insurance company.” If you move it to a bank, will you be responsible for making all the investment decisions? Are you comfortable with that? If you go with the insurance company, are there any specific benefits (they’ll manage it, using segregated funds, etc.) you’ll derive? How are you planning to invest your money? If you want to be in the stock market, do you have the knowledge & skills to do that for yourself? If you’re planning to stick with fixed investments like GICs, then ANYONE who gives you the best rate is the right one, assuming fees aren’t an issue. I strongly recommend you sit down with someone (who doesn’t want to grab your business) and have a talk about this. If you don’t have someone, write to me again with the answers to these Qs.

Question:

Looking for a bit of advice on how to handle our finances while dealing with the major time sensitive financial burden of pursuing IVF, my husband and I both have fairly good jobs (combined 180K before taxes), but are in our mid-30s, living/renting in Toronto and do not yet own a home (we would love to). We also have about $15,000 each in low interest debt (loans and loc, mostly from graduate degrees) which we try to aggressively pay down. We contribute minimal amounts to RRSPs through work deductions but most of our discretionary money goes towards fertility treatments (estimated total expenditure around $50,000 we are at the 1/3 mark).

I receive a yearly bonus between 5-10K (suspect this will be a lean year because of covid) and we also expect a large tax return due to high medical expenses.

Question is, what should we be doing to get through this next year or so without completely destroying our finances? Where should we put the lump sum money we receive? We do not come from family money, so our money earned, our money spent.

Gail’s Answer:

Since you have a short-term horizon for that money, you need to keep it liquid, so look for a high interest savings account to stash it away. You could use your TFSAs if you have room and aren’t using htem for anything else. You should also be building up a “baby makes 3” fund so when IVF does take, you’re prepared for what happens next. You’re investing serious money in getting this baby, and you should have some serious money set aside for when he/she gets here.

Practice living on your mat leave benefits, stashing away the difference in your HISA or TFSA to build up that baby fund. I’m v happy to see you’re serious about getting your debt gone; that is absolutely a priority before you have to take time off work (and reduced income) for baby.

Question:

Currently, I hold a HELOC for $300,000 – interest only payments. My bank is offering me a mortgage, at 2.14% for 5 years, that locks in my payments at a slightly higher amount than I currently pay but is do-able. I am operating on the assumption that paying off principal at a lower interest rate is the better option? Also, if its okay to ask a secondary question, I assume that with the penalties a bank will charge, I would want to be sure I am staying in this house for at least 3-4 years into the future?

Gail’s Answer:

If you HAVE been paying off the principal, then sticking with the lower interest rate on the HELOC works. If you’ve been making interest-only payments up until now, you’re never going to get that $300K paid off. If you don’t have that kind of discipline, the mortgage is the better choice. As for the penalties to break the mortgage, if that’s the route you go, take the mortgage for only as long as you think you’ll be in the house. So if you plan to move in 3 years, take a 3-year mortgage, so you don’t run into a problem.

Question:

I saw your tweet on not using Group RESPs and now I am freaking out a bit. We have maxed out contributions for the past 2 years of for our 21 month old. We have another baby on the way. We are fortunate to be fairly financially secure but want the same or our children.

Since we are signed up for our eldest, do we forfeit the 5 grand already invested and focus on a bank run RESP for both? Do we continue CST for the eldest and do a bank one for the youngest?

I am freaking out that I made a terrible mistake when my baby was 1 month old and won’t be able to provide for him like we wanted to.

Gail’s Answer:

First off, don’t panic. I’m not fond of group RESPs because they have a lot of restrictions. If you can’t withdraw the $$ you already put into the group RESP w/out significant penalty, you’ll have to decide if you want to continue or bite the bullet. As for your next babe, open up an individual RESP for him/her and at least you’ll have diversified somewhat. Please, don’t upset yourself over this (I know about the hormones) it simply isn’t worth it. Learn about your group RESP and then do the pros and cons list to see what the next steps should be.

Question:

I have been following you for years and I think I am in OK financial state. I don’t know if you want to address this as I am not sure how many other people are in my situation. I was diagnosed with breast cancer a year and a half ago. After mastectomy I was cleared and was told I was fine. What do you know…This past July I started having pain in my chest then all the craziness started: 4 hospitals and 5 doctors later, my breast cancer is in my bones now and in some lymph nodes. Anyway, I am a strong person and I am dealing with it. I am a single mom and only 44. My daughter started university this year and my son is in grade 10. I maxed out their RESPs and my daughter also got a few scholarships. I teach at a private school and have a pension of 5 percent. I stopped my RRSPs as I figured there was no point. I know I won’t make it till 65. My question is, did I do the right thing stopping RRSP contributions? I own a house that is worth almost a million and my mortgage is about 130,000. Do you have any financial planning suggestions when you are told you have 5 years, maybe less maybe more. I love travelling so I feel like that’s what I should do, but at the same time I want to leave as much money for my kids as I can. I would really appreciate any advice. Thank you.

Gail’s Answer:

Oh, my darling, I am so sorry. My very best friend died of cancer (of the brain) after being cleared of breast cancer and the journey was not easy. However, she did some things before she died that made her very happy; travelling to Versailles was one. Your house is enough “financial security” for the kids, so never mind about them financially. That’s more than enough to help them off to a good start. In fact, If you took a little more out of it (say another $100,000) you could spend the next few, brief but glorious, years making memories with your kids. Travel. Experience. Lots of pictures. Keep a diary. Write them letters for future birthdays. All that kind of stuff. You will still have left them enough $$ (trust me), but you will also have left them with memories of you, which will be far more valuable. The end may come quickly or slowly, and you should have a contingency for paying for any help you need so you will be comfortable. So to your main Q: should you have stopped contributing to your RRSP? Absolutely. Your RRSP is now your contingency fund for end of life care. You are a brave woman and I wish you the very best through these next few years.

Question:

Can you put only a small amount of your RRSP into a RRIF while working after turning 65, to get prepared for a decrease in income and then transfer the balance when you actually retire in about 6 months or a year later. Would it be better to put the whole RRSP into a RRIF at one time. What are the tax implications for either case.

Gail’s Answer:

There are no tax implications for rolling your RRSP to a RRIF; it’s just a lateral move. However, once you move to a RRIF there is a specific amount you MUST take every year. At 65, you must take out 3% of the RRIF in that year. I’ve sent you a small chart to show how slowly the increases happen. Keep in mind that once you are 65 you’re entitled to the pension income tax credit so that the first $2,000 in pension income has no federal tax. So if you’re not getting a pension from another source, that $2,000 in RRIF withdrawals will save on your taxes.

Question:

My 22 year old daughter has been working since age 16 part-time as a lifeguard. She graduated from university in April of this year. She pretty much paid for 1st year of university herself (with her savings) and I paid for years 2-4 with RESP $. She paid her own rent of $500 per month at the student house for years 2-4. She’s back in college for a 2 year program (she will be paying for it) and still working part-time as a lifeguard. Last year she made approx. $33K and currently has $10K in the bank in savings.

She’s a hard working kid and has always been great at saving $. I’ve been a single parent her entire life and have tried to teach her the value of a $. aka money doesn’t grow on trees. She has no debt and pays off her CC monthly. I pay her cell bill $50 a month. I bought her a car a couple of years ago but she pays her own insurance, car maintenance, license sticker etc.

I downsized to a condo a couple of years ago and paid off the mortgage (yippee!!! best thing I’ve ever done) I plan on moving in with the BF in the next couple of years (he will be building a house) and keeping the condo for my daughter to live in. At that time I think it’s only fair to charge her rent as there will be costs associated with keeping the condo. Child support of $570 a month stopped in May of this year. I pay for the majority of the groceries. She buys her own clothes, pays for her own eating out & pedis/haircuts etc.

Soooo….should I be charging her rent now?? I was thinking something like $250 a month?? I’m really struggling with the guild part lol (none of her friends living at home pay rent). She’s still in school, works hard & helps with chores.

Gail’s Answer:

With an income of $30,000 I’m not sure why you’re still paying her cell phone bill. As for rent, yes, you should ask her to contribute. Ask her what she thinks is fair. I think the number is closer to $600 a month. But it’s between you and your daughter.

It’s so crazy to think that we are nearing the end of this very long year! What financial lessons have you felt most important to you this year?

Missed last week? Check out my recap here: Week 45

New to the Money Master Class? There’s still time to get started!
Check out this Twitter Archive to see all of Gail Vaz-Oxlade’s #MoneyMasterClass tweets from the start.
Find the resources, spreadsheets, and quizzes here: Money Master Class
Check out my weekly recaps to get caught up.
Start here with the Money Master Class Intro and Week One Recap

Check out Gail Vaz Oxlade’s books here:*

Money Rules
Debt Free Forever
CEO of Everything
Money Smart Kids

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