This holiday season, many Canadians are as focused on trying to save money as they are in needing to spend some. With overall debt levels mouting in 2009, it may seem as if there is no way to start chipping away at that massive debt load. Do you start with paying off the mortgage, the line of credit, the renos or the credit card bills? Finance expert Suzanne Schultz can help.
She joined us Friday, December 4th at 12 pm ET for a live online discussion on debt management. Your questions and her answers appear in the space below.
Once the live event is over, please click here to continue the discussion in our Personal Finance forum
Ms. Schultz, a chartered accountant and certified financial planner, has more than 15 years of experience helping individuals with their financial matters. On Wednesday, she appeared in a Globe & Mail Building Blocks video with advice for young families on how to come up with a plan to dig themselves out of debt. In October she provided these tips in a Building Blocks video on how to use child, home and spouse-related credits and deductions to cut your family's tax bill.
When not helping homeowners solve their financial problems on the new HGTV series House Poor, Suzanne works as a certified financial planner at RBC Dominion Securities in Hamilton, Ontario. Her areas of expertise include personal financial planning, tax minimization strategies and estate planning. Known for her expert advice, Suzanne has appeared on Business News Network's Talking Tax, Report on Business Television, CP24, Investment Television and the Canadian Learning Channel. Suzanne also co-authored Tax Tips for Canadians for Dummies and the new 78 Tax Tips for Canadians for Dummies.
In her free time Suzanne likes to run and do yoga, but can usually be found taxiing her children to local arenas for hockey and lacrosse.
Here is a text version of the Suzanne Schultz discussion:
Roma Luciw: Hi Suzanne, Thanks for taking the time to join us today. My name is Roma Luciw and I am the personal finance web editor and reporter here at the Globe. Suzanne is with us now and ready to tackle your debt questions.
We will start with one that was sent to us by email: When debt seems overwhelming, where does one start? Credit counselling services sound like scams (in ads) so I don't know if I can trust them. At the same time, I can't afford an expensive financial planner, but need the expertise they can provide. Thanks! JJ
Suzanne Schultz: Not all credit counselling services are scams. There are many non-profit organizations around to help. It sounds like you are taking matters into your own hands, which is good. There are a lot of great online sites to get financial information and help you budget. But when you debts are overwhelming, you probably do need professional help. Not knowing all the details here, I would start with your bank to see if you can consolidate some of the debts to hopefully lower your interest rate and to have more manageable payments. If you've exhausted that, I would seek the help of a credit counselling service. Good luck.
Roma Luciw: An online reader wants to know: Is it better to close my credit card accounts when I pay them off? One of my $1,200 credit cards is a $15,000 card. After 5 years and I have it maxed out and I know I can't handle credit cards.
Suzanne Schultz: It sounds like you can't handle the temptation of having credit cards. Therefore, absolutely pay them off ASAP and close the accounts when you're done. That being said, you should have one credit card with a manageable credit limit for emergencies or for circumstances in which a credit card is a requirement. Having a credit card and paying it off in full monthly helps maintain a good credit history, in case you need credit in the future. But for now…get rid of that debt and close out the cards.
Comment From Guest: I heard the best thing to do in terms of paying off credit cards is to start off with the ones with the lowest balances owing and work your way up. Do you agree?
Suzanne Schultz: It depends. I would look to see which credit cards have the highest interest rates first. Pay those off in priority. If you have a bunch of cards with the same interest rates, then yes, I would pay the lowest balances off first, then cancel the cards. Make sure you pay at least the minimum balances by the due dates on all the cards. If you have too many cards and are paying too much interest, consider consolidating at the bank to make the payments more manageable.
Comment From Guest: Hi Suzanne, In todays current economic climate, should debt be the primary focus over RRSP,TFSA,RESP?
Suzanne Schultz: Again, it depends. If you have a lot of consumer debt (not a mortgage) then I think that needs to be tackled ASAP. After that, where you invest depends on your needs and tax rates. If you are taxable, and in particular when you need a tax write-off, RRSPs are great as they provide a dollar for dollar deduction against your income. And there is a psychological advantage in that many people won't touch their RRSPs when they need cash, so it will be there for retirement. TFSAs are great for an emergency fund or if you've already saved in your RRSP and want to supplement your savings. RESPs are great to save for school but I personally believe you need to take care of your financial situation first, including retirement, then save for education. Kids can always work to put themselves through school. Its great to have help, but don't forgo your own financial needs for this.
Comment From Kathryn: I am a recent law school graduate. I have debt from OSAP and debt from a line of credit. The OSAP debt is less and the interest I pay can be used for tax credits, but the interest rate is higher. The debt from my line of credit carries a lower interest rate, but cannot be used for tax purposes. Do you have any advice on which to pay down more quickly, or first?
Suzanne Schultz: Without actual interest rates, I can't tell you for sure, but I think you're smart so you can probably figure this one out. You need to determine the after tax cost of the interest to see which is actually lower. If the rates are similar, then the OSAP is probably cheaper on an after tax basis so pay off the line of credit first. If the OSAP is significantly higher, given that you only get a non-refundable tax credit (worth 15 per cent federally), its probably best to pay down the OSAP first.
Comment From modan: Hi Suzanne, I'd like to get your thoughts on borrowing for RESP contributions. My eldest is 2 1/2 years until university and I don't have nearly enough saved for his education. We live in Nova Scotia which has the 2nd highest provincial income tax rates and the highest tuition rates. Should I put myself in debt in order to take advantage of the RESP grant contributions?
Suzanne Schultz: If you already have an RESP, then it can make sense to borrow (in this case) so that you can get the Canada Education Savings Grant (CESG) for your contributions. However, the interest is not deductible, nor is the contribution. If you don't have an RESP already, there are age limits on the CESG, and therefore, if you don't qualify, I wouldn't borrow for the RESP. Instead, in that case I would start saving, preferably in a tax free savings account so you will have the money when you need it, but won't pay tax on the earnings in the meantime. The CRA website has some great information on RESPs. Click here for a link.
Comment From David: My wife and I have multiple lines of credit and OSAP loans, and we just graduated. We do not have any RRSPs. Should we start putting money into RRSPs or use that money to pay off our loans? Thanks.
Suzanne Schultz: RRSPs are a great way to save for retirement but you really only get bang for your buck right now if you are taxable. Given that you just graduated, you might not need the tax deduction, especially if you have tuition credits to claim. I would tackle the student debt now, and possibly consolidate those lines of credit to make the payments more manageable (its really hard to keep track of multiple payments each month). Make sure you pay more than just the interest on the debts as well...some lines of credit only require interest payments which means you are never paying off the principal. Once you start making more money and need a tax write off, get RRSP contributions taken right off your pay, if you can. Your tax will be reduced at source, which means you get your tax break up front. You might be able to afford a higher contribution this way.
Comment From Shelley: I have alot of unused credit available to me (I got it for 'just in case'). Does this amount of credit hurt my credit score? Even if it hasn't been used in years? Should I reduce it?
Suzanne Schultz: The best time to get credit is when you don't need it, so the fact that you have unused credit "just in case" is a good idea. The unused credit will be looked at, but the fact that you haven't used it, have had it for a long time, and there are no outstanding balances owing are all in your favour.
Comment From Alex: What if you have no debt other than a mortgage (being paid off weekly accelerated with a good amount of equity) and a 0% car loan, and have maxed out RRSPs and have also maxed out RESP for our child, is it ok to indulge in some debt to take a nice vacation or renovate?
Suzanne Schultz: Wow -- you are in great shape! I always say that people are pre-programmed to be good savers, or big spenders. You are in the good saver category. Please go on a vacation. You deserve it.
Comment From Mike: Where do you look, and what do you look for in a Certified Financial Planner?
Suzanne Schultz: You can search for a CFP on this website: www.fpsc.ca As far as what to look for, it depends what your needs are. First and foremost you want someone that you feel comfortable working with. If there's not a fit, keep looking. You will also want to ask what services are offered, if financial products are offered and how they are paid. There are some great CFPs out there, working for banks, independent shops and brokerage houses. I'm sure you will find one that suits your situation.
Comment From Howard: Hi Suzanne: What is the advantage or disadvantage in putting your line of credit and credit card debts on your mortgage and using some of your RRSP to pay down your mortgage?
Suzanne Schultz: Wow, this is a biggie. The advantages are you might have a lower interest rate, and lower payments since the mortgage is likely amortized over a long period of time. The disadvantages include that you are eating into the equity in your home and over the long term will pay a lot more since the payments will be made for so long into the future. It really depends on what your amortization period is. Be careful with this. With unpaid credit cards and a line of credit, it sounds like you have budgeting problems. I would advise you to take a close look at your spending and cut out the extras and put that cash towards this debt. Many people who refinance debt into the mortgage keep going back to do this again and again. Finally, RRSP withdrawals are taxable so I would leave this one alone except in very special circumstances.
Comment From Belinda: Hi Suzanne, Thanks for your time in advance today. My question is how much savings should one put aside? And how can one calculate this from their salary and expense of mortgage?
Suzanne Schultz: Hi there. I recommend a minimum of 10 per cent of your net income in savings. If you can afford more, even better. Its a good idea to pay yourself first, by getting a pre-authorized payment out of your bank account on pay day...if you don't see the money, you often won't even miss it.
Roma Luciw: Well, that is all the time we have today. Thanks to Suzanne Schultz for joining us and tackling all these questions. We apologize to the many people whose queries we ran out of time to answer. All the best to everyone this holiday season and good luck managing that debt.