Me and My Money

Susanna

Posted May 2, 2012
Originally Published April 23, 2012

Susanna (not her real name) recently won a contest created by publisher Simon & Schuster to promote my new book, Count on Yourself: Take Charge of Your Money.   The prize was a phone conversation with me about money.   She was thrilled and I was humbled by her eager excitement -- as if she’d won the lottery.

I expected an easy-going chat about debt, saving and RRSPs.  Then Susanna sent me her list of concerns.  The email ran to a couple of thousand words and outlined a life of financial and personal struggle.  Here’s a thumbnail sketch.

Susanna is a 44-year-old single parent with a son in his twenties.  She owns a condo purchased in 2003 with a variable rate, 3.1 per cent, $64,000 mortgage.  After some ill-considered spending she ran up a $32,000 credit line at 4.5 per cent.   She is paying more than required on her mortgage and interest only on her credit line. 

Susanna has been on disability for most of her adult life.  She has had several health crises including one during the purchase of her home.  As a result of her preoccupation, she ended up with post-purchase repairs.

Her car is on its last legs and her stove packed it in late last year. “I am terrified when I am 65,” she wrote.  “The problems I had when purchasing this condo made me aware than I am not always the best person to be looking after my financial business.”

However, as I have told so many people who come to me with financial problems, Susanna knows more than she gives herself credit for and she has made four smart decisions.  

1. Once she realized her health would not allow her to work again she applied for a Disability Tax Credit Certificate. 

2. With it in hand, Susanna opened a Registered Disability Savings Plan (RDSP) at her bank.

3. She set up an automatic contribution plan of $125 monthly ($1500 a year), the minimum needed to get the maximum government grants totaling $4500 annually.

4. She catalogued her financial problems. This process, while sometimes torturous, forces you to organize your thoughts and let priorities emerge.

For example, Susanna’s overriding concern – to the point of paralysis -- was about her income after age 65. “Am I going to be sleeping in my broken-down car and living on canned beans?”  But it is impossible to predict what is going to happen 21 years hence. 

Other issues she raised were more immediate and she can do something about them right away.  There’s nothing like making a financial decision and carrying it through to give you a sense of control. 

We started with some easy improvements.

1. Debt:  It makes no sense to pay the minimum on her higher interest line of credit.  Instead, she will change the mortgage to monthly, stop irregular lump sum payments while increasing the credit line payments.  Freeing up an extra $200 a month means paying off the credit line in about 10 years, compared to never with her current strategy.   Meanwhile, she will continue to reduce her mortgage.

Even better, when the mortgage comes due she can investigate adding the credit line to it.  This will save money long term.

2.  Variable vs. Fixed:  Susanna is fretting about which to choose next year when her mortgage term is up.  I suggested she stick with variable, assuming the spread between variable and fixed is at least 2 per cent.  Interest rates will have to rise by that amount before she is worse off.  Even so if the idea of a variable mortgage adds to her stress level, she may be better off with a fixed rate.

3.  RDSP:  Susanna planned to contribute to her RDSP until age 65 and then start withdrawing funds.  But the government RDSP grants cease at 49.  Instead, at 49 she could devote the money to debt andor contribute to a Tax Free Savings Account (TFSA) allowing her to be debt free quicker and also have money outside a registered account for emergencies.

4. Investments:  Susanna wonders if she made a good choice with the RBC Balanced fund.  A single, balanced fund with cash, bonds and equities does make life simpler.  However, while RBC Balanced isn’t the worst, it’s far from the best underperforming both its category and the benchmark index over time with a higher than average management fee (MER) of 2.35 per cent.

Because RBC only offers an RDSP account at the branch level rather than through the bank’s investment arm, she is largely limited to GICs and funds sponsored by RBC or Phillips, Hagar & North (PH&N).

A single, cheaper and better performing replacement was tough to find. However, for equities either PH&N Canadian Income (equity, 1.79 per cent MER) or RBC Canadian Equity Income (1.75 MER), combined with either PH&N Short Term Bond and Mortgage (.89 per cent MER) or RBC Bond (1.2 per cent MER) could work nicely.  All these funds garner four or five stars by rating agencies.

The balanced fund had only 40 per cent in bonds and cash but Susanna could be even more conservative.  With 50 per cent or more in fixed income and the rest in the equity fund she will get some growth and have lower risk.

Susanna is going to put these changes into effect over the next few months, when that’s complete we’re going to tackle some of her other concerns.

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