Every so often I encounter a simple financial question that makes me cringe. It’s not that the asker is a bad person or that the question is stupid. It’s just that the question gives me a peek into a financial world that looks scary to me.
I like to help people, but sometimes it’s hard to know where to start. Here’s the list of questions (edited for brevity) that I’ve collected so far.
1. Does a mortgage count as debt?
Uh, yes. And consolidating your debt into your mortgage doesn’t count as paying off your debt. Don’t fall into the trap of thinking that a mortgage is good debt. The house is good and the mortgage is bad. Most other types of debt are even worse than a mortgage.
2. Do I need an emergency fund if there is still room left on my line of credit?
Yes. Don’t think of room on your line of credit as available wealth to spend. One of your goals should be to pay off your line of credit and live debt-free. Emergencies shouldn’t throw you into more debt if you can avoid it.
3. How many credit cards is it safe to have?
For some people the answer is zero. For those who pay off their credit cards in full every month, it’s a good idea to have two cards in case one is mistakenly refused at an inconvenient time. Having many cards and using one to pay off others is just a gateway drug to payday loans and ultimately bankruptcy.
4. Should I get a loan to buy an RRSP?
Probably not. Borrowing for an RRSP contribution is rarely a good idea, particularly for those who think RRSPs are something we buy (they are just accounts that hold the investments we buy). Learn to spend less than you make. Once you have some excess income, open a TFSA or RRSP account to save and invest this money.
5. How did my trade-in make my new car’s payments higher?
You owed more on your trade-in than it was worth and the excess debt got thrown onto your new car. Going further and further into debt for cars is stupid. Until you can buy a car outright for cash, consider not owning a car or getting the cheapest car that will meet your needs (not your wants).
6. Why does my pay sometimes go into my account 2 hours later than normal?
I don’t know, but it shouldn’t matter. Maybe you like to monitor all things related to your money very closely. You’re entitled to spend your time as you see fit. But if you know when the money hits your account because you’re living hand-to-mouth, consider trying to save up a small cash buffer.
My short answers are unlikely to fully address the needs of those who ask these questions. I try, but Gail Vaz-Oxlade would certainly be much better able to help.