Elizabeth and Tristan have always found ways to fit travel into their lives, each making time to move with the other as she worked in Switzerland and he studied in Australia.
But now the couple, in their mid-to-late 30s, want to buy a home and start a family. At first glance, they're in a tough spot: After years as a contractor, Tristan is completing a new degree in landscape architecture, for which he's already accumulated $33,000 in loans. He started his degree in Australia, where for 18 months he faced high international-student tuition while she was able to collect only a part-time salary, costing them $35,000.
"I wouldn't take back the experience living abroad," she says. But now she wants to put things in financial order. Right now, the couple is depending on Elizabeth's salary as a human resources adviser at a Toronto bank; Tristan will soon begin an internship where he'll make $20 an hour, but has to return to school for a final year this fall.
"Our ultimate goal is to own a house and start a family before I get too old to do so," Elizabeth says. They hope to live in the Guelph, Ont., area.
Their pocketbook, however, is about to get a boost. The couple will be receiving a $150,000 inheritance from Elizabeth's late uncle in the near future – and they want to make sure they use the money wisely.
For advice on Elizabeth and Tristan's portfolio, we turned to two financial advisers: Heidi Pullem, a certified financial planner with ZLC Financial Group in Vancouver, and Susan Fulford, an investment adviser with TD Waterhouse in Toronto.
$150,000 in incoming inheritance money
$4,000 in a tax-free savings account
$12,000 in an RRSP
$35,000 in consolidated loan debt from travel
$10,000 in credit card debt
$33,000 in Tristan's student loan debt
Heidi Pullem's tips
1. Elizabeth and Tristan's total debts amount to $78,000, subject to non-tax-deductible interest between 8 and 12 per cent, which will hold them back from getting positive returns until it's paid down. "The best thing Tristan can do to improve their long-term financial situation is to pay everything off as soon as he receives his inheritance," Ms. Pullem says. "There are no alternative investments that could possibly guarantee those returns, net of tax."
2. If the couple is looking to buy a home immediately, they can use the remaining $72,000 left after paying their debts to make a down payment on a $295,000 home, "which is likely the maximum they qualify for," Ms. Pullem says. Tristan will soon have some internship income, but he'll return to school in the fall and start adding to his student loans again; Ms. Pullem's recommendation is based solely on Elizabeth's income, and the presumption of no other debt once the original $78,000 is paid off.
Ms. Pullem points out that until Tristan is gainfully employed, buying a house immediately could be risky, especially if Elizabeth's employment situation changes – be it voluntary, like through maternity leave, or involuntary, such as if her company downsizes. Deferring home ownership would let them put the $72,000 into risk-free options. Ms. Pullem recommends putting $47,000 in tax-free savings accounts. "Tristan's future income will give them more security, and options in terms of the price of home they will qualify for," she says.
3. Now it's time for Elizabeth and Tristan to become savers. "The $1,150-per-month now used for loan payments can then be applied toward building an emergency fund equal to six months' living expenses, which should be maintained in savings and short-term deposits," Ms. Pullem says. "Once they've achieved that amount, they can then start contributing to growth-oriented investments in RRSPs, and buy life insurance to protect the family they want to start fairly soon."
Susan Fulford's tips
1. Ms. Fulford's first priority for Elizabeth and Tristan sounds familiar – get rid of all that debt as quickly as possible. "The credit card should be paid off completely and going forward monthly, as it charges on average between 14-19 per cent interest in a very disadvantageous way," she says. The student loans should also be completely eliminated, as well as the consolidated debt, which is costing them $800 a month.
2. Navigating the best ways to pay off debts and invest new income is already enough for Elizabeth and Tristan to deal with, but they also should make sure they manage their taxes effectively and efficiently, Ms. Fulford says. By allocating Tristan's tax-deductible education expenses to Elizabeth, the couple can reduce their payable taxes each year he pays tuition. If Elizabeth has unused RRSP contribution space, she can put more income, from the inheritance or otherwise, into it to further reduce taxes. The couple can then withdraw up to $25,000 to put toward their first home when they're ready, which they can redeposit at a later date.
3. Assuming Elizabeth and Tristan aim to use the inheritance to make the family more financially stable, Ms. Fulford recommends using $70,000 as a down payment for a home, which would let them buy a home in the $300,000 to $350,000 range. But considering today's stricter federal regulation environment for home buyers, and the need for a financial cushion, Ms. Fulford says that "it might be a good idea to consider looking for homes in the $250,000-$300,000 range so that they can have a larger down payment."
Once the home is taken care of, "the remainder of the money should be kept as either an emergency cash fund for the couple or should be applied to Tristan's upcoming tuition to avoid any future debt," she says.
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