As their wedding date approaches, Ruth and Cameron are looking for a financial road map to guide them through the various stages of their lives, from paying off debts to raising a family to long-term financial security.
At least Ruth is. Cameron seems a bit of a spendthrift.
Ruth is 30, Cameron 33. Both have good jobs, bringing in $260,000 a year including bonuses. They have a home in Toronto and a rental property, both with substantial mortgages. As well, Cameron has $27,000 in consumer debts.
"We're trying to save for a wedding, a hypothetical maternity leave and pay off my boyfriend's consumer debt – all while saving for retirement," Ruth writes in an e-mail. "I'm worried that we're not paying down his debt aggressively enough, yet he wants a lavish wedding," she adds. "Obviously, we're not seeing eye to eye when it comes to household finances."
Longer term, they want to upgrade their house and eventually move to a larger one.
"Please help us create a strategy to balance short-term financial commitments, pay off consumer debt and plan for both a family and an early retirement," Ruth writes.
We asked Ngoc Day, a financial planner at Macdonald Shymko & Co. Ltd. in Vancouver, to look at Ruth and Cameron's situation.
What the expert says
Ruth and Cameron need to make paying off debt a priority, Ms. Day says. They should also take full advantage of the tax savings offered by their registered retirement savings plans.
Cameron could consider selling his $2,100 in stock and liquidating his $6,000 tax-free savings account to pay off his $8,000 credit card balance, the planner says. They are putting aside $500 a month for their wedding, so they will have saved $6,000 by next September. That, plus Ruth's TFSA, will give them $11,700 for the wedding, short of their target.
They should scrutinize their wedding budget to find ways to reduce expenses, Ms. Day says, so they don't allow the wedding expenses to create additional debts.
Any extra cash flow (beyond RRSP contributions, wedding savings, emergency funds and home renovations) should be directed immediately to paying down Cameron's personal loan, the planner says. She suggests they transfer $2,000 a month directly from their chequing account to the personal loan each month. As well, the car loan will be paid off in January, at which point the car payment of $597 a month should be redirected to the personal loan. This approach forces discipline to pay off their consumer debts.
After Ruth and Cameron are married in 2015, their priorities should be to maximize their RRSP contributions, Ms. Day says. Both have plans at work whereby their employers contribute to their RRSPs. Any extra funds should go to the personal loan.
"It is particularly important for them to pay off the personal loan before they start having children," the planner says.
If Ruth takes a parental leave late in 2016, their income will drop substantially, the planner notes. If the loan is not paid off, "the family will have no wiggle room in their cash flow."
Another risk is their rental property mortgage, the planner notes. The property nets $210 a month after expenses, which is "not a lot of profit." She suggests they consider selling the rental when the mortgage comes due next spring to reduce their debt load. When Ruth is on parental leave, they cannot afford to run the risk of having no tenants and no rental revenue. The equity from the sale could be used to pay down their home mortgage, fund their renovations or help to buy a larger house in time, one of their future goals.
Once Ruth has returned to work, Ms. Day suggests they continue to maximize their RRSP contributions to take advantage of the tax savings and save for retirement. As well, they should open a registered education savings plan for their child to take full advantage of the Canada Education Savings Grant. The grant will give you 20 per cent on every dollar of the first $2,500 you save in your child's RESP each year.
"Any excess savings should be directed to paying off their mortgage." Throughout, Ruth and Cameron need to keep track of their expenses, the planner says. "Don't allow the discretionary expenses to balloon and cause them to go into debt." In a few years, they can review their situation to ensure they are on track.
The people: Ruth, 30, and Cameron, 33.
The problem: How to save for a wedding, pay down debt, plan a family and save for retirement all at once.
The plan: Pay down the debt first, even if it means cashing in his stocks and TFSA. Take full advantage of RRSP contribution room. Trim wedding expenses if necessary. Consider selling rental property.
The payoff: Less likelihood of friction and anxiety over finances.
Monthly net income: $15,210
Assets: Cash $2,000; residence $775,000; rental property $400,000; present value of his DB plan $15,000; her TFSA $5,700; his TFSA $6,000; his stock $2,100; her RRSP $112,000; his RRSP $127,000; cash value of her insurance policy $11,795. Total: $1,456,595
Monthly expenditures: Living expenses $1,525; home mortgage $3,066; housing expenses $1,272; leisure expenses $1,085; transportation $544; life insurance premiums $200; car loan, personal loan, credit cards $1,689; miscellaneous $290; RRSPs $1,275; homebuyer's loan repayment $77; other savings (emergency fund, home upgrade) $250; wedding savings $500. Total expenses: $11,773
Liabilities: Credit card $8,000; his personal loan $19,000; residential mortgage $689,000; rental property mortgage $350,000; car loan $1,790. Total: $1,067,790
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