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Newlyweds need to change free-spending ways

Violet and Les have been living the good life but they must buckle down if they're going to buy a new home and make room for a baby in their lives.

Rafal Gerszak for The Globe and Mail/rafal gerszak The Globe and Mail

When they tied the knot last fall, Violet and Les turned a new page in their lives. They've been enjoying their double-income, no children status, pulling in $166,000 a year between them in promising careers. She is 30 and works in marketing, he is 35 and works for a municipal government.

They share a one-bedroom condo in pricey Vancouver, dine out whenever they please and have a generous vacation budget. Now, though, they are thinking about having a baby within the next year or two, which would mean buying a larger home.

"We're at a crossroads," Violet writes in an e-mail. "We have a wonderful life, but we're worried about how we can better save in order to move into a bigger home and start a family." They've begun by stashing $300 a month into a tax-free savings account, but they're not sure that will be enough.

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They also wonder whether they should take advantage of an offer from Violet's father to buy a half interest in their existing condo so they would have a down payment for their house as well as a stake in an investment property.

We asked Mark Neufeld, a financial adviser at Rogers Group Financial in Vancouver, to look at Les and Violet's situation.

What the expert says

Looking at the couple's cash flow, Mr. Neufeld notes that money out – including contributions to registered retirement savings plans and tax-free savings accounts – pretty much matches the money flowing in, leaving little in the way of a surplus. Having a baby and buying a larger home will further squeeze their already tight cash flow.

Because saving more means spending less, the planner suggests Violet and Les begin by reviewing their lifestyle expenses to see what might be reduced or even eliminated.

"Now is the time to do such an exercise because they will have lots on their plate when their baby is born."

Next step is to eliminate their line of credit of $1,700, on which they are paying 6-per-cent interest, and Les's outstanding student loan of about $2,800, for a total of $4,500. To do so, Mr. Neufeld suggests they sell their $4,085 worth of stocks, with the balance coming from cash in the bank.

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Tucking $300 a month into one of Violet's two TFSAs is a good idea, Mr. Neufeld says. The money withdrawn for a down payment can be put back into the plan in future. Violet holds a short-term bond fund in one TFSA, while the other is invested in an equity mutual fund. Given that the couple will need this money for a down payment soon, Mr. Neufeld suggests Violet opt for a liquid, short-term bond fund in both plans.

To build their down payment more quickly, Violet is considering shifting some savings ($300 a month) from her RRSP contribution to her TFSA. She would still be contributing something to her RRSP, an idea of which the planner approves because it strikes a good balance between long-term and short-term goals. Violet is having $100 a month deducted from her paycheque to buy shares of her employer, money the planner suggests she redirect to her TFSA for the time being.

"If we include this $100 along with the cash flow that is freed up by eliminating the debts noted above, Les and Violet could increase the amount of money going into Violet's TFSA from $300 a month to at least $860 a month," Mr. Neufeld says. That doesn't include whatever money they can save by cutting back on their lifestyle. Some of this increased savings may have to go to Les's TFSA to stay within contribution limits.

After a year of this extra saving, they will have roughly $14,500 and after two years, nearly $25,000, the planner estimates. That doesn't take into account any growth.

They figure their condo would sell for about $400,000. After subtracting their $250,000 mortgage, they would be left with about $150,000 – a number that would be reduced to about $134,500 after real estate and legal expenses. So their total down payment in two years, including savings, would be in the range of $160,000 – enough to buy a two-bedroom home in their $550,000 target price range without having to take out expensive mortgage insurance that would be needed if their down payment was less than 20 per cent.

They would have a mortgage payment of about $2,100 a month (assuming a 25-year amortization and a 4-per-cent interest rate), about $600 a month more than they are paying now. That, plus the lower income for the time they take parental leave, and the cost of child care thereafter, should be enough to spur them to pare their lifestyle spending.

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Mr. Neufeld advises Violet and Les against keeping a half-interest in their condo and renting it out because they may have to subsidize it for a time and their cash flow will be tight. As well, having a rental property could complicate their lives at a time when they are busy with a new baby.

"There is a lot to be said for keeping things as simple as possible at this stage of their lives."


The people

Les, 35, and Violet, 30

The problem

How to save as much money as possible over the next couple of years for a down payment on a larger home and a first child.

The plan

Cut spending, pay off line of credit and student loan, and tuck money into liquid investments in TFSAs.

The payoff

Enough money for a comfortable down payment on a two-bedroom townhouse and, with some paring of expenses, increased cash flow to help offset the costs that come with a new baby.

Monthly net income



Cash in bank $3,200; stocks $4,085; TFSAS $24,040; other savings $3,350; residence $400,000. Total: $434,675

Monthly disbursements

Mortgage $1,500; condo fees $300; insurance, hydro $65; car expenses $815; groceries $700; dog walking $240; clothing, dry cleaning $250; car loan $498; other loans $162; gifts, charitable $190; vacations, travel $450; other $60; beverages $150; beauty $150; club $45; eating out $700; entertainment $75; pet expenses $75; sports, hobbies $50; life insurance $25; communications, cable, Internet $260; RRSPs $560; TFSA $300; other savings (company stock) $100; union dues $150; his defined-benefit pension plan contribution $490. Total: $8,360


Mortgage $250,000; line of credit $1,700; car loan $4,480; student loan $2,800. Total: $258,980

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