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Gretchen and Bram haven't been married a year and already they're on sound financial footing.

They each owned a condo in downtown Toronto, so when they moved in together, they sold one and paid off the mortgage on the other. Now they own their $310,000 apartment outright.

Bram, 37, earns a little more than $60,000, Gretchen, who is 34, earns about $55,000. They both work in the media.

Like most people their age, they have great plans.

"We want to have a comfortable life, be able to afford to raise our children properly, save for their education, move up from our condo to a house in Toronto and have enough money to retire at 60 with a vacation property," Gretchen writes in an e-mail.

Their short-term plans are to have children and buy a house to live in that can also generate some rental income. Gretchen also hopes to quit her job and go freelance in the next three years.

We asked Jason Heath, a financial planner with E.E.S. Financial Services Ltd. in Markham, Ont., to look at this young couple's situation.

What the Expert Says

Gretchen and Bram are saving about $675 a month outside of their company savings and pension plans, Mr. Heath notes. If they plan to have children, the cost of diapers, clothing, education savings, child care and children's activities "will put them in a negative cash flow scenario," he says. Daycare costs alone could be well over $1,000 a month.

Their plan to buy a house would mean taking on a mortgage, although a house with a rental unit would help offset the higher costs.

"They might be wise to focus on budgeting and baby plans first," the planner says. "Babies don't need much room at first, so assuming they are comfortable in their current condo, they could probably live there for a couple more years."

Gretchen's wish to go freelance (with potential downside risk to her income) and the couple's desire to move into a house (a potential increase in their expenses), are a potentially bad combination.

"As a father of two young children, I can tell them from experience that it's hard enough juggling parenthood without adding financial insecurity to the mix."

The couple's search for ways to generate an income stream, either by renting their condo when they buy a house or renting out part of the house, would involve taking on more debt.

"Debt reduction and repayment can be a pretty attractive income stream," Mr. Heath notes. The less interest you pay the bank, the more income you have left over.

"Saving money is the same as earning money. So lower debt levels generate a pretty good guaranteed income stream, which is an investment in and of itself."

Another income source is their company savings and pension plans. Bram's employer matches his stock purchase savings plan contributions by 50 per cent, making for a "pretty nice return," Mr. Heath says. "It's like buying a GIC [guaranteed investment certificate]paying 50 per cent interest."

Then there is Bram's defined benefit pension plan - Gretchen would give hers up if she went freelance. These plans are becoming rare because employers shoulder the investment risk and guarantee a future pension.

"When evaluating the guaranteed investment return from a defined benefit pension, the rates are often quite compelling."

Looking further into the future, Mr. Heath calculates Gretchen and Bram are on track to retire in their early 60s - "assuming they continue to live in their current condo." If they're planning to buy a house, though, they'll have to do some serious budgeting and cut spending to the bone.

Their goals are attainable, but "it won't be a walk in the park," the planner cautions. "They'll need to hunker down, prioritize and stick to a long-term plan in order to achieve financial independence."

Finally, if they have children, they will have to update their wills and increase their life insurance. If Gretchen opts to become self-employed, she should consider disability insurance to replace the coverage she has with her employer.



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Client Situation

The People:

Gretchen, 34, and Bram, 37

The Problem:

How to start a family, buy a house in Toronto and save for the children's education without running into cash flow problems.

The Plan:

Proceed with caution, stick to a budget and focus on keeping debt to a minimum.

The Payoff:

Achieving at least most of their goals and ultimately, financial security.

Monthly net income:

$7,338.61

Assets:

Bank accounts $12,700; Tax-Free Savings Account $14,101, mutual funds $33,725; company stock $3,500; condo $310,000: Total $374,026.

Monthly disbursements:

Union dues $70.65; savings $675; RRSP $375; employer savings plan $472; employer pension plans $395.08; food and eating out $1,150; clothing $460; medical, drugs, dental $10; dog $150; storage locker $160; gym $53; property taxes, utilities, condo fees $570; house insurance $20; telephone, cable, Internet, cellphone $237; painting, repairs and maintenance $120; furniture and appliances $500; vacations $500; entertainment, music, books $150; auto expenses $550; other transportation $200; life insurance $38.86; group insurance, disability, dental $145.75; donations $20.83; gifts $200. Total: $7,223.17

Liabilities:

None

Special to The Globe and Mail

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