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Lyla and Sam feel they have been living too long with debt.
They have a mortgage that never seems to go down, a line of credit that keeps going up, credit card debt they can't seem to pay off and two children, a boy, 17, and a girl, 15, who will soon be going to university.
“How do we help them financially?” Lyla asks in an e-mail.
Both Sam, who is 50, and Lyla, 49, have steady jobs, he in information technology and she as an administrative assistant. They pull in about $90,000 a year in income but they can't seem to get ahead.
“We are always in the red and pay a lot of interest and overdraft charges,” she laments. They've had to dip into their line of credit to make ends meet, and when it gets too big they add it to their mortgage.
“I'd just like enough money at the end of the month to go out and have a nice dinner with my husband,” Lyla said in an interview.
“I am not sleeping well over our financial situation. I worry constantly and wonder, if we continue the way we are going, where will we be in 10 years?”
We asked Warren MacKenzie of Weigh House Investor Services, formerly Second Opinion Investor Services, to look at Sam and Lyla's situation. The mortgage is indeed the problem, Mr. MacKenzie discovered, but not in the way Lyla and Sam think.
What our Expert Says
There is a huge difference between financial security and financial independence, Mr. MacKenzie says. Financial security comes when people understand their financial situation and feel confident that they are doing things right and that they will be able to retire comfortably.
Sam and Lyla do not have enough money to retire just yet, so they are not financially independent. Because they worry constantly about their debts, they also have no financial security.
They'd feel a lot better if they understood their situation, he says.
“They are concerned because they believe that their short-term cash problem is indicative of a serious long-term problem, but it is not.”
The problem is the speed with which they are paying off their mortgage. When they switched from a fixed-rate loan to a floating-rate one with a much lower interest rate – 1.25 per cent currently – they kept their payments high, hoping to repay the mortgage in full in 10 years. Their eagerness to be debt-free is costing them.
The result is they are paying $1,475 a month – $690 a month more than the $785 they are required to pay. If they made the minimum payments, the mortgage loan would still be retired by the time they were, Mr. MacKenzie says, even though their payments will rise in line with interest rates.
Because they have set their sights so high, “some juggling is often required to have the money available at month end to make the mortgage payment,” the planner observes. Sometimes, in order to make ends meet, they borrow against their line of credit.
Sam and Lyla also worry that they will not be able to pay for a university education for their two children. Mr. MacKenzie's solution: Let the children help pay for their own education through grants, loans and part-time work if necessary. They'll appreciate their education more if they do, he says.
If Lyla and Sam pay half of the cost of eight years of university education at an average cost of $16,000 per year, then their share of the cost (ignoring inflation) will be $64,000, he says.
