In the Paycheque Project, bold Canadians talk to The Globe and Mail honestly about how they spend their incomes and their tough choices for the future.
- Net monthly income: $3,923
- Townhouse: $2,332
- Food: $375
- Transportation: $116
- Fun: $496
- Savings: $100
- Debt: $0
- House: $459,900
- RRSPs: $24,000
- TFSA: $18,000
- Age: 40
- Home: Toronto
- Work: Learning and Development Professional
When Karen Alexander had the chance to upgrade to a corner-unit townhouse twice the size of her former space, she pounced. She wanted extra space for herself, but also room for a potential partner and family down the road.
At 40, Ms. Alexander is debt-free and has a good chunk of change in the bank, thanks in large part to the profit from her last condo sale. Problem is, her spending and saving habits are all based on her current income – which may not last for long.
Her job in the public sector is permanent, but for the last four years she’s filled a temporary position, earning 45 per cent more a year. That position is up for renewal in 2014. She wants to stay on top of her monthly mortgage payments, even if she’s back to her old salary.
“I try to put aside savings and be smart so I can bridge the gap,” she says. “But what if I never ever make that money again?”
Ms. Alexander does occasionally splurge on furniture or dinners out in her trendy neighbourhood, but she funnels as much as possible into savings. Even if there’s a long-term partner in her future, she never wants to rely on him (or a lender) to maintain her lifestyle – and that desire for independence, even in old age, has made padding her savings and paying for critical-illness insurance top priorities every month.
“I don’t factor in my future partner’s income, because what if there is none?” she says. “It’s all based on what I’m earning versus ‘I’ll meet some dude and he’ll pay this much.’”
THE BIG PICTURE
Ms. Alexander is like many Canadians: work has become more precarious, making long-term planning a challenge. Still, she’s managing to save (along with a growing number of us) and anomalously debt-free.
THE PRO’S TAKE
Karen Alexander took a calculated risk when she bought her dream home last year with about $90,000 down and a $360,000-plus mortgage. Her job with the federal government comes up for renewal next year – and if she can’t get a similar position, she could face a whopping 25-per-cent drop in income.
Since her townhouse deal closed six months ago, Ms. Alexander has been squirrelling away surplus income in a tax-free savings account to help with mortgage payments down the road. But she wonders whether she should forgo RRSP contributions for now. And whether she should make extra mortgage payments at this point, or keep building an emergency fund.
Whether contributing to a TFSA or an RRSP makes more sense depends on whether Karen will be in a higher tax bracket when she retires than she is now. If that's likely, a TFSA would be preferable because she could withdraw money tax-free. Because TFSA contributions are limited to $5,500 a year, she may want to save some money in a non-registered account as well.
Ms. Alexander’s mortgage, though, definitely needs attention: Right now it’s scheduled to be paid off by the time she is 65, five years later than Ms. Alexander’s ideal retirement date. Paul McVean of Objective Financial Partners Inc., a fee-only financial planning firm in Toronto, “strongly recommends” she pay it off before she retires.
That doesn’t necessarily come at the expense of her retirement savings. If, for example, she raises her monthly payment to about $2,000, she could pay off her mortgage in full by 60. Paying down her mortgage is equivalent to a guaranteed return on Ms. Alexander’s money of about 4.5 per cent a year, says Mr. McVean. If her income stays the same or rises, though, she may want to put some of her surplus funds in a tax-efficient investment portfolio to earn a better return.
A big risk Ms. Alexander faces right now is that interest rates will be higher when her mortgage comes up for renewal in about four years. “I would want her to have access to other savings to either pay it down upon renewal or to help finance the monthly mortgage payments if required,” says Mr. McVean.
If she loses her current job and her income drops, Ms. Alexander will also run into a cash-flow crunch, he says. If the drop in income is temporary, she may be able to tough it out. If it persists, she might want to consider selling her townhouse and renting, taking in a roommate, or taking on added part-time work.
In the meantime: Mr. McVean says she should focus on her TFSA first, then build some non-registered savings.