Marissa, 23, and Ryan, 24, Kitchener-Waterloo
This ambitious young couple are already homeowners, in an age when many of their peers are boomeranging back into Mom and Dad's basement. Their dilemma: How much should they save for emergencies? She says a lot, but he says a little (and invest the rest). If disaster strikes, which strategy will keep them afloat?
SHE SAYS: SOCK AWAY AT LEAST $15K
We both work in the insurance industry, so potential calamities are never far from my mind. I've read that as a homeowner, you should have 3 per cent of the value of your home saved for repairs and general improvements. Our house is worth about $305,000, which would work out to just under $10,000 saved, plus another $5,000 in case one of us lost a job, for example. Any less than $15,000 is risky - things always cost more than you plan. The house, which we bought in July, is about 40 years old with all the major components in good shape. But unexpected things do pop up, and I want to be prepared for that. I want the money to be available immediately when we need it, and not locked up in any investments.
HE SAYS: SAVE FIVE GRAND, WE'LL STILL STAND
In my mind, $5,000 to $10,000 would cover any emergency situation - and I don't believe there are many that would cost a lot more than that. We have life insurance, car insurance, homeowners insurance, critical illness, and disability coverage. So the emergency fund would be for something like an appliance repair. As an absolute last resort, we'd delve into retirement savings. Currently, a portion of my paycheque goes into my RRSP, TFSA and pension, with a diversified portfolio made up of mostly aggressive funds and some balanced funds. I get immediate tax relief for my pre-tax RRSP contributions, and I also get a match on my pension that I maximize for the full benefit.
Years living together: 2
Occupations: Both work for large insurance firms; she's a corporate compliance specialist, he's an account executive.
Annual household income: $110,000 (about evenly split).
Mortgage: $265,000, five-year fixed term at 3.89 per cent, 25-year amortization period, $638 paid bi-weekly.
Other debt: $0
Current savings: She has $5,000 in a high-interest savings account, he has $1,200 in RRSP contributions.
The Advice: Save for that rainy day
Financial Expert Kelley Keehn
Marissa and Ryan, my utmost kudos for your financial acumen and early success in being consumer-debt free. Being focused on saving at such a young age and laying a solid insurance foundation is commendable.
Both of you have valid points and there are a few options to consider. First, I agree with Marissa as to the amount you should have as an emergency fund. It concerns me, Ryan, when you mention the possibility of dipping into your registered investments. An emergency fund should be accessible and liquid. It's true that guaranteed, short-term rates are insignificant right now, but the tax hit of a registered withdrawal should be avoided.
The next issue is where to allocate your emergency savings. Because you both have proved that you can handle debt (by having zero balance credit cards), you might consider a line of credit as a backup for emergencies. It doesn't cost you anything if you don't use it, and it's definitely something you might want to put in place while you're both working and on solid financial footing. Marissa alluded that your job security could be compromised in the future along with the worries of house repairs.
Since you won't be able to pad your savings account overnight (from what you've already saved), having a secured line of credit that isn't used unless an emergency arises might make sense for the short term. Keep in mind that if something happened to either of your jobs in the near future, it's pretty tough to secure a loan then.
Also you should consider investing in your RRSPs and using the tax refund to top up your short-term savings, especially in higher-earning income years ahead.
Kelley Keehn is the host of W Network's Burn my Mortgage ( kelleykeehn.com)
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