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Randy and Joan bring in $100,000 a year but it’s not enough to cover all their debts and costs, including child care, student loans and their mortgage.Chris Bolin/The Globe and Mail

Randy and Joan are young and well educated with promising jobs in the financial industry. They have a home, a baby, a mortgage, a car loan and a pile of student debt.

Together, they bring in more than $100,000 a year, but it's not enough. She is 30, he is 32. Their situation is typical of many people in their 30s inasmuch as their basic goals – a wedding, a family vacation, even a new furnace – elude their financial grasp.

Joan and Randy left their B.C. home for greener pastures in Alberta a couple of years ago and were doing well until the baby came.

"In 2014, we got surprise pregnant and rents in Calgary were going up fast," Joan writes in an e-mail. "We bought a townhouse using our savings and with help from family," she adds. "Now that I am on mat leave, our income has decreased," Joan writes. When she returns to work this fall, their cash flow won't improve much because they will have to pay for child care.

"Is our best long-term plan to remortgage the house in several years to pay off the student loans?" Joan asks. "It feels like we will never be able to properly save for retirement or anything else while shouldering these payments and interest rates."

We asked Morgan Ulmer of MeVest, a Calgary-based financial literacy and counselling firm, to look at Randy and Joan's situation.

What the expert says

Randy and Joan are doing many things right, Ms. Ulmer says. "They stick to a budget, they've made progress on their students loans, they have no credit-card debt, they have a low rate on their mortgage, they are both educated and working and they both have defined-benefit pensions," she notes. (Randy has only begun contributing to his DB plan.)

But their debt ratio is uncomfortably high. Fixed payments (including mortgage, condo fees, property tax, car and student loans), take up nearly 47 per cent of their net income. Necessities (including housing, transportation, groceries, child care, debt repayment and communications) add up to a whopping 96 per cent of their take-home pay, leaving little room for much else.

Joan and Randy need to focus on a few basics, Ms. Ulmer says. Their first priority should be to stop the bleeding – to get monthly expenses below monthly income. Even after Joan goes back to work this fall, their expenses will surpass their income by $655 a month – money they will have to borrow on their line of credit.

She suggests they go through their expenses with a fine-tooth comb, looking for potential savings in groceries, heat and hydro, alcohol and tobacco and vacations. "Note that not every dollar of discretionary spending should be cut," Ms. Ulmer says. "Small pleasures now and then make cost-cutting more bearable."

She suggests they postpone the wedding and the family vacation until they get their financial house in order. The $200 they are tucking away in their tax-free savings accounts should go to help cover the cash shortfall instead.

Randy is paying interest only on his student loan. Ms. Ulmer suggests Joan do the same. Then, she recommends they begin a "debt snowball" strategy, paying off the smallest debts first. Even before that, though, they have no wills, health-care directives or powers of attorney. They also need more life insurance. The money Randy and Joan have in their TFSAs and Joan's company stock could serve as an emergency fund.

Even with the debt-snowballing strategy, Joan and Randy would not have their non-mortgage debt paid off for 17 years, in June, 2032. Ms. Ulmer suggests they work hard to increase their income so they could pay another $1,000 a month toward their debts (excluding mortgage), retiring it in six and a half years.

Joan asks whether it would make sense to refinance their house and roll their student loans into their mortgage when it comes up for renewal in five years. They could get their mortgage and student debt payment down to a more manageable $1,800 a month, compared with $2,225 now. By then, they should be making more money and could choose to pay down their debts more aggressively.

"Note that the couple will only be able to refinance the whole amount of their remaining student loans if the value of the home increases over the next five years to more than $430,000," Ms. Ulmer says. In five years, they will have $245,000 left on their mortgage and $100,000 in student loans, for a total of $345,000. The calculation ($345,000 as a percentage of $430,000) is based on a typical 80-per-cent loan-to-value ratio. Mortgage rates could also be higher by then.

If things don't appear to be working out, Joan and Randy could consider more drastic options – making a consumer proposal to creditors or even moving back home with their parents, Ms. Ulmer says. A proposal provides protection from creditors in exchange for a partial repayment of the amount owing.

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Client situation

The person: Joan, 30, Randy, 32, and their baby.

The problem: How to grapple with big debts and rising expenses.

The plan: Pare expenses, adopt a "debt snowball" strategy and try to increase their income.

The payoff: Relief from their worsening debt squeeze.

Monthly net income: $6,200

Assets: Residence $300,000; bank accounts $1,500; Joan's company stock $2,180; Joan's TFSA $6,000; Randy's TFSA $3,600; estimated present value of her DB pension $3,375; Total: $316,655

Monthly disbursements: Mortgage $1,375; condo fees $350; property tax $150; home insurance $40; electricity, heating $350; transportation $380; groceries $1,000; child care $1,100; clothing, dry cleaning $100; car loan $170; student loans $850; vacation, travel $200; personal discretionary $270; life insurance $90; telecom, TV, Internet $180; TFSAs $200; pension plan contributions $50. Total: $6,855 Deficit: $655

Liabilities: Mortgage $288,500 at 2.89 per cent, student line of credit $5,000; car loan $10,000; her student loan $43,080; his student loan $71,000. Total: $417,580

Read more from Financial Facelift.

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