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(John Ulan/John Ulan/AP)
(John Ulan/John Ulan/AP)

Financial Facelift

Student debt weighs on newlyweds Add to ...

Christine and Ken moved out West from Nova Scotia last year in search of work. She had just graduated from veterinary college and quickly found a job in an animal clinic in Alberta. He works as a self-employed consultant.

While Christine's education served her well, it also left her with $80,000 in student loans, an amount she has managed to whittle down to $70,100.

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A couple of months ago, the pair married. She's 32 and he's 36. As they look at their finances jointly, a swirl of bewildering questions arises. They want to buy a home and have children, which would mean a temporary drop in family income.

They wonder whether they should sell the (mortgaged) house they left behind in Nova Scotia. "We're kind of emotionally attached to it," Christine writes in an e-mail.

"We know we need to start saving but we don't know how much to save," she adds. "Should we focus on paying down the student loans or the mortgage?"

What our Expert Says We asked Lynne Triffon, vice-president of T.E. Wealth in Vancouver, to examine the couple's finances.

Ken has recently changed jobs and Christine is now working instead of going to school, so they do have a significant amount of cash available each month for debt reduction and savings, Ms. Triffon says.

The only debt they have is a tax deductible mortgage on the rented-out house in Nova Scotia and Christine's student loans. Recently, they refinanced the house, valued at $150,000, to shorten the mortgage amortization from 20 to 10 years. The mortgage is $96,000, so they have substantial equity, the planner notes.

They both have RRSP savings; however, it does not look like they made the maximum contribution last year, she says.

She suggests they start by repaying the student loans, beginning with the most expensive loan first.

Christine's federal student loan has an interest rate of 5 per cent, which falls to 3.75 per cent after the government's refundable tax credit. Her provincial loan after the tax credit is 3 per cent. Her line of credit is at 3.5 per cent and does not qualify for a tax credit.

As it stands, Christine is making minimum payments on the two government loans and $2,100 a month on the line of credit, which she actually does not need to start repaying until next June.

Because they plan to have a child in the next year or two, Christine and Ken need to ensure that they can live on Ken's salary, at least for the interim period that Christine will be off work. They also need to consider the costs of having a child, which are about $11,000 a year, the planner says.

Christine will likely qualify for employment insurance maternity benefits for 50 weeks, which can be shared by both parents. The maximum benefit is $447 a week.

First off, they should set up an emergency fund to cover three to six months' living expenses, Ms. Triffon says. They could use their line of credit as a backstop or set up a cash reserve.

While each has an RRSP account or two, the accounts are at four different financial institutions. "They should consolidate these if possible," she recommends.

At the moment, one of their larger RRSP accounts is sitting in savings, earning little, if any, interest. Instead, the couple is advised to set a target asset mix and invest the funds appropriately.

Another consideration is whether they will use their RRSPs to fund a down payment on a principal residence in the next few years, the planner says. If so, they need to ensure the funds are invested in short-term, fixed-income kinds of investments rather than equities.

"Equities are subject to market volatility and as such should only be used if there is a minimum time horizon of five years."

Ken has about $3,500 in a non-registered mutual fund, Ms. Triffon notes. If he is short of money for his RRSP, he may wish to consider using these funds to make an in-kind RRSP contribution.

Christine holds a small position in stocks, which she might want to shift to her tax-free savings account or RRSP rather than missing a contribution.

As for the house in Nova Scotia, Christine and Ken should consider selling it and using the proceeds for a down payment on a new home, Ms. Triffon says. Selling the property would also allow them to establish an emergency fund.

While real estate has provided very attractive returns in the past, direct real estate investment has its drawbacks: lack of liquidity, potential for bad tenants or no tenants at all; maintenance and repairs; and rising interest rates.

As a consultant, Ken should ensure he is getting qualified tax advice, Ms. Triffon says. He also should ensure that he is setting aside funds to pay income taxes and GST and making the appropriate filings.

Christine has some long-term disability insurance but Ken does not. He should consider getting some, she says.

Neither has life insurance aside from mortgage insurance. While arguably they are both able to support themselves in the event one of them dies, they might consider sufficient life insurance to pay off all debt, including the eventual mortgage on a principal residence, the planner says.

The couple should ensure they have a will in place to provide for a guardian for their children in the future.



Client situation:

The People:

Christine, 32, and Ken, 36.

The Problem:

Where to put their money first, RRSPs, loans or mortgage.

The Plan:

Pay down the most expensive loan first, sell the rented-out house to raise money to buy a home in Alberta and keep making RRSP contributions.

The Payoff:

Less debt now and financial security in the long term.

Monthly net income:

$10,800

Assets:

Rented house $150,000; RRSPs $15,100; non-registered savings $3,000; Total $168,100

Monthly Disbursements:

Rental property mortgage net of rental income $150; rent $1,550; car and home insurance $410; utilities, phone, Internet $375; food $500; clothing and household expenses $400; club membership $50; RRSP contributions $525; loan payments $2,100; gifts, entertainment, donations $500; extra mortgage payment $1,100; car lease $190; TFSA $1,000; gas, travel, miscellaneous $1,000; available for savings or loan repayment $950. Total $10,800

Liabilities:

Mortgage on rental property $96,000; student loans $70,100; Total $166,100

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