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Suzie knows she has some issues about money but she's not really sure what to do. She has a good job in sales, bringing in more than $100,000 a year, but she's facing a cash flow crisis so severe that she fears she may have to sell her home.
Like so many people, Suzie lives beyond her means in the hope that her situation will be better in future – when someone or something rides in to rescue her from her financial woes.
Lately, that something has been her Calgary-area house, now groaning under the weight of a $460,000 mortgage. That's up from about $200,000 five years ago. Add a $40,000 line of credit, $4,600 in credit card debt, a $3,500 overdraft and a loan of $13,000 and – well, you get the idea.
Five years ago, when she and her husband split up, Suzie had a divorce settlement of $225,000 and another $15,000 in a registered retirement savings plan. Now it's all gone. Then came the boyfriend she met through an expensive dating agency, who turned out to be a penny stock promoter: Cost to Suzie: $50,000 plus.
The experience left her feeling angry, embarrassed and too ashamed to discuss her problems with her family and friends, Suzie writes in an e-mail. "My situation is a bit of a nightmare." At 47, with joint custody of her teenage daughter, Suzie knows she must do something. "I do see a light at the end of the tunnel," she writes.
"Should I sell my house to get out of debt and start again?" she asks. "I obviously have no idea how to manage my income and expenses. Should I hire an accountant to manage them and give me an allowance?"
We asked Stephanie Holmes-Winton of Halifax, owner of The Money Finder, to look at Suzie's situation.
What the expert says
"Like many, Suzie's money is running her instead of the other way around," Ms. Holmes-Winton says. If Suzie never borrowed another penny, it would still take her more than 30 years to repay her debts, and by then she would be 77 years old.
"She simply cannot afford to keep her home, period."
Suzie should put herself on a cash diet immediately and try to sell the house as quickly as possible, the adviser says. If she sells for $600,000, she'd be left with roughly $60,000 after real estate fees of $30,000, moving costs of $5,000 and debt repayment of $506,000. That excludes the $13,000 personal loan, which will be paid off in three years, Ms. Holmes-Winton says. Paying off the personal loan would leave Suzie short of funds, and besides, it is more difficult to run it up again than a line of credit.
Of that $60,000, she could use $35,000 for a down payment on a home costing anywhere from $290,000 to $340,000, amortizing the mortgage over 19 years (mortgage payment of $1,900 a month) so she will be debt-free by age 65. The remaining $25,000 should be set aside in a short-term savings account for emergencies.
Suzie's employer has offered to match any contributions she makes to her retirement savings (RRSP or TFSA), a benefit she has not had the wherewithal to take advantage of. With her other debts mostly paid off, Suzie will be able to use her annual bonus to contribute to this pension plan. The adviser suggests Suzie choose the tax-free savings account over the RRSP.
As for the cash diet, Ms. Holmes-Winton suggests Suzie take $260 a week from her income and divide it as she sees fit among groceries, dining out, coffee, clothing, entertainment, gifts, donations and any other items that may come up. The rest of her income will go to fixed expenses. Her total spending will be slashed from $7,477 to $5,436, including $250 a month to short-term savings, $1,900 for the new mortgage and $355 for the loan.
As well, she can tuck away $280 a month in a savings account for vacations. When the personal loan is fully repaid, she can redirect the $355 toward the purchase of a new, modestly priced car – one that costs no more than $17,000, including tax (unlike the $40,000 car she has now).
"This change will have to be lifelong," the adviser says. "Suzie can increase her weekly amount every time she gets a raise – but only by 20 per cent of any increase she receives." The rest should go mainly to retirement savings.
Suzie has one goal she should abandon entirely, Ms. Holmes-Winton says. Suzie says she wants to get out of debt, save, travel and "find a life partner to partner with financially." Suzie must keep her finances separate, the adviser says.
"If she doesn't learn to get her money under control and keep it that way, she will be doomed to repeat her own history," Ms. Holmes-Winton cautions. "She can contribute, she can be a full partner, but for her, money has to be a separate thing."
CLIENT SITUATION
The person
Suzie, 47
The problem
Climbing out from under a mountain of debt.
The plan
Sell her house, pay off her bills, buy a modestly priced home and put herself on a strict, lifelong cash diet. Once the bills are paid, begin saving in earnest for retirement.
The payoff
Peace of mind and, maybe, financial independence.
Monthly net income
$5,591
Assets
House $600,000
Monthly disbursements
Mortgage $1,797; property tax $250; utilities, insurance, maintenance $503; car insurance $221; fuel $0 (company pays); car maintenance, parking $72; groceries $680; child's expenses $400; clothing, dry cleaning $415; line of credit $180; personal loan $355; credit card $36; vacations and travel $250; gifts $40; personal discretionary $683 (grooming, club membership, dining out, entertainment); medical $190; health, dental insurance $33; telecom, phones, cable, Internet $255; cash withdrawals unaccounted for on average $1,117. Total: $7,477. Deficit: $1,886
Liabilities
Mortgage $459,000; line of credit $39,790; credit cards $4,600; overdraft $3,500; personal loan $13,000. Total $519,890
Special to The Globe and Mail
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