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financial facelift

Darren Calabrese/The Globe and Mail

Jane and John seem to be sliding ever deeper into debt and don't quite know what to do about it.

He is 39, she is 41. They have two children, four and three. Given John's $165,000-a-year salary, they should be okay.

But living in one of Canada's most expensive cities on one income – if only for a few years – can be challenging. They've had to refinance their house and take out a line of credit. They also have a car loan. They have little in the way of savings.

Fortunately, John has a partly indexed defined-benefit pension plan that will pay him about $86,000 a year in current dollars if he stays with his current employer until he retires.

In the meantime, Jane is casting about for solutions.

"Should we live in a less expensive house?" she asks in an e-mail. "Are we spending exorbitantly? It feels like we never have extra money.

"We still have an assortment of hand-me-down and university furniture, we don't fly anywhere on trips, we can't afford to do landscaping in the yard. I don't really buy expensive clothes – I buy many things second-hand," Jane writes.

"I do need to get a job, but will this solve the problems?"

We asked Michael Cherney, an independent financial planner in Toronto, to look at Jane and John's situation.

What the expert says

Jane and John are just making ends meet, Mr. Cherney says. John's take-home pay is entirely eaten up by monthly expenses. Some changes are in order.

The easiest solution is for Jane to go back to work, Mr. Cherney says. She is looking for a part-time job in marketing that would pay from $18,000 to $39,000 a year for a four-day week.

"This would be especially invaluable to the family given Jane's low tax rate," Mr. Cherney says. "This would bring in between $15,700 and $30,900 a year and would allow a range of savings options" – paying down the mortgage, saving for retirement, saving for the children's education and taking advantage of tax-free savings accounts.

If Jane does not find work, they could consider selling their home and downsizing to a less expensive one, preferably with a basement apartment, the planner says.

They have about $215,000 of equity in the house, which could easily be whittled down to $150,000 after all the costs involved in moving to a new house are factored in, Mr. Cherney says.

"But if they could add a basement apartment to the mix, perhaps getting $1,000 a month in rent, that would be worth it," he says.

Regardless, Jane and John "would benefit from reviewing their monthly expenses," the planner notes. With so much of their income going to debt repayment, they are "particularly vulnerable to interest-rate increases."

To lower their heating and electricity bills, they could "time-shift" laundry, dishwashing and other "electricity gobblers," turn lights off, and put heating and air conditioning on a timer, he says.

They are paying $786 a month to lease a late-model car.

"They have expressed concern about car safety, though I would point out that there are many low-cost options that have five-star safety ratings," Mr. Cherney says.

He suggests they get someone to take over their lease and buy a good used car that is still under warranty.

Gifts and vacations could also be pared. Instead, the family could enjoy "staycations" or lower-cost camping trips, he says. Grooming, too, could be reduced.

The payoff will be worthwhile, Mr. Cherney says.

"Assuming they can achieve some combination of the above, they will have no problem achieving their goal of retiring at John's age 60 with an income of $70,000 a year after tax," he says. "In fact, they should be able to achieve an indexed income of $94,000 in current dollars" when Canada Pension Plan and Old Age Security benefits are included.

Jane and John are good candidates for income splitting, Mr. Cherney notes. John can transfer up to half of his pension income to Jane and benefit from her lower marginal tax rate. This should also allow him to avoid the OAS clawback, and allow Jane to claim the $2,000 pension income credit. They can also split their CPP benefits.

***

Client situation:

The people: John, 39, Jane, 41, and their two children.

The problem: How to get back on track financially to reverse their high debt and low savings.

The plan: Jane is looking for work. Once she finds a job, her income will help to pay down the mortgage and save for the future. Cut spending where possible and consider buying a used car instead of leasing.

The payoff: No more money worries.

Monthly net income: $8,800

Assets: Home $800,000; bank account $3,060; term deposits $550; RRSPs $11,215; RESP $6,390; present value of his pension plan $81,200. Total: $902,415

Monthly disbursements: Mortgages $2,855; utilities, insurance, maintenance $445; auto lease $785; other transportation $270; groceries $1,000; clothing $280; line of credit $395; student loan $80; credit cards $140; gifts, charitable $250; vacation, travel $335; children's activities $230; grooming $200; other personal discretionary $205; doctors, dentists $250; life insurance $145; drugstore $20; telecom, TV, Internet $210; his pension plan contributions $700. Total: $8,795

Liabilities: Mortgage $372,865 at 2.79 per cent; mortgage $212,840 at 2.2 per cent; line of credit $73,850 at 4.5 per cent; credit cards $5,690; loan $14,150 at 7.65 per cent. Total: $679,395

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