Aaron, 33, and Tanya, 32, Toronto
They've been diligently digging their way out of debt, handing over nearly all of their disposable income every month. But the arrival of their bouncing baby boy has them reconsidering. She wants to sock some cash away for education and emergencies, but he'd rather use every spare cent to slay the debt dragon. Which parent knows best?
HE SAYS: PAY DOWN DEBT
We've got four different loans to pay off: our mortgage, Tanya's student loan, a line of credit that we originally opened to pay for our wedding, and another personal loan. I have to say, I sometimes lose sleep at night over it (when I'm not already awake with our seven-week-old son). I hate debt. When I was in grad school, I maxed out my Visa to pay for living expenses, and it took a long time to crawl out. Luckily, we're much more careful now, and we never carry a credit-card balance. Now, we've got about $500 to $700 left over after expenses at the end of each month, and we've been putting nearly all of it into debt. I say we should keep doing the same. Any interest we'd gain from investing in savings wouldn't outweigh the interest we'd have to pay on our loans. When the debt's paid off, we can think about saving.
SHE SAYS: BUILD UP SAVINGS
For the past several years, we've been working hard at reducing our debt. But since our son Jake was born, I've been wondering whether we shouldn't start putting money aside for his future, too. Even if we start with just $100 a month, starting an RESP now could go a long way when it's time for him to go to university. Realistically, it could take us 15 years before our debt's paid off, and I don't want to wait that long. We've got no savings and no RRSPs - we put the $20,000 from Aaron's fund toward our first house. I've got my teacher's pension, but I have the option of not contributing $9,000 this year while I'm on mat leave, and I'm wondering if that's a good idea. I've always been told it's smart to put money away for emergencies - if one of us loses a job, we could slide back into more debt again. I want to be able to help our kids with their tuition, because neither Aaron nor I had that advantage. And I'd like a vacation or two along the way.
VITAL STATS
Years married: 2
Kids: One son, two months
Occupations: He's a clinical research associate, she's an elementary-school teacher
Annual household income: $150,000 (evenly split)
Mortgage: $781 biweekly ($350,000 @ 3.5 per cent, fixed until 2013, amortized over 30 years)
Loans: Student loan, $15,000 at 5.5 per cent; wedding loan, $13,000 at 7.3 per cent; other loan, $11,000 at 6.8 per cent
THE ADVICE: TACKLE THAT LINE OF CREDIT FIRST
Financial expert Kelley Keehn:
I applaud you both for trying to get your debt paid off while saving for your child's education.
There are quite a few issues here:
1.Paying down the debt
2.Saving for an RESP
3.Emergency savings
4.RRSP investing
5.Contributing to your pension or allocating funds elsewhere.
First, I recommend paying down, as quickly as possible, the line of credit you used to pay for your wedding. Continue paying the minimum amounts on all of your debts, but accelerate the payments on your line of credit with your monthly savings. I agree with Aaron: Saving funds on the side doesn't make sense with the high interest rate on that line of credit.
That room on your line of credit, in turn, can be used as your emergency funds. Aim for a cushion of at least three to six months' income. And it's not a bad idea to get the bank to bump up your line of credit. (If something were to happen - for example, if one of you were to lose your job - good luck getting an increase then.)
If you don't use the line of credit, you'll have it paid off in less than three years. It's at that point that you can look at contributing a bit more than $100 a month to your son's RESP. I know you'll lose the growth from now until then, but I'd rather see a solid foundation first - that line of credit paid off and an emergency cushion established. There aren't any annual restrictions that you have to meet, so you can catch up later.
In terms of issues 4 and 5 - your RRSPs and pensions - I highly recommend you hire a fee-only financial planner to look at your entire picture, now and in the future, and run every possible analysis. It is well worth the $500 to $1,000 for a plan from an unbiased adviser. Sure, you can get a free plan from an adviser who sells investments, but you don't have investments to bring over and you need some unbiased advice. Your pension is nothing to take lightly.
Kelley Keehn is the host of W Network's Burn My Mortgage.
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