Your spouse was laid off last year and is still looking for work. You have a good salary but it barely covers mortgage payments, childcare costs and all your other living expenses. Moreover, savings are low and don't provide much of a safety net.
That's the stressful situation Sally is wrestling with. "My husband was laid off 12 months ago and still has not found another job," she writes in an e-mail. "We bought a house based on two incomes and now we don't know where to focus on one income."
Sally, who is in her late-twenties, earns a good salary as a public servant. But most of it now goes toward the mortgage and their two-year-old daughter's daycare (started recently in the hope her husband Harry – also in his late-twenties – would be back in the work force soon). To top it off, the couple doesn't have ample financial reserves.
There isn't much to fall back on, and Sally is worried about being swept away. She ends her e-mail with a plea: "I feel that we are starting to drown and I'd love to learn some tips on how we can stay afloat during this challenging time."
We asked David Chilton, author of The Wealthy Barber and The Wealthy Barber Returns, to recommend a financial adviser. Getting the nod was Mark Ewald, an investment adviser with TD Waterhouse in Waterloo, Ont.
What the expert says
"Sally's primary concern is their current cash flow situation – they are living paycheque to paycheque," Mr. Ewald begins. "Regardless of whether you are a family, business or government, there are only three ways to eliminate a negative cash flow: 1) increase revenue, 2) decrease expenditures, or 3) do some of each."
In this case, the first option of increasing revenues comes immediately to mind. "It is easier said than done but the key to them meeting their financial goals is getting Harry back to work," says Mr. Ewald. "I believe it is important to view Harry's unemployment as a temporary setback, not a life-altering event."
"Having spent the last 12 months unsuccessfully looking for a job in his field, I think it is time to move to plan B. At this point I recommend that Harry obtain work in whatever field he can, while continuing to apply for jobs in his field."
If revenue doesn't ramp up soon, cut back on spending. "If Harry isn't successful finding employment in the next two months, they should cancel the daycare (saving $500 per month) and have Harry conduct his job search during their daughter's nap times, in the evenings and on weekends. On interview days, they could hire temporary babysitting."
Other plans need to be put on hold, too. "Starting an RESP for their daughter can be postponed until Harry is working again. Both the unused contribution limits and the 20-per-cent government grants carry forward. I would also recommend that they postpone adding to their family until they have two incomes; their cash flow is strained now and a second child would only cause more financial stress. Similarly, their medium-term goals of purchasing a car and building onto their existing home should be postponed."
Mr. Ewald also advises Harry and Sally to take care of financial-planning fundamentals as soon as possible. Specifically, he is concerned that they are taking risks with their daughter's future by not insuring against extended or permanent income loss.
"Sally has adequate disability coverage through her employer, and $152,000 of life insurance. Based on their ages, incomes, net worth and family situation, I would recommend that they consider 20-year-term life insurance in the amount of $500,000 to $1,000,000. This would cost them in total only $65 to $120 per month.
"Harry will not be eligible for disability insurance until he is working again and ideally his new employer will have a good plan. If not, private coverage should be obtained."
Mr. Ewald sees critical illness insurance as the third element of proper income protection. Coverage of $250,000 each can be obtained on a term policy for a total of about $120 per month, he says.
"Next, I recommend they visit a lawyer and have proper wills and powers of attorney drawn up. These documents can be prepared for $500 to $1,000.
"If current cash flow isn't sufficient to cover the cost of these items, I would cancel the cable TV or other 'discretionary' items – the fundamentals are that important."
CLIENT SITUATION
The people
Sally and Harry, in their late twenties, and their two-year-old daughter.
The problem
Can they stay afloat while Harry looks for a job?
The plan
If Harry can't find employment in his line of work, he should take a job in another field until he finds one in his chosen career. If he remains unemployed, cancel daycare and let him job search during the child's nap, evenings and weekends. In the meantime, keep spending plans on hold.
The payoff
A stronger financial position and relief from current worries.
Monthly net income
$4,983
Assets
Bank accounts $1,500; RRSPs $22,500; pension plan $32,500; home $340,000; furnishings $4,000. Total: $400,500.
Monthly disbursements
Pension $250; food $700; clothing $120; medical $40; daycare $500; cleaning service $80; misc. $115; mortgage $1,627; property taxes, insurance and maintenance $603; utilities $295; telecom $120; vacations $200; entertainment $30; public transit $33; EI, CPP $250; gifts $50. Total $4,983.
Liabilities
Credit cards $1,000; personal loan $3,000; mortgage $275,000. Total: $279,000.
Special to The Globe and Mail
Want a free financial facelift?
E-mail finfacelift@gmail.com