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financial facelift

</caption><cutline_leadin>Kevin Van PaassenThe Globe and Mail

Jenny is rightly proud of her ability to live within her means and save money, too.

Thanks to her financial prudence, she was able to buy a small condo in the Toronto area in 2011 despite her relatively modest salary. She is 36, single and earns about $64,500 a year as a family counsellor, her second career.

Now she's on a roll. Even though her condo costs are more than half her income, she wants to save up to buy a house at some point.

She would keep her condo as an investment property. She has $20,000 in the bank that she wonders how to deploy.

Five years ago, Jenny borrowed $16,000 from her registered retirement savings plan to help pay for schooling (the federal Lifelong Learning Plan) and her condo (the federal Home Buyers' Plan). She has 10 more years to pay the money back.

Other than that and a $280,000-plus mortgage, she has no consumer debt.

"I am worried about planning for the future," Jenny writes in an e-mail. She has a defined contribution pension plan at work in which the employer matches her contributions.

She wants help to make her goals a reality.

"My cash flow used to flow freely prior to going back to school and purchasing my first home, all within the last few years," she writes. "Now, things are much tighter."

Her long-term goal: "Not to worry about my finances."

We asked Heather Franklin, an independent financial planner in Toronto, to look at Jenny's situation.

What the expert says

Home ownership does have a way of crimping a person's cash flow, Ms. Franklin says. Jenny should keep in mind that mortgage debt is "good debt" if it helps her build equity in her home. She has no consumer debt and "seems to be very aware that consumer debt will spell trouble," the planner says.

Jenny might want to use the $20,000 she has in a savings account to pay back her RRSP. She could put the balance of $4,000 in a tax-free savings account to begin building an emergency fund.

"Since debt is paid with after-tax dollars, repayment of debt is always an excellent choice for savings," the planner notes. Besides, the sooner Jenny repays the RRSP loan, the more quickly her money will begin to "work and grow for her, tax free, within her RRSP."

For example, if she paid the full $16,000 back now, it would grow to about $26,000 in 10 years with no additional contributions, Ms. Franklin says. Mind you, that assumes an average annual return on investments of 5 per cent.

Ideally, Jenny should build an emergency fund to cover three to six months of living expenses. "Four thousand dollars is a good start." Instead of just plunking the money in a savings account, the planner suggests a high-interest savings account within her TFSA.

"The monies can be withdrawn as required in the event of an emergency and re-contributed the following year without any tax consequences," Ms. Franklin says. Interest would accumulate tax free.

As her salary increases, Jenny should use any surplus cash flow to pay down her mortgage more aggressively. She could shorten the amortization from the current 30 years, which would reduce the amount of interest she ultimately pays. She could also make additional payments to principal each year.

Jenny's pension plan – which resembles an RRSP because it is tied to the performance of the financial markets – will provide a valuable source of income for her after she has retired, the planner says. She suggests Jenny choose long-term investments – such as dividend-paying stocks – because of her 30-year time frame.

"If she continues to pay down her mortgage, contribute to her pension plan and contribute to a TFSA, her retirement outlook should be good," Ms. Franklin says.

If Jenny stays with her employer and manages a rate of return of 5 per cent on her investments, her pension plan could be worth about $520,000 by the time she retires.

By then, she'll own her condo outright.

Jenny's combined Canada Pension Plan and Old Age Security benefits will total about $1,500 a month, Ms. Franklin estimates. Jenny will begin collecting CPP at 65 and OAS at 67.

Jenny may have to put one of her goals on hold for the time being.

"The idea of a larger property might have to be put on the back burner until the present mortgage has been trimmed considerably."


Client situation

The person

Jenny, 36.

The problem

Finding a way to achieve some ambitious goals on a tight budget.

The plan

Use cash to pay back her RRSP and then focus on paying down the mortgage. Put plan to buy a house on hold.

The payoff

The reassurance of knowing she is not overextended financially.

Monthly net income



Cash in bank $20,000; estimated present value of defined benefit pension plan from previous employer $50,000; defined contribution pension plan $1,760; condo $320,000. Total: $391,760

Monthly disbursements

Mortgage $1,300; property tax $230; condo fees $275; utilities, home insurance $140; transportation $60; groceries $300; clothing $100; gifts $50; vacation, travel $125; club memberships $75; dining out, entertainment $320; dentists, drugstore $100; telecom, Internet, TV $115; pension plan contributions $195. Total: $3,385


Mortgage $282,000; RRSP loan $16,000. Total $298,000

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Some details may be changed to protect the privacy of the persons profiled.