Mike and Jade are raising three children on a single – albeit good – salary in an Ontario town where real estate prices are not especially high.
He is 45, she is 51. Mike earns $125,000 a year in a managerial job while Jade stays home with the children, who range in age from 8 to 11. Jade and Mike have paid off their mortgage, but they're still having trouble getting ahead.
"I am well paid," Mike writes in an e-mail, "yet I never seem to have any free cash flow." His extended family has helped, gifting him and Jade money to invest 20 years ago when they were just starting out. Another relative lent them money to buy a vehicle.
"I want to pay back my $16,000 family loan," Mike writes, but instead he is wrestling with a $29,500 line of credit that seems to keep going up rather than down.
"All of my peers are jetting off to vacations in the Caribbean, talking about their tax-free savings account performance, and making plans to spend the summer at their cottages," Mike adds. "Why do I feel like a financial lightweight?"
We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial in Toronto, to look at Mike and Jade's situation. Mr. Ardrey holds the certified financial planner (CFP) designation.
What the expert says
Jade and Mike's problems with budgeting and debt management are growing more common, Mr. Ardrey says. Short term, they want to repay their debts and at the same time spend money on the roof (at least $5,000), eye surgery ($5,000) and a vacation ($15,000).
"These two cannot be achieved simultaneously."
They do not have a good handle on where the money is going, the planner says. "The budget is a key concern for me with this couple. From their comments, they seem to have a real desire to keep up with the Joneses, but what they really need to focus on is getting their own financial house in order." The first step is to track their spending and prepare a detailed income and expense statement.
To repay the family loan, they could liquidate some of their non-registered investments, the planner says. They could sell about $4,000 a year for two years, which would pay off half the loan. With some budgeting, the remaining $8,000 could be paid off at the rate of $2,000 a year for four years.
In his calculations, the planner assumes the couple borrow on their line of credit to cover their short-term spending goals such as the roof, eye surgery and the vacation.
This "does not address the real problem of cash-flow management," Mr. Ardrey says. Without a detailed cash-flow plan in place, they will "end up right back where they started."
The next goal is the children's education savings. They are saving $500 a month and the planner assumes they allocate their $500 surplus to the RESPs as well. As it is, the plan falls short of meeting total education costs for three children. That assumes costs of $20,000 a year for each child, rising with inflation.
Once the children begin studying, the planner assumes no further RESP contributions, so Jade and Mike will be able to use the money that had been going to the RESPs to help pay for the additional education costs. They could borrow to cover any shortfall. After the children graduate, the couple can direct their attention to paying off the line of credit.
With no surplus cash flow, the only way they can take full advantage of their substantial unused TFSA contribution room would be to shift some of their non-registered investments to TFSAs. Mr. Ardrey suggests Mike use the two accounts (he has three) with the least capital gains to fund the tax-free savings accounts: $45,500 split evenly between them this year and $49,500 in 2018. From 2019 onward, they can sell enough from their more profitable dividend fund to make annual TFSA contributions of $5,500 each.
Jade and Mike plan to retire at the age of 65. Mr. Ardrey assumes that Mike will get full Canada Pension Plan benefits at the age of 65 and that Jade will get 25 per cent of the maximum. Both will begin collecting Old Age Security at the age of 65. They will have Mike's work pension, their RRSPs and their non-registered investments to draw from.
They will be in good shape financially, but they could do better if they upped their anticipated rate of return and lowered their cost of investing, Mr. Ardrey says. They are invested mainly in bank mutual funds, which can have relatively high management fees.
Based on their current spending (less savings) and adding a buffer in case their spending is understated, Mr. Ardrey figures the couple can spend at least $5,000 a month, or $60,000 a year, when they retire. By following the saving and budgeting plan noted above, they could increase their retirement spending to $90,000 a year from $60,000.
Given that they have about $750,000 outside of Mike's work pension, the couple can afford to hire an investment counsellor to create a personalized portfolio strategy that would likely increase their returns, lower their risk and cut investment costs, Mr. Ardrey says. If, for example, they could earn 6.5 per cent with investment costs of 1.5 per cent, they would have more than twice as much as the original $60,000 target to spend in retirement.
The people: Mike, 45, Jade, 51, and their three children.
The problem: Trying to figure out where the money is going so they can pay off their loans and meet some short-term spending goals.
The plan: Track their spending carefully and draw up a detailed list of income and expenditures.
The payoff: A better understanding of how to get from here, where they're feeling pinched, to a future where they will be financially comfortable.
Monthly net income: $7,185
Assets: Cash $1,750; non-registered investment portfolio $278,600; his RRSP $268,800; her RRSP $203,200; market value of his DC pension plan $144,000; RESP $89,000; residence $315,000. Total: $1.3-million.
Monthly outlays: Property tax $500; home insurance $30; utilities $380; maintenance, garden $175; transportation $570; groceries $450; child care $75; clothing $150; line of credit (varies) $300; personal loan $100; gifts $125; charity $250; vacation, travel $100; dining, drinks, entertainment $250; grooming $100; clubs $10; pets $45; subscriptions $25; children's activities, special needs $300; vitamins $25; life insurance $180; disability insurance $210; telephone, cellphones, cable $280; RRSPs $1,500; RESP $500. Total: $6,630. Surplus: $555
Liabilities: Line of credit $29,500 at 3.7 per cent; personal loan $16,000 at no interest. Total: $45,500
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