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financial facelift

Rafal Gerszak/The Globe and Mail

Valerie and Victor live with their two young children in a suburban Vancouver condo.

He is 29, she is 30. Their older child is age four, the baby just four months.

Since Valerie has been on maternity leave from her $75,000-a-year government job, they have some extra money – cash that had been going to daycare and transportation while she was working. Her employer tops up her employment insurance benefit, so Valerie is getting her full salary.

Victor, who earns $60,000 a year, has been in his municipal job for about a year. Both will be entitled to defined benefit pension plans if they stay with their current employers.

They wonder what to do with the extra $1,500 a month they are enjoying, albeit temporarily. Should they pay down their $360,000 mortgage? Contribute to a registered education savings plan for the children? Their registered retirement savings plans? Tax-free savings accounts?

"Up until now we have been putting all of our spare money on to the mortgage, but we want to know if this is the best use of our funds," Valerie writes in an e-mail. Should they be spending less and saving more?

"Money is such a taboo subject, we have no idea what our peers are doing or where their finances are to compare," she adds.

We asked Linda Stalker, a financial planner at Henderson Partners in Oakville, Ont., to look at Valerie and Victor's situation.

What the expert says

Like many young couples, Victor and Valerie want to make sure they are making the right decisions when choosing where to put their surplus funds, Ms. Stalker says.

The first thing they should do is build up an emergency fund of three to six months of living expenses, or $23,000 to $46,000. This money should be held in their TFSAs, which they have yet to set up. Each will have $25,500 contribution room as of Jan. 1, 2013. These funds will grow tax-free and can be withdrawn tax-free when required, the planner says.

They should also contribute as much as possible to the children's RESP to take advantage of the "free money" offered by the Canada Education Savings Grant. If they contribute $2,500 per child, they will receive a grant in the amount of $500 per child or 20 per cent of their contribution.

Because they have not taken full advantage of the program in previous years, they should double up their contributions – from $200 to $416 a month – so that they can receive the grant retroactively, Ms. Stalker says.

Both are fortunate to have a defined benefit pension plan. As a result, less emphasis can be put on making RRSP contributions, the planner says.

"Instead, a concerted effort should be put to paying down their mortgage."

They are making biweekly payments on their 3.9 per cent mortgage, which matures in 2014, she notes. The advantages of paying off a mortgage ahead of schedule are substantial, Ms. Stalker says. If Valerie and Victor put an additional $1,000 per month towards their mortgage, for example, they will pay it off in 13 years instead of 22, for an interest savings of $79,919.

"They may want to explore renewing early and extending their term in order to lock into a low rate for a longer term."

There is no rush to pay off the zero-interest car loan.

The two would like to take a vacation costing about $7,500. Because they have only $3,000 in the bank and no emergency fund, "they would be better to move the vacation down the priority list until they have built a small emergency fund," she says.

Valerie and Victor have life and disability insurance at work, but now that they have a second child, they should ensure that their coverage is adequate, the planner says. They might want to consider taking out independent term insurance to cover their debts and replace income in case either becomes disabled or dies.

Client situation

The people

Valerie and Victor, ages 30 and 29, and their two children.

The problem

Where to allocate the extra $1,500 a month they have while Valerie is on maternity leave.

The plan

Set up an emergency fund in their TFSAs, use the temporary saving while Valerie is off work to pay down the mortgage, and double up on RESP contributions to take full advantage of the federal government grant.

The payoff

Peace of mind that the right financial decisions are being made.

Monthly net income



House $525,000; RRSPs $6,500; RESP $5,000; present value of defined benefit pension plans $123,000; non-registered savings $3,000. Total: $662,500

Monthly distributions

Mortgage $1,634; property taxes, condo fees, utilities and repairs $519; car loan, gas, car insurance $1,000; groceries $800; clothing $300; phone, Internet and cable $210; vacation $150; entertainment, dining out $375; gifts $35; personal care $25; sports and hobbies $100; personal discr. $60; pre-school $120; life and disability $40; health and dental $12; RESP contributions $200; savings $200. Total: $5,780. Savings capacity $1,920


Mortgage $360,000; car loan $4,500. Total: $364,500

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