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Millennial couple Jim and Nancy want to know how much they can afford to spend on a cottage.

Chris Donovan/Globe and Mail

For millennials, Jim and Nancy are in great shape financially. They have substantial savings and have effectively paid off the mortgage on their suburban Toronto home. He is 33, she is 34.

While their income is variable, they net more than $15,000 a month between them on average, Jim writes in an e-mail. He works in sales, she in the professions. They have no children and live well below their means, living on one salary and using the other to pay down the mortgage and save.

“We have been very frugal and have tended to be decent earners over the years,” Jim writes. “After all this saving, we finally feel comfortable in rewarding ourselves.” Their reward would be a family cottage and a second vehicle.

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“Our frugal nature leans dangerously on pessimistic,” Jim adds, “which consistently scares us from doing anything at all, really, besides investing.” It’s becoming a problem, he says. “We have saved to the point of sickness and do little to reward ourselves. Please help!” Jim has a defined contribution pension plan, which is similar to a group registered retirement savings plan (RRSP). Nancy has no pension plan.

How much can they afford to spend on a cottage?

We asked Adrian Mastracci, portfolio manager at Lycos Asset Management Inc. of Vancouver, to look and Jim and Nancy’s situation.

What the expert says

“First off, I compliment and congratulate Jim and Nancy,” Mr. Mastracci says. They are a great example of what can be achieved by “magnificent saving habits” and careful use of borrowed money – helped by the fact they have no children.

“They recognize that they have been very frugal – perhaps, too frugal – and are now just getting comfortable with the idea of rewarding themselves,” the planner adds. While good saving habits open many doors, “I encourage them to do something for themselves as often as possible.”

Topping the list of indulgences is the purchase of a recreational property, followed by a second vehicle.

Nancy and Jim bought their current home eight years ago and have set aside the cash to pay the $69,000 or so remaining mortgage, Mr. Mastracci says. They are mostly current on making deposits to their RRSPs and Jim’s tax-free savings account (TFSA).

“I’ve suggested that this practice be continued as it will form a strong foundation for their retirement fund,” even though retirement is not yet on the radar, the planner says.

Jim is the family’s portfolio manager. The portfolio, mainly composed of exchange-traded funds, is roughly half stocks and half bonds or other fixed income. Although Jim is a tad conservative for his age, “he has done an admirable job by paying attention to risk management, diversification, asset mix and occasional rebalancing,” Mr. Mastracci says. “They are comfortable with what they have, so no changes are required.”

A cottage that would suit Jim and Nancy would cost about $700,000, they estimate. The planner assumes they buy in the new year. They would have to arrange mortgage financing of more than $500,000, amortized over 25 years. They could draw from Jim’s TFSA to help with the down payment.

Once they have the mortgage, they should make voluntary payments to the principal periodically so they end up paying off the mortgage in full in about 10 years, Mr. Mastracci says. “This approach provides the most flexibility,” he adds.

“Jim and Nancy recognize that the cottage will require a second set of expenses much \ their principal residence,” Mr. Mastracci says. As well, they will have to maintain records of outlays that will qualify for income tax purposes when the recreational property is ultimately sold.

The purchase of a second auto in the ballpark of $50,000 can be financed through a combination of cash and a loan, the planner says.

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Looking ahead, he suggests Jim and Nancy equalize their investments between the two of them. “The family will pay the least tax when taxable incomes are similar between spouses,” he notes. RRSP and TFSA deposits should be continued as long as possible.

Jim has a benefits plan at work but Nancy does not. She might want to look into long-term disability coverage, the planner says. “She is at some risk.” They should both have term life-insurance coverage as long as the cottage mortgage is outstanding.

A basic estate plan should include a will and enduring power of attorney for each of them. “They should make sure that all beneficiaries are properly designated, along with competent executors for the estate,” Mr. Mastracci says. “The power of attorney should contemplate dealing with the purchase and sale of real estate.”

Finally, the couple should aim to set aside an emergency fund of three to five months’ key expenditures in a savings account, separate from Jim’s TFSA. “Simplicity and liquidity are uppermost for this part,” the planner says. “Not fancy investments."

Client situation

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The people: Jim, 33, and Nancy, 34

The problem: How much can they afford to spend on a cottage?

The plan: Loosen up a bit. Go ahead and buy a cottage in the $700,000 range and aim to have the mortgage paid off as soon as possible.

The payoff: A more enjoyable lifestyle without sacrificing financial security.

Monthly net income (average): $15,315

Assets: Cash and term deposits $152,755; stocks $33,610; share in private company $90,000; his TFSA $69,140; (Nancy does not have a TFSA because she is an American citizen); his RRSP $117,180; her RRSP $82,050; residence $700,000. Total: $1.24-million

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Monthly outlays: Mortgage $1,515; property tax $315; home insurance $60; utilities $195; maintenance $150; transportation $570; parking/transit $350; groceries $425; clothing $175; vacation, travel $250; dining out, drinks, entertainment $850; pets $20; sports, hobbies $70; club membership $15; health insurance $15; cellphone $25; RRSPs $1,665; TFSA $500. Total: $7,165

Liabilities: Mortgage $69,885

Want a free financial facelift? E-mail finfacelift@gmail.com.

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

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