Immigrant family finds it tough to adjust to higher cash flow

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BORIS MINKEVICH / WINNIPEG FREE PRESS illustration (WINNIPEG FREE PRESS) Photo Store

Leo's and Gina's finances

INCOME

Leo: $90,000 estimated 2012 ($4,406 net monthly)

Gina: $24,907 ($1,625 net monthly)

 

EXPENSES

Monthly: $5,904

 

DEBTS

Mortgage: $151,883 at 4.4 per cent interest; $506.50 bi-weekly payments

RRSP loan: $6,385 at 3.5 per cent interest

Store card 1: $800 at 29.99 per cent interest

Store card 2: $500 at 29.99 per cent interest

Total debts: $159,568

 

ASSETS

Home: $200,000

Leo RRSP: $10,000

Leo group RRSP: $1,050

TFSA: $20,129

RESP: $1,801

Chequing: $2,800

Savings: $6,144

Total assets: $241,924

 

NET WORTH: $82,356

Gina and Leo came to Canada almost a decade ago, and they've adapted wonderfully. Leo works in the trades. Gina has a job in the service industry. They have two children in elementary school. They have a mortgage, own a car and have even begun saving in RRSPs, RESPs and tax-free savings accounts.

But they also struggle with a financial problem many home-grown Canadians grapple with daily: reining in spending.

"Right now we have the money, but when we find something we want, we buy it," says Leo, in his late 30s. "We'd like to control our spending better so we know what we can spend and how much we should be saving."

Part of the challenge is Leo's income is variable. He earned six figures last year before taxes and deductions, but this year he's on pace to gross about $90,000.

Gina, in her mid-30s, earns about $25,000 a year.

Aside from the mortgage, they owe about $6,400 on an RRSP loan. Leo borrowed $10,000 earlier in the year to get a tax refund. They also owe about $1,300 combined on two department-store credit cards, even though they have more than $28,000 in chequing and savings accounts and a TFSA, which is also in a savings account.

Leo says they would like to reduce spending dramatically -- as if he was earning $65,000 before taxes and deductions -- but they find it difficult to put into practice.

"We are coming from different conditions (in the Philippines), and we're not used to having money to spend freely," he says.

"We don't want to buy, buy, buy and then my work slows down and we have trouble."

Financial counsellor Sally Massey-Wiebe says the family's total monthly expenses are $5,904, including the RRSP loan payments and RESP contributions of about $216 a month.

Based on their current salaries, they take home $6,031 a month.

"If everything over $65,000 became one sort of savings or another -- RRSP, RESP or TFSA, sticking it under the mattress... whatever it is they're doing -- they can keep going," says Massey-Wiebe, with the non-profit Community Financial Counselling Services.

"But that's assuming he'll always have $65,000 of income."

Earning that amount, their monthly take-home income would be about $4,737. Based on their present spending levels, including savings, they'd be short $1,000 a month.

They'd have to stop saving.

Massey-Wiebe says Gina and Leo should consider cutting spending so they're not dependent on Leo earning a high income just so they can save for the future. And the best place to start is by reducing non-essential spending.

She says it's likely they have room to slash expenses. For example, they spend $100 a month on lottery tickets. They don't need to stop buying tickets altogether, but they could easily reduce the monthly expense by half. They also spend about $50 a week on family events. Again, they could consider reducing costs -- maybe by $15 a week. It's not a lot, but if they reduce all sources of optional spending by just a few dollars, the small cuts add up at the end of the month to substantial savings.

But before they start cutting here and there, Leo and Gina should take a closer look at their cost of living.

"To be honest, many of their budget numbers are estimates, so they're not even certain if this is actually how they're spending," she says. "So they should track where the money is going."

To get a good feel for costs, she recommends they write down all of their spending over a period of two months or more.

In most cases, people often find their cost of living is higher than estimated, and they also often realize they spend a lot of money on unnecessary items, she says.

Determining what expenses are necessary -- or unnecessary -- usually requires further family dialogue.

"There is no right or wrong," Massey-Wiebe says. "It just needs to be mutually understood what their framework is based on when making decisions about where they should cut costs to reach their goals."

But Leo and Gina have other sore spots that could also be fixed to increase savings over the long term. To fix these problems, they'll have to spend some of their savings.

For one, they should consider paying off debt -- even the RRSP loan. Although a $1,300 debt on store credit isn't a lot of money, especially compared to $28,000 in savings, it makes no sense carrying it indefinitely with money in the bank.

"The approximate interest cost on the $1,300 balance on their two credit cards is around $33 per month," she says.

"In contrast, $1,300 in their savings account may be earning at most between $1.50 and $3 a month."

They're giving up at least $30 a month for no good reason.

"The bottom line is the $30 could be invested or used to buy groceries," she says.

They should also consider paying off the RRSP loan right away because they have more than enough money to do so, and again, they're paying 3.75 per cent interest while their savings earn less.

"Everything comes with an opportunity cost that is not just purely financial," she says. They may accept having the debt because they like the cushion of having a lot of savings. "While the math doesn't work, they may prefer paying the debt off a bit at a time."

But even if they paid off the credit cards and the RRSP loan, they'd still have about $20,000 in savings.

Furthermore, they could divert the $798 monthly loan payments into RRSP contributions for this year. That way, they'd receive a tax refund next spring, which they could invest into RRSPs or a TFSA.

"Part of my rationale is that otherwise, this time next year, they'll be facing paying another loan, and what if their income drops and they can't continue paying the loan?" she says. "You can stop putting money into RRSPs if you absolutely have to, but you're committed to a loan."

Leo and Gina are also saving $417 a month for a trip to the Philippines every five years. The trip costs about $15,000, an amount they already have in savings, and the vacation is still two years away.

"So now they could put away $417 a month into their RRSP, which then gives them a greater tax advantage this current tax year," she says.

Or they could contribute monthly to their TFSA to save for other big-ticket costs, such as renovating the bathroom.

But the key for Leo and Gina is ensuring the money is being saved and not spent. To reduce the risk of the money being spent for no good reason, they should have a set amount of funds transferred automatically every pay period from their chequing account to RRSPs and TFSAs.

"Automatic savings will keep them encouraged because they will be able to see that they're progressing in a positive direction and avoid the discouragement of not being able to follow through, which can set up a whole cycle of saying 'to heck with it' and not bothering."

giganticsmile@gmail.com

Republished from the Winnipeg Free Press print edition July 7, 2012 0