Hey there, time traveller!
This article was published 14/6/2013 (1136 days ago), so information in it may no longer be current.
Wade and Alexandra have big expectations about their future and it's not just because they've got their first-born on the way.
The couple, in their 30s, have an ambitiously long list of financial goals they want to achieve.
"There are some things we have to do soon, like get a used family car for about $10,000," says Wade, who works in social services earning about $62,000 annually.
Other goals are farther down the road.
They would like to save for their child's education. They also want about $20,000 worth of renovations on their home, valued at $270,000, on which they owe $216,000.
In about six years, they would like to buy a lake lot for about $30,000, on which to build a cabin someday. A few years later, they hope to have saved enough for a down payment on a rental property.
On top of all that, they have retirement to worry about.
At the moment, only Wade is contributing to his RRSP. Alexandra has been saving money in a TFSA. Having only lived in Canada a couple of years, she has been contributing $200 monthly to a retirement plan in Europe.
"Now that I'm staying here, I thinking that maybe I should stop contributing to that and start an RRSP instead," said Alexandra, a permanent resident, employed as a business consultant and earning $55,000 annually.
The couple have no debts other than their mortgage and they even save a few hundred dollars every month in addition to RRSP and TFSA contributions. Yet they worry they may be overloading their plate, Wade said.
"With a baby on the way, can we actually achieve all these goals and maintain the lifestyle we currently have?"
Certified financial planner Ryan Challis said Alexandra and Wade have good financial habits, which bodes well for their financial future. The fact they purchased their first home with a 20 per cent down payment, saving them CMHC financing costs, demonstrates they have good savings discipline.
"They appear to live within their means, have low clothing costs, one cheap cellphone plan and plan on buying a very reasonably priced car," said Challis, with Nakamun Financial Solutions in Winnipeg.
But a baby in the picture will have a dramatic impact on their ability to save hundreds of dollars a month for non-essential financial goals such as renovations, a cottage and a rental property.
For one thing, they can expect child-care costs -- daycare, clothing, baby food, toys, etc. -- to set them back about $1,100 a month.
At the moment, they only have a monthly surplus of about $500. They will have to find the additional money somewhere, either from the $800 they're saving toward financial goals or from discretionary expenses. At the moment, books, dining out, clothes, concert tickets and other non-essential items cost them more than $800 a month.
They have other costs to consider, too.
Wade and Alexandra likely have life insurance through their work, but it's probably not sufficient to cover lost income over several years if one of them dies.
"Depending on the amount they have through their group coverage -- more than likely two times their annual salaries -- a reasonable amount of insurance might be between $500,000 to $600,000 each for 10- or 20-year terms," Challis said.
"Assuming that they are both healthy, non-smoking individuals, coverage is dirt cheap and will be in the range of $20 to $40 a month."
Wade should apply for life insurance immediately, but Alexandra will have to wait until she's had the baby.
They should also take a closer look at their work benefits to find out if they also have adequate disability and critical-illness coverage. Most work-disability plans provide about two-thirds coverage of lost salary for about two years. They should consider individual coverage that replaces income until age 65. Some plans also offer group critical-illness coverage as an option, but many don't. This type of coverage provides a lump-sum benefit upon diagnosis of a major illness, which can help bridge an income gap until disability starts.
Although they may not have needed much insurance until now, Wade and Alexandra will soon have a dependant who needs protecting. "At the moment, both Alex's and Wade's greatest asset is their ability to earn an income," Challis said. "Given their current salaries, adjusted for inflation and assuming they work for another 30 years, they can expect their unearned income to be over $5 million before taxes."
They'll also need a will and power of attorney, and they should appoint a guardian for their child if something happens to them.
Challis said all these steps will help them manage risks that can derail their plans. Although these assurances come with costs such as lawyer fees and insurance premiums, they're essential and likely affordable because they're still young and healthy.
It's unlikely these expenses will significantly affect their budget. Yet when combined with other new costs, Wade and Alexandra will probably find their surplus cash flow has become a trickle.
Undoubtedly, this will have an effect on their long-term plans.
Still, Challis said they have the right mindset because they plan to chip away at their goals over several years. While reasonable, it's likely their long-term plans may take much longer than anticipated. And they might find one goal may come at the expense of another, such as helping their child (or children) with post-secondary education as opposed to buying a lake lot.
But with saving, like so much else in life, practice makes perfect.
"Since family income is going down over the next while, they should create a budget for the next three years," Challis says.
Their budget should be split into two major categories: essential and non-essential.
Besides the obvious, one of the most essential expenses is saving for retirement.
In that regard, Challis said Alexandra should cease contributing to the European plan and should start an RRSP. This way, she benefits from the tax advantages an RRSP can provide, such as tax-deferred growth and a refund that will put more cash in her pocket today.
She also should inquire whether her savings in the European account can be transferred to an RRSP, which could provide her with a sizable tax refund, providing she has the contribution room.
As for non-essential costs, such as concerts, trips and dinners out, they can be reduced accordingly to help pay for the essentials.
It's all about those baby steps -- literally and figuratively, he said.
"If they can stick to their budget for three years, it will serve as a template for a successful future."