Nick and Jenny moved into their first home a month ago. And they thoroughly enjoy being the kings of their very own castle.
"We love our new house," says Jenny, a sales manager in her late 20s, earning about $36,000 a year with bonuses. "There are absolutely no regrets on that part."
Nick started a new job in the last year that pays a base salary of about $28,000, but he works a lot of overtime in the winter, about $9,000 worth of earnings.
Still, reigning over their domestic domain isn't without a few royal headaches -- especially when it comes to the purse-strings.
"It's (home ownership) been more expensive than we ever imagined."
The couple started out in a tough spot from the get-go. They had to borrow from family to help pay for the down payment because most of their savings are tied up in GICs. One GIC -- $14,500 -- is due in November. And they will use $13,000 of that to pay back what they owe family. The other GIC -- $5,500 -- is locked away until November, 2014.
Besides the mortgage and the family debt, the couple owe about $15,000, including a bank loan, credit card debt and a couple of old bills that have gone to collection.
Jenny says they worked hard while renting to build a budget that incorporated debt repayment while setting aside money for RESPs, RRSPs and TFSAs. She even siphons off 10 per cent of her take-home for emergency savings and short-term goals like holidays.
But owning a home is another kind of financial animal -- and they're worried.
"Our budget and our debt were very easy to manage when we lived in an apartment," she says. "Now, we're on a different playing field."
Debt counsellor Sally Massey-Wiebe says Nick and Jenny face a tough situation -- like many first-time homeowners -- but they shouldn't despair. They have at least turned the corner financially, having already put in place good money habits that will pay off over the long-term.
More than anything, they have come to the realization they're facing future difficulties that need to be addressed right away, says Massey-Wiebe, with the non-profit Community Financial Counselling Services in Winnipeg.
"This is far preferable than getting more deeply mired after months of trying to struggle maintaining the status quo or hoping for improvements."
The obvious challenge for them is matching their income to cover their expenses. Right now, because they've only moved into their home, they're uncertain of the full costs. They have yet even to receive their first utility bills.
But Massey-Wiebe says they're going to have difficulty figuring out how their cash flow measures up because their income numbers are not as accurate as they could be. For instance, they state they receive a child tax benefit amount of $180 a month. But Massey-Wiebe could only calculate a monthly benefit of $80 based on their incomes and their child's age. It could be they are including the universal child care benefit of $100 a month that may be reduced for their child now that she's older. Or the child tax benefit -- because it's calculated on the 2012 tax return -- reflects previously lower earnings. Last year's earnings determine payments from July of this year to July 2014, but next year, the benefit may be a lesser amount because Nick's income is higher.
This isn't necessarily worrisome, so long as they plan for the future. Nick works a lot of overtime -- mostly earned in the winter -- so they need to use that money effectively. In other words, don't spend it on discretionary items like electronics and vacations. The same goes for their annual tax refund.
"It might be wise to them set up for Nick a system similar to what Jenny does with any of her earnings over her average paycheque -- automatically siphon off these additional amounts into the savings account intended to cover the irregular costs," she says. "If they don't get used to living on this 'extra income' from the overtime cheques as part of their day to day costs, it will feel less like they live a 'feast or famine' life as income fluctuates throughout the year."
Ideally, his additional income could be used to make additional payments on debt -- another big sore spot for them.
"They have indicated they have current monthly arrangements totalling $607 to service their unsecured debt," she says. "This is clearly out of balance, and this type situation often starts a cycle of relying on unsecured credit to cover some of the regular living costs because there's not enough cash to handle the minimum payments as well as living."
This is an unsustainable situation that requires solutions sooner than later. While one option is to refocus free cash flow from emergency and other savings to debt, Massey-Wiebe says they can look at alternatives first, such as cutting costs to rustle up additional cash for debt repayment.
Indeed, Nick's overtime earnings -- which should kick in over the next couple of months -- can play a big role here. His additional income can be used to pay more than the minimum on the highest-interest debt, as well as eliminate the debts in collections, which are only a few hundreds each. Eliminating one debt at a time can have a psychologically buoying effect. They're making tangible progress, and as they move forward, they free up more cash flow to reduce other debts even faster.
They should also consider withdrawing their $5,500 GIC a year early.
"Yes, the interest on the GIC will be lost, but with today's rates, how much will that really be compared with the interest they'll be charged on credit card balances over the next year?"
Using the $1,500 they'd have left over from the $14,500 GIC that comes due in November after paying back their family, and the $5,500 GIC, they could eliminate all high-interest debt aside from the two credit cards that total about $7,500. (This excludes their bank loan of about $4,800 at six per cent, on which they're making regular payments against the principal.)
In the meantime, they need to get a better handle on expenses and try to reduce spending -- think extreme coupon clipping -- so they're not relying on credit cards to cover costs.
Although Nick and Jenny may be facing financial difficulty today, they still have flexibility, Massey-Wiebe says
"As always, it is a matter of what they jointly can agree are the areas where they are willing change and make adjustments," she says. "Where do they strike the balance that is right for them?"