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Winnipeg Free Press - PRINT EDITION

Olivia's future looks promising

Single mom can end cycle of debt, save for future

By: Joel Schlesinger

Posted: 01/28/2012 1:00 AM | Comments: 0 (including replies)

PHIL HOSSACK / WINNIPEG FREE PRESS Enlarge Image

"I live paycheque to paycheque and it's driving me nuts," says 40-something single mother of three teenage kids.

OLIVIA has been debt-free before, but it was so short-lived she didn't have time to enjoy it.

It always seems that just when she thinks she's out of debt, an emergency expense pulls her back in. For instance, in the last month the 40-something single mother of three teenage children had to shell out $200 to repair a flat tire.

Olivia's finances:

INCOME:

$60,583 ($3,529 a month net; includes Child Tax Benefit)

EXPENSES:

$3,529

DEBTS:

Mortgage: $159,780 owing on home worth $190,000

Credit card: $3,035

Manitoba Hydro loan: $6,000

Line of credit: $2,000

Bank loan: $24,686

Student loan: $10,000

ASSETS:

Home equity: $30,220

Work pension: $2,000 a month at age 65

RRSPs: $2,803

"I live paycheque to paycheque and it's driving me nuts," she says.

Of course, the federal government employee is also her own worst enemy. Her credit-card debt -- slightly higher than its $3,000 limit due to penalties -- is a glaring example.

"I just had paid it off, but I maxed it out again through Christmas."

All told, Olivia owes close to $30,000 on her credit card, a line of credit and a bank loan. She also owes $6,000 on a Manitoba Hydro loan.

And her mortgage is about $160,000 on a home worth about $190,000.

She takes home $3,529 a month, exactly the same amount flowing out to cover expenses. A fan of the TV show Til Debt Do Us Part, she recently started using a savings system frequently used on the program. She puts aside cash in assigned envelopes every month. Whatever's in each envelope -- one could be for groceries -- is what she has to spend on that expense.

While she's keen to turn things around, eliminating debt and building savings, Olivia faces an added challenge in the next month. Having recently completed her university degree -- 20 years after she first started -- she soon will begin making payments on a $10,000 student loan. She says she will make her first $85 monthly payment in March.

Olivia says she has tried repeatedly to keep an even financial keel. Although she understands she simply has to save more and spend less, she says putting the concept effectively into practice remains elusive.

"I think I know what I have to do," she says. "I just don't know how to implement it."

Scotiabank personal financial planner Darcy Grosney says Olivia has done a commendable job so far: working full-time, finishing a university degree and raising three children. Now she needs to devote her energy to becoming a proficient manager of her financial destiny.

The first step is finding additional monthly savings because in about 30 days, she'll need the extra money for student-loan payments. It's great that she has a budget, Grosney says, but Olivia needs to do more. She must track her expenses on a weekly basis.

"This will give her the true numbers for what is available for paying debt, spending and saving," says Grosney. "Putting pen to paper will help her be more realistic about certain costs, like weekly groceries."

Grosney says it's likely savings can be found. Just by taking a quick look at Olivia's expenses, Grosney found some discrepancies that could parlay into scraping together a few extra bucks.

"Olivia indicates she spends $100 a month for entertainment, gifts and eating out and another $100 monthly on clothes, but then she states $200 a month goes towards spending."

All of these expenses can likely be trimmed for the next month or two to help find additional cash for the loan.

Grosney says another option for Olivia is asking for a reduction in her banking fees. Olivia pays $36 a month in fees. Scotiabank, for instance, could reduce her fees by $20 a month, Grosney says, so it's worth Olivia asking her financial institution for a better deal. While it's not a huge amount of money, every dollar helps.

Fortunately, Olivia will receive a large tax refund in the spring. She normally receives about $2,000 back from the Canada Revenue Agency. But this year, she can apply for the Manitoba Tuition Fee Income Tax Rebate, which would reimburse her for 60 per cent of the $4,500 in tuition she paid in the last year.

"A portion of her refund could be put into a TFSA (tax-free savings account) that she could earmark for emergency savings, family vacations or other uses," Grosney says.

Olivia could also use the refund to make student-loan payments.

With the additional breathing room, Olivia can focus on eliminating other debts. Grosney says it's always best to bear down first on the credit-card debt, which carries the highest interest rate.

The bulk of her debt, however, requires regular payments, so attacking her 14 per cent interest credit card aggressively is not really an option. Still, it's safe to say whatever additional money she may have left over at the end of the month should be used to pay down the card's balance even more.

Olivia could also ask her banker if she could increase her line of credit limit -- currently maxed -- to transfer the credit card debt to a lower interest rate. It's not guaranteed, but as a banker herself, Grosney might agree to do it.

"It's not a huge amount of money, so I wouldn't say 'There's no way!' "

Even if the situation remains as is, and Olivia can keep her expenses in check, she will pay off her credit card balance in about 21/2 years. Then, if she diverts the $125 monthly payments to a TFSA, investing in a high-interest savings account, she will be able to save $22,500 (not including compounding interest) by age 60 -- her ideal retirement date.

As Olivia pays off other debts, she can then focus on her RRSPs, which she'll likely need in retirement.

She does have the good fortune of being part of a defined-benefit pension plan. Her work pension will pay her an estimated $2,000 a month at 65. Yet retiring at 60 will reduce the payment and she'll also need to start CPP early, which will also decrease for early receipt.

Those payments combined will fall short of the $3,529 a month she lives off today.

But if Olivia can redirect the money she pays on her bank loan once it's paid off in about four years, contributing the sum to an RRSP, she will be able to make up for some of the lost working income.

"I recommend redirecting at least 75 per cent of the $513 monthly payment to her RRSP through a pre-authorized contribution," Grosney says. "So, if she contributes $385 a month to her RSP she will have saved over $60,000 by age 60."

If she invests in a more aggressive portfolio than her current RRSP -- mostly guaranteed investment certificates (GICs) -- she may be able to achieve an annual return of about six per cent that would increase her RRSP to about $90,000 at age 60.

Some of these savings could help bridge the retirement/work income gap, if Olivia retires at 60, for five years until she can collect Old Age Security (OAS) payments.

As Olivia gets closer to retirement, Grosney says, it's likely the picture will be even brighter as her income increases, thanks to her upgraded education. Her work pension payment should increase also, as long as she stays with the federal government.

Olivia's future looks promising, but the forecast hinges on keeping spending in check.

Grosney says Olivia should be able to rise to the occasion, though, given that she's already displayed the strength to meet past challenges.

"Now she needs to channel that drive into managing her finances."

giganticsmile@gmail.com

Republished from the Winnipeg Free Press print edition January 28, 2012 B11

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