Karen and Theo are recently married, settling nicely into their one-bedroom home.
While it's cosy, the 20-something couple knows it's going to be a tight space if they want to have a family.
"Basically, we want to have a family in the next four or five years," says Karen, a civil servant.
"Right now, we have just a little over 700 square feet, so we'd obviously want something bigger than that. I guess we'd be looking at the $300,000 to $400,000 range."
The couple already has almost $100,000 of equity in their current home, worth about $230,000, but they're worried about the affordability of their future plans. Not only will they face an increase in housing costs, their overall expenses will be higher as a result of raising a family while their income will likely decrease.
"Right now I'm working full-time, but I have the opportunity to go part-time," she says. "Depending on the child-care situation, I could do that if we have the cash flow to afford it."
Karen earns about $29,000, while her husband -- also a civil servant -- earns $55,000 before taxes and deductions. Although they expect Karen's salary to be cut in half if she works part-time, Theo will likely receive regular pay increases the longer he stays on the job, along with overtime pay.
They also plan to save as much as they can for a down payment on a new home and to help offset any loss in spending power when Karen goes to part-time hours.
So far, they have saved more than $52,000.
"I would say about $10,000 to $15,000 of that came from our wedding," she says. "The rest we saved individually before we got married."
While she adds they're both "savers," they're not sure how much they'll need.
"I know kids are expensive and I don't want to be scrambling paycheque to paycheque," she says. "I'm not really good when it comes to investments and financial matters, so some advice would be really good in that respect."
Financial adviser with Assiniboine Credit Union Sara Kushnir says this couple is a model of financial responsibility.
"Karen and Theo are a perfect example of how good budgeting and savings habits allow us to dine out, shop and plan for vacations and other big purchases without going into debt," she says. "Even after a good amount of savings is included in the budget, there is still a surplus of over $600 for monthly incidentals."
Their savings rate is admirable -- even by a banker's standards -- setting aside about 17 per cent of their after-tax income.
Still, upgrading to a bigger and better home and having children will challenge even this super-savings duo.
Kushnir says much of their future success will depend on Theo receiving those expected salary hikes. If in five years, he is grossing $85,000 a year, while Karen is earning about half of what she makes now, they will actually be earning $16,000 more than today.
Of course, a bigger mortgage payment along with the cost of raising a family will likely cancel out the increase in cash flow.
Saving as much as they can today -- as efficiently as possible -- is essential to achieving their goals, Kushnir says.
One very simple step is using their tax-free savings accounts (TFSAs) to their full potential. Right now, the couple has only about $11,000 in savings combined in their TFSAs with $42,000 in savings sitting in unregistered accounts. With the annual contribution limit increasing to $5,500 each this year, Theo and Karen's total TFSA room should be $51,000 -- or $25,500 each -- so they should have plenty of contribution room to transfer most their unregistered savings to those tax-exempt accounts.
"After leaving three months of expenses -- approximately $11,000 -- for an emergency fund, the remaining $35,000 in savings can be used in a more efficient way to further their dream of a larger home with similar cash flow," Kushnir says.
Because Karen and Theo are conservative investors, favouring high-interest savings and GICs, they need to weigh the interest they're earning on savings against the interest they're paying on the mortgage, their only source of debt.
Karen and Theo's closed mortgage rate is 2.19 per cent for a six-month term.
"In today's marketplace they can get a three- or four-year GIC at 2.35 per cent to 2.5 per cent," Kushnir says.
So, they're coming out a little ahead on savings -- if their money sits in TFSAs sheltered from taxation.
But that's today and not tomorrow.
Six months from now, the best mortgage rate available may be higher than what they can earn in GICs.
"If a suitable investment vehicle earning greater interest than the mortgage cannot be found, or if locking the money away for a defined period of time does not sit well with them, they should look at paying down the mortgage faster."
Pay-down restrictions aside, the couple can make a $35,000 lump-sum payment when their mortgage is up for renewal in six months. They can also switch to biweekly payments instead of a monthly payment, which will reduce amortization on their $140,000 mortgage by one year.
These steps alone would reduce their mortgage by $58,000 in five years.
"If they sell their home for $250,000 then, after real estate fees and paying off their mortgage, the couple could potentially have over $175,000," she says.
On a $400,000 home with a 25-year amortization mortgage, at four per cent interest, their payment would be $540 every two weeks. That's a $100 increase from what they would pay today on their current mortgage if they switched to biweekly payments.
"After adjusting for increased housing costs, insurance, retirement savings and their changes in income, their budget will be balanced but tight," Kushnir says, adding they won't have a lot of extra money for child care and other activities.
"Either their income will need to increase even more than anticipated or their mortgage expense will need to decrease to ensure saving for the future does not suffer."
They could even find themselves in unfamiliar -- and unappealing -- territory: running monthly budget deficits.
Yet, given their propensity for saving money, it's likely they could build up a fairly large safety net to make up for any budget shortfalls in the future. Or, they could use that money to pay down their mortgage even faster, resulting in a smaller payment if they do move to a bigger home.
"Moving into the family stage of life is often a time when finances suffer," Kushnir says.
"But they have the foresight to put a plan into action so their net worth can grow, and that's half the battle."