Hey there, time traveller! This article was published 27/6/2014 (1183 days ago), so information in it may no longer be current.
Beth and Jim are swapping roles.
Jim had been working full time in administration in the private sector while Beth — a health-care professional — stayed home on maternity leave after the birth of their first child.
But now the year of maternity leave has come to an end, Jim and Beth are trading places because Beth earns more than double Jim's $40,000 annual income.
"We think we can afford to do this, but we don't want to shoot ourselves in the foot in terms of planning for the future," says Beth, in her mid-30s.
Jim figures he will be able to work contract from home while taking care of their child, grossing about $12,000 a year.
While the couple doesn't expect much difficulty adjusting, one financial sore spot threatens to throw a wrench in their plan: a rental property out of town.
At the moment, they owe about $116,000 on the rental home compared to the approximately $87,000 they owe on their home.
Compounding the issue is they had to spend about $8,000 on the line of credit to repair the rental, which is more than 100 years old.
"I'm sitting on the fence," says Jim, also in his 30s.
"I think we should sell, but maybe we shouldn't if it makes financial sense."
Last year, they made $700 on the property, and they worry about future repairs and other costs — especially given they are planning to move to a bigger home and have another child eventually.
"At this point, we just have no idea what we can afford," Beth says.
Certified financial planner Shane Verity with the Blando Group at ScotiaMcLeod in Winnipeg said Beth and Jim are "making wise moves" with their finances.
"They haven't fallen into the trap of financing everything — allowing them to keep their debts to a minimum."
They do have some red flags in their plan. At the top of the list is the rental property.
The fact the home is an old money pit, and out of town, makes it a major source of stress. On top of that, it's barely cash-flow-positive.
"The majority of the family debt rests on the shoulders of this property — about $126,000 owing (including the line of credit) with payments of $985 a month compared to their own residence with $804-a-month payments."
While it may well be worth toughing it out and hanging onto the property until the mortgage is paid when it will produce a steady income — likely once they've retired — there are many years in between then and now with a lot of "what-ifs?"
"They should consider thinking about the worst-case scenarios: a vacant rental and having to make the mortgage payments on it from their cash flow for several months," Verity said. "They have to ask if they want to keep the rental, are they comfortable remaining in their current home longer until they do feel comfortable and confident to buy a new home?"
Even if they manage to unload the rental, their budget will be tight if they upgrade their home and have another child. Back at work full time, Beth's monthly take-home pay is about $4,200. That's more than enough to cover their monthly expenses of $3,234.
And whatever Jim can earn will certainly help pad the cash flow.
But as their costs increase with their aspirations, they will have much less wiggle room in their budget.
Furthermore, they also have to save for the future, including their child/children's education. Any government child benefits should be deposited into a RESP to save for post-secondary education. RESPs are one of the best deals out there, Verity says, because contributions draw an additional 20 per cent in grants from the federal government to a maximum of $500 annually.
Then there's the even bigger expense — retirement. Beth says she doesn't know much about her work pension, so she should spend some time investigating what she can expect at retirement from the defined-benefit plan, especially since it will be the cornerstone of their finances once they retire.
As a member of the Healthcare Employees Benefit Plan, she can visit the pension's website and play around with the numbers using the site's pension-benefit calculator.
"Beth can calculate her pension, sampling different income amounts, different retirement dates, years of service and even weigh the effect of buying back her pension for her mat leave," he said. "And, there is also a very comprehensive PDF document, Understanding your Pension Benefits on the website — not to mention the HEB office is very helpful in answering questions when I've had to call on behalf of clients."
But because Jim doesn't have a pension at the moment, they will have to save as much as possible for his retirement. A spousal RRSP, whereby Beth can contribute to an account in Jim's name, may be helpful. But they should also make much better use of their TFSAs, which currently have more than $40,000 in combined unused contribution room.
Verity says any retirement contributions Jim makes going forward — while earning a low income — should go into a TFSA, so future withdrawals likely in retirement will be tax-free.
In addition, while the couple has done a good job so far saving for the future, they should consider investing in higher-yielding assets other than GICs.
"Being as young as they are, if they are comfortable with it, they may want to consider other investment options that could help them grow their money and maintain purchasing power," he says. "Investing the way they are, while their money has a very high probability of maintaining the dollar balance, there is a significant risk that their purchasing power will be eroded by inflation."
That said, the couple is poised for a solid financial future as long as they address the biggest risk to their budget, and that's the rental property.
"Overall, I think Beth and Jim have been on a good financial path and managed their affairs quite well in terms of saving, purchasing assets and managing their liabilities, but they will need to be careful in the coming years, as they could be squeezed by growing expenses on less income."
Jim and Beth's finances:
Jim's income: $12,000 ($900 a month net)
Beth's income: $91,391 ($4,200 a month net)
Monthly expenses: $3,234
Mortgage on home: $86,950 at three per cent
Mortgage on rental property: $116,385 at 6.7 per cent