As government workers, Suhana, 36, and David, 37, make almost $ 190,000 together a year, before taxes. Yet, Suhana says they’re unable to save properly for their future goals.
The parents of two kids under three years old aim to move from their Whitby fixer-upper to a bigger, detached home. They want to stay in the GTA but get more space, for their kids and to let the couple’s parents live with them when they get older or if they fall ill. However, with daycare costs at $ 2,200 a month, and another $ 800 a month spent helping with their parents’ expenses, the bills add up.
The couple has a $ 500,000 mortgage, “a huge debt that is looming over us and we want to pay it down as quickly as possible,” Suhana says. They’re on an accelerated schedule and hope to pay it off in 22 years. Their house needs work, too. “In the next two years we will have to replace the furnace and the air conditioning ($ 8,000). There are some cracks in foundation that we will need to fix this year (will cost about $ 3,000), and we also want to renovate both bathrooms and the kitchen.”
In addition, the family’s second car is on its “dying breath” and they desperately need to replace it. “We would like to spend about $ 40,000 on renovations in the next five years, and another $ 20,000 for a second car (which we will buy used),” Suhana says adding the car is the most urgent —”“we will likely have to purchase something by the end of the year.”
Before COVID-19 lockdown, Suhana would meal-prep breakfast and lunch for the week, only going out for lunch two to three times a month. She treats herself to a coffee from Tim Hortons if she is rushed or needs an afternoon pick-me-up. David eats out more regularly, around three times a week.
So what will it take for Suhana and David to save enough to fix up their home, consider a bigger place for the kids, and quickly pay off their mortgage? We asked them to share their daily spending to get a better idea.
The expert: Jason Heath, managing director at Objective Financial Partners Inc., offers his financial advice.
“David and Suhana are entering an expensive phase in their lives. Studies have shown that spending tends to peak in your 40s, due to child care and children’s activities, housing costs, retirement and education savings, and even income tax all ramping up …It can be tough to figure out what to prioritize.”
- Assuming they both have defined-benefit pension plans as government employees, they may be able to take their foot off the pedal regarding retirement savings. Depending on their future estimated pension entitlement and what they have saved already, they may be able to reduce or stop their RRSP and TFSA contributionsfor a few years to focus on other needs — like renovations and a car. A family with two defined-benefit pension plans may not need a lot of additional retirement savings to achieve financial independence.
- Even their RESP contributions could be put on pause while they incur some short-term extraordinary expenses. A contributor can make catch-up contributions, getting the 20 per cent grant on up to $ 2,500 for a previous year.
- The whopping $ 2,200 per month for child care is on par with owning a cottage! These expenses do decrease as your toddlers get older and that, too, can free up extra cash flow for their renovations and catching up on savings.
- I think their current 22-year amortization on their mortgage is great. I come across a lot of people their age with 30-year amortizations, other debt, and little to no ability to save. So, clearly they are living below their means.
- Buying a slightly used car is a great way to save on transportation costs, because cars depreciate significantly in the first few years of ownership.
- I may be biased on this one, but David and Suhana could really benefit from engaging in some long-term financial planning, on their own or with a professional. They should also make sure they have adequate insurance coverage and up-to-date wills and powers of attorney. Even someone in good financial shape can have things derailed by the unexpected.
Results: They spent more! Week 1 spending: $ 819 Week 2 spending: $ 1,392
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How they think they did: Despite spending more in week two, David and Suhana found that the lockdown led to many savings, “especially when it comes to shopping, entertainment and eating out,” Suhana says.
The savings include forgoing the likes of swimming classes, trips to Canada’s Wonderland, and $ 2,200 every month on daycare. Two brief trips to the United States to see family are cancelled, “saving us at least $ 1,000 in gas, shopping and gifts,” Suhana says.
However, “Our grocery bill is significantly higher, as we are eating more at home. We also have higher electricity and water bills,” Suhana says. The couple’s fridge broke down, and they spent hundreds to replace it — but the daycare savings meant the cash was on hand “as opposed to dipping into our savings.”
Take-aways: The couple feels reassured. “We were confused as to why we always felt like we were broke even though we were making a good amount of money. We never realized that we were actually ‘oversaving,’” Suhana says. As children of immigrant parents, she said they felt it was “extremely important to have a nest egg in place.”
Taking Heath’s advice on daycare expense, the two are looking into other options, including asking family members to babysit so the kids are only in daycare part-time.
The couple has decided to reduce RESP, RRSP and TFSA investment by about 40 per cent, and put that money to the new car or renovations. Also, after taking Heath’s advice, the two have purchased life insurance and critical-illness insurance and are finalizing their wills.