Million Dollar Journey

Paul emailed me for some guidance on his financial situation.  Paul and his girlfriend, Melanie, has good combined income, some debt, and a dream of owning a home in the very near future.  Paul emailed me all of his financial stats to be shared with MDJ readers.

We both live in Ontario.  Melanie lives in Mississauga and I live in Markham.  Due to life circumstances and other factors, we are both currently living at home with our respective parents.  We are 33 and 28 years old.

For our future house, we are looking at $290,000 to $300,000 price range and, realistically are looking to put down the minimum 5% down.  We are flexible in the location but would prefer to live near my work (Richmond Hill) so there is a minimal commute.

For other financial goals I would have to say it would be like other average Canadians: a) pay down mortgage (asap), b) save for our future retirement, c) save for children’s education.

Paul (Expenses)

EXPENSE	Monthly	Yearly
Rogers	200	2400
RBC Loan	515	6180
CAR Insurance	145	1740
Future Shop	50	413	Ends August 2009
GAS (RBC Visa)	350	4200
SPEND	1000	13000
Misc.	55	660
Total	2315	28593

Melanie (Expenses)

EXPENSE	Monthly	Yearly
CAR Insurance	100	1200
TD VISA	85	1020
FIDO	100	1200
Rogers	40	480
Future Shop	60	498	Ends August 2009
BMO Mosaik	300	3600
School	115	1380
Gas	150	1800
Spend	450	5400
			`
Total	1400	16578

Paul & Melanie (Total Debt)

Type	Amount	Interest
TD VISA	3600	11.25
Future Shop	911	0
BMO Mosaik	11200	11.9
RBC Loan	22631	8.8
School Loan	3629	6.5
Total	41971

Paul (Mortgage – Rental Property – 50% Owner)

Mortgage Total	242550	3.40%
Monthly Mortgage Payments	1100	Prime - 0.60%
Monthly Rent	1850
5 Year Variable
40 Year Amortization
1st Mortgage Payment: June 2008

Paul & Melanie (Income)

	Monthly Net	Monthly Gross	Yearly Gross
Paul	$3,700	$5,700	$74,100
Mel	$1,800	$2,200	$28,600
Total	$5,500	$7,900	$102,700

Paul (Savings)

CHQ ACCT	1000
SAV ACCT	1000
ING Savings	5900
Investments	1564
ING RSPs	1585
Total	11049

Melanie (Savings)

ING RSPs	450
Total	450

Paul & Melanie (Savings per Paycheck)

	Bi-weekly	Yearly
Paul	692.5	18005
Mel	200	5200	Will begin Jan/09
Total	892.5	23205

More Numbers

To add to the numbers above, a $300k house with a 5% down payment and 5.25% interest rate, would cost around $2080/month including property tax (~$300/mo), insurance (~$45/mo).   However, this does not include utilities which can vary by province/state.

Here are some of my initial thoughts that stand out.  With a combined after tax income of $5,500 and expenses that total $3,715 that leaves $1,785 every month in positive cash flow.  If Paul were to “spend” a little less during the month, they could easily have $2,000/month in cash flow.

Even with the decent cash flow, they currently don’t pay any rent as they live with their parents.  This means that the $2k cash flow would have to support their house payments which is clearly not enough.  However there is hope as they have high debt servicing costs that can be paid off.  In addition, they plan on staying put for another year or so.

Get Rid of that Debt!

What really stands out in the report above is the amount of debt that they hold, bad debt at that.  If it were me, I would take all of the savings that are not RRSP’s, and pay down debt starting with the highest interest credit card debt.  If they were to wipe out their savings but keep their chequing account and RRSP balance in tact, they would have around $8,500 to work with.

Putting the entire $2,000/month of cash flow (in addition to the $8,500) towards debt, it would only take them around 17 months or around 1.5 years to pay it all off.  The more they save, the faster the debt gets paid off.

After paying off the debt, it then would be a great time to start saving for a down payment on the dream home.  As it stands right now, 5% on a $300k house would be around $15k down + closing costs.  In fact, it may be a good idea to take advantage of the RRSP Home Buyers Plan and max out Paul’s unused contribution room.  They can then withdraw the proceeds from the RRSP as the down payment when the time is right.

The House

How long will it take to save for the $15k down payment?  Not as long as you think!  Since they will have their debt taken care of, it means that the extra cash flow can be saved; approximately $1,300/month.  In total, they will have around $3,300/month cash flow, which will cover their down payment in about 5 months (not including potential income tax returns).

What does their cash flow look like with a new home?  With a monthly payment of around $2,080 plus utilities, it seems that their cash flow of $3,300 should be more than enough to cover it.  Although personally, I wouldn’t be comfortable with a mortgage that is greater than 2 times salary.  Then again, I am fairly conservative when taking on new debt.

Final thoughts

In summary, I believe that it will take about 2 years for Paul and Melanie to dig themselves out of the hole and into their dream home.  However, that’s only if they are willing to buckle down and get aggressive with paying down debt.

Do you have any suggestions for Paul and Melanie?

Disclaimer: The articles posted on Million Dollar Journey are the opinion of the author and should not be considered professional financial advice. Please consult a financial professional before making any major financial decisions.

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Time for the annual financial goal report card. I set these goals at the beginning of the year to help bring focus to what I want to achieve financially. What’s a better way to stay focused than to make the goals public to thousands of readers!

2008 was a big and busy year for our family. Between building a new house, the new baby, and my 2 full time jobs (office job and MDJ), 2008 was a blur. Despite it’s quick pace, it is a year that will forever be in my memory.

Onto the goals. Unfortunately, some of my financial goals did not get achieved this past year. This was mostly due to the historic market correction that we experienced in the latter part of 2008. Lets take a look at what happened.

Goal #1: Increase our net worth by 25%.

This was a very lofty goal of mine, but I felt that it was achievable due to the net worth growth in 2007. In my original article declaring my financial goals for 2008, I mentioned that I was a little worried about the drop in household income due to my wife going on maternity leave combined with additional baby expenses. Even though I managed to make more money in 2008 to account for the income deficit, the market was not kind to my equity portfolio.

As a result, even with steady savings, our net worth only grew by 11%, a goal shortfall of 14%. Hopefully, we can recover sometime between now and when I turn 35. :)

It’s worthy to note that I haven’t accounted for the appreciation of my real estate holdings as of yet which would increase the net worth by several percentage points.

Goal #2: Increase our alternative/passive income to $2,500/month.

Between my dividend, interest, rental and online income, I was able to surpass the $2,500/month milestone in 2008. This was one of my main areas of focus in 2008 to help make up for the reduced household income.

Goal #3: Retain our after tax savings rate of 30%.

With the additional passive income (which we stashed away), we were able to maintain a relatively high savings rate of approximately 30%. Of course this is approximate as our income was quite variable during 2008.

Goal #4: Increase the blog readership of MDJ to 3000 RSS subscribers.

I’m pleasantly surprised with the result of this goal. We started the year with around 1,400 subscribers and ended the year with over 4,000. Thank you for following my financial journey!

Goal #5: Increase our charitable giving to $2,000 for the year.

Along with our monthly contributions to local charities that are close to our hearts, we made a couple larger contributions near year end to bring us to just over $2,000 for the year. In addition, I started volunteering my time in working with a local charity which has brought the positive feeling of giving to a whole new level.

Goal #6: 2008 will be spent learning more about buying stocks at a discount and obtaining a return of 12-15% on my investments.

Although I did do quite a bit of research on bargain stock hunting, in hindsight, the market return goal was a bit of a stretch as it’s impossible to predict what the market is going to do in any particular year. The TSX (XIU) and The Dow in 2008 were both down about 30% which put a big damper on my market returns.  Perhaps this kind of goal would be more realistic in a longer time frame.

Coming up are my financial goals for 2009!  Did you make any financial goals for 2008? How did you do?

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Kathryn and her family live in Ontario where she and her husband work for a non-profit charity and have a combined household variable income of approximately $32,000. She has a passion for personal finance and helping others live well on less. She volunteers her time as a financial coach, meeting regularly with ordinary Canadians whose goal it is to reduce their debt, increase their savings and learn to live within their means with simple, easy tweaks to their spending and savings.

My husband and I are strong believers in the theory that says do what you love and the money will come later. We do what we love, but working in non-profit isn’t exactly lucrative. We had some choices to make once the kids came along. Should one of us move into the profit sector to make more money? Can we stretch our money even further so we can save for the future, provide for our family, and live well on less? Our biggest expense was our housing which was a fixed price. Our second biggest expense was our food budget. If we could dramatically reduce our grocery bill, we could afford to keep doing what we love. This is how we feed our family our family of two adults and two school age kids on $100 a week.

1. Make a menu. At the end of the day, we always know what we’ll be having for dinner that night. Most of the time, a few minutes in the morning to throw a bunch of ingredients in the crock-pot or set something out to thaw is all it takes. When we get home, there is no temptation to eat out or order in. We keep the menu posted on the fridge so if one person gets home before the other, they know what to make.
2. Do the math. Look at the unit prices and consider convenience food with an open mind. Sometimes it is less expensive to buy convenience food. Sometimes it isn’t. I’ll buy President’s Choice lasagna or Chicken Pot Pie (which is way better than I could ever make) and know I couldn’t make it from scratch for that price.
3. Eat the good stuff. We eat lots of fresh fruit and vegetables. The fridge and fruit bowl are well stocked with high quality fresh foods. We rarely buy chips or pop. If we’ve only got $100 to spend on food, I don’t want to waste it on nutritionally empty food. When we do buy junk, we buy the good stuff. Our budget includes dark chocolate and the occasional bottle of Merlot. If we buy juice, we buy 100% juice.
4. Shop once or twice a week. I do my main shopping once a week and aim to spend about $80. One other time in the week I spend the remaining budgeted money on anything we need before the next big shopping, usually a few missing ingredients and a re-stock of fresh fruit and vegetables.
5. Make a list and stick to it. I have met with more people during my volunteer work as a financial coach, that confess to grocery shopping by wandering up and down the aisles to see what catches their attention. Companies hire people with PhDs in psychology to format the store in such a way to optimize temptation. The number one way we keep our grocery budget down is to make a list and stick to it.
6. Use a calculator. Our budget is $100 a week. I have no way of knowing how close I am to the goal unless I keep track along the way. The easiest way to do this is with a calculator or a good old-fashioned ‘clicker’ counter. Then when we reach our set amount, we stop or begin ‘reverse shopping’ (putting back the things we don’t really need).
7. If you bring the kids, put them to work. This clearly works better with school age kids. My kids know all about unit prices and how stores market to children. I try to go alone when possible but when the kids come with me, I put them to work. One of them is in charge of calculating how much we’ve spent so far. The other one is in charge of unit prices. When they are working with us in meeting our family goals, it’s a lot less likely they’ll ask for something that’s not on the list. It also makes the whole ‘grocery shopping with kids’ thing a much more pleasant experience when they have a valuable contributing role.
8. Consider generic. I confess, when it comes to peanut butter, Kraft is the only one for me. However, with many items, there is very little difference in taste between the name brand and the generic. In many cases, the name brand company is producing the generic and it’s the same product with a different label. If you don’t like it, go back to what you like. Food should be about quality healthy ingredients that taste good. It’s not worth sacrificing flavor to save a bit of money. You might be genuinely surprised to find you like the generic brand better than the original!
9. We don’t buy in bulk. (Gasp!) In fact, we quit going to Costco. When we bought in bulk, frankly we ate in bulk and wasted in bulk. Now that we’re buying reasonable portions, our grocery bill is manageable and we’re wasting very little food. When I sat down and did the math I realized that for us, we simply spent more money on food when we shopped at Costco.
10. Pay cash or track it. I know, I know, we all love our cash back and our points. We’re addicted to credit card rewards. I collect PC points and have had almost $1000 in free groceries since switching to PC Financial in 1998. It works for us because we stick to our goal. I have found for most people, paying for their groceries with cold hard cash is the only way they can stick to a food budget, at least in the beginning. It takes some getting use to and yes, you’ll sacrifice the points. Even if you did it for a month, you could reduce your food budget considerably. I track everything we spend at wesabe. When the money is spent, it’s spent.

Eating well on less isn’t about making huge sacrifices or giving up your favourite things. It’s about making a plan, buying just enough, using what you have and choosing quality over quantity every time.

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