Can Jack and Keira defeat debt?
Middle-income couple paying off $73,000 over five years want to put money down on a house
The People Jack, a human resources specialist, and Keira, an educational assistant, are a 40-something married couple with two school-aged children. They collectively earn $105,000 a year, which puts them squarely in the middle-income earner territory.
Unfortunately, the couple has made poor money decisions over the years. They racked up $73,000 in debt and to pay it off, they had to enter into a consumer proposal with their creditors.
They are now on track to paying off all remaining debt within five years.
The Problem The couple mostly sticks to their $5,880 monthly budget, including their debt repayment. But they have trouble doing so in the summer months. Keira receives no income for those two months, so they find themselves short by $900 a month.
Thinking about the future, they would like to purchase a $400,000 townhouse in about seven years. They are currently renting a house for $1,950 a month and would like to see that money go to a mortgage instead. In three years, their consumer proposal obligations will be finished and they will have another four years to save. Is this a realistic proposition?
The Particulars Monthly net income: $5,880 ($4,980 in July and August) Rent: $1,950 Liabilities: Car loan payment — $589 a month; Consumer proposals — $600 a month (until 2018) The Plan Jack and Keira need to improve their cash flow now by scrutinizing all expenses and determining whether they all make sense, says Sabine Lay, a money coach with Money Coaches Canada in Burlington, Ont. That means doing things such as cutting their TV and Internet package to a bare minimum, going down to one car and picking a cheaper cellphone provider.
At the same time, the couple should find ways to earn more income. Lay notes that Keira works part-time as a bartender earning $150 a month. Can she increase her hours? “To plan ahead for next summer, when Keira’s income goes down, they should save $150 a month starting in September,” Lay says.
Lay says once the couple has paid off their $600-a-month consumer proposal, they could earmark that money toward a house down payment. If they saved that amount for three years, it would give them $21,600, enough for a 5-per-cent down payment on a $400,000 townhouse. Still, since it’s less than a 20-percent down payment, they would have to pay mortgage loan insurance premium of approximately $13,680.
She notes that a $393,680 mortgage at 3-per-cent interest with a 25-year amortization currently costs $1,863 a month. “By the time we add property taxes and condo fees it would cost about $2,500 a month,” she calculates. “Given their current rent of $1,950 a month, it would cost them $550 more a month to own a house.”
They will also have to set money aside for home repairs and maintenance. “Whether they will be able to comfortably own a house in seven years’ time will depend on a lot of factors: house prices, interest rates, income level, money management,” Lay says.
Lay feels a better option is for them to continue renting. In a few years, they could use the $600 they are paying in consumer proposals to ease their tight cash flow and start saving for retirement.
Whatever they decide, they need to learn to manage their money better. Any time they pay off a debt, they need to get into the habit of redirecting the money to savings. Lay recommends all savings go into tax-free savings accounts, where they each have $41,000 of contribution room. For instance, when their car is paid off in July 2017, that $589 a month could go into an account for possible car repairs or a down payment on a new car or house.
Once the consumer proposal is history, Jack and Keira will also need to work on rebuilding their credit.
Lay suggests having two credit cards (one each) that they use just once a month. They should then consistently pay off each credit card.