Crucial next steps toward that nest egg
For these recent grads, even a combined six-figure salary will have them strategizing
Financial future Nepalese-born Annie Shrestha will finish a graduate degree from the University of Toronto’s faculty of dentistry later this year. She is 35 years old. Her Nepalese husband Ashish Khadka, 37, completed an undergraduate degree in the same faculty in 2016 and is now a practising dentist with two part-time jobs in Toronto.
The married couple feel fortunate to be living in Canada where dentists are virtually guaranteed high six figure salaries, but Annie admits feeling nervous about the massive debt she and her husband have accumulated at dental school, where annual tuition alone costs about $35,000 per student.
Newly minted dental school graduates earn $96,000 to $144,000 a year. If Annie went into private practice with a graduate degree in dentistry, she could be earning as much as $200,000 a year early on. But Annie’s income potential will be about half that because she wishes to remain in academia as a teacher and researcher. Household income for this Nepalese-Canadian couple should be at least $160,000 per year within the next 12 months.
However they have no assets to speak of and combined student debt of about $400,000, which thanks to historically low interest rates, is costing them only 3 per cent per year. Here’s what three professional financial planners had to say about what Annie and Ashish should be doing to get their financial futures on track. Noel D’Souza, certified financial planner and money coach at Money Coaches Canada The best thing they can do is to be frugal with their lifestyle expenses and continue to live as if they are low-income students, while using their rising earning power to pay down debt and save.
While the interest rate on the $400,000 in student loans is a modest 3 per cent, it still means about $12,000 per year in interest, which will be an ongoing drain on their finances.
Using the government’s student loan repayment calculator, repaying $400,000 of student loans over 10 years will require payments of about $4,000/month. These student loan payments alone would contribute 30 per cent towards the maximum suggested Total Debt Service (TDS) Ratio of 40 per cent, even before considering their housing expenses or any other loans they may take on. (The TDS Ratio is the sum total of household expenses, including mortgage, credit cards and loans, to income.)
Housing prices in Toronto are high and given their student loan debt, it is unlikely they will be able to afford their loan payments, as well as a mortgage and other home ownership costs.
Since they are in their mid-30s and want to start a family, it is unlikely they can put off having children for more than five years or so. The usual implications of having children is that expenses go up, while income often drops, at least in the shortterm.
For the above reasons, renting is the way to go for now. This will allow Annie and Ashish to focus on paying off their student loans and dealing with the costs of starting a family, as well as saving for a home down payment, higher education for their kids and retirement.
Once each child is born, they should start RESPs for them and, cash-flow permitting, contribute at least $2,500 each year per child to earn the maximum Canada Education Savings Grant (CESG). Avraham Byers, financial trainer at Avraham Byers Financial Create a cushion, which is a cash reserve to cover one additional month of fixed expenses, such as mortgage, insurance, car payments and cellphone bills.
Typically, a cushion is between $3,000 to $6,000 saved over a few months.
Don’t give up free money and maxi- mize your employer-sponsored RRSP, if possible. The University of Toronto, for example, has a group RRSP for its employees that will match your contributions 100 per cent, up to a maximum amount. That means you’re guaranteed to double your money.
Buying a house is a great goal, but doesn’t have to happen right now. The fear of not being able to afford a house because the market is hot drives many to buy a home even if it’s beyond their means and will eventually lead to significant credit card debt.
The future housing market isn’t guaranteed to give you 19.97-percent returns every year, but your credit card will charge you that for sure. Marc Sherman, certified financial planner at Sherman Financial Planning Building a properly diversified portfolio using individual stocks and bonds is time consuming and difficult.
When Annie and her husband are ready to begin investing, they can easily build a low-cost, globally diversified portfolio using passively managed index funds, which track major stock and bond market indices such as the TSX and S&P500.
Since Annie’s husband is expected to have a higher salary and will pay tax at a higher rate, RRSP contributions should first be made by him. Annie can also contribute in years in which their total contributions exceed his annual maximum.