Tuesday, November 6, 2007

What we owe, and to whom...

Today’s the day I catalogue our debts and savings goals. I have no doubt it’ll be a thrilling post for all [insert eyeroll here].

First, I prioritized what I wanted to accomplish. I’m roughly trying to follow what I’ve gleaned from other blogger’s discussions about The Total Money Makeover, but as I’m still waiting for the copy I’ve reserved from our local library, I’m winging it for now.

Dave Ramsey recommends starting with a $1000 emergency fund. Luckily for me, I already have $5000 sitting in a savings account. We saved it up during my husband’s co-op semesters in college to help get us through his last four months of in-class studies and the time it took him to find a job afterwards. We didn’t use it all, and thus I’m happy to call it our enhanced safety net. I’m torn between using all or part of the extra $4000 towards some of our debts, but I think for now I’ll leave it where it is. It’s giving me some peace of mind. Since I’m already morbidly worried about stuff (side effect of pregnancy, apparently), I’ll take what little I can get.

Next come our debts.

We have no credit card debt, as we pay off our balance on our cards every month and we’ve already cleared out the line of credit we used as a safety net for much of our university years. So, happily, we can move on to that other remnant of university life, the glorious student loans.

My consolidated loan - $2,072.42 – minimum $50 monthly, automatically withdrawn.
Husband’s smaller loan - $4,435.19 – minimum $53.94 monthly, starting Dec 1st.
Husband’s larger loan - $17,823.39 – minimum $181.11 monthly, starting Nov 30th.

Hoo boy. That last one’s a whopper. My goal is to have mine polished off by the end of 2007, and his smaller one by April 1st, 2008. I’m not going to make a guess how long that big sucker (change the ‘s’ to an ‘f’ and you get my true feelings for it) will take until I’ve had a true look at how our income will be impacted by my upcoming maternal and parental leaves.

After the student loans are gone comes saving 3 to 6 months of expenses. To simplify it for myself, I’m going to call 3 months of income 6 months of expenses. For us, that’s roughly $17,500, which will be $12,500 if we leave the emergency account where it is.

Next is our retirement savings. Ramsey apparently advocates 15% of income to Roth IRAs or other pre-tax retirement plans. I’ll translate that to make more sense for me as a Canadian.

I have about $22,000 of unused contribution room in my RRSPs. My husband has about $18,000.

Every year the Government of Canada allows you to contribute 18% of your income, minus pension deductions, up to a maximum amount (which doesn’t apply to either of us). Anything unused is carried over indefinitely. This year, that means approximately $5454 ($9090 is the 18%, my company pension paycheque deductions total $3636 a year) will be added to my contribution limit, and about $9900 will be added to my husband’s.

I’m currently treating these as a debt, with a minimum payment of $50 to each of our accounts every 2 weeks (average: $216.66 monthly). On the downside, until we finish paying the student loans, we’ll be falling further and further behind with the RRSPs. On the upside, when we do start rolling the money snowball that was previously being used to pay back student loans, we’ll be in for a whopping tax refund that can be shunted right into the plans as well.

After we’ve caught up, we’ll continue to contribute 18% of our income annually (minus any pension plans we have at that time).

Next on the list is an RESP for our child-to-be. Since the first $2000 we contribute every year is eligible for a 20% grant from that (sometimes) generous government of ours, we’d be stupid not to take advantage. What’s the likelihood of finding an automatic 20% return anywhere else? Any returns we get on the investments we choose are gravy at that point. So, once our kidlet is born, we’ll be socking away $166.66 a month for his/her education. (Mental note: determine what dates mark the end of a year for this: calendar, fiscal, or child’s date of birth).

After the retirement and educational savings are up-to-date, it’s time for the mortgage. The current balance is $153,328.57, with a minimum payment of $505.99 every two weeks. We can pre-pay up to 25% of the principal each year as a lump sum. This is 25% of the initial principal, not what’s left at the time. We can also increase our biweekly payments by up to 25%.

And, finally, there’s a $100,000 gift we received from family to help us buy a home. It allowed us to give a whopper of a down payment, and to buy a house that has room for children in a neighbourhood where I’d be willing to raise them. The gift had the qualifier that if the givers are ever in serious financial difficulty, they might come to us for (at least) partial repayment. I don’t see that ever happening, as the family members in question are quite well set up and are very financially savvy. But you never know. I’m keeping the possibility that I might have to repay this open.

All of this information is being tracked with NetworthIQ. If you want to see my profile, it’s in a link on the side. Seems to be quite a handy little tracker, though you could do the same using Excel or any number of other programs.

And now, to start on this marvellous plan. I have several hundred dollars in my chequing account awaiting transfer to my student loan to get the ball rolling. Since I just set up the bill in online banking, I’m just waiting for the test dollar I sent to make it to my student loan account so I know everything is hunky dory.

We’ll soon be off and running.


FourPillars said...

Hi there, just reading through your old posts - looks like a very interesting blog! Congrats on the soon-to-be child as well.

A few comments:

Credit cards - I agree that they are a useful tool unless you are so drowning in debt that you can't take a chance on using them.

Kids - check my series on baby expenses or if you don't want to, I can sum it up with: Get hand-me-downs and used stuff wherever possible!

RESP - the limit is now $2500 per calender year that is eligible for a grant. You can catch up on these contributions so don't feel pressured to start this up right away.


Fecundity said...

Thanks for commenting, Fourpillars. Very helpful points.

About the credit cards: Exactly. i understand why many people feel it's best for them to cut them up, but it's not best for me.

About the kids: I certainly will check out your baby expenses series. Thanks for pointing it out. Most of my family finished having kids 30 years ago, but I have a couple of friends and a cousin that I have plans on hitting up for hand-me-downs. Unfortunately, everyone's had girls lately, so if I have a boy I guess I'll be heading to the second-hand stores for some of the gender differentiated stuff.

About the RESP: Ooooh. I hadn't heard that the grant-eligible limit had gone up. Must be the rock I'm living under. So, switch that monthly savings estimate to$208.33.