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)

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.

Notify of

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Inline Feedbacks
View all comments

Ouch, those Rogers/Fido and car insurance monthlies are killer.

I concur with FT

I think before looking at buying a house together, each should try to eliminate the lion’s share of their respective debts.

The carrying costs on Melanie’s debt of $560 (85+115+300+60) and Paul’s of $515 would go a long way towards the future mortgage.

If you can take the monthly savings and plough that into your debt, you should see that eliminated quite quickly. An extra $400 per month ($200 biweekly) would allow you to eliminate TD debt in 9 months and then contribute it all to the Mosaik, leaving the student loan last.

Paul could continue to fast track his RBC loan and have that paid off in a year. He could then focus hard on savings.


I think your advice is spot on – they need to improve their financial situation before buying a house.

The idea of buying a house might be a good motivator for them to do that.

Don’t forget to budget for outfitting the house: furniture, lawnmower, shower curtain, etc. This can add many, many thousands of dollars to your move-in cost. If you can start off with loaners and hand-me-downs from friends and relatives, great.

I think FT’s advice is probably the best. They’re not in a terrible situation by any means, but things need to improve a bit before buying a $300k house.

FT, what amortization did you use for the mortgage? (I’m sure I could try to reverse engineer it, but it’s too early for that.)

I think they cannot afford it. This would mean a total mortgage of $600000 with a combined $100000 salary. They would be house poor and if interest rate would increase to normal levels in 2-3 years they would be pretty much toast

Start as you intend to continue. They should figure out what their new monthly housing costs will be (mtg, taxes, utilities, maintenance) and include that amount in their current budget. This money should be directed toward debt repayment and then toward saving for a downpayment and later toward the monthly housing costs themselves. This will help them avoid the ‘financial shock’ so many first time homeowners have when they realize the necessary costs of owning a home.

This will also force them to look at their other monthly spending and make adjustments to afford their house.

FT, Great advice! I love these kinds of scenarios where were are looking at real people and real figures.

Here are some of my thoughts.

1) My concern, like yours, is that they have too much bad debt while making over $100,000 a year while still living with their parents. The debt as to go if this is going to work.

2) My advice would be for them to live in the next year ‘as if’ they were living in the house. They should take $2800 ($2080 + utilities and house upkeep costs) every month and deposit it into a savings account. If they find that they are able to easily do this for a year, then they know it’s financially doable and and the end of the year they have $33,600 to put as a down payment. That doesn’t even count any interest their savings would make! This would only work if their parents are willing to have them stay for another year.

3) They mention that would like to save for children’s education. Do they have children already? If so, and if their parents are the #1 and willing, free, and reliable baby-sitters, even better. However, if they don’t yet have kids, these figures will change dramatically once one of them takes maternity leave. This isn’t a viable financial picture with a baby anytime in the near future.

4) Between Rogers and FIDO they pay $300 a month. That’s $3600 a year! Will either of their companies be willing to cover some cell phone costs? Can they claim them as a business expense? Our cell phone is will PC Mobile and we pay $12.50 a month ($25 every 60 days) and we get free call display, free call waiting, and free messages included in that. Between dh and I, who both have cell phone will PC Mobile, we pay $300 for the whole year!

5) My last concern is the amount of RSP’s they have for their age and income. We were also late in starting ours and it’s one of my biggest financial regrets. I worry that they may be looking at a situation where they are house poor and have very little extra money for other goals in their life, including having children and saving for retirement.

They have a fantastic income but are looking to buy in an expensive area. It is ‘do-able’ as FT suggests, but it’s going to take a lot of hard work over the next year to pay off debts and save up a larger down payment.

Best of luck to them!

Consolidating that debt would sure help. Even if you expanded the RBC Loan to pay off the credit cards. Or, try to find another place to consolidate everything for a lower rate.

I would strongly suggest putting finances aside and seeing if Paul and Melanie shouldn’t live together in a rental before buying a house. I don’t know if either have ever not lived at home, but I’ve known too many people who live at home until their mid 30s (because rent is a “waste of money”) only to find out that living together is quite different when they have to do 100% of the cooking, cleaning, taking the garbage out, laundry, grocery shopping, etc. Buying a house adds a whole new level of complexity and I for one was grateful that both my wife and I lived on our own before living together, and then buying a house only after being married.

I think they need to take a hard look at their expenses, in particular debt servicing (pay it down), cell phone & similar costs, commuting costs (car & gas), and spending $1505 monthly on unaccounted expenditures is a hugh black hole that should be described, and allocated.

Then tackle the issue as described by others — putting aside $2800 monthly, first for debt reduction, then as savings for a down payment would be a good start.
In my opinion, Melanie should budget to contribute about 1/4 to 1/3 of the savings, and Paul the difference, based on their incomes. They should use the year they remain at home working out their financial plan, as their current holdings indicate little consideration has gone into their current financial situation.

Might they also consider a lesser house?

BTW, is it time to start a sub-blog MDJ: Financial makeovers? Then possibly turn it into an award wining TV blockbuster!


This post reminds me of the case studies that are often presented in MoneySense. I like! A house purchase is a major step and I think it a rental would be the next logical step. Living together first would help determine responsibilities and how it is to actually have to pick up after yourself? Let the housing market soften a little more and then go house hunting.

@6 (Michael) – I think you’ve misread. They want one house for the two of them – $300k, not $600k.

Naturally, they need to pay down that debt. Credit card debt, Future Shop debt, and what seem like bad phone plans on both their parts. I’d call up Rogers and Fido and see about altering the contracts to include more minutes, text messages, lower long distance, or whatever their costs are. They could also see if their employers have employee plans with the carriers. Alternately, switch to a low-cost carrier or the competition with a “I want to leave Rogers, what can you do to make it worth my while?” approach. Heck, that works WITH your current carrier, which is why they have retention departments.

They need to do more than pay down the debt though. They need to change their way of thinking about debt. The mentality seems to be, “I earn a decent wage, I’ll be able to pay this off.” Instead of, “Can I afford this today? No? Do I need it today? No? Then I’ll wait until I can afford it.” Frugality needs to be embraced.

Since they’re looking in the Richmond Hill area, they have more options available than downtown Toronto. There’s a glut of new developments up there, especially if they’re willing to head over to Maple/Vaughan/Woodbridge area. With the market heading downwards, chances are good $300k could buy them more house than they need over the next couple years. They may find $200-$250 will meet their needs, which means a smaller mortgage if they keep the DP constant. If they honestly assess their needs (ie.- when do they plan on starting a family?), they might consider buying something even smaller in the down market, and move up in a few years when their needs change. Rates will stay low for the forseeable future, but a real estate bottom will likely hit in the next year or two.

I have one small suggestion. We all seem to agree that paying down the BAD DEBT ASAP is a priority. One thing I have not seen mentioned is the effect on their credit scores. As I can’t see how close they are to there credit card max, I would recommend that if any of the credit cards are at or near the max that they use the extra income to pay the card closest to its limit before paying the one with the highest interest scoff….reason being, if they are planning on purchasing that home they will need all the wiggle room they can get in terms of their credit score to get a favorable rate. Your scores are adversley affected when your cards are maxed. Hit those first then go for the highest interest. Also, since they have a decent income I would hesitate at consolidating if possible, as someone had mentioned, because that affects your score negatively as well. It seems they have the resources to smash their debt if they really put their minds to it. Good luck

Like some of the commenters, I would try to get rid of that bad debt as fast as possible. I’d save up a quick little emergency fund of about $1000 – and then get hard to work on paying off the debts. I wouldn’t even consider buying a house until the debts are paid off and a down payment is saved. I might consider buying a smaller more affordable house as well so you don’t end up being house poor.

$1450 in ‘spending’ money every month between the two of them. Where does this money go? That’s a big chunk of change. if they live with the parents, there’s little to no rent. There’s no way that could be food. So where is that money disappearing to?

Consolidating the debt in the lowest interest RBC loan will help lower the interest charge. Student loan can remain unconsolidated as OSAP interest is tax deductible. Most obvious impact will be interest savings. Yet if they go a step further and close down the “extra” credit cards AND lower the credit limit to 2-3k on the 1 credit card that each of them intends to keep for convenience – then their credit score should also improve. Check your FICO score and credit report in a few months to see that everything is displayed correctly. You may be surprised to see a few old cards still showing as active. You will have 38,000 in debt with RBC @8.8% and 3,600 of OSAP. See if RBC can lower the rate further.

Once debt is in a single place and credit cards have reasonable limits, use your savings to contribute to RRSP and put the refund towards paying off the debt. This will establish a reserve for the house downpayment of about 10,000 while helping you in paying off the loan by 3,000 (estimated).

Consider cutting off each and every expense. Buying a house and renting out your basement goes a long with in helping with the cashflow. When we bought our house we would not have been able to afford it without tenants. Consider doing house renovations by yourself whenever possible. Not only you save on expensive labour, you can increase the value of your property (such as building a rental suite in a basement which increases house value by 25-30k). Extracting equity from an investment property via HELOC is also a cheap way of obtaining credit for a downpayment or to pay off a more expensive RBC loan.

Good luck!

My number one suggestion would be to take the $5900 from ing savings account and use it right now to pay off the BMO Mosaik. That will save you around $59 a month in interest payments.

If you think you might need that money soon, don’t worry, worst case scenario you take out a cash advance and you are right back to where you were except you’ve saved some money in interest.

1. Get of debt before sinking money into a house

2. Perhaps purchase something a little less than $300K, maybe a condo could be a good launch pad if they really want to move into a place together,

Regardless, with the current spending habits while living at their parents, a lot of personal changes need to be made before taking on the financial obligations of a mortgage. Homes have a lot of hidden expenses and without proper savings, a broken pipe or busted furnace in the middle of winter can break the bank for many couples.

My advise would be to hold off. Especially with the decline in house prices in Ontario (GTA), there is that buffer right now to put paying off debts into overdrive and get onto a better financial position.

And one thing, how is the cell phone bill so high? I have a Fido Account with my Toronto Blackberry and use it 24/7 for emails/text/voice and barely touched $150/mth and that was before I threatened to cancel at which point retentions cut that bill further to only $100/mth.

Lots of great suggestions already so I’ll defer mine…

All I have to say is that you guys living in the GTO pay very very high property taxes – Ouch! In Cowtown, we’re only paying 1/3 of those taxes.

Just another note, I wonder how most readers of this blog compare to Paul and Melanie?

MDJ: Have you ever conducted a poll of sorts?

I think one important consideration is what’s the culture background of Paul and Melanie. In some cultures, the parents can be very accommodating. If that’s the case, one quick and dirty way to get rid the bad debts is to take a mortgage on the parent’s houses. That should lower the interest rate to around 3.5% and increases monthly cash flow dramatically.

Simple: pay down the debt and save for the next two years. House prices will likely be lower by then. I agree with Kathryn they should contribute to RRSP in some way now. They should not assume the house will be much of a nest egg.

Hate to say it, but the income is tenuous — I don’t know about how stable the jobs are but if the primary earner is out of work it will be very stressful with a mortgage. Food for thought.

I agree strongly with “Novice”. Renting always seams like a bad idea, but it’s an experience everyone should go through. While dating people are generally always on there best behavior, you only see someone’s true colors when you live with them 365 (does he leave the toilet seat up, does she leave her bras hanging all over, who will cook). Years after moving out of my parents place I still have a hard time managing my time to get everything done with my wife.

Not to mention you will collect a lot of things you will need along the way (appliances, furniture, toilet paper). You will probably be able to get nicer stuff also when you don’t have to pay all the hidden house expenses, all at the same time that you pay off the debt & save for your down payment.

In my opinion you should put a BIG focus on RRSPs (If you can manage to save 15K cask you could have about 22K available towards your home if you put it all in RRSPs), you’ll be able to have a lot more cash available. My wife & I maxed out the RRSP HBP at 20K each (though same as you I make more money than my wife I was able to contribute to a spousal RRSP to get the most money back) We also put only 5% down as you can use the remaining RRSP money as you want (boy did it come in handy & it didn’t last very long).

If it’s an option, participate in a corporate group RRSP, it’s simply AMAZING! Your contribution in before tax, so you can save significantly more money than finding the cash lying around to pay out of pocket. If you manage to save 10K out of pocket by end of year, with a group RRSP you could have probably have saved 14K

Good Luck!

Am I reading that right: $350/mo in gas? I don’t see how they will ever afford a mortgage without significantly reducing expenses. Agree the Fido/Rogers bills should be the first thing to go even before paying down debt.

It’s easy to pick apart anyone’s finances including my own. There are many ways to make and save a buck. However they signed up to get suggestions. If I were in their shoes I would unload the 50% rental property for 2 reasons. One you will have too much exposure to the housing market. Secondly you could use the proceeds to put a bigger down payment. You have had the luxury of living at home, yet have been unable to save up for a bigger down payment or get rid of your studenthigh interest loans? You will be in for a surprise trying to service a +250K mortgage with all of the other expensive stuff that goes with buying a home (i.e. property taxes, appliances, house insurance etc etc.)

You should be able to do it but I would eliminate your liabilities first. You will be thankful you did. I would also aim to put a bigger down payment and get the chainsaw out on any non-essential spending to give you a peace of mind that you can handle your new responsibility. You will adapt like everyone does but it’s much better to go into this with a strong financial situation.

Just a quick thought and then I may elaborate later.

I was in this same life situation six years ago. To save for the down payment I plugged all I could into RRSPs knowing I’d buy a place in about 12 months. I managed to save close to $20,000, and sadly watched it shrink to $15,000 due to the downward market at the time.

PLEASE do not put your down payment into an RRSP, especially with the HUGE amount of uncertainty in the markets right now.

I agree with Lakedweller (mostly).

I had 15k in my RRSP that I was planning on using as a down payment on my first place next year and then the crash happened. It’s now worth about 10k…

By all means, contribute to the RRSP (you’ll get the tax deduction then), but if you know you’re planning on using the money in the next 18 months for a house then keep it as cash within the RRSP account.

Folks, if you’re saving money in your rrsp for a house downpayment, why would you invest it in mutual funds or stocks? Just put it in a money market fund or a savings account. Money in an RRSP doesn’t HAVE to be invested in the stock market. In can just stay as cash.

I would suggest they go to the CMHC website and review what their TDS (total debt service) and GDS (gross debt service) ratios are. There are good charts and explanations to get them started. The lender will base their total debt load monthly payments on the structure that they have. The affordability rule is 32% of gross income goes towards housing costs which is called PITH (principle, interest, taxes, heating). They have set up a good explanation of what they will look for especially since they are planning to put down 5%. CMHC rules will apply and one must play by the rule maker. Here is a link to CMHC:

But above all, reduce the debt as much as you can. Then once that is done, consolidate into one or two accounts with the lowest interest rate to help aid in paying it down at minimal cost.

Just to comment on AverageCFA post: extracting equity from the income producing property that is a recourse loan using a HELOC to pay off bad debt that is non-recourse is in my opinion is a bad idea. Meaning, if you miss the payment on you mortgage, the bank takes your property and they’ll come after you until that debt is paid off. Miss a payment on your credit card, they ding your credit score. I would rather keep the asset and use the HELOC to buy another incomer producing asset (dividend paying stocks, income property, etc…) to pay off the credit card debt.

The second thing to watch out for is that your investment property must cash flow or at least break even with the new debt payment attached.

I agree fully with nobleea. If your savings horizon is less than 10 years, you should be looking at much more conservative investments. It seems too often people equate RRSP – mutual fund/stock investments.

I personally did not use any of my RRSPs for my first home purchase, although if you know you could pay it back its probably a good idea due to tax refunds and tax deferred growth – although with the new TFSA, this will also be a good vehicle.

Its a slightly complicated calculation, but you’d certainly need to consider time horizon, expected return, personal income when selecting your RRSP vs. TFSA to save for a down payment.

One additional note: I think everyone should read Millionaire Mommy Next Door’s take on renting vs. home ownership.

If I were in such situation, I would get myself a condo instead(if no kid), with almost 3 times smaller mortgage pmt, you will be thankful that you are not dragged-dead by all the new bills you will face to own a home. And once you are taking better control with all the expenses and have room for savings, you can always sell the condo and buy a bigger place ^_^. make sure you buy a condo that will not lose it’s value in 5 yrs!

There have been some fantastic comments and I think there is general consensus that Paul & Melanie need to become fiscally responsible before embarking on a major change to their lives.

If I wanted to run a marathon one day, I would have to train for months in order to get my body accustomed to the stress, both physical and mental, and build up my stamina. This is why it is a great idea to start diverting money that would be equivalent to all of the expected fixed costs of owning a home right now. Frankly, a lot of fiscal prudence would be beneficial whether or not they purchase a home in a year.

Secondly, from my own personal experience, moving out of my dad’s house while in university was a great experience and decision with little difficulty. But, that is not the case for everyone. Compound this with moving in together, the burden of those large mortgage payments, property tax payments, utilities, household purchases, etc. and it could get overwhelming pretty fast.

There may be some personal reasons, perhaps steeped in cultural traditions, that would prevent Paul & Melanie from living together before marriage and buying a home. If there are, then going on vacation alone will give one a little taste of what it is like to have that person 24/7 – it quickly ended what my gf and I previously thought was a solid relationship.

It is not a bad idea to spend time examining what each of you want from the relationship, where your priorities are, even what principles guide you. I completely understand that certain people need to own a home – in spite of the fact that I don’t personally subscribe to that point of view. Paul & Melina should discuss this because owning a home would make a very significant impact to the way that they are living today, beyond if they were to just rent an apartment or house together. I know many people who fell in love with the idea of home ownership but grew frustrated by the lack of freedom due to having to commit so much time and money to own a house.

There are some fundamental steps that they would be wise to take first. They could look at owning a house as a goal after their finances are in order and they experience, as much as they can, the responsibility of taking care of a household together.

1) Improve bottom line
2 choices:
*Raise income
*Decrease expenses
We’ll assume their income is fixed, and can not be raised.
Expenses can certainly be decreased.
What is the 1505 of “Spending” and “Misc”? This needs to be accounted for. And likely decreased. While living at home, your expenses are minimal.
Potential savings: $600/mth

Car Insurance:
Potential Savings: $100/mth
145/mth and 100/mth for car insurance… given their ages, unless they have poor driving records, they must have collision insurance on their cars. What kind of cars do they have? Are they worth having collision insurance on? Collision insurance will often approximately double the insurance premium. Unless the cars are particularly valuable (in which case they should reconsider what cars they are owning), they probably don’t need collision insurance. If they are overall decent drivers, collision insurance often does not make sense for someone who can take some risk, but wants to wealth in the long run. If you smash up a 5-6k Focus, it doesn’t break you to replace it, would often have some disposal value at the wrecker, etc.

If they drive expensive cars for which they feel this insurance is necessary, perhaps they should consider less expensive cars…

Potential savings: $100/mth.
Gas @ 350/mth. Does Paul do a lot of driving? Does he need to? Once again what type of vehicle does Paul drive? If he drives a fuel inefficient vehicle, this could be a very quick and easy savings. Convservative driving vs. aggressive driving is easily a 20% savings.

Cell phones:
340/mth total
Potential savigns: $150/mth
I have a blackberry with some long distance time, unlimited incoming, a bunch of minutes, and unlimited data for $75/mth. They can probably make do with something similar. Some folks get used to talking a lot on the phone. Limit cell conversations, send quick messages via texts, and use calling cards for $.03-.04/min long distance (during unlimited evening and weekend minutes, or on a landline).

Debt interest:
Potential savings: $330/mth
Get rid of it. It won’t take long once you start saving. I would focus less efforts on wasting time on restructuring it and more on convincing yourselves to pay it down immediately. It can be done in short order if you both work at it.
See below RE: Paying down debts

Debt service costs (including interest): 1075
Other possible savings: 950
Current positive cash flow: 1933
Rental positive cash flow: consider nil after adjustments for expenses including maintenance, property tax, and income tax [it is a good investment though, as it pays itself down]
Total: $3,958

2) Balance sheet

You don’t want to take on more debt (a mortgage) with other debt. Currently (excluding the unknowns of the rental property), the couple has a negative net worth.

They can pay down 9,500 out of savings immediately, reducing their interest costs.
There after, with the spending adjustments above and discipline, 3758 (3958-approx 200 left in interest/mth) can be paid down every month. 32471/3758 is 8.6 months to pay down the debt. (It could actually be slightly better, as this doesn’t factor the reducing amount of interest each month).

Increase savings/down payment.
Once the debt is paid, increase savings. You can put tax free money into an RRSP, and use it for a downpayment on a principal residence. Build beyond your 5% down. If any risks come up in your life, the extra flexibility by not being close to negative equity in a house is a huge value. Further, you will need money to outfit the house (though expect to do so on the cheap and live that way for 3-5 years min).

Over the next 9 months, save:
3958 * 9 = 35,622. Twice the goal down payment.

Other factors:
Once you have a house, rent out a room or two, and/or a basement suite. This can do a lot to offset housing expenses. The money is relatively safe from tax, as your housing expenses become tax deductible (in part). This includes interest on your mortgage, property tax, utilities, maintenance and repairs, etc., etc.

At the end of 18 months:
Purchase a $300,000 house using $30,000 as a downpayment. Use $5000 to furnish, paint, etc. (not a whole lot, they will have to furnish on the cheap if they don’t already have furnishings).

Mortgage 1,808.53 (270,000 amortized over 25 years @ 6.5% fixed for 5 years for security)
Property tax 300 (I’m guessing, I don’t live anywhere near there)
Utilities 400 (again, a guess)
Repairs/maintenance fund 400 (set up a separate ING savings account)
Total expenses: 2908.53

Cashflow before house 3958
Room mate/basement suite 600
Total before house expenses 4558

House expenses 2908

Net after house expenses 1650

And use that extra to make some additional mortgage payments until you have enough equity that you can laugh at market changes because you are in a secure position, while the whole world frets.

The main problem with this plan is that it requires discipline. Otherwise, it is solid.

Although I have nothing to add that hasn’t been said I would like to say that this is an awesome post. Maybe even best post of 2009? lol

I really appreciate Paul & Melanie sharing their information, I have to say I enjoy seeing other peoples situations in detail to help me gauge where I am.

The discussion has been great and I completely agree that debt & expenses are top priorities that need to be dealt with first, so I’ll skip that topic.

Living at home is a fantastic way to save a nest egg very quickly but it appears their spending has taken on higher priority. With lots of income and few real expenses it’s easy to buy whatever you think you want. I think they desperately need to stick to a monthly budget to help change their habits to match their stated goals, which is going to require a lot more savings.

I’m also seeing a large discrepancy in Paul’s income numbers, they don’t all add up. When I add back his annual savings to his monthly net pay I see after he is taking home $62,405, but his monthly gross income equals $68,400. Is it possible he’s saving another $6,000 somewhere else? RRSP’s maybe?

Working the other way, with expenses of $28,593, savings of $18,005 and a tax estimate of $17,300 there is over $10,000 missing from his gross annual income.

These are significant amounts that need to be saved, my worry is they are disappearing in unknown expenses.

Plus where does the $4,500 of cash flow from their 50% rental property go? Is it being eaten by expenses & property tax?

My advice? Rent. They live near Toronto like I do, so I imagine the choices available to them are similar.

, I really hope this is just part one.

There is a lot of important data that’s just completely missing. Particularly regarding Liabilities, Assets, Risk & Expectations.

– They have two cars, but have not listed any maintenance costs. Given that they both need to drive to work, this seems kind of important. He’s paying $350 in gas, so I imagine that he’s racking up the miles. These miles cost money. Sure, maybe they get lucky and the cars last until they’ve paid off all of the debt… or they could be looking at needing a car loan in 9 months.
Insurance deductibles: @Scott mentioned insurance type, but what’s the deductible? Again, they need their cars to get to work. If that vehicle is toasted by a meteor, how much cash do they have to produce?
The income home: how is that structured? What’s the insurance deductible on that? You list mortgage and rent, there’s clearly more to it: taxes, utilities, legal fees, liability on repair. How much of the cash buffer is allocated to covering “un-rented months”? As it stands Paul could already be “under-water” on the house (and that’s at 3.40% interest!)
Continuing Education: there’s no line item for continued professional development.
Health and Wellness: I don’t see any form of gym pass. Does he play rec hockey, does she do yoga? Even just regular running outside will burn through a pair or two of sneakers / year. Massage? Chiro? Prescription drugs? (birth control pill?)
Hobbies: you gotta do something with your spare time. You can’t just sit around and save money. What do your favorite hobbies cost? What can you live without?
Clothing: do they have enough? Will it last two years while they pay down debt? Is there a work-specific requirement?
Gifts & Social Obligations: how big is your family? How do you handle gifts? How about with friends? Have you committed to take part in any weddings in the next year? Do you have committed destination travel plans?

– You have $35k+ in consumer debt. Where did it go? Do you have the option to “downsize” the purchases? Yes you’re technically living with less, but you were clearly living with too much, so it probably balances out.

The income home: what happens if the Bank of Canada breaks from the US trend and increases interest rates by a couple of %? There’s not a lot of wiggle room on that rent and Paul could be left holding the bill.
Disability: I don’t see any item for long or short-term disability and most employers aren’t offering this. Those that do, typically don’t offer 100% income replacement. With 42k in consumer debt, having Paul unable to work would be pretty disastrous, even with him living at home.
Field of Work: Is Paul working at a GM plant? Are his skills highly portable? Can he find a new job easily? What’s his overall risk factor? What about Melanie’s? Are they willing to move if local job markets start sucking? What about taking a pay cut?
Gas prices: currently at $0.75 / L and he’s spending $350 / month, she’s spending $150. What happens if it goes back to $1.50? Can they reduce consumption or do they eat the cost of an extra $500 of gas? If they can reduce consumption, why not do it now?
Parents: both people are living with their parents, how stable are the parental jobs? Are they adequately insured? Is their cash flow stable? Are they healthy or could they become dependents in short order?
– Pregnancy: is there a chance this could happen? Is there a backup plan if this happened tomorrow? Are they to continue to live with the parents? Can they pad the loss of Melanie’s income? You can do lots of amazing things in your 50s, but having kids probably isn’t one of them, so you’ll have to pick a time.

– What are your expectations for quality of life? Think of things like personal living space, food, fitness, commute times, transportation, family dinners, hobbies & entertainment, travel.

These goals are listed:
a) pay down mortgage (asap),
b) save for our future retirement,
c) save for children’s education.

However, these goals fail the classic SMART criteria. Plus we don’t even know if these goals are in-line with your “Quality of Life” answers above. You and a friend just took out a 40 year mortgage on a rental place. You’re going to be 73 & 68 by the time that thing is paid off. Why is it so important to pay down your own mortgage ASAP but not your rental place?

Look, the advice here is pretty straightforward, you need reign in spending and focus on paying down existing debt and then building capital / assets. The steps are pretty straightforward:

1. Write down your goals, real goals. Do it together.
2. You also need to look at all of your insurance and make sure that you are adequately covered. Make sure that your parents are covered. You’re going into a difficult period of debt repayment, make sure that Murphy’s law doesn’t bite you here.
3. Plan for kids, they have a habit of just “happening”.
4. Look at “down-sizing” your life and find some emotional and personal support. That means selling stuff, losing weight, more sleep (or whatever you think could use improvement in your personal life). You are looking at two years of a very different lifestyle and you’ll need to make “inner” changes to reflect the changes happening in the “outer” world.

Given the listed liabilities I would not just “clear out” the savings accounts as suggested by others. It’s honestly OK to have 4-6k in cash given your setup.

Paul and Melanie, financial issues of this magnitude generally reflect someone acting out some form of unconscious social pattern. Unless you can recognize and change this pattern, you probably won’t make it through two years of debt repayment.

So, here we are 40 comments into the fray. Is it time to hear the comments of Paul & Melanie on the collective wisdom provided here?

Or do we break for two minutes for these ads from our sponsors………..


Frugal_Trader said: “DAvid, i like the TV series idea.. maybe you can host!”

I dunno — I’m torn between the Howie Mandel vs. Alex Trebek look!

I disagree with those who say Paul and Melanie are in particular financial straights. This type of position (negative equity) is surprisingly (shockingly?) common.

If they have access to a revolving source of debt (e.g. line of credit) that is relatively secure, they don’t really need to keep cash on hand in case of emergencies. These include paying insurance deductibles, home repairs (rental house or primary residence), etc. This would not take care of long term risks (such as disability insurance would cover). RE: Deductible level, lots of insurance coverage… this is certainly an option. An option that bears higher premiums. Each should choose their own risk level – I find in the long run that higher deductibles tend to be worth the lower premiums. Never in my life have I had an insurance claim. IMHO, insurance is there for large losses, not small ones. I can take a 1-2k hit, because I’ve planned for it. Even if I don’t have the change in my chequing account at the time. In particular RE: collision insurance, a car can always be replaced with a 1000-1500 clunker (many of which can be found that run pretty well, actually) in case of significant adverse events.

Car maintenance and repair expenses was something I meant to include in my post. Certainly, these should be accounted for. A good starting estimate is approximately the same expense as fuel, less if you do your own work. Oil changes, tires, etc. add up – and it doesn’t take much to get a 1-2k repair bill if something goes wrong. At the very least, count on at least $100/vehicle/month for minimal maintenance and repairs.

They should also not plan to move to an unsustainably low quality of life while paying off debt. This would be akin to a crash diet and carry a high risk of failure. They should continue to purchase items such as clothes as needed (probably in the 1500 “misc/spending” category right now), but make wise purchases that don’t need to cost a whole lot.

Scott ~ In my reference to their situation being particular I meant that they were making over $102,000 a year and still lived with their parents, not so much their situation of negative equity. :-)

This has been an interesting read. My take on this is similar to most (pay off debt first, lower expenses, strongly consider renting for awhile before buying, etc.) The only other thing I would add is that Paul and Melanie need to consider the possibility that they’re irresponsible with money. Unless they had some unusual set backs, then they really shouldn’t be ~30K in the hole at their ages, especially if they’ve been living with their parents. While this situation may not be uncommon as Scott points out, it should be. I’m not trying to be mean spirited with this comment, but if they’ve established a “saving unfriendly lifestyle” then they need to address it before buying a house.

I’d like make a suggestion based on Kathryn’s point 2 in comment #9. When the time feels right, go rent a house. Lets say the place will cost you $1500 a month. You can start accumulating furniture and fixtures and other homeowner stuff. Have automatic contributions to your RRSP, emergency fund, kids education fund, etc. Use any money left over to pay down debt if it’s not gone before starting to rent. Once the debt is gone transfer the money into a down payment account. When transfers to the down payment account stabilize at or above $1300 (Kathryn’s $2800 – $1500 rent) then you’re probably ready to buy. It would be nice if that down payment account was big enough to avoid CMHC fees.

A bit of math for those who are worried about throwing away $1500/month on rent. The mortgage payment presented by FT is about $1735/month, which would have an average interest component of a little over $1200/month for the first 2 years. Add taxes and insurance you’re throwing away about $1550/month by buying.

Let me start off by saying thank you to each and every one of your for taking the time to offer your advice and wisdom in helping us out. I read through the comments last night and have to say it has given us a lot to think about. What we would like to do is take the time over the weekend to go over the comments and think about the adivce offered and our next steps.

When FT told me that he had posted the information on his site, I was excited and scared, expecting to hear some things that I did not want to really hear. I must admit, I was a little overwhelmed last night. At the same time, and after a discussion with Melanie, we are the ones who asked for it! And we are glad we did!

The humility for us is that the hole we are in was dug by our own hands. We are certainly not proud of this but it is something we take ownership for. Believe me, we are ready to move forward.

Again, we want to thank you for the time you have taken to support and guide us on the beginning of our “MDJ”.

Rogers $200/month also includes internet and cable for the house.

– paul and melanie

re rental income. A commenter above suggested selling it. Likely you will not have much equity in the place if it was bought last year and, hate to say it, you won’t have much equity for the forseeable future (i.e. 10 years plus given your amortization and the state of the housing market). Unfortunately you will have to carry it but OTOH it’s generating a slight positive cash flow for you. I would expect some to all of the cash flow will need to be used for maintenance and taxes. You are lucky, though, that rates will likely be low for a while now.

If you are thinking long term, I would agree to try to sell your stake to your business partner, even if at a slight discount from your initial investment, and clear your books. Use the proceeds to pay down your high interest debt ASAP. The present value of your high interest debt is way higher than the future income from your property investment. I would hazard a guess that the property will be a millstone and there are better investment opportunities out there, even taking into account taking some loss liquidating your position today.

I re-iterate — I think you are better off liquidating. I don’t know what agreement you have here and how close you are to the other party, so maybe they can assume your equity stake without a problem. You could threaten to trigger a sale on the open market and force your partner to cover, depending upon his cash position. Sounds nasty but you only need to explain your cash position and the need to liquidate and it’s fair game. If you have negative equity at current market rates you’re stuck and this option is moot. If this is an agreement between friends and family it’s more complicated and why personally I avoid business ventures with close friends and family, unless our finances and goals are perfectly aligned. JMHO.

I have to disagree with Jesse re: selling the investment property.

It seems quite possible to reduce other expenses, get out of debt, and increase savings without needing to touch the rental.

In addition to the monthly positive cash flow, there is an increase in home equity (albeit at a slow rate given the 40yr amortization), there is potential for asset appreciation (given a reasonable time horizon), and there are tax benefits associated. If rental rates drop dramatically, this may change but it seems like they have a pretty good investment here (assuming the condition is decent).

Jordan said: “I’m also seeing a large discrepancy in Paul’s income numbers, they don’t all add up.”

For whatever reason, the author of the numbers knows their annual gross income, and the bi-weekly paycheque, however they multiply their biweekly income by 24 pay periods instead of 26. This addresses the income discrepancy, and indicates a larger sum ($8000 income + $4500 rental income) is running through their fingers without accounting than described in the initial entry. If properly managed, the additional $12,500 annually will help them to their goals much more quickly.


We’re only at the beginning of an epic-sized real estate value crash. It’s a great time for these two to save, save, save and eliminate their debts and get ready for the deal of a lifetime. In a year or so, when the market has started to hit bottom, they’ll be in an ideal situation to aggressively seek out their dream home for 10% or 20% cheaper than they could buy it now.