Case Study: Paul and Melanie Want to Buy a House

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.

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Frugal Trader


FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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11 years ago

Twenty weeks to go!!!! You should be able to make your first contribution to your house savings account by Christmas.

Well done!


Paul and Melanie
11 years ago

@ Brian:

I actually tried doing this earlier in the year. Currenlty, I am at $1000 deductable and the broker advised me that raising the deductable would make a difference of about $2 a month. I haven’t looked into any further since. Maybe when the dust settles, I can revist my insurance as I do not mind having a $1500-$2000 deductable at all (do they even have a $2000 deductable?)

@ FT:

Thanks! I marvel at we have been able to accomplish – we owe much thanks to you and the wonderful ‘team’ here at MDJ.

@ cannon_fodder:

At the beginning, we took our savings and used almost all of it to pay off the debt. Since we began our ‘debt reduction plan’ we have never missed a payment of at least $1320 every two weeks. I took extra OT shifts at work (20 to date) and still have the rest of the year to take more shifts. All of this money went to our debt reduction. My RRSP contributions were zero this time around. My RRSP is pretty paltry at this time. Something for me to think about moving forward. When we are debt free, I will be more then happy to go into more detail about our journey.

Paul and Melanie

11 years ago

Melanie and Paul – it would be very interesting, and could prove quite educational, how you managed to get through so much debt so quickly, especially after the Christmas bills start coming in the mail. You managed to elminate debt fastest from the beginning of the year to early March.

Did you forego RRSP contributions (very popular at that time of year)?

Brian Poncelet,CFP
11 years ago

Hi Paul and Melanie,

You guys are doing great. Here is one idea you may consider. Increase your deductable on your cars. I will assume you probably have a $500 deductable. Call your insurance company and find out how much you would save if you increased it to say $2,000. You may find that on two cars this will net you about $200 to$400 per year. Taking this money to pay down more debt is like making another $300 to $600 gross or more a year! The “extra risk” you take is really another $1500 to self insure, for the savings this may be worth it.

Going one step further once you get the house take this money to insure yourself which is more valuable than the cars!


Paul and Melanie
11 years ago


Just wanted to give you a quick update:

Debt as of July 23, 2009 => $13211

Paul and Melanie

11 years ago

Paul & Melanie,
Sixty-three hundred dollars of debt reduction in the past 6 weeks – WOW! Best wishes on following the plan you have set for yourselves.


Paul and Melanie
11 years ago

Hi again,

Just wanted to give everyone a very quick update:

Debt as of Dec 31/08 => $41971

Debt as of March 8/09 => $27431

Debt as of April 27/09 => $21104

paul and melanie

David: Thanks for the advice…we will try to keep an account of our thoughts along the way in order to share with others.

12 years ago

Paul and Melanie,

I had to head out in short order after I made my earlier post, so here’s a bit more.

Please keep track of how you accomplish your goals, what you did, which pieces of advice worked for you, and the impacts it had on your lifestyle. It would make an interesting counterpoint to the original blog to be able to come back and share your successes with the wider world. Who knows, your tale might inspire others to do likewise.


12 years ago

Excellent start! The $7000 you have reduced your debt in the past 3 months is stellar. Keep working on reaching your goals.