From bachelor to new dad // Save
On Thursday December 9th, 2010Print
On Thursday December 9th, 2010Print
A few years ago, Ryan Gelbart and his wife Shana were enjoying the carefree life of newlyweds. “Money wasn’t an issue,” says Gelbart, an associate at Minden Gross LLP. Now, the couple has a one-year-old son, Jonah, Shana is returning to work part-time (she’s the director of fundraising and communications at the Macaulay Child Development Centre) and they pay about $1,500 a month for childcare. Gelbart is starting to feel the pinch.
Together, they bring home $10,000 a month after taxes; fixed expenses and discretionary spending account for about $8,300 of that. They pay about $2,000 a month on the mortgage for their three-bedroom Bathurst and Lawrence– area home, and they just put $30,000 on their line of credit for a kitchen renovation. They aren’t drowning in debt but they want to head off any problems. “We have to pay close attention to things now that we’re starting a family,” says Gelbart.
Shona Bertrand, a Toronto-based lawyer turned financial advisor, understands Gelbart’s concerns. Still, she says saving and budgeting is easy to keep up once you get in the habit. She has some advice for the Gelbarts.
While Gelbart has been regularly putting his bonuses into his RRSPs, Bertrand says it’s not enough. She suggests he start making regular monthly contributions of at least $500 and use his annual bonus (usually around $10,000) to top it up. If he can do more and contribute the maximum — at his current earnings, about $22,000 a year — he’ll have about $2.6 million by the time he retires (assuming a six-percent annual rate of return). However if he waits even a few more years to start, he could end up with half that amount.
By maxing out, he’ll also get a $10,000 tax refund. Bertrand says he should then take $2,500 of that refund and put it into a Registered Education Savings Plan. With post-secondary education and expenses rising every year, Bertrand says Gelbart needs to start saving now. Use the rest of the refund to cover other expenses or, she says, “do some fun consumption stuff.”
Bertrand acknowledges that creating a monthly budget doesn’t work for everyone. But right now, Gelbart’s only means of tracking expenses is looking at his monthly credit card statement. “That’s impossible to follow,” he says. Bertrand recommends he create a list of monthly expenses, but calculate them in percentages, not dollars. “You can’t do anything about the mortgage, utilities or the nanny and you have to put food on the table,” she says. “That takes up a certain percentage of income.” But she adds that a good budget doesn’t have to drain all the pleasure out of daily life: “Being financially responsible doesn’t mean giving up Starbucks.”
The sooner Gelbart can pay off the $30,000 line of credit, the better, says Bertrand — but not at the expense of his RRSP. “That’s number one,” she says. He should pay down some of the line of credit each month, then apply a chunk of the refund toward it.
Gelbert has some work ahead of him, but he’s eager to put a plan in motion. And while he probably won’t max out his RRSP contribution, Bertrand says not to worry. “Don’t stress too much,” she says. “If you can manage it without much pain then do it.”
Insure your family’s future
Shona Bertrand has a warning about insurance: “The way many policies calculate benefits hits high-income earners pretty hard.” For high-income earners, the income replacement ratio (usually about 60–80 percent) may not maintain your lifestyle.
Some group plans, she says, might cover 60 percent of a salary, to a maximum of $6,000 a month. That could upset a family’s routine, she says, especially one where fixed expenses take a chunk of the income.
Bertrand suggests you consider buying additional life, critical and disability insurance and make sure the amount you purchase covers your expenses and keeps up your family’s standard of living. “Most people will want to pay off the mortgage, educate the kids and leave a pool of money for their spouse,” she says. Expect to spend $200 to $500 a month on additonal income protection insurance.
Photo by Daniel Ehrenworth