Case Study- Transition to stay at home spouse but complicated finances

[northof60ish]

Case Study - We need help to figure out transitioning to a one income household for having a baby.

Also, we have a kind of complicated financial scenario in earning structure, leave benefits, etc. This combined with my heavy student debt make me feel like my hair is on fire, but my partner feels like I am worrying too much and the long term plan is still no problem. Looking for some help sorting out my mess - questions listed at the bottom.

(Went through form but some of it not applicable for Canada).

Life Situation: Married Filing in BC Canada (ages 30,29), no dependents just a dog and a cat

Gross Salary/Wages:

From Jobs:

Pre tax income me : $49,934 (day job) + $50,000 (contract)
Pre tax income spouse : $31,200

From rental Property yearly: $7,200

Total gross income: $138 334

Post tax income: roughly: $107,834
Monthly: $8986

Here is where it gets a bit more complicated.
Over the next 5-6 years the income that is stated as 49,934 will change every 12 months starting in May 2017
Through that time I will still be getting the additional 50,000 in contract pay.

Annual            Monthly

$55,705.25    $4,642.10
$60,702.95    $5,058.58
$65,341.31    $5,445.11
$70,268.71    $5,855.73
$75,022.44    $6,251.87

Then at the end of all of that the split between those two listed (day job and contract) salaries will end I will grossly make $350,000 to $400,000.

Current expenses Monthly:
Internet: $60
Bank account fees: $15
Storage: $108
Mortgage: $1,353
Phones: $140 (contracts end in spring 2017)
Netflix: $10
Hydro: $43
Condo fees: $392
Groceries (food is more expensive here but still this is high): $500
Car Payment: $461
Car Insurance: $83
Life insurance: $22
Disability:$4
Health/dental/prescriptions: $0 (its free for both of us between government and my work dental/medications)
Home insurance: $100
Property tax: $180
Dog care/food: $250
Car Maintenance: $25
Vehicle Fuel $60
Home Maintenance/supplies $200
Birthday gifts/parties: $30   
Christmas gifts/food/travel: $85
Gardening   $13
Travel: $250
Veterinarian: $70
Piano: $240
Entertainment: $50
Restaurants: $100
Other: $100

=$4944

We also have three student loans between the two of us and here is what we pay:

Student LOC 1 (no minimum payment):  800
Student Loan 2: 594
Student Loan 3: 500 

=$1894 on debt

TOTAL  EXPENSES $6,838 if over on categories we spend up to $7000.... which even in Canada is insane, I know.

Assets:
1. Rental Property: $175,000
2. Condo that we live in: $320,000
3. Family cottage: $45,000
4. Savings: $29,000
5. Car (Mazda CX5 2016): $20,000
6. VISA x 2 = 0 balance

Total = $589,000

Liabilities:
1. Condo Mortgage:
Outstanding Principal:   $263,213.27
Original Amortization:   300
Actual Months Remaining:   249
Interest Rate:   2.69%

2. Student LOC 1:
Total $188,768.12
Interest: 2.7% (interest only minimum payments for next 6 years)

3. Student Loan 2:
Total $28,176.01   
Remaining Term:100 Months   
Current Interest Rate:   5.20 %

4. Student Loan 3:
Total $15,000
Current Interest Rate:   5 %

5. Car Loan:
balance:$19,175.26
Interest rate: 1.9900%
Remaining term:3 Year(s) 4 Month(s)

Total Liabilities: $514,332.66

Things you should know:
1. Don't want to sell the rental because I plan to live there in the future. I payed the mortgage off with my student LOC because the rate was better, which is why it is so high.
2. Can't sell family cottage because multiple owners
3. Completely willing to sell car but would need some sort of vehicle
4. Our child leave benefits where I live are that maternity leave can only be taken by the mother and is weeks 1-17 where I will get roughly $832/week for those weeks. The rest of the year (35 weeks) can be taken by either partner and you get 55% of your salary which would be $330 a week for my partner. After that, my partner plans to not go back to work. From when I go back to work until 10-12 months after, I plan to not do contract work and therefore will just be making one salary. I think our gross earning for that year to 1.5 years will be more like $86000 gross and we will have to pay a lot less tax on that. After that the plan is that it will just be me working.

Questions 1:
1. How can I start a family and not go into more debt, or should I be worried about this?
2. I am planning that I will pay off the majority of my debt once I finish my training and am at a higher earning potential, as I see most of my friends doing. However, I know I could be doing so much better with spending and money management, which makes me fee guilty. In Canada we have TFSAs and RRSPs, should I be putting my savings in there or should pay down my debt more aggressively instead?
3. Is there a path for me to work 10-15 more years full-time and then cut back?

Thanks :)

[marty998]

No takers yet, wow. I guess if you earned $10k instead of $100k the thread might have blown up :)

Ok... what are your savings for?

You have $29,000 in savings earning... nothing? And you have a student loan of $28,100 which you are paying 5% on.

I would use all the savings to pay down all of SL #2. And then instantly you free up $594 per month.

Then you can throw $1094 per month at SL #3 and clear that in 15 months.

If you bought a mazda because you like a mazda, sell it and buy an older model. It's unlikely a baby will appreciate the car in the same way that you do. After you clean the shit and vomit and food out of it, you'll smack yourself a hundred times for getting a new car.

I'm not fussed how much you spend, even if you spend $10k, you'll still be ahead by $10k, which you can use to hit the mortgages with. Personally I would be uncomfortable with your current leverage (debt to equity).

[Hargrove]

Case Study - We need help to figure out transitioning to a one income household for having a baby.

Current expenses Monthly:
Internet: $60
Bank account fees: $15 (there is no reason for bank account fees anymore)
Storage: $108 PUNCH TO YOUR FACE SIR. STOP PAYING TO PAY FOR THE THINGS YOU DIDN'T NEED WHEN YOU PAID FOR THEM.
Mortgage: $1,353
Phones: $140 (contracts end in spring 2017) Even with a rather non-Mustachian provider like Verizon, this shouldn't be more than $80. 1 or 2 GB plan. Your phone is a phone. Use your computer for the internet.
Netflix: $10 A reasonable entertainment budget.
Hydro: $43 (?)
Condo fees: $392
Groceries (food is more expensive here but still this is high): $500 SWEET BOUNTIFUL COCONUTS THIS SHOULD BE LESS THAN HALF THAT. GET A COSTCO MEMBERSHIP.
Car Payment: $461 THE FIRE IS EVERYWHERE IT BURNS. Sell and get a used car with like 10k miles for half the price.
Car Insurance: $83
Life insurance: $22
Disability:$4
Health/dental/prescriptions: $0 (its free for both of us between government and my work dental/medications)
Home insurance: $100
Property tax: $180
Dog care/food: $250 What are you feeding him, bacon? This should be half that. Less than half that. Are you prepared to argue that dogs are only for the rich? $3000 a year, seriously?
Car Maintenance: $25
Vehicle Fuel $60 Actually not terrible with an SUV, but, do you really need a car at all? If so, why is it an SUV...?
Home Maintenance/supplies $200
Birthday gifts/parties: $30 (Ah, the entertainment expense)
Christmas gifts/food/travel: $85 A month?? Tell your friends you're having a child and can't buy them diamond earrings this year. Two entertainment expenses...
Gardening $13
Travel: $250 GET RID OF THIS! You won't want to do all that much traveling with a screaming infant anyway, will you? Just take a break. Three entertainment expenses.
Veterinarian: $70 Oh no you don't. Your dog care number is high enough. You didn't save anything by making this another number. What are you, sending him off to be washed AND going to the vet on separate budgets? Your budget argues that dog care costs nearly 4K/YEAR!
Piano: $240 ... yet another entertainment budget, even more on fire than the last...
Entertainment: $50 WHA... AGAIN?? For crying out loud, you just typed out "PIANO." You have enough entertainment budgeted!
Restaurants: $100 HOW MANY ENTERTAINMENT BUDGETS DO YOU HAVE??? YOU ALREADY HAVE A FOOD/TRAVEL BUDGET AND A PARTIES BUDGET, SO WHICH RESTAURANTS IS THIS RESTAURANT BUDGET FOR?
Other: $100 "Other" means only "I COULD NOT COMMIT TO MY ALREADY ENORMOUS BUDGET WITH MANY DUPLICATED BUDGET ITEMS DESIGNED TO FOOL MYSELF INTO THINKING MY SPENDING LOOKED LOWER!!"

As previous poster said, kill SL 2 and 3 with the money you save here and savings, and you won't have anything to worry about with a kid on the way except keeping those entertainment budgets from making more entertainment budgets.

[GrandioseMustachio]

I think the right way to do this is to look at:
1- Before the chikd. (say this lasts 12 months)
2- During the first 1.5 years after the child.
3- Afterwards.

From what I gather:
1- You net monthly income will be 9000$.
2- Your net monthly income will be about 5500$.
3- Your net monthly income will ramp up from 7600$ to 8600$ for the next 4 years.

Is that right?

I also figure that you're paying 1200$/month in interest. Your non-debt spending is 3591$/month. Thus non-debt + interest is about 4800$/month.

Thus, you should be able to get through this period and still increase your net worth. My estimate is that by the end of this (6.5 years), your net worth will be up by 250k$ (including lower interest costs as you reimburse debt).

Now, time for some face-punching:

Case Study - We need help to figure out transitioning to a one income household for having a baby.


Current expenses Monthly:
Internet: $60 Bring this down to 40$/month with another distributor. No need to better than 7 mbps. Not while hair is on fire.
Bank account fees: $15 Make this vanish.
Storage: $108  Make this vanish.
Mortgage: $1,353
Phones: $140 (contracts end in spring 2017)    Go pre-paid. Your provider will likely offer you a 50% discount on your contracts. Negociate and threaten. Downgrade contract. Cut this to 70$. 
Netflix: $10
Hydro: $43
Condo fees: $392
Groceries (food is more expensive here but still this is high): $500    Go somewhere that offers price-matching. Reduce this to 350$. 
Car Payment: $461    Destroy this. Buy a 6000$ car using your savings. Or use zipcar. 
Car Insurance: $83    Cheap car will cost less. 40$ savings. 
Life insurance: $22
Disability:$4
Health/dental/prescriptions: $0 (its free for both of us between government and my work dental/medications)
Home insurance: $100
Property tax: $180
Dog care/food: $250   Cut down to 100$/month. 
Car Maintenance: $25
Vehicle Fuel $60   Limit to one fill-up per month of a small car. 30$. 
Home Maintenance/supplies $200
Birthday gifts/parties: $30    Hair is on fire. No.  30 $ savings.
Christmas gifts/food/travel: $85
Gardening   $13
Travel: $250   Hair is on fire. Plus kids. No. 250$ savings. 
Veterinarian: $70   Cut down to 20$/month. Bare minimum. 50$ savings 
Piano: $240   No. Hair on fire. 240$ savings.
Entertainment: $50
Restaurants: $100
Other: $100

=$4944

Thanks :)

You can trim 1614$ per month. This would add another 142k$ to your net worth (including lower interest costs). Thus, within 6.5 years, your liabilities will be down to 106k$.

If you keep those expenses at that level (about 2000$/month) and keep that last year's salary and rental income (75k$+50k$+7.2k$), you can retire about 8.5 years later. Thus, you could be FIREd in about 1 years. You'd have about 750k$ in investments, plus a paid-off condo, investment property and family cottage.

[Novik]

Bank account fees: $15
Storage: $108
Phones: $140 (contracts end in spring 2017)

Car Insurance: $83
Life insurance: $22
Disability:$4
Home insurance: $100

Dog care/food: $250
Veterinarian: $70

Home Maintenance/supplies $200

Birthday gifts/parties: $30   
Christmas gifts/food/travel: $85
Entertainment: $50
Restaurants: $100
Other: $100

Travel: $250
Piano: $240   


3. Student Loan 2:
Total $28,176.01   

4. Student Loan 3:
Total $15,000

5. Car Loan:
balance:$19,175.26
Interest rate: 1.9900%


2. I am planning that I will pay off the majority of my debt once I finish my training and am at a higher earning potential, as I see most of my friends doing. However, I know I could be doing so much better with spending and money management, which makes me fee guilty. In Canada we have TFSAs and RRSPs, should I be putting my savings in there or should pay down my debt more aggressively instead?

1. If you do nothing but pay the extra you already have in your budget (2k/month) + the budgeted payments on SL 1&2 (1100$), they should be gone within 15 months (28k + 15k + rough calc of 5% interest / 3100). I can't see why you would want to keep those around, especially when planning to have a kid and take leaves. Crush them! Crush them even faster with lump sum payments from savings!

2. You have more in cash savings than your car loan, by 10k. Others have advocated selling the car, but if you don't... What interest is your cash earning? If it's less than your car loan, check out online banks that will hit 2% (like EQ bank) so you stop losing money. Consider making a lump sum payment on that loan (5-10k) to stay ahead of depreciation and cut lifetime interest costs (but I would not reduce savings to 0$).

3. low hanging fruit. Changes that shouldn't be too tricky to make.  (these address only things I left in the quote budget and it adds up to A LOT)

• cheaper phone plans (or prepaid) when contracts are up
• Do you really need that storage? Can you store seasonal/bulky items at the cottage? Does your rental house have a space you could reserve for yourself?
• Bundle insurances for a discount if not doing so yet and shop around when plans are due to renew
• Figure out a way for your dog to be cheaper (costco pet food, pet sit trades vs. kennels, more of your own in home care vs. groomer/vet).
• What are you spending 200$ a month on for your house? I'd suggest living within more like 50-100$ and delaying fun household purchases if needs come up
• I would suggest bundling your entertainment/gifts/food budgets so you see how it adds up, then reducing it and spending based on priorities vs. the fact that you the cash budgeted
• piano/travel - if these are vitally important, that's okay, but that is a choice, and not everything can be designated as vital with your amount of debt

4. Where do costs for your rental house/cottage come up... consider budgeting those separately from now on (ie. 200$ house may be for all 3 properties, in which case that makes a lot more sense, but best to track each one's cost/income separately).

5. To address RRSPs and TFSAs. In Canada, unlike the US, room in these accounts accumulates year over year whether you use it or not. So the cost of missing a year is MUCH lower. Given that, and your escalating income, I would prioritize crushing the 5% debt and reducing costs for a year, then reassess what your baby timeline is. However, if you're keeping large cash savings on hand waiting for baby, no reason not to put them in short term GICs or high interest savings within a TFSA, as long as you pay attention to contribution/withdrawal timing. Going forward, within 2-4 years you should be maxed out on TFSAs for you and your partner and investing within them, and then in 3-5 years look at maxing your RRSP and spousal RRSP (possibly saving the tax deduction or part thereof for when your income skyrockets) (exception: if your employer matches RRSP contributions you likely want to grab those ASAP).

As with every case study, you know your situation better than us, so please come back, explain why you're budgeting certain things, give some more details and ask more questions! We want to see you rise to the occasion and FIRE. And as a fellow canadian, I am happy to help with canada-specific questions.

[Cranky]

Why are you paying so much for a piano? Is one of you a concert pianist? I'm pretty sure you could find a cheaper piano.