The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.
If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.
Also, please leave constructive comments, questions, and so forth. Simply telling someone what a mess they have, how they have made poor decisions, and so forth is not helpful. There is a way to say, "That was a mistake, but here's what you can do to correct it" that both acknowledges the problem and offers a solution. It's this sort of feedback that this series is intended to solicit.
Next in the series is FMF reader VF. She answered my questions (in red below) as follows:
Please tell us a bit about yourself.
My husband and I are 24 and both work as engineers for the Canadian military. We got married in 2011 and have a 6 month old daughter.
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.)
My husband and I are both on the same page financially, personally as well as for our careers. Family is a priority for us and our job in the military provides us with good financial stability to raise our daughter. We plan on having a second child once our first is about 1 year old.
In our 2nd year as a married couple we made a combined income of about 120 K per year (with an even split between the both of us) with a guaranteed pay increase every year (not substantial but constant). Most of our savings were used to pay for our wedding (in 2011) and put a down payment on our house (in 2012)/purchase home items we hadn't necessarily taken into account (ie lawnmower, small tools for quick fixes around the house, etc.).
Having a good income out of school and no student debt (we both had our education paid by the military), we initially splurged on diners at the restaurant, expensive satellite TV, high cost cellphone plans and other things we now consider a waste of money. Because we operated without a budget for our first year of marriage (and miscalculated the less obvious costs of owning a home), we ended up using up all of our income and were only able to put down a 5% down payment on our 245 K home. One water damage incident from a leaking toilet as well as an unexpectedly high property tax bill during our first week in the home pushed us to borrow 15 K on a 7.19% credit line. Needless to say that mismanagement of our first year of income as well as jumping too quickly into home ownership led to this situation.
We realized we were making bad financial decisions so we sat down and discussed our budget. We cut back on expenses and made a plan to repay the 15 K during the following year. We had already planned to have children within our first two years of marriage so we took into account the costs of childcare in this new budget. This is what our finances look like:
Monthly income (total 5990$)
- Me : 4796$/month gross, 2995$/month net
- My husband : 4796$/month gross, 2995$/month net
- Government childcare benefits : 100$
- Mortgage & Property Tax : 1440$ (227 000$ left @ 2.99%). Mortgage is 570$ twice monthly, the extra 300$ is set aside for taxes.
- Electricity bill : 120$ (this is an average monthly payment calculated by the power company)
- TV : 43$
- Cell phones : 160$ (two cellphones)
- Internet and home phone : 90$
- Alarm monitoring : 40$ (this allows me to save more than 40$ monthly in home insurance)
- Appliances : 160$ (0% interest payments over 3 years which we took to give us more cash flow)
- House insurance : 110$
- Car payment : 530$ (15 600$ left @ 3.79%) it’s a 2011 SUV bought with the intent to keep it as long as possible
- Car insurance for both of us : 130$
- Childcare and baby food, clothes etc. : 650$ (we buy almost all clothes, toys 2nd hand)
- Dog insurance : 68$ (got this after a few couple of hundred dollars vet visits, I can already see some readers shaking their heads ;)
- Life insurance for myself, my husband and my daughter : 315$
- Gas and oil changes : 150$
- Groceries and personal care: 550$ (includes haircuts, toilet paper, etc)
- Entertainment : 100$
- Family gifts: 80$ (this is an averaged cost monthly for 50$ gifts on birthdays and Christmas for our family members)
- Home cleaning : 120$ (got this service after our daughter’s birth)
- Interest on credit line : 33$
- Pet : 35$
- Debt repayment : 800$
- Emergency fund : 100$
- Savings: 100$
- Home equity : 23 K
- GIC : 3 K
- RRSP : 6 K
Currently all of our debt repayment, emergency fund and savings (1000$) is combined to put towards the credit line.
What are the current financial issues you're facing (saving, paying off debt, etc.)?
Since we cannot get an investment that would give us a higher return than the 7.19% we currently have in interest on our credit line, I am putting all of our extra money including savings towards it. We owed 11 K on the credit line on the 30th of July 2013, and today, we owe only 2.6 K. We were both on parental leave the first 6 month of my daughter’s life and due to many pay issues on the part of the provincial government and our employer we initially did not get paid which forced us to balance our budget on the two months’ worth of salary I had saved for emergencies. Once we got paid back 4+month of both our pay as a lump sum in July, I put the whole thing on the credit line which is how we got to 2.6K. As well, any other income that we received went directly to the credit line. (The military completed provincial parental pay to 98% of our salary)
I anticipate that the credit line should be paid off in full in about 2 months. Following this, we are asking ourselves the following questions:
1 – How should we invest the 1000$ a month after the credit line is paid off? Should we knock down some of the principal on the appliances even though the interest is at 0%? Should we be paying extra on the mortgage or the car loan? Or should we simply be putting that money aside toward our 6 months’ worth of salary emergency fund?
2 – We both agree that our cellphones bills are way too high but it would cost us about 600$ to break our current contracts and be able to get lower cost plans. Although this would save us almost double the money over the term we have left, should we be spending this lump sum instead of using the amount for savings? We are afraid to spend money we don’t currently have, as we consider our 1000$ savings to be inaccessible for monthly spending.
3 – We are looking for any suggestions to find savings in our monthly expenses. This is to account for baby #2. We will be promoted mid 2014 which will increase our combined net monthly income by 800$ but we intend to funnel the entire amount into savings.
We made some mistakes in our first year of steady income but we have done our best over the past year to correct this. Being military, we expect to move again in about 2-3 years and we intend to maintain our expenses at our current level despite upcoming promotions and raises. We would like to focus on savings so that we can grow our net worth.
What are your plans for the future. (retire early, build your career, etc.)?
Although we both love our jobs, my husband and I prioritize our family and kids over advancement and promotions. Our goals are simple: to save smartly in order to be able to afford a plot of land on which to build our dream house (modest size, but with our dream layout and a great location in the country), and to retire early (we would get a 70% pension from our employer at 43 years of age). Family time is of the utmost importance for us.
What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
Learn about finances and do it early. When we racked up that 15 K credit line in under a year, we realized that even a combined income of 120 K would be of no help if we didn’t plan out how those dollars were spent. Make sure to check your accounts daily, and to know exactly how much you spend on every aspect of your life (house, car payments, food etc.)
For young adults like us, I would say the most important is to avoid following friends into a spending spiral, especially after landing your first full time paying job. We invite friends over for diner instead of eating out and we avoid the pub crawl crowd – lots of money can be wasted on just one night out.