Reader Profile: VF

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$

Monthly expenses/savings

• 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$

Assets

• 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.

Comments

[BJ]

Congrats on having your daughter, a steady safe job and been on the same page financially. I will say keep it up but there is definitely room for improvement. In fact, I can find you extra 400$-500$ from your budget and possibly more if you are serious about having a second child. Have you started a college savings for the first child? Wouldn’t you be glad you gave your daughter and possibly the second one a head start in life by helping them pay for college rather students loans or worst giving their college away as birthday gift every month? It’s the little success that leads to huge success. Am sure you know how it feels to not have a student loan.
Why do you need a home phone when you both have 2 cells phones? Do you have a nanny at home or grandparents? Do without the home phone and you can save at least $50. Yes your cell phone is high and you are locked into a contract. But go back and look at the plans you have, I am sure you can downgrade to a lower monthly bill by choosing a different plan after you go through your past months bills to see what you are averaging in minutes, messages and data. We too were in this situation and slowly reduced our plan until we got out of the contract. Now we pay less than $100 for even more and better services than we did 2 years ago. Savings of about 20-40$. Why do you need life insurance on your daughter? Do you currently rely on her income? What type of life insurance do you have, term or whole life or annuities? You should just get term life policies for 20-30 years. Even if you decide to get a $1,000,000 policy for each of you, you won’t pay more than $40 per person with your age. But what you really need is 20-25x your yearly expenses. Savings of about $250-280. What type of gifts are you buying? You mean there is a birthday every month? Look at it this way, will you still be able to afford $80 when you lose your job or don’t have a house to live in? Take care of your emergency fund first, then you can start buying gifts or better still, if you direct $50 to your daughters college savings, do you know how much she would have 18years down the road ?Savings of $50. You really need more money in emergency fund especially when you move 2-3 years down the road and for some reason can’t sell the house. Total savings without digging deeper of about $400.

[getagrip]

I will also state that the life insurance payments seems out of whack for two young adults and can be modified if all you are looking for is salary replacement if one of you passes. As mentioned for both of you a total of about $80 a month should get you each covered with a 20-30 year term policy for a $1M or more. You self insure for the kids via having a large emergency fund (e.g. 6 months expenses).

With respect to the cell phones, you gave yourself the answer in that you will save more money breaking the plan in the long run. Take that first credit line payoff and use $600 of the thousand to make the switch and then add the savings difference in the phone to monthly savings to recoupe.

Groceries for two people at $550 a month, that's a lot IMHO for two adults and a baby where you've included the baby food in with the childcare expenses. That's $140 a week in groceries and sundries. The two of you may want to examine that bill.

With respect to the dog insurance, $68 a month is $800 a year. I expect to pay $300-400 a year for my dog and if it's more serious than that it should only be once or twice in the critters life. For that I'm covered with emergency funds and hopefully that's a once or twice in the dogs life over ten plus years. Unless you really expect to pay $800 a year (assuming whatever procedures are necessary are fully covered) it may not be the protection you think it is. Something to consider.

Maybe I read through too quick or am not aware of differences in the Canandian system, but I'm not seeing your savings for retirement or kid's college in the mix. May want to consider that as you set up what to do with the $1000/mo savings. $200 a month is $2400 a year times 22 years (you don't have to stop once they're in school) and that's about $53K sans interest. That may not pay for all of it, but it can be a start for whatever they choose to do post high school.

Finally, you've got the house, a car, one kid and another on the way. I didn't really see a large emergency fund to buffer you, so that should likely be a chunk of priority for the $1000/mo planned in the near future. Keep in mind it's not investment, it's self insurance so you're not necessarily looking for it to earn better than a certian percent in interest.

[Jason]

I agree with other posters, the life insurance costs are a big red flag. At your ages, you should be able to get sufficient term life policies for ~$60/month for both of you. Also, your daughter does not need a life insurance policy.

[Renee s]

I have heard ads about cell phone companies offering to buy you out of your contract if you get a no contract phone with them. That may be something to look into.

[Belle]

All good advice listed above. I would also eliminate the housekeeping and have the babysitter do ti for a little extra. A 6 mth old sleeps a lot and the sitter could do some laundry and cleaning then. If you're going to move again in 3 yrs i wouldn't focus on paying down the mortgage, in fact i probably wouldn't have bought the house with the amount of moving you expect to do. Now you have to pay to move more stuff/ tools around with you or sell them with the house. I would build up the EF first and then pay off the car. That suv is probably a gas guzzler but theres always a lot of stuff that kids need.
Congrats on the baby. I wouldnt start saving for college until you have saved in tax advantaged accounts first. This way you will have some flexibility after baby 2 if you dont want to work. Would it save money if you and your husband took leave at different times? For example, you take first 6 mths and then he takes 6 mths? That would keep childcare costs down. Your leave is much more generous than the 12 weeks i got. Best of luck.

[VF]

Hi to all here at FMF, thank you for all the great insight. By the way, since this post, we have cleared our credit line and are now debt free (apart from our mortgage and car loan). I will try to answer all questions as they come.

@ BJ - As far as a savings fund for university, we are setting that up during our next meeting with our financial planner and have asked relatives to contribute to this instead of giving gifts while our daughter is too young to really understand what gifts are. We are planning to contribute one year of university only. We will obviously be there for our kids financially if they need a hand but from experience within our friends, people tend to take school more seriously when they're the ones paying for it. We find that paying the first year will give them a good head start and force them to be mindful of budgeting. We initially got a home phone because our families are out of the province we live in and there were no reasonable long distance plans for cellphones. Now though the plans have finally come out with nationwide minutes so I will get on that ASAP. My provider will only let me upgrade in plans and not downgrade so I am looking into the tips you gave to break my contract and get a better deal in the long run. As for life insurance on our daughter, we bought it to guaranty a minimum coverage amount in the future if she were to be diagnosed with a disease such as diabetes (which would render her uninsurable). This happened to a family friend and he wasn't able to get any coverage for any sort of life/health insurance. Although the risk is slim and I know some will argue that it is a waste of money based on this, I have peace of mind knowing my daughter will have a minimal amount of life insurance in case the unthinkable happens. The life policies are two whole life of 100K each and then terms for both of us of 500K each. We went some amount in whole life (instead of term) as our health situation can quickly change depending on what happens in the military and didn't want to be stuck with huge premiums at the end of our term if ever something happened. We went through the numbers many times and I am comfortable with the degree of coverage our current plans give us. Premiums are high because of our employment, the possibility of being deployed overseas and some health stuff from our careers in the military. For the gifts category, we took the total amount of immediate family members and gave a 50$ birthday gift as well as a 50$ Christmas gift. We have about 1000$ set aside for us, split whichever way we choose between Christmas and our birthdays but we usually only use 400$ total and put the rest toward savings. I agree we could cut back this amount pretty substantially.

@getagrip I typoed when I wrote the post, the childcare is actually 750$ not including any baby food. The 550$ a month includes diapers, formula, our food, paper towel, shampoo, really anything that is a consumable for the household. I still agree that its high though and I've been trying to cut it down. I find that the meat and veggies are totally killing the total cost even by shopping sales and buying in bulk. I welcome any tips about this problem, not sure how to cut the cost without cutting the quality of the food. For the dog insurance, I go back and forth on this. When we run the numbers its always on the fence of being worth it, and I will go revisit again after your comments. I think it may be more about peace of mind then financial logic so I will have to look at it more objectively. In Canada, 57K will most definitely cover the whole 4 years, average of 7K per year. I've got contributions coming right out of my pay for retirement but I am saving the room in my RRSPs for when my salary increases, in order to maximize the tax benefits. We have a promotion coming up and our pay level on the pay scale will be much higher in a few years. Right now we are dumping all extra money in the emergency fund. There is no employer match on RRSPs which I am assuming are the Canadian equivalent of ROTH IRA or ROTH. Now that our debt is paid off the entire 1000$ a month is going into funding our emergency fund.

@ Renee S - Definitely will look into that, thanks for the tip!

@ Belle - I totally hear what you are saying about the housekeeping and if I had a sitter at home I would definitely get her to contribute. My daughter goes to daycare though so that is not the case. Although it is an extra 120$ a month, so far its allowed us to spend quality time with our daughter and our emergency fund is still growing quickly. I have cut the extra 120$ spent on this from other areas of the budget (groceries, dog, gifts) and if I find that it isn't working I will readjust. Agreed though that this can be cut at anytime and is a splurge, not a necessity. As far as the house goes, the military pays for all moving expenses including packing (and moving), realtor fees, inspection fees etc which means any money we make on the sell goes directly in our pockets, no deductions, no fees. The initial purchase of all the house necessities was a cost upfront (unexpected which is where I think we made a mistake) but I feel like paying rent when all the other costs associated to home-buying are covered is a waste of money. Any insight? The military pays us our full salary minus 2% for the entirety of our leave and although we could save a bit by taking leave separately we loved the experience of being there together in the early months of our child's life and I think we will sacrifice the 5000$ difference for that. Good point though and duly noted. Thank you for all your insight, and please let me know if my reasoning is off base somewhere.