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Things to know
Job: Sheldon has been working as a professional electrician for 15 years. He really enjoys his work so assuming he can keep his occasional back pain under control, he wants to continue working until at least 60.
- Marital status: married 12 years
- Children: Two (ages 9 and 5)
- Purchase price of home: $450,000
- Current value of home: $470,000
- Mortgage remaining: $310,000
- Spouse’s salary: $58,000
- Vehicles: Two
- Line of credit debt: $10,000
Other notes: Now that their youngest has started school, Sheldon’s wife decided to go back to work at a friend’s company as a business analyst.
Sheldon’s oldest daughter made a competitive indoor soccer team this year. In addition to the extra time commitment, this will cost hundreds of dollars more than they’re used to.
Unfortunately, a leak in their basement last year revealed major structural damage. He and his wife were forced to take out a $10,000 line of credit to pay for the renovations. They have just begun to pay off this debt.
Sheldon loves to read about stocks and corporate news over his lunch breaks. Two years ago he signed up on a trading website that allows him to buy and sell stocks with minimal fees. His stocks did so well that he decided to start investing most of his family’s monthly savings through the site.
Sheldon and his wife have yet to setup any type of post-secondary savings account for their children. Since his stocks are doing so well, Sheldon figures he will just withdraw some of that money for tuition when that day arrives.
By the numbers
|Sheldon’s average income:||$70,000|
|Combined spousal income:||$128,000|
|Combined After-tax monthly income||$8000|
|Everyday savings account||$3,000|
|Line of credit payment||$500|
|After school child care||$600|
|Vehicle insurance and expenses||$700|
|Phone/ TV / internet||$180|
|Soccer and youth activities||$200|
|Meals and take-out||$200|
|Clothing, beauty etc.||$300|
|Vacation/ new truck savings||$495|
Financial goals and dreams:
- Too full house – With the kids getting older, things are starting to get a little tight in Sheldon’s starter home. Time in the bathroom is now being strictly scheduled. With that in mind, Sheldon and his wife are committed to moving into a larger house within the next three years.
- Pedal to the metal – While his wife’s car is brand new (a gift from Sheldon’s in-laws), Sheldon figures he will have to replace his aging truck sometime in the next year.
- Pleasure cruise – The family has never taken a real vacation together so Sheldon is hoping they can take the kids on a Caribbean cruise next summer.
- Retirement ready – Sheldon and his wife are already fantasizing about their retirement. Sheldon figures that if they can save $2 million dollars that should be more than enough to finance their retirement condo and international back-packing adventures.
Q: I would say that Sheldon is the first “real adult” we’ve looked at so far. He’s got a career, children and even a mortgage. What pops out to you first?
A: It’s definitely Sheldon’s “occasional back pain”. Since he’s a tradesperson, right away I’m wondering if he has disability insurance. If not, he’s putting his largest asset and income generator (himself) at risk. Sheldon’s whole situation is a very risky profile.
Q: So how can he start to fix that?
A: This case screams to me that Sheldon and his wife could have insufficient insurance for their family. What if one of them couldn’t work for some reason? They’re in dire need of a backup plan.
Q: Sheldon’s expenses are also changing, including his daughter joining a competitive soccer team. Do you ever try to convince your clients to avoid signing their kids up for expensive extracurricular activities?
A: (laughs) Well that’s a touchy subject because our kids deserve everything, right? It’s a real internal debate. My son plays rep hockey and it’s very expensive. But on the other hand he’s learning discipline, developing leadership skills, making friends and it’s athletic.
Again, I don’t judge my clients. I want them to spend their money where they want to spend it. But it comes back to deciding how you want to divide up your pool of money. If your kids are going to do these activities, what will you sacrifice?
Q: Speaking of sacrifice, is that larger home in Sheldon’s future?
A: Well he has $160,000 of equity in his home, so he could sell and use that money to buy a larger home and take on a bigger mortgage. But that means he’ll either have larger mortgage payments or have to spend more time paying it off.
There will also be increases to his property taxes, home insurance, and utilities if they buy a larger home.
Q: So maybe it’s not the best idea right now?
A: Maybe not. Sheldon has a bad back and his wife is working at a friend’s company. I’m not sure these are secure jobs for life. But I also understand that their oldest child is already nine, so they may not be willing to wait seven or eight years for their financial situation to accommodate the purchase of a new home. And by then, the kids may be getting ready to move away for school anyways.
Q: If they were to postpone getting a new home, where would you suggest they focus their money?
A: They should try to start an RESP for their children’s education right away. If they were to wait five more years I think it will be really tough on them. Also, if you don’t start saving for your child by age nine then you can’t receive the maximum grant from the Government for your contributions ($7,200). As contributions are made to an RESP, the government provides a 20% grant as an additional deposit.
Q: I’m sure Sheldon would also want me to ask about that family vacation and new truck…
A: If those items are very important to him then he could probably allocate some of the $200 per month he’s investing in stocks right now. But honestly, I don’t think that money should be going towards a truck or vacation. He needs to start saving for things like his children’s education and his retirement. Some of the $495 per month he is currently saving in his vacation/truck fund could also be used for education savings.
Basically he hasn’t freed up enough cash to meet all his goals. So he’ll likely have to pick one (either the truck or the vacation) to work towards for now. But I wouldn’t recommend that he use the $3000 in his savings account to help pay for one of these items because that will leave him with no wiggle room in his budget and no emergency savings.
Q: Is there any harm in Sheldon using those do-it-yourself stock trading websites?
A: Well what makes me nervous is what happens if he doesn’t have time to watch his investments? What if he gets sick or just picks the wrong stocks? It all screams higher risk to me.
He needs to establish a safe financial core for his family including the RESP and some safer, long-term investments. Diversify his portfolio. Right now he’s forcing his high-risk tolerance on his entire family.
Q: Should Sheldon’s wife be taking a more active role in their finances? It seems like she isn’t completely aware of the risks he’s taking.
A: Yes, his wife should be doing her own risk profile to understand her comfort zone. Even if one spouse is taking the lead on the finances, it’s critical that they both be constantly communicating. Both partners need to be aware of their financial picture.
Q: Finally, what about Sheldon’s retirement? He seems to think he and his wife need to save $2 million dollars but it’s not clear where he got that number.
A: As we discussed with Sally, it all comes down to how much money you’re planning to spend in retirement. Since Sheldon and his wife want to do a lot of travelling he should also be considering the cost of health insurance. That cost prevents a lot of retirees from travelling, especially to the United States.
In general, Sheldon and his wife need to start saving significantly more than their current $300 per month if they want to have $2 million for retirement. Sheldon needs to review his monthly spending. He currently allocates everything he makes but he also has goals that require more money. Something has to give. Either spend less now to accomplish these goals or revise them.
Final recommendations for Sheldon:
- Start investing in an RESP for children’s education
- Purchase life insurance and disability insurance
- Step back and make a plan with his spouse. Prioritize financial and spending goals.
Lyn’s Bio: Lyn Greer is a Chartered Accountant and independent Certified Financial Planner with Investment Planning Counsel in Richmond Hill, Ontario. She is a past member of IPC’s National Advisory Board and has also volunteered on the Financial Standards Planning Council. Lyn’s specialty is in comprehensive tax planning which is a key focus of her wealth management approach, alongside cash flow analysis, disciplined savings, insurance, and estate planning. You can contact Lyn or learn more at The Greer Team’s official website.
Eric has an extensive background in content marketing and professional writing. He loves to write about personal finance and life insurance issues for the Lifenotes blog because he enjoys the challenge of making complicated topics fun for readers! Eric also covers community outreach initiatives.
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