Last post outlined our family case study. What should Mr & Mrs B do?

Their concerns about a large amount of mortgage debt, retirement and lack of confidence with respect to the day to day finances are very common and can add a great deal of stress to a household or relationship. It seems their priorities are:

1. Get a handle on day to day household money
2. Develop a future plan (retirement, education etc.)
3. Contingency planning

Mr & Mrs B have busy lives and if they don’t take the time now to set up a money system and a start a future financial plan, it will be pushed off to next year. Here’s the pre-work to be done:

• Gather 6 months worth of pay stubs, bank statements, bills and credit card statements
• Go on-line and use a retirement calculator to determine how much they may need (ball park) for retirement
• Obtain their employment benefits information and any other insurance documents (life, disability, home)

Now that they have the information they need at their finger tips they can begin to make a plan. The first step is to decide what their top 3 priorities are, approximately how much they will cost and what time frame they are dealing with.

TIP: If retirement is a priority but it is 25 years away and the annual amount to save seems astronomical, then establish a starting point for this year with goals to increase the savings each year.

The second step is to add up how much is required each year to achieve these goals. Divide by 12 to establish a monthly target.

Draft a budget based on net income coming into the household and the average expenses paid out over the last 6 months. See what the difference is and fit in budget amounts for the goals. If there isn’t room, then make room. Mr and Mrs B will have to determine how important their goals are compared to the other things they spend their money on. The other option is to increase income and/or review all resources available. Their youngest will be transitioning to school in the fall and that will decrease child care costs and perhaps by enough to begin retirement or education savings. Is there room in their home for a suite or to accept home stay students for some months of the year? Could Mrs B get full time hours? Could Mr B bike or take transit to work reducing transportation costs (gas, insurance and parking)? Perhaps grandparents would consider contributing to the kids’ education funds in lieu of some gifts?

A few tips to make day to day money management easier:

• Simplify accounts to as few as possible.
• Same for credit cards or lines of credit. If they’re not used, put them away.
• Set the mortgage payments at whatever frequency best matches frequency of pay checks.
• Use either cash or credit card to pay for things but keep it consistent.
• Use auto savings or set up auto transfers where possible.

Contingency planning isn’t really something that Mr & Mrs B have put much thought to but the fact that having a large mortgage is the source of some anxiety, it’s important to address. The first thing to do is review their current benefit coverage and make sure they don’t have any major gaps. The insurance most often needed is disability coverage – find out how much will be paid each month. The second thing to know is how much they need (minimum) to live. Needs only. Multiply this by 6 to get a 6 month contingency fund target. If they begin retirement savings, these will do in a pinch – just remember to invest them with this in mind. If they need to be ‘on hand’ in case of an emergency they should be invested in low risk and liquid investment vehicles.

If they can work at reducing their mortgage at an accelerated pace, they will reduce the amount of interest paid and free up more of their monthly cash flow sooner. In addition, their equity builds. Accessing this equity may be a good way to obtain the funds to do any renovations or home upkeep in the future.

It may seem like a complicated situation but once the planning is done, keeping it running smoothly is relatively easy.