By Christine Williston, B.A., CFP®, Money Coach
Meet Melanie and Brian
When I met Melanie and Brian (names have been changed for privacy), Brian was 50 years old and Melanie was 42. Both had high power, high paying corporate jobs that kept them very busy. What free time they had, they devoted to their two children ages 13 and 14. Their income was almost half-a-million dollars a year, but without the time or expertise to maximize their financial situation, they found themselves in debt and worried about retirement.
Melanie and Brian had a combined income of around $470,000 a year, but they also had a debt of $185,000 on lines of credit and credit cards. Their mortgage was $980,000. They both had good pensions, but no real retirement plan. If they entered retirement with this level of debt it wouldn’t be manageable.
My spending analysis revealed that they were over spending by about $700 on a regular month. I also found that they were paying $800 a month for Universal Life insurance policies that contained high fee segregated funds that were not earning them a return. And while it was positive that they were planning ahead by investing in mutual funds, I could see that they were paying higher than necessary investment fees.
There were some expenses they were willing to accept. For example, they wanted to continue supporting their children’s activities (dance classes and competitions were costing them around $1400 a month). But other expenses, like $1000 a month in interest for their lines of credit and credit card debt, left them frustrated, but they had no real battle plan for reducing debt.
Melanie and Brian are hardworking and committed to their family. They knew all the pieces were there for them to have a good life and secure retirement, but they were uncertain if they were making the best investment choices, unclear on where their money was going each month and unsure on how to turn the situation around.
“The biggest challenge when we entered in Money Coaching,” says Melanie, “was getting organized to understand where our money was going.”
- Combined Income $470,000
- Line of Credit Debt $160,000
- Credit Card Debt $25,000
- Mortgage Debt $980,000
- High Investment Fees
- Monthly Insurance Payments of $800
- Over spending by $700 a month
The first thing I did was help them create a Spending and Savings Plan. Regardless of income, if you don’t know how much money you have coming in, and where it’s going, it’s like operating a boat in the fog. You’ll end up on the rocks; not because your boat isn’t sea-worthy, but because you just can’t see where you’re going.
Next we addressed investment fees. I had Melanie move her high investment fee RRSPs to her work RRSP plan. This reduced her investment fees from an average of 2.25% to 0.32%. My suggestion for Brian was to move his RRSPs to a Robo advisor, reducing his fee from 2.25% to approximately 0.6%. Those moves reduced the couple’s investment fees from $13,000 a year to $3,700.
Insurance was another area where savings could be found. Melanie and Brian had been paying $800 a month for Universal Life insurance for the last 11 years. I showed them that their needs would be better served with term insurance that would cost them $290 a month. Additionally, by cancelling the Universal life insurance, they were able to take the $40,000 which had accumulated in the policy, and use it toward paying down their credit debt.
Piece by piece we went through their finances. And piece by piece we looked for ways to maximize growth and reduce costs. For example, I suggested moving Brian’s work savings into a Tax Free Savings Account (TFSA) so that the tax on the growth of those savings would go from 49.8% to 0%.
Talking to clients about their long and short term goals is a big part of what I do. Melanie and Brian shared their goals for retirement. I was able to show them that their retirement was secure as long as they had their debt, including their mortgage, paid beforehand. Then we came up with a strategy to make that happen. It included using the $40,000 from the Universal Life policy and redirecting money (like the monthly savings on insurance) toward debt repayment. Within 12 months of working with Melanie and Brian, their $185,000 consumer debt was down to $71,000.
The couple also wanted to provide for their children now, ensure their university education and leave them a legacy. I helped them create a full education savings plan and we reviewed their estate plan to be sure it reflected their wishes.
By implementing my suggestions, Melanie and Brian saved $9,300 in investment fees, $12,000 in interest costs and $6,200 in insurance payments. A total of $27,000 a year.
Once the couple got their non-mortgage debt down to $30,000, I advised them to refinance their 10 year mortgage, roll the $30,000 debt into it and then redirect the $3,000 per month they were using to pay down non-mortgage debt into the mortgage. This saved them approximately $55,000 in mortgage interest over the 5-year term. They are now debt free except for their mortgage, which will be paid off in 12 years, just in time for retirement.
Over the next five years, the combined savings from investment fees, insurance and consumer and mortgage interest can be expected to reach $190,000.
Having a clear picture and better engagement with their personal finance has changed Melanie and Brian from a couple feeling overwhelmed, to one that confidently plans goals they can accomplish.
They have just taken a $20,000 European vacation that they paid for in cash. Their next big goal is to save for a $100,000 home renovation. And I have no doubt they will achieve it.
The Couple’s Perspective
“We appreciated Christine’s coaching style. She was always willing to listen without judgement and provide us with options to research ourselves. She took the time to understand our goals and what was important to us.”
“She helped us see our situation holistically, which allowed us to see that we were in better shape than we thought we were. Then when we cleared off all of the credit debt we had a whole new perspective on how we wanted to spend our money.”
“Our attitude toward managing our money has completely changed. It is a lot more enjoyable and we find ourselves looking for the next challenge to improve our savings. We recommend Money Coaching because everyone should have a plan in place to help them have clarity about what needs to be done and a timeline for making it happen.”