"We're 31 and we paid off our mortgage"

The Debt -Free Solution

Wow!” says Lenore Davis, a certified registered financial planner and senior partner with Dixon, Davis & Co. Chartered Financial Planners in Victoria. “Owning a clear title home at the age of 31 is a great accomplishment! However, as Joan admits, it was tough, and neither of them is prepared for Tom to continue putting in those long hours at work anymore. But what this couple clearly demonstrate is that they are very averse to carrying debt. They could have everything on their short-term wish list with a $50,000 line of credit – which any bank would be happy to give them – but that would just negate the effect of being mortgage-free.

“To achieve this family's goals without going into debt requires vigorous prioritization. Joan and Tom need to rate the items on their wish list and start ticking them off one by one. But the most important item on that first list has to be preparing for Joan to re-enter the workforce. Paying for the right courses to help her move smoothly back into the workforce when the family is ready will do more for this couple's bottom line than all the penny-pinching in the world. The big tax refund that Tom will receive this year and the increased cash flow on his paycheque each month should go toward Joan's courses. They will have to consider the cost of day care while Joan takes her courses, but there may be subsidized day care available through her educational institution.

“As for the rest of the wish list, Joan and Tom are going to have to get creative if they don't want to take on any debt or have Tom working 60-hour weeks. They should do the three-month exercise of recording all their purchases and analysing where they might save small amounts of money. When couples do this, they often find that as much as 30 per cent of their expenses are discretionary. Joan and Tom might prefer to spend less on gifts or holidays, for example, and more on a new sofa.

“This couple can also get creative in other ways. For example, they want to replace one of their cars, but they live in an area that's served by one of the new car-borrowing organizations, which are cheaper than renting a car and certainly cheaper than owning. This might work for the next few years. Can they use the library for their computer needs? If neither of them is handy, do they know someone who will lay the front walkway for them at cost in exchange for a service that they can provide? In other words, perhaps they can beg or borrow (but not steal!) some items on their list without big cash outlays.

“It's important to start saving for the kids' education, but that should come after Joan's education needs are taken care of; then that money can be redirected toward RESPs. As for retirement savings, they've made a start with a commitment of $2,000 a year, and the company pension is in place. Again, once Joan is making an income in a few years, they can ratchet up the retirement savings.

“Even though this couple hates having debt, they should at least have a line of credit, say $25,000, as an emergency fund in case of a setback, such as Tom losing his job. They've shown that they won't abuse it, and it's something they should apply for while they're in good financial shape. No one will give them a loan if they're in trouble.”