Second Time Around

Republished from the Winnipeg Free Press print edition June 6, 2015 B13

Hoyt and Summer knew home ownership wouldn’t be easy. After all, the former Money Makeover participants were told as much by a financial counsellor their first time around.

Phil Hossack / Winnipeg Free Press

In 2012, they graduated from university and were interested in jumping into the condominium market. Both having landed full-time jobs with good pensions, they believed home ownership would help them get ahead.

“We had been renting about five years,” said Hoyt, a civil servant in his early 30s. “We had a lot of debt, so we thought we could buy a condo, live there a few years, and after selling it, we could hopefully find some way to alleviate the debt we had.”

“Boy, were we wrong,” said Summer, an administrative worker in her late 20s.

At the time, the couple had about $21,000 in debt, largely the result of earning university degrees.

They did have some savings — about $17,000, including $11,000 from their parents for a down payment. Moreover, they had steady income, earning a combined $75,000 before taxes a year. Eventually, they purchased a renovated two-bedroom condo for about $187,000.

It didn’t take long before they realized it was more than they could handle.

“The debt just kept ballooning because we couldn’t keep up with the mortgage payments, the condo fees and everything else that comes along with it,” Hoyt said.

The expenses that hurt the most were large, unanticipated repairs: a sewer backup, burst water pipes and a leaky roof — to name a few. Soon their reserve fund was empty and they were paying out of pocket.

“We had rose-coloured glasses on and seeing what friends were doing with their lives, we thought ‘this is something we should be doing, too’ not realizing we were not financially in a place to do it,” Summer said.

So late last year, they sold at a $20,000 loss and were relieved to be renting again. Now Summer and Hoyt owe about $42,000, including a $6,000 no-interest loan from their parents, and they have almost no savings.

Still, they have hope.

They earn more than before: more than $90,000 combined a year. And they are determined to get out of debt as soon as possible, particularly since they want to return to school so they can upgrade their career options and earn more money so they can become homeowners again.

“We are really a cautionary tale for others like us thinking of doing the same thing,” she said.

Brian Denysuik is a local credit counsellor and a registered insolvency counsellor at the for-profit debt-management agency Creditaid in Winnipeg.

He said many first-time buyers find themselves in financial trouble because — like Summer and Hoyt — they underestimate or even overlook the costs of ownership, particularly with respect to condominiums.

“The repairs and the (loss of the) reserve fund frightened them so understandably they decided to cut their losses.”

Now, Hoyt and Summer must become debt-free to move forward. Yet while they have been trying to track expenses and make regular debt payments far above the minimum requirements, Denysuik said they will have to bear down on the budgeting process to make meaningful progress.

“I asked them if they are working from a spending plan and tracking their expenses and the answer was ‘we have a hard time keeping up after a week or so.’ ”

But if they were tracking costs, they would realize they have more free cash flow than they think.

“Three years ago, they had a combined gross income of $75,000, but today they have a combined gross income of $94,446, an increase of 26 per cent,” he said, adding their take-home pay has increased to $4,640 from $4,088 a month.

While their debt has doubled, they do have the cash flow to pay it down faster than their current pace.

In 2012, their discretionary spending was $850 a month when they were advised to cut costs if they decided to buy a home.

Today, they’re spending more than $950 a month on entertainment, coffee, clothing and dining out even though they are focused more on debt reduction than they were before.

“At this point, even if they earned an extra $20,000 a year without changing their habits, they will just keep spending more.”

The upside here is they make enough money to become debt-free in less than five years without taking more drastic measures such as a consumer proposal or bankruptcy. But they must become dedicated budgeters to make it happen.

Hoyt and Summer have to closely track their expenses to understand their true cost of living. This is the only way to find where they can cut spending to increase cash available for debt payments while building up emergency savings so they’re not forced to go back into debt when things go sideways.

Already, they’ve done some good work, paying more than $1,000 a month on debt while saving $165 a month for emergencies. Still, they could do better because about $466 a month of income is unaccounted for in the budget.

Moreover, they could increase the effectiveness of their efforts using the ‘avalanche method’ of debt repayment — something Summer is already doing. This involves paying the minimum amount on the lowest interest debts while making the largest payments against the highest interest debts.

“In this respect, Hoyt should look at reducing his line-of-credit payments — at seven per cent — from $300 a month to $100 and increase payments on his credit card payment — at 20 per cent — to $400 a month from $200,” Denysuik said.

“This way they can have their unsecured debt paid off in 40 months with another five months to repay parents.”

Yet with a few more tweaks, they could be out of debt even faster.

“If they reduced their discretionary spending by $400 a month, increasing emergency savings from $160 to $200 and pushing $300 more to debt repayment, they can be out of debt in 30 months,” he said.

Another benefit of this strategy is their cash flow would increase to more than $500 a month from $466 a month simply because their money is being managed more efficiently. This extra cash could be used to save for a home, tuition or pay debt faster.

“All of this is dependent on monthly tracking of expenses and making adjustments,” he said.”That means keeping all receipts and once a month sitting down together and sorting the bills and adding up each category.”

And it need not be a grim task either, he said.

“Make it a date night at home where you cook supper, have a little wine and summarize the tracking and compare it to plan.”
— — —
Summer and Hoyt’s finances:

INCOME:
Summer: $49,500 ($2,340 net a month)
Hoyt: $43,900 ($2,300 net a month)
MONTHLY EXPENSES: $4,173
DEBTS:
Summer line of credit: $15,000 at 3.5 per cent
Hoyt line of credit: $10,500 at 7 per cent
Summer credit card: $7,070 at 19.99 per cent
Hoyt credit card: $4,300 at 19.99 per cent
Loan from parents: $6,000
ASSETS:
Summer TFSA: $90
Hoyt RRSP: $1,300
Savings: $800
NET WORTH: – 40,680

Student Loans: Your Saving Grace or Debt Trap?

You are 18 and all your friends are going to university so you follow the pack and sign up for some courses too. You intend to work part time so you only borrow $8000 in provincial and federal government student loans for the first year to help pay for your expenses.

In September you move out and put a deposit on an apartment. But now you need furniture so you buy some. You dip into your student loan money for both. You reason that since that you have a roommate- you can afford it.

After going to Mexico for spring break, your money runs out in late February. But you still need to get through two months of school! You increase the number of hours you work but then your marks suffer. You don’t finish your first year with straight A’s like you imagined.

Year 2- You still want to go to school but are not sure what field you want to go into. You decide to take more general arts or science course. You don’t want to run out of money again so you borrow $12,000 in student loans this time.

Year 3- Because your marks aren’t high enough to be accepted into law school, you decide to stay in university and declare history as your major and psychology as your minor. Or you dream of being a doctor and continue with your general science courses. You borrow another $12,000 in student loans.

Year 4- Ditto, and another $12,000 borrowed.

At the end of four years did you get into medical school? Or law school? Or another high paid profession?

If not, you could be in serious financial trouble. Even if you graduate with a B.A. or B.Sc., where are you going to find a job paying you enough money to be able to pay rent, your living expenses, make a car payment, PLUS your student loan re-payments. You now owe $44,000. The interest has been calculating since your last day of school and your payments are set at $444 per month. You are likely to have this payment for approximately 10 years. Unless you now have a high paying career as a result of your 4 years of education, you may struggle to pay your rent, car payment, and other living expenses for the next 15 years! What about being able to buy a house or starting a family?

Here are some tips to avoid the above scenario:

By all means choose a career that you think you will enjoy as you will be spending up to 1/3 of your life working at it. But be realistic. Ask yourself these questions:

1) Am I smart enough and do I have what it takes to successfully finish the schooling for this?
2) How much does this career pay? Some careers pay a higher salary in relation to others that required the same amount of education: 4 year Bachelor of Nursing degree, Pharmacy or Engineering degree vs. 4 year general arts or sciences degrees. If you graduate as a nurse, pharmacist or engineer your salary would likely be over $70,000 per year. With a general arts or science degree you might be lucky to find a job paying $35,000.
3) What are the job prospects in the province I want to live in? If you want to become a marine biologist but continue to live in Manitoba, find out what the job prospects truly are. In order to find work, maybe you need to become an aquatic biologist instead.
4) Choose a career where you are actually trained for a career that is in demand. Don’t study arts or science courses unless you intend to go into education or graduate with a master’s degree in that field of study.
5) Consider alternatives to university or college. You could join the military (Department of Defence). Because they require all sorts of professionals such as dentists, doctors, pharmacists, nurses, lawyers, etc., you may qualify for a program in which they pay for your schooling.
6) Reduce your expectations. If you had your heart set on becoming a doctor but your marks are not high enough, consider another medical related career such as a cardiology technician, sonographer or respiratory therapist. Or if you want to become a lawyer but your LSAT mark is too low, consider alternative career choices as a parole officer, government policy analyst or a career in human resources which deals with employment law.
7) HERE IS THE MOST IMPORTANT TIP: Don’t make the mistake of overlooking a career as a tradesperson. It has been estimated that by the year 2020, Canada will have 1,000,000 vacant positions. The apprenticeship system usually involves six months of schooling followed by six months of practical paid work (for a four year period) which can drastically reduce the need for student loans. There are many trades that pay six figure incomes. Don’t make the mistake of thinking that a university education will pay you more as this is simply not true.

Here are some general tips to avoid the student loan trap:

1) Buy everything USED. Second hand school books, clothing, furniture, equipment (including refurbished phones and computers) can save you thousands of dollars during your school years.
2) Make a monthly budget and keep track of your expenses. Be disciplined. If you struggle, instead of telling yourself ‘No’ and feeling sorry for yourself, tell yourself you can buy it once you are working full time.
3) Do not USE your student loan money to buy a car or go on a spring break trip. It should only be used for tuition and books. Do everything in your power to reduce your expenses while you are in school.
4) You are finally an adult and want to be on your own but it is in your best interest to live at home until you are finished school and working. Even if you have to pay ‘rent’ at home, it will likely be far less than if you move out. Then you’ll be paying rent, utilities, groceries, tenant insurance, cable and internet expenses, etc.
5) Do not ask (or let your parents) co-sign your student loans. As an adult you need to be
responsible for your own debt. Someday, if you are not able to repay your student loan
payments your parents will be forced to. If they are not able to make your payments their credit rating could be affected. It is also possible that their wages could be garnished.
6) If you move- always update the student loans departments with your new address. Don’t make the mistake of thinking ‘If the government can’t find me, they can’t make me pay’. If you do, two things will happen. The first is that your wages will be garnished. (They can track you through your social insurance number). You will lose up to 1/3 of your pay cheque until the debt is paid in full. The second is- you will now have a negative rating on your credit report. You may not be able to purchase a house or a car because of this. In order to rebuild your credit you will have to repay the entire student loan debt, plus the accumulated interest. It could take many years to rebuild your credit so that you qualify to buy a house or car. Don’t make the mistake of thinking that you can outrun your student loan debt no matter how many years have gone by.

Written by Creditaid Credit Counsellor, Laurie Boudreau.  Whether you’re a current student dealing with student loans or a recent graduate trying to make ends meet, speak to one of our counsellors today.  We have many tips to help you manage your debt.

Student Loans – Coping with Student Loan Debt

If there is one thing that a student doesn’t need it is the worry of a huge debt hanging over them after graduation. A lot of you are probably thinking, hey, I have a grace period. While it is true that you usually have a grace period of six months after you graduate, on federal and provincial student loans, you are not out of the woods yet. You still have to pay eventually, and your federal loan accrues interest during the grace period.

As difficult as it may seem, you need to get used to making payments on your student loan, right from the offset. Don’t let it stress you too much though; there are ways to ensure you don’t carry that debt for a lifetime. The first thing you need to do, before you can even begin to pay off your debt, is to find a source of disposable income.

Some of you will find yourself employed and in a position to make your student loan payments immediately. For those less fortunate, here are some ideas to help you out.

1. Lower Living Expenses: Remember that time you flew the nest and set out on your own? Well, this may break your heart, but moving back to your parents for a while could help you save the extra cash needed towards paying your loan payments.
2. Revision of Terms: You can ask for a revision of terms; which means you can extend the loan period in order to reduce the monthly payments. Just make sure you keep up with these new lower payments, and as soon as possible, begin paying extra towards the principle.
3. Waiver Period: If you find yourself out of a job, don’t despair. You may be entitled to an interest relief period. During this period the government will pay your interest and you won’t have to make any loan repayments.

Don’t let student debt creep up on you, budget your payments today.