Moneyville Makeover: Young, disciplined and planning for family
Moneyville Makeover is our new twice-monthly feature offering readers a chance to review their financial goals with the help of experts.
The health-care worker and municipal employee, both 26, live in London, Ontario, and earn $111,000 between them. They have a modest home and want to start planning for a family. They have put together a strategy that allows them to do it in a measured way. They can enjoy life while they get their financial house in order.
One of their techniques is the time-tested strategy of labelling accounts for separate goals.
“We know we are never going to be wealthy in either of our professions,” says Callie. “But we want to be disciplined so that when we have children we are able to afford everything comfortably.”
Saving today for an easier tomorrow has meant driving old cars, choosing a modest home and curtailing their spending with another simple prompt: A glass bottle they fill with just enough cash to last the week.
The couple turned to Betsy Prospero, a Certified Financial Planner with the Fiscal Wellness branch of FundEX Investments Inc. in Stratford, Ont.
Prospero, who lectures other advisers on the topics of saving and debt reduction, says it has been proven that if you set up separate accounts for savings goals you will be far more successful than if you just divert a lump sum.
“You won’t go on vacation until the proper amount is saved in your ‘vacation account’,” she predicts. “You won’t buy the new couch until the correct amount is saved in your ‘furniture’ savings account.”
Prospero’s advice is supported by academic research, including a recent study involving low-paid labourers in India. Along with another researcher, Dilip Soman, the Corus chair in communication strategy at the University of Toronto’s Rotman School of Management, found that workers would save more for their children if each week they put rupees into separate, sealed envelopes instead of a single envelope. They saved more still if there was a photograph of their children on the envelopes.
Only when their savings targets were set too high did separate accounts prove less effective during a 14-week trial.
The incentive to save might wear off over time, the researchers concede. But Callie and Carter are enjoying success after more than a year, having first saved for a wedding and then repaid Carter’s $5,900 student loan in a mere five months. Now they are tackling a line of credit used to purchase materials to renovate their basement.
“Having the accounts at ING Direct that are labelled is incredibly helpful for us,” says Callie. “It does make you feel like you are achieving more. And you are not stressed about where your money is coming from when you need to make a purchase. . . The labelling just gives you focus on what you are saving for.”
It helped that the newlyweds found a modest home in London, where prices are much lower than in or near Toronto. Callie had purchased the home with help from her parents before she married. The 35-year amortization has been reduced to 15 years and seven months.
The newlyweds aspire to retire, or work less, by age 55. They may have seen too many London Life commercials, but it will help that they are both members of public-sector pension plans. On the advice of Prospero, whose name means prosperous in Italian, Callie and Carter also save extra using registered retirement savings plans and tax-free savings accounts. Callie’s pension plan does not have a guarantee of full inflation protection.
The couple aims to repay a $15,000 line of credit within a year, to be in a position to consider replacing two cars. Eventually, they hope to buy and renovate a larger home.
“We want to start a family in the next couple of years and we don’t want to have the extraneous debt,” says Callie, who admits to “chronically” tracking their progress on computer spreadsheets.
“We both hate to be in debt,” says Carter. “We try to find efficient ways to pay all of our (expenses). I think the big motivation is we can go about our day knowing we will be financially secure for our future.”
Prospero has warned them, however, it’s not enough to have an emergency account for car and home repairs. “I always inform clients that an emergency fund must be established and only touched for a very serious emergency, such as illness or job loss,” she says.