RRSP Or debts? Baby on the way!

[plangevin]

Hi folks,

For the first time in quite a while, I have a very had decision to make and I was hoping to get some advice. I am Canadian and my wife is 4 months pregnant (due in August). I have never bought RRSPs before but I now have a great job which allows me to do plenty of overtime. Now I can't count on this overtime forever but I don't see it ending anytime soon. Anyhow, I am presently renting at 600$ a month for a 3 bedroom apartment. I would love to eventually buy a house to raise my family and being 30 years old, I feel like it would be a great retirement plan to have a paid off house by 55 or sooner!

Here are a few facts:

Age: 30
Wife: 33

Base Salary: 55k
Salary with overtime included last year: 85k

Wife Salary: 38k
Overtime: None.

Total RRSP upto date: 0
Money in savings account: 10k
Total personal debt: 0
Total Wife debt: 14k

Pension plan with work: Yes.
Will it be enough to eliminate RRSPs: No.

------------

Ok so I have 10k saved up. My plan was to put 20k into RRSPs (10k loan from bank and my 10k from savings) because I made a lot of overtime, which puts me into a 44%ish bracket for maximum return. I would then take that return, repay the bank and hurry to pay off whatever amount I'm missing (2-3k) to the bank. Then, I would always have that 20k in RRSPs that I could eventually use as a down payment for a house if we were ever forced to leave our apartment or really wanted to make the jump to a house.

Here's the problem: My wife has a 14k debt, she is pregnant and though she likes working, you never know if she may want to become a at-home mother. That would mean that we will be living off one salary. If forced to work, she would gladly do so but I wouldn't want her to be forced to go back to work if she would prefer to stay home. So, I was considering paying off her debt quickly and playing it safe for when we have a baby.

I must say, in a perfect world, I would have RRSPs and a paid-off home to ensure a proper retirement and leave a home for our children when we pass. I came for a very poor family so this is a chance to get my next generation into the middle class and give them hope to move up from there.

Tough decision... Any advice?

Thanks!

[snafu]

Sorry, Insufficient information, How long at this job? How secure is employment? is wife's SL your only debt? Car loan? CC? Are you in rent controlled apt? Is wife eligible for maternity leave? How long does she plan to work before taking matr leave?

What interest rate is the bank or CU offering? [typically v/low for RRSP]. What sum does your 2011 Notice of Assessment permit for your 2012 contribution valid until 2/28/2013. Any excess amount will be assigned for 2013, a tax deduction accessible when you file in 2014 for income earned 2013. It helps to run the figures to work out the actual RRSP deduction. Will you use your RRSP tax deduction to payback part of the loan? What is your plan to payback the loan? Do you have a specific plan for investing your RRSP sum?

It's important to understand current legislation allows withdraw for first home purchase but they are fierce about payback rules. If not re-paid as required you are charged a ghastly penalty and it all gets added back to income...what a hit you'll take.

[Wino]

Total personal debt: 0
Total Wife debt: 14k

Let me fix that for you:

Total debt: 14K

Quit thinking that the two of you are two separate businesses with two separate accounting packages. You are married. Your wife's debt is your (plural usage) debt. Are you planning to let her stop paying if she quits working?

You make about $120K per year with OT, and about 90K per year without OT, and about $53K per year with the wife staying home. You (plural again) are expecting your baby in August. It's not that "she's pregnant."

Once you consolidate your debts and income (in your thinking), then you should look at your spending. At $80K to $90K per year for your budget, you should be able to do everything you're planning. If you budget with ONLY your income without OT when it comes to spending, then you can do everything you're suggesting without any problem, merely by saving everything over about $2.6K per month, which is your monthly spending limit. That's $31,200 per year ($53K * 60% = $31,800), so you should have that income with no OT and with your wife staying at home. If you lose your job, then your entire budget has to be reworked anyway.

Can you set up a budget on $2600 per month? If so, then you can use the OT and the wife's income to pay off your $14K debt, and after that, you can put more money into savings of whatever type. I suggest you put at least 15% of your take-home pay into long-term savings for retirement, and put another 10% toward goal-oriented saving such as "new home" or "new car" or "new toy." If you stick to your spending based on "base salary, husband" then your wishes can become reality merely by waiting and buying rather than spending money you don't have by borrowing it.

[plangevin]

@snafu:

How long at this job? 6 years

How secure is employment? Important position in a financial environment. Relatively solid.

is wife's SL your only debt? Yes

Car loan? None. I own my vehicule. Perhaps we will get a second-hand minivan when the baby is born.

CC? Paid off.

Are you in rent controlled apt? Family owned. We pay 600$ and could ask for a 10 year lease.

Is wife eligible for maternity leave? She is not permanent. We will get a little assistance for 6 months.

How long does she plan to work before taking matr leave? Maternity leave would being June 1st.

What interest rate is the bank or CU offering? No idea. Meeting is setup for Monday.

What sum does your 2011 Notice of Assessment permit for your 2012 contribution valid until 2/28/2013? I have 38k of unused. Maximum I can contribute is 22,500.

Will you use your RRSP tax deduction to payback part of the loan? I will use complete deduction to pay back the RRSP bank loan.

What is your plan to payback the loan? I typically pull in about 2k net per 2 weeks. With low rent, I will repay the balance of the loan within a month or two.

Do you have a specific plan for investing your RRSP sum? No. I am very new to RRSPs and though I do some research, I am no expert. I will diversify but ultimately, seeing as I want a house, I do not plan on having many risks, thus low returns.


@Wino

Wow, I feel as though I hit a personal cord with your response. To make things clear, I do not see us as independents but for the sake of being thorough in my explanations of debts and wages, I decided to separate everything. Yes, if she quits working and can't pay off her debt, she will have to declare bankruptcy because I can't be bothered to pay more than my share...*sarcasm*

If we were to stay in a $600 a month apartment, we would have no issues maxing out the RRSPS and paying off the 14k debts off one salary but a home would cost at least 250k.

At 250k, assuming a 4% rate (currently 2.9%ish) combined with taxes, heating and others, we are making the jump to roughly 1600$ and that's without putting money aside for maintenance and whatnot. If I had a guaranteed 85k job, than we'd still be fine but I was always told to never add overtime into a salary unless I feel like losing everything, which is pretty logical.


Alright,
Thanks again.

Pat

[Wino]

If we were to stay in a $600 a month apartment, we would have no issues maxing out the RRSPS and paying off the 14k debts off one salary but a home would cost at least 250k.

So we come to the crux of the matter. You don't want to "eventually buy a house to raise my family." You want to "immediately" buy a house to raise your family.

You can't yet afford the house you're talking about. With the pay levels you mentioned, you could easily afford the house you're talking about within about two years by living on the $2600 I mentioned (that's your budget), but saving everything over that after paying off the loan. You should be able to conservatively pay off the 14K in 6 months, then save an additional $30K per year toward the house, as long as the OT holds out and the DW continues to work.

When the baby arrives, you can trust me that for at least the first two to three years, the house you're in won't make any difference to the child. How would you like to walk in to the loan negotiations with $90K in hand? That's where you could conceivably be in 3.5 years if you cut back your lifestyle to the "guaranteed" income.

By the way, on $53K, you can only afford about $150K in housing by most calculations. If you can save up $110K, then you could conceivably buy the $250K house, as your payments would then be based on the $150K you borrowed.

[plangevin]

So we come to the crux of the matter. You don't want to "eventually buy a house to raise my family." You want to "immediately" buy a house to raise your family.

You can't yet afford the house you're talking about. With the pay levels you mentioned, you could easily afford the house you're talking about within about two years by living on the $2600 I mentioned (that's your budget), but saving everything over that after paying off the loan. You should be able to conservatively pay off the 14K in 6 months, then save an additional $30K per year toward the house, as long as the OT holds out and the DW continues to work.

When the baby arrives, you can trust me that for at least the first two to three years, the house you're in won't make any difference to the child. How would you like to walk in to the loan negotiations with $90K in hand? That's where you could conceivably be in 3.5 years if you cut back your lifestyle to the "guaranteed" income.

By the way, on $53K, you can only afford about $150K in housing by most calculations. If you can save up $110K, then you could conceivably buy the $250K house, as your payments would then be based on the $150K you borrowed.

Pretty sound advice. We should stay in the apartment for a few years to save up.

One thing that wasn't clear is: Would you then opt to max out my RRSPs this year (22k) and then pay off debt and save up as much as possible or skip RRSPs altogether and simply pay off the debt and save up?

Thanks for clarifying.
Cheers,
Pat

[Wino]

Would you then opt to max out my RRSPs this year (22k) and then pay off debt and save up as much as possible or skip RRSPs altogether and simply pay off the debt and save up?

Pay off all debt before savings. The only exception to this is mortgage debt, which you should pay WHILE saving for retirement. You really need to write down your goals and then determine how to get there. One of the quotes that comes up on the top of SA is something to the point of "Goals without plans are merely dreams," or similar. You have two goals: retirement and a paid-for house. You need to lay out a plan to get there.

My suggestion of using $2600 per month as a budget is one way to get there, as long as the OT and/or DW continues to work. If DW quits and the OT stops, you can continue to spend at the $2600 rate, but you won't be saving much if any. Set up a baseline budget (what do you NEED to spend), and from that, work out your plan to get to 20% down payment while still saving for retirement.

[snafu]

1st. not even bankruptcy eliminates outstanding SL. You'll need to run the figures to work out what will work best for your situation. Is your wife on board with decisions based on your financial situation? Would you both be ok staying in the apartment since the rent is low? Does your wife contribute to EI? How many weeks of contribution reflects how many weeks of mat benefits. You are also eligible for bonding EI benefits and may be able to share these with wife. [sorry they change these often, check with your local MP's office for details]. If wife is considering returning to the workforce, start researching infant care facilities in your specific district.

It's usually not smart to borrow money to invest. Depending on interest rate offered [prime + 1/4?] and sum offered by lender of $ 22,500 eligibility. You can add anytime, you don't lose that RRSP allowable. Can you commit overtime income to speed pay the loan?

In spite of all the lists for infant layettes, babies need very little and grow very fast! Better to buy minimally as needed and as fits! The legislation requires you have 20% downpayment to buy condo/duplex/house/personal residence. It's not smart to buy more than 2.5 times annual income. It's shocking how much more it costs to operate a home than an apartment. You pay all utilities, maintenance, taxes, outdoor equipment and a hundred and one small costs that add up to incredible sums by year end

[lindsay06]

It will totally depend on your situation, but also realize that putting money into RRSP's is just deferring your tax. You will have to pay the tax when you want to use the money.