It has put Eric and Ilsa in a bit of a bind, as they have put lifestyle ahead of financial concerns. He is a 41-year-old physician, and she is a 39-year-old dentist.
They have five children ranging in age from less than a year to nine, all of whom will attend private school. Even though Ilsa is on mat leave at the moment, they have considerable earning power, but Eric chooses to work for less money than he could. The couple lives in a relative’s house rent-free (they pay taxes, utilities, and upkeep) and regrets not purchasing a home earlier, Eric writes in an email. In the past two years, the prices of houses in their Vancouver neighborhood have doubled. They need to move quickly because the house they live in is going up for sale soon. Their family bought a building lot for $1.1-million last fall, and they plan to build a house large enough for their family and a live-in nanny. Can they afford the builder’s $1-million price tag with a combined income of $360,000 ($450,000 when Ilsa returns to work) and an $800,000 mortgage?
Will they be able to borrow the cast of the professional money?
Two cast of the professional should be able to afford a modest house, but we can’t get the numbers to work and would appreciate some assistance, Eric writes. The medical clinic he works for pays him $200,000 a year. The real love of his life is to teach, which he does one day a week at a university; this pays him $100,000 a year.
Eric writes that he has no pension, but like his parents, colleagues, and mentors, he loves his job and plans to keep working well into his 80s, so retiring is not a huge concern. Ilsa and Eric’s situation was discussed with Warren MacKenzie, principal of HighView Financial Group in Toronto.
According to Mr. MacKenzie, Eric and Ilsa’s education costs are likely the highest they will be, and they have not yet seen the long-term benefits of their education and the income it will generate for the rest of their lives. The couple feels strapped for cash, as they have five young children and a nanny.
According to Mr. MacKenzie,
Even if they run a $50,000 cash flow deficit per year until the children leave the house, they can do what is important to them. They will accumulate over $1-million in additional debt as a result of their annual deficits. Despite having the option to build their own home, they must make a decision. Eric will either have to work one more day a week in the clinic, or they will incur a great deal more debt. Eric and Ilsa are fortunate because their parents are willing to put a home equity line of credit on their own house in order to extend them the $1-million they need to build, as well as finance their annual deficit, the planner notes. As the planner points out, things do not always go as expected when you accumulate so much debt. Especially when there is an easy fix for the cash flow issue, it would be unwise in this case, MacKenzie says.
“We can build the new home with a HELOC using the parents’ home for security,” Mr. MacKenzie says. “If Eric is willing to work one more day a week at the clinic, then they can live within their means.” Eric brings in $500,000 per year. Her goal is to earn $150,000 per year as soon as she starts working part-time again. The first priority should be to pay off the mortgage once the house has been built.
Ilsa and Eric have to deal with an immediate threat. Despite having five children and a large debt load, they do not have a disability or life insurance. In the long run, Eric’s high earning potential is what determines their financial security.
Mr. MacKenzie says that if Eric died or became disabled, Ilsa would be left with five children and severe financial problems. “This is an unnecessary and dangerous risk. Eric should have term life insurance to provide his wife with an income in the event he died, as well as disability insurance in case he was unable to work. Eric should compare 20-year term life policies and disability insurance that pays $10,000 a month. According to the planner, these policies will cost between $600 and $800 a month.
The situation of the client:
- Eric is 41 years old, Ilsa is 39, and they have five children.
- Is it possible to build a new home at the $1-million price tag and live the lifestyle they’ve chosen?
- Eric would earn more money by working a second day a week in the clinic, or they would run up a large deficit over time. Right away he acquires health insurance.
- Gaining a roadmap to a secure and stable financial future.
- Net income: $25,000 per month
Among his assets, he has $6,000 in cash, $180,000 in RRSPs, and a $1.1-million residential property. He has $1,286,000 in assets.
Mortgage: $3,800; property tax (both properties): $1,000; utilities: $490; insurance: $90; maintenance, garden: $190; transportation: $800; groceries: $2,000; clothing: $520; children’s activities: $1,000; tuition: $5,400;
Child care is $600; summer camp is $600; gifts to charity are $320; vacation, travel is $2,000; dining, entertainment is $200; sports, hobbies are $200; miscellaneous (furniture, toys) is $400; health insurance is $50; cell phones are $220; telecommunications, Internet, are $80; RRSPs are $3,000; and cast of the professional associations are $500. The total is $25,660.
An interest rate of 2.6 percent on an $800,000 mortgage
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Reader’s note: An earlier version of this Financial Facelift indicated Eric and Ilsa spent $6,000 monthly on the cast of the professional associations. This is actually the amount they spend annually. The article also stated that Eric works one day a week in the clinic and one day a week as a teacher. The physician has clarified that he works up to 80 hours per week through longer working hours and extra days and hours both in medicine and teaching