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Tara Orme, whose father
helped her come up with a
$350,000 down payment
on her $470,000 Toronto
duplex, has done a lot of
things right, says Adrian Mastracci |
By: Brenda Bouw
Financial Post
FP Money
March 30, 2002
Tara Orme wants to retire at 55 with an income
of $100,000 -- she has a lot of saving to do.
Tara Orme is the proud owner of a half-a-million-dollar
home in Toronto's upscale Forest Hill neighbourhood.
Not bad for someone who is single, 31, and earns
roughly $43,000 a year.
The mortgage had been covered by renting one
half of the duplex to her brother for $900 a month
-- until he moved out.
Now Ms. Orme is struggling to pay off $10,000
in credit card bills, keep up with her mortgage
payments and $400 in basic housing expenses. And,
she wants to be able to retire in comfort at the
age of 55.
Adrian Mastracci , a fee-only investment
counsellor at KCM Wealth Management Inc.
in Vancouver, says Ms. Orme has lofty goals, but
is on the right track. "Tara should be congratulated
for doing many right things, such as getting into
the housing market, making some RRSP deposits,
and starting on the concept of 'paying herself
first,'" he says.
Mr. Mastracci says her high credit card
debt, spending patterns and lack of a budget are
"not unusual at her stage of financial development."
"Tara's situation with credit card loans
demonstrates the never-ending payment stranglehold
of using credit card debt. Relying on credit cards
and/or a line of credit to smooth out an emergency
has drawbacks and makes Tara vulnerable because
the amount of credit can be reduced or denied
with little notice."
Mr. Mastracci says Ms. Orme has a lot
of saving to do to achieve her goal of retiring
at age 55 on $100,000 in today's terms. He says
she will need about $4-million of investment assets.
That takes into consideration a number of factors,
including an annual inflation rate of 3% and a
6% return on her investments.
Adrian Mastracci, fee-only
investment counsel
at KCM Wealth Management says,
“Tara should be congratulated for doing many
right things, such as getting into the housing
market,
making some RRSP deposits, and starting on the
concept of ‘paying herself first.’”
"Attaining this sum by age 55 could be difficult
for Tara," Mr. Mastracci says. "It
would require her to assume more risks in the
investment portfolio than she is likely comfortable
with. It also means that Tara has to consistently
save money from her paycheque to achieve the saving
capacity."
Ms. Orme has been in the entertainment business
nearly 10 years and is the director of Canadian
television sales for Equinox Films Inc., a Toronto-based
distribution and production company.
Her ultimate goal is to pay off the mortgage
on the home she bought in August, 2000, for $470,000
with a downpayment of $350,000. Some of the cash
came from the sale of a condominium she bought
at age 22 for $127,000 and sold in her late 20s
for $160,000. Her father also chipped in.
He says Ms. Orme's immediate goal should be paying
down those credit cards. "They should be
transferred either to a line of credit, say on
the basis of prime, or repaid from a loan from
her family. In either case, the interest savings
should be applied to the repayment of the outstanding
amount to get the maximum benefit," Mr.
Mastracci says.
He also recommends that she refinance her current
7.5% mortgage due to today's low interest rates.
"There will be a considerable saving from
the current rate; however, she will likely be
facing the ravages of increasing interest rates
from here forward," Mr. Mastracci
warns. "In the past, mortgage rates have
often risen a full 1% with little or no notice
... Tara will have to consider the impact on her
budget if she switches to a loan based on prime
and such a dramatic rate increase comes along."
As well, Mr. Mastracci says Ms. Orme lacks
any back-up funds in case of emergency, such as
an accident or job loss. She has managed to set
aside some savings, including about $6,100 in
RRSPs and $6,500 in GICs. He recommends a financial
cushion of three to six months of total expenses
and that it be placed in a financial institution
that she does not already deal with. The GIC savings
could also form part of her emergency fund, he
says, but warns against relying on the RRSP savings.
"It should be looked upon as the last resort
because the funds become taxable and cannot be
replenished after withdrawal," says Mr. Mastracci.
Ms. Orme has other goals: setting up an education
fund for any children she may have, buying a house
in Alberta and owning a car.
That should wait, Mr. Mastracci says.
"Tara has three major areas that require
attention. The first is to put in place an emergency
fund system to protect her from an unexpected
turn of events, such as a prolonged disability,
a period of unemployment and/or a reduction of
income.
"The second is to implement a game plan
to retire the current liabilities in a reasonable
period. The third is to begin implementing the
financial pillars to achieve the long-term prospects."
In light of Mr. Mastracci's advice, Ms.
Orme has already contacted her bank about refinancing
her mortgage. She is also planning to set aside
$250 each month toward RRSPs to avoid having to
take out a loan next year. "I am willing
to sacrifice in order to achieve my goals,"
she says.
Ms. Orme is also giving up the goal, for now,
of owning a home in Alberta.
"Paying off my credit cards is my number
one priority," she says. But borrowing from
her family is not something she is willing to
do right now.
"It is sort of a pride thing with me,"
says Ms. Orme, particularly after her dad helped
with the downpayment of her current home. To keep
her expenses down in future, Ms. Orme is planning
to rent out the part of the duplex where her brother
lived to her mother beginning on May 1.
While she agrees some steps are necessary, Ms.
Orme isn't planning to completely change her lifestyle.
The first thing she's going to do when her mom
moves in and her load is lightened?
"I'm hitting Holt Renfrew," says Ms.
Orme. "I haven't done any real clothes shopping
in almost a year."
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