By Heather Sokoloff
National Post
Arts & Life Section
Tuesday, October 28, 2003

Even a couple earning $150,000 a year can run a deficit

Tabitha Hardy has the perfect life. The 36-year-old is the mother of two healthy children -- Peter, 4, and Naomi, 14 months. A year after Peter's birth, Tabitha and her husband, Drew, 38 (not their real names), bought a dreamy four-bedroom home for $325,000 in a Southern Ontario suburb boasting some of the province's best public schools. With bi-monthly mortgage payments of $1,100, the couple is slowly building equity in their home.

Every morning, Tabitha and Drew drop the kids off at a licensed daycare that offers lessons in computers and French ($338 a week), park their Honda minivan and take the GO Train to Toronto's Union Station. Each is employed at a major financial consulting firm in a management-level position at a salary of about $75,000 a year, plus bonuses. Together, their retirement savings total about $100,000.

Tabitha is particularly proud of her career. She dropped out of university to support her single mother and never had the chance to graduate. She says her children will not be denied the toys, new clothes and opportunities she missed growing up.

She has obtained the Canadian dream, if such a thing exists: membership in the upper-middle class. So why are Tabitha and Drew saddled with $75,000 in debt?

"I have the perfect life, the perfect kids," she says. "There is just this one major problem."

With skyrocketing home prices and a consumer culture running out of control, $150,000 does not buy what it used to in places like Oakville, Ont., Okotoks, Alta., or Abbottsford, B.C. And while families earning upwards of $150,000 a year appear well-off from their tax brackets, more and more are being pushed into debt chasing a lifestyle that remains just outside their grasp.

Stanley Kershman, author of Put Your Debt on a Diet: A Step by Step Guide to Financial Fitness and an Ottawa bankruptcy lawyer, is concerned that low mortgage rates have seduced families like the Hardys into buying homes in affluent suburbs and pricey urban enclaves they can barely afford.

Canada's prime rate dropped from 7.5% in December, 2000, to 4.5% today, with five-year mortgage rates hovering around 5%.

Statistics Canada's surprise announcement that Canadians' debt-to-income ratio passed 100% for the first time in September was likely influenced by the thousands of young two-income families who put just 5% down to purchase a first home or condo.

If mortgage rates increase just one or two percentage points, many will be in danger of losing their property, warns Kershman. "People don't realize how much it costs to run a household," he says. "You can spend $75,000 to $100,000 on food, mortgage payments, taxes, new clothes, toys for the kids and a second car. That's before you pay for the vacations and golf memberships.

"If you are bringing in $150,000, you are going into the hole every month."

While the average Canadian owes about $22,000, household debt among high-income earners is much larger because of their buying power. When that type of consumer asks for help, financial planners like Diane McCurdy must play the role of psychologist as much as money advisor.

"A lot of people think the word 'budget' is for poor people. But even people making $200,000 a year have to stick to a budget."

Professionals like doctors and teachers, who chose their careers to help people, have even more complicated feelings about money, says McCurdy, author of How Much is Enough?

Often they ignore mounting debts and fail to check interest rates on credit cards because they associate money with materialism. "They were taught that money is a bad word," says McCurdy. "Even though they spend a lot."

Many professionals do not know how much money they make and how much that entitles them to buy, adds McCurdy. She gets them to do a reality check.

First, she advises clients to cut luxuries such as daily lattes (savings: $200 a month) and reduce magazine subscriptions to the publications that actually get read.

McCurdy says her clients often got into problems by simply buying too much, too fast. Many professionals in their thirties lived at home until their late twenties and got used to their parents' lifestyle. When they finally move out, the adult children assume anything less than their parents' quality of life is inadequate. "They don't understand that they have to work their way up," she says. "They feel having two cars, a golf membership and a couple of exotic vacations a year are things they have to have right away."

Adrian Mastracci, an investment counsellor at KCM Wealth Management Inc. in Vancouver, tells his clients to think of paying the interest on a credit card loan or mortgage in before-tax dollars. For an individual in the 35% income-tax bracket, that means a 6% interest rate becomes 9.2%. In the 45% income-tax bracket, it becomes 10.9%.

His advice to the Hardys and others in their situation?

"Get those non-deductible loans off your back as quickly as possible," he said. "Sometimes that's not the advice people want to hear. They think that being in the market or doing all these fancy things is better. But sometimes simple, constructive actions that have always worked well in the past are the best ways to build wealth."

The Hardys are better off than most. Not surprising, since Drew is trained as a financial planner. They have savings to fall back on if either one loses their job or if some other unforeseen event -- like a blown-out furnace -- forces a major expenditure. But their debt is forcing them to pay out more in interest than their savings are earning.

About $40,000 of their debt comes from two lines of credit and $10,000 from credit cards. Eight anniversaries later, they are still paying off their $25,000 wedding.

The lines of credit came with their mortgage, which was already larger than they had planned. Instead of buying a small starter home or a fixer-upper, the couple bought the dream home they plan to live in for the next 25 years.

Of course, the home had to be furnished. It also needed a white picket fence so the kids could play in the backyard. Tabitha and Drew built the fence that ended up encircling both the front and back yards, spending $3,000 on wood and power tools they hope to use in future renovations, such as installing a swimming pool.

"In retrospect, we should have just settled for a small chain-link fence," groans Tabitha. The swimming pool has been put on hold for five years, for safety as much as budgetary reasons.

Tabitha and Drew put themselves on a three-year plan to reduce their spending and pay off their debt, although they do not want to do anything drastic that will seriously affect their lifestyle. Tabitha would never consider taking the kids out of licensed daycare for a cheaper alternative, like a neighbour who watches a group of children in her home. The kids will get a trip to Disney World in Florida this year. But after that, all Hardy vacations will be to Tabitha's sister's in Los Angeles.

"There's lots of little things we are trying to do," says Tabitha. The kids' home movie budget is getting slashed, for example. Their video library already consists of 75 titles. Each cost $10. Tabitha will still buy nice clothing for them at Old Navy and the Gap. But she is buying lots of red sweaters and pants for Peter that will still look cute on Naomi.

Tabitha is also attempting to save $400 a month by packing a lunch, a proposition she loathes. "It becomes a social thing in the office," she says. "Being a manager means you can eat out with the other managers. I'm going to feel a little weird sitting in the cafeteria with all the administrative assistants."

Luckily, her colleagues are all in the same situation. A group of managers made a pact to all bring their own lunches and eat together. "We are all paying these huge mortgages or saving for something ridiculous like a new plasma TV."

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.