By Eve Lazarus
Family Finance
National Post, Business Magazine
December 2001 issue

August was a tumultuous month for Karen Roberts. She gave notice at work, moved into a new apartment with her boyfriend in Vancouver's Kitsilano neighbourhood, sold her car and found out she'd flunked half of a two-part entrance exam for the coveted Certified Management Accountants program in Vancouver.

Roberts (her name has been changed), 28, has just now left her job, and is hunting for a new one. She'd like a job at her current $40,000 income plus bonuses, but she believes that she's "maxed out as far as job potential," and is prepared to take a cut to the mid-$30,000 range if it means finding something more creative than her accounting job for a local forestry company.

After earning a Bachelor of Commerce from the University of Guelph in 1996, Roberts moved out West and spent two summers planting trees and cooking and the winters working at a B.C. ski hill. Roberts then landed her current job and has been honing her skills in human resources, payroll and accounting ever since. Last year, she spent her spare time in a fast-track course in preparation for the CMA program entrance exam - an exam with a 40% failure rate, she says. Roberts rewrote the test this fall and, assuming she passes, will start the part-time course in January. The annual cost for the two-year program and association membership will run Roberts just under $3,000.

Roberts is articulate, attractive and funny, and on a Sunday morning she is casually dressed and sipping tea at the Sunset Grill near her home. She likes to spend money on clothes to the tune of about $1,500 a year, and spends another $4,700 a year on entertainment, which includes restaurants and bars, movies, snowboarding in winter and field hockey in summer. She budgets $3,000 on vacations, spending most of it on visits to her parents in Ontario and the rest on weekend trips away.

While it's a great lifestyle, Roberts wants to plan for the future. She'd like to buy a home, continue with her education and save for her retirement. She's also worried about her $11,000 debt, which eats up nearly $600 a month in repayments. Most of that is on her line of credit, which at $8,924 is almost maxed out. She also owes $276 on an RRSP loan. The rest of her debt is on her credit cards, which have a whopping 19.5% average interest rate. Since she now shares her boyfriend's car, Roberts was able to sell her own car and use $2,000 of the proceeds to reduce that debt to $1,800.

After a month spent searching for an apartment in Vancouver's oppressively tight rental market, Roberts, her boyfriend and his German shepherd found a $950-a-month suite in a Kitsilano heritage house. Roberts is delighted with her new home, but eventually she and her boyfriend would like to buy their own place, and she wonders if a condominium in the $200,000 price range would be "ridiculously unfeasible."

"I'm getting awful tired of paying rent and I think that I'm pretty good at paying my bills. I should be able to reorganize myself and do a mortgage," she says. On the other hand, she adds: "It is more important for me to change jobs at this point and get going on a more promising track before actually paying a mortgage. I am quite interested in purchasing a home, but career and school seem to be the priority now."

If she enters the housing market, Roberts wonders whether she should take advantage of the federal government's RRSP first-time Home Buyers' Plan, which would allow her to draw up to $20,000 tax free as long as she paid it back over 15 years. Her RRSPs are currently worth less than half of that.

Roberts socks away $150 a month into her RRSP, and this year used extra funds to top the contribution up to $4,600. Last year, however, she dipped into the RRSP for a couple of thousand, and has a lot of unused room from past years. While she has almost $10,000 currently invested in an assortment of equity and balanced mutual funds, she knows that at 15%, her foreign content is too low, and she wonders if her investment strategy is too conservative.

Like most people in this prolonged bear market, she's not entirely comfortable with the stock market. "I just watch my money whittle away. I can't believe it - my statement constantly says the same thing even though I've contributed month after month," she says. "The only one not below right now is the TD Dividend Fund and I've made $9 in four months."

Retirement is not a great concern right now, though Roberts adds, "I'm not going to work forever." She sees retirement at age 60 as a viable goal.

"I feel that I'm just on the brink. I'm starting to make a little more money than I have before and I wouldn't mind thinking about buying a place," she says. "However, I also feel like I am constantly in the credit card battle, and I'm still trying to contribute to my RRSP and pay down debt at the same time. Sometimes I wonder, Should I continue with the RRSP or should I put it off a bit? I don't know, what should I do?"

WHAT THE EXPERTS SAY

Because Roberts is so young, she can afford to postpone saving for her retirement and make home ownership a priority. Adrian Mastracci, a fee-only financial adviser with KCM Wealth Management Inc. in Vancouver, and Sandra Hrvacanin, in Richmond, B.C., agree that Roberts' home ownership dream is attainable within five years.

"The main thing is she has to pay off her credit card debt and have all her debts gone by the time they buy a house," says Hrvacanin. "And she can do that."

"Overall, Roberts' expenditures are not out of line," Mastracci explains. "Sure she's got some interest costs and she's got some loans outstanding, but she's 28 and I'd say that she is in pretty good shape in relation to a lot of other people in her bracket."

Karen has three major areas that require attention, says Mastracci. "The first is to put in place a financial system to protect her from an unexpected turn of events, such as a disability or a reduction of income. The second is to accelerate repayment of the outstanding loans. And the third is to figure out how to implement her home ownership dream." Of these three, the first is the most pressing. Roberts is risking her financial future by having few available cash resources in the event of an accident, disability or another interruption to her income, Mastracci says: "A line of credit can be yanked at any time by the institution."

Mastracci would like Roberts to put away enough cash over the next year to cover three to six months of expenses. He warns that Roberts shouldn't use the RRSP as an emergency fund because once money is withdrawn it becomes taxable and Roberts will lose that contribution room for the future. In addition, "relying on credit cards and a line of credit to smooth out the expense roller-coaster has drawbacks and makes her vulnerable."

Hrvacanin commends Roberts for using the proceeds from the sale of her car to eliminate most of her credit card balance. She says if Roberts continues to pay off $200 a month on her line of credit, she could be debt-free by early 2005 - as long as she doesn't rack up her credit card debt again.

One way to quickly start generating some cash is to transfer as much credit card debt as possible to her line of credit. That would reduce her interest rates to 7.5% from 19.5%, which would save her about $200 a year in interest payments on her $1,800 credit card balance, Mastracci says.

Hrvacanin suggests Roberts consider borrowing next year's $2,900 tuition from her RRSP, through the Life Long Learning Plan, rather than take on more debt. If she does this, says Hrvacanin, Roberts should put the $242 a month she has budgeted for education directly back into her RRSP.

Both advisers say that Roberts should look on her home ownership goal as a three- to five-year plan. It should also be viewed as a lifestyle choice, not as an investment. "If it turns out to be an investment, it's a bonus, but people get into housing thinking it's the greatest investment going. Well that's a lot of bunk," says Mastracci. "There is going to be a cost through interest payments, but there's also a cost in renting. With the exception of property taxes and repairs and maintenance, there probably isn't going to be a big difference between the renting and the condo."

Rather than make a choice between paying down debt and contributing to an RRSP with home ownership in mind, Mastracci says Roberts should do both. While reducing debt quickly will save Roberts on interest costs, Mastracci would rather see her pay off the debt at the current rate of about $600 a month and keep up the $4,600 RRSP contribution listed in her budget. "It's something she has planned for, and I think she has to stick with it. It may not be the best use of money, but it gets her used to saving and that's often more important than getting the best return," he says.

Mastracci says it will take Roberts a minimum of three years to get out of debt and save the $20,000 in her RRSP for her share of the down payment - the maximum amount eligible under the Home Buyers' Plan. Along with $20,000 from her boyfriend, the couple will be able to afford a $200,000 home. "A mortgage of $160,000 at 7.25% per year will require a monthly payment approximating $1,150. The payment itself is very close to the total rent payment currently being made by Roberts and her boyfriend," he says.

Since the RRSP will play a pivotal role in helping Roberts to buy a home, Mastracci suggests she change her asset allocation to include an income instrument such as bonds or term deposits. "If the investment time horizon is less than five years, then equity investments may be too risky, especially when funds may be required on short notice for other purposes," he says.

Hrvacanin would prefer that Roberts save for a down payment outside of her RRSP. She says that if Roberts saves $439 a month, she can look at a house in the $250,000 range by 2005. Roberts' mutual funds are already well diversified, but Hrvacanin would like her to save the down payment through a more conservative, growth-oriented vehicle, such as a diversified equity mutual fund with a potential return of around 8.5%.

Hrvacanin feels it is important to save for retirement while young. "It will mean less required in the future and more time to take advantage of compounded, tax-deferred growth." However, in order to finance the debt repayment and home savings plan, she suggests that Roberts reduce her annual RRSP contributions to $1,800 a year. Once she buys the home, Roberts can increase her RRSP contributions to about $5,300 a year.

"This would provide Roberts with an estimated RRSP value of $850,000 at age 60, based upon an 8% rate of return over the long term," Hrvacanin calculates. "Including CPP and Old Age Security, this would provide an estimated annual income of $22,000 in today's dollars after tax at age 60."

Both advisers say that, even should Roberts have to take a cut in income, her goals are still realistic. "It's probably going to take her another year or two," says Mastracci. "But finances are never 100% given."

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.