Oodles of student debt

[VoxPopuli]

April 2013 marks one year since I started this diary. Before I post the regular monthly update, here's the big picture of our progress from the last twelve months.

Excluding vehicles and household goods, my wife and I have a current household net worth of $3,604.19. That may not sound like much, except that one year ago our net worth was minus $47,398.93. In other words, we improved our net worth by $51,003.12 in the last twelve months.

While our index funds are up slightly since last year, it's safe to say that 95% or more of the net worth improvement came directly from either paying down debt or adding to our savings. Together we made about $120,000 before taxes during the last twelve months, and because of built-up tax credits and deductions we were able to take home about $100,000 of that. That means we were able to "save" roughly 50% of our take-home pay over a twelve month period (counting debt reduction as savings).


On April 1st, 2012 our balance sheet looked like this:


Cash: $56,949.67
Registered accounts: $34,019.12

Total assets = $90,968.79

Student debt: $105,130.85
Consumer debt: $33,236.87

Total debt = 138,367.72

NET WORTH = -$47,398.93



On April 1, 2013 our balance sheet will look like this:

Total Cash: $35,263.39
Total Reg'd Accounts: $62,591.11

Total assets = 97,854.50

Student debt: 94,180.91
Consumer Debt: 69.40

Total debt = $94,250.31

NET WORTH: $3,604.19



Last year at this time we had a car loan of more than $13,000 (at 7.29% interest), and $10,000 on a LOC (at 6.99%). We had a bunch more debt on credit cards with low promotional interest rates. In total, we had more than $33,000 in consumer debt. Shortly after April 2012 we paid off the LOC and vehicle loan, and we've been consumer debt-free ever since.

We have combined monthly payments of about $1,250 on our Canada student loans and my professional student LOC. About $800 of that goes to principal, and with a couple of extra payments we've knocked nearly $11,000 off our student debt in the last twelve months.

Add it all up, and we've eliminated $44,117.41 worth of debt in the last twelve months.

When I posted one year ago we had just sold our house, so we had nearly $57,000 in cash sitting around (plus just over $700.00 in TFSAs). A big chunk of that cash went right away to paying off the consumer debt, but we've been stuffing money into savings and TFSAs since then, to the point where we now have $62,350.71 in cash and TFSA savings.

Add in some modest gains in our retirement accounts, and we've managed to increase our assets by $6,885.81 since April, 2012.

Even with our incomes increasing, we won't be able to duplicate this year's success any time soon. We're currently living in a very low cost-of-living area, but we expect to move sometime this year. We'll also be looking to buy a house when we move, with all the immediate and long-term expenses that brings. Sooner or later there will be children and maternity leaves. While our progress will inevitably slow, we wanted to make sure we got a real head start in our first year with both of us working. I'm happy we were able to achieve that goal.

[VoxPopuli]

Here's the regular monthly update for March. As expected, this was a huge month due to large tax refunds for both my wife and I. She got big tax deductions for moving in February 2012 and the associated costs of selling our house, while I had something like 50,000 in federal and provincial tuition tax credits save up from law school and undergrad. Our combined tax returns were nearly $12,000.

We're starting both a job hunt (for me) and a house hunt in our home city, where we'd like to move back later this year. We will more than likely buy a house when we move, meaning adding to savings for a down payment is still priority #1. Our cash/TFSA savings are now getting to the point where we could actually put down 20% on some homes, though we're thinking more and more about putting down 10% and getting a more expensive home that we won't outgrow. Decisions, decisions.


Cash:
Actual Cash: $20.00
Uncashed cheques: $0
RBC chequing: $20,902.51
RBC HI savings: $5,038.10
Scotia chequing: $9,302.78

Total Cash = $35,263.39 (+$12,063.92)

Registered Accounts:
RBC TFSA:$26,408.05
RBC RRSP:$14,923.27
Standard Life RSP: $20,580.52
Questrade TFSA: $679.27

Total Reg'd Accounts = $62,591.11 (+$357.32)


Debt:
Scotia Visa: $10.49
MBNA Mastercard: $58.91
Husband Student Loan: $23,467.43
Wife Student loan: $17,602.81
Professional Student LOC: $ 53,110.67

Total debt = $94,250.31 (-$2,155.02)


NET WORTH: $3,604.19 (+$14,235.28 in March)

[My Own Advisor]

Tough decisions, re: house but I'd wait until you have 20% AND the home you want. There is really no rush, rates are going anywhere and if you can save $44k (which is an amazing amount in one year), if you could do that again in another year, you'd have a solid downpayment.

If you could kill at least one if not 2 of 3 student loans before the house purchase, you won't be servicing at much debt and more of your income could go to mortgage (when you get it).

Continued good work saving.

[VoxPopuli]

Tough decisions, re: house but I'd wait until you have 20% AND the home you want. There is really no rush, rates are going anywhere and if you can save $44k (which is an amazing amount in one year), if you could do that again in another year, you'd have a solid down payment.

If you could kill at least one if not 2 of 3 student loans before the house purchase, you won't be servicing at much debt and more of your income could go to mortgage (when you get it).

Continued good work saving.

I would absolutely love to wait until we are debt-free, have 20% down and can buy the home we want. I just don't see the financial benefits outweighing the 5-6 year wait it would require.

We currently have $62,500 in cash and TFSAs. We currently have free cashflow of about $2,500/month to devote to savings or debt repayment, as long as we're in our current location. When we move (likely in a few months), our housing costs would go up by at least $1,000/mo, leaving us with $1,500/mo to add to savings or pay debt.

If we were to take ALL of our cash flow ($1,500/mo) and devote it to the student loans (on top of our minimum payments), then our two Canada student loans could be gone in ~21 months. The professional student line of credit could then be gone in another 15 months or so.

So, if we threw all of our free cash into debt repayment, we could be debt-free in about three years. However, we'll likely have two maternity leaves in the next four years or so, which is going to reduce our ability to throw money against the debt. Let's call it four years to be debt-free, then.

In four years, we'll still have the same $62,500 in savings. Maybe a little more, if the index funds do well, but then again we'll be fighting inflation on the balance on the mean time.

In order to buy us a house that will last us twenty years, we're probably looking at $400,000 to $450,000 in our home city. So we need to come up with another $17,500 to $27,500 to have a twenty percent down payment. We'll also need some more for closing costs and a modest emergency fund- better save up another $15,000 or so.

In order to save $32,500 to $42,500, we're likely looking at a year to two years. That's a total of five to six years from today.

Five to six years of trying to find and keep the right rental house, hoping the landlord doesn't jack up the rent or move in his cousin so that we have to move our young family (likely more than once). Five to six year after which we have virtually all our net worth tied up in housing, with no retirement savings for me at the age of 36 or 37.

I certainly understand the financial benefits of waiting until we're debt free and have 20%, I just think that in our case they are outweighed by the benefits of buying sooner.

[YYC]

Just wondering how the transition to the oil patch is going? I assume you're all set up and making some "real money" by now?

[Pigzfly]

Just wondering how the transition to the oil patch is going? I assume you're all set up and making some "real money" by now?

Teeehehe.

Well done on posting such a large increase in net worth/saving so much. Here's hoping that you can put another really solid year under your belts. That will take you a long long way to being debt free.

Any chance you could put up with a roommate or two for a year, once you buy a house? Just throwing it out there... my spouse vetoes this discussion every time, haha.

[lonewolf]

Given your future earning power, I think your overall balance sheet looks very good.

I'd totally forget about retirement saving right now. Your earning power is likely to rise faster than inflation. Go ahead and pay down debt - leave saving for later. Besides, your wife is already building retirement savings through her pension - that is enough for right now.

I have one big question: are you thinking about buying a house which you could carry on one (your) income alone? If not, have you factored the cost of daycare into your affordability calculations?

This hasn't ever been my personal situation, but I do know other moms who have wished they'd planned things differently when they bought a house that requires two salaries to afford, and then they had kids and couldn't afford to stay home with them, but also got killed on daycare costs for two kids in care. Two pre-school age kids will run you more than $2000/month (deductible from lower income-earner's salary) in my city. ...Just a thought.

As for what you should do - you should do what you're most comfortable with, and that sounds like Option 1 for you. I can't recall what CHMC premiums run. Sometimes people borrow from a relative in order to avoid the CMHC premiums.

MoneyGal is
Canada's, Suzy Orman

[VoxPopuli]

Just wondering how the transition to the oil patch is going? I assume you're all set up and making some "real money" by now?

My oil patch dreams remain on hold for now...

Any chance you could put up with a roommate or two for a year, once you buy a house? Just throwing it out there... my spouse vetoes this discussion every time, haha.

I'm actually very interested in having roommates after we buy; we've lived with roommates for nearly ten years, up until about fifteen months ago. The two complicating factors will be 1) We have two noisy dogs; and 2) We will likely have a couple of babies around at some point. That limits our pool of potential roommates pretty heavily. We're getting to the age where there are few friends who are still looking to rent a room, and we've had bad results renting rooms to unknowns in the past. I love the idea of roommates for a year or two, I just think it would be tough to find candidates.

[Young&Ambitious]

Vox, what about getting a house with rental income potential via a seperate suite?

[VoxPopuli]

It's possible, but:
a) a legal suite tends to add quite a bit to the price of the home, which would further squeeze our current cash situation;
b) I'm not sure it really solves the noisy dog vs thin walls problem;
c) the type of homes we're looking at rarely come with suites; and
d) We'd like to buy a house that will last us for the next 20 years (buying and selling houses is so bloody expensive). While the rental income would be nice now, I'm not sure we want to be dealing so closely with tenants for the next 20+ years.