Émilie*, 45, is an education professional and a single mother of two boys aged 11 and 13.
Posted at 7:00 am
She enjoys a well-paid job and an extra income through child support paid by the father of her two children.
His annual income of about $101,000 per year, or just under $70,000 in net income after taxes and deductions, allows him to fairly support the family lifestyle.
Emily finds that her ability to save for a reserve fund and a financial asset independent of her job is relatively low.
On his personal balance sheet, assets are highly concentrated in the equity of the family home (approximately $280,000 after mortgage balance) and his participation in the robust pension plan for Quebec public sector employees (RREGOP, a defined benefit) .
On the other hand, Emilie’s accumulated financial assets in an RRSP independent of her employment are limited to $26,000. In addition, Émilie has not yet made any contributions to her tax-free savings account (TFSA) or set up a registered education savings plan (RESP) for her two children.
On the liability side, in addition to the $119,000 home loan balance that is imminently renewed, Émilie’s balance sheet shows an unpaid balance of $8,000 on high-interest credit cards, as well as an $8,000 balance on a home equity line of credit. at a rate of 3.7%.
– Registered Retirement Savings Plan (RRSP): $26,000
– In a tax-free savings account (TFSA): $0
– In a registered education savings plan (RESP): $0
– In current savings account: $1,000
– In the Quebec public sector pension plan (RREGOP): defined benefits of 70% of salary after 35 years of service or at 60me emily’s birthday
– Family residence: approximately $400,000
– Mortgage balance: $119,000
– Credit card balance: $8000
– Balance of mortgage line of credit: $8,000
– Employment: $92,000
– Alimony: $11,880
Main annualized disbursements:
– Related to residence: approx. $21,000/year
– Related to family lifestyle: approx. $45,000/year
– Linked to savings/investment (RRSP): $1,320/year
In this context, Émilie seeks advice on financial planning to be able to carry out her priority projects in the medium and long term.
First of all, Émilie wants to have the means to adequately finance her children’s post-secondary studies, which are planned for a few years.
Second, Émilie wants to build up a cushion of savings with a view to replacing her aging car in the next two or three years.
At the moment, he estimates the total cost to be around $25,000, to be financed with a car loan or by leasing for a few years.
Third, Émilie anticipates having to do renovation and maintenance work on the family home in a few years. The proposed budget would be in the range of $25,000 to $30,000.
Finally, in the longer term, Émilie wonders how to optimize her independent savings for retirement, considering that she already participates in a strong defined-benefit pension plan in the Quebec public sector.
Émilie’s questions and concerns were sent for analysis and advice to David Paré, who is a financial planner and investment savings advisor at “L’Équipe Lacasse, Paré, Bédard”, which is affiliated with Desjardins Wealth Management in the region of Québec.
From the outset, David Paré considers that Émilie’s economic situation is “in general good” given her situation of parental responsibilities and her professional work with a solid pension plan.
On the other hand, at the budget level, David Paré confirms the lack of room for maneuver in the face of costly unforeseen events in the family lifestyle.
“At the moment, everything indicates that it is an outstanding balance on the credit card that serves as a little room for maneuver. But it is too expensive in interest, when she already has a mortgage line of credit available”, says David Paré.
In that context, he recommends as a priority that Émilie take advantage of the next renewal of her mortgage loan to add an amount to pay off her credit card balances and her home equity line of credit.
Additionally, David Paré suggests that Émilie add $25,000 to her next mortgage loan balance, which could serve as a reserve fund for her car replacement projects and renovation work on the family home.
“By doing so, Émilie will not only be able to consolidate her debts into a single mortgage loan on better terms, but she will also be able to consolidate her various payments into a single mortgage payment that would be less than the total of her current payments,” says David Paré. .
According to her calculations, with a new mortgage balance raised from $119,000 to $160,000, amortized over 15 years, and with an interest rate of about 4.5%, Emily would then have a single monthly payment of about $1,200.
“That’s almost $1,000 less a month than Emilie is spending these days on mortgage payments and partial payments on credit cards and line of credit balances,” says David Paré.
“Consequently, it is with this thousand dollars in available cash that Émilie could begin to achieve her main medium-term financial goal: preparing adequate funds for the post-secondary studies of her two children. »
Saving for education
Beginning with the expedited redemption of an Education Savings Account (RESP) for the 13-year-old.
“He has 4 years left -up to the age of 17- of eligibility for tax subsidies equivalent to 30% of the contributions to his PRAE up to the maximum of $2,500 per current year, plus $2,500 per previous year without contributions, explains David Ready.
“Contributing a maximum of $5,000 per year [env. 415 $ par mois] and adding tax subsidies over the years, Emilie’s oldest child’s RESP balance would be at least $26,000 at age 17.me anniversary. It promises to be a good sum to support your post-secondary education projects. »
As for the PRAE for the 11-year-old, David Paré recommends that Émilie start contributing as her cash becomes available, but limit herself to the taxable maximum of $2,500 per year.
“Because your minor child still has six years of RESP contribution eligibility before their 17th birthdayme birthday, Emily can wait until the end of double contributions [courantes et de rattrapage] the RESP in his eldest son, in four years, before increasing the contributions to the RESP of the minor up to the maximum amount of “recovery” of the years without contributing, explains David Paré.
“At this rate [2500 $ par an pendant quatre ans, ensuite 5000 $ par année pendant deux ans]the capital accumulated in the cadet’s RESP and augmented by grants over the years could approach $28,000 by age 17.me anniversary. As for the oldest, it would be a good total to start his post-secondary studies. »
Along the same lines, David Paré points out to Émilie that, in the event of budget surpluses in the coming years, she would have a financial and tax advantage by first using them to increase her minor child’s RESP contributions to the amount eligible for tax. . subsidy, instead of making contributions to her personal TFSA and RRSP accounts.
“Émilie’s retirement savings planning is already well established with Quebec’s strong public sector pension plan, hence little need to add more through RRSP and TFSA at the moment,” says David Paré.
“However, after the end of her children’s RESP contributions, and the realization without too much additional cost of her plans to replace her car and work around the house, Émilie could use her then foreseeable budget surpluses to replenish her RRSP contributions. to the maximum eligible for the tax credit. »
By doing so, explains David Paré, Émilie will also be able to optimize the tax yield of her RRSP contributions when she is likely to be in her years of highest taxable employment income.
When her RRSP has been filled to the tax-allowable level, Émilie can use any budget surplus to accelerate the final repayment of the mortgage loan, in accordance with allowable conditions, or contribute to her TFSA account as investments for future, nontaxable use. . .
* Although the case highlighted in this section is real, the first name used is fictitious.
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