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Case Study: Paul and Melanie Want to Buy a House

Paul emailed me for some guidance on his financial situation.  Paul and his girlfriend, Melanie, has good combined income, some debt, and a dream of owning a home in the very near future.  Paul emailed me all of his financial stats to be shared with MDJ readers.

We both live in Ontario.  Melanie lives in Mississauga and I live in Markham.  Due to life circumstances and other factors, we are both currently living at home with our respective parents.  We are 33 and 28 years old.

For our future house, we are looking at $290,000 to $300,000 price range and, realistically are looking to put down the minimum 5% down.  We are flexible in the location but would prefer to live near my work (Richmond Hill) so there is a minimal commute.

For other financial goals I would have to say it would be like other average Canadians: a) pay down mortgage (asap), b) save for our future retirement, c) save for children’s education.

Paul (Expenses)

EXPENSE Monthly Yearly
Rogers 200 2400
RBC Loan 515 6180
CAR Insurance 145 1740
Future Shop 50 413 Ends August 2009
GAS (RBC Visa) 350 4200
SPEND 1000 13000
Misc. 55 660
Total 2315 28593

Melanie (Expenses)

EXPENSE Monthly Yearly
CAR Insurance 100 1200
TD VISA 85 1020
FIDO 100 1200
Rogers 40 480
Future Shop 60 498 Ends August 2009
BMO Mosaik 300 3600
School 115 1380
Gas 150 1800
Spend 450 5400
Total 1400 16578

Paul & Melanie (Total Debt)

Type Amount Interest
TD VISA 3600 11.25
Future Shop 911 0
BMO Mosaik 11200 11.9
RBC Loan 22631 8.8
School Loan 3629 6.5
Total 41971

Paul (Mortgage – Rental Property – 50% Owner)

Mortgage Total 242550 3.40%
Monthly Mortgage Payments 1100 Prime – 0.60%
Monthly Rent 1850
5 Year Variable
40 Year Amortization
1st Mortgage Payment: June 2008

Paul & Melanie (Income)

Monthly Net Monthly Gross Yearly Gross
Paul $3,700 $5,700 $74,100
Mel $1,800 $2,200 $28,600
Total $5,500 $7,900 $102,700

Paul (Savings)

ING Savings 5900
Investments 1564
ING RSPs 1585
Total 11049

Melanie (Savings)

ING RSPs 450
Total 450

Paul & Melanie (Savings per Paycheck)

Bi-weekly Yearly
Paul 692.5 18005
Mel 200 5200 Will begin Jan/09
Total 892.5 23205

More Numbers

To add to the numbers above, a $300k house with a 5% down payment and 5.25% interest rate, would cost around $2080/month including property tax (~$300/mo), insurance (~$45/mo).   However, this does not include utilities which can vary by province/state.

Here are some of my initial thoughts that stand out.  With a combined after tax income of $5,500 and expenses that total $3,715 that leaves $1,785 every month in positive cash flow.  If Paul were to “spend” a little less during the month, they could easily have $2,000/month in cash flow.

Even with the decent cash flow, they currently don’t pay any rent as they live with their parents.  This means that the $2k cash flow would have to support their house payments which is clearly not enough.  However there is hope as they have high debt servicing costs that can be paid off.  In addition, they plan on staying put for another year or so.

Get Rid of that Debt!

What really stands out in the report above is the amount of debt that they hold, bad debt at that.  If it were me, I would take all of the savings that are not RRSP’s, and pay down debt starting with the highest interest credit card debt.  If they were to wipe out their savings but keep their chequing account and RRSP balance in tact, they would have around $8,500 to work with.

Putting the entire $2,000/month of cash flow (in addition to the $8,500) towards debt, it would only take them around 17 months or around 1.5 years to pay it all off.  The more they save, the faster the debt gets paid off.

After paying off the debt, it then would be a great time to start saving for a down payment on the dream home.  As it stands right now, 5% on a $300k house would be around $15k down + closing costs.  In fact, it may be a good idea to take advantage of the RRSP Home Buyers Plan and max out Paul’s unused contribution room.  They can then withdraw the proceeds from the RRSP as the down payment when the time is right.

The House

How long will it take to save for the $15k down payment?  Not as long as you think!  Since they will have their debt taken care of, it means that the extra cash flow can be saved; approximately $1,300/month.  In total, they will have around $3,300/month cash flow, which will cover their down payment in about 5 months (not including potential income tax returns).

What does their cash flow look like with a new home?  With a monthly payment of around $2,080 plus utilities, it seems that their cash flow of $3,300 should be more than enough to cover it.  Although personally, I wouldn’t be comfortable with a mortgage that is greater than 2 times salary.  Then again, I am fairly conservative when taking on new debt.

Final thoughts

In summary, I believe that it will take about 2 years for Paul and Melanie to dig themselves out of the hole and into their dream home.  However, that’s only if they are willing to buckle down and get aggressive with paying down debt.

Do you have any suggestions for Paul and Melanie?

Disclaimer: The articles posted on Million Dollar Journey are the opinion of the author and should not be considered professional financial advice. Please consult a financial professional before making any major financial decisions.

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FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 71 comments… add one }

  • Gates VP January 14, 2009, 2:12 pm

    @Sarlock: …aggressively seek out their dream home for 10% or 20% cheaper than they could buy it now.

    This is a very good call, I’m actually expecting bigger drops in some regions I’m looking at, though I could be under-estimating increased labour / materials costs. The other thing to keep an eye on is salaries in a volatile environment. Even a modest increase in salary can make a big difference, especially if salaries remain stagnant elsewhere.

  • dogatemyfinances January 14, 2009, 10:37 pm

    How humiliating to both live with your parents AND commute so much you have a beastly gas bill.

    Whatever happened to the standard, obvious solution? RENT A CHEAP APARTMENT.

    It’s just silly to buy a really expensive house with someone you aren’t married to, and have never lived with.

  • DAvid January 14, 2009, 11:58 pm

    That’s a little harsh. There could be many reasons why the authors are staying home, including the care of a family member. It’s not really far to pre-judge the situation.


  • Mechanonuke January 17, 2009, 9:19 pm

    A number of good posts above Re: P&M’s finances. Scott in post #36 has some particularly good suggestions.

    Therefore in addition to those, here are some more practical(contrarian?) suggestions that could be taken immediately:

    1. Move in together now, but stay at one of your parents houses. I assume that one of the 2 parents may be willing to accommodate this situation as both P&M are currently making good money and living at home. [This will benefit P&M by a)enabling them combine and eliminate a number shared expenses, b) may give a tax/insurance break for being common-law. c) allow them to agressively save (if they are disciplined enough)]

    2. Use P’s savings to pay off as much as possible on the TD Visa and BMO Mosaic CCs. Consolidate the remaining debt by obtain a line of credit at a lower interest rate for the remaining debts (BMO Mosaic, RBC loan, student loan) – Credit unions offer decent rates (6.25% now) and typically do not report to the credit bureau.

    3. Reduce the credit limit of the TD Visa and BMO mosaic credit cards to ~$1000. No need for more.

    4. Set up an effective budget. Pay all debt/expenses on payday and divvy up the remaining cash for variable expenses (gas, food, entertainment, etc) between the 2 of them evenly. Use cash instead of credit cards – this will make P&M aware of how much they are actually spending.

    5. Get married in a cost effective way. (i.e. immediate family and friends.) This will save you some money for the house down payment.

    6. (A bit contraversial…) Ask each of your parents if they are willing to help you with a house down payment. Most parents are, therefore P&M’s are likely no exception. On a side note many parents will leave their children their estate only after they pass away. As a parent, I would like to see my children enjoy a potential gift (i.e. help with a down payment), instead of just simply passing on an estate after I die. (imo)

    7. Go to Chapters (or better yet the public library) and get educated about a) budgeting, b)the most basic accounting practices (to keep track of your finances and rental property investment), c)read up on RRSPs, TFSAs, investing, and basic financial planning. By educating themselves P&M can decide for themselves plan (or advice) best works for them.

    Good luck P&M

  • Paul and Melanie January 20, 2009, 6:48 pm

    Hello all….just wanted to give you guys a quick update to some of the decisions we have made after sorting through the advice you have taken the time to give us. I will provide FT with some more detailed information for you guys to compare with the past data but for now, I will quickly let you know what we have done: 1) paid off both Future Shop Credit Cards, 2) Paid off TD Visa, 3) transferred BMO CC balance to MBNA CC (@ 1.99% until Nov 2009).

    We decided to pay the following debts off first:
    1) Melanie’s school ($3500 @ 6.5%)
    2) RBC Loan ($21956 @ 8.3%)
    3) MBNA ($11600 @ 1.99%)

    Paying off the school loan will free up an extra $115 in money we can use towards our ‘focused debt payments.’

    Currenlty we are both paid on a bi-weekly schedule. My income is fixed and Melanie’s income fluctuates depending on her hours worked. We decided to take $900 and $410 from our respective bi-weekly pays and put the money specifically toward debt repayment. We expect to pay off the school debt by the end of January 2009. This will bring our debt down to approximatley $33556. We also promised ourselves to be debt free by the end of 2009. We are also looking to take more shifts at work and look at creating additional income streams.

    – paul and melanie

  • DAvid January 20, 2009, 10:08 pm

    Paul & Melanie,
    Congrats on taking the first steps. It looks like you have done a lot of soul searching in arriving at your decisions. You have also set some firm and aggressive goals. Good, it is something to stretch for.

    One question: is Melanie’s school loan a Canada Student loan? If so, it might be better to look at the other loans first, as the interest costs on it are tax deductible, reducing your interest cost a fair bit. I’d suggest you retain your repayment plan, just alter the order of loans to atack!


  • Mark January 26, 2009, 12:38 am

    Paul, Melanie,

    Just wanted to throw in my 2 cents worth; your on a great path! Keep the focus & I’m positive the goal will be reached even before the anticipated date!

    My wife & I decided last year to move to Ottawa (to be closer to family) and since taking that decision, took the steps to clear & pay off all c/c debts and loans.

    Not only has it proven to be easier than anticipated but with the sale of 1 of our 2 homes (rental property), we now can clear all our debts with money leftover for our downpayment.

    When we sell our residential home, hopefully within the next month or two we will be in a great position to start our new life in Ottawa!

    Keep the focus!


  • Detox February 25, 2009, 1:00 am

    I really love these case studies, they are great for people to read and learn from.

    One quick observation…………………in the finanical breakdown, I don’t see all of the other expenses listed that comes with owning a house, and considering they are currently not even renting these would be all new expenses. AND SIGNIFICANT EXPENSES

    For Example:

    1) Municipal Water Fee
    2) Annual Property Tax
    3) Municipal Garbage Fee
    4) Monthly Groceries
    5) Monthly Gas
    6) Monthly Electricty
    7) Annual House Maintenance (furnace breaks, landscaping, repairs etc)
    8) Cable TV/Internet

    I would STRONGLY suggest renting a place for a year and monitoring bills and savings. If that works out well, start looking for a house because in one year it will be an even better buyers market.

  • Paul and Melanie March 12, 2009, 11:21 pm

    Hello eveyone,

    Just wanted to give everyone a very quick update:

    Debt as of Dec 31/08 => $41971

    Debt as of March 8/09 => $27431

    paul and melanie

  • Ray March 13, 2009, 12:24 am

    good job thats almost 50% reduction in debt

  • FrugalTrader FrugalTrader March 13, 2009, 7:29 am

    Paul and Melanie, congrats on getting aggressive on your debt reduction! Keep us updated on your progress.

  • DAvid March 13, 2009, 10:55 am

    Excellent start! The $7000 you have reduced your debt in the past 3 months is stellar. Keep working on reaching your goals.


  • DAvid March 13, 2009, 4:18 pm

    Paul and Melanie,

    I had to head out in short order after I made my earlier post, so here’s a bit more.

    Please keep track of how you accomplish your goals, what you did, which pieces of advice worked for you, and the impacts it had on your lifestyle. It would make an interesting counterpoint to the original blog to be able to come back and share your successes with the wider world. Who knows, your tale might inspire others to do likewise.


  • Paul and Melanie April 27, 2009, 5:13 pm

    Hi again,

    Just wanted to give everyone a very quick update:

    Debt as of Dec 31/08 => $41971

    Debt as of March 8/09 => $27431

    Debt as of April 27/09 => $21104

    paul and melanie

    David: Thanks for the advice…we will try to keep an account of our thoughts along the way in order to share with others.

  • DAvid April 27, 2009, 11:33 pm

    Paul & Melanie,
    Sixty-three hundred dollars of debt reduction in the past 6 weeks – WOW! Best wishes on following the plan you have set for yourselves.


  • Paul and Melanie July 24, 2009, 1:06 am


    Just wanted to give you a quick update:

    Debt as of July 23, 2009 => $13211

    Paul and Melanie

  • Brian Poncelet,CFP July 24, 2009, 6:04 am

    Hi Paul and Melanie,

    You guys are doing great. Here is one idea you may consider. Increase your deductable on your cars. I will assume you probably have a $500 deductable. Call your insurance company and find out how much you would save if you increased it to say $2,000. You may find that on two cars this will net you about $200 to$400 per year. Taking this money to pay down more debt is like making another $300 to $600 gross or more a year! The “extra risk” you take is really another $1500 to self insure, for the savings this may be worth it.

    Going one step further once you get the house take this money to insure yourself which is more valuable than the cars!


  • FrugalTrader FrugalTrader July 24, 2009, 9:24 am

    Paul and Mel, in a little over half a year, you have gone from $42k in debt to $13k, that is amazing! I’m happy to see that you two have some real saving power, it’s only a matter of time before you have a large cash down payment for that dream house of yours.

  • cannon_fodder July 24, 2009, 10:21 am

    Melanie and Paul – it would be very interesting, and could prove quite educational, how you managed to get through so much debt so quickly, especially after the Christmas bills start coming in the mail. You managed to elminate debt fastest from the beginning of the year to early March.

    Did you forego RRSP contributions (very popular at that time of year)?

  • Paul and Melanie July 24, 2009, 10:58 am

    @ Brian:

    I actually tried doing this earlier in the year. Currenlty, I am at $1000 deductable and the broker advised me that raising the deductable would make a difference of about $2 a month. I haven’t looked into any further since. Maybe when the dust settles, I can revist my insurance as I do not mind having a $1500-$2000 deductable at all (do they even have a $2000 deductable?)

    @ FT:

    Thanks! I marvel at we have been able to accomplish – we owe much thanks to you and the wonderful ‘team’ here at MDJ.

    @ cannon_fodder:

    At the beginning, we took our savings and used almost all of it to pay off the debt. Since we began our ‘debt reduction plan’ we have never missed a payment of at least $1320 every two weeks. I took extra OT shifts at work (20 to date) and still have the rest of the year to take more shifts. All of this money went to our debt reduction. My RRSP contributions were zero this time around. My RRSP is pretty paltry at this time. Something for me to think about moving forward. When we are debt free, I will be more then happy to go into more detail about our journey.

    Paul and Melanie

  • DAvid July 24, 2009, 12:18 pm

    Twenty weeks to go!!!! You should be able to make your first contribution to your house savings account by Christmas.

    Well done!


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