MoneySense Magazine, October 2008
7-day makeover: Mr. Spend and Mrs. Save
Sam drops $300 on a vacuum he uses once. Caroline feels guilty when she spends $20. Can this financial odd couple find happiness?
This article was first published in the October 2008 issue of MoneySense.
Can a free-spending bachelor find happiness with a penny-pinching mother of two young boys? That was the question posed to us by Caroline Mills of Saint John, N.B.
Caroline, 31, told us that she has been dating Sam Crosbie, 29, for two years. Both of them work in the health-care field. Caroline is a physiotherapist, while Sam is an x-ray technologist.
When Caroline’s not busy at work, she’s busy at home. Since the break-up of a youthful marriage in 2004, she has raised her two boys, Andrew, 8, and Jason, 5, on her own. (We’ve changed names and details to protect privacy.) Being a single mom hasn’t been easy. But Caroline has not only managed to make ends meet; she’s also begun to build a tiny bit of net worth.
Three years ago she scrounged up a 5% down payment for a small 34-year-old bungalow. The house has gone up in value since then, but carrying a mortgage while raising two kids has turned into an endless struggle. Caroline keeps a keen eye on her spending, but sometimes the money runs out before the month does. “Periodically I use my credit card to pay for groceries,” says Caroline. “Between the repairs needed for a home this age, and the pathetic amount I manage to put away every month towards my children’s post-secondary education, I am constantly hoping that my car doesn’t break down and that red peppers and spinach are on sale this week.”
Two years ago, Caroline met Sam while working in the hospital’s intensive care unit. The couple started sharing coffee breaks and lunches. Sam, who had always been an impulse shopper and had run up $27,000 in credit card debt, began to feel that perhaps his life could use a bit of financial physiotherapy. “I was a 27-year-old bachelor living the bachelor lifestyle,” says Sam. “But I was attracted to Caroline’s intelligence, stability and financial goals. I was ready to move forward with my life.”
Sam and Caroline plan to move in together this fall. But they wonder how they’re going to combine their different approaches to money. They hoped MoneySense could show them a way to merge their financial lives without constant tension. “The timing of this contest is so right for us,” wrote Caroline. “We don’t want to combine our financial lives without a plan. Can you help us?”
You don’t have to probe deeply to find out why Caroline and Sam feel so differently about money. Sam’s parents divorced when he was 3. His mother remarried and together with her new husband launched a fish packaging firm. It was a big success and his mother showered Sam with money.
She supported him for eight years while he earned not one, but two university degrees — one in life sciences and one in x-ray technology. She also paid off his debt whenever he maxed out his credit card. “My mom was basically given a set of luggage on her 18th birthday and told to make her way in the world,” says Sam. “She wanted me to have the financial support she never had. So she always paid for way more than she had to.”
Unlike Sam, Caroline didn’t have an indulgent parent. Her dad was an RCMP officer who tracked every cent he made. He didn’t believe in useless or impractical gifts — he gave Caroline a stapler for her birthday one year. When Caroline was 12, her parents divorced and she soon realized her mother knew little about money. While still a teenager, Caroline became the budget maker in the family, but times were tough.
In 2000, Caroline married her first husband, Phil, while both were still students at the University of Ottawa. They had their two boys before the marriage broke up in 2004. Today, Phil sees the boys every second weekend and pays a small amount of child support that goes straight into registered education savings plans for the boys.
Sam says that he is looking forward to being a stepdad to Andrew and Jason, but admits that some aspects of family life still leave him shaking his head. “When Jason was being toilet trained he’d do this dance with his brother. The two of them would run around the house naked and then run to the bathroom to see who could use the potty first,” says Sam. “It took a while to get used to it. Of course, I’m sure there are other things that will take some getting used to when we move in together. But I know we can make it work.”
As they prepared for the Seven-Day Makeover, Caroline and Sam told us that they believed real estate was the best investment they could make. Caroline bought her first home shortly after moving to Saint John in 2004. “I wanted stability,” says Caroline. “I had $2,000 in savings, cashed in $3,000 from my RRSP and got a $4,000 bank loan to come up with the down payment on my bungalow. It needs work but my sons are happy here. It’s even appreciated nicely in value, which is great.”
Sam also owns a home. He bought it in 2006 with plans to do a quick renovation and flip it for a healthy profit. Unfortunately, the house has become a money pit. “My money habits aren’t great to begin with,” says Sam. “Renovating the house has just made them worse. I’ll be honest — if I want something, I just go out and buy it, and all of those little expenses keep piling up. My latest purchase is a $300 Shop-Vac. I used it only once to clean up some dust in the house and now it’s sitting in the garage. Caroline was really angry about that.”
While Sam respects Caroline’s frugal ways, he admits he finds some of her money habits maddening. She will spend two weeks debating whether she should make a $20 purchase. Or she will buy something, feel guilty about it, and take it back to the store. “We fight about it a lot,” says Sam. “I end up feeling as though she’s always blaming me for spending money that she feels ought to be going towards paying off my debt. What can I say? I’m trying.”
Caroline insists that she doesn’t mean to make Sam feel guilty. “I don’t like spending money, and relinquishing total control of the household finances will be hard for me,” says Caroline, who tracks her spending every week on a computer spreadsheet. “It’s a security issue with me. I like to be in control because at any time in my life when I wasn’t, it had bad consequences.”
Sam and Caroline have combined incomes of $100,000 a year. Sam’s only sizable asset is his house, which he believes is worth $147,000 and has a mortgage of $110,000 on it. In addition, he still has $27,000 in consumer debt to pay off, although he has consolidated it into one loan.
Caroline has small amounts in an RRSP and her boys’ RESPs, but, like Sam, her biggest asset is her home. It is worth $177,000 with a mortgage of $129,000. Right now, she also has $3,000 in credit card debt.
The young couple hope that Sam can sell his house quickly for his full asking price. Once he does that, he can pay off all his personal debt and move in with Caroline and the boys. That will leave the couple with just Caroline’s mortgage to pay off. “At that point, we’re hoping that there will be enough at the end of the month to save and invest. That’s when our priorities will be to beef up the kids’ RESPs, save more in our RRSPs and to begin planning for a child of our own.”
The problem is that the real estate market in New Brunswick has softened. Homes in Sam’s area are selling for less than their list price, if at all. “I’m worried about it,” admits Sam.
He and Caroline want to sell his house before they get married, which they’re hoping to do next year. They want to hold the event in either Jamaica or the Dominican Republic. They figure it will cost them about $9,000. “We want just close family and friends to be there,” says Sam. “But we want to do it right. It will be a very joyous occasion.”
Sam and Caroline were surprised to discover that real estate has historically been a so-so investment. Several of our experts — notably Norbert Schlenker and Warren MacKenzie — pointed out that real estate moves in booms and busts that can last for several years. After an extended period of boom times, real estate prices in many regions seem to be cooling off.
Sam says the news made him think that perhaps he should be more flexible when it comes to pricing his home. “I don’t think I’ll be fixing up any more homes,” he says. “I hate the idea of not getting back the money for all the time and effort I put into fixing up my current house. I’m also beginning to realize that once I move in with Caroline and the boys, there just won’t be any time to fix up houses. One house will be all that we can handle.”
On the bright side, the couple were delighted to learn that with approximately $78,400 in net worth they are doing far better than most people their age. They were especially pleased with Malcolm Hamilton’s evaluation of their situation. Hamilton, an actuary with Mercer, pointed out that many of their biggest assets are things that would not show up on a traditional balance sheet. For instance, they both enjoy great job security because they work in the health-care sector. In addition, they both have good pension plans, are well educated, and have many years to grow their wealth.
However, the most immediately useful lesson may have come from Amanda Mills, a financial therapist, who worked with our participants to explore the link between money and emotions. “I learned that our money habits are shaped by our childhood experiences,” says Caroline. “That’s helped me understand for the first time why Sam handles money so differently from me.”
Our experts agreed that Sam and Caroline are in good shape, provided they can learn to respect each other’s approach to money and to set priorities.
Step No. 1 is for Sam to sell his home. MacKenzie, Schlenker and financial adviser JoAnne Anderson acknowledged that it may be tough for him to accept less than he thinks he should get, but Sam has to realize that there is a cost to not selling. Every month he keeps the house, he has to pay mortgage interest, property taxes and utilities. He should keep in mind that his capital gains will be tax free — and they can be used to pay off his personal debts.
Once those debts are gone and Sam has moved in with Caroline and the boys, the couple should keep things simple. Schlenker estimated that with a combined household income of $100,000, Sam and Caroline should have at least $10,000 a year to invest. The best way to use that money? To pay down their mortgage. That’s right — no fancy investing strategy, no stock portfolio. “Paying down your mortgage is a risk-free investment that is going to produce a guaranteed after-tax return of 5% to 6%. That’s a better investment than an RRSP for now,” says Schlenker. “Once the mortgage is paid off, you can begin applying your extra cash to the kids’ RESPs and, when those are topped up, you can build up RRSPs for yourselves. At that time, you can consider investing in low-fee mutual funds or exchange traded funds. But not before the mortgage is completely gone.”
To avoid arguments over money, Debbie Gillis, a credit counselor and one of our presenters, recommended that Sam and Caroline do their grocery shopping one day each week instead of making numerous trips to the convenience store after work to pick up groceries. Our experts also stressed that the couple must respect each other’s feelings. For Caroline to feel comfortable, Sam will have to agree that there will be no further debt — each of them must agree to pay off their credit card balance in full at the end of every month. “Credit card debt is ugly, high interest debt,” says MacKenzie. “You should not be carrying balances on your credit cards.”
On the other hand, some indulgences are worth it and Caroline has to be willing to bend when the occasion demands it. Spending $9,000 on their wedding is worth it, our experts say, because the memories will last a lifetime. But the smart way to pay for the wedding is to save up the money, rather than charging it. “Tuck some money away beforehand,” says Schlenker. “Between the two of you, you have enough income. Separately you’ve been living frugal lives and never saw $9,000 in one chunk. I’ll bet you can put it together in no time.”
Six weeks later
Sam has moved in with Caroline. To help mesh their money habits, Sam has already cut up some credit cards and is paying more attention to his spending. He’s also put his house up for sale, hoping to sell it privately. “He’s not allowed to shower or sleep at his house because we have it perfectly cleaned and staged,” says Caroline. “We are very much looking forward to putting his house behind us.” But after six weeks on the market, there have only been four people over to look at the house and no offers. “If it doesn’t sell by mid-September, I’m going to list it with an agent,” says Sam.
The couple have visited the human resource department of the hospital where, on the advice of financial planner Anderson, they have reduced Sam’s life insurance coverage to $150,000 while Caroline has raised hers to $150,000. “I know, it’s baby steps,” says Caroline. “But everything really depends on getting Sam’s house sold. Then we can put the rest of the plan into action.”
Can Sam get what he thinks his house is worth? Can the couple mesh their money habits? Will their plans for an expensive wedding throw their hopes into disarray? Find out what happens next at www.moneysense.ca/samandcaroline.
MoneySense Magazine, October 2008