How to pay off debt and save for the future
Can two young chiropractors with a big mortgage and more than $140,000 in combined student loans and line-of-credit debt still find money to start saving and investing for the future?
Can two young chiropractors with a big mortgage and more than $140,000 in combined student loans and line-of-credit debt still find money to start saving and investing for the future?
Phil and Candace Ranjan are smart people. In fact, the two chiropractors have four university degrees between them. And for a young married couple still in their 20s, they also have a healthy combined income of $110,000. But the pair, who live in London, Ont., also has three huge liabilities: $47,000 in student loans, $94,000 on a line of credit and a $400,000 mortgage on a home they purchased last year for $431,000. In total, they are starting married life deep in the red, with net liabilities of $96,800. âWe have huge expenses and absolutely no spending money,â says Phil, 29. âWeâre professionals but weâre not earning to our fullest potential. We know we need to pay down our debt but arenât sure which way is best. And weâd love to start investing but we just canât seem to save any money. Itâs frustrating.â
The Ranjans (whose names weâve changed to protect privacy) married last fall. They spent two years saving up for the cost of their wedding and $31,000 for a down payment on the 1950s-style red brick bungalow they now own. âItâs a fixer-upper, but itâs near nature trails and we really love that,â says Candace, 28. âWe figure weâll be doing small renovations for a few years. We want to spend $2,000 this spring to lay more tile.â
Another ongoing expense is the cost of setting up practice. Right now, they both work for Philâs fatherâa chiropractor who plans to retire in 10 years. âYou can buy a business yourself but thatâs expensive,â says Phil. He explains that chiropractors starting their careers must practice with an associate, and usually give up 40% of their salary to that mentoring associate for three years. âMy dad is only having me give up 20% and Candace none at all. Thatâs a good deal for us.â
Living in Philâs parentsâ basement for free between 2011 and 2013 was another boon for the coupleâit was instrumental in helping them save money for their wedding and home down payment. And because Phil graduated from chiropractic school in 2011, a year before Candace, he was also able to whittle down his student debt from $30,000 to $15,000. âIâve always wanted to be debt-free,â he says. âThatâs important to me.â
Where the couple has really fallen short fiscally was in failing to take a harder look at their joint finances until last October, when they moved into their new home. The mortgage aside, the majority of their debt is tied up in Candaceâs post-secondary education costs.
âChiropractic college alone was $22,000 a year for each of us,â says Phil. âMy parents stepped up to the plate each year with $10,000 and the remaining $12,000 a year was funded through student loans.â Candace also had help with financing from her parents but not to the same extent. âTuition, books and residency fees were overwhelming,â she says. âMy parents gave me $500 a month towards rent but nothing else.â Candace now has $94,000 outstanding on her line of creditâmost of it for chiropractic college expensesâand another $32,000 in student loans.
âMy biggest worry is Candaceâs line-of-credit debt,â says Phil. âWe feel trapped by it.â Theyâd like to pay off their student loans first, which carry a 5.5% interest rate. But Phil has heard rumors from friends that the interest rate on Candaceâs line of credit can, at a momentâs notice, be raised to 6% from its current 3%. âThe details of how her line of credit works in particular are a mystery to me, but I donât want to appear pushy so I donât ask any questions,â he says. âBut having it makes me nervous. Iâm curious to find out if we could transfer the loan to another bank and try to get a lower rate.â
Additional costs Phil and Candace never foresaw were how expensive work insurance and chiropractic association membership fees would be. Right now, they pay $3,126 annually in malpractice insurance, almost $2,000 in disability insurance, and $1,669 in critical illness insurance for two policies each worth $100,000. âI like the idea of getting $100,000 right away in case one of us gets critically ill,â says Phil. âAnd if by age 65 we havenât used it, we get our premiums back. Itâs like a forced savings plan for us.â
They are also paying $1,850 per year for two whole life policies, also worth $100,000 each. âItâs permanent insurance,â says Candace. âWe pay the premiums for 10 years, then donât have to pay any more. That seems like a good deal to us.â
Annual professional membership fees to the Ontario Chiropractic Association (OCA), the College of Chiropractors of Ontario (CCO) and the Acupuncture Council of Ontario (ACO) also eat up about $5,000 of their expenses. âWeâre happy with our malpractice insurance but, coupled with other insurance costs, that totals more than $13,000 per year. Thatâs a huge expense that crept up on us,â admits Candace. âA good friend of ours sold us most of our insurance,â adds Phil.
Despite all these expenses and considerable debt, one thing working in Phil and Candaceâs favour is their great work ethic. âIâve always tried to save as much as possible and contribute to my own education bills,â says Phil, who spent his summers off from school working at a variety of part time jobs in his native London. Candace, who grew up in Ottawa, has also had part-time jobs since starting university. âI worked for a steel factory for three summers, watching the molds and making sure they didnât overflow,â she says. âIt was a safety inspectorâs job and it was boring work, but it paid very well.â
It was in university while both were studying kinesiology that the couple met. âI even went to a class I wasnât supposed to be in so I could meet her,â says Phil. âShe was just such a friendly person that I was drawn to her from the start.â Then, in 2007, Phil entered Chiropractic College. Candace followed a year later.
Today, another concern the couple has is whether theyâre too focused on putting every spare penny they have toward debt elimination. Should they also be building their investment portfolio using RRSPs and TFSAs? They used all the money from their RRSPsâ$19,000âfor the Home Buyers Plan last summer and are on track to pay it back in 12 years. They have $9,000 in a savings account earmarked for repairs to their home. They also have an emergency fund made up of $5,500 in an investment account holding guaranteed investment certificates (GICs), as well as $2,700 in Philâs TFSA. He plans to contribute just $600 to the TFSA this year. âWe really want to get started with a savings program,â says Phil. âI just donât know if we should start now, or after the line of credit and student loans are paid off. Itâs hard to say whatâs best in the long run.â
The good news is that because Phil and Candace are self-employed, and because they also have tax credits remaining from their post-secondary education, their tax bill is lowâjust $12,000 a year between them. So this year, after all expenses are paid, they hope to have a net income of about $8,000.
Theyâd also love to learn more about investing and maybe even buy a rental property in a few years. âI think real estate is a great investment when we can afford it,â says Phil. âI love the idea of having someone else pay off my mortgage. But for now, I still have a huge one of my own so I probably shouldnât get ahead of myself.â
The coupleâs main focus is their goal of being debt free in 15 years. They realize that goal is a lofty one, but theyâre also counting on having more future income as they continue to grow their business and get more clients. âWeâre both self-employed so our income will vary, but in five to seven years I should be able to earn $200,000 and Candace about $150,000,â says Phil. âThatâs heartening.â
And one day soon theyâd also like to start a family. âWeâre looking forward to being parents,â says Candace. âItâs the key to a happy life for us. We canât wait.â
Phil and Candace Ranjan are smart, young professionals at a busy time in their lives. Since graduating two years ago, theyâve started jobs, gotten married, and even bought a house. âThatâs amazing,â says Annie Kvick, a fee-for service planner with Money Coaches Canada in North Vancouver. âItâs difficult for young people just starting out but Phil and Candace are being smart with their money. That will pay off in the end.â
There are also savings to be had with the coupleâs insurance, says Jack Bendaham, an independent insurance broker in Thornhill, Ont. âBut they need to make sure they have the right policies in placeâand at the right cost.â
To eliminate their debt in 15 years and start an investment plan, the Ranjans need to do the following:
Pay off student loan debt first. The interest rate on the Ranjansâ student loans is 5.5%. âPay off Candaceâs $32,000 student loan in five years,â says Kvick. âIt should be a priority. Then Philâs.â When those are paid, Kvick says the Ranjans should take the money that was going to student loans and put it towards their line-of-credit debt.
Phil shouldnât worry about fluctuating interest rates on Candaceâs line of credit. Kvick adds, âJust keep paying your bills on time and improving your credit score. If you do that, increases will be minimal.â
Another factor working in the Ranjansâ favour are the larger salaries they can anticipate as they become more established in their careers. âAs their income increases over the years, 50% of any salary increase should go towards the debt,â says Kvick. âIf they follow this plan, their non-mortgage debt will be paid off in 12 years.â
Look at your insurance. The Ranjans are paying more than $5,400 towards disability, critical illness and life insurance coverage. Thatâs a lot. If the Ranjans feel strapped for cash, insurance expert Jack Bendaham says they should consider cancelling their whole life policies and replace them with term insurance. That move alone would save them $1,850 a year.
âThe couple should have enough life insurance to pay off their debt plus at least five times their annual income,â Bendaham says. âAnd since kids will be in the picture soon, I think they should buy a $1 million joint-to-die 20-year term life insurance policy. It will cost them only about $900 a year. The younger you are, the less expensive insurance can be.â
Regarding their critical illness insurance, Bendaham says itâs expensive but feels they need it. However, they can modify the policy to save some money. âThey can save themselves about $300 annually by cancelling the âreturn of premiumâ rider which adds 20% to their premiumâmaybe more.â
Contribute to RRSPs. Right now, the Ranjans have $8,270 available for investment every year. Kvick advises the couple to put $4,000 to Philâs RRSP and $4,000 in a spousal RRSP for Candace each year. The money should be invested 80% in equities and 20% in fixed income because of their long time horizon before retirement.
âThey can use their TFSA as an emergency fund,â says Kvick. âA portion of the tax refund from the RRSP contributions can be put towards the TFSA and the rest toward their student debt.â
Get the help of an adviser. If the Ranjans feel they need an adviser, the MoneySense Approved tool is a great place to look for a fee-for-service planner. âItâs also a good idea for them to have an annual financial check-up with an adviser to make sure they stay on plan,â says Kvick. Because if they stay the course, they should be completely debt-free in 15 years, âwhich is amazing.â
Only at that time should they consider investing in a rental property. âOptions will open up for them,â says Kvick. âTheyâll be in great financial shape, whatever they decide to do.â
Would you like MoneySense to consider your financial situation in a future Family Profile? Drop us a line at [email protected] if we use your story, your name will be changed to protect your privacy.
Julie Cazzin is an award-winning business journalist and personal finance writer based in Toronto.
Share this article Share on Facebook Share on Twitter Share on Linkedin Share on Reddit Share on Email