Here in Canada, both Financial Post and The Globe and Mail run similar articles each week where they go through readers' current financial situation and suggest how they can improve their retirement readiness.
I've always enjoyed reading these articles and examine people's monthly expenses compared to ours. This past weekend The Globe and Mail had an interesting article called Debt doubts cast shadow for professional couple with five kids, in which a young couple struggles to make ends meet on only $25,000 a month. While reading the article I was shaking my fist and screaming WTF. This is a perfect example of high income earners mis-managing their money.
The couple, Eric and Ilsa are both high earning medical professionals. Eric who is 41 is a physician that earns $200,000 a year. He also teaches at a university for which he makes another $100,000 annually. Ilsa, 39, is a dentist currently on maternity leave who will bring in another $150,000 when she returns to work. So $300,000 annual household income currently (or $25,000 per month) and will increase to $450,000 annually or $37,500 per month once Ilsa returns to work.
Those income levels are something I can't even imagine. I'm sure most of the readers will love to have that kind of income too! Despite their high income and prosperity, they can't make ends meet. What the heck are they doing?
From the article:
They are living rent free in a relative’s house (they pay taxes, utilities and upkeep) and “regret not having bought a house years ago,” Eric writes in an e-mail. Houses in their Vancouver neighbourhood have doubled in price in the past two years. The house where they live is going up for sale soon, so they need to move quickly.
Last fall, they bought a building lot for $1.1-million and are planning to build a house large enough for their family and a live-in nanny. But with a combined income of $360,000 ($450,000 when Ilsa returns to work) and an $800,000 mortgage, can they afford the builder’s $1-million price tag? Who will lend them the money?
“Two professionals should be able to afford a modest house, but we can’t get the numbers to work and would appreciate some help,” Eric writes. He earns $200,000 a year working in a medical clinic. But his real love is teaching, which he does one day a week at a university; this earns him $100,000 a year.
“I have no pension whatsoever, but like my parents, colleagues and mentors, I love my work and plan to keep going well into my 80s, so retiring is not a big concern, just living,” Eric writes.
The people: Eric, 41, Ilsa, 39, and their five children (ranging age from less than a year to 9)
Monthly net income: $25,000
Cash in bank $6,000
Residential building lot $1.1-million
Property tax $1,000
Maintenance, garden $190
Children’s activities $1,000
Summer camp $600
Child care $2,800
Gifts, charitable $320
Vacation, travel $2,000
Dining, entertainment $200; sports
Miscellaneous (furniture, toys) $400
Health insurance $50
Telecom, Internet $80
Professional associations $500.
Mortgage $800,000 at 2.6 per cent
Holy cow! $25,600 in monthly expenses! And they only make $25,000 per month right now. They're in the red for $600 each month and they'll only manage to be in the green once Ilsa goes back to work... but that also means the child care expense will increase.
Is it evil for me to say that I don't feel sorry for them at all? Medical professionals work super hard and deserve every cent they earn. But when they have no financial literacy you end up like Eric and Ilsa. It's shocking considering so many bloggers have extremely high savings rate like 50% or more. These bloggers certainly put Eric and Ilsa to shame when it comes to savings rate.
Looking at their expenses a few things jumped out at me. Let's ignore their mortgage and property tax payment for now since Vancouver real estate is a bit out of whack...
1. $2,000 in grocery bill seems quite high. I know they have 5 kids but $2,000 seems really high.
2. In the article it says all 5 kids will go to private school, hence for the $5,400 per month tuition. I'd imagine this amount will only increase once the younger kids get older. I can't imagine spending that much money for schooling. Is private school really that much better than public school?
3. Children's activities for $1,000 seems high, I'm curious what these involve, considering they're spending $2,800 each month in child care.
4. Good to see that they're putting $3,000 in RRSP each month but that's not even close to the maximum 18% allowable contribution they can make. If they were to contribute less, then the monthly expenses would come below monthly income.
Whichever way you put it, over $25,000 in monthly expenses is a lot! I hope Eric and Ilsa will take a serious look at their monthly expenses and reduce their spending somehow. They can probably cut out a lot of luxury items to reduce their expenses. Our household has 3 people and our monthly spending is a small fraction of $25,600. I sure hope Eric and Ilsa get some education in personal finance and quickly turn their monthly deficit into surplus! Live below your means!
Another thought... although the couple has assets of $1,286,900, they have liabilities of $800,000. This means that their net worth is $486,900. Considering their income level and their age, I think their net worth is actually quite low. This is taken into account that they were staying at their relative's house rent free while they finish building their house.