Reference no: EM133001063

Rising Interest Rates Leads to Debt Anxiety 

Jasper and Anneka Rehnquist, a married couple living in Toronto, are sitting in your office seeking help with their financial situation. They have advised you that they are having trouble "making ends meet". Anneka, who takes care of the finances for the family, said she really started to worry about their debt load when she saw their chequing account balance continuously drop in value over the last few months. Anneka confessed that the change in interest rates over the last year had been gradual at first, but before she knew it, the couple's payments to debt had increased multiple times.

The couple agree that their main priority is paying down their debt. They want to do so, not only to help reduce the sleepless nights they have had worrying about their finances, but also so that they can begin to start saving for retirement. They envision a retirement where they can travel. They would like to be debt free when Jasper turns 60 and Anneka turns 58 in 16 years so that they can retire at that time and only require enough cash flow to cover their living and travel expenses, which they estimate will be $70,000 after-tax in today's dollars. Jasper worries that this goal is not feasible given the debts they owe.

Jasper earns a gross salary of $72,000 per year for his work as a paramedic. Anneka earns a gross salary of $84,000 per year for her work as a dental hygienist. In addition to their government source deductions, Jasper and Anneka also pay $100 and $200 per month, respectively, in other employment source deductions for the benefits associated with their group insurance plans.

Jasper and Anneka own their own home worth $450,000. Their mortgage has an outstanding balance of $270,000 that is accruing interest at 3%. The couple have $2,000 in their chequing account and $1,000 in their savings account. Jasper and Anneka have $30,000 and $10,000 in their respective RRSPs. Jasper's car is worth $5,000. Anneka's SUV is worth $15,000 and still has $18,000 owing on a 6% loan the couple used to finance the purchase of the vehicle. Anneka has a $25,000 government student loan that is accruing interest at 5%. Jasper has a $15,000 personal line of credit accruing at 6% that the couple used to cover living expenses while she completed her dental hygienist training. The couple have a jointly-owned unsecured line of credit, with a credit limit of $25,000 and a balance of $19,000 owing and accruing at 6%, that they used to renovate the home they purchased. The expenses from the couple's most recent vacation is still on their credit card. The balance is $4,000 and is accruing at 20%.

Jasper and Anneka pay $2,192 per month towards their mortgage; $2,000 of which goes towards principal and interest and $192 to pay the creditor insurance premiums to pay off the mortgage in the event that either of the couple should die prematurely or be diagnosed with a critical illness. Although they pay semi-annual installments of $2,400 for their property taxes, they save the required amount monthly to ensure they have enough money to pay the bill each time it comes due. They pay their annual home insurance premium of $1,200 on a monthly basis and pay $100 per month to each of the heating, hydro-electricity, and water companies.   

The couple's lifestyle expenses include $1,000 for food, $150 for their cell phones, and $120 for cable television and internet connectivity. Their monthly automobile expenses include $200 for insurance, $125 for auto maintenance and $150 for gas for their cars. The couple also spend $100 eating out, $300 on entertainment, $100 on their morning coffees from Tim Horton's and $100 on miscellaneous items. The couple take two vacations per year at a cost of $3,000 each.  

Jasper and Anneka also pay the following debt payments each month: $484 to the car loan, $365 to Anneka's government student loan, $456 to Jasper's personal line of credit, $570 to the couple's joint line of credit, and $100 to the couple's credit card.

Questions

1. Identify and write down Jasper and Anneka's goals.

2. Make a net worth statement for Jasper and Anneka.

3. Make a monthly cash flow statement for Jasper and Anneka.

4. How much free cash flow do Jasper and Anneka have each month?

5. Do Jasper and Anneka have a cash surplus or deficit?

6. How large should Jasper and Anneka's emergency reserves be based on their monthly expenses? Do they have sufficient emergency reserves to cover them in the event of an emergency?

7. What recommendation could you make to help Jasper and Anneka improve their financial situation?