Every week, the Globe and Mail features some family in need of financial planning advice.
The submissions are usually pretty straightforward. Retirement questions are common, especially trying to figure out if a couple has enough to make it happen. Younger folks generally ask about buying a house, especially in overvalued markets like Toronto or Vancouver. And so on.
But last week’s submission takes the cake. It is the greatest thing I have ever read. No time for more preamble, there’s a lot of mocking up ahead. (Edit: it has been updated from when I first wrote this)
Eric and Ilsa put lifestyle ahead of financial concerns but it has put them in a bit of a bind. He is 41 and a physician, she is 39 and a dentist.
They have five children, ranging in age from less than a year to 9, all of whom will go to private school. They have substantial earning power – although Ilsa is on mat leave at the moment – but Eric chooses to work for less money than he could.
Ilsa, hey? What is she, a character in Frozen?
Financial Uproar: staying on top of the pop culture references since 1998.
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.
To review so far, we have a doctor and dentist who are living rent free in a relative’s house, which is about to go up for sale. Sounds like a pretty sweet arrangement to me. What’s the problem again?
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.
Here we go.
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?
If only there was an option to, I dunno, NOT build a million dollar house.
“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.
They’re prepared to spend $2 million on a house (remember, the lot was $1.1 million) and they’re using the word modest? Okay, fine. Vancouver’s real estate is nuts. You can still get a pretty decent house for $2 million that’s already completed, but hey, these people need their dream home. Or something.
He earns $200,000 a year working one day a week 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.
He works two days a week.
“I think I found a solution to your money problems.” — everyone who isn’t a moron.
“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.
“I love my work so much that I drag my ass into it TWICE every week.”
Am I the only guy who would bust my ass doing the medical stuff for like a decade and just retire? The guy’s looking at earnings potential of a million bucks a year, not even including his wife’s income.
A financial planner had a few pieces of advice for the cash-strapped doctors, which surprisingly didn’t just consist of him bashing his head against his desk for 20 minutes.
Eric and Ilsa’s expenses are likely the highest they will be and they have not yet seen the long-term benefit of their education and the income it will generate for the rest of their lives, Mr. MacKenzie says.
They currently make $360,000 per year and one spouse is on maternity leave. I’d say they’re seeing some pretty damn good benefits RIGHT THE HELL NOW.
“It is financially possible for them to do the things that are important to them, although by doing so, they will run a cash flow deficit of $50,000 a year until the children leave home,” Mr. MacKenzie says.
I like how the planner just throws that out there. “Hey, you can keep going on your current path. No biggie, you’ll just go backwards $50k a year, probably forever. NBD.”
Over time, their annual deficits will add up to more than $1-million in additional debt. They can build their home, but they have to make a choice. Either Eric works one more day a week in the clinic, or they run up substantially more debt.
OH NOES ERIC MIGHT HAVE TO WORK THREE DAYS A WEEK WON’T SOMEBODY THINK OF THE CHILDREN LIKE MAYBE THE NANNY.
By the way, out of ten possible working days per week, this couple currently works two of them and have a full-time nanny. Yep. Makes total sense.
Eric and Ilsa are fortunate because their parents are willing to put a home equity line of credit on their own home to extend them the $1-million they need to build, and to finance their annual deficit, the planner notes.
This isn’t even a first world problem. It’s a 1% world problem.
I get emails from real people with real problems. And this jackass can’t reign in his spending enough to build a freaking dream home in one of Canada’s most expensive cities? What a stunning lack of self-awareness.
“However, there is a danger in accumulating so much debt because things don’t always work out as expected,” the planner says. “In this case, it is unwise especially when the cash flow problem could be easily solved,” Mr. MacKenzie says.
(Files that statement under the “no shit” category)
“If Eric is willing to work one more day a week in the clinic, they can live within their means and still afford to build the new home using a HELOC with the parents’ home as security,” Mr. MacKenzie says. He would be bringing in $500,000 a year. Once Ilsa returns to work part-time, she hopes to make $150,000 a year. Their first priority once the house is built should be to pay off the mortgage.
Two doctors working part-time with the earning potential to earn $650,000 before tax are feeling pinched. Wow.
I know his clients aren’t anywhere close to savvy, but hot damn does this planner sound dense. “Duh, you work more. More money is good. Less is bad. Duh.” I bet he charges people $100/hour for that advice, and they gladly pay it.
But Ilsa and Eric face a more immediate risk.
DUN DUN DUN
From their financial situation, I’m betting it’s being able to feed and clothe themselves. If all the restaurants close, they’re screwed!
With five children and a big debt load, they have neither life nor disability insurance. Their long-term financial security is dependent mainly on Eric’s high earning power.
That’s actually true. Eric should get his ass some life insurance.
Let’s take a closer look at Eric and Ilsa’s financial picture. First, their assets.
Assets: Cash in bank $6,000; his RRSP $180,000; residential building lot $1.1-million. Total: $1,286,000
For a guy who said about 500 words ago that he doesn’t want to retire, he sure is preparing for it.
Liabilities: Mortgage $800,000 at 2.6 per cent
BAHAHAHAHAHAHAHAHAHA They don’t even own the building lot. They’re gonna owe $2 million by the time they’ve built that house.
Monthly disbursements: Mortgage $3,800; property tax (both properties) $1,000; utilities $490; insurance $90; maintenance, garden $190; transportation $800; groceries $2,000; clothing $520; children’s activities $1,000; tuition $5,400; summer camp $600; child care $2,800; gifts, charitable $320; vacation, travel $2,000; dining, entertainment $200; sports, hobbies $200; miscellaneous (furniture, toys) $400; health insurance $50; cellphones $220; telecom, Internet $80; RRSP $3,000; professional associations $6,000. Total: $31,160
There’s so much hilarity in there I barely know where to begin. $7,200 per year for summer camp? $24,000 per year in groceries? $190 per month for somebody to take care of the garden at the place they don’t even own? $5,400 per month for tuition? My God, imagine what would happen if your kids went to (shudder) public school? That’s where they smoke marijuana and beat the kids with rulers.
I’ve met some doctors over the years who are incredibly good at their specialized field and make an assload of money, but have no idea about spending it. It’s probably a big reason why most end up working until their 80s — they can’t afford not to. It just goes to show that if you spend a decade in school getting a very specific skill, you’ll probably lack in other areas. That’s just common sense.
But at the same time, Eric and Ilsa are especially bad. It’s not just that they’re bad with their money, but the lack of self-awareness is what really gets me. They’re looking to build a $2 million house in one of Canada’s ritziest neighborhoods, and say stupid things like it’s a “modest house.” Piss off, it is not. The average house in Vancouver costs more than $1 million, but certainly not $2 million.
I’m not begrudging anyone’s success, and Eric and Ilsa should be able to afford a $2 million home. It’s not that hard, especially after taking a serious look at their spending. But enough with the ‘woe is me’ stuff. That’s what pisses people off, and rightfully so.