Major family budget analysis

Several months ago I announced our plan to have a home in the country and a home in the city and divide our time between the two places. I began that blog entry with the following:

Those of you who have followed my blog for some time now will already have recognized that, when it comes to plans for the future, I change my mind frequently. Actually, DH and I like to say that we are Dreamers. We love making plans for the future, even though we know that a particular plan may not ever manifest itself and that it’s likely to change completely down the road…it’s the dreaming-about-it part that we enjoy so much. Keep this in mind as you read the following post, so that if I completely change my mind 3 months from now you can’t call me a flake, lol.

Well, I’m here to report that we have, in fact, changed our plans.

After our intent to purchase the Xmas tree farm fell through, we sat down with our budget to see what our options were with regards to other properties on the market. What was supposed to be a brief examination of the budget turned into a two day, major analysis of our current and future financial situation involving numerous Excel worksheets.

The first point that became immediately apparent is that having two homes when one of them is rented is a colossal waste of money. Whether or not it fits comfortably into the monthly budget, the long term costs of doing so prompted a substantial reality check. So much for City Mouse, Country Mouse.

We then did a 1.5 year- and a 3 year projection based on 3 possible scenarios. Plan A called for emphasis on rapid debt reduction, putting everything towards our car loan and a small sum we owe to my mother, and putting just shy of 10% net income into an RRSP each month. Plan B called for purchasing a piece of real estate immediately (whether it is “the one” or just a place holder), keeping debt payment schedules “as is”, and keeping the 10% RRSP contribution. Plan C called for putting almost everything into an RRSP, save for a small amount to slowly pay off our debt to the Bank of Mum.

The results were surprising to me. Plan B turned out to be the worst scenario, because in the short term of 1.5 to 3 years one doesn’t gain a whole lot of equity in real estate. Plus one accepts the risk that real estate values could go down. Paying off loans early also didn’t make much sense, because as much as I love the words “debt free” one must consider interest rates. We got our car financed for 3.9% interest; paying it off early would save us only about $1300. But the extra money used to pay it off early could instead be put into an RRSP and earn us considerably more than $1300. In fact, thanks to our attractive RRSP laws here in Canada it turns out that maxing out our allowable contributions each year will net us considerably more money in 1.5 and 3 years than any of the other plans. Plan C was the winner.

So as of July we will begin Plan C. But….we’re still looking at real estate! It takes time to find the right place, and each month that we follow Plan C puts us ahead. Right now, the right property for us has not appeared, but when it does Plan C will put us in an even better position to buy than we are right now (because in Canada, first time home buyers can withdraw money from their RRSP to use as a downpayment; thus we pay with pre-tax dollars). And if the right place comes up tomorrow, we’ll go for it.

The only question now is whether we will buy a home in the city and postpone the dream of buying land for a few years, or whether we will try to find an acreage that is within commuting distance of the city and see how I handle living in a rural suburb.

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