How to pay for today and save for tomorrow

On the surface of things, Lindsay Tithecott would seem the financial envy of most millennials. The 29-year-old engineering consultant from Kamloops, B.C., earns $71,000 annually, owns an affordable $150,000 condo and already has $46,000 of investments amassed in her RRSP and TFSA. To be sure, Lindsay’s very proud of her accomplishments: “I’m saving 20% of my salary and my housing costs are just under 30% of my income, which is nearly unheard of in B.C.” There’s just one problem: Her spending surpasses her income every month, and she’s piling up significant consumer debt. Right now, Lindsay owes $11,000 on her line of credit as well as a separate $15,000 car loan. “I try so hard to achieve financial balance in my life, but it doesn’t seem attainable,” she says. “I don’t understand what I’m doing wrong.”

Lindsay feels she has her savings under control, noting that she’s currently socking away $400 a month to her TFSA and $220 a month to her RRSP (an amount her employer matches) to achieve her goals. Long term, Lindsay wants to build up retirement savings and within a year or two move to a bigger condo. “A two-bedroom condo would cost me $200,000 but it would allow me to get a dog and have a garden. I’d love that.” But this high savings rate has left her with very little money each month for paying down her debt. “I make a $50 monthly payment to my line of credit and would like to increase that to $200, but that would really squeeze my savings.” The car loan, however, is her biggest challenge. “It’s killing me. I cringe at my $567 payment every month.”

Attempts at curbing other costs aren’t helping. “I attack things piecemeal and this month I’m agonizing over how to lower my utility bills,” Lindsay says. “Should this really be my priority right now? I don’t know.” Getting her cash flow under control and coming up with a budget she can live by is Lindsay’s main goal. Her financial future rests on it: “I don’t want to jeopardize my plans.”

The action plan

In many ways, Lindsay is in good financial shape for her young age. But she’s playing a game of smoke and mirrors with her finances. “She’s only partially tracking her money and that’s causing problems,” says Heather Franklin, a certified financial planner in Toronto. “She’s trying to accomplish too many things at once.” Franklin says Lindsay has several distinct components of her finances to address—and all are interrelated.

Step 1: Rethink savings

Lindsay must learn to track all of her expenses more judiciously. “Right now she’s categorizing savings to TFSAs and RRSPs as spending categories,” says Franklin. “This is backwards. She needs to recognize her true expenses, subtract them from her net income and then allocate what is left to savings. That’s priority No. 1.”

Step 2: Focus on debt

The money Lindsay presently pays servicing her debt eliminates the gains she makes on her savings. “She’s pursuing a savings program out of fear that she won’t have enough money to retire well, and that’s putting her more and more into debt,” says Franklin. “That’s counterproductive.”

Step 3: Prioritize goals

Finally, Lindsay must examine and reconcile her present and future financial plans. “She sees saving for a bigger condo as a short-term goal,” says Franklin. “In fact, it’s a three- to five-year goal that needs to be part of a bigger overall strategy to make it achievable.”

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