Renovation, Kids, and Cash Flow: Case Study

by | Feb 20, 2020

Every year, we give some thought to what we want for you in the year ahead. We proceed to spend the rest of the year riffing on that subject, hoping that multiple perspectives on a singular concept will provide the means for you to integrate it into your lives.

This year, what we want for you is to deepen your understanding of planning as the practical application of action and decision-making to the philosophy of your life. As we told you in January, we think that financial planning and all its related specialties is about defining your own life philosophy, and using that as the guide to making great decisions.

Of course, money is one of the many tools we use to make reality out of those life philosophies. So, too, are:

  • the investment vehicles you choose
  • the liabilities you decide to take on
  • the tax and estate law that governs what you’re able to do
  • the risk management structures you use to protect your dreams 

As we dig further into our toolbox, we realize that this is one of the tools with a false bottom. Beneath that first set of tools, we have far more. We have tools that are a little more difficult to use, that require a great deal more skill, forethought, and consideration. They’re the tools that make all the difference. 

This second set of tools includes regular introspection – the ongoing process of looking within to refresh your life philosophy with the tweaks that experience has given you. It includes deep conversation with those who matter most to you. From your best friend, to your spouse, to your business partner, your children, your grandchildren, and more. It includes a commitment to living your own life, well spent, with the understanding that you and your life are always a work in progress.

Financial planning isn’t about getting the math “right,” picking the “right” investment strategy, or tricking your way out of income taxes. It isn’t about somehow – magically – forecasting the actual future you will experience. It isn’t something you can do once…and feel confident that you have life all figured out.

Sorry about that. 

Once we’ve made really good use of that first set of tools, we don’t really have to think about them all that much. We can set them up to work on their own, checking on them periodically and making minor adjustments as the world changes. 

The second set of tools, however, needs our regular awareness. This is the reason why financial planning is hard work for everybody involved. It’s not the complexity of the money, investments, taxes, insurances, etc. – despite the fact that, yes, there is a great deal of complexity there. It’s the complexity of simply being a human, interacting with other humans and the world around us, that makes financial planning hard work. 

But it’s worth it. Here’s an example of why.

Troy and Annie’s Debt Renovation

Troy and Annie (not their real names) have been working with the Spring team (and its previous iterations!) since 2013. They came to us with that age old question: 

where does all the money go?

Troy was a team lead at a manufacturing plant, and Annie worked full-time as a graphic designer at a publisher. In her “spare time” she was also a consultant to small businesses, providing logos, style guides, and online graphics. This meant they had three streams of income. The first two employment streams were relatively easy to manage – their companies deducted all the income tax, CPP, and EI contributions required. But Annie’s self-employment income didn’t have deductions applied, and they always seemed to be owing taxes at the end of each year, without any spare cash to pay it. 

Their two children, Joel and Britta, were both in elementary school. After school, there were sports and arts activities, Brownies and Scouts, and, if they were lucky, enough time for homework. Annie and Troy cobbled together the support of their own parents, other parents in those same activities, and a part-time nanny to get the kids the places they needed to go. They were confident that these costs, along with the fast food that often came with crazy weeknights, were creating the cycle of credit card debt from which they never seemed to dig their way out of.

On top of this, their home needed some serious upgrades. It was getting older and items like appliances and tile replacement couldn’t wait any longer. The home was actually too small for their family, with Joel and Britta sharing a room – something that Troy and Annie just knew wouldn’t make sense over the long term. They knew what they needed for a family home, but in Vancouver… they just couldn’t see their way to affording it. 

It felt nearly impossible to even consider saving towards Joel and Britta’s future post-secondary schooling costs, let alone Troy and Annie’s retirement. 

Annie & Troy’s Cash Flow Plan

Dreaming out Loud

Through the process described below (in case you want details!), Troy and Annie were able to get real clarity about what they hoped to achieve during their lives, and translate that into how they used their money. 

In their first meeting, they dreamed out loud and created a vision for the life they really wanted. This allowed them to create intention with their future spending. After that were three more meetings to create the foundation of their cash flow plan, identifying the different types of income they had. 

Since their children were born, Troy and Annie had been using their visa to supplement their income. To end the cycle of pain, they realized that they were going to have to change their spending habits and it was a little scary, but they were committed to the vision they’d created in their first meeting.

Trying out the Plan – Review… and Review Again

With their dreams identified and their cash flow plan clearly documented, it was time to try out the plan in real life. What many people miss when creating their own cash flow plans is that you won’t get it “right” immediately. Annie and Troy knew that there would be two more meetings to review the outcomes of the theoretical plan that was built, so that we could make tweaks and changes once it was experienced in reality. Those two meetings were absolutely necessary to ensure that they knew how to deal with the inevitable curveballs that life would bring to their cash flow plan.

It was a pleasant surprise to find out that making those scary changes weren’t actually that hard, after all – especially since their plan wasn’t based on cutting out everything enjoyable in order to save money. Instead, we worked on creating their plan in a way that would allow them to spend on exactly what really mattered to them; leaving behind unconscious and unfulfilling overspending. It was easier now to simply say “no” to things they’d never really thought of before. Without a plan, saying “no” was like self-denial – it felt awful. But with a plan, with a WHY in place, not spending $50 on something that didn’t really matter in their big picture didn’t feel like pain at all. Instead of being forced to live a lesser existence, they were choosing the life that meant the most to them.

Annie and Troy now have individual spending accounts, and the freedom to spend however they wish from those accounts, without having to ask permission to spend from “family money.” If Troy wanted to buy something and he had the money in his account, he just could – and so could Annie. They felt more wealthy than ever before. The tensions and disagreements between them stopped! While this wasn’t a specific goal they’d outlined, it was an outcome they were ecstatic about.

Finally, after managing all of the lifestyle expenses they knew were important and meaningful, they found they actually could put money towards long term savings… and started contributing to their RRSPs for the first time in years.

While their engagement could have ended after those two meetings, Troy and Annie decided they needed continued accountability to stay on track. They wanted Kathryn on their team for the long term. From that point forward, they held regular quarterly meetings to handle changes as they came, and celebrate wins together. 

The Biggest Stress Test

In 2014, Troy’s plant shut down. While he received a packaged payout, it wasn’t a lot, and there were a few months where the only income he had was from EI – which provided considerably less money than he had been making. They were able to manage through it, thanks to the clarity within their cash flow plan

In their ongoing work with Kathryn, they decided to temporarily stop savings into their family RESP, and reduced their debt repayment to the minimum. Even after that, there was still a $1,500 monthly deficit. They decided to draw this amount from Troy’s packaged payout until it ran out, and after that, would draw from their line of credit.

Thankfully Troy was only out of work for three months, and they didn’t need to use their line of credit after all. Knowing that there was a plan in place, exactly what the parameters were, and how they would handle it helped them maintain calm during a time that would otherwise create panic and extreme tension. 

Even Better… The Home of their Dreams

In 2017, Annie and Troy had enough experience with their plan – not to mention confidence with their money – that they wanted to look at remodelling their home into the one they really needed. It was an adventurous plan, with separate rooms for the children, plus a separate suite and a coach house – both of which would add to their cash flow over time. Before they felt confident that they could proceed, Annie and Troy wanted to know what the outcome might look like.

Using their cash flow as a base, Kathryn created a scenario of what a renovation might look like, from a cost perspective, and what the ongoing costs and income might be. She needed to factor in:

  • a construction loan
  • costs of paying their existing mortgage
  • existing house expenses 
  • paying rent (since they had to live out of the house while construction was happening) 

It was an expensive time for the whole family. 

There were three phases of lending throughout the construction, and each phase required its own plan. Kathryn factored in a 20% contingency into the total renovation costs, with the caveat that they could always go higher.

Once the renovation was complete, there would be an increase in the property tax and insurance, and the construction loans would be rolled into a higher mortgage. Then of course, the rental income would need to be layered in on top of that. The scenario projections demonstrated an increase of $1,800 per month to their cash flow, after all costs were factored in. 

Of course, there were bumps along the way – as with most renovation projects! But Troy and Annie had a great deal of peace of mind because together, we had developed plans for what actions they might take if things went sideways. While Kathryn was not able to predict everything, she was able to predict enough to give Annie and Troy the information they needed to remain even-tempered throughout a difficult, and sometimes stressful, renovation process.

After all was said and done, their actual surplus was within $300 per month of the original projections. Now, Annie and Troy are debt free, have the house of their dreams, and $18,000 per year to save towards their future. 

If Troy and Annie’s story resonates with you, we’d love to help you on your path to success and financial freedom. You too can dream out loud while we listen. We’ll help you pave the way to your debt-free life, RRSPs, your dream home and more!

Kathryn Mandelcorn
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