Walter (54) and Freya (52) live in Zermatt, Ontario. Walter is a Ski Instructor, who works at the nearby Ski Hill in the winter and runs cycling tours in the summer. Between the two jobs he earns $58,000/year (gross). He drives a 13 year old Honda which he estimates the current value to be $4,000. He has saved $25,000 in an RRSP.
Freya works as a veterinarian in the local clinic and takes home $90,000/ year (gross). She had been taking advantage of the company's RRSP matching program, but stopped contribution six months ago as she found the money was better spent paying off debt. She credits this program for helping her to grow her RRSP to a current value $415,000. The RRSP is invested 50/50 in a Canadian Equity and Global Balanced fund.
Freya still has $30,000 in student loans that she is repaying $300 per month towards. The current annual interest rate on the student debt is 7%.
They live in a home they purchased 12 years ago after first moving to Zermatt. The home was bought for $300,000 but has grown in value and is now worth $420,000. Walter and Freya are still paying off their mortgage, which has a current balance of $123,400 and a monthly payment of $1,550. The current interest rate on the mortgage is 4%.
Two years ago the couple undertook a kitchen and living room renovation. Not having the funds at the time to take on the project, they took out $85,000 from a home equity line of credit, which has a current balance of $72,500. They only need to make a minimum payment of $200 per month, but they recently increased their payments to $500 a month in the hopes of paying it off as soon as possible. The current rate of interest on the HELOC is 5% (APR), with interest compounded monthly.
In addition to the HELOC Freya has a $10,000 car loan remaining on her $40,000 vehicle. She also has a coin collection inherited from her mother, worth an estimated $12,000.
Freya & Walter have heard good things about the Tax Free Savings Account, and each opened accounts last year. They currently have $10,000 in each of their accounts and are contributing $250 per month each. The TFSA balances are invested in a high interest money market fund paying 0.75% per annum.
Freya has a developed an interest in fashion, and has been spending close to $1,000 a month on clothing. She hasn't told Walter, but she has actually built up credit card debt totalling $15,000 as a result. The annual interest rate on the credit card is 18% APR and the monthly minimum payment is $60
Walter's weak spot for spending is Ski equipment, while he hasn't spent any money on this recently, he thinks he has accumulated about 10,000 of equipment in their house. Other personal and household assets are estimated to be worth about $20,000
The couple's other expenses include the following:
Annual: Property Tax of $6,000, Professional dues of $2,000, Gifts of $3,200, Vacations of $10,000.
Monthly: Groceries $1,000, Utilities $520, Entertainment $700, Car expenses $800, Health & Hygiene $420, Life Insurance Premiums $65, Personal Trainer/Fitness $470, Cell Phones $210, Home insurance $215, Alcohol $300, Ski Pass $150. Car Loan $250
Walter also recently signed up for a coffee membership, where he gets 3lbs of freshly roasted coffee mailed to him for a monthly fee of $65. They have one joint bank account, with a balance of $2,000.
Both Freya and Walter are wanting to retire by age 65, but at this point they aren't sure of their financial ability to do so.
Calculate each of the following ratios for Walter & Freya:
Liquidity Ratio
Asset to Debt Ratio
Investment Assets to Total Assets
Debt Payments to Net Revenue Ratio
What do each of these ratios tell you?