My wife and I make a combined $170K/year but we still can’t afford to save for retirement. How do we get back on track?

In today's economy, making a six-figure salary can leave you feeling broke, especially if you live in Toronto.

According to the latest data from Nesto, a household needs an income of $179,103 to $212,388 in order to qualify for a mortgage on an average home in the city (1). With sky-high home prices and a rise in the cost of living, many families who look wealthy on paper are feeling the squeeze.

Katie and Brad are just two of the many Torontonians who find themselves in this tough situation. This hypothetical couple in a very relatable predicament are both 32 years old, have two children and earn a combined $170,000 per year.

Between their rent ($2,500 per month), childcare costs and about $30,000 in combined student loan and credit card debt, Katie and Brad are finding it hard to see beyond the monthly expenses and put money away for their future.

Right now they have about $50,000 saved for retirement, but in order to get ahead of their debt, they’ve stopped contributing regularly to their RRSPs. Meanwhile, the spiralling costs of essentials have also wiped out their emergency fund.

Despite these financial challenges, their goal is to save for a down payment on a home and contribute at least 15% of their income each month into their retirement accounts. With this in mind, here are some tips for Katie and Brad — or anyone else who is paid well yet still struggles to get ahead.

Sorting out financial priorities

Despite the fact that they’ve chosen to focus on their debt, couples in a similar situation as Katie and Brad often wonder what to work on first: paying down debt or prioritizing retirement savings.

Turns out Katie and Brad wisely chose debt.

While there are multiple schools of thought on which approach is best, one effective way that Katie and Brad could tackle their financial predicament is with Dave Ramsey’s 7 Baby Steps. According to this approach, Katie and Brad should do the following, in order:

• Save $1,000 in an emergency fund, which they can build on later
• Use the debt snowball method to pay down their $30,000 student loan and credit card debt
• Try to add at least three months’ worth of expenses to their emergency fund
• Begin investing at least 15% of their household income in retirement savings
• Set aside funds for their children’s education
• Start saving for a down payment — for existing homeowners, Ramsey recommends paying off the mortgage early
• Build wealth and give back: Debt-free and living in their own home, Katie and Brad can then look to build wealth and/or give back to charitable causes

Here’s how Katie and Brad can put their first few baby steps into action.

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Making a realistic budget

Before Katie and Brad start working on the first of their baby steps, it’s important for the couple to understand where their money goes each month and create a budget that leaves room for savings or paying off debt.

The couple should start by gathering a year’s worth of bank statements — including credit cards and any investment accounts — so that they can understand how they spend their money.

This will establish a budget that’s based in reality, rather than vague notions of how they think they spend, or where they think they can cut down.

Padding your emergency fund

While advice on how much to save in an emergency fund differs between individuals, most personal finance experts suggest anywhere from three to six months’ worth of expenses.

According to Ramsey, you should opt to save three months’ worth of expenses if:

• You’re single with a stable job and no children or other dependents
• You’re married with two stable incomes

On the other hand, six months’ worth of expenses is safer if:

• You’re married and live on one spouse’s income
• You’re in a seasonal job, self-employed, work on commission or in a volatile industry
• You’re a single parent
• You have dependents who are chronically ill

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Contributing to retirement accounts

Once they have cleared their debts and fully replenished their emergency savings, they can then redirect that money to their RRSPs or any other retirement accounts they may have.

Thankfully, Katie and Brad are still young and may work for another 35 to 40 years before they retire. With this in mind, they have a long time to save and get back on track with their retirement savings targets. However, to take advantage of the benefits of compound interest, Katie and Brad should strive to pay down the debts and beef up their savings as soon as they can.

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Nesto (1)