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AAMARA MAXES OUT THE CREDIT CARDS
Paige Addesi and Matt Lord wrote this case under the supervision of Chuck Grace solely to provide material for class discussion. The
author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised
certain names and other identifying information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com.
Copyright © 2016, Richard Ivey School of Business Foundation
He’s the love of my
life, Jen! Our wedding
was straight out of a
fairy tale!
It was all going so
well and now THIS.
It’s way too soon to
be a mom! I can’t
even pay off my debt
on one income.
Version: 2021-10-01
I know
Mar …
What am I going
to do?
Should Aamara pay off the
debt or start saving for the
kids’ education and postpone
the RRSP even further?
Jenny was at a loss as to what to
suggest.
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Page 2
9B16N039
Jenny was shocked. Her best friend, Aamara, had just left Jenny’s apartment after spending an hour in tears.
When Aamara graduated from the Ivey School of Business (Ivey), she had a financial plan (see Exhibit
2)—and it was a good one, too. But even the best laid plans of Ivey graduates can go awry.
Aamara had met the love of her life, Tim Simms, in Australia. The subsequent wedding and honeymoon in
South East Asia had been extraordinary—but at a cost.
Moving back to Canada had already been expensive, but then came today’s news that Aamara was pregnant.
She had always wanted to have a lot of kids, but this was way too soon. Jenny knew Aamara’s career was on
track, but the debt was higher than anticipated and she had not yet started her retirement portfolio (see Exhibit
1). Now, with Aamara and Tim expecting a baby, Jenny felt that their expenses would only pile up further.
Aamara had come to Jenny because Jenny had always been the friend who was good with money. As Jenny
wrestled with the reality of the recent news, she reflected on Aamara’s original financial plan that she had
built while at Ivey.
Jenny was at a loss as to what to suggest. Should Aamara pay off the debt, or start saving for her children’s
education and postpone the retirement savings plan even further? Selfishly, Jenny was glad this financial
situation had not happened to her. But that did not make solving Aamara’s problem any easier.
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9B16N039
EXHIBIT 1: AAMARA AND TIM’S CURRENT FINANCIAL SITUATION
Assets
Condo
Car 1
Car 2
Furniture
Investments
Emergency
fund
Cash
$345,000 Liabilities
$19,900
$13,500
$10,000
Mortgage
Car loan 1
Car loan 2
Student/OSAP
Credit card 1
$324,000
$17,500
$9,000
$10,000
$10,000
$1,500
$7,500
$397,400
Credit card 2
Line of credit
$5,000
$35,000
$410,500
−$13,100
Net Worth
Income and Expenses
Aamara
$56,500
$13,010
$25,704
$9,521
$3,000
$5,000
$2,000
$3,000
$4,000
Salary
Income taxes
Housing
Transportation
Food
Student loans
Clothes
Vacation
Entertainment
Interest
payments
$2,100
Miscellaneous
$2,000
Loan payment to Tim’s parents
Household
Gym
$500
Insurance
(house)
$1,200
Total Expenses
$71,035
Net Income
−$14,535
Tim
$52,000
$11,609
$1,200
$3,000
$2,500
$5,000
$3,000
Total
$108,500
$24,619
$25,704
$10,721
$6,000
$7,500
$7,000
$6,000
$4,000
$2,100
$2,000
$3,450
$3,000
$750
$4,200
$4,000
$3,450
$3,000
$1,250
$37,609
$1,200
$108,644
$14,391
−$144
Source: Author’s notes.
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9B16N039
EXHIBIT 2: AAMARA’S FINANCIAL PLAN FROM HBA2
MY PLAN TOWARD FINANCIAL FREEDOM
I find myself at an exciting point in my life. After three and a half years at the University of Western Ontario,
I am about to embark on a semester abroad to complete my undergraduate experience. While the past few
years have been full of great experiences, I will have to now turn my attention toward financing my future.
There will be many triumphs and setbacks on the road ahead, and all the while I will have to keep one thing
in mind—I am the only one planning my financial future. Understanding this is an individual effort, the
following represents my goals and expectations for my life, and I how I plan on funding my journey.
Know Yourself—Understanding My Personality
Net Worth at Graduation
I am about to head off on the trip of a lifetime to Australia for an exchange term in Sydney. It really goes
without saying that this experience will have an influential part in shaping the start of my non-academic life.
But this experience comes at a cost. I have been very fortunate thus far to have my university education
paid for entirely by my parents. They have put me in a position to leave Canada with $0 in debt. However,
I will be financially responsible to cover my term in Sydney. I have been approved for a $20,0001 student
line of credit through my local bank, and $5,500 from OSAP.2 I will use OSAP first because it comes interestfree so long as I am a student, and then any additional funds needed will be covered from my line of credit
from the bank. I expect my total net worth at graduation to be –$13,000.
Investor Profile
If I could use only one adjective to describe myself, I would choose adventurous. I am someone who loves
to try new things, explore as much as possible, and understand the world around me. Rarely do I find myself
happy sticking with the status quo. It is for this reason that I would pre-classify myself as an advanced
investor. While I understand that investment security is attractive to many, given the “slow and steady wins
the race” mentality, I much prefer to take risks while I can still afford to make mistakes. After taking several
investment profile questionnaires, it appears that I am currently better suited as an aggressive investor.
Despite having risk-averse tendencies, I prefer to avoid risking everything on one venture, or placing all my
eggs in one basket—the equities-focused approach for aggressive investors. I plan on positioning myself
one level lower than my investment profile suggests, and pursuing growth investor strategies (at least for
the next few years).
At 21 years old, I am not in any position to start investing today. I have very little saved to cover my daily
and monthly expenses, and will be relying entirely on debt to finance the next six months. I have considered
using a portion of my line of credit to put toward investing, but this would require me to earn more than the
interest on my debt. Without enough time to pledge toward monitoring any investment right now, my focus
on starting my portfolio will come at the end of my exchange term, about the time I turn 22. By then, I will
be in a position to start repaying my debts and investing my savings. This gives me roughly seven months
to enjoy my last days of carefree living before a harsher reality arrives. And you know what? I’m all for it.
1
2
All currency amounts are in Canadian dollars unless otherwise specified.
OSAP = Ontario Student Assistance Program.
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9B16N039
EXHIBIT 1 (CONTINUED)
My Knowledge as an Investor
I have little to no real-life experience dealing with investments. However, despite lacking these experiences,
I have learned a significant amount through my courses and peers at the Richard Ivey School of Business.
For these reasons, I consider myself to be a below-average investor. My background sets me up to have a
lighter learning curve, so within several months of starting I should become much more comfortable as an
investor.
My lack of practice in investing tells me one thing—I will need help. I intend on seeking the help of a
professional financial advisor to invest not only my money but also his or her time with me. Furthermore, to
better equip myself for the path ahead, I will try to gain more insight into the world of finance by taking the
Canadian Securities Course.
Personal Goals and Life Events
My life will be quite the ride. I realize not all rides are smooth sailing, and mine won’t be any exception. While it
is crucial to plan for the fun times in life, it is also necessary to plan for the tough times and the unexpected.
Short Term (Age 24 to 29):
I plan on living in Sydney for three years before moving back to Toronto when I’m 24 years old. While in
Sydney, I will be renting an apartment downtown for $850 per month while working for RJ Commercial Real
Estate (RJCRE) as a research analyst, making $40,000 a year. During my time in Sydney, I will start to pay
off a significant amount of my student debt. The remaining amount will be paid off once I move back to
Toronto to become a serial entrepreneur. As the pathway during entrepreneurship is uncertain, I will be
unable to predict my income. I know there will be a time of certain losses, but I expect those to be followed
by successful ventures resulting in substantial pay outs. When I return to Toronto, I will continue working
at RJCRE, making $60,000 a year, until I am 29. For this period, I will live at home for six months to one
year to save money to buy my own condo in Toronto. When the timing works, I will put a down payment on
a two-bedroom condo in the Yonge and Eglinton area and rent out the second bedroom to help cover my
mortgage payments. After gaining enough experience with RJCRE, I will pursue my entrepreneurial life.
Medium Term (Age 30 to 60):
After a streak of fortune with my entrepreneurial ventures, I will find myself in a better position for items on
my big-ticket list. To start, I plan on leasing a new car every five years, starting from when I’m 30 years old.
At age 35, I will marry my high school sweetheart, and we will have two kids together. We will move into a
house in the York Mills area of Toronto.
I expect at some point to help my parents financially in their retirement. I’m not sure to what extent this will
affect my personal financial situation, but I am committed to helping my parents, just as they have helped
me through school. Due to uncertainty, I have left contributions to my parents separate from my plan.
Toward the latter half of my medium-term goals, I will need to focus on paying for my children’s postsecondary education. I also plan on continuing my passion for travel throughout life with adventurous
vacations across the globe, later establishing a cabin in the Swiss Alps as our family vacation house.
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9B16N039
EXHIBIT 1 (CONTINUED)
Long Term (Age 60+):
In the long term, I need to reach an optimal level in my portfolio to feel comfortable with retirement. I expect
to require $200,000 per year to sustain my living standards during retirement (see Exhibit 5). While I will
continue to travel and use much of this money for that reason, I will also use a large portion to spoil my
grandchildren. Family is very important to me, and I will ensure I can spend as much time as possible with
my children and grandchildren.
Unforeseeable Events and the Emergency Fund
The real troubles in your life are apt to be things that never crossed your worried mind, the kind
that blindside you at 4 p.m. on some idle Tuesday.
—Kurt Vonnegut
Kurt Vonnegut couldn’t make the financial implication any clearer—plan for surprises! This is a difficult task
because you are planning for something you don’t quite know exists yet. The only real way to be prepared
is to have an emergency fund. It will be my personal mandate to set aside 5 per cent of every paycheque I
receive for an emergency fund. While this money can be used if I find myself in a dire situation, I plan on
using this fund only in desperate times.
Two events that I can foresee requiring this emergency fund are helping my parents through retirement and
an unplanned pregnancy.
CONCLUSION
No one knows what will happen in his or her life. Certainly, if they did, it would make life far less exciting.
While it is important to have a financial plan in place, it is also very important to understand that life will
happen as it will. You can’t plan for every detail, so flexibility in financial plans will lead to less stress when
life does unfold.
Source: Author’s notes.
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Page 7
9B16N039
APPENDIX A: DEBT
“A bank is a place that will lend you money if you can prove that you don’t need it.”
– Bob Hope
When you look at wealth management objectively, the vast majority of investors who have traditional needs
(i.e., a house, kids, vacations, retirement) are well served by a fairly simple list of habits that are rooted in
common sense habits. In particular, for young people just beginning the journey, the list is straightforward,
and keeping it simple will enhance the probability that it everything on the list will be implemented.
We describe “the list” as high-impact wealth management, and we define it as an inventory of activities or
habits that have been empirically proven to generate wealth in the “real world.”
For most people, the list will look surprisingly like “common cents.”
“COMMON CENTS” STRATEGIES
1.
2.
3.
4.
5.
6.
7.
Start with the end in mind
Save
Adjust the asset mix to drive returns
Be aware that your behaviour drives risk
Minimize fees and taxes
Avoid catastrophic risk
Seek good advice
The case entitled “Jenny and Andrew Pick an Advisor” specifically addresses item 6 on the list of “common
cents” strategies: debt as a catastrophic risk.
Debt, in of itself, does not need to pose a catastrophic risk. In fact, for many people, debt can be a
convenient and easy way to afford large purchases. For example, in Canada, two-thirds of the population
are homeowners and two-thirds of those homeowners are carrying mortgage3.
Unfortunately, however, there is also a significant number of households who find their debt becomes an
impediment to financial wellness and in some cases compromises their wealth. In its simplest expression,
every $1 that goes towards the repayment of debt is a $1 that cannot be saved or a $1 that does not
contribute to lifestyle.
In studies completed by the Financial Wellness Lab at Western University with the Canadian Payroll
Association,4 we found that approximately 25% to 30% of Canadian households were ‘financially stressed’
and that one of the root causes of the distress was debt. The research team used machine learning and a
technique known as clustering to uncover previously unknown patterns in household financial behaviour.
The research concluded that Canadians could be clustered into one of three groups – financially
comfortable, financially coping and financially stressed.
The typical member of the ‘stressed’ cluster would find it difficult to manage a brief financial setback, saves
little to none of their income, and places greater emphasis on the monetary aspects of employment (such
as salary or benefits) as compared to non-monetary aspects (such as time off or work-life balance). The
Sharanjit Uppal, “Homeownership, Mortgage Debt and Types of Mortgage Among Canadian Families,” Statistics Canada,
August 8, 2019, accessed September 26, 2021, www150.statcan.gc.ca/n1/pub/75-006-x/2019001/article/00012-eng.htm.
4
Adam Metzler, Chuck Grace, and Yuhao Zhou, “Learning About Financial Health in Canada,” Quantitative Finance and
Economics 5, no. 3 (2021): 542-570.
3
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stressed group is the most heavily indebted in that they are (i) most likely to have car loans, student loans,
loans from family members, outstanding balances on their line of credit, and credit card debt (concerningly,
half of the stressed group has credit card debt), (ii) most likely to report that their debt load increased over
the previous year and (iii) least likely to feel they will ever be completely debt free.
Importantly, the clustering could not be explained by simple demographics. It appeared to be completely
agnostic with respect to geography, gender, age and income. Even the wealthy can get in over their heads
when it comes to debt.
The Risky Components of Debt
Debt is not simple and the risks it can pose are complex and inter-related. However, five characteristics
play a dominant role when assessing debt from a risk perspective.
1. Amount – the total amount of debt obviously plays a key role is defining risk but it also has to be viewed
in context. Household income, collateral, other assets and any special conditions or terms need to be
considered when attempting to determine how much debt is too much debt. In combination with the
interest rate (below), the debt balance will determine carrying costs – your monthly, quarterly or annual
payments. This carrying cost needs to be assessed in the context of your income and, as a general
rule, should never exceed 40%. But remember – in personal finance general rules can be dangerous.
It is important to assess your personal risk in the context of your personal plan.
2. Amortization Period – how long you take to pay off the debt contributes to both the opportunity cost
(below) and the total cost of the loan. Having a loan with a high interest rate (a credit card for example)
isn’t necessarily risky if the balance is paid off promptly. Conversely a loan with a very low interest rate
(a mortgage for example) could be risky if you take many, many years to repay it and the total resulting
cost compromises your financial goals.
3. Interest Rates – the interest rate charged on the loan obviously creates a potential for risk. Loans with
high interest rates will require larger loan payments and therefore pose a risk to your financial wellness.
And the structural nature of the interest rate can also pose a risk. Fixed rate loans (where the interest
rate is ‘locked in’ for a period of time) means no surprises. If you know exactly what your payments will
be, you can budget accordingly. Variable or floating rate loans, on the other hand, can change without
warning and could present an unwelcome surprise for your monthly budget.
4. Asset Matching – borrowing in order to purchase an appreciating asset (a home for example) can help
build wealth. The key is to ensure that the cost of the loan (see points 1 and 2 above) doesn’t exceed
the value of the asset. Conversely, borrowing can be risky when it is used for discretionary purchases
that have no corresponding asset (for example vacations or living expenses). In these situations, it is
important to maintain discipline and ensure the loan is repaid promptly or risk a debt spiral where the
loan values continue to grow unimpeded. An unusual number of households in the ‘stressed’ group
regularly used credit cards to pay for everyday expenses such as groceries.
5. Opportunity Cost – as noted above, debt also poses an opportunity risk since the cash flows directed
towards the repayment of the loan cannot be directed to your savings –possibly compromising your
savings goals. It is therefore important to balance your debt obligations against your wealth goals to
ensure one doesn’t impede the other.
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A Word on Student Loans
Many post-secondary students rely on some form of debt to help finance their education. In Canada,
approximately half of post-secondary students graduate with debt. For undergrads at business schools, the
average balance was $19,5005 in 2015 (the last year Statistics Canada collected data on the subject).
A post-secondary education is important to your financial future. It can help set the trajectory for your career
path, your income and your employment prospects. And using debt to pay for your education can be a
practical and enabling decision. However, it also represents a possible barrier to financial wellness and
your other goals. As noted above, every $1 directed towards paying off your student loan is one $1 less
that can be directed towards your lifestyle or savings.
For that reason, it is important to pay off your student loans over a prudently short period of time. How long
is prudently short? As a generalization,6 aim for 5 years but no more than 10. After that, the asset you’ve
acquired (your degree) becomes less “valuable” compared your performance on the job. As with other debt
decisions, you don’t want to be paying for the asset when it no longer has value. For example, no one wants
to be paying for a car loan if you can no longer drive the car.
A Word on Housing Debt
In the research conducted by the Financial Wellness Lab we noted a strong relationship between housing
and our clusters. The issue wasn’t homeownership per se but the mortgage. The majority of respondents
in all 3 clusters are homeowners (79% of Comfortable are homeowners, 73% of Coping and 63% of
Stressed). But the percentage of monthly income consumed by housing costs (including the mortgage)
differs greatly. For example, 41% of Comfortable spend less than 30% of monthly income on housing costs
while 49% of Stressed are spending more than 40%7 on housing costs. The financially stressed group are
much more likely to believe that housing costs are unaffordable and to express a concern with their overall
debt load. The Canadian Mortgage and Housing Corporation (CMHC) considers 39% to be the threshold
for mortgage approval but even amongst the comfortable cluster, 25% exceeded the CMHC thresholds!
Some have argued that in the long run the pressures from housing costs will presumably ease as household
incomes rise and the value of the home appreciates. And that argument is true – with an important caveat
in terms of financial resilience. In order to remain financially resilient, you need to be able to tap cash
reserves in the event of an emergency, job loss or an unexpected expense. The challenge in being ‘house
rich’ and ‘cash poor’ is that it can be difficult to ‘pull cash from the home’ without selling it. It is therefore
important to balance your decision to own a home against the obligation your potential mortgage payments
may have on your other goals and your financial resiliency.
A Word on Predatory Debt
There is debt and then there is DEBT! A particularly toxic form of debt that should be avoided at all cost is
predatory debt where the lender imposes unfair, deceptive, or abusive loan terms on the borrower.
Examples include payday loans, loans with unusually low monthly payments, loans with balloon payments
or loans with fees over and above the interest rate. Predatory lenders often use aggressive sales tactics to
entice a borrower to take out a loan that they will not reasonably be able to pay back – and set up for the
borrower for a catastrophic loss. When we talk about debt as a potential contributor to catastrophic loss,
predatory debt is at the top of the list.
Diane Galarneau and Laura Gibson, “Trends in Student Debt of Postsecondary Graduates in Canada: Results from The
National Graduates Survey, 2018,” Statistics Canada, August 25, 2020, accessed September 26, 2021,
www150.statcan.gc.ca/n1/pub/75-006-x/2020001/article/00005-eng.htm.
6
Note the author’s previous warning on the dangers or generalizations!
7
Note: In September 2021, mortgage rates (and the corresponding impact on housing costs) were at 30-year lows –
presumably housing affordability issues can only worsen if interest rates return to historical norms.
5
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9B16N039
APPENDIX B: THE 5 C’S OF CREDIT
Knowing that most people will take advantage of debt at some point in their future, it is important to
understand when and how a lender will approve your request. When an individual applies for a loan, there
are generally five things the lender assesses—often referred to as the Five Cs of Credit: Character,
Capacity, Capital, Collateral and Conditions. Examining each of these helps the lender determine whether
to approve the loan. And by “putting yourself in the shoes” of the lender, you can better anticipate what it
will take to gain their approval.
1. Character – Character is reflected in the borrower’s willingness to meet their obligations. In a lending
scenario, your character is strongly weighted by your credit report. Your credit report is a detailed
report outlining your credit history, including any loans you have had such as student loans, credit
cards and more. Some credit bureaus will also include other financial obligations such as rent, utilities
and even your monthly cell phone bill. The reports show how you have handled your financial
obligations in the past and gives an indication of how you will handle them in the future. Checking your
credit score is important. Options to do so include:
a. Purchase credit scores from a Canadian credit bureau: Both Equifax and TransUnion provide
credit scores for a fee. Credit scores can be purchased online, in person or by mail. The credit
score provided by each credit bureau is the bureau’s proprietary score.
b. Your bank or credit union: Some banks and credit unions offer credit scores free for customers
through online banking sites and/or mobile apps. However, the credit score a bank or credit union
shows its customers may not be the same score the bank or credit union uses to make lending
or other decisions. If you obtain a credit score through a bank or credit union, it usually indicates
which credit bureau or company has provided the score.
c. Other sources: Depending on where in Canada you live, you may be able to use a free credit
scoring site. Some other organizations offer free credit scores to people who sign up for their
services and receive a no-obligation credit card or loan offer. For example: borrowell.com
2. Capacity – Capacity refers to your ability to pay back the loan. It is determined by a number of factors
but generally comes down to income – your source of income and its stability. Some lenders will look
at your capacity to repay the loan by assessing ratios such as your Total Debt Service Ratio or TDSR.
Your TDSR is calculated by adding together your mortgage or rental payments, property taxes and all
other debt payments (credit cards, loans, lines of credit, etc.). The sum of all debt payments is then
divided by your gross income. Typically, a lender will look at 40% TDSR as the maximum level.
3. Capital – Lenders like to see the borrower investing their own capital in a project or goal, as it shows
a seriousness about the investment. A great example of this is the a down payment on a home when
applying for a mortgage. Net worth is good way to determine capital. Your net worth is determined by
comparing the value of what you own to what you owe. A high net worth indicates stability to the
lender.
4. Collateral – Sometimes when you apply for a loan, you have the option to offer collateral as a way to
strengthen the application. This means that, in the instance you aren’t able to repay your loan, the
lender can repossess the collateral as payment. This could be your home, a vehicle, other assets or
whatever you have negotiated with the lender. Providing collateral can also reduce the interest rate
on the loan, as it reduces the risk to the lender.
5. Conditions – The conditions of your loan are also considered before it is granted. This includes the
interest rate, the repayment term, the amount and the purpose of the money. If a lender knows the
money is intended for a specific purpose, they may be more likely to approve your request than if you
are applying for a loan just to have the available credit.
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For the exclusive use of S. Liu, 2024.
Page 11
9B16N039
APPENDIX C: RELEVANT READINGS
For readers who wish to pursue these topics a little further, the following resources may provide useful insights.
Online Resources
•
•
•
•
•
Financial Consumer Agency of Canada; ensures federally regulated financial entities comply with
consumer protection measures, promotes financial education and raises consumers’ awareness of their
rights and responsibilities, “Home Page,” Investment Industry Regulatory Organization of Canada,
accessed September 22, 2021, www.canada.ca/en/financial-consumer-agency.html.
CMHC (Canadian Mortgage and Housing Corporation); provides tools and advice on homebuying and
mortgages, “Home Page,” CMHC, accessed September 22, 2021, www.cmhc-schl.gc.ca.
Consumer Financial Protection Bureau (CFRB); is a US government agency that provides resources
for consumers and tracks financial wellness, “Home Page,” CFRB, accessed September 22, 2021,
www.consumerfinance.gov.
The US Federal Reserve (FRB); undertakes extensive research on household finance and economic
well-being,
“Consumers
&
Communities,”
FRB,
accessed
September
22,
2021,
www.federalreserve.gov/consumerscommunities.htm.
Personal Finance Research Centre (PFRC); is an independent research centre that specialises in
social research across all areas of personal finance, mainly from the consumer’s perspective. “Home
Page,” PFRC, accessed September 22, 2021, www.bristol.ac.uk/geography/research/pfrc.
Recent Research on the Topic of Financial Well-being
•
•
•
•
•
•
•
Canadian Payroll Association, “National Payroll Week Survey, 2020”, accessed September 23, 2021,
https://www.payroll.ca/PDF/News/2020/2020-NPW-Press-Release_EN.aspx.
Consumer Financial Protection Bureau, Financial Well-being in America, September 2017, accessed
September 22, 2021, https://www.consumerfinance.gov/data-research/research-reports/financial-wellbeing-america/.
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This document is authorized for use only by Songyuan Liu in W2024 FIN4400 taught by Shiu-Yik Au, University of Manitoba from Dec 2023 to May 2024.
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