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Colleen and Cal have big plans for the future - children, a family home - but they are concerned about overextending themselves financially. And with good reason.

Cal is a jazz musician, working when he can, so Colleen, who is a nurse, has the larger income by far. This means the family's income and saving capacity will tumble when she is on maternity leave.

Recently, the couple bought a triplex in the Toronto area. They live in one unit and rent out the other two, bringing in enough money to cover the $471,000 mortgage - at least for now. Their variable rate mortgage is at 2.25 per cent.

"Our plan is to eventually move out of our current house and keep it as a rental, and purchase another property as our family expands," Colleen says. She figures they'll have to pay $600,000 to $800,000 for the family home. As always, there are conflicting claims on their money. Cal, who is in a lower tax bracket, has $20,000 of unused registered retirement savings plan room.

"Should we be prepaying the mortgage or should I be contributing to his RRSP to lower my taxes?" Colleen wonders.

We asked Jane Cheong, financial planner with T.E. Mirador in Montreal, to take a look.

What our Expert Says

Because they are living rent free, the couple's saving capacity is substantial, Ms. Cheong notes. Net income of $8,050 less living expenses of $4,355 leaves $3,695. She subtracts from that the $200 a month they pay into Colleen's RRSP.

But there are costs beyond those they have identified. The planner adds $250 a month for vacations "because people need balance in their lives."

Interest rates are likely to rise over the forecast period, Ms. Cheong points out. If Colleen and Cal were to lock in at 5.14 per cent for a five-year, fixed-term loan, mortgage payments would rise to $2,777 from $2,050. Add another $727 to the expense column.

That would leave them with $833 a month for their tax-free savings accounts and $1,685 for non-registered accounts.

Suppose Colleen takes maternity leave next year. Their surplus shrinks to $1,108 a month, the RRSP contributions are shelved, $200 is added for child care expenses and $100 for life insurance. Their saving capacity falls to negative $169 a month.

The following year, 2012, Colleen goes back to work again, so their surplus of income over expenses bounces back to $3,695. The RRSP contributions of $200 a month resume and $415 is added for daycare. That would leave them with saving capacity of $1,803, divided among their tax-free savings accounts ($833), registered education savings plan for their child ($208), and non-registered savings and investments ($762).

As for the rental property, the planner does not recommend prepaying the mortgage as the interest on it is tax-deductible for the rented portion.

The dream home will have to wait. Although Colleen and Cal can save $106,000 over the next five years, they still won't be able to afford a house costing $600,000 to $800,000 without stretching themselves too far, Ms. Cheong says.

In five years, their equity in the triplex is estimated at $280,000. If they refinanced the property for 80 per cent of its value, they could raise $150,000 for a down payment on another house, she notes. But that wouldn't be a good idea as the mortgage for a personal residence would not be tax-deductible.

If they were to liquidate Colleen's portfolio, which in five years might have climbed to $200,000, refinance their triplex to raise $150,000 and get a $250,000 mortgage to buy a $600,000 house, it "would be too much," she says. "This means there is no additional savings going on, and everything is going to an illiquid asset not earning anything."

The couple could look to the suburbs for a lower priced house, or just continue living rent-free, Ms. Cheong says.

Colleen has a defined-benefit pension plan, leaving her with only $2,500 a year in RRSP contribution room. She should contribute the maximum to her own plan and the same amount to a spousal RRSP so that when they retire they can split their RRSP income.

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Client situation

The People: Colleen, 32; Cal, 36

The Problem: Whether to pay down the mortgage, contribute to RRSPs or save as much as possible to buy a house in five years

The Plan: Leave the mortgage, contribute the maximum to RRSPs, look for a less expensive house to buy or put off the purchase for a few more years

The Payoff: Avoiding the cash-flow trap that comes from being overextended with too much debt and too many expenses

Monthly net income: $8,050 (including rental income)

Assets: Triplex $651,000; RRSP $16,000; savings and investments $154,500. Total $821,500

Monthly disbursements: RRSP contributions $200; food and dining out $560; clothing $50; tobacco and alcohol $30; miscellaneous $70; mortgage payments $2,050; property taxes $320; house insurance $65; gas, hydro, water, phone, cable $660; maintenance $100; entertainment $50; transportation $160; donations $20; gifts $20. Total $4,355 Saving capacity: $3,695

Liabilities: Mortgage: $471,000