Millennial Money is a weekly submission-based series that provides financial advice to millennials in the GTA. Read the full series here.
Maria feels like she’s been blessed. At 22 years old, she’s already secured a full-time job as a junior designer making $ 45,000 a year.
“I am very lucky that I got a job right out of school. I’ve never had a real job before and it’s so different from working part-time here and there. I can actually save a lot but I just don’t really know where to start,” she says.
Living with her parents in North York, she saves on rent and meals at home. It’s also enabled her to spend more money on shopping and dining out with friends. Working from home also means saving on transportation — taking the TTC occasionally instead of daily, which would have cost $ 150 a month.
“Occasionally I see my friends for a patio or park lunch or dinner. I take the TTC down, as well as when I need to get some supplies for work. I used to go to school at York U and spent $ 150 each month just on a pass. I know that might have to happen if I get asked to go into work, but I think I can afford it.”
Maria’s next goal is to find a place of her own to rent and start being independent. The problem? She’s faced with a mountain of student debt.
“I have $ 25,000 in debt. I’m lucky that I actually have a steady income but it is overwhelming. My friends from school aren’t as lucky,” Maria says.
From her limited knowledge, she says that she’ll likely take her extra money to put down more on her OSAP. She also has goals to start savings accounts — one that she could eventually put toward travelling and other personal buys.
“Because we missed out on grad trips, it would be great to save $ 2,000 or something for a trip later on with friends when it’s safe.”
The expert: Jason Heath, managing director at Objective Financial Partners Inc., on Maria’s student debt.
Maria is lucky to have jumped right into a full-time job following her graduation. She appreciates that and is making the most of it. She is also pretty lucky to have low expenses right now. She benefits from living rent-free with her parents and not having to buy groceries. She also works from home and has lower transportation and clothing costs — for now. This is a great time for her to chip away at her OSAP debt from school before her expenses start to go up.
Starting a savings account is a good idea, too. She should open a Tax-Free Savings Account (TFSA) so what little interest she earns is at least tax free. She may find it tough to earn much more than 1 per cent in a savings account these days. Meanwhile, her OSAP rate could be 3 per cent or more. As a result, there is a benefit to paying down her OSAP and avoiding that interest when the return she earns on her savings is less. She could invest her TFSA into stocks to earn a higher return which could be in the 5- to 7-per-cent range over the long run. In a given year, stocks could be up or down 30 per cent though. For example, the Toronto Stock Exchange was down 35 per cent in 2008 and up 31 per cent the next year. Last spring, at the start of the pandemic, stocks fell by over 30 per cent in a single month. Over a three- to five-year period, stocks generally go up, but in a given year, they can be down about one third of the time.
The appeal of a TFSA is Maria can use it for different purposes. She can save for the vacation she wants to take. She can save money for first and last month’s rent. She can save for a contribution to her Registered Retirement Savings Plan (RRSP). TFSAs grow tax free, and withdrawals are tax free and unrestricted. At $ 45,000, her income may be too low to really benefit from RRSP contributions unless her employer matches her contributions in a group plan. At 22, she also has a lot of other short and medium-term savings targets that should take precedence over retirement.
Maria may be able to pay off her OSAP in the next year. I think that building a small savings account and getting debt-free should be priorities. If she can stay at home for a few years before moving out, that could really help her accumulate some savings. At the same time, I can appreciate the desire to become independent and be out on her own. She notes that her food costs and other home expenses would rise if she moves out. It is important to consider the true costs of moving out, or buying a home, or getting a car. When people budget for something they want, they may unintentionally (or intentionally) ignore some of the ancillary costs to make the math work. Fudging the numbers with your personal finances only hurts yourself.
Results: She spent more. Spending in week 1: $ 229.50 Spending in week 2: $ 388
How she thinks she did: “I spent more but I think it’s because of the reopening excitement,” Maria says, adding that her own graduation has been dampened by COVID-19.
“I just want to go out there and buy some new clothes to feel refreshed, see friends and have normal interactions, but I know that I’ll have to slow down my spending eventually to save properly to get my own spot.”
Take-aways: “Wow, this advice has been really helpful! I wish we learned more about it in school,” Maria says.
Her biggest takeaway is that she needs to start a TFSA account now. “I just had a checking and savings account … I didn’t really know what that was but maybe I can put a little bit into travel savings there.”
It was also really consoling to Maria that she may be able to pay off OSAP next year, but realizes she’ll need to get on it right away. “The interest drives me crazy! I think that getting rid of it faster might be better for me in the long run to be clear of everything else.”
Finally, in terms of moving out on her own, she’s going to take it slow. “Factoring in things like rent, transportation, food, going out, internet as the advice stated, I don’t think I’m ready for that yet,” Maria says. “I’ll start with organizing my money and paying off debts first.”
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