Millennial Money is a weekly submission-based series that provides financial advice to millennials. Read the full series here.
A year out of post-secondary school, Maya, 23, is making $ 62,000 a year as a corporate analyst working in Toronto.
Already living in the city with her parents, she paid off her debt with savings from previous part-time jobs, and is continuing to build up her savings.
“I work from home so I have eaten all breakfasts, lunches and most dinners at home throughout the pandemic,” she said. On the weekends she’ll cook from home, but also grab takeout with family and friends, and explore the city.
Even though she’s landed a great start to a career, Maya has more ambitions that she wants to financially prepare for. “What can I do to optimize my savings to position myself to be able to finance grad school?”
Her frugal lifestyle combined with the privilege to work from home, has led to her saving quite a bit of money. “I have approximately $ 80,000 in savings thanks to no student debt, frugal spending habits and working for about a decade throughout school,” she said.
That’s spread across a savings account and investments made through robo-investing in two TFSA accounts and an RRSP. “I’m also enrolled in a defined benefit pension plan through work so I know I’m also saving for retirement passively there.”
With her employer announcing a return-to-work plan, she anticipates her expenses will go up in the fall. “I’ll begin commuting to work part-time and doing more social activities that will cost money, like going away on the weekends,” Maya said.
On top of her continuing education goals, Maya also wants to know how she can best position her savings to indulge in vacations and eventually buy a house.
With no debt, tens of thousands in the bank, what can Maya do? We asked her to share a week of spending to get an idea of her habits.
The expert: Jason Heath, managing director at Objective Financial Partners Inc., on Maya’s finances.
Maya is in a strong financial position with a good income, low expenses, no debt, and lots of savings. However, she knows her expenses are about to rise with a return part-time to the office and with a goal to pursue graduate school studies in a year or two.
She has a defined benefit pension plan, so she probably does not get a lot of new RRSP room each year. However, she has been working for 10 years, so may have some carry forward of RRSP room from past earnings. Her RRSP contributions may save her about 30 per cent tax depending on how much she is contributing to her pension. If she puts $ 10,000 into her RRSP, she will magically turn that money into $ 13,000 due to $ 3,000 of tax refunds.
Her RRSP can be used to help pay for grad school using the Lifelong Learning Plan. The LLP allows up to $ 10,000 of withdrawals per year from a RRSP — up to $ 20,000 in total — for a full-time educational program at a qualifying educational institution.
Although she does not expect to buy a home for 10 years, her RRSP can also be used again under the Home Buyers’ Plan (HBP) to withdraw up to $ 35,000 for a house or condo.
Even though her RRSP can come in handy for school and real estate, she may want to limit how much she saves, targeting no more than the $ 20,000 she may use imminently for schooling.
At 23, a RRSP can often be a short-term tool as opposed to a long-term way to save for retirement. Maya should consider working with her robo-advisor to reduce the stock exposure in her RRSP if she could be taking an LLP withdrawal in the next year. A one-year time horizon is a bit short to take on stock market risk.
Maya should try to come up with a budget for grad school and determine to what extent she may be able to work while attending. She may need to budget for not only her tuition, but also to top up her cash flow for her month-to-month expenses. My guess is that with her current modest spending, her existing $ 80,000 of savings is more than enough to get her through. A good portion of that money could be invested with a longer term time horizon given she may not need it for many years.
She should make sure her TFSA is maxed out. She can confirm her TFSA room with CRA. I would use her TFSA for her more aggressive long-term investments, and her lower risk savings to be used during her time at grad school should likely be in whole or in part in a high-interest savings account.
One problem with a robo-advisor is they may apply the same asset allocation (mix between stocks and bonds) across all of your accounts. So, Maya should have a conversation with them to ensure her RRSP, TFSA, and other savings accounts are invested in large part based on the time horizons for the accounts.
This is the time for Maya to really take advantage of her low cost of living. She has no rent payments or mortgage, contributing only to groceries and takeout for her family. She has no car and is just now starting to commute to the office part-time. Home and car ownership costs can be awfully expensive, so building up savings like she has done will help make her financial life much easier in the next five to 10 years.
Results: She spent more! Spending in week 1: $ 309 Spending in week 2: $ 567.03
How she thinks she did: She spent more, but she’s not going to be too hard on herself for it.
“My spending was up but I attribute that to restrictions loosening and corresponding celebration in this new normal. Overall, I am still on track with my goals and am OK with spending more in the nice summer months,” Maya said.
Also this week, Maya felt extra thankful for her home situation, and contributed by paying for a cleaning service. “It was a luxury after living in constant close quarters for more than a year,” she added.
Take-aways: Though Maya has always been frugal, this exercise has shown her how important it is to really track purchases on paper.
“I will be making a budget for myself in September to minimize discretionary spending,” she said. “In this budget I will determine if it’s best for me to work while in grad school or take an accelerated program that could have me back into the workforce faster.”
She was also really thankful to learn about the Lifelong Learning Plan. “I will absolutely look into this to fund grad school as I know an RESP at this point won’t help,” she added.
As for the future plans of moving out of her parents’ place and buying her own home, she knows she’s years off. Still, it’s good to know that the RRSP program is there whenever she needs it.
With this new found clarity, moving forward she’ll be contacting her robo-investor to organize her saving allocation. “I’d like a different asset allocation across my accounts based on risk and when I’d like to withdraw,” she said.
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