Millennial Money is a weekly submission-based series that provides financial advice to millennials. Read the full series here.
As a self-proclaimed “older millennial,” Peter, who just turned 40, makes $ 94,000 a year working in social services.
Being an avid investor throughout his life, he’s long been able to take advantage of GTA’s hot housing market. “I live in midtown and I own two condos in the Toronto area, which I bought 10 and seven years ago,” he said.
While he’s made big purchases, his day-to-day spending remains humble, which has allowed him to save about $ 70,000. “I try to save about $ 1,000 a month. During the pandemic, there were months I could save $ 2,000.”
Because Peter is “super into health and fitness,” he meal preps 95 per cent of his meals. “I rarely eat out unless I’m dining with family and friends.”
Also, he doesn’t usually indulge in impulse buys. “Aside from gas, groceries and an occasional bakery treat, I don’t spend money during the week,” he added.
Two new hobbies he picked up during the pandemic that he doesn’t mind spending on are paddle boarding and tennis. “I just bought a paddle board for $ 550 and a tennis racket. But after those initial costs there is no fee.”
Now, with tens of thousands saved up, he hopes to figure out how he can best manage his investment properties and savings. “I have tenanted out one of my two condos and profit around $ 300 from one,” he said. “I just moved into my second condo — it was a preconstruction build and hasn’t closed. I’m paying the interest costs.”
In about a year, Peter has aspirations to move out and rent the spot he’s currently living in. He wants a dream condo in downtown Toronto but is debating between living in it himself or renting it out.
“I don’t plan on having children so I’d like to have the freedom to choose to retire as early as possible. I’m considering purchasing a third property, or if that is not feasible, I need to know how best to invest my savings,” he said.
To get a better idea of his finances, we asked him to share a week of spending.
The expert: Jason Heath, managing director at Objective Financial Partners Inc., on Peter’s investments
Peter has managed to buy two condos by the age of 40. He lives in one and rents out the other. He mentions he may buy another downtown and rent out the condo he is living in next year.
Three condos would provide a lot of exposure to Toronto-area real estate prices. One of the most important tenets of investing is diversification. If Peter’s investing is limited to condos, he is highly reliant on Toronto real estate prices continuing to rise. He may forgo the opportunity to invest in stocks and, more importantly, to take advantage of tax strategies that investment accounts may offer. RRSP and TFSA contributions could allow his investments to generate tax refunds, tax deferral and tax savings. Investments like these can also be more flexible and liquid than real estate. In other words, a TFSA withdrawal is easy to make to pay for a car repair. You cannot use a brick from a property to pay for something (although you can borrow against real estate).
My point is not to invest in stocks instead of real estate. I would suggest the same caution if all of Peter’s investments were in technology stocks or cryptocurrency as well. The point is to avoid investing too much in any one investment opportunity to reduce your overall risk. Nobel Prize winner Harry Markowitz once said, “diversification is the only free lunch in finance.”
Peter aims to save $ 1,000 per month but has been able to save $ 2,000 per month at times during the pandemic. He spends well below his income in part due to inexpensive hobbies and meal prepping. Anyone looking to save more should be looking at the repetitive expenses, small and large, in their budget. Avoiding lattes is not going to buy you a condo on its own but avoiding daily lattes and similar recurring splurges can sure help you boost your saving ability if that is important to you or necessary.
I note that Peter’s take-home pay is about half his gross income. I would have to imagine he is a pension plan member on that basis, and as a frugal, single person who does not plan to have kids, his pension may cover a significant part of his retirement income needs. If he wants to retire early, he will need to work on boosting his net rental income and accumulating RRSP and TFSA savings as well. He can increase his net rental income by increasing the amortization on the condo mortgage to lower the payments. This may provide more cash flow for RRSP and TFSA contributions, or for saving for other purposes like replacing his old car.
As a single person, his biggest financial risk is a disability. He does not have insurance as part of his monthly budget but may have workplace coverage. He should take a close look to be sure his income would be fully replaced in the event of disability. He can consider private disability insurance coverage if necessary, or a critical illness insurance policy to complement the disability coverage. Critical illness insurance provides a lump-sum payment in the event of a specific list of critical illnesses.
Results: He spent more. Spending in week 1: $ 112 Spending in week 2: $ 756
How he thinks he did: “This week was a little atypical, as I just moved so I needed to buy a dining table,” he said, spending a few hundred dollars.
Another consideration is that out of lockdown, he knows his spending will increase.
“Now that the world is opening back up, I’m going out more and am feeling the need to dress better — hence a small shopping trip to Lululemon,” he said. “I’m dining out a little more because I’m worried about a fourth lockdown shutting everything down, so I want to make use of the patio season while I can still socialize.”
Take-aways: Off Heath’s financial advice, Peter has already made the first move to meet with a certified financial planner. “I’m looking to get more specific advice on where to invest my savings,” he said.
In terms of buying properties as investments, Peter is now reconsidering. “I shouldn’t put all my eggs in one basket, and I don’t think I will purchase another property because I don’t want the potential additional burden of more tenants.”
The biggest takeaway Peter has is Heath’s advice on disability insurance.
“Not having the funds to care for myself never even occurred to me. I’ve always been in good health, so the idea of saving for a potential rainy day was foreign,” he said. “Now, I’m looking into what my current options at work are and will step it up if these aren’t adequate.”
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