Millennial Money is a weekly submission-based series that provides financial advice to millennials in the GTA. Read the full series here.
Making $ 36,000 a year as a recruiter, Marlon, 25, is hoping that he can get his finances together to make a major purchase: a car to save time getting to work. He could spend the extra hours with his five-year-old son.
“(I’m) saving up to buy my first car, something under $ 10,000, (because) I don’t want the burden of paying for a car over three to five years,” Marlon said.
Currently, he’s renting a room in his mom’s home for $ 350 a month. Moving out would be ideal, but it’s not his most immediate priority. “It’s far into the future, but hopefully saving enough for a down payment to purchase a rental unit or having enough liquid money to make a way into real estate,” he said of his longer-term goals.
Right now, Marlon drives his mom’s car to work on days she doesn’t need it, and uses it for errands. He rarely brings food to work. “I’m not the best cook but I can cook to survive. In most cases I skip lunch,” Marlon said. “I skip breakfast as well, not a big fan.”
After work, he spends a lot of time with his son going to the park or on walks. On the weekends, his son is at his mother’s place and Marlon will treat himself to takeout lunch, but he’s always mindful of money. “If I could eat something I already have in the fridge I would do that instead.”
Marlon has paid off $ 3,000 of his $ 5,000 debt on his personal line of credit, a loan he took out for the lower interest rate compared to credit cards.
He’s wondering how he can move to the next chapter of his life to provide more for himself and his son.
The expert: Jason Heath, managing director at Objective Financial Partners Inc., on Marlon’s situation:
Marlon is wise to be saving up for a used car. That new-car smell can be enticing, but costly. New cars depreciate significantly in the early years.
Buying a slightly used car can be a great way to reduce either your monthly payments or your repayment period. Although a used car may have more repairs, the cost of repairs can be significantly less than the payments on a newer vehicle.
Marlon is lucky to have low costs living with his mom, but he’s conscious on spending in other areas like eating out and even cuts his own hair. It can be easier, especially when you’re young, to control your expenses than your income.
He was smart to set up a line of credit. Unsecured line-of-credit rates can be less than half that of a credit card. As long as you avoid the temptation to use your line of credit for spending, debt consolidation can be a good strategy.
Marlon mentions that he wants to save up a down payment for a rental property. He would need 20 per cent down to buy a condo that is not owner-occupied.
In Toronto, rents are relatively low compared to the rents you could earn on a comparable rental-property purchase elsewhere. This means Toronto condo investors are more reliant on capital appreciation.
One problem with a rental-property purchase for a young person is that the acquisition and sale costs can be expensive. Provincial and municipal land transfer tax, legal fees, real estate commissions — they all add up.
Overcommitting your savings to an illiquid investment too early can lead to debt. After all, Marlon will not be able to use the sink in his condo to pay for hockey equipment or summer camp for his son, or for training or education as his career develops.
On the other hand, he would only need a five per cent down payment to move into a condo of his own.
If Marlon wants to save for the future, a Tax Free Savings Account would likely be best for his short- and medium-term goals of buying a car and purchasing real estate.
He could open a Registered Education Savings Plan to save for his son’s post-secondary costs, but I’d focus more on short-term debt repayment and saving for now. He should be debt-free and have some savings of his own before he starts saving for costs that could be almost 20 years away.
The results: He spent less. Spending in week 1: $ 215 Spending in week 2: $ 190
“I think I did a better job restricting myself from buying lunch during the work week and bringing lunch in,” Marlon said, knowing that he still has to treat himself once in a while.
He’s created a schedule to help save more. “Instead of two days of ordering takeout, I’m going to start only doing that on Saturdays,” he added.
Take-aways: This experience has brought Marlon a lot of clarity. Firstly, “I thought a down payment was 20 per cent across the board. I didn’t know the difference when it came to owner-occupied and non-owner-occupied real estate.”
Knowing this, Marlon has opened his perspective about not only purchasing a car, but the longer-term goal of being independent. “I am now saving toward the car to start my independence, keeping my mind open about the rental property or just finding a place for myself down the line.”
His number one takeaway from the exercise is priorities. “Do one thing at a time. If you try to get two goals done at the same time it can result in you dipping into savings or using your credit card,” he said.
Finally, because of these changes, Marlon says he’s getting closer to paying off the remaining $ 2,000 on his line of credit.