Millennial Money is a weekly submission-based series that provides financial advice to millennials in the GTA. Read the full series here.
At 29, Nicole, a policy analyst making $ 78,000, says she’s going through a #MillennialLifeCrisis with her finances, and wants more clarity.
Just this year, as condo prices went down in the pandemic, Nicole bought her first property: a $ 485,000 place in Roncesvalles. “I had saved $ 100,000 saved up by June 2020, and bought my apartment immediately.”
How was she able to save six figures? She attributes that to living at home with her parents until the age of 27, which allowed her to save on housing, food and other costs.
By the height of the pandemic, just a few months after moving into her apartment, Nicole temporarily moved back home to her parents to stay connected to them and not be isolated, and as an opportunity to save more money.
“While I’m at my parents I can save $ 1,000 to $ 1,500 a month,” she said.
Also, she’s lucky that she’s been working from home since March 2020. “This means I eat most of my meals at home with family, and occasionally we “splurge” on ordering takeout on the weekends,” she said.
Before the pandemic, Nicole says she was living a comfortable lifestyle, which included travelling, eating out, buying clothes and taking Ubers — and she wants to continue that when it’s safe to. But at the same time, she would like to feel financially comfortable and independent.
Short term, Nicole’s goals are to have enough to take an extended vacation in Europe in the next year or so.
Long term? That’s where she’d like more direction.
“I’m just not sure what next steps should be. Emergency fund? Travel fund? Future larger house fund? RRSPs?”
She also has a government pension and has been contributing since 2013. Right now, she has saved up $ 10,000 in her bank account.
She’s also planning to move back to her place “in the spring when the warm weather returns.”
Her only debt right now is her mortgage, which includes $ 17,000 that she withdrew to purchase the condo under the Home Buyers’ Plan that she needs to pay back this year. The only additional cost she feels she can give up is the car. Currently she drives a 2003 Honda, which her father does maintenance on.
“I’m questioning now whether to use this time to bump up my savings now or to jump in to buy a bigger spot and risk being house poor and my lifestyle taking a hit,” she said. “I have been having some regrets about the condo given what I paid and the direction condos and rent prices have been going. Basically, I’m lost!”
We asked Nicole to share a week in spending to get a good idea of her finances.
The expert: Jason Heath, managing director at Objective Financial Partners Inc., on Nicole’s confusion:
Nicole sacrificed during her 20s to save up a 20 per cent down payment on a condo. Just 50 per cent of 30-year-olds owned a home according to the 2016 census. Interestingly, Statistics Canada reports that in 1981, only 56 per cent of 30-year-olds owned their home — not much different from today.
Nicole works for the government and has had a pension plan for the past eight years. Her pension enrolment means she does not accumulate much new Registered Retirement Savings Plan (RRSP) room each year.
She may have some accumulated room from working earlier in her 20s or teens, but I would not necessarily prioritize retirement saving. She is saving for retirement on every pay cheque already, through her own contributions and those of her employer, and has a head start on many of her peers. That is not to say that she does not need to save beyond her pension, but at her age and stage, I would consider alternatives.
She has some other short- and medium-term goals like a European vacation and a larger home. She may want to contribute to a Tax Free Savings Account (TFSA) and keep some of the funds in cash or bonds, and some invested more aggressively with exposure to stocks.
It sounds like it could be several years before she buys another home, so that gives her an opportunity to take a bit of risk with her TFSA if she can stomach it. If not, and if she has a low risk tolerance, I would consider making extra payments against her mortgage. Mortgages often allow you to pay off 10 to 20 per cent of the original balance annually.
I think it is OK to build a bit of low-risk savings, but if she starts to accumulate a lot of cash earning one per cent in her TFSA, she could consider paying down her 2.09 per cent mortgage for a better return.
She may want to establish a home equity line of credit, if she does not already have one, as a backup emergency fund. She is a saver, and if she can resist the temptation to raid her line of credit, it can provide peace of mind.
An emergency fund is always a good idea, but given her car is nearly 20 years old, a point may come where the repairs are more than her handy father can handle for free.
The inevitable expensive repair or required replacement of that vehicle may not be as exciting to save for as a European vacation, but it is a good example of an anticipated expense that some people like to ignore. Emergencies happen, and the more you plan for them, the less likely you are to have a true one.
Finally, I would not be in a big rush to repay her Home Buyers’ Plan (HBP) balance. She only needs to repay 1/15th of the $ 17,000 withdrawal each year with the first $ 1,133 repayment required in 2022 — two years after the original withdrawal. If she does not re-contribute this amount to her RRSP, it gets added to her income for the year, and she loses that RRSP room forever.
The results: She spent less. Spending week 1: $ 1,252 (including mortgage) Spending week 2: $ 358
How she thinks she did: Nicole thinks that this week she managed to keep her daily costs pretty average and at a manageable level. “My online spending and takeout budget has increased since lockdown, but living at home helps offset those costs,” she said.
Take-aways: The first thing Nicole recognized is that she hadn’t considered putting additional payments toward her mortgage. “It makes sense that this could give me a better return and this year, if I do have more savings, I’m planning to do so.”
For her car, though she recognizes it is more than 20 years old, having it die wouldn’t be the worst thing. “I think I would just do without a vehicle and take transit.”
As for her priorities, they’re still focused short-term on vacations and long-term on continuing to save for a larger home.
Mainly, Nicole got a sense of comfort knowing she is doing well for her age.
“I’ve worked hard to be a homeowner and still maintain my lifestyle and want to continue to be able to make smart financial choices. It was also reassuring to hear my pension puts me in a good position for retirement,” she said.