Millennial Money is a weekly submission-based series that provides financial advice to millennials in the GTA. Read the full series here.
Sid, 31, is an engineer at a consulting firm making $ 92,000 a year. Being an avid saver, his short-term goals are to pay for deposits for a major milestone celebration and to save for retirement.
Over the pandemic, Sid got married but kept the reception small due to COVID-19 protocols. “We eloped at a wedding chapel down the street (just the two of us). We planned on having our wedding celebration last September with family and close friends (50 people), but of course we had to reschedule.”
He’s hoping in the short term to be able to pay off all the deposits, in a smart way, for a bigger wedding in November, pending the vaccine rollout.
For years, Sid has followed a regimented savings routine. “Every month, 15 per cent of my paycheque goes directly into my RRSP (my employer contributes another five per cent). Another $ 450 gets automatically deposited into a TFSA and $ 50 into an emergency fund. Any leftover savings goes into my chequing account,” he said.
Day to day, Sid tries his best to keep costs low. “Before COVID-19, a typical workday often involved leftovers for lunch and cooking dinner at home.” On occasion, he’d have sushi with friends or Subway for days when he was in a rush. But the biggest time kill would be the commute. “I would take three modes of public transit from midtown Toronto to Oakville (subway, GO train, bus). The commute was long (2.5 hours a day) and I often skipped breakfast in a mad rush to get to the office for 8 a.m.,” he said.
Now, because he’s working from home, he has found more time, and is able to cook all meals from home with the exception of delivery now and then. “We try to support our favourite local midtown restaurants!”
On weekends, the couple used to dine out, watch a movie, go to the museum or get drinks with friends. “Now we hunker down at home and read, watch the Raptors and take our dog for long walks around the neighbourhood.”
Long term, Sid wants to consider home ownership, but is questioning it with Toronto’s sky-high prices. He also has plans to save for retirement, build an emergency fund and travel once a year, when it’s safe. “My wife and I share a joint motto in life: ‘eating our way around the world.’ ”
With no debt, Sid wants assistance managing his savings. We asked him to share a week of his expenses to get a better idea.
The expert: Jason Heath, managing director at Objective Financial Partners Inc., on Sid’s financial goals:
Sid and his wife have some short- and long-term goals they are saving for and need to balance them both. I think it’s great he has $ 72,000 saved up in his RRSP, but with only $ 11,500 in cash and TFSA balances, he may be planning too long term.
They are hoping to have a wedding in the fall, but, more importantly, they want to target a 20 per cent home down payment. Sid may be overcommitting to his RRSP given he can only withdraw a maximum of $ 35,000 of his $ 72,000 RRSP balance using the Home Buyers’ Plan.
I would consider making the minimum group RRSP contribution he can make to get the maximum matching contribution from his employer, as opposed to contributing the 20 per cent of his income he’s contributing currently. That’s a great saving rate, but it may be too focused on long-term savings.
Saving in his TFSA may be a good option for a home down-payment fund going forward. A 20 per cent down payment is a great target, but reaching that target may be tough for them and many other young people. They need a five per cent down payment at minimum for a mortgage. I wouldn’t buy until they were confident they could stay put in one place for at least three to five years.
I note Sid and his wife divide their rent payment based on their incomes. They have been legally married since 2019 though their family wedding has been delayed due to the pandemic. Some spouses keep their finances separate, as they appear to do, while others combine everything and make decisions as one. There is no right way to do things, but if they managed their finances more holistically, they could come out ahead. For example, the cash in his bank account earning zero interest could be used to pay down her OSAP loan that is accruing interest payable.
Sid notes he has disability insurance at work but wonders about his critical illness and life insurance needs. Disability is his biggest risk, given that if he can’t work due to an injury or illness, he and his wife could suddenly be a one-income family in an expensive city. Some group disability insurance policies are inadequate both in terms of how much of your income they replace and how strict the definition of disability is after the first two years. I’d prioritize understanding how good his disability coverage is first and foremost.
Life insurance is more important when you have children or a spouse with a significantly lower income. That said, life insurance is cheap for a 31-year-old in good health, and could be secured now in anticipation of future dependants. Life insurance could always be ramped up in the future if Sid and his wife have children.
One of the good things that has come from the bad COVID-19 situation is people like Sid starting emergency funds. Whether it’s the stark reality that emergencies happen, or the inability to spend money the way he and his wife used to previously, I hope planning for the unexpected is something they can continue to do. It becomes even more important when you buy a house that invariably will have essential repairs, as well as tempting discretionary purchases.
The results: He spent more Spending week 1: $ 219.25 Spending week 2: $ 2,375.15 (including rent)
How he thinks he did: “Obviously I spent more this week since rent got taken out, which is my biggest expense by far,” Sid said. “Overall, my spending has been down considerably over the past year due to the pandemic.”
Take-aways: After receiving the advice, Sid agrees he’s been too focused on his long-term goals. Due to that, he’s decided to make some changes. “I have taken the advice and lowered my monthly RRSP contribution, while still getting the maximum contribution from my employer. The difference will automatically get transferred to my TFSA and emergency fund,” so he can focus on short-term goals, he adds.
Another factor that Sid is now considering? “I’m going to take a closer look at my disability insurance coverage at work to make sure it is adequate for my needs.”
Finally, he agrees that co-operation and openness about finances will be best for his relationship. “I will sit down with my wife and try to take a more holistic approach with our finances to see if we can come out further ahead, as the expert pointed out.”