This 26-year-old Toronto data scientist makes $120,000 a year, but recently moved back home due to COVID-19 uncertainty. Can he buy a home in the GTA within the year?

Millennial Money is a weekly submission-based series that provides financial advice to millennials in the GTA. Read the full series here.

After years of intense studies, David, 26, has landed a job as a data scientist making $ 120,000. Thankfully, he’s retained his job throughout the COVID-19 pandemic, but the uncertainty of the times led him to make a life-changing transition recently.

He moved back in with his parents.

That meant moving out of his downtown condo, sacrificing his independence, and relearning to cohabitate outside of the city — for example, adjusting to a lot more driving. “No more walking and transiting,” he says. Now it’s $ 300 to $ 400 added to his monthly bills driving his parent’s second car whenever he needs to go out.

But because he’s working from home, he’s also saving a lot every month eating most of his meals at home. His parents provide the meals, along with rent-free shelter.

“Before COVID-19, I was spending $ 2,000 plus in rent downtown and going out to eat for lunch on weekdays, which cost me $ 400 to 600 each month,” he says. “I also spent $ 100 to 200 a month on clothing because I felt I had to keep up appearances working downtown.”

Before getting to his future goals, David still wants to use some of the money he’s saving from living with his parents to enjoy life. That means continuing to meet friends in his bubble at a restaurant twice a week to socialize and indulge in one of his favourite activities — eating.

He also stresses the importance of not being too strict with spending. That means putting some money into a vacation fund — around $ 200 a month — that he can use when he feels safer to go overseas. He also allocates $ 400 a month for online educational courses.

Other than his well-paying job, David is also interested in investments. “I feel that because I am young, I can invest aggressively.”

With all his school debt paid off, he’s hoping to gain some insight into how he can start his future with what he has now. First goal? Buying his own home in the GTA within the year, and secondly “to be financially independent in my 40s.”

“With the economic turbulence and headwinds we are facing, I’m struggling to save money because houses in the GTA are so expensive,” he adds.

We asked David to record his day-to-day spending for a week to get a better idea of his finances.

The expert: Jason Heath, managing director at Objective Financial Partners Inc., takes a look at David’s finances.

  • David is in the sweet spot right now. He has a high income and he lives with his parents. The biggest risk of good cash flow is lifestyle creep that results from increased discretionary spending causing your saving potential to disappear. This is a good time for David to really ramp up his savings to get ready for the next phase in his life, as his expenses will no doubt rise in the future.
  • He has a high income and will save 43 per cent tax on his RRSP contributions. He should be careful about building up too much RRSP funds too early — yes, there is a risk — because he will only be able to withdraw up to $ 35,000 for a home down payment under the Home Buyers’ Plan (HBP). He should also be contributing to a TFSA to have his savings build tax-free. If his timeline to purchase a home is one year, he should be conservatively invested with his down payment funds, likely in a savings account or other near-cash investment. Stocks fall about one-third of the time on an annual basis, so it would be unfortunate to invest aggressively and have to sell stocks if they were down a year from now.

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  • I note David’s car insurance is pretty high at $ 280 per month. Maybe David drives a high-end car or has had tickets or accidents in the past. He might want to shop around his car insurance with an insurance broker. While he’s at it, his ability to work is his most important asset right now, so as a single person, he should be sure to protect against the risk of disability with good disability insurance coverage. Even if he has a group plan at work, he should determine whether it would be taxable or tax-free if he were disabled, and how much of his income it would actually replace. Also, many group policies become more strict with their definition of disability after two years, leaving some gaps that can be filled with private coverage.
  • I like the way David has a monthly vacation fund he’s contributing to, even if the coming year may be a difficult time to travel given the pandemic. He should consider doing the same with his home purchase goal, working backwards from the target down payment he will need. First-time homebuyers are often surprised by some of the other costs of a home purchase, like provincial or city land transfer tax, legal fees, home inspection, new furniture, and so on. I would encourage David to develop a proper budget not only for the purchase, but also for the ongoing costs of owning a home. That way, he can figure out how much he should be spending to buy the home in the first place based on the budget that will leave him in a comfortable financial position post-purchase — not just based on what the bank approves him to borrow.

Results: He spent less. Spending in week 1: $ 624.98 Spending in week 2: $ 255.46

How he thinks he did: David is pretty satisfied with his week two spending. “I deliberately cut down on the discretionary spending, for example, by not buying a barbecue grill that I wanted for $ 350,” he says.

Most of David’s recent impulse spending has come in the form of eating with friends, he says. “My idea is that if I just cut back a little on that, I can pay for other activities, like virtual board games,” noting the importance of staying busy during the pandemic.

Take-aways: “The advice hit the nail on the head,” David says. “Certainly when I moved back home due to COVID-19, I felt like I was entitled to spend a bit more on myself because I was saving so much in rent.”

He agrees with Heath — he is in fact in a “sweet spot.”

But one thing he noticed after reading the advice? “I am not doing well in being conservative with my investments. I understand that I will be at risk of having to sell stocks at a bad time in order to buy a house,” he says. Since receiving Heath’s advice, David has adjusted his portfolio from 90/10 per cent stock/bond to 75/25 per cent as a compromise.

On Heath’s car insurance advice, he agrees he is spending too much, but unfortunately he was in a minor at-fault incident in 2015 that remains on his record. “Luckily, my insurance was recently renewed at $ 217 a month.”

When it comes to disability insurance, unfortunately, David thinks that most “young people often disregard the possibility of becoming disabled.” But in this time of COVID-19, he says it wouldn’t be a bad idea to top up on additional coverage to what he already has from his group plan at work.

Finally, can he buy a home in a year? Perhaps it’ll take more time and savings, David says, after assessing the advice. “I agree that the costs involved are often underestimated and I will do my due diligence to ensure I am not overstretching my budget,” he adds.

“My main takeaway from this experience is that small costs certainly do add up. Lifestyle creep, like the name says, literally creeps up on you and requires taking active steps to prevent. And that like everything else in life, maintaining a healthy personal balance sheet is a result of developing good habits, not motivation.”

Are you a millennial living in Toronto or the GTA and need help with saving your money? Be a part of #MillennialMoney and email ekwong@thestar.ca
Evelyn Kwong

TORONTO STAR