Millennial Money is a weekly submission-based series that provides financial advice to millennials in the GTA. Read the full series here.
Recently divorced, 27-year-old Sammi is now stuck with thousands in debt. How much exactly? A $ 24,500 line of credit with six per cent interest.
During the difficult transition, she saved where she could, which included heading back home. “After my divorce, I moved back in with my parents, so my bills are now much lower,” she said.
Making $ 67,500 a year as a pricing analyst, Sammi hopes that she can get back on her feet. “Paying off debt is priority,” she said, adding she also wants to live independently again. “I am trying hard to save as much as possible to either begin renting again or possibly save up for a house. However, with my debt, I don’t think that is possible.”
On a typical work day (from home), Sammi typically eats a free home-cooked meal, which has been good for her savings. On the weekend, she’ll meet up with friends for takeout to get more variety and stay busy during the pandemic.
One thing she’s thankful for? Having set up a Tax-Free Savings Account and a Registered Retirement Savings Plan account early on. “My work matches RRSP contributions and I currently have $ 3,500 in RRSPs as well as $ 1,000 in a TFSA account,” she said.
What are the next steps Sammi must take to pay off her debt, and save enough to move out?
We asked her to record her daily savings to get an idea of her finances.
The expert: Jason Heath, managing director at Objective Financial Partners Inc., on Sammy’s situation:
- Sammi has a fair bit of debt to pay down, but she is also in a sweet spot. She’s working, unlike a lot of young people right now. She really should take advantage of the low living costs she has right now to prepare for the future.
- Her monthly take-home pay is about $ 4,100 and her expenses appear to be about $ 1,800. That suggests about $ 2,300 of extra cash flow each month, but my experience has been that people don’t budget for the incidental costs that can easily grind down their actual saving potential. Even if she could save $ 2,000 monthly, that means it will take her 13 months to pay off her line-of-credit debt. If she can only put $ 1,000 per month against the debt, that would mean about 27 months to become debt free.
- The good news is Sammi’s debt is only at six per cent interest. If she was instead paying 19 per cent credit-card interest, the repayment timelines would increase.
- Given the interest rate, I think debt repayment is where I would focus extra cash flow. To invest in an RRSP or TFSA, Sammi probably wouldn’t be able to earn more than six per cent investing to come out ahead. If Sammi had a group savings plan at work where her employer matched contributions, that could be an exception, but getting debt free as soon as she can will help her with other goals.
- I note Sammi’s monthly car costs are over $ 700 per month, excluding any maintenance costs. That’s approaching 20 per cent of her take-home pay. Car costs are often a necessity for someone living in the suburbs. If it weren’t for the pandemic, public transportation or ride-sharing options could be an easy way to bring down costs, but I can fully appreciate the premium people may be willing to pay to travel safely in their own car.
- Given Sammi lives rent free and doesn’t pay for food at home, I challenge her to allocate payments to her debt at least in line with her estimated rent and food costs if she were living on her own. If she limits herself to spending the rest, at least she’s notionally prepared for moving out of her parents’ house in the next year or two. As time goes on, Sammi will also need to factor in having additional cash flow to save for other short and long-term goals like a new car, home down payment and retirement.
The result: She spent less. Spending in week 1: $ 448.03 Spending in week 2: $ 252.99
How she thought she did: With a lot of takeout buys, Sammi says she did “OK” for the week.
“I spent more than usual on eating out as I had a day off work and spent time at my friend’s place,” she said. To make up for it, she has goals to spend a bit less on food for the next few weeks, but also understands that it’s a balance as COVID-19 continues to drag on into the winter.
Take-aways: Getting a divorce, accumulating debt and moving back home have been a huge lifestyle change. Sammi adds that sometimes it may feel like she’s going backwards but she knows that she’s making changes that will help her in the long term.
“That means I will stay as long as I can, and will learn to handle living with my parents,” she said.
Her first priority is to pay off her debt. How will she start? Sammi’s immediate plan of action is to put $ 2,000 a month toward the debt until she can move out again.
“His advice showed me that it’s more important to get rid of my debt than to put money in savings right now,” noting the calculations Heath made on how long it could take her to pay off the amount.