After years of the grind and paying off debt, 38-year-old Ted, a customer engagement manager at a grocery retail chain, is sitting comfortably making $ 85,000 a year. Even during COVID-19, he’s able to work from home. Now, he’s in a sweet spot to begin thinking about his future — which means buying his first Toronto condo.
But before that happens, he wants clarity on how to change his financial situation. For decades, Ted has been sending $ 1,000 every month back home to his parents in Taiwan. He is writing into Millennial Money in hopes he can figure out how to readjust these payments to become a homeowner in Toronto.
Owning a real estate property in Taiwan that’s worth $ 130,000 Canadian, he figures he can rent it for $ 10,000 a year.
“I’m planning to use this rent money to replace the money ($ 1,000) I send home so that I can aggressively save up for my condo down payment — currently in my TFSA, where I just started at the beginning of April to contribute $ 440 bi-weekly. I can probably double that next year,” he says.
The other option? To buy a condo sooner at a lower price rather than wait in Toronto’s rising real estate market, while continuing to send money back to his parents.
“Which one is better?” That’s what he hopes to learn from our money coach.
In terms of his daily spending, even before COVID-19, he’s always watched his cash flow like a hawk. “I make sure that I pay myself first in my RRSP and TFSA before spending my money on discretionary items.” This means meal-prepping all his lunches for work, and spending just a dollar on a coffee, which is subsidized by his company. Breakfast and dinner for Ted are enjoyed at home as well. On some weeknights before the pandemic, he’d attend a tennis lesson or a free class at his university, which he has access to as an alumni.
His one guilty pleasure during the work week? Spending a couple dollars once a week on a baked good. “While I watch my spending like a hawk, I don’t want to feel miserable at the same time,” he says.
To offset his strict weekday spending, he will also splurge over the weekend — which has been dramatically reduced since physical distancing rules have been in effect. Before, he’d dine out with his partner for lunch and dinners.
“Sometimes we’ll go window shopping, to watch a movie, or to hang out with our friends. They cook, we bring wine and desserts, vice versa, or sometimes have brunch somewhere,” he says.
Other than his initial savings for a down payment, Ted has an emergency savings account worth $ 12,000 and another $ 4,000 personal savings for things like travel, entertainment and education.
On top of saving for a condo, retiring early is a huge goal for Ted. “I want to retire when I’m 55 to 60 years old.” He thinks he’ll need $ 1 million to $ 1.5 million to do that.
We asked Ted to track his weekly spending to see how he spent his money.
The expert: Jason Heath, managing director at Objective Financial Partners Inc., shares his advice for Ted:
- Ted is helping to support family members in another country, sending $ 1,000 a month to them. Many young people have a tough time saving $ 1,000 per year, but he has been able to support his family by keeping his spending low. Ted has a good income, but lifestyle creep often causes people’s spending to rise with their incomes. Most of that spending tends to be discretionary spending. Ted keeps costs in check by eating most meals at home, bringing his lunch to work, taking public transit and paying modest rent.
- In terms of his question on how to start saving or buying a condo, it’s hard to say which approach is going to be best, but here’s my take. Local condo prices have gone up quite a bit in the past few years. Real estate in Toronto has gone up a lot over the past decade, but condos have been surging recently. I suspect as the pandemic continues and Airbnb landlords lose out on rent but still have to pay their mortgages, more condos will be converted to long-term rentals. This will push down monthly rents, and that may push down condo prices, or at least temper their growth. And if the recessionary slowdown continues, once the 6-month mortgage deferrals many people have opted for are done, you could see more pressure on real estate prices, especially more modestly priced condos. I can’t envision real estate prices rising significantly in the next few years, and suspect they will be flatter than what we have seen. They could even fall. It’s more art than science, but I might hold off to see how the real estate market shakes out over the next year. The rental income he’s getting internationally is pretty good. I would keep saving and consider selling abroad and buying here over the next few years.
- Ted isn’t forgoing his own saving though. He’s saving about $ 25,000 per year to his RRSP and TFSA, which is fantastic. The RRSP contributions are saving him about 30 per cent tax at his level of income, which helps free up more cash flow for TFSA contributions.
- Although Ted may only be able to take $ 35,000 from his RRSP for a home down payment under the Home Buyers’ Plan, given his high income and his age, I like that he is biased toward RRSP contributions over TFSA contributions.
- At 38, Ted is at a point in his career when he should be thinking about retirement. His goal of saving $ 1 million to $ 1.5 million to retire by age 60 may be a bit arbitrary. If someone had $ 1 million saved in a RRSP account at age 60 currently, they may be able to safety withdraw $ 30,000 annually and increase that amount by inflation each year, with lots of asterisks about the assumptions used. Government pensions — CPP and OAS — might add another $ 15,000 to a 60-year-old retiree’s potential income, again, depending on a number of factors. CPP and OAS are also indexed to inflation. At $ 45,000 of pre-tax income, that’s about $ 38,000 after tax in Ontario. Whether or not someone can live comfortably on this income depends on a variety of factors.
- That said, Ted is 38. When Ted is 60, something that costs $ 1 today will cost $ 1.55 assuming two per cent annual inflation. And whether Ted owns a home or not at 60 makes a difference. Might Ted downsize in retirement? Could Ted be married or in a relationship by retirement, and what sort of pension income or retirement savings might his spouse have at that point? Is Ted a conservative or aggressive investor? Does Ted pay high or low fees on his investments? Retirement planning and setting savings targets can be tough without really considering all factors.
- Regardless, Ted appears to be on a great trajectory. His generosity toward his family is fantastic to see, but I would encourage him to maintain a balance between providing for them and saving for his own short- and long-term goals. Hopefully his $ 1,000 per month of family support is sustainable, but he needs to be sure it is not at the expense of adequately supporting his future self.
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Results (during COVID-19): Week 1 spending: $ 95.39 Week 2 spending: $ 184.68
What he thought: Besides spending significantly less during COVID-19, Ted says he believes he’s always been responsible with his money. “I think I’m pretty good at staying on top of my expenses. I usually know what my spending pattern is and where my money goes,” Ted says. A couple of years ago, Ted created an “optimal” savings plan that would help him save money, and has been tracking his weekly spends for several years now. “A similar pattern is expected to happen again this week, where my spending tends to spike during the weekends.”
Takeaways: Ted will do his best to follow Heath’s advice and not allow his “lifestyle creep to rise with his income.” More specifically, that means trying to keep his dining-out expenses to $ 80 for four occasions during the weekend. “Sometimes the cost will go up to $ 100 to $ 120, but having that $ 80 target helps to anchor the number in my head … I’d rather make some sacrifices on my spending today than later in life. Thanks for the reminder!”
While this practice has cleared a few things up on how he can more efficiently save for a condo and retirement, he also noted that it’s important that he wants to make sure he has enough for travelling at least twice a year after the pandemic. “One bigger trip for $ 2,500-$ 3,000, and one smaller trip for $ 1,000-$ 1,500.” Another personal spend? Learning. “Since I love to learn new things, I’m setting aside some funds for doing a course or buying books.”
It’s understanding his spending habits that has him reconsidering the amount he may need for retirement. “The coach is right, $ 1 million might not be enough to support my lifestyle during retirement. I may need to reconsider my retirement age target while saving more aggressively toward a $ 1.5 million-$ 2 million target.”