Millennial Money is a weekly submission-based series that provides financial advice to millennials in the GTA. Read the full series here.
Melissa and Joe, a millennial couple living in Vaughan, have moved onto a new stage of their life after recently giving birth to their second child.
Melissa, 36, makes $ 128,000 a year as a policy-maker and part-time professor and Joe, 37, earns $ 68,000 a year as a professor and business analyst. After taxes, they take in just under $ 10,000 a month — but this year it’s been a bit different.
“I am finishing up my final maternity leave this week and finally getting my income back,” Melissa says. “I want to really figure out how to start investing, save for RRSPS and RESPs, do some renovations and hopefully pay our mortgage off faster.”
Recently, the two just bought their first family home. With mortgage burdens in mind, they’ve created an eating/food-spending schedule to spend less on that, knowing that child-care costs and other bills will pile up.
“We bring lunch almost every day, and will buy something two or three Fridays a month. Breakfast is always at home. We order dinner from a restaurant once a week and have just signed up for a meal-prep delivery service twice a week,” Melissa says.
On weekends, due to the COVID-19 lockdown, they keep their children entertained at home. “We’ll often buy lunch on a Saturday but rarely go out for dinner or meals.”
They have $ 10,000 in savings but would like to accumulate more for emergencies and for the kids as a priority. “We want to have $ 40,000 for each of the girls in RESPs.”
They want any leftover savings to go to a vacation savings fund for post-pandemic times, and also renovate their backyard to include a pool.
We asked Melissa and Joe to share their finances to get a better idea.
The expert: Jason Heath, managing director at Objective Financial Partners Inc., weighs in.
Melissa and Joe’s spending highlights the benefits and costs of living in the suburbs as opposed to the city. Their mortgage payment of about $ 2,100 per month is around 13 per cent of their gross income or 22 per cent of their after-tax income. The tradeoff is monthly car expenses of more than $ 1,000 per month.
If Melissa or Joe worked from home at least half of the time for at least four consecutive weeks in 2020, they’ll be eligible to claim home-office expenses using the recently introduced simplified method. This lets taxpayers claim a $ 2 deduction per day for all days they worked from home during the year to a maximum of $ 400 each. (They may be able to claim a larger deduction using the detailed method, so they should consider both options.)
I note their goals: an emergency fund, investing and a renovation. That said, I see only $ 100 for insurance costs besides their home and car insurance. I encourage them to assess their life and disability insurance needs. They have young kids and should be sure that if either Melissa or Joe died or became disabled, their income would be replaced. They may have insurance coverage at work that is not part of their budget, but I think a young family’s insurance needs should be a priority.
It looks like their sample spending included a week with a couple of extraordinary costs — an interior designer and a cottage rental deposit — but otherwise, they seem to have about $ 1,500 of extra cash flow in a typical month. They could set aside cash for the renovation but may want to consider putting that cash to work instead. Saving up cash when interest rates are less than one per cent while they have a mortgage at two or three per cent may not be the best approach. They could consider making extra mortgage payments and then borrow money back to do their backyard using a line of credit or adding the required funds to their mortgage. They will want to balance taking on too much debt and waiting too long to incur such an expense; often parents delay a backyard or basement renovation so long their kids are no longer around to enjoy it.
If they are going to invest, I would encourage them to consider contributions to Joe’s RRSP or to a spousal RRSP in Melissa’s name. Both will give Joe tax deductions, and given his lower tax bracket, they will get a bigger bang for their buck contributing in his name compared to Melissa. TFSA contributions for both of them could be an option, but if they are using the TFSA to save for a specific short-term expense like the backyard or a vacation, they may not want to take on too much investment risk. Investing in stocks in your TFSA is better reserved for long-term savings with a time horizon of at least three years.
The result: They spent less. Spending in week 1: $ 4,925 Spending in week 2: $ 800
How they think they did: “I think this was a good week,” Melissa says, despite breaking out of their food schedule.
“We’re spending far more than we would like to on takeout and meal-kit delivery, but with the stress of the pandemic it’s a help to not have to grocery shop as much and cook dinner every night,” she adds.
Take-aways: Heath’s advice gave the couple a big realization.
“It never occurred to us to make extra payments towards the mortgage to borrow off later. That’s actually genius, as our mortgage is at 1.82 per cent,” Melissa says. “The adviser is right, we can afford it and a pool would bring us and our kids so much enjoyment.”
Melissa and Joe were unaware there was a spousal RRSP option. “We will look into setting one up for Joe to offset my taxes,” Melissa says.
Finally, the two realized that even though they have insurance through work, they needed to “get (their) act together with insurance and wills” after their second child. They had looked into it months ago and then “let it fall to the wayside, but (recently) I contacted the adviser to set up an appointment to finalize it,” Melissa says.
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