Millennial Money is a weekly submission-based series that provides financial advice to millennials in the GTA. Read the full series here.
Living in downtown Toronto’s west end, Rebecca, 35, and Brian, 40, feel they’ve outgrown the semi-detached home they bought six years ago. With a four-year-old son, “being at home this past year has highlighted our need for more space,” Rebecca said.
Together, they make more than $ 200,000 a year both working at a tech company. Since the pandemic hit, they’ve been fortunate to work from home, which has allowed them to save quite a bit.
“Since having our son, the biggest expense we’ve had — more than our mortgage — is child care. Now that he is approaching kindergarten we are curious how to best reallocate the $ 2,000 a month we will save,” Rebecca said.
So, they want to know, should they buy a cottage for family getaways up north, or save up more and upgrade to a larger home?
“Given the recent demand for cottages and the rising prices I don’t know if it will be feasible. Otherwise, we’ve thought about moving to a bigger place and putting the savings from child care toward a bigger mortgage,” Rebecca says, adding that staying in the city is ideal, and that they can rent out their basement if needed.
For now, the couple has less than $ 250,000 remaining on their mortgage and very little credit card debt, which they pay back on time.
In terms of day-to-day costs, the couple has signed up for produce and grocery delivery boxes since working from home. “We also order takeout two to three times a week to support local restaurants,” Rebecca said. On weekends, they spend most of their time at home fixing up their backyard and hope to invest in some outdoor furniture this summer, but know they have to get their daily finances in order as well.
“We are the first to admit we don’t know where all our money goes. Savings are always in the back of our mind as is an RESP (Registered Education Savings Plan) for our son. Unfortunately, it always feels like at the end of the month there is some unforeseen expense that keeps us from saving,” Rebecca said.
Finally, the two do not have any current savings other than Registered Retirement Savings Plans through their employers. So which is a better plan? A cottage or a bigger home?
We asked Rebecca and Brian to share a week of spending to get an idea of their finances.
The expert: Jason Heath, managing director at Objective Financial Partners Inc., on the couple’s real estate choices:
Rebecca and Brian are, like many parents of young children, looking forward to the day those daycare payments stop. Even though daycare costs might disappear for them when their son starts school, there can be other costs. They may need before- and after-school care, for example. Children’s activities and camps can also add up as well. They should be cautious not to spend their savings before they’re sure it’s going to be there.
As they note, Ontario cottage prices have gone nuts the past year. Could they reallocate some of their almost $ 29,000 per year in daycare savings to a cottage? Sure, they could. I might be inclined to try renting a cottage a few times to see if cottage life is for them and help them narrow down what they are looking for in a vacation property first. They may find that spending a few thousand on cottage rentals is cheaper and easier than committing many thousands of dollars per year to cottage mortgage payments, property taxes and maintenance.
Rebecca wonders if she can take money from her RRSP using the Home Buyers’ Plan (HBP) to buy a cottage. The HBP does allow withdrawals of up to $ 35,000. However, the home cannot be a secondary property like a cottage.
If Rebecca and Brian moved to a bigger home, she could consider a HBP withdrawal. They could rent out their basement and as long as the rental use was small relative to their own use of the home, it could still qualify as their tax-free principal residence. Rebecca should make sure she’s getting the maximum group RRSP match from her employer with her contributions especially if she thinks she may take advantage of the HBP.
I note the family’s food budget is $ 1,750 per month, which is arguably high for a family of three. They order takeout at least two to three times per week so that’s a big part of it. Sometimes it takes an exercise like this to really understand where your money goes.
The family’s newfound cash flow could be put to use in a few ways beyond a cottage or a bigger mortgage. They are interested in opening a RESP for their son. Contributions of up to $ 2,500 per year get a 20 per cent matching grant from the government deposited to the account. Since they have not contributed in the past, as long as no other family member was contributing to a RESP for their son, they can play catchup. They can contribute up to $ 2,500 for a past year of missed contributions — $ 5,000 total for the year — and get 20 per cent or $ 1,000 deposited by the government.
Rebecca and Brian have group RRSPs at work, which is great. Do they have adequate life and disability insurance? They seem to be in a good place financially right now, but disability or death is a risk worth mitigating for a young family.
The result: They spent less. Spending in week 1: $ 1,536 Spending in week 2: $ 722.00
How they think they did: After seeing their day-to-day spending laid out, the couple decided to make some quick moves. “We cancelled our weekly produce box and are no longer having groceries delivered. We did not appreciate how much we were spending on food and groceries,” Rebecca said.
They’re also hoping to commit to ordering takeout only once a week and buying coffees only on the weekends. “It adds up quickly and we want to put that money to better use elsewhere,” Rebecca said.
Take-aways: To get a better idea if cottage ownership is for them, they’re going to take the coach’s advice and rent one first. “We need a vacation!” Rebecca said.
As per Heath’s advice, the two are also “exploring life and diability insurance — above and beyond what we have through our employers — as an extra saftey net.” It was also helpful to learn about the RESP matching grant. “We will absolutely opt for the catch-up option. Great news!”
Finally, participating in Millennial Money has taught them a valuable lesson: “This exercise has helped us be mindful of where the money goes.”