Millennial Money:
She’s saved up for a house, but what to do in the meantime?
In our Smart Money series, #MillennialMoney, we ask people to record every penny they spend in a typical week. Then, using tips from a financial adviser, we challenge them to cut their spending the following week so they can save more money. Will they fail or succeed?
Working as communications specialist at a non-profit, Kate, 31, makes $65,000 a year. With no debt, and renting a spot in Burlington with her partner, working from home has sped up the process of saving.
“After working hard to save, I now have $70,000 in my TFSA. The problem is that I have no idea what to do with that money, and it is currently making just $5 a month in interest,” she says.
Since Kate moved out of her parents’ home almost a decade ago, she’s only been in the rental market. With a little luck, that’s about to the change: she and her partner are planning to buy a home next year in the GTA.
But for now, what should she do with her savings? Before COVID-19, a typical workday for Kate meant bringing lunch half the time and buying it the other half, which would cost around $7 per take-out lunch on those days. “Now that I work from home I almost always make lunch or eat leftovers,” she says. “It’s boosted my savings quite a bit.”
On the weekends, lockdown means less outdoor spending activities. “We usually stay close to home, go for walks, watch Netflix,” Kate says. “Before the pandemic, we’d visit a winery maybe once a month, go out to eat dinner a few times a month.”
With no debt, she aims to capitalize on her savings, help buy a home with her partner, and preserve a bit of a nest egg to regrow after putting the money toward a down payment.
We asked Kate to share her daily expenditures to get an idea of her finances.
The expert: Jason Heath, managing director at Objective Financial Partners Inc., on Kate’s situation:
Kate had a modest lifestyle even prior to the pandemic and is able to put away about $1,400 per month with even lower expenses now. She has accumulated a $70,000 TFSA that she hopes to use to buy a home next year. I appreciate the $5 of interest she earns monthly is paltry, but we learned how volatile stocks can be last year. Canadian and U.S. markets fell more than 30 per cent in the spring of 2020. Even the biggest stock by market capitalization, Apple, was down about that much. Stocks can be up or down significantly over a one-year period. Given she hopes to buy a home next year, is it worth taking a risk on stocks? In my opinion, that is too short a time horizon when you need your money for an imminent home down payment or other immediate purpose.
It seems Kate’s TFSA is her main investment account as she does not even mention her group RRSP balance. She has a RRSP account at work, and chances are her employer matches her contributions. I would try to maximize the matching deposits from her employer every year — it’s like giving yourself a pay increase. She may also want to inquire if she can take a withdrawal from the account by using the Home Buyers’ Plan. Not all group RRSP plans allow withdrawals, but if she needs or wants to put down a larger down payment on a home purchase, she may be able to access up to $35,000 from her RRSPs. If this helps her and her partner get to a 20 per cent down payment sooner, they may avoid hefty Canada Mortgage and Housing Corporation mortgage-loan insurance premiums on their purchase.
Depending on the RRSP matching program rules, she could consider a lump-sum contribution to her group RRSP using her TFSA. She could also make contributions to a personal RRSP using her TFSA. A $10,000 RRSP contribution could save her more than $3,000 in tax based on her salary and turn $10,000 of her down payment funds into $13,000 like magic.
I think Kate has the right mindset planning for a home purchase that will still let her save. Buying too much home can leave little wiggle room for emergencies let alone for retirement saving, family planning or vacations. The bank may approve her and her partner for a larger mortgage than they should take on. Budgeting for a home purchase depends in part on bank mortgage ratios, but also on your own financial goals. Everyone is different.
The result: She spent more. Spending in week 1: $190 Spending in week 2: $1,150
How she think she did: “Because I’ve become careful about saving, I think this was a normal good week!” Other than rent, the purchases are nothing too out of the ordinary, she says.
Take-aways: “It’s reassuring to hear that the money coach says that I have been saving money, smartly,” Kate says.
It’s also good to hear that even though $5 a month doesn’t seem like a lot, accumulating that much in TFSA actually isn’t terrible because of the volatile stock market.
Also with investments, she just wants to be sure that she’s doing everything she can in the safest way having saved so much. “With the GameStop situation and the rise and fall, I just want to make sure I’m not missing out by not jumping right in to invest.”
Finally, Kate says she’ll be looking into Heath’s advice about the lump-sum payments.
“I feel reassured about our decisions moving to the next step buy a home, while still being able to save.”
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