Looking to upgrade living

Single mom hopes to pay off debt and buy a home.

In our Smart Money series, #MillennialMoney, we ask people living in the Greater Toronto Area 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?

As a single millennial mom, 28-year-old Malika has ambitions to move her family into a home instead of living in a cramped condo. But making $45,000 a year as a lease return co-ordinator and with $12,000 in debt, all amid the COVID-19 pandemic, she’s wondering if that will ever be possible.

Malika needs to pay back $12,000 that has accumulated from school and child costs. She feels fortunate to have kept her job, but has to commute to the office, which pushes her monthly transportation costs to more than $660.

Thankfully, her living costs are low because she’s renting her mom’s condo investment. “I only pay $500 in rent living downtown,” she says.

Also, her sister recently moved in to assist with child care and cooking while she heads to the office.

In a typical work week, Malika brings lunch three out of five days.

Despite living in the city, motherhood has helped her to not spend money on non-essential buys.

To cope with the pandemic, she’s part of an athletic club, playing soccer at a local park every week to make sure she gets time for herself. Being outdoors is important because there isn’t much space in her living area.

“COVID-19 has taught me that I really want my own space for my son and I, a home or condo that I can buy myself.”

We asked Malika to track everything she spent in a week to get a better idea of her finances.

The expert: Jason Heath, managing director at Objective Financial Partners Inc., on Malika’s financial situation.

Malika appears to have extra cash flow each month based on the numbers she provided, so that means she has the choice to invest or pay down debt. She has $12,000 of debt right now, and I’d probably focus on repaying it over investing. Assuming it is an unsecured line of credit or credit card, it will probably be at a high single digit or even double digit rate of interest. She’s not likely to be able to invest and earn a rate of return nearly that high, so debt repayment is probably a superior choice with anything left over each month.

Once she is debt-free, I would open a Tax Free Savings Account (TFSA) to begin to save for the future. TFSAs can be versatile, used for an emergency fund, a home down payment, or retirement. At $45,000, she is already in the lowest Ontario tax bracket, so RRSP contributions may not be that beneficial. RRSP contributions become more appealing as her income rises or if she works for an employer with a retirement plan that matches her contributions. á I can’t help but notice her car payment is almost as much as her rent, though I’m guessing her rent may be subsidized by her mother who owns the condo she lives in right now. I don’t want to jump to any conclusions, as she may be aggressively paying off a car loan or have chosen a short car-lease term. But for a single parent with modest income, I would be inclined to opt for a modestly priced car. The best value for a car purchase may be a slightly used car given how much cars depreciate in the first year of ownership. New cars may have appealing financing rates, but zero per cent interest on a large number is still a large payment. Even if you have to pay interest to finance a used car, you may pay 20 per cent to 30 per cent less for a car that is a year old as opposed to buying the same car brand new. Malika has daycare costs that appear relatively modest, so I am guessing the fees may be subsidized based on her relatively low income. She could open an education savings option called a Registered Education Savings Plan (RESP) that can be used to save for schooling costs for her child. RESPs can only be used for post-secondary costs. Contributions of up to $2,500 per year (and $2,500 for any previous years’ missed contributions) will attract a 20 per cent Canada Education Savings Grant (CESG). This means an instant 20 per cent return on investment deposited by the federal government to her RESP. At $45,000 of income, Malika will also qualify for an additional 20 per cent grant on the first $500 of her contributions. If her child is relatively young, I’d focus on building an emergency fund of her own before dedicating too much money to education savings. She should also avoid scholarship plans or alternative education savings products, as they can be inflexible and expensive. A traditional RESP is going to be her best education savings option.

Results: She spent more! Spending in week 1: $70 Spending in week 2: $605

How she thinks she did: “Obviously I spent more, but it’s mostly due to rent,” Malika says. Also now that her sister has moved in, she’s able to decompress a little more from work and being a mom by going out to dinner on the weekend to recharge.

Also she points to Heath’s observation that she actually has extra cash flow per month. “I’m going to use a little bit for me to survive this pandemic. It’s been a lot,” she says.

Take-aways: For Malika, this experience has been extremely eye-opening, especially the need to get on top of opening an RESP account. “I had no idea that I could qualify for that grant,” she says. “It makes me feel more secure for my child.”

In addition to opening an RESP account, Malika will consider looking into a TFSA account. “It’s a good place to start saving for larger goals, including to buy my own place,” she says.

Heath’s advice has made her realize that she needs to pay off her debt first. “With the extra cash flow, there’s no excuse to just pay it all off,” she says. Malika adds that though she will use some of it for personal engagements, paying down debt will become a priority.

Finally, after the exercise, she’s learned that its important to ensure her child has a better idea of financial organization. “I didn’t know many things about finances, or saving money. This has been very helpful for me to move onto another chapter of my life clearly!” Are you a millennial living in Toronto or the GTA and need help with saving your money? Be a part of #MillennialMoney and email