Millennial Money is a weekly remittance-based series that provides financial advice to millennials. Read the full series here.
Peter, who just turned 40, calls himself a “millennial older” and earns $ 94,000 a year working in social services.
Being an avid investor throughout his life, he has long been able to take advantage of the GTA real estate market. “I live downtown and I own two condos in the Toronto area, which I bought 10 and seven years ago,” he said.
While he has made large purchases, his daily spending remains modest, saving him about $ 70,000. “I try to save about $ 1,000 a month. During the pandemic, there were months when I was able to save $ 2,000. “
Because Peter is “super interested in health and fitness,” he prepares meals for 95 percent of his meals. “I rarely go out to eat unless I’m having dinner with family and friends.”
Also, he usually does not indulge in impulse purchases. “Other than gas, groceries and an occasional dessert from the bakery, I don’t spend any money during the week,” he added.
Two new hobbies he took up during the pandemic and which he doesn’t mind spending on are paddle surfing and tennis. “I just bought a paddle board for $ 550 and a tennis racket. But after those initial costs there is no fee. “
Now, with tens of thousands saved, you hope to discover how you can better manage your investment properties and savings. “I have rented one of my two condos and earn about $ 300 on one,” he said. “I just moved into my second condo, it was a pre-construction construction and has not been closed. I’m paying the interest costs. “
In about a year, Peter has aspirations to move in and rent the place where he currently lives. You want a dream condo in downtown Toronto, but you are debating whether to live in it or rent it.
“I do not plan to have children, so I would like to have the freedom to choose to retire as soon as possible. I am considering buying a third property, or if that is not feasible, I need to know what is the best way to invest my savings, ”he said.
To get a better idea of your finances, we asked you to share one week of expenses.
The expert: Jason Heath, Managing Director of Objective Financial Partners Inc., on Peter’s Investments
Peter has managed to buy two condos at the age of 40. Live in one and rent the other. He mentions that he can buy another downtown and rent the condo he lives in next year.
Three condos would provide a lot of exposure to Toronto-area real estate prices. One of the most important principles of investing is diversification. If Peter’s investment is limited to condos, it is highly dependent on Toronto real estate prices continuing to rise. You can forgo the opportunity to invest in stocks and, more importantly, take advantage of the tax strategies that investment accounts can offer. Contributions from RRSP and TFSA could enable your investments to generate tax returns, tax deferrals, and tax savings. Investments like these can also be more flexible and liquid than real estate. In other words, a TFSA withdrawal is easy to do to pay for a car repair. You can’t use a brick from a property to pay for something (although you can borrow against real estate).
My point is not to invest in stocks rather than real estate. I would suggest the same caution if all of Peter’s investments were also in tech stocks or cryptocurrencies. The point is to avoid investing too much in a single investment opportunity to reduce your overall risk. Nobel Prize winner Harry Markowitz once said that “diversification is the only free lunch in finance.”
Peter aims to save $ 1,000 per month, but has been able to save $ 2,000 per month at times during the pandemic. You spend well below your income in part due to inexpensive hobbies and meal preparation. Anyone looking to save more should factor repetitive expenses, small and large, in their budget. Avoiding lattes won’t allow you to buy a condo on your own, but avoiding daily lattes and similar recurring wastes can help increase your ability to save if that’s important to you or necessary.
I notice that Peter’s take-home salary is roughly half of his gross income. You would have to imagine that you are a member of the pension plan on that basis, and as a frugal single person who does not plan to have children, your pension may cover a significant portion of your retirement income needs. If you want to retire early, you will have to work to increase your net rental income and accumulate savings from RRSP and TFSA as well. You can increase your net rental income by increasing your condo mortgage amortization to lower your payments. This can provide more cash flow for RRSP and TFSA contributions, or to save for other purposes, such as replacing your old car.
As a single person, your greatest financial risk is a disability. You do not have insurance as part of your monthly budget, but you may have workplace coverage. You should watch closely to make sure your income is fully replaced in the event of disability. You can consider private disability insurance coverage if necessary, or a critical illness insurance policy to supplement disability coverage. Critical illness insurance provides a one-time payment for a specific list of critical illnesses.
Results: Spent more. Spending in week 1: $ 112 Spending in week 2: $ 756
How you think you did it: “This week was a bit unusual as I just moved in so I needed to buy a dining room table,” he said, spending a few hundred dollars.
Another consideration is that outside of the confinement, you know your expenses will increase.
“Now that the world is opening up again, I go out more and feel the need to dress better, hence a little shopping trip to Lululemon,” he said. “I’m having a little more dinner because I’m worried that a fourth will shut everything down, so I want to take advantage of the patio season while I can still socialize.”
To carry out: Outside of Heath’s financial advice, Peter has already taken the first step in meeting with a certified financial planner. “I’m looking for more specific advice on where to invest my savings,” he said.
In terms of buying properties as investments, Peter is now reconsidering. “I shouldn’t put all my eggs in one basket, and I don’t think I’m going to buy another property because I don’t want the potential additional burden from more tenants.”
The most important thing Peter has is Heath’s advice on disability insurance.
“It didn’t even occur to me to have the funds to take care of myself. I’ve always been in good health, so the idea of saving for a possible rainy day was strange, ”he said. “Now, I am investigating what my current options are at work and will intensify them if they are not suitable.”
Reference-www.thestar.com