Millennial Money is a weekly remittance-based series that provides financial advice to millennials. Read the full series here.
After living at home for more than a decade after college, 29-year-old Cassandra moved into her first solo rental: a floor of a Victorian house north of Bloor Street West in Toronto’s Koreatown.
It is also the first time that you will pay rent, which is $ 1,500. “I am very happy after moving from my parents, even if it means spending a lot to live alone,” said Cassandra.
Recently, she found a full-time job making $ 50,000 a year as a customer service representative for a retail company. Before that, I was doing part-time jobs here and there, making about $ 30,000 a year.
Now, with a steady job, he hopes to finance his dreams of becoming an artist. This includes saving a considerable amount to pay for equipment and supplies. “I hope to save at least $ 20,000 for my artistic endeavors by 2023,” he said.
But due to the costs of moving out, Cassandra ended up racking up around $ 10,000 in credit card debt. “I know it is a lot, but I realize that if I have debts, there is no better time than now, (since) I have a stable job,” he said.
Cassandra says that he is quite frugal and cooks most meals at home, as he can mostly work remotely.
“Since it got cold (and I couldn’t walk to work) I have been working from home to save time and money. I always prepare breakfast and lunch at home, as well as coffees, but dinners are a mix of take out and dinners out, ”he said.
On the weekends, he will go to dinner or a drink once or twice.
To get a better idea of your expenses, we asked you to share a week of shopping.
The expert: Jason Heath, Managing Director of Objective Financial Partners Inc., on Cassandra’s artistic endeavors.
Congratulations to Cassandra for moving downtown to live alone. It is certainly an exciting time for her.
His rent is relatively modest at $ 1,500 per month, including utilities. The median one-bedroom rent is close to $ 2,000 in the city. Your rent is 36 percent of your salary before taxes, and your rent plus credit card payment is about 40 percent. There is no “right” metric for evaluating housing costs, but debt service ratios are a good starting point.
When applying for a mortgage, lenders will consider the gross debt service ratio (GDS) and the total debt service ratio (TDS) of the borrower. GDS is the mortgage payment, property tax, heat, and 50 percent of the condo fees divided by income before taxes. TDS adds loan payments, car payments, and credit card interest. Lenders will allow GDS ratios to go up to 39 percent and TDS to go up to 44 percent. Cassandra is a tenant, not a homeowner applying for a mortgage, but she provides a frame of reference.
Statistics Canada’s latest survey of household spending found that the share of spending on housing costs in Canada averaged 29 percent. In Ontario, it was slightly above the national average: 31 percent. Cassandra spends 45 percent of her after-tax income on rent (assuming she spends most or all of what she earns).
You have $ 10,000 of credit card debt that you have accumulated since you moved in and that should be your main financial focus right now. If you’re paying 18 percent interest, that’s a guaranteed high rate of return to pay off your principal and avoid that interest. Your budget suggests that you have about $ 500 a month of additional cash flow, and if you do, that puts you within about two years of being debt-free. Ideally, a young person should aim to be debt free and have an emergency fund before moving out on their own, if they can, because it is more difficult to pay off debt when paying rent.
Cassandra may want to consider applying for a line of credit. Your rate can be half the interest rate on your credit card. It could also be a good emergency fund given how tight your cash flow is at the moment. Of course, having more access to debt can be a bad thing if it leads to higher spending, so it is a temptation to be avoided.
It appears that Cassandra has cut costs, working from home and keeping takeout and transportation costs low, but she admits to being tempted to spend on clothes. You should try to set a target monthly debt payment that occurs automatically and what is left over, you can spend. If you want to spend more on clothes, you may need to spend less on takeout and home delivery. Cash flow management is all about compensation and he says he cooks more at home to try and save for his dream job as an artist.
Cassandra should keep track of her spending on art supplies as she is actively seeking freelance work and it is a legitimate business endeavor. Your art costs and part of your rent will be eligible business expenses when you file your tax return. In the early years, companies can even lose money and these losses can reduce the tax payable on wages or other sources of income, generating tax refunds.
Results: She spent less. Spending in week 1: $ 312.94 Spending in week 2: $ 172
How you think you did it: Cassandra said she was able to get an exact understanding of where her money is going outside of rent and other essential purchases.
“Working from home has been essential in reducing costs and giving me more time,” he said.
To carry out: While Cassandra expected harsh criticism, being “a millennial who is in debt and rents alone in Toronto,” she is happy to see that the advice is not too generic or ignores her goals.
“The advice was really realistic. I know I have to pay my credit card, but I’m happy that no one else is telling me to give up my art, “he said.
Cutting other costs, like buying clothes on an impulse, is something you’ve been trying to control. “I am improving and those costs are not necessary,” he said.
Right now, your main goal is to deal with your high interest debt, but you also want to make sure you can find a way to start saving. “It’s great to know that art supplies and other things can possibly be eligible business expenses,” added Cassandra.
With her income, Cassandra is considering a line of credit to accelerate some of her goals, but is cautious because she wants her credit card debt to be in a better place first.
“Taking a few days to really get into finance is part of the process,” he said. “That is my biggest conclusion.”