Millennial Money is a weekly submission-based series that provides financial advice to millennials. Read the full series here.
Paula, 37, works in tech earning $92,000 a year — an increase from her previous job in health care.
She’s spent years battling more than $60,000 in debt — which includes $11,200 in student loans, $17,400 left on a $25,000 personal loan she took out to “pay back awful credit card debt,” another $16,500 accumulated on her credit card, and a line of credit at $16,500.
And that’s not all.
“I have my mortgage for my piece of land. It was $76,000. I got a loan for $57,000,” she explained. “It’s awful. I’m so ashamed of all this.”
Reflecting on her financials, Paula said she doesn’t feel like she has a “crazy extravagant lifestyle.” Day to day, she eats mostly at home, only occasionally dining out with friends. On weekends, she’ll drive to see friends or do outdoorsy activities, but nothing too expensive, she noted.
“I drive a 2009 car that I bought with cash a few years ago. I haven’t traveled in two years,” she said. “What’s probably my most important non-essential expense is sporting goods — bikes, skis, equipment and clothes,” she said. “I also needed to get an almost entirely new wardrobe because of pandemic weight gain.”
Currently, Paula rents a semi-detached house in a small mountain town for $1,300 a month after moving out of Vancouver during the pandemic with her dog “to improve quality of life.” She bought a piece of land in 2021 and wanted to build a small house on it, but she hasn’t been able to find the time or funds to do so.
“The demand is high and both the materials and the workers are expensive,” she said. “I love my piece of land and have many ideas of what could be built there — but even modestly, it’s very expensive, and I’m scared that my project is stupid and I’ll never be able to afford it.”
While she’s been in the dumps over her finances, a small remedy is an expected $7,000 to $15,000 she’ll be receiving soon “settling a pay equity case.”
Currently, she has $4,000 in a savings account, but no TFSA or RRSP. She also has no retirement plan, but because she worked six years in health care, she has some money saved up from that pension.
Paula wants to know if she should sell her land and put the money toward buying a house, as well as how to tackle her debt.
We asked Paula to share a week of her spending to get a better idea of her finances.
the expert: Jason Heath, managing director at Objective Financial Partners Inc., on Paula’s situation.
Paula has incurred a lot of expenses to get two master’s degrees, but it has benefited her career trajectory. She now earns almost six figures. The question now is whether her accumulated debt from her will weigh her down and whether she should build a house or not.
$61,000 of non-mortgage debt is quite a bit. Her carrying costs for her are about $1,000 per month and about 20 per cent of her take-home pay for her. Whether she builds on her land de ella or sells and buys a home instead, this debt is going to limit her options de ella. She may have a hard time qualifying for a construction mortgage as a result.
Paula may want to talk to a mortgage specialist to better understand what she would qualify for. This may be the reality check she needs. They may also be able to increase her mortgage based on the appreciated land value to pay down some of her credit card debt, but land is difficult to finance. The challenge for her de ella will then be not tallying up a credit card balance for a third time if she is able to increase her mortgage.
I would be inclined to use the expected payment from her pay equity case to pay down her credit card debt. When you have multiple debts, it generally makes sense to pay down the highest-interest debt first. She will probably have 30 per cent tax withheld on her lump-sum payment and her tax payable on this amount could be a little higher, so she should anticipate another $500 to $750 of tax payable next April.
She should probably come up with a budget and have extra payments made each month toward her credit card debt on the day her payroll is deposited. Saving first and spending second — keeping in mind saving can include debt repayment — is a good habit to develop.
Frankly, I don’t think it’s a terrible idea to consider selling her land and paying down her debt so she can start fresh and build up some savings for a home and for her future. That may not be the answer she wants to hear given how much she loves her land from her, but I think it’s worth considering. At the rate she’s going, her debt is going to take years to pay off. She also has a 13-year-old car that is going to have repairs or need replacing at some point too.
She depends on her income to pay her bills, so her primary dependency is her ability to work. On that basis, if she does not have disability insurance through her employer, she should consider getting that coverage in place.
Results: She spent less. Spending in week 1: $823.99 Spending in week 2: $441.39
How she thinks she did: “I think I did OK. I did have some social activities planned, and I think these are important to stay sane, but otherwise I cooked at home,” Paula said, adding that she was able to stay away from online shopping.
In addition, after seeing her expenses, she decided to cancel a few streaming services and is looking to sell some clothing. “I realize things add up pretty quick. I’m now going to keep track of my expenses more closely, starting the new month fresh and staying within my budget.”
Takeaways: With Heath’s line-by-line breakdown, Paula is stunned.
“Coming up with these numbers was a shock to me. I forget that I have considerable debt to pay back, which takes away a good amount of my income, and that’s why ends don’t meet and I keep getting into more credit card debt,” she said.
“The advice scared me a little,” she said.
In terms of the land that she bought, Paula said she wants to keep it “considering how the real estate market is rising” and how “attached” she is to it. Because of this, she’s hoping that her lifestyle changes can help out.
“With the right mindset, I could limit my expenses to a minimum for a few years and get rid of those monthly debt payments to eventually be able to save to build,” she said.
More immediately, with the money she’ll be expecting from the settlement, she wants to immediately tackle her credit card debt and to ask her bank to lower her limit to avoid getting into this situation again. Along with that, she’s considering putting the $4,000 in her savings account toward her credit card debt.
“It’s a bit more encouraging to see the efforts to pay back debt as saving,” she said.
JOIN THE CONVERSATION
Anyone can read Conversations, but to contribute, you should be a registered Torstar account holder. If you do not yet have a Torstar account, you can create one now (it is free)