Millennial Money is a weekly submission-based series that provides financial advice to millennials. Read the full series here.
Will millennials ever be able to afford a house in Toronto?
That’s a question Michael, 38, wants an answer to. Working as a financial clerk making $60,000 a year, he’s a longtime renter in the city, splitting housing expenses with his partner.
“Ideally we would be saving for a home,” Michael said “but that’s not realistic at the moment.”
Instead, he is looking into maximizing his savings for other reasons that seem more achievable including tuition for graduate school. Michael also wants to be able to build his savings to start a family, a “cost of living fund” in case he takes time off work and retirement. More immediately, he also wants to save for an upcoming trip to Europe to visit his girlfriend’s family.
As far as expenses, Michael said that he and his girlfriend are good with money and only buy necessities.
Due to the pandemic changes, he’s shifted to work from home four days a week — saving money on food costs as he makes most meals at home. “I enjoy cooking so I make most of our dinners at home, but we get takeout maybe once a week,” he said.
The one day he does go into the office, Michael bikes. “It’s my favorite way to get around and it’s actually significantly faster for me than the TTC,” he said.
One thing Michael and his partner really love is coffee, and the two don’t mind spending a bit more on it at home.
“We really enjoy coffee so we spent the money on gadgets and gizmos to make the varieties of coffee that we like so now we rarely buy coffee out,” he said.
One other thing: he’ll soon want to join the gym again which will add $150 a month to his expenses.
So, how can Michael start saving? We asked him to share a week of spending to get a better idea of his finances from him.
the expert — Jason Heath, managing director at Objective Financial Partners Inc., examines Michael’s situation:
Michael and his girlfriend pay modest rent in North Toronto and although they would like to save for a home, they feel it is not realistic.
He mentions saving for retirement as his primary goal amongst others. Luckily for him, the new Tax-Free First Home Savings Account (FHSA) may be versatile enough for both. Although not available until 2023, the account will allow tax deductible contributions (like an RRSP) and income and growth would not be subject to tax. If they do buy a home, withdrawals would be tax-free. If they do not, the account could be transferred on a tax-deferred basis to an RRSP to be used for retirement.
Once opened, an annual maximum contribution of $8,000 would be available each year for five years, for a total of $40,000. If Michael has an existing RRSP account, he can make transfers from the RRSP to his FHSA up to the $8,000 annual and $40,000 lifetime limits.
He may pursue graduate school studies and that has costs involved both as an expense and due to a potential reduction in income.
RRSP contributions may be worth considering in the short-term as a savings strategy, as he can take tax-free Lifelong Learning Plan (LLP) withdrawals from his RRSP to fund post-secondary costs. Those contributions could also be used to fund FHSA contributions if he does not go back to school and help supplement the FHSA contributions he can make from cash flow.
The good thing about all these different accounts and programs is savers have options. The bad thing is that it is getting more confusing than ever to know how best to save.
It sounds like Michael and his girlfriend could also be considering starting a family.
They have lots of potential costs and changes to their incomes to consider. If they have not already started talking seriously about the timing and priority of these goals, it could be something to consider together.
They may also find that by combining their finances somewhat, there can be other efficiencies. For example, one may have better benefits or group retirement savings plan options than the other. When and how to merge finances as a common law couple can be tricky, but if they are considering a family, there is no better time than the present to delve into these conversations.
Results: I have spent more. Spending in week 1: $173 Spending in week 2: $267
How he thinks he did: “My weeks are pretty consistent and this past week was no different,” Michael said.
Keeping things modest, Michael’s day-to-day isn’t a huge concern. “Besides groceries, we went out for burgers on Saturday and I had a small medical expense,” he added. “I don’t think there is much room left for day-to-day budget optimization, but this process has fast-tracked my efforts to more effectively track my spending to better forecast my savings.”
Takeaways: After receiving the advice, Michael has learned quite a bit. First thing he’ll look into? Canada’s new FHSA initiative — which is giving him a little hope to perhaps buy a house even in the red-hot real estate market.
“I was glad the adviser touched on the new FHSA because I was aware of it from this year’s budget announcement, but didn’t actually know much about it. I also didn’t know about the LLP withdrawals. Between FHSA, RRSP and TFSA there is a lot more research I’ll have to do,” he said.
When it comes to all the different things Michael hopes to save for, he agrees with Heath about taking time to organize.
“I also agree wholeheartedly that efforts for my girlfriend and I to plan and strategize as a couple should be a priority,” Michael said. “She is still currently a freelancer so it is difficult to plan around that, but we are working on that together.”
The biggest takeaway? “Personal finance can be complicated even though my life seems rather uncomplicated,” Michael said.
“Most importantly, I have an even greater appreciation for the value of financial literacy and emphasis on openly talking about finances, especially in response to the increasing costs of living and social pressures to spend beyond our means.”
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)