This & That: Just Starting Out Edition
Posted by Gail | Filed under This & That
R Wrote: I am a single 22-year old woman, University Graduate and Private in the Airforce Reserve. I paid for half of my University and currently work full-time and pay rent to live at home. I have no debt whatsoever. I have saved $31,000.00 and continue to save at least $1200.00 a month – my question is – should I buy a house? I want to move out within the next 6-8 months and having saved so much I worry about spending it on a down payment and taking on a large debt load after never having debt before. Right now my monthly take-home is just over $2400.00. I am due for a promotion in January and a hefty pay-raise. My only fixed expense is the $830.00 I give my parents for rent/food/heat etc. I have no car of my own. In moving out – should I look for my own property or would I be better off renting elsewhere and continuing the save? Is there any way I can simulate owning a house and its associated costs?
Gail Says: You’re very smart to be thinking ahead about the debt, the costs of ownership, and how to simulate the experience. The first thing to do is, think about what kind of home you would buy for yourself. Look around. What do you like? What do you think you can afford. You should put 20% down as a downpayment if you want to avoid mortgage insurance fees and not take on more debt than you can manage. Once you’ve picked the kind of home/price range that works for you, figure out what it’ll cost to carry the home. There will be the mortgage payment, the taxes, the insurance, utilities and maintenance. If you figure it’ll cost you $1,600 a month to carry your home that means you actually have to come up with $1,600 a month every single month. To see if you’ll be comfortable with that cost, live like you’re spending that money while you’re still living at home. So take that $1,600 a month, less the $830 your currently give your folks, and stick it in a savings account. Hey, I’m not talking about if you can THEORETICALLY come up with the money. I’m talking about taking that $770 (which is the difference) and socking it away every single month. First, you’ll learn to live on less disposable income; you better start practicing before you buy your home so you’re ready for the adjustment in your lifestyle when you do take the big steps. Second, that money is going to get you to your downpayment faster. And the whole thing will answer the question, “Can I?”
C Wrote: My boyfriend and I are both 24 and want to do some traveling/backpacking in 2012. As exciting as this is, it has posed some financial obstacles.
I purchased my first home last year and plan to rent it out while traveling to cover my mortgage, property tax, strata, and a contingency fund should anything arise (in total, $1300 per month which I can realistically rent it out for). I have a mortgage of $200,000 and do not have any additional debt (car payments/credit cards…).
I have $10,000 in a TFSA (hopefully for a newer car sometime in the future), RRSPs of $11,000, and $15000 in savings to cover my living expenses upon our return home. This leaves me with $16,000 to travel on (plenty as we plan to backpack and stay in hostels).
I am unable to take leave from my current job, and my boyfriend’s temporary job ends in a few months, so we will both return home without employment/income.
I shudder to think of the positive impact this money could have on my mortgage if we decided to forgo traveling but it is something we both want to do before settling down and starting a family. My parents are concerned that if I quit my job to travel I will quickly go from financially secure to debt ridden.
I thought I had planned well but now I’m concerned that my savings won’t be sufficient. Is there anything that I need to save for/haven’t considered? Is this idea really financial suicide, as my parent’s suggest?
Gail Says: Darling-heart, do not let all the “old” people in your life dissuade you from following a dream. You’ve planned well. It looks like you’ve got your bases covered. Why would you be “in-debt” if you’ve got the money in the bank and you think it’ll be enough? This is the perfect time — before you settle down and have children — to have a grand adventure. Be prepared that it may take some time when you get back to find “the perfect job”… you and your partner may have to work two or three part-time jobs each until just the right thing comes along. But it sounds to me like you’re a very sensible girl and you’ve done you homework. Go off and have a fabulous time! Take heaps of pictures and keep a journal, so that later you can relive it with your own children and tell them about the joys of going on walk-about!
M Wrote: I am a recent graduate making around $130,000 a year; however, due to high tuition for my specialty field I also have a hefty debt load. I currently have a professional line of credit (locked in at prime) with $156,000 owing. My question is, should I focus solely on paying off my debt or should I be investing for retirement too (to take advantage of the tax breaks and well so I can retire at a decent age). I am hearing opposing thoughts from various professionals I have consulted with. Thanks so much!
Gail Says: You would be very wise to save for the future even as you pay down your debt. I’m a lonely voice on this m’love, but I can tell you from experience that it is better to have a balanced financial life than to focus solely on any one aspect. So put as much as you can toward your debt (you’ve made a plan and set a deadline, right?) and make contributions to your retirement savings (and you have an emergency fund too, right?). Use any tax refunds you get to further pay down your debt.
R Wrote: I’m a 23 year old dancer, struggling to put order in my life. Since watching Til Debt Do Us Part and your new show Princess, I’ve gotten almost everything in order and paid off. My issue is with income taxes… Since I only get paid in tips, I don’t get a pay slip, and after five years of unfiled taxes-I’m petrified!! It’s become a big black cloud over me. I don’t know where to start or who to ask. Please Gail, send advice!!
Gail Says: With no pay slips, there is no way for the government to have tracked you thus far. And since you’ve only received tip income, you likely would wipe out that income with the personal tax exemption claim. Each tax filer in Canada is entitled to claim a personal exemption amount. For 2010 it was $10,382, so you would not have had to pay any taxes if your income stayed below this personal exemption amount.
If you want to file tax returns for the previous years, first you must find out what the personal exemption amounts were for each year (check on the internet). Then file returns claiming the tips you earned, which very likely will be under the personal exemption amounts, so you would not owe any taxes. Since penalties and interest only apply if you owe tax, as long as you don’t owe any taxes, you’ll be in the clear. File those returns, and remember to claim everything else to which you’re entitled. Take your time. Go slowly. Good luck.
A Wrote: I watch your shows regularly and love the tips and resources you have on your website. My financial situation has recently changed and will be changing again in the near future, so I find myself in unfamiliar territory.
I am 24 years old and have no debt; I pay off my credit card in full every month and just recently made the final payment on my student line of credit (yay!). I have about $1500 in savings and make roughly $750 bi-weekly (I work 2 part time jobs and pick up extra hours when I can). My monthly expenses are very low; I still live with my parents so thankfully I don’t need to pay rent, and I pay for my phone bill and gas for my parent’s car monthly. The time has come for me to: a) stop driving my parent’s car and purchase one of my own (the cars I have my eye on range from $15k-$22k), and b) go back to school for a one year postgraduate program, which will cost about $6000. My goal is to save a minimum of $1200 a month, ensuring me at least $14,000 in my savings account by the time I begin school and need to purchase the car in one year’s time.
My question revolves around how much of these savings I should use. Because of your sound advice, I know that I should have 6 months worth of expenses in an emergency fund. I have looked into car prices and gotten some insurance quotes…but wouldn’t my monthly car payment depend on how much I put down? I don’t know how much I should keep in reserve. I am tempted to just put everything into paying it off so I can get rid of the debt sooner.
I am also starting to look into retirement savings, but at my age and with these changes happening soon, I am unsure about how much I should be putting away. I know that my contribution limit for this year is just over $9000 but let’s be real here I won’t be maxing that out.
So, I really need my own car to go back to school. But going back to school means that I won’t be able to work as much so my income will shrink significantly. I am a little worried because these are two big expenses that will fall around the same time. I want to make the most out of this year as I possibly can so I can ease my financial burden down the road.
Gail Says: We have a bit of territory to cover, so here goes:
1. At your age you need only be saving about 6% of your income to make retirement work. Do that while you’re working. Suspend while in school, and double up til you catch up once you’re back to work.
2. You must keep your emergency money handy. You never know what life has in store for you. Don’t spend that money.
3. You plan to save $14K and need $6 for school. Is that just tuition, or will you have “life” needs as well? Think about your total cost.
4. The amount of a downpayment on a vehicle will affect the monthly payment. Why not go for a “deal” that charges you next to no interest, where you make payments over 4 or 5 years. With no interest, you’re just stretching out the payments. Maintain the car properly (don’t skimp!) and it should last you for YEARS.
July 5, 2012 at 6:57 am
Thanks for saying save for retirement while paying debt. My hubby needs to see that.
July 5, 2012 at 8:40 am
saving for retirement while paying debt is discouraged because often the interest rate on the debt is higher than the return you can get on savings- BUT if you consider the compound interest your will receive on retirement savings, plus your tax refund from RRSPs, it is a smart decision
July 5, 2012 at 9:17 am
@ the first question – You’re only 22. I’d focus less on the ‘can I afford a house’ to ‘how confident am I that I want to be tied to this house’. You’re only 22. You might take a new job in a new city, meet someone, join the military full time, there’s so many options out there. Most people I know who bought at a very young age ended up regretting it because it really is like an anchor around your feet, tying you to the house (look at the second poster, who has to go to the trouble of renting out her house for a year just to go travelling). Not saying that it’s always a mistake, but 22 is awfully young.
July 5, 2012 at 11:45 am
@ C:
Not travelling more when I was younger is still one of my biggest regrets. Gail is 100% right, this is the perfect time for you to take on such an adventure!! You really do seem very well-prepared, so just DO IT!!
July 5, 2012 at 12:13 pm
Good advice to R! That girl should know that there’s a bubble in most Canadian housing markets that’s expected to pop sometime around September. All the banks are saying so. Home prices could drop 15%. …So best she hang on for awhile and see what happens.
Also, a whole house is a lot of work for one person! I’m single as well and rent a one-bedroom apartment. Have *no idea* what I’d do rattling around in a big, three-bedroom by myself! It’d be very weird.
Good to hear stories like this about people who are responsible from the outset! Wish I’d met someone like her when I was younger.
July 5, 2012 at 2:01 pm
I agree with Geoff – Is there anything R wants to do before buying a house?
I bought my first house when I was 25 (2006) – but only after 2 years of travelling and being a ski bum. Because it was a small house (630sqft) in a cheap area so my living expenses weren’t any more than renting an apartment would have been.
So I’m also a little biased when I say I think C should go for it! The time I spent overseas was amazing.