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Millennial Money is a weekly submission-based series that provides financial advice to millennials. Read the full series here.
After living at home for more than a decade following university, Cassandra, 29, has moved into her first solo rental — a floor of a Victorian house just north of Bloor Street West in Toronto’s Koreatown.
It’s also the first time she’ll be paying rent, which clocks in at $1,500. “I am really happy after moving out from my parents, even if it means spending a lot to live alone,” Cassandra said.
Recently, she found a full-time job making $50,000 a year as a customer service rep for a retail company. Before that she was doing part-time jobs here and there, making around $30,000 a year.
Now, with a stable job, she’s hoping to fund her dreams of becoming an artist. This includes saving a sizable amount to pay for equipment and supplies. “I am hoping to save at least $20,000 for my art endeavours by 2023,” she said.
But because of the costs of moving out, Cassandra has ended up accumulating around $10,000 in credit card debt. “I know it’s a lot, but I realize that if I do have debt, there’s no better time than now, (since) I have a stable job,” she said.
Cassandra says she’s quite frugal, and cooks most meals at home as she’s able to work mostly remotely.
“Since it started to get cold (and I couldn’t walk to work) I’ve been working from home to save time and money. I always make breakfast and lunch at home, as well as coffees, but dinners are a toss up between takeout and dinners out,” she said.
On the weekends, she’ll go for dinner or drinks once or twice.
To get a better idea of her spending, we asked her to share a week of purchases.
The expert: Jason Heath, managing director at Objective Financial Partners Inc., on Cassandra’s art endeavours.
Congratulations to Cassandra on moving downtown to live on her own. It is no doubt an exciting time for her.
Her rent is relatively modest at $1,500 per month including utilities. The average one bedroom rents closer to $2,000 in the city. Her rent is 36 per cent of her pre-tax salary and her rent plus credit card payment is about 40 per cent. 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 a borrower’s gross debt service (GDS) ratio and total debt service (TDS) ratio. GDS is mortgage payments, property tax, heat and 50 per of condo fees divided by pre-tax income. TDS adds in loan payments, car payments and credit card interest. Lenders will allow GDS ratios to go as high as 39 per cent and TDS as high as 44 per cent. Cassandra is a renter, not a homeowner applying for a mortgage, but it provides a frame of reference.
Statistics Canada’s latest survey of household spending found the share of spending on shelter costs across Canada averaged 29 per cent. In Ontario, it was slightly above the national average — 31 per cent. Cassandra is spending 45 per cent of her after-tax income on rent (assuming she spends most or all of what she makes).
She has $10,000 of credit card debt she has accumulated since moving out and that should be her primary financial focus right now. If she is paying 18 per cent interest, that is a high guaranteed rate of return to pay down her principal and avoid that interest. Her budget suggests she has about $500 per month of extra cash flow and if she does, that puts her on about a two-year timeline to be debt-free. Ideally, a young person should target being debt-free and having an emergency fund before moving out on their own if they can because it is harder to pay down debt when you are making rent payments.
Cassandra may want to consider applying for a line of credit. Her rate may be half her credit card interest rate. It could also be a good emergency fund given how tight her cash flow is right now. Of course, having more access to debt can be a bad thing if it leads to higher spending so that is a temptation that needs to be avoided.
It sounds like Cassandra has cut costs, working from home and keeping takeout and commuting costs down, but she admits to being tempted to spend on clothing. She should try to set a target monthly debt repayment that gets made automatically and whatever is left over, she can spend. If she wants to spend more on clothes, she may need to spend less on takeout and delivery. Cash-flow management is all about trade-offs and she says she is cooking at home more to try to save up for her dream job as an artist.
Cassandra should track her spending on art supplies since she is actively pursuing freelance gigs and it is a legitimate business endeavour. Her art costs and some of her rent will be eligible business expenses when she files her tax return. In the early years, businesses may even lose money and these losses can reduce the tax payable on salary or other sources of income, generating tax refunds.
Results: She spent less. Spending in week 1: $312.94 Spending in week 2: $172
How she thinks she did: Cassandra said she was able to get an exact understanding of where her money goes outside of rent and other essential buys.
“Working from home has been essential to cutting costs and giving myself more time,” she said.
Take-aways: While Cassandra was expecting some harsh criticisms, being “a millennial that is in debt that is renting alone in Toronto,” she’s happy to see that the advice isn’t too generic or disregards her goals.
“The advice was really realistic. I know I have to pay off my credit card but I’m happy it wasn’t someone else telling me to give up on my art,” she said.
Cutting other costs like buying clothes impulsively is something she’s been working to curb. “I’m getting better, and those costs aren’t necessary,” she said.
Right now, her main goal is to tackle her debt because of the large interest, but she also wants to be sure she can find a way to start saving. “It’s great to know that art supplies and other things can possibly be eligible business expenses,” Cassandra added.
With her income, Cassandra is considering a line of credit to speed up some of her goals, but is wary as she wants her credit card debt to be in a better place first.
“Taking a few days to really get into finances is part of the process,” she said. “That’s my biggest takeaway.”
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