Author Topic: Case study: how to allocate $2000/mth?  (Read 2113 times)

jordan33

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Case study: how to allocate $2000/mth?
« on: July 12, 2016, 03:15:16 PM »
Hello all! I have been reading the forums for some time now and would love to hear your advice!

Life Situation: Single, 1 dependent (age 10), Ontario Canada, 33 years old.

Gross Salary/Wages: $42,000

Other Ordinary Income: $900/mth (mainly government child benefits and support payments)

Taxes: $600/mth

Current expenses: $1500

Assets: Emergency fund $1000

Liabilities: Student loan $40,000, no interest for next 5 years - minimum monthly payment $200

Specific Question(s):

What do I do with the $2000/mth that I am saving?
-making my emergency fund bigger
-paying off the student loan
-purchasing a vehicle (I don't have one at the moment)
-starting an RESP for my child
-starting an RRSP or TFSA
-saving downpayment

Considerations:
-the student loan feels like a huge burden and I would like to get rid of it; however I don't know if it makes sense to focus on that when there is no interest accumulating
-I don't really need a vehicle, but it would make my life easier and save time - not sure if it's worth the expense though; my insurance rate would be approx. $180/mth; also don't know what would be a good amount to spend on a car - last time I bought a vehicle it was for $2000 and it broke down quickly
-would like to start the RESP to take advantage of the government grants that would be added to it ($600/yr if I contribute $2500/yr)
-buying a house - not sure this is something I want to do but thought saving a downpayment may be worthwhile in case I decide it's a good idea to buy; I would likely be looking at $200,000 and would like to have about 20% to put down

I'd like advice on whether I should do all of these things at once, contributing a bit to each, or do one at a time, or ... ???
What would you do?
« Last Edit: July 12, 2016, 07:46:52 PM by jordan33 »

dess1313

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Re: Case study: how to allocate $2000/mth?
« Reply #1 on: July 12, 2016, 04:20:37 PM »
Great savings!  A case study format may help others make suggestions.  There is a post at the top of this category about writing a case study but my tablet wont let me copy it 

But, what is your yearly income?  What % of your monthly income is that savings? 

RRSP advice will be very dependant on that information

Will you have a future pension?

RESP be careful you get a good one.  Some are very limiting or have high fees.  But starting contributions sounds good if uou can find a good option

I would definitely expand your emergency fund somewhat

For cars, are you at all handy?  Do you know ahynone who maintains cars that could give you advice?  Try looking for any elderly person who does minimal driving and may be selling.  Those cars are often in fantastic shape.   there are many car sharks in in the used market.  What about a smaller electric car?  What would you even use it for?  Groceries?  Long trips? 

When would the interest start on your student loan?  What would be the interest rate?  What are the curent payments?  How many years are you projected to take to pay it off as is now?  You could contribute small amounts now while you work on other targets.  Even if you did 500-1000 as extra payments, it would be drastically cut shorter.
« Last Edit: July 12, 2016, 04:24:39 PM by dess1313 »

jordan33

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Re: Case study: how to allocate $2000/mth?
« Reply #2 on: July 12, 2016, 07:38:02 PM »
Great savings!  A case study format may help others make suggestions.  There is a post at the top of this category about writing a case study but my tablet wont let me copy it 

But, what is your yearly income?  What % of your monthly income is that savings? 

RRSP advice will be very dependant on that information

Will you have a future pension?

RESP be careful you get a good one.  Some are very limiting or have high fees.  But starting contributions sounds good if uou can find a good option

I would definitely expand your emergency fund somewhat

For cars, are you at all handy?  Do you know ahynone who maintains cars that could give you advice?  Try looking for any elderly person who does minimal driving and may be selling.  Those cars are often in fantastic shape.   there are many car sharks in in the used market.  What about a smaller electric car?  What would you even use it for?  Groceries?  Long trips? 

When would the interest start on your student loan?  What would be the interest rate?  What are the curent payments?  How many years are you projected to take to pay it off as is now?  You could contribute small amounts now while you work on other targets.  Even if you did 500-1000 as extra payments, it would be drastically cut shorter.

Thanks for your reply. I edited my initial post to make it more like the case study example.

My yearly income is about $42,000 before taxes. The $2000 I am saving is about 55% of my after tax income.

No pension anticipated from work unless I change jobs. Will get CPP and OAS at age 65 and 67 respectively (around $1200/mth).

Not handy with cars. I would be using it for visiting family out of town, day trips, etc. (now I use a rental car)

Unless my income increases significantly, I will qualify for no interest for 5 years. After that, the interest rate would be 5%. My payments are around $200/month right now.
« Last Edit: July 12, 2016, 07:49:49 PM by jordan33 »

Reynolds531

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Re: Case study: how to allocate $2000/mth?
« Reply #3 on: July 12, 2016, 08:02:39 PM »
Here in Ontario housing prices have run up a lot. Maybe wait on that.

Personally I'd do some combination of the loan, RESP, and any employer match you might be eligible for. Your child may eventually get o s a p plus help from the other parent.

Any choice other than spending the money is a win. Great job.

dess1313

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Re: Case study: how to allocate $2000/mth?
« Reply #4 on: July 12, 2016, 09:47:04 PM »
Focuses for now should be
1.emerg fund - unfortunately crud happens and even 2 or 3 months of expenses covered will allow you some breathing room especially with your dependant
Also your emerg fund can be held as a savings account under the TFSA umbrella.  Consider tangerine banking, i have a code for $50 reward for sign up.  All their accounts have no monthly fees and unlimited transactions which is nice compared to a lot of banks
2. Do the minimal amounts to gain the RESP matches - these dont roll over so its a time sensitive one
3. Knowing you have some breathing room make some dents into your student loan.  The interest rate is amazing for 5 years but at $200 per month it would take 200 months to ever pay it off with just 0 interest.  You should make some progress while its low interest in case you cant finish it for some reason when the interest restarts.
4. RRSPs.  Do you have student credit to reduce your taxes?  If you do then RRSPs wont be as effective since your taxable income will be lower due to that.  Do you expect to see pay increases as you gain experience and years at your job?  If you expect to run out of student credit, as well see an income rise i would wait a bit.  You will also have some good deductions due to having a child.  Taxtips.ca has some awesome calculators to see what happens if you do rrsp and resp and other things affecting your taxes
5. House.  I would wait a bit.  You need to save a down payment and to try to do this all at once will be difficult.  Last thing you want is to be house poor. 

FrugalFan

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Re: Case study: how to allocate $2000/mth?
« Reply #5 on: July 13, 2016, 05:38:05 AM »
You're doing amazing if you can save that much on that income as a single mom!

Because you are completely reliant on your income and you have a child, I would definitely increase the emergency fund first.

With that much debt, even if the interest is zero, I would also want to pay a good chunk of it off before saving for extra expenses you don't really seem to need like a car or a house down payment. Once the interest kicks in, you'll be paying $166 a month just in interest so it will be challenging to make headway on the loan principal.

RESP's have a great return on investment with the government grants but you also need to be thinking about your own retirement.

My advice would be to build up the emergency fund first. Then split the 2000 something along the lines of 500 for debt, 800 investing for retirement (TFSA and RRSP), 500 saving for a potential future expense like a house or car, and 208 for the RESP.