Reader Case Study - Recent Grad in the North! (Aka Canada)

[mustachia]

Hello fellow Mustachians!

I'm flexing my early mustachian muscles and trying to grow a 'stash. Here's wondering if anyone can review my current state and provide me with some pointers (for some reason, it seems to be much easier reviewing other people's cases and trying to identify problems than looking at your own).

The only wrench in this is that I'm a Canadian with a high income tax (sigh).

Here are the stats:
Salary: 80K before taxes, recently started position; average monthly income after taxes is about $4k or so
Student loan debt: 40k in a student line of credit (non secured), charging interest of 3.5% (paid off 10k already)
Credit card debt: None. Paying it off every month
Car: No car yet; looking to buy in the near future
House: No house; living in basement of parents' place til I figure out how to save enough of a stash to get my own place

Monthly spendings:
Averaging at about $1500/mo. - includes:
- Phone bill: $50
- Transit: $100
- Insurance bills (disability insurance): $100
- Misc shopping: $500-700 (hopefully that'll change now that I've stumbled on this blog)
- Travel/vacations: $300-400/mo average
- Dining out: $230/mo - hanging out with friends by going for dinner...trying to cut down on this
- Fees: $60-80/mo - related to my job
- RRSP payments: none yet. I'm working on this..
- TFSA contributions: none yet. Again working on this..
- Pension plan contributions: $250/mo

What do you all suggest? I'm a bit overwhelmed and not sure where to start off first. Pay off all the student loans? Stop paying it off and save the 'stash to get a rental property? Put more into RRSPs and TFSA and distribute the payments for student loans over a longer time? Am I growing my moustache with the wrong fertilizers?

Thanks in advance!

[Ziggurat]

I would go with a balanced approach. Start with some kind of percentage savings toward your various goals. Just pick something and start, you can adjust the automatic transfers easily enough later.

I'd lean more on the RRSP if you're saving towards a home -- use the home buyer's plan to borrow your own RRSP money and pay it back interest free over 15 years (sweet deal). Of course, the RRSP is also a good way to increase your income while saving, as it lowers your current income tax payable (you get some money back at tax time, or if you fill in the right form, pay less every paycheck).

The RRSP drawback is that other than the HBP, you pay tax when taking it out, so you really only want to take out when in a lower tax bracket.  i.e. non-HBP money pretty much stays in there until retirement.  With the TFSA you don't pay tax on the way out, so it can be used as a shorter-term savings account. OR, it can be used long-term to try to generate big growth (i.e. invested in the market), due to not paying tax on that large growth when withdrawn.  You can do both ... some in cash or GICs etc, some in the market for growth.

I wouldn't be in a big hurry to pay back the loan at that rate, but do allocate some reasonable percentage to that as part of your diversification (guaranteed 3.5% return is not bad).

Your expenses are quite reasonable compared with your income, so you have a fair bit of money to go into each option.  To quote Covey, begin with the end in mind, and imagine what you want your money doing for you in three years, five years, ten years, forty years.  Allocate accordingly. Revisit the plan maybe a few times per year, decide if your priorities have changed, adjust the allocations.

[KMMK]

We need more details about your goals.

Do you want to be a homeowner? It's a lot of extra annoyance. For lots of people renting for a while at least (or forever) fits their life better.

Do you want to be a landlord of a rental property? See above. Are you handy? Want to deal with people a lot?

Any chance of moving to a different city in the near or distance future?

How secure is your job? Any chance of lay-offs?

All that stuff will change advice a lot.

Other than that - decide how much you want to spend vs how quickly you want to build your 'stache. Definitely figure out where all that "miscellaneous spending goes". Travel is high, but if that's a priority to you that is your choice. I guess your parents are still paying for groceries and utilities, so eating out isn't that bad if that's your only food expense. But how easily can your parents afford to pay your bills? Are you chipping in at all? How soon do they want you to move out? All that is so individual/cultural.

Happy to write more with more info.

[mustachia]

Thanks Ziggurat and Kestra!

Ziggurat: thanks for the tips. I was speaking to an advisor recently and the girl said she personally doesn't like the HBP from RRSPs.. Not sure why that was the case.

Kestra here are some answers to your qs:

My job is pretty stable - I'm not too worried about layoffs or such.
 I would like to be a homeowner - I haven't read much into it since I've been focused on studying before, but overall that's my current plan.
Not quite handy in terms of home renovation related things but I'm good with my hands and won't mid trying to DIY it. Purchasing an investment place and renting it out is something I'm interested in in the future for sure. However I'm in a city with a real estate bubble currently.
Moving - likely not moving in the near future.
As for parents - yes it's definitely a local / cultural thing. They're ok with me staying - I likely would be pitching in somehow soon (none of this was really talked about before because I've only recently started working). As for when I'd like to leave, I'm trying to see more from a financial perspective.

Ultimately my goal is to be able to reach FI as soon as I can. This isn't to say I don't like my job :) The freedom is the best part - an yes you've guessed it, travel is pretty important to me! So I'm trying to reach FI while being able to travel as well.

[panthalassa]

I would like to be a homeowner - I haven't read much into it since I've been focused on studying before, but overall that's my current plan.
Not quite handy in terms of home renovation related things but I'm good with my hands and won't mid trying to DIY it. Purchasing an investment place and renting it out is something I'm interested in in the future for sure. However I'm in a city with a real estate bubble currently.

Hi there, fellow Canadian.  Please allow me to direct you to greaterfool.ca where you can decide whether you want to tie a rope around your neck with a 200 lb anchor and fall into an abyss or not in regards to buying a house in your city.  (The right answer is: you don't.)

[aclarridge]

In no particular order:

1. Your situation right now is great. I'd say pay down the debt first, and use the time wisely to read up on investing. Take your time with it. MMM just had a couple good articles about this for Canadians. If you do this, ideally you'll be well prepared when, in less than a year, you start investing with no debt and lots of available income.

2. Try to lower your cell phone bill (do you REALLY need a data plan?) and try to find ways to still enjoy life the same or more while spending less on shopping and dining out.

3. Don't be so eager to buy a house right now, Canada is wildly expensive at the moment with the possible exception of the east coast. But even if the market were sane, I would still say you should consider renting first in the particular area you're thinking of buying in, to get to know it really well first. Buying is such a huge commitment.

4. Somebody mentioned the HBP, i.e. borrowing from your RRSP. Be careful with this, it's not always a good plan. Ideally you would want to pay any down payment out of taxable savings accounts first - only take investments out of your RRSP if you have no other options. The RRSP doesn't tax you on dividends or capital gains, so it's best to keep it full of investments whenever possible. Definitely max out your RRSP and TFSA, but only pull from them for a down payment (or any other reason) if you have no other (taxable) money.

[TrMama]

Ditto what the others have said about being careful with the HBP. Although you can withdraw the money tax free and you get 10 years to pay it back there are two big drawbacks. 1) Your RSP 'stashe takes a big hit and you lose the opportunity for it to grow over time, since you're essentially resetting it back to 0. 2) The repayments can't be deducted from your income the way regular RSP contributions can. It hurts to  scrimp and save to make RSP payments and not be able to deduct them. This is especially true if your income increases in future and you could really use the extra deductions.

Can you tell I used the HBP about 10 years ago? LOL It only worked out for me because we made a ton on appreciation of that first house. Those results are not repeatable today.

Do you expect your income to increase much in the future? If yes, I'd invest more heavily in your TFSA and save the deduction room in your RSP for when you're earning more income. If you think your income is going to stay relatively flat, I'd focus more on the RSP, to reduce your income tax. Figure out how much you'll be able to contribute to your RSP in 2014 and then fill out form T1213 with CRA. This way you'll pay less income tax through 2014 and can invest the difference. You'll see a smaller refund, but you won't be lending $ to CRA in the meantime.

Figure out your timeline to buy a house (hint: it should probably be on the long side) and save your downpayment in the TFSA.

[daverobev]

IMHO - look at canadiancouchpotato, and just get yourself paying into an RRSP and TFSA *every month* from your chequing account.

3.5% on your student loans is a GOOD rate; so don't worry about paying it off early. Just get your investments started as they will grow all by themselves over time.

If you are, stop paying for a chequing account - PCF or RBC (with a chequing, VISA and investment product) is free, amongst others.

One option that is super easy is an ING Streetwise (maybe Tangerine now? They have renamed themselves) - it's a pre-balanced fund, so all you do is pay in. Another is the TD eSeries. My preferred option is a Questrade or other brokerage account, but in truth it's probably more flexible than I need (ie, I buy individual shares rather than just ETFs like I 'should').

But as others have said, you need to know *where you are going* before you decide *how to get there* (saying that - saving money for *something* even if you don't know what is better than frittering it!!).

People's Trust have a 3% TFSA if you just want a pretty good interest rate - note, that's no good for retiring - you *need* stocks for compound growth over 15+ years (if you're planning on retiring in 8 years this is less of an issue, perhaps... but not really as you need your investments to grow *while* you're retired too).

[Ziggurat]

I'm not sure why the HBP is automatically considered bad by some commenters. I agree that you need to evaluate whether the HBP makes sense for you, but consider this: if you have not maxed out your RRSP (the OP said it has nothing yet), then any money you save somewhere else is money that could have been in the RRSP, but isn't.  Therefore you didn't get your marginal income tax rate back on that money.  And if you don't use the HBP, you will be giving less of a downpayment, possibly paying mortgage insurance because of that. And, of course you will be paying your mortgage rate on the higher mortgage amount.

Even if you max your RRSP (all back-contribution room) and TFSA and still save a huge amount for a downpayment, you could still use the HBP as part of a diversification strategy. You don't have to use all of your RRSP.  You can use a portion instead of putting it into bonds or GICs. And, if you are saving so much money, then you can pay it back in a few years and not miss out on much growth opportunity. In any case, for non-taxable accounts, the big growth should be in your TFSA as much as possible, where you don't pay tax on it when it comes out.

Really, the right way to do it is to break out the spreadsheets and run scenarios.  Assign your bets to stock market growth, interest rates etc. and see which allocations are most likely to work well for you in a range of scenarios.  But meanwhile, start some automatic transfers into the accounts, and adjust the amounts later as you figure these things out.

[Petari]

Hi mustachia! I'm also a new grad in Canada, and I read this blog before graduating, starting my job, and moving into a new apartment. I've been working for just over six months now. Here are some of my thoughts / recommendations:

* First up, save an emergency fund of at least about three months' living expenses. There was a round of layoffs at work not long after I started, and I feared nothing because at that point I already had three months' worth of cash in the bank. It is a very good feeling. I have like six months' worth of expenses saved up, but my job isn't super stable
* I use Koodo and TekSavvy for mobile phone and internet, respectively, and I pay about $30/month to each of them. I bought a Nexus 4 off contract last year and use that, so by bringing my own phone I get a 10% discount on my Koodo plan.
* If/when you move out of your parents' house and get a place on your own, seriously consider getting a roommate. My life is pretty heavily mustache-optimized and my biggest expense is the (not outrageously high) $800/month I pay for my 1 bdr apartment. In my city you can rent a 2bdr apartment for the same price, which could cut my rent in half. As you imagine, that would cut my time to FI significantly.
* Get a bike and bike as much as you can. I think there were a couple months in the summer/fall where I actually spent nothing on transportation because I biked everywhere.
* I like ING Direct for cash savings because their savings account rates are high, their fees are low/non-existent, their website works well, and their phone agents are available 24/7 and are generally quite helpful.
* Investing...Some good resources are Finiki.org, Canadian Couch Potato, and Canadian Money Forum. Investing in mutual funds in Canada can be a bit brutal because their fees tend to be higher than in the US, but you can still come out ahead. You should do your own research on asset allocation and asset location, but here's what I do as a sample:

I chose an allocation of 80% stocks and 20% bonds, which is aggressive (note that I do have a decent amount of cash that I'm not counting on this) but not atypical for Mustachians. In more detail, my allocation is 27% Canadian stocks, 27% US stocks, 27% international stocks, and 19% bonds.
I can't in good conscience recommend ING Direct Streetwise unless you really don't want to learn anything about investing: their fees are definitely not as low as you can go. TD e-Series are not bad...I use Vanguard Canada ETFs that I buy from Questrade. VCN, VUN, VDU, and VAB are the four funds I use (and they match, in order, the four categories I listed above).
I hold the stocks in my RRSP and the bonds in my TFSA...I also hold emergency cash in my TFSA. I buy once a month, at the end of the month once my second paycheque has come in. Once my RRSP fills up I will bump the Canadian stocks to an unregistered account (i.e. outside of RRSP or TFSA) and use the RRSP room for US and international stocks.

Other thoughts: Keep housing, transportation, and food costs low and get some low-cost hobbies and you'll do pretty well.

[mustachia]

Wow, thanks all! Looks like I've got more reading to do and try to figure everything out. Honestly, I wonder sometimes why we're not taught the important stuff in school ;p Mosr of the people I've worked or went to school with don't know a penny on personal finance.