Author Topic: Reader Case Study - Canadian new grad - need advice  (Read 4307 times)

McBuck

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Reader Case Study - Canadian new grad - need advice
« on: July 03, 2015, 11:46:16 AM »
Life Situation: 23, single, Ontario, Canada

Gross Salary/Wages: $65000

Pre-tax deductions: currently 4% RRSP matched 100% by employer.

Adjusted Gross Income: $62400

Estimated taxes:
federal and provincial: $12,349
CPP: $2480
EI: $931

Current expenses (per month):
Rent: $390 all inc (with cable and internet)
car insurance: $80
gas: $80
car maint/upgrades/travel: $200 (into savings account so after maintenance is taken care of I can either travel or do unnecessary fun stuff to my car.
groceries: $160
cell phone: $45
gifts: $25
haircut/hygiene: $20
clothing: $30 (probably high but I need some more professional clothes)
gym/sports registration: $60
entertainment(restaurant,bars,activities): $200
Total: $1290/mo

Assets: 14k cash

Liabilities: OSAP student loan: 30k @ 4.9%(interest is tax deductable) monthly payments of $378 starting November.

Specific Question(s): I'm unsure of where I should allocate my excess money. I just graduated and started my job, so I'll only be working 6 months in 2015. This will make my gross income ~34k for this year. I feel like I should only contribute enough to my RRSP to get the employer match (4%) and then next year max it out since it'll be deducted from a higher tax bracket when I'm making $65k.
For my emergency fund, I want to keep $6000 in cash. This gives me a safety net with free banking, a free credit card with 1.75% cashback on everything, roadside assistance, etc. I could stretch that out at least 6 months in the worst case scenario.

My plan was to start a TFSA with the last $8k of my cash and deposit everything leftover at the end of each month (about $2300/mo).
When I have to start paying my student loans in November I will make the minimum payments of $378. I think the effective interest rate is about 4.1% after the tax deduction, so I'd rather invest than pay it off.

2015 TFSA room: $36000
2015 RRSP room: $19000

Come January, my 2016 RRSP limit should be about $25k and I'll max that out next year, putting any leftover into the TFSA.
Both RRSP and TFSA will be invested in index funds with a mix of Canada/US/EAFE/Global.

Future plans: Buy an investment property (duplex, rent rooms, etc) to live in at least 5 years from now. I would eventually like to get into real estate more and have some passive income.
If possible, I would like to retire by 40 with an income of $25k + inflation. By then my primary job income should be in the low 6 figures.

Am I on the right track here? Is it best to wait until next year to contribute to my RRSP? Did I miss anything important from my budget? I do everything I can do be frugal and still have fun while I'm young. I only really go out to eat when invited by friends. Do all my own car work, buy gas gift cards in bulk to save 15%, only buy things when they're on sale.

Thanks all. I'm looking forward to growing out my stache.



beee

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Re: Reader Case Study - Canadian new grad - need advice
« Reply #1 on: July 03, 2015, 12:59:24 PM »
Good job!

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> Is it best to wait until next year to contribute to my RRSP?

yes, contribute only the amount needed for the employer match this year


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> I do everything I can do be frugal and still have fun while I'm young

Then don't care about budgets and stuff, just don't let lifestyle inflation to ruin your bright future.


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> I think the effective interest rate is about 4.1% after the tax deduction, so I'd rather invest than pay it off

You can also do both with your $2300/mo savings: for example, pay $1k towards the loan, and the rest to tfsa.
Another option: max out both your RRSP and TFSA first (will take you 3-4 years), then focus on paying off the loan (that's my plan with the mortgage).


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> If possible, I would like to retire by 40 with an income of $25k + inflation

Find a right partner and you'll retire in 30-35 :)


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> a free credit card with 1.75% cashback on everything

What card is this? I want the same one :)
« Last Edit: July 03, 2015, 01:02:53 PM by ildar »

human

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Re: Reader Case Study - Canadian new grad - need advice
« Reply #2 on: July 04, 2015, 10:27:45 AM »
Not many people responding to this I see. I don't have much to say except maybe I wish I could build a time machine and go back to 23 years old and do what you are doing. I made close to 60k and had 34k in loans, focused on paying the loan but invested nothing and saved nothing. I paid off the loan in 5-6 years instead of the minimum payment of 12 years (I did a Masters degree in the middle of those years). Just started investing at 37 so can't offer much wisdom. That loan could be paid in a couple of years, but then again you could get a real aggressive start to investing. Good job in not blowing all your money!

PharmaStache

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Re: Reader Case Study - Canadian new grad - need advice
« Reply #3 on: July 04, 2015, 12:47:58 PM »
Everything looks fine over here.  Getting that employer match on your RRSP and loading up your TFSA is key.  I'd put extra on the student loans too.  Are you planning on saving a downpayment too (i'm assuming your TFSA is retirement savings, given that you're investing it in index funds)?  That's another consideration. 

You might want to think about how much you get back by totally maxing out your RRSP next year…you may want to spread it over a few years, depending on what marginal tax rates you are paying.  Is your income going to be going up quickly?

okits

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Re: Reader Case Study - Canadian new grad - need advice
« Reply #4 on: July 04, 2015, 02:29:57 PM »
Figure out the optimal level of taxable income you want for next year (maybe the $40992 bracket limit?  Depends on how much the Ont Health Premium pisses you off) and aim to have enough RRSPs to deduct from your 2016 gross income.  You can invest now in your RRSP (up to current available room) and deduct in future years when your income is higher.

I would go a bit more aggressive on the student loans. Even though the interest is deductible it's still an expense (money pissed down the drain).  If your sustainable, long-term investment return average is around 7-8% your loan isn't cheap enough for me (you'll save the 4.9% interest guaranteed if you pay down the loan, but your investment returns for any given year are uncertain, and some will be immediately taxable.  I would be more in favour of carrying debt while investing if the interest rate was 2-3%.) Consider applying 50% of your spare cash to debt repayment, 50% to investing.

I would keep an emergency fund of 3 months max ($3-4k) and back it up with a line of credit.  $6k is too much cash for you to keep idle in your circumstance (negative net worth and no dependants.)

Yes to the TFSA.  Have nothing in taxable accounts before you max out your tax advantaged ones.

Congrats on the great-paying job and low cost of living!  You are doing great.

dess1313

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Re: Reader Case Study - Canadian new grad - need advice
« Reply #5 on: July 04, 2015, 05:56:03 PM »
I would say you're right on track
Contribute only as much as you need to the RRSP for the employer match.  roll this years tax credits over to next year when your tax brackets will be higher

I would also focus more on your student loan.  That interest rate is a pain that won't go away, and isn't really all that of a great tax rebate.  Its $1500 a year right now in interest costs going to some bank's pockets and not yours.  You plan on saving $2300 a month.  I would put a good share of that away on the loan.  find a good calculator and see the difference in interest costs when you take different spending approaches.  2 years 4 years 6 years 8 years etc.  Figure out what's comfortable for you.  Also your tax return could be a good spot to invest in here.  You should have some student credit that helps on the taxes as well.  Its a guaranteed results, and market investing isn't.  Even if you focused more on it for 2 years and chipped it down then did more long term savings would help the interest costs

Also, just because you're investing in a TFSA or RRSP, what TYPE of investment will you be doing there?  GICs?  savings accounts?  Stocks or bonds?  High fee? low fee?  That will have a big role on what you do too.  Interested in reading books?  I had the bogleheads guide to investing recommended to me and i loved it.  Learned a ton about things

Al1961

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Re: Reader Case Study - Canadian new grad - need advice
« Reply #6 on: July 04, 2015, 06:44:56 PM »

*snip*

Also, just because you're investing in a TFSA or RRSP, what TYPE of investment will you be doing there?  GICs?  savings accounts?  Stocks or bonds?  High fee? low fee?  That will have a big role on what you do too.  Interested in reading books?  I had the bogleheads guide to investing recommended to me and i loved it.  Learned a ton about things

Along this vein, what are your near-, mid-, and long-term savings goals?

You need to match the risks, and investment vehicles to those goals.

Consider developing an investment policy statement to help organize your thoughts/goals and lay out the strategies that will help you get there. Lots of info in the Bogleheads Wiki that would help you sort this out.

Al

tardis

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Re: Reader Case Study - Canadian new grad - need advice
« Reply #7 on: July 04, 2015, 07:54:06 PM »
Hello fellow Ontario new grad!  :)  All I can say is how on Earth are you getting such low rent?  The best I have ever managed is $450 all included, and that was a few years ago for a room in a bleh part of Cambridge, ON (...in my opinion the armpit of the KWC region).  I'm not sure how much you use your phone, but I have a pay as you go plan with Telus for ~$6.50/month for 250 texts, 0.15c/minute local calling, and use wifi for my internet needs.  I believe Rogers has an equivalent.

RichMoose

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Re: Reader Case Study - Canadian new grad - need advice
« Reply #8 on: July 05, 2015, 12:39:04 AM »
Great advice here so far. Regarding your RRSP contributions, be aware of your MERs for funds in your company plan. It may be best to contribute only the amount that maxes your employer match with them and invest yourself through Questrade in ETFs for the balance.

McBuck

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Re: Reader Case Study - Canadian new grad - need advice
« Reply #9 on: July 05, 2015, 03:28:01 AM »
I appreciate the responses from everyone. I'm very new to all of this and trying to absorb as much information as I can.

@Ildar
The card is the BMO word elite cashback mastercard. It's only free if you open a premium chequing account that has a $30/mo fee. That fee is only waived if you park $5k in it. They have a promo right now for $200 to open a new account and switch payroll and another $105 to apply for the credit card and make your first payment from your new bank account, so that's what I'm doing.

@human
Thanks! I consider myself lucky to have found this forum and realize how possible ER really is. Seems a few people here are suggesting putting a bit extra on the OSAP loans to pay it down faster. I'll definitely consider that. One thing to note is in the event of unemployment OSAP loan repayment can be delayed 6 months with no interest. Would this change any opinions on paying this loan back?

@Pharma
I will be saving for a downpayment in the future using the home buyers plan to borrow 25k from my RRSP. Then take from a taxable investment account whatever I need to get a 20% downpayment. The house I've briefly looked at are around $150k-$250k. My income should rise slowly for a few years and then I'll have more opportunities to make larger jumps.

@Okits
I'm guessing my optimal level is $44,701 for the federal rate before it jumps to 22%? I will definitely take a look at the interest calculations on my loan and see if the extra 2-3% interest I "probably/might" make investing is worth having the debt hang over my head.

@all
I suppose I don't have any real near or mid-term goals. I'll need 30-60k for a house DP 5+ years from now. Other than that it I won't need it until I retire. I only need 625k to be FI, but I want to have $1M in assets before I retire... as silly as that sounds.

My index funds are all stocks currently. Would it be wise to add in some bonds as well for my timeframe? The MERs for my funds are between 0.36-0.54%. Is that good? I haven't looked into questrade at all

@Tardis
I really lucked out finding this place. Looked on kijiji for a couple weeks. Most of the others I was looking at were $500+ for a room. It's with a roommate, but it's a good area a short walk from downtown and my work :)
I use a fair bit of data on my phone but few texts or calls. I have 2gb with fido unlimited, but I've been considering switching to a tablet data plan which is $35 for 5gb.

Yikes that was a lot of writing. I wouldn't blame anybody for skipping over it.

edit: I should also mention that I like having more cash on hand if a car comes up for sale I can fix it up and make a quick buck.
« Last Edit: July 05, 2015, 03:32:24 AM by McBuck »

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Re: Reader Case Study - Canadian new grad - need advice
« Reply #10 on: July 05, 2015, 05:54:30 AM »
Quote
My index funds are all stocks currently. Would it be wise to add in some bonds as well for my timeframe? The MERs for my funds are between 0.36-0.54%. Is that good? I haven't looked into questrade at all
That's pretty good, if you want to go lower, look at Canadian couch potato website, they suggest 3 ETF's, the MER on those is 0.20%, but you would need a questrade account (No commission's on ETF's, unless you sell them). If I were you, I would stick with what you have, paying 0.20-0.30% more won't hurt you that much. I would of been more worried if you had told me that you paid 2-3% in fees. Sadly, if you are canadian and you have no clue about finances, that is what people pay for their investments...I know, I was one of them until I found about MMM and this forum.
« Last Edit: July 05, 2015, 05:56:47 AM by fb132 »

human

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Re: Reader Case Study - Canadian new grad - need advice
« Reply #11 on: July 05, 2015, 11:56:28 AM »
McBuck, thanks for letting us know about the credit card. I considered opening a premium account and getting the world elite air miles one, but I've been investing instead of trying to keep my checking account over 5-6k. I may reconsider that. As for the student loan, 4.9% is a decent return if you are paying it off, I'd be tempted to go half and half debt repayment v. investing. I work in the gov so unemployment and emergency cash isn't too much of a concern for me (right now) which is why I'd go whole hog on the debt . . . although depending on the next election I may regret not worrying about an emergency fund.

Heather in Ottawa

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Re: Reader Case Study - Canadian new grad - need advice
« Reply #12 on: July 05, 2015, 09:27:03 PM »
You sound like a car lover (fun upgrades?). But i'll suggest this anyways, just in case youre more interested in minimizing spending vs enjoying a few frills... Because everything else you've posted looks just about perfect  :). Get telematics car insurance to bring your premium down. Also ride your bike to drive less so you'll spend less on gas, and drop the gym membership.
You're off to a wonderful start.

beee

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Re: Reader Case Study - Canadian new grad - need advice
« Reply #13 on: July 05, 2015, 09:37:54 PM »
BMO offer is great! I plan to do it someday.


Quote
The card is the BMO word elite cashback mastercard.

1.75% cashback on everything, $120 annual fee

I think I'll stay with ScotiaBank Visa Momentum Infinite with 4% cashback on groceries and gas, 2% on recurring payments and drugs, and 1% on everything else with $100 annual fee.
I'll have to spend $16k per year more to break even on the additional $120 annual fee with 0.75% cashback :)

Btw, guys, ratesupermarket gives away $100 if you approve to it through them:
https://www.ratesupermarket.ca/credit_cards/scotiabank/scotia_momentum_visa_infinite/

McBuck

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Re: Reader Case Study - Canadian new grad - need advice
« Reply #14 on: July 07, 2015, 12:54:02 PM »
That's pretty good, if you want to go lower, look at Canadian couch potato website, they suggest 3 ETF's, the MER on those is 0.20%, but you would need a questrade account (No commission's on ETF's, unless you sell them). If I were you, I would stick with what you have, paying 0.20-0.30% more won't hurt you that much. I would of been more worried if you had told me that you paid 2-3% in fees. Sadly, if you are canadian and you have no clue about finances, that is what people pay for their investments...I know, I was one of them until I found about MMM and this forum.
Do you know how much they cost to sell? I do think I'll stick with my employer's plan, at least until I max out my RRSP, and then I may use questrade for my taxable investments.
I've heard of those insane MERs. My parent's RRSP used to be 2.5% that was chosen by the "financial advisor" at our bank.

@Heather
I am definitely a car guy! There are very few parts on my car that haven't been replaced or upgraded. Telematics won't work since my car is OBD-1. I do walk to work so my driving is mostly longer trips to visit my parents or go to the beach, etc. Thanks for the tips :)

McBuck

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Re: Reader Case Study - Canadian new grad - need advice
« Reply #15 on: July 07, 2015, 01:03:23 PM »
BMO offer is great! I plan to do it someday.


Quote
The card is the BMO word elite cashback mastercard.

1.75% cashback on everything, $120 annual fee

I think I'll stay with ScotiaBank Visa Momentum Infinite with 4% cashback on groceries and gas, 2% on recurring payments and drugs, and 1% on everything else with $100 annual fee.
I'll have to spend $16k per year more to break even on the additional $120 annual fee with 0.75% cashback :)

Btw, guys, ratesupermarket gives away $100 if you approve to it through them:
https://www.ratesupermarket.ca/credit_cards/scotiabank/scotia_momentum_visa_infinite/
That was my 2nd choice. Since I'm keeping 5k in the chequing account to make the BMO card free, I don't spend enough on gas and groceries to justify the Scotia $99 annual fee. If they would ever waive (other than FYF), I would jump on it immediately.

fb132

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Re: Reader Case Study - Canadian new grad - need advice
« Reply #16 on: July 07, 2015, 01:43:53 PM »
That's pretty good, if you want to go lower, look at Canadian couch potato website, they suggest 3 ETF's, the MER on those is 0.20%, but you would need a questrade account (No commission's on ETF's, unless you sell them). If I were you, I would stick with what you have, paying 0.20-0.30% more won't hurt you that much. I would of been more worried if you had told me that you paid 2-3% in fees. Sadly, if you are canadian and you have no clue about finances, that is what people pay for their investments...I know, I was one of them until I found about MMM and this forum.
Do you know how much they cost to sell? I do think I'll stick with my employer's plan, at least until I max out my RRSP, and then I may use questrade for my taxable investments.
I've heard of those insane MERs. My parent's RRSP used to be 2.5% that was chosen by the "financial advisor" at our bank.

@Heather
I am definitely a car guy! There are very few parts on my car that haven't been replaced or upgraded. Telematics won't work since my car is OBD-1. I do walk to work so my driving is mostly longer trips to visit my parents or go to the beach, etc. Thanks for the tips :)
I sold my VAB shares so I can rebalance and it cost me 5$...mind you, I only rebalance once a year if the percentages of my allocation go a little bit weird on me, so it's not a big deal.