At 27, Samantha has goals for the future, but feels hindered by mounting debt. How much exactly? $18,000 on a line of credit, and she’s not entirely sure how all that spending racked up.
“It’s hard to pinpoint how I ended up spending so much money, but likely a combination of the following: shopping, two annual life insurance payments, and a recent vacation to visit friends in Europe,” she says.
Working at a new company as a project manager, Samantha makes $70,000 a year and lives with her parents in Vaughan. She has aspirations for her future, that include a comfortable retirement (some day), buying a home in downtown Toronto, future vacations and a wedding “in case I ever get a boyfriend and/or choose to get married.”
But before she can dream that big, she needs to manage her everyday situation. On a typical day, Samantha spends most of her free time stuck in transit. Her commute to work takes one and a half hours each way. “On a very bad day, it can take up to two and a half hours,” she says. She drives her car and parks it at a TTC station, then takes multiple subway lines down to her office.
Because her commute is so expensive — it includes spending more than $150 on her Presto pass, $120 for parking and $416 for car insurance, gas and maintenance each month — she tries her best to save money by eating food at home.
In the morning, she’ll pack a smoothie or pancakes for the commute and meal-prep most of her lunches — other than the standing lunch meeting she has with a co-worker bi-weekly. Sometimes, when the commute wears her out, she’ll opt for a salad bowl at Freshii, Starbucks, or something at the grocery store.
For dinner, to escape the afternoon transit rush, she’ll often meet up with friends downtown, maybe two to three times a week. “Otherwise, I eat dinner at home — usually my mom has made something during the day, or I make myself a meal.”
Because she spends “about 75 per cent” of her “waking hours working or commuting during the weekdays,” the weekends are usually low-key at home. “Occasionally I will go for brunch or dinner, but typically only with friends who live in Vaughan.”
Samantha reached out to #MillennialMoney to find out how she could start paying down her debt.
“I’m mostly focusing on paying off debt, so not saving a ton right now. Any extra liquid cash goes into a regular savings account for use the next month or a TFSA made up of mutual funds,” she says. She’s also planning to take advantage of her new employer’s RRSP matching (up to two per cent) in 2020.
We asked Samantha to give us a snapshot of a week of spending. This is what happened:
The expert: Jason Heath, managing director at Objective Financial Partners Inc., had this advice for Samantha:
> Samantha’s current spending seems fairly modest, with only occasional splurges on lunches and eating out. She’s limited in how much she can indulge because of the $18,000 in line of credit debt she accumulated in the past. It’s a good lesson that spending more than you make and not accounting for extraordinary expenses can catch up with you and make it tough to get ahead.
> I question her decision to borrow to buy mutual funds in her TFSA when she still has so much debt in the form of an unsecured line of credit. Those usually charge 8 to 10 per cent or more in interest rates. I doubt she’s going to earn 8 to 10 per cent or more investing in mutual funds, even if they are really aggressive investments.
> The group RRSP she’s planning to join is a great idea. I’d be inclined to contribute whatever she needs to get the maximum company match — which sounds like two per cent of her salary. If she’s getting a full match on her contributions by her employer, that’s a 100 per cent return on her investment right off the bat.
> Samantha’s commute time is crazy. That’s great motivation to make the move closer to work. Her timing for moving out may not necessarily coincide with her paying off debt and accumulating a home down payment. So, if either she or her parents decide it’s time she goes out on her own, she shouldn’t worry about renting for a period of time.
> I note her goals are retirement, buying a home in Toronto, future vacations, and a wedding (though she’s currently single). I’d reprioritize to put retirement last on the list. Young people are often told to start saving for retirement early, but there are so many things like a home purchase, wedding, kids and other costs that they will have first.
> I note she has life insurance but no dependants. If she dies, nobody is counting on her income and her line of credit debt would not become her parents’ responsibility — it would be unrecoverable by the lender. I’d say her risk management should focus more on what happens if she has a health issue that prevents her from working.
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The results: She spent more, but will be reimbursed partially by her employer for her professional membership fee. Spending in week 1: $902.48. Spending in week 2: $1,077.96.
What she thought: “I think I did pretty well this week,” Samantha says, even though her expenses were a little higher. “The bulk of my money was spent to maintain my professional designation, which is important, as my career is directly tied to my finances (I’ll also be reimbursed for 75 per cent of the cost by my employer).” Also, because the advice seemed to be more long-term, it was difficult to implement right away, but at least she knows her next steps. “Even though there wasn’t much I could apply to the next week, I appreciated the advice because it gave me a different perspective on where I should be putting my money.”
Take-aways: First, she’ll be taking Heath’s advice by joining her employer-match RRSP, rethinking her TFSA contributions versus paying debt, and coming up with “a serious plan” to move out of her parents’ place. “The only issue with moving out is that it will essentially eliminate my ability to pay down my debt — which then limits my ability to buy furniture, food and other essentials one would need in an apartment.”
Also, Heath’s advice has made her reconsider where her money should go. “For the foreseeable future, and based on today’s tough economy for people my age, I’m recognizing that my need to access liquid assets might be more of a priority than to lock my savings in a retirement fund.”
Samantha still worries about she’ll ever be able to afford to live on her own in the city. “I live with my parents, I have a full-time job in my field with decent pay — but at the same time I feel like I’m struggling because I have debt to pay off. Knowing that I’m not in the worst situation makes me think of people who might be getting paid less and have rent to pay — how are they doing and how do they manage their funds?”
This question has pushed Samantha to think more about the overall sustainability of housing costs in the city, and whether or not there would be a breaking point. “Will wages rise? Or will we have to wait for all the boomers to die at once and flood the market with their empty homes?