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Managing a Budget in an Expensive City: A Boomer & Echo Financial Makeover

Susan Wilson (28) landed a position doing communications and marketing for a major charitable organization. She earns $68,000 and has full benefits. Susan moved from a smaller town to Toronto but, even with a bigger paycheque, she now has less disposable income because of the higher cost of living. She is more mindful of her spending these days and has to monitor her finances to keep herself on track.

Related: Diversifying assets for a balanced portfolio

Debt payments are her biggest worry. Susan still owes $26,000 in student loans, has a $17,000 car loan, plus about $18,000 in credit card and line of credit borrowing, much of which is attributed to her move to Toronto.

Travel is very important to Susan. She uses her credit card travel points, but still spends $2,500 – $5,500 on travel every year. She also spends most weekends driving out of town to visit friends and relatives in southern Ontario.

Current Assets

  • RRSP’s – $16,000
  • Personal accounts – $6,900
  • Defined Benefit Pension Plan – $5,300

Goals:

  1. Pay off her debts.
  2. Buy a home in the near future.
  3. Travel to all corners of the world.
  4. Retire by age 60.

The Financial Plan

Here’s what Susan can do to help achieve her goals.

Aim to be debt free within 5 years

Susan needs to eliminate her debts as quickly as possible and commit to not accumulating any more debt going forward. She must monitor her spending habits and eliminate where necessary to come up with extra funds to pay against her credit cards first.

Related: Debt avalanche vs. debt snowball

Thankfully her tastes aren’t lavish and if she’s careful she should be able to keep to her budget and funnel even more to her debt payments. This will free up more money for savings and she can set aside a regular amount for her travel.

Buy a house

Although homeownership is not a high priority, Susan wonders if she should invest in a house in the next few years, or continue renting?

Her father has indicated he would help her with a down payment, but she is wary of having to sacrifice her vacation time for the sake of a mortgage or to build up the remaining recommended 20% down payment.

She should first make every effort to pay off her credit cards and loans.

If she plans to remain in Toronto it might make sense to for her to purchase a condo in a few years if she can find one for a reasonable price and her mortgage and related expenses are less than the current $1,600 she pays for her 950 square foot, 1 bedroom apartment.

Related: Managing the proceeds from a rental property sale

She would love to have a real garden, but she doesn’t see herself with a roommate. “That doesn’t fit the lifestyle I want.”

Build up retirement savings

Susan would like to retire by age 60. She has a portfolio of mutual funds in a 60/40 ratio of equity to fixed income. She took the recommendations of her financial adviser at her bank.

“I haven’t made the effort to research funds myself.” She wonders if her investments could support the lifestyle she wants in retirement?

It would be advisable to switch her high MER mutual funds to a diversified index fund portfolio at her current bank, and set up a regular bi-weekly contribution up to her maximum annual RRSP limit.

She should concentrate on long-term growth by increasing the equity portion of her portfolio to 70%.

If she has a retirement shortfall at age 60 she’s fine with that. If she can’t afford it she’ll work a bit longer. “But I still have over 30 years to go.”

Final thoughts

Susan has learned good financial habits in the past and she is able, for the most part, to keep to her budget. This is not easy for a single person living in Toronto.

Related: Retiring after self-employment

She needs to make sure she also budgets for annual expenses, including insurance and clothing, and add this to her savings account on a monthly basis. She also needs to earmark funds to a dedicated savings program for her travels so she doesn’t dip into emergency or other savings (or her credit cards).

Susan may want to consider one big trip every few years instead of travelling every year. She can funnel her uncommitted monthly income into her Tax Free Savings Account.

Susan is on her way to achieving her goals of travel, retirement at 60, and homeownership.

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4 Comments

  1. Cool Koshur on April 2, 2015 at 4:18 pm

    I would propose she first start nailing down credit card debt. This is typically the one with highest % rate. She can take a cheaper vacation till entire debt is paid off. $1600/month is on higher side for 1 bed room apartment. I understand rents in Toronto vary drastically for each area. If Susan can shop around she can find a suitable 1BR apt for $1200. She can brown bag her lunch and prepare meals at home. No lattes outside. She can visit her friends/relatives every alternate week to cut down on gas bill. If she is living in City… does she really need a car. She can rent zipcar which will save her insurance bill (which is very high in Toronto), car maintenance, payments and gas. If doesn’t want to give up the car. She also has a option of take part time job to supplement her income, . No pain… no gain

  2. Carmen on April 3, 2015 at 6:08 am

    I agree with KC, but also know from being lonely in TO. Keeping the car and travel priorities leaves SS little hope to get out of debt in 5 years absent a big pay boost. However, if Dad is willing to offer a downpayment, instead Susan(S) should discuss a loan repayment. Dad pays off the $60k debt and S pays him the continued monthly amounts and Dad puts the “interest” into a TFSA for S.

  3. Jim O'Marra on April 3, 2015 at 2:18 pm

    I can’t see how you can say that Susan normally lives within her budget when you also say that she has accumulated most of this debt since moving to Toronto. From the figures above, she has cranked up consumer debt of $ 35,000 since she moved to Toronto, which is a huge amount for a single person, and it does not look like there is anything to show for it.

    She should be bringing home a net amount of approx.
    $ 4,500. If she is paying $ 1,600 per month for rent, and $ 400 for the car, this leaves her with $ 2,500 of disposable income. This is a very comfortable amount to live on, even in Toronto. So the fact that she has accumulated such significant debt in a short time tells us that she must be eating out a lot, spending significant money on other entertainment, and purchasing a lot of clothes on a regular basis. All of these expensive habits will need to be reigned in for her to begin the process of building wealth. It doesn’t mean that she can’t have fun on vacations, but she must vastly reduce other expenses on food, entertainment and clothing in order to have these vacations and still save for her future.

    The fact that she has such great benefits, including a defined benefit pension means that she likely does not need to save nearly as much as those without such benefits, and she should recognize how fortunate she is.

    With such significant consumer debt, and a father willing to help with a DP on a house, she should ask him for the funds to eliminate the debt immediately, and then she can start saving for a home or condo. The starting point is to have 10% of her gross earnings taken from every pay and set aside for retirement. By not having the chance to spend it, she will get used to living on less. Then she can start the process of saving for a home. However, given her lifestyle, and the fact that condo’s are at very high prices, this is not likely the time to buy.

    Good luck to her, but she really needs to change her spending habits in a big way. She is living way beyond her means that this point.

    • Don on April 20, 2015 at 4:59 pm

      Jim,

      I agree with your post, but I’d just like to point out that if you assume her pension contribution is a modest 8%, then she takes home $3,821 before she pays EI and CPP off for the year. At which time her take home pay will rise to $4,194, so she has a bit less to work with than the $4,500 you calculate. Although, it still isn’t terrible if you are single, and only rent.

      One thing that is really strikes me is the travel- it isn’t modest. It’s roughly 8-12% of her take home pay, and this doesn’t include her trips by car to visit friends and family in southern Ontario. No information is given on how much she spends on these trips, but I’m guessing they eat up a significant amount of her income. Furthermore, she also seems reluctant to have anything interfere with her travelling.

      Unless she has a big change of heart, she won’t meet her goals, and runs the risk of going much deeper in debt.

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