Millennial Money is a weekly submission-based series that provides financial advice to millennials. Read the full series here.
At 21, Olivia is ready to move out and gain some independence as she finishes her last years of university.
“I am ready to move out!” she said. “But I want to do it right.”
Luckily, Olivia landed a one-year internship at the start of this year that pays around $30,000 a year, or $1,900 a month after taxes. While that may not be enough to rent a spot on her own, she’s looking to live with three or four friends she met at school.
While scouring Craigslist and PadMapper, Olivia realized she can’t make an impulsive move, as she already has other bills to pay.
“I want to save a comfortable amount first because I still have to pay off OSAP,” she said, which she’s currently putting money toward and is around $20,000.
She’s capping her monthly rent budget at $1,000 or less for her share. “I think it’s findable,” Olivia said.
Currently living in Richmond Hill with her parents, she has a long commute to school, and will often buy lunches or dinners with friends and stay over at their downtown pads on weekends.
“I am thankful for my parents and all I have been able to save at home,” she said. “I just want to know what other expenses I should prepare for if and when we find our place.”
Her hope is to find something close to school and work, to save on transit time and costs, but she is willing to compromise with her friends. Her most immediate goal is to save $5,000 to prepare for the move.
We asked Olivia to share a week of spending to get a better idea of her finances.
The expert: Jason Heath, managing director at Objective Financial Partners Inc.
Olivia’s goal of saving at least $5,000 before moving out may not take her long, as her take-home pay is about $1,000 more than her estimated monthly expenses. Her goal is to budget for up to $1,000 per month for rent, and this could be manageable in Toronto given she plans to rent with three or four others. However, I have a few words of caution.
If she is going to rent for an amount that is comparable to her extra monthly cash flow, that means she probably will not have much left over every month. Her expenses will go up at the same time for food and utilities and other household expenses that her parents currently pay.
Her commuting costs could go down because she works in Toronto now and commutes from the suburbs where she lives.
She is expecting to pay back $20,000 in student loans, and while payments will not start until six months after her full-time studies have ended, that is an added monthly expense for her to consider. Interest starts to accumulate right away when your full-time studies are complete, and that interest rate will rise as interest rates rise.
I think she needs to weigh her desire to move out with friends with her ability to stay at home a bit longer and get her student debt paid down. It will be harder to pay it off sooner and start saving up for other medium- and long-term financial goals if she commits to a monthly rent payment too early.
Her income is too low to really benefit from Registered Retirement Savings Plan (RRSP) contributions and the associated tax savings, so I think she should be saving up an emergency fund in a Tax-Free Savings Account (TFSA).
I would be inclined to keep it simple and consider a high-interest savings account as opposed to stocks, mutual funds or exchange traded funds (ETFs) in her case. Beyond a modest emergency fund, paying down her OSAP is a good option for extra cash flow.
If your interest rate is 3.95 per cent, paying that loan down is like earning 3.95 per cent in your TFSA. Given the likelihood of more interest rate increases over the coming year, interest is going to cost more, and that guaranteed rate of return on avoiding that interest will also rise.
I am young enough to appreciate Olivia’s excitement over moving to the city and being on her own with her friends. But I am old enough to know that when it comes to your finances, patience can really pay off.
Only Olivia knows her job prospects after her internship ends and how much her income could rise next year. She may well pay off her student loan quickly with a pay increase, but keeping her costs low as long as she can also has some benefits.
Results: She spent less. Spending in Week 1: $218 Spending in Week 2: $151.99
How she thinks she did: “Since writing my expenses down I’ve been trying to prepare more food for school, and see that it is doable,” she said.
“It’s good practice for if I do move out.”
Take-aways: Olivia added that after seeing her weekly expenses, she realized she might not be able to go out for drinks or to eat with friends after she moves out — something she enjoys.
“The adviser is right. (My income of) $1,900 minus rent and OSAP leaves me with very little,” Olivia said. “It’s also a time when my expenses on everything will go up.”
Because she just started the internship, she isn’t too sure about her job prospects and said that if it’s possible, she’ll move out if the spot ends up being under $700 a month.
“I doubt that is doable without squishing. The space might be tiny!” she said.
She’s going to see what options her friends come up with, but unlike her, they don’t have OSAP payments to make.
“It’s a tough situation, but something I’ll have to deal with,” she said.
For now, she’s going to keep saving and open a TFSA to start investments, even if they are just a little.
In the future, she’ll reconsider moving out when she gets a full-time job with more pay.
Are you a millennial living in Toronto or the GTA who needs help with saving your money? Be a part of #MillennialMoney and email ekwong@thestar.ca
Digital design by Cameron Tulk.
Evelyn Kwong is a Star team editor based in Toronto. Follow her on Twitter: @evystadium
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