# Just starting to save



## Macro007 (Apr 18, 2010)

Technically I'm re-starting. Having kicked some drug and alcohol problems in the past I have another 6 months to go before I have all my debts paid off. It's been a long time, but after a few years I am excited to finally be seeing some progress.

I want to save $300k in less than 6.5 years, to purchase a home with cash. I will not live in debt again.

I am aware there are benefits to a mortgage, but I won't do it. I have a working plan on how to do this, but I want some advice on my choices, and any input on how to do better. 

I am doing this with my partner, so the numbers I use will be combined totals.

We make approximately $90k / year. We are unionized workers and expect a raise every 6 months for 5 years, and an annual cost of living (inflation adjustment) raise once per year. By year 6 we expect $130k / year.

We do not plan on children, our current budget (which we have tracked for the past 16 months) is $2700 / month or $32400 / year. This is expected to increase by 2% per year. This includes rent and a $200 / month contingency fund.

To maximize savings we are building our RRSP's up to the max $25k each (50k combined) which will be withdrawn and repaid in the years after we purchase our home. It will take 24 months to max out both RRSP's.

We will be each be making twice monthly contributions (after tax, but I will fill the T1213 to correct this), to our RRSP's. I want little to no risk on these, the money cannot be locked in for long, if at all, as it needs to be liquid-able for the property purchase. I am with Royal Bank, but for no other reason that that I started with them. Any advice on the RRSP side of things? 

After 2 years, we will begin to max the TFSA, and continue to contribute the max. $5k per annum each. I know nothing about TFSA's. This must carry very little risk, as we have little time to wait and recover if a stock plan crashes. The money needs to be available for withdrawal.

A portion of our income goes to a company stock plan, which grants employer matching and a restriction of 2x annual withdraws. I am not comfortable having so much of my savings tied to one stock and would take advantage of the withdraw option if only I knew where to put the money next? 

The remainder of savings would just sit in the bank, I would presumably just purchase short term GIC's for the last couple years until we had accumulated enough money.

This is our plan, we've been sticking to the budget for over a year now, so I know we can do it. I'm not concerned about the budget or expenses side of things at all. It the savings that concern me, all my past "savings" just went to pay off debts. I've never invested before, so I don't know how solid that part of my plan is. I've tried to be conservative, my calculations assume 3% ROI on the RRSP, 2.5% on the stock, and 1.5% on my savings. I know that I'll get it done in 6.5 years, can you help me do it faster?

Thanks!


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## Addy (Mar 12, 2010)

I know others will give you better investing information, so I wanted to say Congrats on kicking the habits. You sound like you and your partner are well on the way to that mortgage free house!


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## bh23 (Apr 16, 2010)

If the housing market has a correction...and there are many things to suggest it might...why not take a mortgage and buy when the market is low and rates are still historically low?

I took a 7 year mortgage on a 30 year ammort...I thought while I was paying my mortgage down I would save aggressively. And I did...and paid off the mortgage at around the 4 year mark. The penalty was negligable...the amount of interest I paid more than offset the increase in value of the house too.

Unionized workers with job safety and guaranteed wages are perfect options for taking a mortgage. I work in high tech...and I knew I was one bad quarter from not having a job at any time...things are different for you.


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## bh23 (Apr 16, 2010)

a couple more points...while you're busy saving, you're paying rent. THat is basically competition to your savings. It's money out the window.

RRSP should likely be in money market at this time...the stock market is currently quite risky, and there's no reason to think that will change anytime soon.

TFSA could likely be in the same boat...money market. Or laddered GIC's...

I am assuming you have a large amount of contribution room on your rrsp? Is that true?


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## m3s (Apr 3, 2010)

I wouldn't just say renting is "money out the window"

A lot of times just as much if not more money goes "out the window" when you take a 30 year mortgage and pay property tax, house maint etc etc etc


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## Macro007 (Apr 18, 2010)

Most people look at me like I am crazy when I say I'll pay cash for my home. I'll try to explain. I know there are advantages to the mortgage, but I am not ready to buy. We live downtown city center, walk to work in 5 min, spend 30$/ month on gas, own our car, pay only 800 in rent (we share a two bedroom and rent the other room out furnished. Currently to a close friend, once she moves out she'll be replaced by a student who we can charge $100-$150 more per month. Our set-up is great right now. When we buy we'll move out of the city to a much smaller town, my partner will go back to school (maybe) and we'll be down to one income. Plus if we ever "miss" making a contribution to our RRSP, TFSA, or savings account one month, no penalty. But if we miss a mortgage payment one month, we get hit. What if we get hurt/sick can't work? We have no worries (or at least less) if we are just renters with not too much financial responsibility. No Bank demanding a payment each month from us. Once we have a house we'll need a second car, we'll need to pay utilities, repairs, more gas, insurance, the list goes on and on...Yes, it's great to own, and I realize that $300k won't buy as much in 6.5 years as it would today, but this is the route we're taking.

Thanks for all the responses, I've got to head out but I'll check back in a few hours.


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## bh23 (Apr 16, 2010)

True...very true. But, if you take my case...the fact that I own my house outright is a huge financial gain. I have limited expenses per month and I can accumulate a lot of savings. 

I always advocate living within means...small house, small utility bills...lower property tax, etc. etc. I am a cheapskate.


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## MoneyGal (Apr 24, 2009)

The problem I suspect you are going to encounter is that by sticking to "safe" investments which generate interest (not capital gains), you will see a lot of your investment return frictioned off by tax every year. 

Not, obviously, in your RRSP and TFSAs, but you are going to need to have unregistered accounts to meet your savings goals as you've set them out. 

The other conundrum is that with such a short time-frame, in my view you should likely have very little equity exposure at all...certainly well under 50% of your portfolio. (And I'd allocate all the fixed income to your RRSP and TFSA accounts, with all equities in the unregistered accounts, for tax reasons.) 

At some point along your journey, you will hit a break-even point where the optimal choice is to buy a house (and incur mortgage debt) rather than continuing to save in unregistered accounts for a goal which is drawing closer (and which has you thus allocating progressively more of your funds to fixed income and cash).

Another choice (given that you asked for other perspectives) would be to buy a house once you've reached that tipping point with an open mortgage, and then focus on paying down the mortgage as fast as possible...rather than saving interest-generating dollars in open accounts, having the interest taxed (at a very high marginal rate, given your salaries), and then saving the after-tax dollars for a house. If you follow the option I set out in the *first* part of that sentence (buy earlier with an open mortgage), you get to skip one of the steps - that is, having your returns taxed before they are saved for the house purchase. 

Avoiding debt is great. But so are financial models which show the impacts of your choices. Avoiding mortgage debt is not always the most rational choice, largely because of taxation.


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## the-royal-mail (Dec 11, 2009)

mode3sour said:


> I wouldn't just say renting is "money out the window"
> 
> A lot of times just as much if not more money goes "out the window" when you take a 30 year mortgage and pay property tax, house maint etc etc etc



I completely agree. I had a condo in the GTA which was sold and now I'm living in a smaller western city. My rent here is only slightly more than what I was paying in taxes and condo fees alone. Then when you consider the mortgage payment on the condo, much of that was gobbled up by real estate agent and other fees that came to far more than I'm paying in rent. Yes, I got SOME equity back but I can accomplish the same thing by saving money and renting, as opposed to buying property and feeding middlemen. 

Renting is far from throwing money out the window.


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## Macro007 (Apr 18, 2010)

Thanks guys, some great feedback.

I figured as much about for the RRSP / TFSA, staying away from equities. I am leaning towards mainly a GIC approach with these accounts, and I can see the sense in money markets, although wow the rates are low. 

MoneyGal, you make very good points about the break-even point and taxation, when it actually become advantageous to take a mortgage. I've been analyzing the BE point, but I've been lazy and shied away from examining the tax side of things as of yet. 

My partner and I agreed that we would start looking for a home once we hit the 200k mark (approx. 4.5 years). Not for any analytical reason, it just a nuber that sounds good. We're planning to leave the city, I need to get a job transfer, and may need to get trained for a new position, so it'll take time for everything to go through. The problem is though, once we move, we may very well go down to just one income, so any mortgage we have to take out is that much more of a burden. I'd like to avoid anything greater than 50k. We're already going to have to payback the RRSP's, which although not technically "debt", it's still an obligation we have to fulfill.

Let's try to run with the idea of paying cash for the home, maybe not the most rational approach, nor the most cost effective, but it allows me to sleep better at night knowing I don't owe anybody.

Here's a quick breakdown of what some of the numbers look like over the 6 years, and how I currently allocate assets.

End of year 1 - $40k, 10k in company stock, 30k RRSP's
End of year 2 - $80k, 12k TFSA's, $17k company stock, 50k RRSP's
End of year 3 - $122k, 44k TFSA's, $26 Company stock, 52k RRSP's
End of year 4 - $176k, 17k cash, 70k TFSA's, 36k company stock, 54k RRSP's
End of year 5 - $230k, 45k cash, 80k TFSA's, 47k company stock, 55k RRSP's

My plan as it stands is centered around GIC's and MM funds in my registered accounts. Non-Reg cash would go into HI savings accounts or GIC's as well.

Should I have equity exposure inside my registered accounts at all? 

It's clear I have way to much risk hold such a large amount in one companies stock, I can easily convert this to cash 2x per year, but now what do I do with all the cash sitting around? GIC's? MM, Fixed Income options? If I should have equity options, whats the safest approach?

Also where should I go to have all this managed?

Thanks again!


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## bh23 (Apr 16, 2010)

if you come to your conclusion by comparing a toronto condo to a western city....then yes, renting is likely better. 

If you lived in Toronto and could own or rent your condo and purchased it in the recent past...the condo appreciated quite a bit, and you build equity. And you likely built equity faster than you could have saved had you rented the same place.

Each circumstance is different...had I rented my house the last 8 years, I would still be on the hook for rent each month and these units rent for about 1200. My condo fee and taxes are about 400 a month...seems like 800 in cash flow that I have every month. Not to mention the 180k i have in equity. I can't see a rental circumstance that could compare favourably to those numbers.


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## MoneyGal (Apr 24, 2009)

Thanks! 

Just one quick point - you can also carry out a form of tax arbitrage by contributing to an RRSP in a high-income year, and then withdrawing for a house purchase and not repaying the funds in low-income years (given that you said you might go down to one income at some point). 

Yes, you lose the contribution room permanently. I am only looking at the tax angle. If you do not repay the 1/15th owing in any given year, that amount is taken into income for the year. And if you have no other income, the amount of tax you would pay on that amount is very small. Hence, you have contributed the money in a high-tax year with no tax owing - and shifted the taxable event to a later date and a lower taxation rate (there's also a time value of money component which I am not including in this model right now). 

Just food for thought. 

My other quick thought is that you do not need to have *anyone* manage this for you. If you do an all-GIC portfolio, you can just do this yourself either with a bank advisor or using a SDRRSP and TFSA with an online discount brokerage. No advisor compensated on straight commissions is going to want to take on this portfolio; the spread (commission) on GICs is too small.


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## jared (Apr 8, 2010)

mode3sour said:


> I wouldn't just say renting is "money out the window"
> 
> A lot of times just as much if not more money goes "out the window" when you take a 30 year mortgage and pay property tax, house maint etc etc etc


I completely agree with these sentiments... I live in downtown Calgary.. I pay a measly $750/month for renting a one-bedroom apartment. I could go out and buy an equivalent condo for say, $150,000 (theoretically)..

$175,000 x 4.0% estimated annual interest rate = $7,000 / 12 = $583/mo interest

Plus: let's say a $250/mo condo fee

Total of $833, which is of course more then renting where there are no responsibilites for repairs/taxes/transaction fees.

It would appear that I'm hardly throwing money out the window


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## brad (May 22, 2009)

bh23 said:


> And you likely built equity faster than you could have saved had you rented the same place.


I think you have to take into account the fact that during the first years of a mortgage you're paying mostly interest. The percentage of interest versus equity depends on the term of your mortgage, but you aren't building equity very quickly for the first five years if you're just paying off your mortgage on schedule.

We are three years into our 15-year mortgage and currently pay almost twice as much in interest per month for our 3-bedroom house as we paid in rent per month for our 3-bedroom apartment that was less than a kilometer from our current location. The house is in a nicer area and it's a house rather than an apartment, and the rent where we were living was a very good deal, but I'm just using this example to illustrate that renting can sometimes be a smart way to go. We saved a ton of money while we were renting, and it enabled us to save up quickly for our 25% downpayment while eliminating any remaining debt, buying a new car with cash, and saving for retirement.


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## Oldroe (Sep 18, 2009)

I'm not convinced this is a great time to buy a house. And it's also a bad idea to save the 300k and pay cash.

What would work better is to save on your schedule waiting for some bad economic times. And then jump in with the most liberal repayment options. For example TD allows you to adjust amortization period, So you sign for 20 years and move the amortization to 5 years this means you paying off your mortgage 4 times faster. So in 5 years you own it.

Owning money is not bad if you have a plan.


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## MoneyGal (Apr 24, 2009)

"Renting is throwing money out the window" is a fallacy of the first order. 

Unless you have the capacity to pay all cash for a house, with a mortgage you are renting money. 

The housing discussion is complicated, because it involves leverage, spending and consumption. 

However: at a basic level, with housing you can rent space, or you can rent money. The optimal decision is not always to buy, and to suggest that rent money is "lost" money demonstrates a misunderstanding of what you are actually getting for your money with both a mortgage and rented space.


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## Sampson (Apr 3, 2009)

Macro007 said:


> Here's a quick breakdown of what some of the numbers look like over the 6 years, and how I currently allocate assets.
> 
> End of year 1 - $40k, 10k in company stock, 30k RRSP's
> End of year 2 - $80k, 12k TFSA's, $17k company stock, 50k RRSP's
> ...


I don't want to wade into the buy/rent issue, but I have some minor issues with your projections. 

I also did some quick math on your estimated post-tax income vs. expenses, and assuming stable incomes - the actual cash saved would be shy of $150,000, or just under $30k per year. I'm guessing you already have $40k saved? So your $190k capital (now and future savings) will have to become $300k in 5-6 years. Even with your estimated annual raises of 10% (90k to 130k in 5 years), this will be challenging.

You mention you plan to hold GICs, CDs, MMFs etc, yet your TFSAs grow at an annualized rate of 7-10%.

To me, some of the math is filled with some lofty expectations.

From a psychological perspective, I think you'll find it more and more difficult to maintain a $32k/year budget as your savings begin to accumulate. Lifestyle inflation can get the better of you quite quickly when you see $100's of thousands of dollars growing in your accounts.

Keep at it though, and good luck!


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## bh23 (Apr 16, 2010)

rent is money out the window in the same way that maintenance, taxes and condo fees are money out the window if you're an owner. You get nothing tangible in return...you get to live somewhere, but that's really just an expense.

A mortgage will eventually yield a tangible and historically appreciating asset. Do the math for your situation...I think mine is quite simple. I made out really well by buying a home that I can easily afford and pay off quickly. Buying a 300k house today...might not be as great of a play as what I was able to do.

I wouldn't be keen to buy a place right now as I think a correction is coming to real estate....but if the correction happens in the near term, I would recommend this person get a house and a mortgage, but buy a house that is easily affordable and pay if off fast. If you take a big mortgage and pay if off in 30 years....you will pay a heck of a lot for your home.


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## the-royal-mail (Dec 11, 2009)

Good point - the mortgage interest also needs to be factored in as one of those costs of home ownership, like the gas in the lawn mower and the new roof you bought last year. None of these maintenance costs can be recovered.

Renting has virtually no such maintenance costs. MG has it right. This is actually a very complicated scenario and remember that not all houses are created equal. A lot of houses depreciate, remember not everyone lives in the city.

I think everyone here understands that there are many, many variables to this discussion. I'm just a bit defensive when it comes to this due to the numerous people I've talked to in my life who have blindly and boldly insisted that I'm throwing away my money on rent, without considering my background and POV. They seem to see it as very black and white, renting = bad, buying = good. Not really aiming that as you, bh23, just a little more generally.


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## bh23 (Apr 16, 2010)

agreed...each scenario is unique. My scenario is a simple proof of how much better buying can be. I have seen and will see many others that are not as good...


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## the-royal-mail (Dec 11, 2009)

jared said:


> I completely agree with these sentiments... I live in downtown Calgary.. I pay a measly $750/month for renting a one-bedroom apartment. I could go out and buy an equivalent condo for say, $150,000 (theoretically)..
> 
> $175,000 x 4.0% estimated annual interest rate = $7,000 / 12 = $583/mo interest
> 
> ...


Not sure how I missed this before but....YES! That's the kind of math I use too. Although in my case my condo fees were $350 (and they were hardly the highest in the area) and taxes were about $150 a month. So we're at about $1100 using your math.

Better to continue spend your $750/month on rent and save save save. Then one day if the numbers change and make ownership more lucrative you'll have the cash for a down payment. The key is not to waste those savings on unessential consumer items. 

Oh and yes, anytime something breaks here in the apartment they are here the next day to repair. In my condo I would have been on the hook to do the repairs myself. Or pay someone to do them. $$$ again. The savings are significant.


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## Macro007 (Apr 18, 2010)

I get that there a benefits to both, but I'm stubborn, and I'm paying cash. Yes there will be a point where I am "throwing money away", and it would make financial sense to take out a mortgage. But it doesn't make sense to _ME_. I've been in debt for 8 years, living worse than paycheque to paycheque at times, and I won't do it again. Even if it is "good" debt.

I wouldn't even take out a loan at 5%, to invest at 6% even if it was guaranteed. Won't do it.

If I took a mortgage, I HAVE to pay it, no choice in the matter whereas saving each month is a choice
PLUS
I'll need another car
I'll pay more insurance
I'll pay more in gas
I'll pay more car maint.
I'll pay utilities
I'll pay for repairs
I'll pay property taxes
on and on...

biggest kicker...I'll have *half* my normal income if my partner goes back to school.

Reason being we're going to move to a smaller town, where I can get a job transfer, but she can't. 

MoneyGal, thanks for the advice on the repayment of the RRSP. It might make sense in my partners scenario, as her income will be very minimal.

Sampson, my numbers posted are not exact, don't bother with the math. The main reason for the increase is not due to a high ROI, but rather scheduled raises at work. (3 per year for 5 years, plus 1 per year after that), so as the years go on I'll be saving substantially more each month.

As for sticking to the budget, we've gone from earning less than $40k (combined) to over 80k and been able to stick to the same plan month after month...although she's pushing me to sock money away for a wedding fund...but that's what overtime is for. We both get double pay for it so when things come up we put in a few extra hours and everything balances out.


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## Macro007 (Apr 18, 2010)

I think what I'd like to do is the following:

Set-up a registered savings account (RRSP) that I can transfer funds to every two weeks to build up a lump sum, and then each $1000-$5000 lump sum, I would invest into registered GIC's. I think that this is the strategy I would be most comfortable with as I can count on the funds because there's no risk in these holdings.

ING is offering 1.2% registered savings, and their 1-5 year GIC's range from 1.25% to 3%.

Any suggestions on a better institute for the RRSP?

I've also been looking at Ally for the TFSA, and non-registered savings/GIC's. I would focus on those accounts after the RRSP's were capped. The TFSA savings is 2%, as is the non-registered savings account. They also offer GIC rates for 1-5 years ranging from 2% to 3.8%

Of course I'd have to keep a basic account open somewhere so I could actually have access to my money, so I'll probably just keep my account open at RBC.

Thoughts?


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## Oldroe (Sep 18, 2009)

Ing is a good place to accumulate money because of the no fee structure.


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## HappyCat (Apr 27, 2010)

Sounds like you have a bunch of HUGE goals! Kudos to you for wanting to better your life and your financial outlook.

My only suggestion is that you consult a CPA or other financial adviser before making any sort of drastic moves. And always, always, ALWAYS take into consideration random spending -- which will happen no matter what. Just a few weeks back, I didn't see myself purchasing Masters Tickets. It happened and I'm a few hundred bucks short of where I personally thought I would be.


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