Considering Vancouver is consistently ranked as the world’s most expensive city, Vancouverites could benefit from being a bit closer with their personal finances. If you missed Forward Finance, our event last Tuesday co-hosted with YWiB Vancouver sponsor, Tangerine Bank, you're in luck because we took notes! Nicole Wells, VP at Tangerine Bank, dished out very helpful tips for saving smart and what you need to consider when budgeting for a home.
Take stock of your debt and savings
If you have debt, do you have a strategy to pay it off? When you're in debt, it's intimidating to even think about how to handle it, but a strategy can be as simple as deciding how much money per month you can comfortably put towards paying it down, and calculating how many months it will take to zero it out. Then make sure to do it. All it takes is a recurring monthly transfer from your chequing account, and you can set that up easily online with most banks.
Are you contributing monthly to a savings or investment account? Hate to burst your bubble (no Vancouver housing market joke intended), but you need to be saving a reasonable chunk of change if you want to be down-payment ready! Whether you pay off all your debt before starting to save is up to you, but take a look at what you're paying in interest. Lots of times it will make sense to pay the debt off first.
TIP:It’s okay to save money and pay your debt down simultaneously. No one says you have to pay all your debt off first.
Identify small sacrifices from your living expenses
Want to boost your monthly savings? Consider everything you purchase on a daily basis. Which items are frivolous and when do you pull out your wallet even without thinking? If owning your own property (or buying a car or whatever your longer term >3-5+ year goal) is worth more than your morning breakfast, then ditch the nonfat, sugar-free vanilla lattes or breakfast croissants. Nicole also gave us an excellent piece of advice: “small sacrifices” are the key to stick to your savings plan. Saving can be like being on a diet: go cold turkey on something you truly love, and you’re likely to fail. So, if caffeine is something you literally can’t be without and a coffeemaker is foreign to you, taper back to 2-3 days per week or pick something that won't hurt so much.
TFSA vs RRSP
These are two “programs” with different rules. The money you put into a Tax-Free Savings Account is taxed today; you don't pay tax on it later on when you withdraw the funds. Money you put into an RRSP is not taxed today; the tax is deferred, meaning it's paid when the funds are withdrawn.
Which is best? It has to do with the tax bracket you’re in now the one you expect to be in when you take your money out. This means you need to think... When are you planning to purchase your home? If you’re in at a higher tax bracket today than you expect to be when you withdraw, an RRSP is your best bet. You will defer the tax payment until later and it will be taxed at your lower rate.
Time to buy!
Before you start looking at properties, know exactly what you can afford on a monthly basis and draw a big, fat, black line right there. Do not forget to include those one-time costs associated with: legal fees, home insurance, moving costs, and all other expenses associated with buying a home. These add up in a hurry, and they’re not insignificant.
Another reason not to stretch your wallet has to do with mortgage payments. A 5-year fixed rate mortgage is typical…but what happens after those 5 years? Interest rates go up and down, and once your 5-years is up, your mortgage is now subject to change. Unlucky for you if interest rates are higher than they once were. It can add a considerable amount to your monthly payment, and if you only squeezed by during the last 5-years, you can imagine how tough it will be. Tangerine recommends setting aside about 3 weeks equivalent of your salary for time when making payments is tight. TIP: A healthy monthly mortgage payment is roughly 20-25% of your monthly income.
When possible, take advantage of prepayment options. It can amount to saving tens of thousands of dollars over the life of your mortgage!
A huge thank-you to Nicole Wells and everyone from Tangerine Bank!
------------ DISCLAIMER: The above information is not intended for nor constitutes investment, financial, tax or legal advice from either Young Women in Business or Tangerine Bank, and should not relied upon for those or any other purposes. Finances are personal and everyone's circumstances, needs, and goals are different. Consult a financial advisor before making investments.