Winnipeg Free Press - PRINT EDITION

Money Makeover: The down-payment plan

Couple needs help finding room in budget to save up for first home

  • Print

Corbin and Shirley have a simple plan.

They want to save enough for a down payment on a home in the next few years.

But the problem is figuring out how to come up with the money.

"We live paycheque to paycheque," says Shirley, in her mid-20s, working in public relations earning about $45,000 a year. "We want to eventually get a house in the next two to three years, but we really have no savings for that."

Corbin does have some savings, about $8,000 left over from an RESP for school.

"I wasn't too sure what to do with it, so it's sitting in savings," says the store manager, also earning about $45,000 a year.

 

The couple both have car loans. Corbin owes about $22,000 while Shirley only owes about $3,400. Shirley also has an ongoing credit card balance of about $300.

Both have work pensions and Shirley has about $1,900 in RRSPs -- money amassed from a previous job.

Shirley says they both know they spend a little more freely than they should. She randomly spends about $400 a month on her credit card. Dinners and drinks cost them about $300 a month and vacations cost about $6,000 a year.

'With convenient payment options like debit and credit cards, it is all too easy to spend more that you earn'

--financial adviser Sara Kushnir

But knowing they have some spending fat to trim is one thing. Actually making cuts with a plan to save for a goal is another, so they're hoping a little guidance will set them on the right course.

"We want to save up," she says. "That's where we need help."

Financial adviser with Assiniboine Credit Union Sara Kushnir says living paycheque to paycheque isn't necessarily a bad situation at their stage, so long as they are automatically deducting savings from every paycheque for the goals that matter to them.

"Every dollar should have its place and should be budgeted for -- within reason," she says.

In most cases, trying to save money in their bank accounts, used to pay for regular expenses, isn't an effective savings plan. "Setting up separate savings accounts for specific areas of expenses can often be helpful."

They should consider opening Tax-Free Savings Accounts (TFSAs) for their short- and long-term savings needs so their money can grow, tax-free.

Of course the first step is finding money to save. Kushnir says they have a small monthly surplus based on their estimates of expenses. But they'll need much more than about $75 a month to gain any ground toward their goal. They need to keep track of their expenses more carefully than they have and figure out how their money is spent every month. On the plus side, if they often use plastic -- credit and debit cards -- to make purchases, tracking costs should be easy; just examine the statements.

But plastic has its downsides.

"With convenient payment options like debit and credit cards, it is all too easy to spend more that you earn," she says.

Because Shirley has an ongoing credit card balance, limiting credit card use and sticking to cash when shopping -- which limits the likelihood she'll overspend -- might save her money in the long run.

They can also find plenty of free budgeting tools online to help them mind their spending, but the low-tech pencil-and-paper method will do the job just as well, Kushnir says.

Once they sit down and tackle the numbers, it's likely they'll find enough savings every month to develop an effective savings plan for a down payment on a home.

As it stands, Kushnir says Corbin and Shirley might consider cutting costs like travel, which would save them $500 a month. Diverting this money into savings alone would have them house hunting in three years.

By then, they will have saved $18,000 -- likely enough for a five per cent down payment on a home with a little extra left for closing and other costs associated with a home purchase.

While setting aside $500 a month may seem like an immense sacrifice, Shirley and Corbin don't have to eliminate vacations altogether for the next few years.

They can find savings in other areas so they can take holidays -- only the vacations will be a little more modest than in the past.

For example, they spend $300 a month on dinners and drinks, so a $100 reduction in that cost would provide them with a $1,200 vacation fund every year.

They'll also find more savings once they eliminate their debts.

In fact, Shirley should pay off her credit card balance even before they start saving for a home. This will start them off on the right path -- and save her $700 in interest costs over three years.

Although they already have $8,000 in savings -- which is money that could be used for their down payment, putting them in a home sooner -- Kushnir says this sum should serve as an emergency fund, providing about two months' worth of their living expenses.

If they want to reach their goal sooner, she says Shirley and Corbin could likely cut costs in other areas. For instance, they have a Netflix account and pay $151 a month for cable. They could keep the Netflix account and cut cable, saving more than $1,800 a year. Alternatively, they could use those savings for long-term goals, such as retirement.

"By eliminating the $151 cable payment, Corbin could begin to save $100 in an RSP a month and $50 toward building up the emergency fund," she says. "At a six per cent rate of return, this will grow to about $150,000 before inflation by age 65."

Corbin would likely need more funds than that to retire, considering $150,000 will be worth $75,000 in today's dollars after inflation.

"But this is a representation of what a small of amount of money can do."

They could even use their RRSP to save for their home instead of the TFSA, using the Home Buyers' Plan, which would allow them to borrow cash from their RRSP, tax-free, for a down payment.

Like a TFSA, their money would grow tax-free until they need it, but more importantly, their contributions to the RRSP will be tax deductible.

"At $45,000 gross income, the tax savings on $3,000 a year of contributions may be $1,100," she says.

They could then contribute the refund into their RRSPs, which would increase their savings rate and get them to their goal sooner.

The Home Buyers' Plan does have a hitch. The zero-interest loan must be paid back to the RRSP within 15 years.

It's a big commitment for some, Kushnir says. But if Shirley and Corbin cultivate good savings habits over the next three years, they should have little difficulty paying back the RRSP loan afterward.

And while this new-found focus on saving can feel like financial drudgery, it doesn't mean they have to give up the good things in life.

"Everyone deserves to have fun with their hard-earned money," Kushnir says. "However, the 'needs' versus the 'wants' need to be identified and only then can they weed out the wants they can do without so they can be better off financially in the future."

Republished from the Winnipeg Free Press print edition June 29, 2013 B12

Fact Check

Fact Check

Have you found an error, or know of something we’ve missed in one of our stories?
Please use the form below and let us know.

* Required
  • Please post the headline of the story or the title of the video with the error.

  • Please post exactly what was wrong with the story.

  • Please indicate your source for the correct information.

  • Yes

    No

  • This will only be used to contact you if we have a question about your submission, it will not be used to identify you or be published.

  • Cancel

Having problems with the form?

Contact Us Directly
  • Print

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

Have Your Say

New to commenting? Check out our Frequently Asked Questions.

Have Your Say

Comments are open to Winnipeg Free Press print or e-edition subscribers only. why?

Have Your Say

Comments are open to Winnipeg Free Press Subscribers only. why?

The Winnipeg Free Press does not necessarily endorse any of the views posted. By submitting your comment, you agree to our Terms and Conditions. These terms were revised effective April 16, 2010.

letters

Make text: Larger | Smaller

LATEST VIDEO

Christmas Cheer Board hamper kickoff

View more like this

Photo Store Gallery

  • A pelican comes in for a landing Wednesday afternoon on the Red River at Lockport, Manitoba - Standup photo- June 27, 2012   (JOE BRYKSA / WINNIPEG FREE PRESS)
  • A nesting goose sits on the roof of GoodLife Fitness at 143 Nature Way near Kenaston as the morning sun comes up Wednesday morning- See Bryksa’s Goose a Day Photo- Day 07- Web crop-May 09, 2012   (JOE BRYKSA / WINNIPEG FREE PRESS)

View More Gallery Photos

About Martin Cash

Martin Cash joined the Free Press in 1987 as the paper’s business columnist.

He has spent two decades chronicling the city’s business affairs.

Martin won a citation of merit from the National Newspaper Awards in 2001 for his coverage of the strike and subsequent multi-million-dollar union settlement at the Versatile tractor plant. He has also received honours and awards for his work on agriculture and technology development in Manitoba.

Martin has written a coffee-table book about the commercial and industrial make-up of the city, called Winnipeg: A Prairie Portrait.

Martin Cash on Twitter: @martycash

martin.cash@freepress.mb.ca

Poll

Are you concerned about the death of a seal at the Assiniboine Park Zoo?

View Results

View Related Story

Ads by Google