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Money Makeover: The down-payment plan

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

Hey there, time traveller!
This article was published 28/6/2013 (1515 days ago), so information in it may no longer be current.

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.

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

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.

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."

Read more by Martin Cash.


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