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Discussion Starter #1
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To maximize savings we are building our RRSP's up to the max $25k each (50k combined) which will be withdrawn and repaid in the years after we purchase our home.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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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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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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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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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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Discussion Starter #6
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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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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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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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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Discussion Starter #10
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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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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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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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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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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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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"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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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.
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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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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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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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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