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Discussion Starter #1
Hi all,

I'm looking for some advice on how to make sure I start off my financial journey on the right foot. I graduated about 2 years ago and have worked hard to save money by living at home. I'm looking to move out next year (spring/summer) in the KW area.

Some basic info:
Salary: $70k
Savings: $55k (ING savings acct)

Investments (80/20 split of equity/bonds in index funds)
RRSPs: $13k
TFSA: $5k
Non-registered: $12k
Monthly investment purchases: 28% of gross income

I'm debating whether I should look to rent or buy when I move out. I'm skeptical of buying a house (around $250k in KW), because it would require me to reduce my recurring investment purchases (plus the potential instability in the housing market). I'd like to live in a nice place, so it would be around $1000-1100/mo for rent. I could look at buying a condo (monthly cost not much more than renting), but I'd worry that I would not want to live there long enough to make it worth all the fees when I need to sell it.

I know the early years can have a big impact on my financial future, so I look forward to any advice that you can share. I think one of the things I really struggle with is trying to balance saving for the future with living for today. Currently, a large part of me just wants to invest like crazy and accumulate a huge sum of money, but I wonder if later in life I won't regret spending more when I was young.

Thanks.
 

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I have mentioned this before, but it bears repeating. In the near term, I wouldn't worry about saving for retirement. I see a lot of plans, and believe me, most individuals don't start to obsess about saving until well into mid-career. In the near term, you have a family to raise, house to purchase (mortgage to attend to), and a career to feed and water.

Most individuals don't get excited about saving for retirement until well into their forties. Chill out.
 

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Steve41's advice isn't too helpful. Looking at the information you provide, it would seem that moving out is a no-brainer if you wish to do so considering your $70K income. There is nothing wrong with getting an apartment on your own or sharing it with a roommate if you don't feel ready to purchase a house or condo outright. Some people are so dead set against renting... but I think it would be a fine option for a couple of years. It provides you with the mobility you may need, plenty of time to look at purchasing if that suits you, and enough lead time to amass a tidy down payment.

Anyhow, according to Steve41, "most people" don't start to look at retirement savings until their forties or later. These are the older people serving you at Wal-Mart. If you don't want to be like "most people", I think you should keep up your savings habit. But for now, a logical first step would be to rent, with or without roommates, and decide later what you would like to commit to. It does seem that you are building a nice nest egg, and you should be way ahead of "most people" in a few years.
 

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what an appealing letter, from a youngster who's done just about everything right.

others will write to you about the real estate i'm sure.

don't mean to pry, but you did post up some figures. If i understand correctly you're currently keeping 55k in cash-equivalent in an ING savings account plus about 30k distributed among rrsp, tfsa & non-registered accounts, where you have chosen index funds offering 80% equity and the rest bonds.

so my thought is that the cash proportion is somewhat high for a young person. Altogether, you are presently the proud owner of about 85k, but only 24k is invested in equities. A proportion of at least 50% equities might be more appropriate. Many would think the equity component could be higher because of the young age.

there's a quality to your final sentence that suggests you're perhaps one of those lucky ones who get it about investing when they are relatively young. They're quickly comfortable with all kinds of instruments. Stocks, bonds, options, currencies, they learn the language easily and they feel at home. For example, i recently encountered a young man who'd just graduated in economics. His older brother had helped orient him at a sophisticated level, beginning when the youth was only 15 or 16. At 24, he had a formidable stock portfolio consisting mostly of well-chosen, smart but frankly speculative issues. His reasons for each pick were cool, detached, analytical, canny. I had a feeling this young man will be a millionnaire by 30.

so if you have this talent i hope you'll use it, not lose it. It'll make your house easier to buy, your children easier to educate and even your vacations & travel more exotic and adventuresome along the way.
 

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Discussion Starter #5
Thanks for the advice so far, I appreciate it.

To clarify with regards to humble_pie's comment, I guess I was considering the cash savings as separate from my investments, thinking that it would be used for a down payment or something like that in the next few years (even if I was to rent for a while). You do make a good point though - if I'm not buying a house right away, I might want to look at rolling some of it into other investments. It's not much of an issue with the low interest rates now, but it's not very tax efficient to keep it there.
 

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DrStan has very good advice.

Rent for a while, get your independence, and stay mobile. Mobility in youth can be very valuable. If you've got a chum across town, sharing a 2-bed for a bit could be both a lot of fun, and cheap.

And keep saving.
 

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"....buying a condo (monthly cost not much more than renting)". I would look at those numbers again, seriously doubt it. Are you forgetting the interest costs? or the monthly assessments? or the property tax?
 

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Another way to think about these issues is from lifecycle and human capital theory.

The human capital perspective holds that when you are young, your largest asset is your human capital, which can only be monetized slowly over years.

From that perspective, it makes little sense to take your financial capital (a relatively small part of your overall balance sheet, human capital included) and invest it in a large, illiquid, undiversified asset class such as a principal residence.

Instead, you should wait until you have a significant downpayment, so that you aren't overallocated to real estate and human capital from a holistic balance sheet point of view.

Just food for thought. (And if real estate "always goes up," you can capture that growth by investing in REITs.)
 

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I bought a condo in the mid 90's for $97k.,
I paid it off as fast a I could.
Not only have I avoided paying rent all those years , the value
of the property has almost tripled.
That was near the bottom of the market so today it would be harder
to get those type of results.
Had I rented and invested that money, who knows what might have happened.
Maybe I would have done what many others did, buy Nortel stock :D
 

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Discussion Starter #11
"....buying a condo (monthly cost not much more than renting)". I would look at those numbers again, seriously doubt it. Are you forgetting the interest costs? or the monthly assessments? or the property tax?
A condo would be similar to renting because of the cash as a down payment (right not the cash isn't really earning anything). In addition, real estate in KW isn't as expensive as Toronto and other areas. But I don't like condos much because of the risks of short-term ownership (plus others make good points about mobility with renting).

I guess the question now is what to do with the cash in the meantime. Since I will likely want it for a down payment in the medium term (maybe 2-5 years), I don't know if I really want to put much of it into equity. I could put some into my RRSP as fixed income for the home buyer's plan, but I don't have that much RRSP contribution space available. I just don't like the tax consequences of holding that much cash.
 

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You will probably find your cash is eaten up much more quickly over the next couple of years than you have experienced in the past. Correct me if I am wrong, but much of your growth in wealth has likely been fueled by low expenses (living at home with your parents), and tuition credits applied against any taxes owing? In the next couple of years, your tuition credits will run out and you will have to start paying taxes, and if you add a home, food costs, etc... that come from living on your own, you will quickly have to adjust to an income stream that is much less than you have been used to.

There is a lot of value to moving out and finally living on your own, but keep in mind that each additional year you stay with your parents, can make a huge difference to the amount of your savings, while perhaps not so much to quality of life. Whichever way you go, I would recommend to stay as liquid as possible. Being tied down to a house is not the way to go.

I was in pretty much the same scenario as you not too long ago (except a lot less money saved) and I bought a house, failing to realize that I did not want all the additional maintenance and upkeep that comes with it. So I was stuck with a "fixer upper" that I was never going to fix. I loved the freedom having my own house and being able to turn music up, having lots of space for the big TV and sound system. But I hated mowing the lawn, taking out the trash early in the morning so wild animals don't get at it, shovelling snow, dealing with neighbors leaving trash on your lawn, repairs, and all the rest of it. To be fair, laundry, parking, heating/Air Conditioning, noise levels, and shopping become more difficult when living in an apartment.

Like others have commented, consider whether you plan to keep you current job or live in the same town forever or not. Probably earning 70k straight out of school, you would probably not think twice of leaving for a better job, but eventually you will. The more you advance your career, the more important it is to be mobile and keep yourself open to advancement opportunities. In my opinion, being stuck with a house that you may have to sell on short notice is not a good idea at this stage in life.

Once you have a significant other living with you, he/she will limit your options, and you will have to compromise with him/her on your home (the first of many sacrifices in the name of love). So I recommend to keep your options open while you still can and not become too attached to your first home.
 

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Steve and DrStan both make very good points that have merit.

I think you shouldn't be overly focused on your retirement but you should be saving something. Remember you are young and you are probably way ahead of others in your position.

What might be a good compromise is build a good initial nest egg (maybe 50K in rrsp) and then take a break and enjoy your youth and the fact that you are making a very good living at a young age. By doing this you at least have some money that's working and growing while you enjoy life. Trust me when I say this but life has a tendency to change very quickly. Before you know it you're married with kids and your focus changes. Live a little now so you won't regret it later.

As for the house. I agree with staying mobile. Your only 2 years out of school so don't get tied down with a mortgage. You don't now where new opportunities will come up and you should be in a position to act quickly to take advantage of them.
 

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Discussion Starter #14
Good point Max - I do owe most of what I've accumulated to low expenses while living at home (I do pay some money to my parents, but nothing compared to what I would be paying on my own). I know I could continue to save even more by continuing to stay at home, but I feel like I've reached a point where I need to experience the independence of living on my own. Plus, I don't want to get too used to this unrealistic lifestyle of low expenses (and turn into one of those 30 years old living at home and driving a BMW :)).

I think there's definitely a balance to achieve between saving for the future and living for today. I know that if I focus too much on saving/investing now, I'll have a hard time keeping it up later in life, and will probably regret it. At the same time I don't want to save too little now, and get used to the extra income and have to ramp up savings later in life. Ideally, I'd like to be able to find the right amount that I can consistently save throughout my life.

Currently I've decided to invest 28% of my gross income for long-term savings. This is based on maxing out my RRSPs, then adding another 10% as per The Wealthy Barber type of plan. My idea is that by doing this I'll have enough in my RRSPs to generate a good stream of income later in life, and then I can use the other 10% investments (in TFSA and non-registered) for large one-time purchases (such as cars, vacations, etc.). Ideally I'd like to be able to keep this up, using whatever is left for buying a house and other life expenses, but I don't know how realistic this is going to be in the future.
 

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I bought a condo in the mid 90's for $97k.,
I paid it off as fast a I could.
Not only have I avoided paying rent all those years , the value
of the property has almost tripled.
That was near the bottom of the market so today it would be harder
to get those type of results.
Had I rented and invested that money, who knows what might have happened.
Maybe I would have done what many others did, buy Nortel stock :D
Obviously, you are very bright and intelligent and are doing just great with your money. But just to address your point here, I don't think anyone here would argue in real estate being a great long term investment, and I think everyone should make it their goal. But "not wasting rent" is not a good reason for someone who is broke and in debt to take that on. Does this mean NEVER buy a home, or waste money on rent for 10-20 years..heck no. But I would advise people to just go crazy on debt reduction for a year or 2 (that seems to be the average) then buy. If you bought that house in say 1997 instead of 1995, how much difference would that have made? And just to be clear...I am NOT saying you should not have bought when you did, I don't know your situation, this comment is not against you specifically, this is for anyone else reading who are considering taking on a mountain that "feels" like a mere molehill. This is what causes foreclosures.
 
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