The reader mail just keep rolling in, if I haven't gotten to your email question yet, I will get to you soon. Today's story is from Sean, a Vancouver BC native. From his email, it seems that he was a free money spender in his younger years (like a lot of us). However, Sean at 31 years old, is now starting to turn his financial picture around. Here are the details:
At 31 years old I am admittedly entering the multi-million dollar march a little late, though hopefully there are a few tricks I can learn to maximize my efforts going forward and ending in a decent retirement. I realize you are not a professional advisor, nonetheless I would appreciate your opinion(s) and the opinions of your readers with regards to defining and creating a winning strategy in my finance area. Here is a little about me:
- $54,000 gross salary (net $2900/mo)
- Only debt is a 1 month old $3,000 personal loan @ 11% w/ $276 pmt (to put something recent on my bureau)
- Total monthly expenses are $1,596 (inc. loan pmt & rent)
- Mastercard with $1,500 limit @ $0 balance (Secured by 2yr Term deposit &earns 3.5%)
- No RRSP w/ $48,000 contr. limit
- No cash savings or investments
- FICO score @ 5708.
- Single / no dependants
- have left the party / excessive spending habits scene and am focused ondoing what it takes
- maximize savings & interest on savings
- increase FICO score
- maximize tax returns for re-investment
- position myself for 20% down payment on a mortgage (pre-qualified for $220k)
- would like to use the Smith Manuever
My thoughts on direction; start moving my total net monthly income ($2900) into a high interest savings account @ 4+% to earn the interest on all of my income as much as possible. Use my mastercard for all monthly expenses, making 1 payment ($1,500 / month) on my CC when the bill comes which should get me off to a good start on raising my FICO score (so I'm told). Maximize my RRSP /yr and invest returns into the RRSP. Reading the posts on you're site and others have uncovered many strategies that I can go with, though I really don't know much about financial matters and am quite overwhelmed by it all as the longer I wait to start…the less I have at retirement.
What would you do going forward if you were me?
Sean, I'd like to start by saying congrats on getting your financial matters in order. It is never too late to start optimizing your finances. It seems that you have the right idea, but i'll add a couple more.
I see that you're starting to improve your credit score with personal loans, which should help improve your score in a hurry. However, time and paying your Mastercard every month will also do the trick.
Unless you have a personal line of credit for an emergency fund, you should have some money put away to cover your expenses for hard times. Check out my article on Emergency Funds – How Much is Enough?
After your emergency fund is established, I would forget about any other savings and, max out that RRSP of yours. The reason being is that you plan on owning a home one day, and you can use the RRSP Home Buyers Plan to help you achieve this. Under the HBP, each spouse can put $20k towards the down payment of their first home. The great thing about the RRSP is that not only do you get tax deferred compounding of your investments, you'll get a significant tax refund that you can redeposit into the RRSP.
Once you get the $20k saved in your RRSP, you can either continue putting money in there, OR, start a non-registered account. Whatever the case, keep yourself in the habit of saving and your financial picture will remain bright.
A concern of mine is, what kind of home can you purchase in Vancouver, BC for $220,000? From what I hear, $450,000 buys you a starter home. Even if that's the case, I wouldn't feel comfortable with a $220k mortgage on $50k salary. For me, the maximum mortgage I would ever consider is 2 x gross salary. Although, I realize that I sometimes tend to be conservative when it comes to non-deductible debt. Perhaps you should consider staying as a renter for a few more years, while building up your RRSP nest egg and income. However, the whole picture changes with a common law and two incomes.
So this is what I would do:
- Continue saving like crazy.
- Continue paying ALL of your bills on time if not early. This alone will increase your credit significantly.
- Build an emergency fund in a high interest rate savings account.
- After the emergency fund is established, put all savings, tax refunds, and extra money into your RRSP. This will give you an option of using the HBP in the next few years.
- Continue living below your means.
That's my take on Sean's situation. As stated in his email, he wants your opinion also.
Any financial advice that I give should be taken as opinion only and not as professional financial advice