The Price of Freedom - 5 Tips for Saving Up So You Can Move Out
In Canada, more than one in three people aged 20-34 live with their parents. In urban centres like the Greater Toronto Area, that number is much higher – closer to 50%.
If you’re in the “still lives at home” category, chances are you don’t want to stay forever. The freedom of living on your own is alluring, but the price tag is high. Especially if you want to buy your own home, you’ll need to save tens of thousands of dollars for a down payment. How do you even get started?
Whether your dream is to rent or buy, or just get out of there ASAP, here are some tips to help you save up, so you can move out.
Set your goal
The first place to start with savings is to set a goal. Whether you want to rent an apartment or buy a home, saving is a lot easier if you know how much money you need.
If you’re planning to rent you might only need to save up enough money for a deposit, and to buy the things you need for an apartment that you never thought of while you were living at home. (You’ll never believe how many trips you’ll make to the dollar store for things like shower curtain rings).
If you’re planning to buy a home, you’ll need enough money saved to cover items for your home, but also enough to pay for a down payment and closing costs. You can look at real estate listings in your area and use a mortgage payment calculator to determine how much you’ll need for a down payment. Estimate an additional 1.5% of the home’s purchase price to pay for things like lawyers and adjustments.
Be warned: if your goal is to save extra so you can afford a higher monthly payment, you’re going to find yourself in trouble. Unless you have a very clear plan as to how you’ll increase your income, your savings will eventually run out and you’ll have to choose between taking on debt and giving up your home.
Save like you’re paying a mortgage
Once you have a good idea of how much money you’ll need to save up to move out, it’s time to start saving.
An effective strategy is to save as if you’re paying a mortgage or rent already. This strategy will not only help you reach your goal faster, it will also give you a good idea of what your finances will look like once you live on your own.
If you’re planning to rent, figure out how much you need to save by looking at rental listings in the area where you want to live.
If you’re planning to buy, you can look at real estate listings and use a mortgage calculator to determine your monthly payment. When you own a home, you’ll also need to pay for property taxes, utilities, and maintenance. Add those to your monthly savings amount.
Saving this much money each month might look daunting, but it reflects the reality of your budget after you move out. If you find it’s too difficult to keep up with such a large amount, you might need to adjust your plans for where you want to live. It’s better to go through this while you’re still living at home than when you’re out on your own.
Use a high interest savings account
If you’re still using the savings account your parents set you up with when you were a kid, you’re probably being ripped off.
Most of the savings accounts offered by the Big Five banks pay very little interest, and some charge ridiculously high transaction fees. There are some high interest savings accounts in Canada, however, that do quite the opposite. Do yourself a favour and open a high interest savings account that pays decent interest and that won’t gobble up your savings with transaction fees.
Currently, the best savings account interest rate in the market is 2.40%. If you save $1,200 per month for two years, your account will grow to be worth $29,531.16. That’s $716 more than you’d have saving the same amount in a big bank’s savings account that pays 0.05% interest. It really pays to save in the right account.
Take advantage of the home buyers’ plan
This plan is only for first-time homebuyers, so unfortunately this strategy won’t work if you’re planning to rent or if you aren’t committed to purchasing a home.
The home buyer’s plan (HBP) allows first-time homebuyers to withdraw up to $25,000 from their registered retirement savings plan (RRSP), without penalty, to buy a home.
The beauty of this plan is that it allows you to save in an RRSP and get all the benefits that go along with it, not the least of which is a tax refund for your contributions. You can contribute money to your RRSP, get a large tax refund for doing so, and reinvest that money into your savings.
The downside to this plan is that you have to pay the money you withdraw from your RRSP back over a period of 15 years.
Max out your tax-free savings account
A good option for would-be buyers and renters alike, the tax free savings account (TFSA) is a tax shelter that lets you invest money without having to pay tax on the interest you earn. You can withdraw money at any time, so this is an ideal tool to use if the rules pertaining to RRSPs are too restrictive.
Despite the name, a TFSA can hold all kinds of investments, so you’re not limited to just savings accounts here.
There are contribution limits when it comes to TFSAs, but you start collecting contribution room from the year you turn 18.
Freedom is on the horizon
Saving for your first home is an exciting journey, and one that can be highly rewarding. With some discipline and planning, and the right tools, you can achieve your goal of moving out.
– Jordan Lavin for Ratehub.ca