Mill Day

Enough clucking from the wrinklies in steerage about their fat real estate gains, dividend torrents, thirsty underwear and dangerous conservative urgings. Welcome to Millennial Wednesday here at GreaterFool. Today let’s muse on some of the things the kids are worried about, which means the oldies can spend this valuable time washing their Def Leppard T-shirts and swilling Rogaine.

First up, Patrick the urban dude. “I participated in your various surveys, so I understand the majority of your audience is much older than myself. I’m a 26 year old business professional (CPA by trade, but now working as a strategy consultant) living in downtown Toronto, and making a better-than-average pre-tax salary of just north of $100,000 with no assets and roughly $45k in my TFSA,” he reveals.

Like many younger audience members of your blog, I am renting a place for $1,350, which is a very good deal for the area that I live in. I made the choice to move downtown when I had the option of living with my parents, so that I can take advantage of the downturn in the rental market. I hope to become a homeowner – hopefully – by the time i’m in my mid-30s (which to me sounds reasonably ambitious).

My questions: (1) For higher-than-average income earning younger adults, when is the right time to open up my RRSP? Should I be allocating a good chunk of my income to RRSPs instead to get some tax benefits this year?

(2) What is the best way to manage capital allocation for different goals? Right now I have a well-diversified self-managed TFSA account. I myself am confused as to what this is for (retirement?). Does it make sense to open up a TFSA/RRSP specifically for buying a home with a less risky portfolio (assuming I’ll cash out in ~10 years)? Otherwise I would have to take a big chunk of my saving in the one TFSA account to fund a house, which I realize opens up more contribution room, but not sure if there is a better way to plan out my finances. Writing this email in between meetings, so apologies for any confusion.

First, P, if you’re living downtown for thirteen hundred bucks a month, paying nothing for a car, commuting, property tax, condo fees or property maintenance and saving most of your salary, why stop? The moment you decide to become a real estate owner will immerse you in debt, immobility, recurring costs and (sadly) adulting. Enjoy this time. Use it to build. As you are.

Now, RRSPs are meaningful and much misunderstood by the moister class. These are tax-shifting vehicles more than retirement accounts. You can chunk 18% of your earned income in there, use that to reduce taxable income, grow the money without paying a cent to Justin (even if you like him) then suck it out cheaply during a year of sabbatical, layoff or transition. Moreover, it’s the perfect thing to feed if you do end up succumbing to house lust.

The Home Buyers’ Plan allows a $35,000 withdrawal from the RSP for a deposit. No tax. You need not start making repayments for two years. Then you have a long 15 years to put the money back into the fund (if you miss a year that portion is added to income). In the year of purchase ensure you make the max contribution at least 90 days before using the HBP, so you’ll also have a tax refund to spend on new appliances.

As for establishing a separate registered, low-risk, account for a real estate buy ten years away, bad idea. You do not want to be all in bonds or wussy funds – stay balanced. Roaring Twenties, remember?

Here’s Ann. Simple question.

I am a new Ontario teacher and would like to start investing my salary since I live with my parents and I refuse to enter the crazy condo game. I have about $25,000 so far, but will add 50k every year. How do you suggest doing this for a small amount like this?

Other than hooking you up with Patrick, the first thing to do is stuff your TFSA. Teachers have enviable DB pensions (defined benefit), which means a sizeable portion of pay is directed into that plan, reducing RRSP contribution room. Besides, if a teacher retires with a sizeable RSP, when it is eventually turned into a RRIF (after age 71) the forced income can push you into a higher tax bracket. Nasty outcome.

But a giant TFSA in retirement can pump out a steady stream of cash flaw and not a single dollar will be counted as taxable income. So, start there. Load up that sucker, then spill the extra income into a non-registered account (B&D of course). In retirement this will also provide tax-efficient income, thanks to dividends and capital gains. And are you paying your parents rent, Anne? Do it.

Now, Brian is 28, works in construction, and understands the incredible benefit of the MSU. “Your blog has changed my life!” he says. “I recommend it to everyone I meet who brings up financial talk.”

My partner took my advice (all from you) and in a year went from $10,000 debt to $9,000 in a TFSA and $3,000 that’s going in an RESP for our newborn. Thank you so much! I make 55-75k a year with a net worth now of 36k.

Jan is on mat leave – she makes 45k a year now but as her seniority in her union goes up it’s 100k+ a year in 6-8 years. We just had a baby boy and rent a basement suite outside Vancouver for $1,200. I see so many people in the emails you share grovel to you and say your advice has helped them and then they ask some dumb ass question about how can they work out buying this house they NEED.

I am not gonna ask you that. I want to know how to get my partner and I’s net worth to 250k! I was wondering if everyone at my age is getting these huge mortgages and overleveraging is it not the smarter thing to try and get an investment loan? Is it smart or worth the risk for my partner and I to try and get loans to stuff our TFSAs full right now and let the gains grow while we make the payments ? And will they loan us even half of what people get in a mortgage? Thank you for your time and devotion to guiding Canadians financially.

Don’t do it, Brian. Borrowing money to invest seems seductive, but the rate on a non-secured loan would be high and using the bank’s capital would just ratchet up the stress level, maybe encourage you to seek higher gains by absorbing more risk.

Steady work, good prospects, new baby, low rent, no debt, solid relationship – you are far wealthier at this moment than so many others your age who lose their way. Be proud.

About the picture: “This is Marley,” writes blog dog Peppy Sue. “She’s our 12-year old chocolate Lab, an independent, sweet girl who loves showing off her toys to friends and strangers alike. We sometimes refer to this as ‘babies on parade’. She is much loved and adds joy to every day.”