How We’re Saving $100,000 For A Down-Payment (P.S. I’m engaged!)

Greetings readers! I have some big news: My boyfriend proposed on September 21 and we’re engaged! He proposed after a 4km hike in the rocky mountains — and I used the car ride home to snapchat shots of the ring to all my cousins and call my parents.

me & my husband-to-be at my cousin's wedding this past July

me & my husband-to-be at my cousin’s wedding this past July

I’m still not used to saying “fiancé” but “my betrothed” confuses people and takes up too many characters on twitter.

We’re still deciding what kind of wedding we want — both of us have the same financial values, so it’s hard to think of spending tens of thousands of dollars on a single day. On the other hand, it’s hard for me to turn down the opportunity to throw a really big party ;) We haven’t set a date, but we’re thinking Fall 2015. Right now I’m in a rush to find a decent venue for that time. Many I’ve called area already booked for Sept/Oct next year, and I’m hesitant to go later because there will be snow on the ground.

I don’t know how much I’ll be blogging about wedding planning.

Firstly, because I know enough about the wedding industry to be an unwilling participant in much of the nonsense beyond a decent dinner and an open bar. I don’t care. I just don’t freaking care about bridesmaids and wedding colors and centrepieces and having a Say-Yes-To-The-Dress moment. This isn’t new: I’ve been singing this tune since 2011.

Secondly, because I’m so sick of reading “frugal wedding” posts (sorry recently married PF blog friends!) that I can’t justify contributing to the collection. There are hundreds, possibly thousands, of personal finance blogs that have done excellent posts on how to save money on your wedding. You don’t need me here, kids.

That said, I do have a lot to say about getting married, so I’ll be blogging about that soon.

We’ve been sharing finances since we moved in together, but now that we’ve committed to sharing a life together, we’re now sharing major financial goals. The first?

We’re saving six-figures for a down-payment on a home.

If you think that number is totally ridic, I don’t blame you. But I recently blogged about real estate prices where we live, and $100,000 is an appropriate sum to ensure we’re putting over 20% down. It’s important to pay for at least 20% of your home’s value in the down-payment to avoid insurance fees. By putting 20% down (or more, depending on the final purchase price), we’re ensuring a lower monthly payment, a more affordable mortgage, and starting with a strong equity stake in our first property.

How are we going to save such a large sum in 2-3 years?

The most obvious way is there’s two of us contributing, which means we each need to save $50,000. $50,000 is still a big number, but it’s not nearly as intimidating as $100K. Both my fiancé (god, still so weird to say that) and I are savers, so we’re not starting from scratch, and there are some tools to help us:

Each of us can withdraw up to $25,000 from our RRSPs under the first-time homebuyers plan to be used as a down-payment, giving us $50,000 together. I’ve set a personal goal to get my RRSPs to $100,000 by age 33, which means withdrawing $25,000 (that I have to pay back within 15 years) will not eviscerate my retirement accounts. Options like this are available all over the world, such as the Homestart first home buyers grant Perth, so it’s worthwhile to see what’s available where you live. It is very important to me NOT to have all my funds in one place, and that includes a home. Since I’ve already saved a significant amount of money in my RRSPs, my goal right now is rebalancing so I don’t have to sell more profitable investments, such as stocks, when I make the withdrawal under the first-time homebuyers plan. I’m hoping my RRSP withdrawal under the HBP will be primarily cash and a low-cost mutual fund, with the bulk of my retirement savings remaining in stocks and ETFs. I recently bought a 2-year GIC RRSP to plan for this.

This leaves only $25,000 each to save up outside of our RRSPs. Now, don’t get me wrong, $25,000 is not petty change, but with a 2 or 3 year timeframe it’s very manageable — mostly, again, because we’re not starting from zero. The TFSA contribution limit is currently at $31,000 with another $5,500 to be added for 2016. Since I withdrew a ton of money out of my TFSA over the past 1.5 years to go back to school for my MBA, I’m actually not sure if I’ll be able to max out my TFSA in the next 2-3 years since now I have to catch up and save up to the new contribution limits, but at least I can get over $25,000. Again, I am hesitant to sell profitable investments like stocks and ETFs or wipe out my Emergency Fund which I also keep in my TFSA, but it’s still the best account tax-wise for saving, so it’s better to put my down-payment fund money here than anywhere else.

When we buy a house and how much we put down will depend on a lot more than just saving up $100,000 — such as market fluctuations, interest rate changes, and even what city we live in (I think we’ll stay in Calgary, but I’d be open to moving to another major Canadian city if our jobs took us there). In the meantime, saving now means being prepared to take advantage of opportunities later.

What are your thoughts on our $100,000 down-payment? How much did you save for your first home? What are your strategies for putting money away?

Creating a GIC money mill in my Emergency Fund

I’ve developed a somewhat bizarre, somewhat creative, I think effective savings strategy for my Emergency Fund.

When I finally managed to find a summer MBA internship, the full-time income let me catch up on my finances. Combined with income from freelance writing and this blog, I started to inch ever closer to the income I enjoyed before returning to school to pursue my MBA. When the summer ended, my employer extended my contract for another month, and now as September closes, it’s been renewed again for October (I’ve asked not to continue past October though, so this gravy train is slowing down… but only so another one can get on its tracks, more on that later).

One of the first things I did with the extra cash was dump it into my TFSA, where I normally keep my emergency fund. Once the balanced tipped over $5,000 (my goal for this year), I started to wonder what the heck I was doing keeping that much cash on hand.

I hate leaving the $5,000 in cash of my emergency fund just sitting there earning 1.3% interest BUT I don’t want to invest money I might need to access immediately. I wondered:

is there a better place to save this money that leaves it accessible while earning a higher interest rate?

Sure is, kids. There sure is. I masterly contrived a bizarre and elaborate strategy I submitted to Mikhaila for approval (always good to have best friends that are also personal finance nerds) before implementing on September 1. Here’s what I’m doing:

1. Maintaining a “float” of $2,000 of cash in a tax-free savings account

 

2. Staggering a series of $1,000 3-year term GICs to mature quarterly beginning in 2017.

Why GICs? GIC stands for Guaranteed Investment Certificate which is an investment vehicle that traditionally pays higher interest than a savings account, but only if you don’t withdraw the money before the end of the term. The terms vary — anywhere from months to years — and the interest rates very with the term, with higher interests typically being offered for longer terms.

Tangerine offers some of the best interest rates on GICs available. You can sign up for an account using my Orange Key 32251507S1 and receive a $50 referral bonus. 

The GIC I bought pays an interest rate of 1.9%, which over its 3 year term, pays more interest than the same amount of money would earn in a savings account:

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comparison of how much interest $1,000 will earn in a 1.9% GIC vs. a 1.3% savings account over a period of 3 years

I plan to purchase my next $1,000 3-year GIC on December 1st, and then another on March 1, 2015, and so on every 3 months for 2 years. The first one will mature on September 1, 2017 and the rest will come to term on a quarterly schedule after that for the following two years.

What’s the point of this nonsense?

Well, first of all, 32 year old me will probably not be vehemently opposed to getting $1,000 + interest deposited into her TFSA every quarter.

I already have more than 3/4’s of my financial assets invested in stocks and ETFs, which means I’m not locking up any significant portion of my savings. If you’re trying to aggressively grow wealth, I would not recommend GICs, but if you already have a good chunk of change working hard for you in the stock market, a super secure investment might be just the balance you’re looking for.

Breaking a GIC and forfeiting the interest is just painful enough to deter someone like me who loves to raid her TFSA for this, that, and whatever. Money in GICs is less accessible, which means I can’t borrow from myself to cover an expense or a splurge then pay it back later. The money is locked up, and it’s gotta stay there!

The 3-year term is short enough that if interest rates do go up (they’ll go up someday right?), I’ll be investing regularly enough to catch it. If interest rates drop even further, I’ll have caught rates where they are now with some of my funds, ensuring a higher return than what the rest of my money is earning.

The $2,000 cash float in the savings account is a decent amount for quick fixes: a plane ticket to Salt Lake City to see my parents, a replacement phone if I smash mine or lose it, or almost 2 months of essential expenses (as you know, I contribute $1,250 per month to the joint chequing account I share with my boyfriend to cover my half of our shared expenses).

If I need more than $2,000 to cover an emergency, I can break one of the GICs. Because the GICs will be split in $1,000 increments, I can opt to break one (or two, as needed) of the GICs. This is a better option than had I dumped all my funds into a single GIC — if I only need $700 it’s a real shame to break a $5,000+ GIC for it!

*Note: When you break a GIC, you get back your money but you lose the higher interest rate. Sometimes you get zero interest, or you get interest at an even lower rate than a typical savings account.

Interested in trying this yourself? You only need to save $83 per week

Simply transfer $83 every Friday to a savings account and let it build up. Every 3 months, use the money (which has been earning interest too!) to buy a GIC. 

It will take two full years of quarterly investing to tie $8,000 up in $1,000 GICs — which means the first one will mature only 12 months after I put the last one away. I bought the first one at an interest rate of 1.9%, which means it will pay out $58 in interest at its maturity, but Tangerine updates your interest every day so you can see its current value anytime you log on:

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snapshot from September 26th

The Result In Tabular Form

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click to embiggen

The best perk of this strategy? I can change my mind! Because I’m buying GICs every 3 months, I can stop anytime and switch gears.

Lastly, the money doesn’t have to be for emergencies. I like to think that 3 years from now, I’ll be riding on 3 more years of improving my finances and I’ll need $1,000 (or $8,000) even less than I do now, but you never know. In any case, I’ll be able to keep the money as emergency savings OR use it towards…

If there’s anything I’ve learned from being a personal finance blogger, it’s that there will be no shortage of things I want to do with my money.

If you looked closely at the table, you may have noticed this savings strategy will save me nearly $750 above my $10,000 EF goal. This number could change depending how interest rates change over the next 2 years, but in any case it looks like I’m over-saving. If I’m adamant of sticking as close to $10,000 as possibly, I can simply opt to only deposit $320 in my last GIC.

$9,000 + $320 = $10,000 

No, really. Here’s how:

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I don’t think I will buy a $320 GIC, but I might opt for two $700 GICs in March and June 2015. After my convoluted internship hunt, I know finding a job after graduation might take some time, so I might want to tone down aggressive savings plans at this time:

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Having some flexibility in any plan makes it easier to stick to, and saving strategies are no different.

Thoughts on my bizarre EF money mill strategy? How do you maximize the interest you earn on liquid cash? What are your emergency fund goals?

Setting Financial Goals & Making a Plan (simple spreadsheet included!)

Setting reasonable goals is an important part of financial planning. However, many people struggle with determining what constitutes as “reasonable” and end up with stupid goals instead. We all have a tendency to dream big without actually planning or executing big, but there’s a way to stop setting yourself up for failure. I find shorter timelines are the answer to making and achieving goals. A short timeline necessitates a reasonable goal as well as provides a sense of urgency.

Below is a chart I regularly use in my own financial goal setting:

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Because I’m often managing multiple goals, I like to track them in one place so I know how much reaching for all of them will cost me — otherwise it’s so easy to think “I’m only saving $50 for this per month!” but if you’re doing it for 6 different goals you might end up feeling financially strapped.

Want the table for yourself?

I made the table using NUMBERS for Mac, but wordpress is currently not letting me upload the document. However…

Click here to download the EXCEL version!

Now I’ll walk you through it. The first thing you want to do is put in what you’re saving for, the interest/return rate on that account, what you currently have saved (it’s ok to set to $0!), and how much you plan to contribute per month.

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From my example you can see I’m starting with $6,000 and plan to save $604 per month (note: not real numbers!). The table will auto-populate with the data changes based on your inputs, but we’ll revisit that in a sec. The next step is to set your goals for each account by inputing them at the bottom of the table:

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Now the table might be doing wonky things based on how I’ve manipulated the formulas in each cell. Here’s what’s happening:

If you’re not saving enough each month for one of your goals, the “gap” cell will turn red and display the amount you’re short of this goal. In this example, I set the monthly saving of the Emergency fund to $80 a month, and now there’s a $25 gap between my goal and the amount I will actually finish with at the end of 24 months:

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$80/mo is not enough to save in order to meet my goal of having $3,000 in my emergency fund at the end of two years, so let’s say I increase my savings rate to $82/mo by changing the monthly contribution at the top of the table:

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Two things happen as a result: the number in the Gap row is now green, indicating that I’ve over-saved by $23 and some of the cells in that column have turned green:

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From the green-colored cells I can see that I’ll have met my goal. Always nice to be ahead of schedule instead of behind!

If I want to use this table for tracking my savings as well as planning, I edit the values in the appropriate cell at the end of each month. For example, when I click on the cell for January, the formula is as follows:

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But if I actually had $1,100 in that account instead of the $1,083 the table predicted, I will change that and enter my value:

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The rest of the table will auto-populate with the new calculated values:

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This way, you can go in to the table at the end of every month and enter in your new value and it will update the rest of the cells accordingly, and you’ll be able to see right away if you’re on track, behind or ahead of schedule — and you can adjust your monthly contribution accordingly.

Happy Saving!

Saving $100,000 in my RRSP by Age 33

Now that I’m employed full-time again, I’ve revisited some goal setting in my savings. One of my main focuses (which seems to be intensifying as I’m getting older!) is saving for retirement. I like accumulating lots of retirement savings, not just for the security in my future old age, but also because of options like the First-Time Homebuyer’s Plan, which would let me withdraw up to $25,000 from my RRSPs for a down-payment on a home. Still, the primary goal of my retirement savings is net-worth building. These are long-term investments that I don’t plan to withdraw from for decades, but make me happy now to see a big balance on my personal net worth sheet!

Because my income is primarily from blogging and now a summer internship, I’m still not totally sure what my total income will be for this year, but I’m guessing it will not be high enough to be favourable tax-wise to contribute to my RRSPs. Consequently, I’m directing my savings to my TFSA, even though in my mind it’s still ear-marked for retirement. I can always transfer the extra savings from the TFSA to RRSP if I need the tax advantages in future years and/or continue to contribute a little bit to my RRSPs and claim the deduction later. My primary goal in the next 2 years is to max out my TFSA, and then focus on maxing out my RRSP.

I would like to have saved at least $100,000 for retirement by age 33.

Originally, I thought age 35 but since I’ll be about half-way to $100K at age 30 after only saving for 5 years, it doesn’t seem reasonable to expect less savings success in the 5 years following my 30th birthday! I think age 33 is a short enough time away (5 years) to be challenging but still doable. I’m actually hoping to exceed it, but I don’t want to sacrifice other financial goals for it so middle ground at $100K seems just right! As far as past and current progress though, this fits in just right:

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my retirement savings plan & progress (low savings rate for age 27 & 28 because I’m currently an MBA student!)

I made the savings right slightly more aggressive in later years for 2 reasons: 1) it’s more likely than not my income will be higher as I age and 2) as I save more money, more interest & dividends are earned each year helping me reach my goals faster. I’m hoping when I finish school and work full-time as a salaried employee again, I find an employer with a retirement matching program of some sort too!

Currently my retirement savings is comprised of cash savings, a mutual fund, and stocks in this proportion:

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While I love investing in the stock market in order to get a higher return on my money, as years go by I will want to reduce the risk in my retirement assets so I’m expecting by age 33 the distribution will look more like this:

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I’m not sure if I’m totally on board with having $15,000 of cash and $20,000 in mutual funds lying around — right now I’m hungry for more risk than that. Furthermore, because the stocks have higher returns, that account is growing faster than my other investments and I can’t really wrap my head around saving more as cash rather than buying more stocks, but that’s what I’d need to do to get this pie. Nevertheless, designing a rough framework gives me a bit of an idea of where and how to save.

The main component of this plan is just being disciplined enough to grow my retirement savings by $12,000+ per year, and the main risk is market fluctuations since the bulk of my savings is in the stock market. 

Saving $100,000 for retirement by age 33 is attractive for a number of reasons, namely that banking six-figures so early gives the nest egg a number of decades to grow before I need to make any withdrawals.

$100,000 invested at age 33 returning 5% will grow to nearly $500,000 by age 65 without any further contributions.

As per usual, I’m always advocating shortcuts, and I can’t think of a better one than getting six-figures into your retirement savings in your early 30’s!

Your Wealth-Building Cheat Sheet

I know some how-to posts are tiresome for the PF community, but sometimes it’s important to share old information in new ways for readers who are just getting started on their journey to wealth. Some of my friends and acquaintances have mentioned my blog has encouraged them to start saving & investing, but still don’t really know where to get started or where they want to end up.

I’ve created some simple tables to act as a “cheat sheet” for what kind of savings you need and where to keep it, as well as what investment vehicles you should utilize.

What kind of savings you need + in what accounts

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Explanations:

Your Emergency Fund should represent 3-6 months of essential expenses. You should keep this in a TFSA or unregistered accounts since these will have no tax repercussions if you withdraw the money.

Your Retirement Savings can be kept in any type of account, but more likely than not it’s in your best interest to max out your TFSA, then max out your RRSP, and then use an unregistered account for retirement savings.

Savings for school or a down-payment on a home can be kept in any account, but your TFSA is the best option followed by an unregistered account. The least desirable option but an option nonetheless is your RRSP, which allows you to withdraw up to $20,000 for school or $25,000 for a down-payment on a home.

Savings for a wedding or any other savings such as for a vacation, car, etc. should be kept in a TFSA or unregistered account to avoid any taxes when you make a withdrawal.

What types of investment vehicles you should utilize for each of your savings goals

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Explanations:

Your Emergency Fund needs to be liquid and readily accessible, so it should ideally be kept as cash but is also safe as a GIC — though you forfeit the interest rate of the GIC if you withdraw the money before maturity.

Retirement savings should be diversified across all types of investments, with the focus on investments with slightly more risk (like stocks) in your 20’s and gradually becoming more heavily weighted to less risky investments (like mutual funds, GICs and cash) as you near retirement.

Savings for school or a down-payment on a home should be in cash or GIC, but mutual funds are also acceptable if you’re not planning to go back to school or buy a home until 2 years from now or longer.

Savings for a wedding or anything else you plan to purchase in 2 years or less should be kept in the least volatile investment vehicles, like cash or GICs.

What investment vehicle you choose for any other savings depends on what that savings is for and its timeline! Savings you need to access in 2 years or less should be kept in cash or GICs. Savings for 2 to 5 years can be mutual funds, and for longer term investments for 5 years or more, common stocks, bonds, and ETFs are great options.

Ultimately what you save for and how you do it is up to you, but this is a simple breakdown for the new saver or investor!