Gillian : An Introduction

I stand (okay, I sit) here before you a university graduate roughly $60,000 in student debt.  I know, this number seems astronomical. And let’s be real, it is. Let me explain the story of how I came to be in such a financial mess…

How it happened.

Although I was smart, I was the typical head-in-the-sand high school student who felt like the real world was miles away. I did not have passion towards any area, but excelled in my accounting classes and felt that I could make a good living doing this. I decided to go to a decent school close to home, and went off on my merry way.

I quickly realized I did not want to be an accountant. Ever. I was still very unsure about everything. I have always dealt with anxiety, but at this point did not know what was “wrong” with me. All I knew was that I dreaded school and had panic attacks doing things as simple as riding the bus to school. I mentally broke down, and left school by the end of November. One semester’s tuition and an entire year of rent (my landlord was not understanding at all) left me my first $5000 in debt.

I worked through a lot of my anxiety issues, evaluated what I wanted out of life and decided to go to school for something I truly enjoyed: fashion merchandising. The next Fall I headed off to college. School went a lot smoother for me, but living in Toronto cost a LOT. My two-year program cost me $25,000.

While in college, I realized that I wanted university after all. I attended university for marketing management. It was truly enjoyable and I am happy with my choice. Tack on the final $30,000 in debt.

I was a complete idiot with my finances. I made very little money in the summers because I could not usually find full-time work. I had a problem with spending. I knew I was majorly in debt but I thought I could easily make $50,000/year straight out of school and pay it back in two years tops. I liked a lot of stuff – M.A.C. make-up, lots of clothing, and going out to dinner multiple times a week. Once summer hit and I had a bit more income coming in, I felt like I DESERVED extra stuff and extra fun.

How I plan to pay it back.

It has been a very harsh reality check realizing that I am making more like $25,000-30,000/year, and am going to need to pay down at least $600/month in student debt to get out of this hole in eight years. It’s tough to look back at the frivolous way I lived, but all I can do at this point is move forward and not ever get back to that place. There are so many things I’d like to do soon; getting married and starting a family are something I’d like to do in the next five years and my debt is holding me back from being able to achieve those goals.

I have already started working to get out of debt by lowering my fixed expenses, cutting back on variable expenses (good-bye clothes, it was nice knowing ya!) and doing freelance work to increase my income. I am trying to be as frugal as possible without over-doing it.  I do not want to get debt burn-out since I’ve got quite a few years left of repayment. My goal is to be paying $1000/month (hopefully more!) towards my loan eventually. I’d like to eventually get a better paying day job so I have been taking steps with that. Even though my debt is lowering at a snail’s pace, this is the worst of it. Now instead of shopping, in my spare time I read/write blog posts, budget, figure out better ways to spend (or not spend) my money… and watch Dexter.

 

I wish it made sense to buy instead of rent

After spending a month on my own in Paris, in the smallest but most stylish studio apartment I’ve ever been in in my whole life, I decided that I would really love to live in a studio apartment. Permanently. In Edmonton.

What I want is a small, maybe 500 ft2 space that forces me to be creative, live without a lot of stuff, and takes the least amount to clean. What I can get in Edmonton, however, is 800-1000 ft2 of luxury, look-at-me, please-put-your-leather-couch-and-matching-ottoman-here.

Sigh.

Nevertheless, I did fall in love with one centrally located loft that boasts exposed brick walls and wood-beam ceilings. It’s on the smaller end at 800 ft2, and I was in the mood to compromise so I decided that the extra room was just fine. I quickly began to stitch together an awesome fantasy life where I am a super trendy twenty-something in an upscale loft downtown. I could put art on the walls and have my friends over for cocktails at my bar table and I could live into my thirties like the down-to-earth, minimalist-but-still-fashionable missing character from Sex & the City.

It was going to be AWESOME.

So, committed to being single and sexy for at least the next 5 years, I decided maybe I would like to buy this loft. What did I need my grandmother’s 4 bedroom house for? I’m going to be a jet-setting professional that can only call a place home if it is within 10 metres of at least 5 different restaurants.

Of course this glorious dream came to a screeching halt when I was reminded that I live in EDMONTON, city of unjustifiablyexpensivehomes. Only here would a loft — yes, 800 ft, no distinct bedrooms, one bathroom, four-walled-thing — cost $300,000.

Should I even begin to point out the problems with this? After my dreams of home ownership were crushed, I decided I could probably console myself by renting one of the lofts instead of purchasing it. Except rent is about $1,000/mo, which I thought was interesting since it really shows the difference between owning and renting — namely why renting is better. Now, many of my friends hate when I say that, but it’s because they were duped into the ridiculous idea that buying a house is always an “investment” and renting is always “throwing money away”. STFUDF, renting for me is awesome because when compared to home ownership of the $300K loft, it looks like this:

Ok, so I have a pretty good deal not having to pay utilities or internet, but $650/mo is NOT the cheapest rent in my city — it’s completely reasonable to find a room that costs as much as $200 less than that if you wanted!

So, I did my math assuming a 20% down-payment on the loft of $60,000 plus an additional $6,000 in closing costs. The condo fees are $400/mo and the property taxes are $1513 per year as written on the sales listing. By renting instead of owning, I have $871 extra to play with each month. Now, imagine I saved up that 20% down-payment + closing costs, and instead of buying the loft, invested the cash and contributed my extra $871 each month. After 5 years, even a simple savings account at 2% produces a better return than what I would build up in equity in the home. Because many would argue the case for homes appreciating in value (as if a downtown loft has any appreciation value.. HA!), I re-did the calculation assuming an annual appreciation of 3%, and it’s still less than investing at 2%. Would I ever allow so much money earn 2% though? Of course not. I’d dump all that cash in riskier investments, and here assuming a very conservative return of only 5% was see that after 5 years renting KILLS owning:

For me, renting is not throwing money away — it’s an easy way to make $20,000.

Now I understand the main problem here is I want a $300,000 home. Maybe if I set my sights on some dumb townhouse in suburbia the numbers would flip, but for now renting is the best decision if I want to stay downtown… which is terrible, because I really want that loft.

If I had to buy a car tomorrow

You guys know I really appreciate the financial rewards of taking public transit, but if for whatever reason I had to buy a car tomorrow, I have a plan.

I know it probably seems a bit excessive to entertain such a “what if”, but I really like calculations (like, really) and having a plan of action for every single possible scenario makes me feel super secure so a few months ago, I made a spreadsheet for buying a car.

I compared the cost of an auto loan, the expected monthly costs, and how much I could comfortably — and uncomfortably — afford. I’ve wanted a mini cooper for the past few years, and nice used minis usually run for $11,000 to $17,000 in local ads on Kijiji so that’s what I generally plan for. After this month’s snowfall however, I think it’s crazy not to own an SUV, but that’s beside the point right now. My spreadsheet lets me know what I could afford if I used an entire loan (a line of credit I already have), borrowed ~2/3′s of it (“stretch”), borrowed only 1/3 of it (“affordable”), or didn’t borrow at all. Here’s what it presently looks like:


A few months ago, I only had $300 saved and couldn’t get anything without maxing out my LOC. Now the red box is around “stretch” because that’s what I’d need to get used Mini from Kijiji. The savings of $3000 is the amount I’d be willing to borrow from my car/house fund for this purchase.

So car ownership right now would not be great, but it’s nice to know I wouldn’t be maxed out. In fact, saving just $3000 has already saved me hundreds of dollars in potential interest:

6.75% is the current interest rate on my LOC, but because there’s no balance and I have good credit, I’m hoping I’d be able to negotiate it down so I included a lower number for comparison.

Now, I would say most people don’t take all the costs of car ownership into account when they buy a vehicle. Generally they zero in on the monthly payment, and ignore the rest. At best they’ll consider the cost of gas and insurance, but I have yet to meet anyone that makes estimates for parking and regular maintenance or emergencies. When my friends’ cars get damaged or ticketed and they’re stuck with huge bills, they panic and work extra hours or drain their savings to cover the it. My expected costs of car ownership are these:

Parking at my apartment building is $85/mo for residents, and I’d expect more than one paid parking excursion at the UofA for a cost of ~$15/mo. Gas is a low-ball estimate at 88.9 cents/L because like I said, this original spreadsheet was made a few months ago before gas went up. Not sure about the insurance estimate at all. All in all, not perfect guess but at least there’s ball-park numbers for me to consider.

$615/mo is a big sum and would be uncomfortable for my budget to absorb, but I could manage it. I think it’s interesting that even with no payments and a low estimate for gas, it would still cost me $315/mo to own a car. Ouch!

In short, I could buy a car tomorrow and it would kind of suck but it would still be manageable, and that’s reassuring. Hopefully I can get into that “affordable” column by graduation just in case a new job forces me to give up the train and the bus!

How to buy big

I was talking about credit cards with some friends, when one of them remarked that he agreed it was important to never spend more on credit than you could afford to pay off — except for big purchases, like a vacation or a computer. I asked why those were the exception and his reply was:

“What else am I going to do? Just save up $1800?”

Well.. yeah.

I really don’t think it’s a different process to buy an $1800 object than it is to buy an $18 one, the former just requires you work longer. I think the problem with credit is that it’s made instant gratification so accessible, we justify using it to buy things that we’d otherwise have to wait for. This is really bad because things are more expensive when you buy them in credit. They’re actually more expensive twice over: first, because of the interest on the purchase you have to pay to the credit card company, but also because of the interest you lose by not saving the money first. The difference can be almost negligible but the loss gets humongous as you buy bigger things.

For example, I also want a computer so let’s say my friend & I each decide to buy the same one, except he puts it on his credit card pays it off for 8 months, whereas I save up for the same amount of time. In addition to paying $100 less than him for not racking up any interest, my savings earns $14 in my TFSA. This is the end result:

Not a huge difference, but one nonetheless. In the savings example, if I had been willing to spring an extra $40, I could have bought the computer a month earlier, whereas paying off the debt a month early would require an extra $170. Even on small-big purchases saving up for it can make a huge difference.

Now imagine we went ahead and bought really cool Mini Coopers at $25,000 each, except friend needs to have his right now and I’m cool with waiting until age 30 five years from now, because I’m really loyal to public transit. He signs up for a 5 year car loan and pays $492 per month, I sock away the same amount for only four years. Here are the results:


Look at that! Not only am I done paying off my car in FOUR years to friend’s five, I paid over $4000 less than him!

I highlighted the monthly payment and total cost in each of those four tables because I think it’s really important to see that we are paying identical amounts each month, but the route we take produces radically different end products. The amounts aside, I think the really important result here is the time you gain by saving instead of borrowing. Friend is stuck with a $492/mo payment for a whole other year, whereas I have freed up $492/mo in the same year #5 that I can now use towards something else like a vacation — or even the computer in the example above ;)

Whenever I bring up these figures, many people accuse me of being unrealistic. I think it’s sad that it’s become normal to carry a car loan for 5 years, but weird to save up to buy a car for 4 years. The latter is obviously much more financially sound. I understand why it can be inconvenient to save up for a car for years, but I know it’s not impossible.

I’m currently without a vehicle, but I don’t think I always will be. I recognize that car ownership might be a necessity in a few years, and I’m preparing accordingly. This is why I distinctly label my largest savings as my “Car/House Fund”. I really want to be able to buy BOTH a car and put a large down-payment on a home, but I also know that’s asking a lot of my little income so I let my two big goals share the balance. This way, if I need a car in one or two or five years, there’s a hefty sum ready to use. Likewise, though I hope to never touch my retirement savings until retirement, the Home Buyer’s Plan will let me withdraw from my RRSP for a down-payment on a home. This helps motivate me to contribute to the account, even though it feels like I have eons to grow old.

If you know you’re going to need a computer, a vacation, a car, a house, a comfortable retirement, etc., then go out of your way to save for it. Simple planning and the discipline to put the money aside instead of buying on credit will net you tens of thousands over your lifetime.

Heads up: I added a Tool page!

Look up, look up, look waaaay up… just kidding, look right there at the tabs of my blog: I added a page for Tools!

This page contains a small collection of links from my favorite websites, that will save you the headache of figuring out any calculations on pen and paper. These calculators cover everything from debt repayment to mortgages, and I even included Morningstar in the mix where you can set up a “pretend” stock portfolio!

If you know any other calculators or tools I should include, please let me know!