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.

There’s No Such Thing As Good Debt: Student Loans

I hate the notion of “good debt”. It’s such a misnomer that people hide behind to justify spending. While there definitely is a gradient of debt “quality” (for lack of a better term), I feel we should still hold on to the mentality that all debt should be avoided if possible, even if that’s not necessarily realistic.

Let me explain what I’m getting at here. Many people categorize consumer debt — credit cards, lines of credit, etc. — as bad debt. I also include car loans as bad debt, but it toes the good side because it still provides you with a sellable asset. Student loans and mortgages are generally categorized as good debt, but I personally find this association a bit inaccurate, especially for the former.

Student loans are considered good debt because you’re essentially borrowing to make an investment in your future earning potential. Additionally, the interest rates are very low, and payments don’t kick in until after graduation. However, most students don’t pay much attention to what they’re borrowing or how long it will take to pay off. Furthermore, students will use their loans for non-academic purchases: everything from iPhones to vacations. If student loan money is your only income, it is not okay to spend it frivolously. Period. I once pointed this out in our school newspaper, where I criticized students for whining about the cost of tuition then hitting up the bar every weekend. I got a nasty response dripping with self-entitlement that was along the lines of, “oh so I don’t get to have any fun?”
Firstly, STFUDF. Secondly, well, no actually, with other people’s money, you don’t. While I do think going out with friends is an essential part of the college experience, doing it on the government’s dime is careless. That is the most expensive beer you’ll ever drink in your life — and not because of the bar mark-up, but because you’re going to pay interest on it for the entire lifetime of your loan which can approach 12 years or more.

I have both provincial and federal student loans. I took my first one out in my third year of university, which is the when I stopped working during the academic year. With this and a little bit of savings and some scholarships, I was able to cover my living expenses and tuition for the next two years. This is also when I started saving, so my budget was pretty tight, but I managed to earn a bit extra “fun” money from tutoring that let me get those beers on weekends without racking up a lifetime tab.

Still, I think of my student loan as bad debt. It’s a large sum that’s going to be around for awhile. It’s what drags my net worth down into the negative. I sometimes think that it could have been avoided entirely had I just worked full-time and save more during my few years between high school and university. It’s good in the sense that it has helped me reach my goals, but I know it’s part of my credit report and going to come into play when I want to buy a house. It’s bad in the sense that if I were without it, I could save all the money I’m instead going to have to use for repayment.

Don’t pretend your student loan is good debt, there’s no such thing. Like bad consumer debt, student loans are something you owe, they will accumulate interest, and they can go to collections and trash your credit score if you don’t pay them. So please don’t hide behind any false sense of security about where exactly your negative equity is hiding, all debt is bad debt — just some of it is less bad than others.

STFUDF

STFUDF is a term I learned from I Will Teach You To Be Rich (one of my favorite websites!). It stands for: shut the *%^# up, dumb friend.

It’s an ever-useful description. Seriously. Especially for really bad financial tidbits your friends will share with you should you ever dare to bring up your own saving or debt repayment. People always have something to say about money, because we all love money, and we all think there’s a right way to handle it. Sometimes your friends will say something dumb because they genuinely don’t know any better, but sometimes they’ll do it with arrogant self-satisfaction that prevents you from trying to argue, even though you know they are just being SO DUMB. I recognize maybe I’m this friend to some people, but that’s another topic for another day. For now, I just wanted to introduce the acronym because, my god, do I ever think STFUDF on a regular basis, and I wanted to share some of my favorites that have inspired my affection for the term:

“But a car is a need.”

“I have a lot of debt from traveling, but I don’t think I’ll ever regret it because I gained a lot of life experience.”

“I don’t need an emergency fund because I have a lot of room before I reach my credit limit on my Visa card.”

“I’ll just wait until I make more money, and then I’ll save, like, $2000 a month.”

“I refuse to put any money away, even in savings accounts, because the market is soooo unpredictable right now.”

“I think I’m going to have to rent out a room in my house, because I just bought this new car and the payments are killing me.”

“I didn’t pay my student loans because I didn’t have any money. Look at my new sweater!”

“Just cancel your cellphone contract, it’s only $400 and then you can get the new iPhone 4 for $159.”

“I don’t feel the need to save money because I feel really secure in my job right now.”

“I just accept that I will always have debt for my whole life: a mortgage, car loans, student loans, credit cards. It’s one of those things that never goes away, you know? Plus everyone has debt, it’s totally normal.”

“I could probably wipe out my credit card balance with my next paycheque, but then I wouldn’t be able to go shopping with the money.”

W T F.

More gems to come in the future, I’m sure. In the meantime, you can read Ramit’s original STFUDF article here!