Reader Case Study: Canadian Atmospheric Scientist and Family
Sidney lives in a west-coast Canadian city with her husband, Steve, and their nine-year-old son. Sidney works as an atmospheric scientist for the federal government and Steve is an analyst, also with the government. They’ve been renting out their basement suite to friends for the last three years, but those friends will be moving abroad in May. Sidney’s grappling with whether or not they need to continue renting out the basement for the income, or if they can reclaim that space for home offices and a guest room for visiting family. We’re off to Canada today to help out Sidney and Steve!
What’s a Reader Case Study?
Case Studies address financial and life dilemmas that readers of Frugalwoods send in requesting advice. Then, we (that’d be me and YOU, dear reader) read through their situation and provide advice, encouragement, insight and feedback in the comments section.
For an example, check out the last case study. Case Studies are updated by participants (at the end of the post) several months after the Case is featured. Visit this page for links to all updated Case Studies.
The Goal Of Reader Case Studies
Reader Case Studies intend to highlight a diverse range of financial situations, ages, ethnicities, locations, goals, careers, incomes, family compositions and more!
The Case Study series began in 2016 and, to date, there’ve been 73 Case Studies. I’ve featured folks with annual incomes ranging from $17k to $200k+ and net worths ranging from -$300k to $2.9M+.
I’ve featured single, married, partnered, divorced, child-filled and child-free households. I’ve featured gay, straight, queer, bisexual and polyamorous people. I’ve featured women, non-binary folks and men. I’ve featured transgender and cisgender people. I’ve had cat people and dog people. I’ve featured folks from the US, Australia, Canada, England, South Africa, Spain, Finland, Germany and France.
I’ve featured people with PhDs and people with high school diplomas. I’ve featured people in their early 20’s and people in their late 60’s. I’ve featured folks who live on farms and folks who live in New York City.
The goal is diversity and only YOU can help me achieve that by emailing me your story! If you haven’t seen your circumstances reflected in a Case Study, I encourage you to apply to be a Case Study participant by emailing email@example.com.
Reader Case Study Guidelines
I probably don’t need to say the following because you folks are the kindest, most polite commenters on the internet, but please note that Frugalwoods is a judgement-free zone where we endeavor to help one another, not condemn.
There’s no room for rudeness here. The goal is to create a supportive environment where we all acknowledge we’re human, we’re flawed, but we choose to be here together, workshopping our money and our lives with positive, proactive suggestions and ideas.
A disclaimer that I am not a trained financial professional and I encourage people not to make serious financial decisions based solely on what one person on the internet advises.
I encourage everyone to do their own research to determine the best course of action for their finances. I am not a financial advisor and I am not your financial advisor.
With that I’ll let Sidney, today’s Case Study subject, take it from here!
Hi there, my name is Sidney (age 39), and I live in a west-coast Canadian city with my husband, Steve (age 42), and our 9-year-old son. Steve and I spent most of our 21-year relationship as students or in low-income jobs, and only in the past year and a half have we been a full-time, two-income household.
That said, I come from a privileged background. My parents paid for my undergraduate education and part of my first masters degree. My mom has also helped out over the years with financial gifts, most of which we saved for the 20% down payment to buy our first house in 2019 (20% down is required in Canada in order to qualify for a 30-year mortgage).
I estimate that half of the down payment came from my mom’s gifts over the years. Steve comes from a more blue-collar family background, and is the first member of his family to obtain a university degree, which he got as a mature student when he was 40 years old.
I’m pretty frugal by nature, which I believe was reinforced by seeing how finances played out in my mother’s life. My fabulous, generous, loving mother raised me and my sister as a single parent. She’s a freelance professional who started her own private practice in the 1980s and is doing that to this day. Thus, my mom has a very high income, but she also spends a lot of money on items I consider luxury (lots of clothes, shoes, nice car, latest tech, jewelry, home renovations and paid-services like home cleaning, gardening, etc).
And so, while she’s a high-earner, my mom has always worried about finances, and now that she’s 73, she’s still working full-time, and afraid she doesn’t have enough to retire on. Although she has substantial retirement savings to live off of, she’s worried about having to cut back on luxuries. When I was a kid, my mom would say things like, “Oh I’d never go downhill skiing. If I broke my leg, I wouldn’t be able to work, and then we’d have no income!” This made me feel like I don’t ever want to miss out on the fun things in life because of a lack of financial security. That said, my mom was also an excellent example of loving one’s career and following your heart to get what you want in life.
Sidney & Steve’s Story
Steve and I got together in 2000 in Ontario, when he was 21 and I was 18. Steve had done one semester at the local university, but was forced to drop out because he couldn’t afford to continue. We met while both working at a fast food restaurant, which for Steve was his only source of income, since he was living independently with roommates. For me, on the other hand, it was a summer job while I still lived in my childhood home.
A year later, we moved in together in another city about 2 hours away from my hometown so that I could attend university. My tuition and living expenses were paid for by my parents who had an RESP (RESP=registered education savings plan in Canada) for me and my sister, for which we’re extremely grateful. Over time Steve got slightly better–but still not great–jobs. Eventually, Steve went to a private college with a student loan and a retail part-time job for one year to get trained as an audio engineer.
Over the next few years, however, we found that the music industry is competitive and exploitative – with many unpaid internships and below-minimum wage jobs. Steve struggled for a number of years in a few cities to make a living as an audio engineer, but when the opportunity to teach at a branch of his former college came, he took it for the relatively stable and higher income. He taught audio engineering for 7 years in Toronto, with hours ranging from 20-40 hours/week depending on the semester and would also get sporadic freelance gigs.
After I got my BSc with a physics major in 2005, I had no idea what to do for work, so I went to grad school in order to continue my sheltered life! That said, I had a really great time doing a 2-year masters in astronomy in another city, which thankfully paid a good stipend, which was enough for me to be financially independent from my parents, but not enough to save anything. After that, still not clear on where I could work, I moved to Toronto to be with Steve and struggled to find a job. I eventually got an IT job that I kept for about 9 months, but it was considered an internship so it didn’t pay well, and I hated the job. Steve and I got married in 2008 (wedding paid for by our parents) and thanks to generous gift money from our family, we paid off Steve’s student loan at that time. We’ve been debt free ever since!
Around that time I did some information interviews, which helped me determine that I wanted to do scientific work for environmental protection as a career. I ended up going to the University of Toronto for a second masters degree and a PhD in atmospheric physics.
Thanks to untaxed scholarships and stipends, I actually made a higher net income as a grad student than Steve was getting as a college teacher. That said, our combined income was still too low to be able to save much. But being a grad student in this program allowed me to travel to wonderful places for scientific meetings and conferences. I got to travel to France, Germany, Scotland, New Zealand, Australia and the United States as a grad student, and we paid for Steve to join me on a few of those trips.
Finally, in 2014, I graduated and got my dream job as a scientist in the federal government!
Leading up to that, we decided that Steve ought to go to university in order to have better career prospects. So the same year that I finally started my career, in the fall of 2014, Steve, at age 36, started his bachelor degree in Media Production. Four years later, he became the first person in his family to get a university degree. He also got a great job at a TV studio during his last year of study, so for about 8 months in 2017, we had a good set of two incomes coming in for the first time in our lives!
Steve and Sidney’s Son
Going back to 2012, while I was still a PhD student, we had our one and only child! Thanks to living frugally, renting a cheap basement apartment, kiddie hand-me-downs, and our city’s income-based childcare subsidy, we were able to get by in a great family-friendly Toronto neighborhood, despite the city being extremely expensive. I am tremendously grateful for my scholarship, which paid 4 months of maternity leave; for our country’s Employment Insurance program, which allows for 1 year of paid parental leave (for those traditionally employed – Steve used 4 months of it to take care of our baby when I returned to my PhD program); and our city’s childcare subsidy, which sheltered us from the true cost of daycare for our son.
A Cross-Country Move
Around the time Steve graduated with his BA, I got a promotion that encouraged us to move across the country to the West Coast. So in 2018 we moved across the country! Steve started a Masters of Public Administration (a 2-year program with co-op terms and an excellent scholarship for his first year) in our new city.
Now that we were in a slightly less-expensive city for home-buying, and I was making a good income, we started saving aggressively for a down payment (inspired by the Frugalwoods blog, we cut way back on our main luxury, which was eating out!). We bought our first, and likely forever, home in 2019.
Houses cost a lot in our city (though not as much as they do in Toronto!), so we rent out our basement suite to some wonderful friends in order to help pay the mortgage. At this point, Steve has gotten a great job as a policy analyst with the federal government (different department than mine), working from home. So, it’s only as of September 2020 that were are both working full time in our chosen careers (aka, no longer students or precariously employed).
What feels most pressing right now? What brings you to submit a Case Study?
1) To rent or not to rent:
Given our late start in life to having well-paying jobs, we are now looking forward and trying to figure out the best path forward financially. We’ve enjoyed having our two dear friends rent out our basement suite, but in about 3-4 months they are moving to a different country. When they move, we’ll have to make some decisions. We’ve already agreed to adopt their little old dog! But they’ll also be looking to offload their car and furniture, which means we need to decide if we want to offer to buy some furniture from them in order to keep the basement suite furnished. Then, we need to decide whether or not to continue renting it out.
We get $1,200/month in rent now, which is a friend rate. Market value is closer to $1,600/month if we offer it furnished and all-inclusive of utilities. We’re close to a university in a city where rental demand is high, so getting renters shouldn’t be a problem.
However, there are a number of factors that make me NOT want to rent it out:
- Space for friends and family:
- We live very far away from our family and many of our friends. We’d like them to visit us and we’d like to be able to host them comfortably at our place when they do.
- But this is not possible in our part of the house on the main floor. However, we could have house guests if we had the basement space available.
Space for home offices:
- Since September 2020, Steve’s been primarily working from home. I’m also working from home during the pandemic, and anticipate only returning to the office part-time post-pandemic.
- Therefore, having the basement space year-round would allow us to set up nice home-office spaces for Steve and me, without cluttering up our main floor with work (like it is now).
- But if we do this, we’d have no rental income… though in this scenario we might be able to claim some portion of our home office space and expenses on our taxes.
- Rent it out for part of the year:
- I’ve considered as a compromise that perhaps we should rent it out, furnished, for 4-8 months of the year to co-op students, for example, and keep that space for ourselves during the summer months, when we expect most of our out-of-town family and friends to visit.
- In that scenario, we could get $1,600/month for 4-8 months of the year. But, we’d have to keep our “home offices” up in our living room (where they are now) in that scenario.
- Climate adaptation:
- We didn’t have access to the basement – which is several degrees cooler than the main house – during last summer’s “heat dome.”
- Homes in our region don’t have air conditioning, so it would be nice to have the basement to hangout and sleep in during future heat waves.
2) To car or not to car:
We have a second “good dilemma,” which is whether or not to offer to buy our friends’ 2006 Honda Civic for ~$800 when they move away in a few months.
Steve and I have lived as a car-free family since 2007 and we love the freedom of not having car expenses and responsibilities, as well as the environmental benefits.
We’ve always biked (with our kid in a child seat on the back of our bikes) or taken public transit for commuting and local trips. We’ve rented cars when we took longer trips. In Toronto, this system worked well for us.
Our new city is geographically smaller, but hillier. The main differences in our new city are that:
- The culture here is more car-centric. Most families have cars and expect everyone else to have cars, so often birthday parties and other activities (e.g. scouting) are located farther away and not easily bikeable. We’ve mainly solved this problem by asking to carpool with other parents, but I don’t want to come across as a mooch since we can’t reciprocate!
- Our friends/tenants have let us borrow their car whenever we’d like, which has resulted in a creep up in our car usage! Anytime I need something big from the hardware store, I borrow it. Anytime it’s raining when we need to pick-up/drop-off my son somewhere a little far, we borrow it. Any time we want to explore something outside of town, we borrow it, and so on and so on. Basically, we’ve become used to the convenience of a car, but without the responsibilities and costs of a car, and while I’m not eager to take those on, I’m also nervous about going back to zero car availability (unless we rent one) after our friends leave town.
- Our son is getting bigger and older and in a few more years, he’ll be too big or won’t want to be riding in a seat on the back of our bikes. I’m hoping at that point, he’ll be a good enough cyclist to bike as well as we do in order to get around. For now, he can only ride short distances on his own bike.
On the environmental front, Steve has suggested we take advantage of scraping rebate programs that provide up to $6,000 when you trade in an old gasoline-powered car (the one we could potentially buy from our friends) and buy a new electric car.
Additional government subsidies for buying an all-electric car exist too, for about $7,000 more. For example, buying a new Nissan Leaf, which costs $39,000, would actually cost about $26,000 after the subsidies. While that’s a lot of savings ($13k in subsidies), it’s still a huge outlay of money to have an, albeit new, electric car, that we won’t need to use very often. I know Mrs Frugalwoods highly recommends buying used cars, but I’m not sure we can easily find a cheap fully-electric car on the used market and the subsidies may not apply to the used market.
What’s the best part of your current lifestyle/routine?
We love our house, neighborhood and city and feel extremely lucky to live here. We also love working from home and enjoy spending the extra time together. I love finally having a yard to garden in. We like going for hikes locally and to nearby lakes and beaches, finding new playgrounds, and exploring new areas.
We enjoy having our two dear friends rent out our basement suite (it was lovely to be a “household” with them during the isolation of the pandemic), and the ability to borrow their car without the responsibility of ownership and maintenance.
We also both love our jobs and Steve is eager to advance in his. I like being able to travel as a part of my job (pre and, hopefully, post-pandemic), and would like to bring my family along more often, as well as take our own trips on vacation.
What’s the worst part of your current lifestyle/routine?
Because we live across country from our family and many friends, I’d like to be able to have them stay with us when they visit. But, as mentioned above, we don’t have the space for out-of-town guests in our part of the house. Now that the pandemic is slowly ending, we anticipate several families wanting to visit starting this summer. We want them to be able to stay with us instead of at a hotel, but that would only be possible if we reclaim the downstairs space in our house (after our tenants move out).
We also find our current space (750 sq ft) in the house a little constraining when our kid has friends over inside, and with Steve and I having our work desks side by side in the living room. If we had the basement available, we’d go up to 1,350 square feet of living space.
I also occasionally find my job to be too challenging, and still occasionally suffer from imposter syndrome. It’s better than it was before, and I expect the longer I’m in this role, the easier things will become. However, part of me wishes for the option to retire early if my job continues to be too challenging and stressful.
Where Sidney & Steve Want to be in 10 years:
- While we’re not eager to retire in 10 years, it would be nice to have the freedom to retire a bit early if we want to.
- As federal government employees, we’re entitled to an unreduced pension if we’ve worked at least 30 years, or reach the age of 65. For me that will be in 2044 at age 61 (30 years of work). For Steve, that will also be in 2044 at age 65 (24 years of work).
- Our pension combined with the Canada Pension Plan (CPP) would amount to 2% × # of years worked* × our average income during the 5 consecutive highest income years.
- *to a maximum of 70% if we work 35+ years
- We feel very lucky to have this benefit, but we’re also confused on how much we should be saving in the meantime, given that we know we’ll have a pretty good income from our pensions. We currently have about $27k each in our RRSPs (registered retirement savings plan), and are adding $500/month each into those.
- A recent pension estimate showed we’d get approximately $4,733(mine) + $1,950(Steve) = $6,683 per month from our pensions if we both retired in 2044.
- If we retire any earlier, our pension is reduced by about 5% per year that we are early in taking it. (e.g., if either of us retires 5 years earlier than stated above, our pension would be 25% lower).
- Our son will be 19 in 10 years, and we’d like to be able to pay for his tuition and living expenses for a bachelor degree. We have about $30k saved up in his RESP (registered education savings plan) now, and we contribute automatically $200/month plus occasional lump sums when he gets birthday money. We hope to have $100k in there when he’s 18 (this amount is the current advice for Canadian universities for the year 2030, I believe).
- Family: I hope that Steve and I still have a strong marriage, and that our family and friends from out of town are still visiting us occasionally and us visiting them in Ontario every couple of years or so.
- Travel: I also hope that in the alternate years we can go on international trips for vacation – starting post-pandemic and continuing the rest of our lives. My work still requires international travel for meetings and conferences, so we can save some money (the cost of my airfare) by adding some vacation on to those trips when desired.
- Social life: Pre-pandemic and in our old city, I enjoyed social activities like playing on a softball team, taking an aerial acrobatics class and going indoor rock-climbing with a friend. Steve used to play bass guitar in a band… post-pandemic and into the future (10 years and beyond), I think it would be great if Steve and I added more hobbies and social activities to our lives again. I just started an adult gymnastics class for example!
- I’d still be in my career, though promoted up 1-2 levels to a more senior scientist role (and hopefully feeling more confident).
- Steve still working for federal government, but at a higher level, more advisory-type job.
Sidney and Steve’s Expenses
I’ve been reading the Frugalwoods blog for the past 4 years or so and have learned a lot! I’ve kept meticulous track of our family’s expenses during the last two and a half years. I even enjoy doing it manually in my excel sheets. All dollar amounts below are in Canadian dollars.
|Sidney’s net pay (after taxes and all other deductions)||$6,734.61||Scientist in federal government. I recently topped out salary-wise for my level, but could go for promotion next year to get into the next salary scale.|
|Steve’s net pay (after taxes and all other deductions)||$4,335.75||Analyst in federal government. Due to a pay error, he’s not actually getting paid at the proper level. He also recently got a promotion. So this amount should be about $200/month higher in the near future|
|Rent from basement suite||$1,200.00||We love renting to our good friends, but they are planning to move out ~May 2022. Market value for renting that space furnished is likely more like $1,600/month. Or could be $0 if we reclaim that space for ourselves.|
|Tax credits||$971.24||Canada Child Benefit ($135/month) plus our annual tax return averaged monthly|
|Gifts from family||$80.00||Our parents are very generous, but now that they are getting older, we’d like to turn this around and start paying for their flights out to visit us, and any future care they might need from us.|
|Cash back from credit card spending||$49.00||Average cash back from our Tangerine World Mastercard|
|Selling stuff online||$5.00||I occasionally sell our son’s old toys and clothes that he’s outgrown if they are still in decent shape.|
|Item||Outstanding loan balance||Interest Rate||Loan Period and Terms||Equity (amount you’ve paid off)||Purchase price and year|
|Mortgage||$573,229||2.49%||30-year fixed-rate mortgage (with remaining amortization 23 yr, 3 months)||$188,771||$762k; purchased in 2019|
|Item||Amount||Notes||Interest/type of securities held/Stock ticker||Name of bank/brokerage||Expense Ratio|
|Sidney’s Tax Free Saving Account (TFSA)||$40,475.48||The TFSA is a savings account where you don’t have to pay tax on the amount it grows. There is a contribution limit of $6,000/year per person. I’m currently contributing $500/month automatically to this + occasional larger lump sums.
I have about $40k of contribution room currently since I didn’t max out my contributions in previous years.
Part of our TFSAs is our emergency fund.
|Diversified mutual and index funds.||IA securities||1.60%|
|Steve’s TFSA||$40,206.01||Contributing $500/month automatically + occasional larger lump sums.
Part of our TFSAs is our emergency fund.
|Diversified mutual and index funds.||IA Securities||1.60%|
|Our son’s Registered Education Saving Plan (RESP)||$30,565.01||The government matches contributions at 20% up to of $500/year to $7,200 total. This money can only be used for educational expenses. We contribute $200/month automatically + occasional lump sums to this account, and would like the total to be $100k by the time he’s 18 (though the contribution limit to the RESP is $50k – so we would need a separate account after that).||Diversified mutual and index funds.||IA Securities||1.60%|
|Sidney’s Registered Retirement Saving Plan (RRSP)||$27,570.25||The RRSP is a retirement savings account where you can deduct your contributions from your income the year you contribute (though you pay tax when you pull from it during retirement). I have ~$7.6k of contribution room left this year. I’m currently contributing $500/month automatically to this + occasional larger lump sums.||Diversified mutual and index funds.||IA Securities||1.60%|
|Steve’s RRSP||$27,116||Contributing $500/month automatically + occasional larger lump sums. He has room to contribute $31k more this year alone||Diversified mutual and index funds.||IA Securities||1.60%|
|Sidney & Steve’s chequing account||$12,231.00||This is a joint account from which we pay monthly bills and part of this is our emergency fund.||0%||TD|
|Sidney’s webbroker TFSA||$6,323.97||I enjoy buying and selling stocks on my own.||Stocks and ETFs||TD Waterhouse webbroker||$9.99 fee for every buy or sell transaction|
|mortgage||$2,700.00||This is $2,404 that we have to pay (for 30-year amortization) + $295 extra on the principal that we started a few months ago in order to pay the house off about 5 years earlier.|
|food||$1,152.00||groceries, toiletries, & propane for BBQ. My goal is $1,000/month, but I have no idea how to get there. We don’t waste food and we eat mainly whole foods…|
|household & garden items||$437.31||This includes a lot of gardening stuff and we had to replace our fridge a few months ago. This monthly avg is based on the last 2.5 years of new home-ownership|
|Kid’s activities||$421.46||This cost included a competitive gymnastics program that our son decided to quit in Oct ’20, which saves us $396/month going forward!
He continues to do Cub Scouts and will do swim classes and other kinds of activities in the future but for significantly less $$ than this.
|vacation||$413.14||Costs for travel and accommodations. Last summer we took a long-awaited trip back to Ontario. Sometimes we will rent a car and a cottage to have a nice weekend get-away closer by.|
|eating out||$392.06||This is a bit high! My goal is $100/month for mainly one nice family dinner at a restaurant, but looks like we creep over that quite a bit!|
|alcohol and bars||$318.00||Mainly for Steve who is looking to cut back|
|bikes and bike maintenance||$311.33||This amount is high because 1.5 years ago we bought two brand new electric bikes that we absolutely love. Maintenance is only about $10-20/year, but this number reflects the cost of the bikes over the 18 months that we’ve had them so far|
|electricity||$247.27||Our electric bill includes heating & hot water for our house. We also have an electric mower and electric bikes! This is monthly avg. It’s higher in winter and lower in summer.|
|property tax||$244.53||We pay in June for the whole year. This is averaged monthly.|
|entertainment||$214.33||This amount is quite high because it includes a new computer purchase in the last year. Aside from that, this category is ~$125/month. This category mainly includes video games for Steve, and occasionally doing fun stuff like going mini-putting, bowling, to a movie, going skating, to a museum, etc. Though for the most part our weekends are spent on free activities like parks, beaches, hiking, etc. And we love our library for books!|
|gifts||$177.63||Birthdays and Christmases. Our family generally has a “no gifts for adults” policy with the occasional exceptions. We buy gifts for ~8 kids who are family or close family friends, and we give ~$10 cash gifts to my son’s friends at birthday parties, which seems to be the culture here. Occasional teacher, student, or coach gifts too.|
|Misc||$115.59||E.g., Steve’s tuition & text books, which won’t be an expense in the future + our son’s summer and spring break day-camps, which decrease as he’s getting older.|
|city utilities (e.g., water, sewage, garbage collection, etc).||$109.22||paid 3x per year. This is the monthly avg|
|home insurance||$108.27||TD insurance|
|clothes & accessories||$86.44||Nearly all of our clothes, shoes, and many housewares come from the thrift shop. Stuff like underwear and socks are from Walmart. This is a monthly avg based on the last 2.5 years|
|parents’ activities||$73.00||This is a new category since I just recently started an adult gymnastics class for fun.|
|internet||$62.67||from Tech Saavy – any other recommendations?|
|life insurance for Sidney & Steve||$58.05||Sunlife term plans|
|School supplies, field trips, & day camps||$56.55||day camps are accidentally split between this one and the “Misc” category|
|Charity donations||$51.00||Automatic monthly, though we occasionally contribute to other charities one as a one-off.|
|cell phones||$48.16||from Public Mobile. This is Canada’s equivalent to an MVNO I think. And I have Canadian members of the Frugalwoods facebook group to thank for this recommendation. We switched over to this service about a year ago, and recently reduced Steve’s data plan.|
|Kid’s allowance||$36.00||$(his age)/week. He buys his own toys, video games, candy, and whatnot with his allowance. We only buy him those things as birthday or Christmas gifts otherwise.|
|cash||$21.50||2.5 years ago, in order to better track expenses and get the most out of our cash back credit cards, we stopped getting cash out and used our credit cards to buy everything. However, the occasional cash is still needed (e.g. to provide our kid’s allowance or a friend’s birthday gift) and so this category still creeps in somehow, and this money is not accounted for (it’s the change leftover after allowance, etc).|
|medical, dental, and therapy||$1.99||We used to have a co-pay in this category, but now that Steve has an insurance plan too, all medical, dental, etc are fully covered by the combination of our plans. The remaining amount is for a “findadoc” service since we don’t have a family doctor due to a severe shortage in our city (and province apparently).|
|babysitter||$0.00||$0 during pandemic. Was $14.92 the year before. Will probably stay close to $0 since our son is getting older and we try to “date” while he’s busy with other things.|
Credit Card Strategy
|Card Name||Rewards Type?||Bank/card company|
|Tangerine World Mastercard||cash back (2% in 2 categories and 0.5% in all other spending categories)||Tangerine|
Sidney’s Questions for You:
- Should we continue to rent out our basement or not?
- Once our friends move out in about 3 months, should we continue to rent it out? Rent it out for part of the year? Can we afford to not rent it at all?
Should we buy our friends’ 2006 Honda Civic for ~$800?
- Even though we don’t really need a car and won’t use it often?
- If we do buy it, should we keep it or trade it in for a subsidized new electric car?
- Is there some calculation for the wisdom of car-buying if you only plan on using it ~3 times per month?
- I’m interested to hear the opinions from carless families with children aged 9 and up on this topic.
- Also, are there any Canadians in BC who can speak to how to get inexpensive car insurance?
- Should we pay off our mortgage early?
- Since we were late in life buying our first house, I’m eager to pay the mortgage down more quickly than the original 30-year amortization.
- We’re overpaying by about $295 every month (which would mean it would be paid off in 24 years).
- At this rate, we’d have it paid off at roughly the time we’re thinking to retire (in 2044).
- Should we continue to do this? It is our only debt.
- Should we save more for retirement?
- In light of our pensions, should we still be trying to save as much as possible in our RRSPs every year? (we’ve been contributing $500/month). If we retire before 2044, we’d still get a pension, but it would be significantly reduced.
- Our retirement savings are nowhere near the 3×income suggested for 40-year-olds! However, is that formula for people without pensions? Or should we start saving like crazy for retirement to catch up?! If so, this might help us answer questions #1 and #2. I do hope/expect we’ll have our house paid off by then, which would bring our monthly expenses down considerably.
- Given our expenses, are there some good places where we can cut back, so that we can save more towards our goals?
- Credit Card strategy:
- We have only one joint credit card between the two of us: a Tangerine World Mastercard (no fee, 0.5% cash back on all purchases, 2% cash back on purchases in two spending categories – groceries and restaurants in our case). It has one benefit that we really look for, which is rental car insurance. So this credit card account satisfies all of our credit card needs – but my question is; is ok that we only have the one credit card between the two of us? Or does that present a problem?
Thanks for your help!
Liz Frugalwoods’ Recommendations
Sidney and Steve are in great shape and have worked hard to get there! I get the sense that coming into “adult” salaries and home ownership only recently has impacted the way Sidney views their future. Past uncertainties over money are very hard to let go of and it takes awhile to settle into the realization that you’re actually doing great from a financial perspective! I hope that Sidney will utilize this Case Study to gain confidence around her finances and to recognize that she and Steve are doing well. Really well!! Ok, let’s dive right into her questions:
Sidney’s Question #1: Should we continue to rent out our basement or not?
There are two variables in this question:
- The financial aspect
- The lifestyle aspect
If this was a purely financial question, I’d say YES! Absolutely continue to rent out the basement because it’s a relatively easy way to make quite a lot of money. Renting it out at $1,600 per month is $19,200 per year, which is significant. Also, I wonder if they could charge even more given that Sidney noted they are, “close to a university in a city where rental demand is high.” I’d think you could charge more than $1,600, so that’s something to look into.
Sidney asked a few times whether or not they could afford not to rent it out, so let’s do that math now.
Here’s their income minus the rental:
|Sidney’s net pay (after taxes and all other deductions)||$6,734.61|
|Steve’s net pay (after taxes and all other deductions)||$4,335.75|
|Tax credits||$971.24||Canada Child Benefit ($135/month) plus our annual tax return averaged monthly|
|Gifts from family||$80.00||Our parents are very generous, but now that they are getting older, we’d like to turn this around and start paying for their flights out to visit us, and any future care they need from us.|
|Cash back from credit card spending||$49.00||Average cash back from our Tangerine World Mastercard|
|Selling stuff online||$5.00||I occasionally sell off our son’s old toys and clothes that he’s outgrown if they are still in decent shape.|
The rental would add $19,200, for a grand total of $165,307.20.
Sidney and Steve’s annual spending is $94,290.12, so yes, they can afford to not rent it out, in terms of being able to cover their monthly expenses.
That being said, it’s tough to turn down $19,200 in additional income, which could be deployed for retirement savings, investments, travel, etc.
Another way to look at this is to ask themselves if having the basement space is worth $19,200 per year to them? There’s not a right or wrong answer here, just a consideration of how much that extra space is worth to them.
If the main issue is their home office space, could they rent a small office space elsewhere (for less than $19,200 per year)? Could they join a co-working space? Is there a creative way–other than using the basement–for Sidney and Steve to have a better home office situation?
Could Sidney and Steve rent it out for year and see how it feels? They could then do an assessment at the end of the year to determine the cost/benefit of the extra $19,200 versus the inconvenience of not having access to that living space.
As a side note, something that’s possible in the US is deducting house maintenance as part of your rental business if you’re renting out part of your primary dwelling. Is this possible in Canada as well? Something to look into.
A major question I have for Sidney and Steve relates to their liquidity, by which I mean cash available to them at a moment’s notice. Also known as an emergency fund. As I’m not Canadian, I’m not terribly familiar with TFSAs so I read the Canadian government website on TFSAs and learned this:
Depending on the type of investment held in your TFSA, you can generally withdraw any amount from the TFSA at any time.
What concerns me is the “generally.” If Sidney and Steve’s TFSAs aren’t able to be withdrawn from at any time without penalty, then I’m concerned about their liquidity. Outside of their TFSAs and all other restricted accounts (retirement, education, etc), they have $12,231 in cash. This wouldn’t be enough if, say, they needed to replace their roof and repair a water leak in the same month. As homeowners (and potentially landlords), they’d need to have more cash available. However, if they are allowed to withdraw from their TFSAs at any time without penalty, then they have $92,912.49 on hand, which is more than ample.
So, Sidney and Steve, please look into your TFSAs and confirm that you’re able to withdraw money from them without penalty and at any time.
Sidney’s Question #2: Should we buy our friends’ 2006 Honda Civic for ~$800?
Yes. I love how thoroughly Sidney is considering car ownership, but in my opinion, this is an easy yes for a number of reasons:
- Sidney notes several times that their new city is not as bike-friendly.
- Sidney notes that their son’s activities often take place at non-bikeable locations.
- Sidney notes that they’ve been borrowing this car, renting cars and getting rides from their son’s friends’ parents.
All of this points to: you need a car. And a Honda Civic is a great little car and $800 is a great little price.
Next Question: If we do buy it, should we trade it in for a subsidized new electric car?
Absolutely not. I fully understand the desire to have an electric car (it’s what I want too!!), but Sidney’s taking an $800 car and turning it into a $26,000 car. NOPE. Will the 2006 Civic last forever? Of course not! But since Sidney’s not even sure they actually NEED a car, this is not the juncture at which to spend $26,000. Furthermore, this is a historically atrocious time to buy a car–used or new. Due to the epic supply chain issues, there are few cars to be had and those that you can have are extraordinarily expensive.
If it were me, I would:
- Buy the Civic for $800 today. ASAP.
- Drive the Civic for a year.
- Re-evaluate the desire/need for car ownership in a year or two.
Sidney and Steve need data on how they function with a car before making a $26,000 expenditure. Or any car expenditure over $800.
Plus, in another year or two, there will be more electric vehicles on the market and hopefully the BANANAS supply chain situation will have sorted itself out. Waiting as long as possible to buy a car makes a lot of sense right now (written by a person who tried VERY HARD to replace her ailing 2010 Toyota Prius last summer with zero luck).
Additionally, since Sidney and Steve are able to get by without a car, it is ok if this elderly vehicle isn’t 100% reliable. Since they’re in a city where they CAN bike or walk if they need to, the car is a nice-to-have, not an absolute necessity.
Canadian readers, please offer them advice on car insurance companies!
Sidney’s Question #3: Should we pay off our mortgage early?
Nope. In my opinion, this doesn’t make sense from a mathematical perspective (others will disagree with me, but this is my opinion). Here’s why:
- The house is essentially their only major asset and they don’t have much in savings given their incomes (which I totally understand because these incomes are recent). Hence, from a liquidity standpoint, they’ve not got much.
- Paying off a house early–or even just overpaying as they’re doing now–ties up a ton of money in one single, illiquid asset.
- There’s an enormous opportunity cost to paying off a mortgage early because there are so many other things one can do with that money.
- By funneling all of your money into your house, you’re missing out on potential gains in the stock market, etc. It’s kind of like cutting off your nose to spite your face. Yes, you’re solving one “problem”: your mortgage, but you’re hindering your ability to grow your wealth in a significant way. Of course there are risks involved with investing, but the salient point is the inherent opportunity cost.
If Sidney and Steve want to pay off their mortgage before they retire, I think that’s fine! If it were me, I would save and invest that money over the coming decades and then pay it off in one lump sum prior to retirement. In my mind, it just doesn’t make sense to tie up extra cash in a fixed-rate mortgage.
Sidney’s Question #4: Should we save more for retirement?
This is a tough one. On one hand, Sidney and Steve have generous pensions to look forward to. On the other hand, pensions can be undercut and underfunded.
However, in light of the fact that they both work for the federal government, it seems unlikely their pensions would be underfunded or reduced. But then again, it feels risky to put all of your eggs in one basket–the pension basket.
If Sidney or Steve had to take an early retirement (due to health, for example), they wouldn’t be eligible for their full pension amounts. If they are able to work their full number of years and nothing happens to the pension system, then yes, they are all set. But if any one of those variables falters, they’re not in as good a position. There’s not a concrete, definite answer here since it depends on future events, but the adage I always come back to is:
No one has ever regretted having extra money saved up.
As Sidney noted, if we don’t look at their pensions, they are indeed pretty far behind on retirement savings. Sidney’s spot on that the (kinda oversimplified, but still helpful) rule of thumb is:
Aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67 (source: Fidelity Investments).
At present, that equals:
- ($6,734.61 x 12) = $80,815.32 x 3 = $242,445.96 for Sidney
- ($4,335.75 x 12) = $52,029 x 3 = $156,087 for Steve
This is a long way off from the $27,570.25 Sidney has in her RRSP and the $27,116 Steve has in his. However, this is not inclusive of their generous pensions.
If it was me, I would start saving a lot more for retirement. If it was me, I would rent out the basement apartment, look for places to reduce my spending and fully max out every retirement account I could find. But I’m rather conservative when it comes to my own money and I fully recognize that not everyone feels that way.
One of the reasons I’m promoting this idea for Sidney and Steve is that they have the salaries to do so. They’re both making great money and definitely have enough to funnel towards retirement. Maybe Sidney and Steve both work for the same employer (the federal government) until 2044 and the government does not underfund their pensions and they retire with their full pensions. And maybe they also have a ton invested in their RRSPs. The “worst case” scenario then is that they have a very well-funded, luxurious retirement.
Sidney’s Question #5: Given our expenses, are there some good places where we can cut back?
I imagine Sidney knows where they can cut back and this is, again, going to be driven by whether or not they want to rent out the basement and how much they feel comfortable investing for retirement. The greater their income, the less they need to cut back. The more they want to invest for retirement, the easier it will be if they come at it from both ends of the equation (income and expenses).
Sidney’s Question #6: Is ok that we only have one credit card between the two of us?
Yes. The root of this question is, I imagine, about their credit scores. Having a credit card open for many years and FULLY PAID OFF every single month helps your credit score a lot. However, you don’t necessarily need to have more than one credit card.
With credit cards, the key is that you pay it off in full every month and keep it open for many years. The reason this helps your credit score is that it demonstrates to lenders that you are a responsible borrower. It demonstrates to lenders that you can handle debt and pay it off on time. That’s the whole idea. And the primary thing most people need a good credit score for is to qualify for a mortgage. Sidney and Steve have already done that, which is wonderful!
If they wanted to, they could look into opening a travel rewards card (assuming those exist in Canada?) as the points can be used to offset travel expenses (affiliate link).
Investment Expense Ratios
Something that jumped out at me are the relatively high expense ratios (1.6%) on Sidney and Steve’s investments. That’s a fair bit of money going to fees every year! I did a very deep dive on expense ratios in this Case Study, so head over there to read up on them.
I googled “Vanguard Canada” and landed on this page, which lists a bunch of investment options with expense ratios in the range of 0.15%, which I consider to be nice and low. I encourage Sidney and Steve to do their own research to find brokerages that offer lower expense ratios, since I think they’re getting fleeced with that 1.6% rate.
- Rental: do they want home offices and extra living space or do they want an extra $19,200 per year?
- Could they rent it for a year and then do a cost/benefit analysis?
- Is there a creative way–other than using the basement–for Sidney and Steve to have a better home office situation?
- Could they charge even more than $1,600 given their prime location?
- Car: if it were me, I would buy the Honda Civic for $800 and drive it for at least a year. Then, do a review of the advantages/disadvantages of car ownership. Consider trading it in for a (hopefully slightly used) electric vehicle in the future when (a) they know they want a car for the long term; (b) the car supply chain has normalized.
- Mortgage: if it were me, I would stop overpaying on the mortgage. I personally would instead invest that money and then, if I wanted to, pay it off in one lump sum at the time of retirement.
- Retirement: determine your risk tolerance for the pensions. If you aren’t able to work for the government for the full 30 years, will you have enough in your RRSPs? Will you feel more confident if you max out your RRSPs and know that, while you might be OVER funding your retirement, you’re not UNDER funding it.
- Expenses: sure, cut back on luxuries. Consider again the cost/benefit of the rental income and the risk tolerance level with the retirement savings. You have the income level to do it all, as long as you’re mindful about your monthly spending.
- Credit card: totally fine to have just one as long as you pay it off in full every month. Look into travel rewards cards if you want to as the points could help offset travel costs in the future (affiliate link).
- Expense ratios: look for a brokerage that offers a much lower expense ratio on their investments.
Ok Frugalwoods nation, what advice would you give to Sidney? We’ll both reply to comments, so please feel free to ask questions!
Would you like your own case study to appear here on Frugalwoods? Email me (firstname.lastname@example.org) your brief story and we’ll talk.
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