Millennial Money is a weekly submission-based series that provides financial advice to millennials. Read the full series here.
At 30 years old, Julie, a talented recruiting manager making $ 110,000 is finally back in Toronto, her home, after living and working abroad for five years.
Employed in Germany, Julie is super thankful for all the international experiences she’s had, despite two years of COVID-19 overseas, but is now having a bit of hardship picking up the pieces and settling back in her city.
She’s accumulated $ 20,000 in debt from living overseas – traveling a lot because it’s accessible to many other destinations.
“Because of the constant access to travel to Spain, Italy, UK, I actually accumulated $ 20,000 in debt on my credit card. I’ve been paying it back bit by bit, ”she said.
But a hindrance to immediately paying it back, despite having $ 10,000 in a TFSA and saving regularly, is going out for dinners and drinks as she tries to make up for lost time with her friends here.
“I know I make enough to pay this off, but there’s this feeling of missing out (with) my friends so I just haven’t been motivated to save and stay in,” she said. “Can I balance both or should I rush to pay it off?”
Renting a condo in the King West neighborhood, Julie is able to work on a hybrid schedule, which means half at home and half in the office, to which she takes either an Uber or public transit.
As a “very healthy person,” Julie said she usually cooks at home and brings lunch prep, because she buys particular organic ingredients while skipping breakfast.
But when it comes to dinners, she’ll go out several times a week.
Similarly, on the weekend, she’ll spend a couple days grabbing drinks or setting up a brunch date with friends.
She knows she can change her lifestyle to save even more and just pay her credit card off, but has been holding off.
How can Julie balance her work and life? We asked her to share a week of weekly spending.
The expert: Jason Heath, managing director at Objective Financial Partners Inc., on Julie’s situation.
Julie has a good salary but has been hindered by credit card debt she incurred traveling while she worked in Europe. Now she wonders whether she should rush to pay it off but is torn by the fear of missing out on time with her friends.
I note she has $ 10,000 in her TFSA but she is carrying $ 20,000 in credit card debt. Let’s assume her credit card interest rate is 20 percent and do some quick math.
Let’s assume her TFSA can earn five percent per year. If she has $ 10,000 in her TFSA and earns five percent per year for five years, she will have $ 12,673 to show for it. Meanwhile, an equivalent $ 10,000 of credit card debt at 20 percent interest could balloon to $ 24,883.
The point is unless your TFSA investments are earning a higher rate of return than your debt, you are falling behind staying invested instead of paying that debt down. The math is a little trickier with an RRSP account because RRSP withdrawals are taxable, so cashing in an RRSP to pay down debt may only be advisable in dire situations. But saving in a TFSA when you have credit card debt is probably not a winning strategy for Julie.
In the long run, it would be great to see her contribute to an RRSP because her marginal tax rate is 43 percent. She can put in $ 100 and get a $ 43 tax refund. But I think I would focus on debt repayment before investing and strongly consider using her TFSA to put a dent in her debt.
Her rent is pretty modest for Toronto at $ 1,800 including utilities. Rentals.ca and Zumper report the average rent for a one-bedroom in Toronto excluding utilities at $ 2,044 and $ 1,975 respectively. Julie saves money on lunches by cooking at home and brown-bagging it, but she likes to go out for dinner and drinks with friends two to three times a week. She also wants to go on a big trip soon as well, presumably missing the European travel that got her into debt in the first place.
The easiest way to pay off debt or save is to reduce your expenses. Alternatively, you can increase your income. Expenses are much easier to control, especially for someone with a lot of discretionary spending. If Julie wants to achieve her travel goals while also paying down her debt, she may need to limit dinner and drinks with friends to one to two times per week instead of two to three times. It may be a good tradeoff for going on a big vacation soon. In the long run, saving first and spending second can help her achieve other goals like home ownership or saving for retirement, even if they are not specifically on her radar.
I would set a monthly debt repayment goal and set up automatic payments. Julie may also want to start spending using her debit card instead of her credit card. If her bank account balance dwindles before her next pay check, she then needs to make a conscious decision to use her credit card and incur debt or say no to a night out with friends.
Results: She spent less. Spending in week 1: $ 2,294.49 Spending in week 2: $ 937.50
How she thinks she did: “I think I managed, but I realized that my weekly expenses are close to or surpass $ 1,000 which is insane – mostly due to repayments,” she said.
While she had hoped to cook more this week, buying a huge haul of organics from Farm Boy, she also recognizes that she might have to hold off on saying yes to all weekend engagements to get out of debt.
“It’s clear that if I don’t get organized, I’ll fall behind.”
Take-aways: Looking at the advice, Julie is stunned by how far she’s gotten into debt, despite making a lot of money.
“When Jason broke down the TFSA and credit card interest comparison, it was really eye opening,” she said. “I might think I’m OK to just look away from the accumulation on my credit card, but it all adds up.”
A big habit she wants to curb is impulsively online shopping.
“I think I was really desperate to just start my life here again, look good and reconnect, but now it’s becoming a mindless habit of scrolling and buying,” she said.
On top of that, when it comes to going out for drinks or dinner, she wants to try to reduce, just as Heath said, to see if there’s a huge difference.
“FOMO (fear of missing out) is so real, but we will always have time to catch up,” she said. “Hopefully these small lifestyle changes will get me back on track.”
For now, she’s going to dedicate most of her time paying back her credit card with the extra cash flow she has from her pay check.
“It’s not something I wanted to confront, but I’m happy I did it.”
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