Finding financial balance
Finding financial balance in life is never easy. I’ve been talking to a lot of individuals lately in my financial education workshops and I recently sat down with Jake who is 23 years of age and trying to do the best with the money he makes. In fact, he makes pretty good money working up in the diamond mines. He has $10,000 in an RRSP from a previous employer’s Group RRSP plan as well as another $6500 in cash.
Jake has an $11,000 loan from the purchase of a skidoo and a quad. The value of the quad and skidoo is about the same value of the loan. Jake loves quading so much that he wants to buy a new quad that is the latest and greatest model.
New house or new quad?
Purchasing a new Quad is a purchase for lifestyle purposes. Although purchasing a new quad has financial impacts, it would be foolish to think it has positive financial impacts. When we talk about finding balance in our lives, we have to balance enjoying our lives against being financially responsible.
Jake is really passionate about this quad and to get the latest and greatest model, he will have to part with $15,000. Although Jake would love to keep a second quad around, he realizes that it will significantly hurt his ability to buy a house. When I positioned it this way, Jake decided it made financial sense to sell his current quad and skidoo, which will pay off the $11,000 so that debt will be wiped out. To buy the new quad, he has a couple of options:
- Finance the entire amount so he can use the $6500 to the purchase of a home
- Use the $6500 towards the new quad and finance the difference ($8500). This option would also delay the purchase of the house.
More on the house purchase
The house that Jake is looking to buy is a 4 bedroom house and he figures he can get $600 per month per roommate. He is currently renting a 3 bedroom condo with 2 friends and he figures these roommates would welcome paying $600 per month for a bigger place with a yard and more space. With $1800 per month of potential income, Jake figures he would have his mortgage payments and utilities covered.
If all of Jake’s assumptions are correct, this is a pretty good deal. He buys an appreciating asset; his renters help him pay the mortgage; and overall, he builds equity and wealth.
To buy the house, Jake was planning to cash out the $10,000 RRSP which would give him $8000 plus the $6500 he has saved puts him with a $14,500 down payment. Jake was not aware of the Home Buyers Plan.
Related article: Buying your first home
What does the finance guy say?
There’s no big surprise here but my suggestion is to make the house purchase a priority because of the many positive financial implications.
I get and understand the lifestyle is important especially for a 23-year-old but the more money you put into depreciating assets like cars, quads and skidoo’s, the worse off you will be financial.
Here’s the part about balance
I suggested that Jake can find financial balance. Here’s my suggestion on how Jake can buy the new house and get the new Quad:
Instead of cashing out the RRSP, Jake is actually better off leaving the money in the RRSP and using the Home Buyers Plan (HBP). In fact, Jake should take the $6500 and put the money into RRSPs. At his tax bracket, he would get a tax refund of $2470.
If Jake uses the Home Buyers Plan, he now has $16,500 towards the down payment of the house ($2000 more).
The $2470 can then go towards the purchase of his new quad bringing the financed portion to only $12,500 which is not far off if current debt amount for the quad and the skidoo.
So what would you do if you were Jake? Do you have any other suggestions for Jake? Any thoughts to share?
Comments
If I were Jake I would stop financing anything that depreciates and start practicing delayed gratification in regards to his wants. Buying used versus new is also a great practice.
Does Jake fully understand the true cost and expenses that come with home ownership?
I would recommend that Jake read the book “The millionaire next door”.
Quote to ponder: If you take the easy way out of life, life will get harder, if you take the hard way, life will get easier.
If I were Jake I would sell the ski-doo and keep his old quad. Pay off part of the loan with the ski-doo funds. Then he doesn’t have to get another massive loan and still has a quad to play with. He can take his $2470 and put that on the remainder of the loan…won’t be long before he owns a quad free and clear if he can continue his old payments. At the same time he can follow your other suggestions re: the Home Buyer’s Plan.
One of the things I’ve had to learn is how to wait… and reward myself later. Personally, I tend to invest the money and let it grow for me until I reach my goals. In fact, that’s how I’m paying for my summer holiday this year based on the profit I made from a holiday investment since last summer.
Frankly, I can only add my support to the 3 who have commented. Jake may will follow the proposal you have suggested that will get him the short term gratification of getting his cake and eating it right away. It will be very unlikely that Jake will learn the habits necessary for long term financial success without first leaning restraint. He perceived need for the latest in “quads” is a signal of this lack of balance and restraint. Presenting a financial plan to achieve both is a push onto a slope he should avoid.
Jake shouldn’t buy a house yet.No guarantee that the house will increase in value.If anything it may well decrease in value as interest rates reset higher.he should only buy a house with at least 25% down.Nobody seems to discuss compounding interest on investments, they always say build equity(which costs you money to access and only if your employed).If he can’t find roommates or they leave and he loses his job then what?Sell the house in a down market and incurring large fees to do so then he has to also payback HBP or pay tax on it.Get him to build large portfolio and use the returns to pay his share of rent on house in someone else’s name, he can walk away at anytime.
Come on guys, cut poor Jake some slack. I agree with Jim 100% on this one. The best investment you can make in your lifetime is to own the house you live in. Yes, there are short term risks, but the tax free rewards down the road are worth it…… especially if the roommates are paying the mortgage.
For a 23 year old, Jake already has his financial act together. I don’t know too many 23 year olds with $6,500 in ready cash, not to mention $10,000 in RRSP’s. Of course, I don’t know many 23 year olds making $80,000 a year either.
Jim’s right. The most difficult financial decision we all have to make is in the balance of whether to spend now or provide for the future. Jake has a right to spend some on frivolities if he is also able to make the commitment to purchase a home and provide that stability for his future.
Good luck to you Jake and congrats on having your act together at such an early age.
“If I were Jake I would stop financing anything that depreciates and start practicing delayed gratification in regards to his wants. Buying used versus new is also a great practice.
Does Jake fully understand the true cost and expenses that come with home ownership?” Well said. I believe that a house is required to live in but it should not be viewed as an investment or one of the best investments you ever make. The return on investment is surprisingly low when you consider mortgage interest, property taxes, utilities, and fees associated with upkeep over the years. I’d show Jake a graph with savings rate and years until financial independence is reached and let him decide what is truly important. A new quad and working the next 40 years or saving 50% of his income and being financially independent within 17 years.
Thanks for sharing let us know what Jake decided to do.
The Money Spot
At 23 Jake sounds quite grounded. All the previous advice works well in my mind. Might suggest seven year plan that plots life wants versus needs. At thirty… a quad will play second fiddle to a house,besides he has a quad..happiness is relative.
IF Jake is really into money and investments, that advice could set him up nicely. But I am more concerned about the stability of Jake’s job. Making that much money is suggestive of industries like construction or oil and gas, that are very influenced by economics. Jake could end up without a job and have a big mortgage to service. If his current roommates are employed in the same industry, his tenants could disappear. My advice to Jake would be to see whether he is interested in home ownership because it will be HIM mowing the lawn, shovelling the snow and dealing with neighbours if it doesn’t get done (instead of quadding or sledding). If he is not ready for that, home ownership could become an albatross around his neck. If Jake were 32 or so, I might not be as concerned because he would be developmentally ready for home ownership and settling down.
I love all the comments, ideas and suggestions! Keep them coming