Advice appreciated (25 y/o F in Toronto)

[samsam53]

Hi guys,

I'm a 25 year old female (soon to be 26 in a few months) working in the Federal government, making around $63,000 annually.

I've been really interested in saving for the past year or so and have recently been reading a lot about Personal Finance on Mr. Money Mustache, Canadian Couch Potato and doing some lurking around here (this is my first post!). I'd like some advice on what to do.

CURRENT FINANCES:

• No Debt
• 25k in cash in a TFSA savings account with PC Financial, not invested in anything. Basically just earning a little bit in interest each month
• 10k in a RRSP 1-year GIC that I purchased without much thought in February 2016 (wanted the tax return and was not sure how to invest my money)

INCOME:

• $63,000 annually
• Approx $3300 after-tax per month (A lot of deductions due to our pension plan)

MONTHLY EXPENSES:

• Rent - $1000 (Toronto)
• Cell phone - $55
• Car insurance - $100
• Gas - $50
• Public Transit - $130
• Food, Dining, Entertainment, Shopping $200-400

I aim to save around 1.5k per month and am usually able to.

I know that having cash just sitting in my bank without investing it is not very smart, but I'm not confident in my strategy. I'm thinking about maxing out my RRSP contributions this year and putting around $10k in the Tangerine RSP Investment Fund in their highest risk (all equity) portfolio, but a bit scared to take the leap without perhaps considering other options. I'm thinking about also opening another Tangerine Investment Account (non RSP) for mutual funds (same risk and portfolio) for another $10k since I don't want to be penalized by CRA for going over my RRSP limit. Does that make sense to do?

GOALS/FUTURE:

• I'd like to put $20k in a mutual fund or some sort of financial vehicle and have it generate as much money as possible. Not planning on touching the principal or earnings until I take out everything in 15-20 years or so. I plan on contributing at least $1k per month to this. Not sure what I'll use this for in the future, maybe my (future) kids' University education or maybe to have some financial independence and only work part-time when I'm older.
• I'm undecided on if I want to save for down payment on a house or condo in Toronto. I plan on being here long-term but I've read a lot about how renting for life may the smarter investment, although it is an unpopular opinion. Anyone have any thoughts on this?

Any insight on how I should invest my money would be greatly appreciated. Hopefully no one will be too harsh on me for my lack of financial literacy.

Thanks for taking time to read all this if you did... even more so if you respond!

 

[turmoil77]

@samsam53 I would max out your TFSA before putting anything into an RRSP. Your current TFSA is earning "a bit of interest". Switch that into index ETFs. Absolutely do not open a non-registered investment account while you still have TFSA room. If you want to keep your 25K in something safe there is still nothing stopping you from putting the 10K into a TFSA and then investing it there where it can grow tax-free and you can still access it when you need to.

Your pension may change the math on RRSPs, but I'm not a public servant and don't know the details. I just know that some people with pensions have lower caps for what they can put into an RRSP.

 

[resjudicata]

@turmoil77

Your current TFSA is earning "a bit of interest". Switch that into index ETFs.

Are you saying take money out of the TFSA and invest it in ETFs?

 

[john2020]

@resjudicata I don't think so, TFSA is poorly named, but it is a registratration with the CRA like an RRSP, you can do almost anything with the money in a TFSA. So the actual advice is to open a tfsa account with

a) tangerine to invest in thier funds,

b) a robo-advisor such as wealthsimple or wealthbar to invest in their portfolios, or

c) a brokerage such as questtrade to buy a portfolio of ETFs.

You would want to do a transfer in-kind, but its quite simple to do.

 

[zahrazaida55]

@john2020 Yup - you can go to either RBC, CIBC or any other bank that has a self-directed TFSA option offered by their Direct Investing platform, and hold any Cdn listed equity, mutual funds, ETFs etc in a TFSA and all gains and dividends and distributions on those are untaxed.

 

[newmommie305]

@samsam53 like others have said.. definitely max out your tsfa before you move onto any rrsps. I am also a government employee with a defined benefit pension plan. RRSPs only really work out in the end if your income is less than when you are withdrawing it. But if you are planning to stay with the government, your income due to you pension will still put you in a higher income bracket meaning you may pay just as much or even more taxes depending on the situation. A good reason for you to put money into the rrsp is you find yourself not working for the government or an employer without a pension. This way it acts as a hedge. TSFA is king for every situation though. It is very accessible and you can even use it as an emergency fund if need be. I am going to be perfectly honest with you here and tell you to go 90-100% on ETF's or equities. This may not be the most popular here. But honestly, as a government employee myself, you are pretty much hedged with your pension at the moment. You can take more risks and especially at a young age where you have time to let your portfolio grow. This especially true at your beginning stages. I mean, 20-100k in equities at this moment will be a small percentage of what you will have in your portfolio eventually anyways. This is fine as long as you are not manuvering in and out. Just keep adding money and coast through. It will be hard not to check your portfolio and the markets everyday at the beginning, but you are in a good position so no need to panic. The situation may change a lot if you change careers or employers.

 

[orlandin]

@samsam53 Honestly just rent! I think people forget about the other fees you might have to pay when purchasing a home or a condo. Condo fees can be sometimes half of the rent on top of the rent (I've seen this with a friend, not all condos are like that but condo fees never go down, always up). Imagine saving $500 per month and putting that in your TFSA. You have fantastic financial literacy. I am in your age cohort but we are definitely a minority among people I know.

 

[truth_love]

@samsam53 To be honest, while I agree that long-term investing should be your focus, I don't think it's bad that you have $25K just sitting in the bank. It's nice to have that kind of emergency fund and the only sucky thing about it is that it's in your TFSA.

Ideally you want to be using your TFSA on investing and when your GIC is up, you'll want to put that somewhere else too given that it's in your RRSP. However, outside of those, you will want to have a sizeable smount of cash in an account in case the worst happens (assuming you don't already).

When it comes to investing, I think the standard advice is typically to seek out the help of a professional and that makes a lot of sense. That being said, one piece of advice I'd offer is to take a couple thousand and invest it how you feel it should be and then monitor the results for a couple months. It's not a long-term strategy, but I see it as a way to get comfortable with the market and it incentivizes you to start thinking more about the economy. It also gives you a better idea of how much risk/loss you're willing to tolerate, which will be important information down the road. Finally, if you make costly mistakes with the money, it will be a good lesson and a relatively cheap one as long as you kept the vast majority of your money on the sidelines during this process. You don't have to go this route of course, but personally I think there's some benefit to it.

As for as buying versus renting...buying in Toronto is very difficult for first timers right now. It's not undoable, but you'll be saving up for a while before it's reasonably viable, so you might want to mostly table that for now and just keep an eye on the market, monitoring the sale or list prices of places in areas you're interested in.

 

[resjudicata]

@samsam53 May I ask what you do at the govt. And how you got that job? Im 30and been trying to crack the government nut for 6 years

 

[bugster3]

@samsam53 You don't have to bother much with RSP unless you have a home to buy in the horizon, maximize your TFSA first, this should be priority.

You seem serious about your monthly contributions for the upcoming mutual fund, which is awesome, so I would say diversify in a few funds rather than putting all your eggs in one basket. I personally love myself 100% growth-oriented funds, we are similar age so take advantage of stocks in the fund rather than settling for a slow moving bond fund.

As you lurk in CCPs, I am sure you know all about Index Funds, so explore dividend-paying growth funds, both U.S and Canada have great top 10 firms so take advantage of it.

Once you have kids, then diversify within RESPs for the government to match your stuff.

 

[apocalypticadam]

@samsam53 Hey, I'm in a similar place as you: 24F (25 in a couple months!) in Toronto.

Step 1 is to have an emergency fund - 3 months' expenses at lease in a high interest savings account, preferably not in your TFSA. So about $5.2k here.

Step 2 is investing for retirement (or, depending how good your pension is, other long term goals). Because your taxable income is relatively low it's probably best to save your RRSP contribution room until you make more and use your TFSA. You can get the same all-equity fund in a Tangerine TFSA as in their RRSP (I have both in the same fund). Contribute your $1k per month to this until you've maxed it out. You can use this for a down payment if you want to in the future, or to pay for a wedding, or childcare expenses, etc. The $19.8k you have left in your TFSA now should go here.

When you max your TFSA, Step 3 is to create an RRSP like the one with Tangerine and keep investing that $1k/month there. The money you already have in your RRSP should be transferred to this account (NOT WITHDRAWN AND RE-DEPOSITED) once it's free of the GIC.

When you max that, if you still have money to put away, then you can think about a taxable brokerage account. This will probably not happen anytime soon. But do make sure you know your contribution limits each year and don't go over.

Regarding buying a house in Toronto, I know I don't plan to. I am saving for a house, but I'll be moving away before buying. If I were to stay in Toronto I'd probably be planning to rent forever.

 

[sevensong]

@samsam53 If you want to live in Toronto for good and considering between rent or buy, you may want to read the book "Wealthy Renter" by Alex Avery who gives a good argument that rent is a good investment especially in expensive city like Toronto (He's a Torontonian)

Otherwise, it's sounds like you're looking at a bright future financially. Maybe also read CCP blog and podcast if you are looking into long term investment

 

[shetel]

@samsam53 I can't weigh in on the rent/buy debate, except to say that Toronto is very expensive. I prefer buying, but if I were in Toronto, that might not be the case.

You have a lot of money in cash. You've identified that some of it should be moved into a product that will get you some long term growth. You're correct. I recommend the Canadian Couch Potato blog http://canadiancouchpotato.com/ as a place to start. Low-cost index funds are almost certainly your answer. They will bounce around in value, losing 30% some years, and gaining 30% other years, (but over the decades, will average 6-9% per year compounded) so you need to be ready for that. Grab a copy of the Canadian book 'Millionaire Teacher' which will help prepare you mentally for this, and it's quite entertaining as well.

You will want to keep some in cash as well. PFC recommends cash in an "emergency fund" valued at several months worth of your expenses. This should be kept in a high-interest product such as one found at https://www.highinterestsavings.ca/chart/

Keep in mind that TFSA and RRSP are just classifications you can add to any financial product. Your investments can be classified as RRSPs or TFSAs, as can your cash savings accounts. You have a limited amount of contribution room in each of these, which you want to maximize before considering using 'unregistered' accounts. So you can avoid paying taxes on growth.

 

[john2020]

@samsam53 I think you have gotten excellent advice and I also think you are in a very strong spot, so good job on that.

I only have a couple of things to mention, first, while tangerines mutual funds are great, the fees are still a little higher than you need to be paying. I would suggest looking into a robo-advisor like wealthsimple or wealthbar. The total fees will end up being a little lower.

The second thing is that your tfsa does not need to be a savings account, you can do all of the same investments with it as you can with an RRSP for example. If you go onto the site for wealthbar or wealthsimple, they give you the option to open both a TFSA and RRSP account at once so you only have to go through the paperwork hoops once.

Again, great job and good luck

 

[sarahs_]

@samsam53 Investing is good, and mathematically you'd get the best expected long-term returns by going stock-heavy, but you need to be comfortable with it or you may have a really unpleasant experience. Lots of people think they're risk-tolerant, buy 100% stocks, and then a crash happens, they sell at the bottom, and never invest again. Average investors do dramatically worse than the market, and in large part for this reason.

To increase comfort, there's a few reasonable options.

• Get professional advice. If you have an advisor you trust, they can help keep you on the straight and narrow.
• Dip your toes in with a small investment. Build comfort your own way, and hopefully feel better down the line.
• Invest in low-volatility products, like bonds. These have far less risk of losing lots of value in a crash.
• Invest in products with guarantees, like GICs, segregated funds, or a whole life policy. These ensure you a guaranteed minimum return.

All of these options have costs - fees, foregone returns, or both. But all of them are better than leaving the money in a bank account forever, and also better than throwing it all in stock, losing your shirt, and then hiding cash in a mattress until you're 92.

Re living in Toronto, real estate isn't a bad thing to invest some of your money in, and the advantage of being a homeowner is that it locks in your costs over the long term, whereas they keep growing annually if you rent. But there's costs and effort involved, and the money that's in the house can't be invested elsewhere. The usual rule of thumb is to buy if you're staying 5+ years, and I think that's reasonable, but it depends on your preferences.

 

[zahrazaida55]

@samsam53 I've found that the idea of leaving money in a bank account earning low-interest is actually detrimental in the below-inflation-interest-rates offered by most banks currently. Consequently, until the Bank of Canada decides to alter that and/or its hands are forced through Finance Canada taking on debt, etc; the best option for personal finances is to show the current balance in your accounts when applying for a revolving unsecured line of credit for that amount.

This will also give you piece of mind that in the case of a catastrophic event (e.g. new car being totalled and insurance will only pay a portion and not half because it's your fault, vet bills from a cancer-ridden cat/dog) you can dip into the line of credit, carry a balance in that for a few weeks while you unwind investments to liquidate assets to pay off the line of credit balance.

At the same time, start investing in diverse ways. Because you seem somewhat risk-averse, I would suggest diversifying investments in a few ways by 1) diversifying what type of organizations you invest using (I personally invest using a Return-Of-Premium Insurance Product, a Credit Union, Employer-provided RRSPs, RBC Direct Investing); 2) Diversifying your portfolio in terms of cash-flow structure (A return-of-Premium Insurance Product, A S&PTSX30-linked Principal Protected Note, a Portfolio of ETFs, Self-Directed ETFs that I like); 3) Diversifying the countries that your investments are exposed to (My portfolio of ETFs are heavily weighted towards the BRICs due to the higher earnings environments in those countries).

Note: a PPN or a Principal Protected Note is a great place to start investing with. My credit union has one where they buy say a $1,000 Zero-Coupon Bond at say $973, and for the remainder $27 they invest in a S&P TSX 30 ETF. This means that you are basically getting back $1,000 when the PPN matures and an extra kicker from the returns on the ETF.

Here's a few lessons I've learnt over the years: Don't put all your eggs in one basket and assume its going to work. Credit Unions will tend to invest in other people's mortgages with less of an interest-rate gap on their interest rates offered vs paid and can help you with low-cost, low-risk investments. Most Canadian banks and eTrading platforms have Direct Investing which will allow you to invest in high-risk high-return investments. Understand your risk tolerance, but also understand that as you get into more investments, your risk tolerance will change. E.g. because I have so much money in my PPN, I don't care if my ETF portfolio yields a negative return because I know I have my PPN to fall back on.