Can young lawyer take his next step?
BUSINESS | SMART MONEY
This young Toronto corporate lawyer wants to go back to school. Can he make the money work? In our Smart Money series, #MillennialMoney, the Star’s Ghada Alsharif asks people to record every penny they spend in a typical week. Then, using tips from a financial adviser, we challenge them to cut their spending the following week so they can save more money. Will they fail or succeed? Roger is a corporate lawyer with dreams of continuing his education. The 25-year-old wants to complete an international master’s degree in the next five to seven years. The good news is he’s a high-income earner, making a salary of $130,000 annually and expects his income to increase by about $10,000 a year in the future. He lives in Toronto’s Queen West neighbourhood and pays $2,500 in rent. Every month Roger puts $300 toward a TFSA, $200 toward an RRSP and $100 to his company pension. He buys dinner when he works at the office but typically makes lunch and breakfast at home. Over the weekends he prefers to hang out at his friends’ places or has them over, which allows him to “save money on transport and dining or drinking out,” he says. On his days off Roger says he lets himself indulge in UberEats. How can Roger best plan ahead to save up for his aspiration to study abroad? We asked him to share his monthly and weekly spending to see what he can do. The expert Jason Heath, managing director at Objective Financial Partners. Roger expects his income to increase by about $10,000 a year in the future. That represents an increase of eight per cent on his current salary, but it is important to put that in perspective. As a high income earner paying over 43 per cent marginal tax on his next dollar of income, Roger only keeps about half of his raise. If his cost of living absorbs all that after-tax income, it can make it hard to get ahead. In his case, tax deductions from RRSP and pension contributions can help. These contributions save tax by allowing a tax deduction for the contributions, and save a lot of tax for someone in a high tax bracket. Roger can contribute $10,000 to his RRSP, or he can have $5,700 after-tax to spend today. That $10,000 can grow a lot over the next 30 to 40 years, and hopefully be withdrawn at a low tax rate in retirement. One problem that I see with Roger’s saving plan is he only contributes $100 a month to his company pension. Company pensions generally have matching contributions that are made by an employer to magnify your savings rate. If he can contribute more and get a larger matching contribution to the pension from his employer, he should consider increasing those contributions and reduce RRSP contributions. If Roger’s medium-term goal is a master’s degree, he can plan to accumulate and withdraw up to $20,000 from his RRSP under the Lifelong Learning Plan. I would be hesitant to build up much more than that in his RRSP given his age and stage. His TFSA could be more flexible and used for anything. TFSA withdrawals can even be taken in the future to top up your RRSP. I like how Roger has automated his investing with monthly deposits to his pension, RRSP and TFSA. If you save first and spend second, it can help you live within your means. His challenge may be keeping his expenses in check as his income rises. I would challenge him to save at least half of any salary increase. Take-aways While the advice wasn’t particularly surprising to Roger, he says he will be taking Jason’s advice on board. “I will be implementing the increased funding to my TFSA and RRSP as well as increasing my pension requirements to double it,” he said. ARE YOU A MILLENNIAL LIVING IN TORONTO OR THE GTA WHO NEEDS HELP WITH SAVING YOUR MONEY? BE A PART OF #MILLENNIALMONEY AND EMAIL GALSHARIF@THESTAR.CA