Millennial Money: Lola has a solid income and feels ready to take the next step.

In our Smart Money series, #MillennialMoney, we ask 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?

Lola, 37, works in the pharmaceuticals industry making $87,000 a year, plus bonuses. Having spent most of her adult life living with roommates, it’s time for her to be more independent.

Though the plus side to her living situation is her rent comes in under $600 in Etobicoke, there is a downside: lack of privacy.

“I really need my own space,” she said.

She started looking into renting her own place, but found that listings started at around $1,500 to $1,600 a month. “It’s too expensive,” she said.

The high prices got her thinking: if she would be paying $1,500 a month to live alone, how different is that from monthly mortgage payments if she chooses to buy?

Though she’s earning more than ever before, she notes that her work contract is set to end in June 2022. She also has $10,000 to pay off in student debt.

Before jumping into home ownership, she wants to make sure she can be financially stable in case her contract doesn’t get extended.

Luckily during the pandemic, Lola has been able to save around $300 monthly as she hasn’t been incurring public transit or grooming (hair and nails) expenses.

In addition, working from home has led her to have more homecooked meals. “During pandemic times, most meals are at home, but I’ll still buy lunch at $10 to $15 per meal.”

Should Lola be looking to rent or buy? How can she get organized to make that move? We asked her to share a week of spending to get a better idea of her finances.

The expert: Jason Heath, managing director at Objective Financial Partners Inc., on Lola’s living situation.

Lola is a renter who is considering buying a home. There are a few things that she should consider.

She should get pre-approved for a mortgage so she knows how much a bank will lend her. Based on some quick calculations, she may be able to buy a $400,000 condo with a $20,000 down payment. You need a five per cent down payment at least and can borrow the other 95 per cent from a bank.

It is one thing to know what the bank will give you and it is another to know what you can actually afford.

Lola’s budget of about $1,500 per month suggests she should be saving over $3,500 per month based on her income. If she is, that is great, and she could pay off her OSAP debt and build a down payment in no time.

I am wondering, though, if she has understated her spending, so she may want to do a deeper dive on her expenses. Online banking sites often have built-in tools to analyze your spending by category, and there are third party apps for the same purpose. Lola should consider building a budget to see if the cost of home ownership works for the lifestyle she wants to live.

Say the bank does approve her for a $380,000 mortgage with a $20,000 down payment, there are other closing costs like provincial and municipal land transfer tax, legal fees and moving costs to take into account. Her mortgage payment could be $1,600 to $1,700 per month assuming a mortgage rate of 2 to 2.5 per cent.

At first glance, that seems like a bad choice given she thinks she can rent for $1,600 per month. However, assuming a 2.25 per cent interest rate on a $380,000 mortgage over 25 years, about $950 per month of her mortgage payments would go toward paying down mortgage principal in the first year.

On the other hand, home ownership has other costs. If it is a condo, as would likely be the case in the Greater Toronto Area at that price, there are condo fees to consider. There are also property taxes, insurance costs and repairs. The point is you cannot simply compare a mortgage payment to monthly rent to determine which is best financially.

In the short run, I think Lola should focus on paying off her remaining student debt and building a down payment fund while she considers her budget for renting or buying. She has $150 less to spend on public transit given she works from home, so hopefully that is all going toward debt repayment and saving.

Results: She spent less. Spending in week 1: $261.50 Spending in week 2: $175

How she thinks she did: Lola notes that her week-to-week spending are quite similar as she’s put together a plan that she sticks by, but this exercise has made her realize that there may be expenses she’s unaware of.

“I need a better tracking system to track my expenses, because smaller expenses can go unnoticed which might add up later,” she said.

She’s downloaded an app to help track all her costs to get a better idea.

Take-aways: “Given all the detailed calculations and advice from the expert, I think renting would be a good choice for me at this moment,” Lola said.

This doesn’t mean she is giving up totally on home ownership, just putting those plans on hold for now. “This advice was really helpful to make a decision. I will work toward building up my down payment and maybe I would be able to afford a bigger house at a later stage.”

On top of looking for rental spaces, she wants to change her mindset about the extra cash she has. “I will keep in mind any extra cash saved or earned will go toward paying my student loan or investing,” she said.

“A small change in perspective can make a big difference.”

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