When it comes to money decisions, it can be hard to know what to do. Should we rent or own? Should we get the variable or fixed rate when considering a mortgage? To clear up some of the money quandaries that we all face, we asked our resident money expert, Melissa Leong, for help.
You’re hearing rumours that your job could be at stake. You have no emergency savings and you have $5,000 in credit card debt. Should you start building up your savings or should you pay off your debt?
The answer is pay off your debt.
You’re paying 18, 19, 20% in interest on your credit card debt. It’s not effective to have money sitting in a high interest savings account, earning 1% when your debts are bleeding you. An emergency fund is important; but if you lose your job or your car breaks down, or you get sick and you need money, your existing credit card debt is going to be a big burden. Debt is like having a boat that’s taking on water when a storm’s on the horizon: plug the holes before that storm hits, and you’ll safely make it to shore.
Now in some cases, it can make sense to save before paying debt if your debt is low or it has a very low interest rate. If you’re saving for retirement and your company has a matching program then take advantage of this! When it comes to retirement, you need to have time on your side for your investments to grow.
You’re a young professional starting your career. Your job has opportunities for transfers which excites you. But you plan to stay in this city for a few years and you want to start building wealth for your future. Should you buy a home or rent?
You should rent.
Renting comes with benefits like more mobility and freedom. Renting is also cheaper than owning so you’ll have more money for other priorities. Plus, if you think you’re going to move and sell in fewer than five years, it might not be worthwhile to buy. Selling a house is expensive — you’ve got land transfer taxes, lawyer and real estate agent fees, moving costs. I’m stressed out just thinking about it!
And I hear you, you want to build wealth, but you can do that in other ways. As a renter, if you diligently invested your money in the stock market, you could outperform the homeowner. In terms of annual returns, the Canadian housing market hasn’t done as well as the Canadian stock market over the last few decades. Buying a home is a deeply personal choice. It could be that you want stability for your family and you want to make a home that is yours, or you like building equity in real estate because it’s like forced savings for you. You just have to make sure you can afford all of the costs that come with homeownership, like those pesky raccoons in the roof or an accidental autumn flood.
You’re buying a house! If your goal is to save the most money, should you get a variable or fixed interest rate when getting a mortgage?
The answer is variable.
Historically, variable rates tend to save you more money than if you were to lock in. So if you do some math, you might find that you’re better off sticking with a variable rate. But just because a variable rate is cheaper, it doesn’t mean it’s for you. If you’re a worrier and you’re going to freak out when rates rise, that’s not worth it. If you sleep better having a set payment, lock into a three-or-five-year fixed term now and save yourself the stress.
You commute a lot to the office and take weekend road trips with the family. Since you drive a lot, you want a nicer vehicle. You’re in the market to buy a new car and you want to be money savvy. Should you buy a car through financing or leasing?
You should buy the car.
In terms of monthly costs, sure, it’s more expensive to buy a car through financing than it is to lease one. But in the end, you own that car. You can sell or trade it at any time and in this case, you have the freedom to drive it as much as you want. With a lease, you have limitations on your mileage and can face extra fees if you go over. You’ll also face fees to break your contract early; you’re in a cycle where you never stop paying for your vehicle. That might work for you if you like to drive the newest of the new and you like the idea of changing it up every few years and just walking away from a car. Maybe you run your own business and you can write off some of your lease payments.
No matter which option you choose, shop around. If you want to do what’s best for your wallet, buy a slightly used vehicle and drive it into the ground. After all, there’s nothing quite like the rumble of a good ole’ used 2010 Honda Civic.
Your job with a private company comes with a defined benefit pension plan. However, the company seems to be on shaky ground and you’ve decided to just quit in a blaze of glory. You have the option of taking out a lump sum payment today or leaving the pension in place and getting monthly payments for as long as you live. Should you take the lump sum or keep the pension?
You should take the lump sum.
If you work for the government, a pension will likely provide you with certain income for the rest of your life and if you have good genes and you’re healthy, you could receive that pension for a long time. Also, some pensions come with health benefits, which is fab. That being said, for private companies, pensions are less secure, like in the case of Sears Canada retirees who saw their pensions cut after the company shut its doors. Maybe you think your employer might struggle to continue funding the pension plan. Maybe you like the idea of having more control of your money and investing the lump sum yourself. Maybe you want the option of having money left over after you die for your heirs. In this case, you’d opt for the lump sum and have it moved into a locked-in retirement account.
Regardless of your choice, explore all of your options carefully. Engage a professional for advice if you need help crunching numbers.
You have a very limited amount of money to save. Should you put that money into your retirement savings or your child’s education fund?
The answer is to save for your retirement.
Ideally, you’d do both. And I know we love our kids and we need to contribute to an RESP to access free money from the government. BUT, if you have to prioritize, I would choose the retirement fund. You know when you’re on an airplane and they tell you to put on your oxygen mask first before helping others? You need to take care of yourself in order to help those around you. You need to start saving immediately to have a big enough nest egg that will support you and your costs of living when you stop working. You can’t rely on the government or your kids to fully cover your needs. Put the money away now for future you, and your kids will thank you in the long run when they don’t have to foot your bill.