This millennial couple making $150,000 just became parents. Can they survive on one income?
Millennial Money is a weekly submission-based series that provides financial advice to millennials. Read the full series here.
As a tech programmer and teacher, Andrew and Mia, a couple in their 30s living in the GTA, make a combined income of about $150,000.
Living in a house they bought together in Durham Region, 2021 has been a milestone for the couple, as they've become parents. Since having our baby and COVID, we don't go out much. If we do, it is usually free events in the community or exploring parks and trails. We also have friends over to play games regularly," Andrew said.
Mia is currently on maternity leave and is making more than $2,000 less a month than before. Still the two are thankful to bring a child into the world, and now are really looking to get their finances straight to prepare for the future.
On a typical day, Andrew and Mia have a short drive to work. We're only going twice a week though, and the wife is on parental leave," Andrew said. The couple always eats breakfast at home and are also good about packing a lunch to work. (Out of parental leave) my wife will eat out for lunch, for about $10 to grab Tim Hortons," he added.
The two enjoy making dinner at home, and only dine out once a week, usually with Mia's parents who pay for the meal. When it comes to buying groceries, the two are always looking for deals. We price match groceries every time we go," they said.
As parents now, they have very specific goals in terms of preparing for their future. They want annually to add $2,500 in the RESP plan to maximize the government grant." They also want to max out their TFSA accounts each year, in which they currently have about $6,500 combined. There are also plans to buy back Mia's pension from parental leave by May 2022 (around $5,000).
On top of these savings, the couple wants to be able to pay off their mortgage, and have been quite productive in doing so. We have put about $10,000 extra each year in 2019, 2020 and 2021," Andrew said.
Eventually, the plan is for Andrew to become a stay-at-home dad while living on Mia's income, $86,900 a year, starting September 2022 until July 2023 at least," they added.
Other than their mortgage, the two have no debt but have some anticipated expenses coming up.
We likely want a deck and fence for summer 2022 (est. $4,000), and a wedding out of province, ($1,000 for flights and food - accommodation is covered)," they said.
To get a better idea of their finances we asked the couple to share a week in spending.
The expert: Jason Heath, managing director at Objective Financial Partners Inc., on Andrew and Mia's goals:
Andrew and Mia have seen their family income drop and their expenses rise since becoming parents, but were well positioned for it. One financial challenge as you work your way through adulthood and especially life events like home ownership and starting a family is planning for these peaks and valleys in cash flow. In Andrew and Mia's case, they are both able to take extended periods of time off work to be with their newborn because they live within their means and have built up savings and avoided debt. These types of opportunities are the rewards for sacrificing spending in the past.
They may want to put a pause to RRSP contributions for now to improve their cash flow. If they will both have lower incomes due to parental leaves, the tax refunds from their RRSP contributions will not be as beneficial either. The pension buyback for Mia is a good thing to consider. By contributing the approximately $5,000 for missed pension contributions while off with their little one, she will be entitled to more pension income in the future. The school board will also contribute to the pension as well, so not only are the contributions tax deductible, but they will also prompt her employer to contribute more to her future income in retirement. The return" on the investment to buy back pensionable service is often better than could be earned contributing that same money to an RRSP, but should be evaluated on a case-by-case basis. If cash flow is tight, pension buybacks can generally be funded with a transfer from an existing RRSP account as well.
Andrew and Mia are making TFSA contributions as well as extra payments against their mortgage. As long as their risk tolerance is relatively high and their investment fees are relatively low, they may be able to come out ahead using this strategy. If their risk tolerance is low or investment fees are high, their expected TFSA return may not be much more than their mortgage rate, making debt repayment possibly more appealing. As interest rates rise, the opportunity to use TFSA savings to make additional lump-sum mortgage contributions is something to consider for borrowers.
An RESP is a good way to save for their baby's post-secondary costs. A beneficiary can have up to $2,500 per year of contributions qualify for a 20 per cent Canada Education Savings Grant. If Andrew and Mia's parents or other family members open an RESP and contribute to it as well, that will reduce the amount of their own contributions that will qualify for the government grant. Even if a new parent does not have the cash flow to make RESP contributions, if they have a TFSA account, they could withdraw from it to contribute. TFSAs are tax free and RESPs are tax deferred. The tax on RESP withdrawals could be minimal as the income is attributed to the child at a time when they may not be working while attending college or university. But the 20 per cent return on contributions makes RESPs really appealing, especially if the funds can be committed now without compromising family cash flow needs.
If Andrew and Mia don't already have good insurance coverage and up-to-date wills and powers of attorney in place, a life event like the birth of a child is a good reason to check those items off their financial to-do list.
Results: They spent less. Spending in week 1: $1,870.87 Spending in week 2: $996.29
How they think they did: We did our best to stick to essential spending at a very expensive time of year," Andrew said, adding that many of the purchases were for Christmas gifts.
Our one treat was lunch for Grandma's visit to her grandchild. Outside of the gifts and larger credit card bills, this is a typical week for us."
Take-aways: After reading the advice, the first thing Andrew and Mia realized is how conservative they are with spending, which will help them with their future goal of temporarily having a single income.
It was nice to know we are still able to live within our means with reduced income so a parent can be home with baby," they said.
Because of their jobs, both have defined benefit pensions, and so they are able to forgo RRSP contributions. They say they can catch up in future years when their income is higher again, and both continue back at work.
Reflecting on their expenses and seeing Heath's feedback has made them also grateful and proud of how they've done so far. We learned that our ultimate goal of putting family first is possible because of our financial goals leading up to our first child. It is a welcomed reassurance based on the advice we received," Andrew said.
In the future they will continue to make saving their number one priority, and make sure to live within their means, especially as more costs arrive as their child grows up.
Even when our incomes were low compared to now, our spending habits stayed the same. This allowed us to increase our savings as we got older, giving us the foundation we are on now as we start our family," they 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 ekwong@thestar.ca
Digital design by Cameron Tulk.
Evelyn Kwong is a Star team editor based in Toronto. Follow her on Twitter: @evystadium