But when it comes to dinners, she goes out several times a week.
Likewise, on the weekends, she will spend a few days having a drink or having a brunch with friends.
She knows she can change her lifestyle to save even more and just pay off her credit card, but she waited.
How can Julie reconcile work and life? We asked him to share a week of weekly expenses.
The expert: Jason Heath, Managing Director at Objective Financial Partners Inc., on Julie’s situation.
Julie has a good salary but has been hampered by credit card debt she incurred while traveling while working in Europe. Now she wonders if she should rush to pay but is torn apart by the fear of missing out on time with her friends.
I note that she has $10,000 in her TFSA, but she has credit card debt of $20,000. Let’s assume her credit card interest rate is 20% and do some quick math.
Suppose his TFSA can earn five percent a year. If she has $10,000 in her TFSA and earns 5% a year for five years, she will have $12,673 to show. Meanwhile, the equivalent of $10,000 of credit card debt at 20% interest could climb to $24,883.
The fact is, unless your TFSA investments are earning a higher rate of return than your debt, you’re falling behind by staying invested instead of paying off that debt. The calculations are a little trickier with an RRSP account, as withdrawals from an RRSP are taxable. Therefore, cashing in an RRSP to pay off a debt is only advisable in difficult situations. But saving in a TFSA when you’re in credit card debt probably isn’t a winning strategy for Julie.
In the long run, it would be great to see her contribute to an RRSP, because her marginal tax rate is 43%. She can put in $100 and get a tax refund of $43. But I think I would focus on paying down debt before investing and would strongly consider using his TFSA to reduce his debt.
His rent is quite modest for Toronto at $1,800 including utilities. Rentals.ca and Zumper report the average one-bedroom rent in Toronto, excluding utilities, at $2,044 and $1,975 respectively. Julie saves money on lunches by cooking at home and putting them in brown bags, but she enjoys going out to dinner and having drinks with friends two to three times a week. She also wants to take a big trip soon, presumably missing the trip to Europe that got her into debt in the first place.
The easiest way to pay off debt or save money is to reduce your expenses. Alternatively, you can increase your income. Expenses are much easier to control, especially for someone who has a lot of discretionary spending. If Julie wants to meet her travel goals while paying off her debt, she may need to limit dinner and drinks with friends to once or twice a week instead of two to three times. This can be a good compromise for going on a big vacation soon. In the long run, saving first and spending later can help her reach other goals like home ownership or saving for retirement, even if they aren’t specifically on her radar.
I would set a monthly debt repayment goal and set up automatic payments. Julie may also want to start spending using her debit card instead of her credit card. If her bank account balance is running low before her next paycheck, then she has to make a conscious decision to use her credit card and go into debt or say no to a night out with friends.
Results: She spent less. Week 1 expenses: $2,294.49 Week 2 expenses: $937.50
How she thinks she did: “I think I made it, but I realized my weekly expenses were approaching or exceeding $1,000, which is insane, mostly due to repayments,” she said.
While she hoped to cook more this week, buying a huge amount of organic produce from Farm Boy, she also acknowledges that she may have to wait until she says yes to all the weekend commitments to get out of debt.
“It’s clear that if I don’t organize myself, I will fall behind.”
Take away food : Looking at the boards, Julie is amazed at how much debt she has gotten into, despite making a lot of money.
“When Jason broke down the comparison of TFSA and credit card interest, it really opened my eyes,” she said. “I might think I’m okay with not looking at the buildup on my credit card, but it all adds up.”
A big habit she wants to curb is impulse buying online.
“I think I was really desperate to start my life over here again, to look good and reconnect, but now it’s become a crazy habit of scrolling and buying,” she said.
On top of that, when it comes to going out for a drink or dinner, she wants to try cutting back, as Heath said, to see if there’s a huge difference.
“FOMO (the fear of missing out) is so real, but we’ll always have time to catch up,” she said. “Hopefully these small lifestyle changes will get me back on track.”
For now, she’ll spend most of her time paying off her credit card with the extra cash she gets from her paycheck.
“It’s not something I wanted to face, but I’m glad I did.”
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Digital design by McKenna Deighton.
Evelyn Kwong is a Star Team Editor based in Toronto. Follow her on Twitter: @evystadium