Should Managing Debt Come Before House Hunting?

Financial Decisions Can Be Tough When You’re Backed Into A Corner

A couple, two kids, two jobs, debt, minimum wage, and house hunting. Sound familiar?

Find out what the Ontario minimum wage hike means for them and whether they should jump into the housing market now before it becomes even more expensive.

Managing debt is one of the single most boring tasks that anyone wants to do but we need to do.

I often get emails from readers about their debt problems when it becomes a serious matter.

Don’t make the mistake of waiting until it’s too late to pull yourself out from under, do it before.

Worst of all don’t add more debt unless you’re confident you can make more money from it or that you can pay it off.

House hunting is a big task that many people take on especially during the spring and summer months.

Real estate agents are ready to go and want to start house hunting with their clients.

Any time a young person messages me about managing debt the debt help they seek is about four things:

• School Debt
• Consumer Debt (credit card, bank loans, etc.)
• Personal loans
• Mortgage

The last thing you want to be doing when you are just starting out in life is to be plagued with heavy debt.

The reality is that with less available full-time work, fewer or changed benefit options (if any), large-scale competition, it can be a struggle.

Just this past week I went for a job interview for the second time in over a year and there were more candidates than I had imagined.

I’ve been working on a contract with this organization for almost 4 years working two jobs just to get my foot in the door.

This is what it takes these days to garner the attention of hiring managers.

They hire the best to make sure they look even better. It’s about keeping the place running smoothly on all levels.

Even the specialized skill category of employment that I’m in will always have competition.

Married readers who contact me complain that their spouse is spending too much money and concerned they will lose their house and marriage.

Why are we not managing debt properly?

Why are we creating debt we don’t need?

The answer: Because we can.

Plain and simple because the options for credit and loans are widely available and geared towards such people.

The excitement slowly becomes sadness when there is little to no funds to pay back borrowed money.

Make more spend more or make more and start managing debt.

Yes, start managing debt. The exciting news for this week was Ontario Premier Kathleen Wynne’s announcement to raise the minimum wage to $15 by 2019.

Those who currently earn $15 are wondering how it might be fair if they don’t get an increase.

Small businesses are wondering how they will survive the wage hike and the extra money by minimum wage earners is met with happiness and doubt.

Managing Debt vs. House Buying

I know couples who have bought a house with little to no savings and have struggled ever since to pay the bills.

Living pay to pay is NOT what you want to be doing when you own a home but many people must live this way to make ends meet.

It may not have always been that way but things happen in life that put homeowners in a changed financial position. Options- move or stay and fight it out financially.

Anyone currently in this position would tell you it’s tough.

I received an email from a reader the other day who explained to me about his interest in buying a house now that minimum wage was increasing.

He’s 24, married with two young children and they both have budgeted for a year.

His wife on the other hand is not convinced that they should be house hunting until the get a grip on managing debt and building a savings stash.

They live in a city where house prices are through the roof and they would like to continue living there.

A townhouse which is the new starter home from young families sells between $350,000 – $500,000.

Fair enough.

Who’s right?

Who’s wrong?

It all depends on whether they can afford it or not.

The husband works in the city and his wife stays home with their two children.

Right now he’s working two jobs one of which offers him minimum wage (part-time) and the other $21/hr (full-time).

He will see an increase over the years with his full-time job as he gains more experience.

They currently have no debt other than a new car loan that will last another 4 years eating up $300 a month from their wallets.

Their net income from his two jobs is approximately $5000 a month leaving them around $3900 net to play with.

That’s not much considering they live in the Greater Toronto Area where rent for a 2 bedroom apartment ranges well over $1000 a month.

Luckily they got in a newly renovated house apartment for $900/month plus gas.

In their emergency savings account, they have $3500.

Money looks better when you earn more

When you’re young and have only worked minimum wage jobs all your life up until now that number seems like a jackpot win.

I remember getting my first job making more than minimum wage back in the UK and had the same feeling but I still saved like crazy.

The big wage earner feeling grows weaker the older you get as family, higher taxes, retirement, and other financial obligations come your way.

The more you earn the more you spend is true especially if you don’t have a frugal mindset.

You know what I mean if you’re nodding your head yes.

Move Left, Move Right or Stay Put

They wanted me to take a look at their monthly budget to see if house hunting was a smart move or managing debt was the better move.

Everything in life is a risk, even buying a house because anything could happen.

Since I bought my first house when I was 21 I wasn’t sure if I was the right person to share my experiences with them.

I reminded myself though that my situation was much different. I had no debt, no kids, and saved like crazy.

If you are a first time home buyer in Ontario as of January 2017 the government doubled the maximum land transfer tax (LTT) amount to $4000.

What this means is that if you qualify you likely won’t have to pay much if at all for LTT with coverage up to $368,000 of the purchase price.

Again, this depends on where you buy and how hot the market is.

Prices in and around the Toronto area have sold for $50,000-$100,000 over asking price.

What you see is not always what you get with house prices especially when it becomes a battle of the buyers.

Minimum wage increase and your budget

First of all, there is no rush to run out and buy a house when you are young especially if you have a family.

You’re better off saving money, managing debt, and have a somewhat freedom feeling before signing on the ‘You just bought a house‘ dotted line.

In a perfect world buying a house and managing it on one income would be great but these days most couples must both work to pay for the bills and childcare (if they have kids).

Some couples can do this but it depends on the mathematics of the situation.

Every financial situation is different.

Here is the breakdown he sent me for their budget.

They use a projected expense budget from my Free Downloads and Tools section.

• Car $300/month
• Rent $900/month
• Utilities $300/month
• Groceries $350/month
• Investments $800/month RRSP/TFSA
• Clothing $50/month
• Misc $200/month
• Car maintenance – $75/month includes CAA, oil changes etc.
• Petrol $120/month
• Entertainment $50/month (eating out etc)
• Allowance $50 /month each
• Sports and activities $50/month
• Life Insurance – $80/month
• Travel $50/month
• Christmas $25/month
• Birthdays $25/month
• Health and Beauty $50/month
• Work-Related $50/month
• RESP $420/month

Total $3295

Emergency Savings approx $305 whatever is left or $3600 a year. If they need to they could lower/chop some of the extras from their budget such as allowance, entertainment, groceries, travel, birthdays.

Don’t let money work against you

I’m a fan of paying yourself first and in this case they are investing for retirement which is a good start for their young family.

As his income grows they will be able to save more for their down-payment if they wait and pay off existing debt.

Related: First time home buyer mistakes to avoid.

If we were in their situation we would rent until we had the down-payment that we would consider our financial safe zone.

This means we can afford everything on one income in the event something should happen.

Don’t settle for the minimum needed even if you are a first-time home-buyer unless you have a nice emergency savings account to back yourself up.

Even then I’d concerned.

I’m a bit of a worrywart when it comes to debt even if  ‘good debt’ is relevant to net worth growth by other financial experts.

For me, debt is debt even if it can make you a mountain of money by investing it.

The risk factor is everything.

Owning a house is far more expensive than renting an apartment as it comes with obligations such as property taxes and maintenance.

The maintenance side is always the first category to get dumped when funds are too tight.

Let your house fall apart and you potentially risk losing money if you ever have to sell it.

Related: Paying rent-Am I really wasting my money?

The minimum wage increase might see their income go up a few hundred bucks a month but not enough to jump into homeownership.

Keep in mind that if you use your RRSP as a first time home buyer as part of your down-payment that you’ve just created a debt using your own money.

In this situation, the couple plans to use their Tax-Free Savings Account (TFSA) as a savings vessel for their down-payment along with any savings above 6 months of budgeted emergency savings.

You’re permitted to withdraw up to $25,000 from your RRSP for qualifying home purchases.

Form T1036 needs to be filed to report the withdrawal.

Under this plan, only first-time home-buyers are eligible to participate, unless the special rules for persons with disabilities (discussed below) apply.

You’re considered to be a first-time buyer if, during the four calendar years prior to the year of withdrawal and up to 30 days before the withdrawal, neither you nor your spouse or common-law partner owned a home in which either of you resided.- Tax Planning Guide 2016-2017

If his wife plans to go back to work at a clothing shop she will be earning minimum wage and then have to pay for daycare for 2 young kids.

They may also see an increase in transportation, grocery, clothing, and extras.

Keep in mind the needs of his two jobs for them to afford the lifestyle they currently have while renting.

This is key.

Conclusion

Managing debt and saving more money is the first thing I would do before making any further large debt commitments.

Just because the minimum wage goes up doesn’t mean everything else won’t either.

If so the revolving door just keeps on going unless you’re managing debt or earning extra money.

The larger the down-payment the less you will pay monthly for your mortgage. You may also have the option to add a lump sum yearly or optimize it so it’s paid off sooner.

That means if you do have extra cash you can dump it right into your mortgage or invest it (whichever you are comfortable with).

Our down-payment of $80,000 on a $265,000 home allowed us to become mortgage-free in 5 years. 

Hang on to your money and keep saving, pay off your vehicle, and then look around for something affordable for a one-income family.

This might mean buying a condo, townhouse or fixer-upper if you’re handy (this can be costly so be warned).

Do what’s right for the both of you but consider how you will deal with certain situations before you buy.

Thanks for your email and question.

Mr.CBB

Discussion Question: What do you think this young couple should do? Buy a house as soon as they can with the minimum down-payment to get into the market or continue managing their debt, save more, and keep their options open?

A Week In My Life

As I mentioned above I went for a second job interview for a new opportunity in my line of work.

I don’t know if I will get the job this time around but hopefully I will know more by next week.

We are getting close to our trip to Europe and so far have nothing done.

Once I sort out a few bits and bobs with our vehicle next week it’s all focus on the trip.

Not too much action happening around here. Just work, family, cook, chores,work-out, blog.

Have a great week.

Mr.CBB

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Even if you are down in the financial dumps or life is crappy finding ways to encourage inner peace will help get you from point A to point B.

Amanda from the blog Centsibily Rich shares with her readers about ways to increase happiness because that’s really what we are all looking for. Enjoy the read.

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Making a difference (MAD) 2017

Welcome to the 2017 Making A Difference series! Join the networking movement of Personal Finance Bloggers around the world.

If you are a personal finance blogger and would like your blog to be featured simply drop me an email.

I’m currently booking June /July/August 2017-Limited spots.

Personal Finance Bloggers and Fans: I’m currently recruiting for guest posts on the blog while we go away on holidays. This is your opportunity to get published on CBB.

If you have a topic idea and interested please contact me via email. canadianbudgetbinder@yahoo.ca let’s talk.

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