Millennial Money is a weekly submission-based series that provides financial advice to millennials. Read the full series here.
A musician who usually splits his time between rehearsing and touring, 33-year-old Michael is making a pretty big life change: After years of living with roommates, he is about to move in with his partner.
Right now, rent is low: Michael currently rents a room from a married couple in Parkdale, and pays just $775 a month. He wants to know how to budget ahead for a drastic increase in rent when he jumps into Toronto’s hot rental market.
“So far, I’ve been lucky enough to pay low rent and for the first time I’ll have to deal with the reality of the current market,” Michael says, adding that he’s also debt free. Over the last few years, he adds, his freelance income has “stabilized,” and for the first time he will be able to afford an apartment.
Michael says he doesn’t have a “typical” weekday with his schedule, but tells the Star that he either works from home or rehearses at a venue.
“On rehearsal days I try to bring lunch with me, but if I don’t bring lunch, I usually try to keep the cost under $30,” he explains. “I tend to have only coffee for breakfast, and I almost always cook my own dinner.”
On his off days, he cooks for himself and might go for coffee or to a bar with a friend.
We asked Michael to share a week of spending to get a better idea of his expenses.
The expert: Jason Heath, managing director at Objective Financial Partners Inc. on Michael’s situation.
Michael is renting a room from a married couple and paying only $775 a month, which is pretty modest in the west-end Toronto neighbourhood of Parkdale. He hopes to move out soon with his partner but knows his rent will go way up.
He and his partner should probably put together a reasonable budget for rent, food, and other personal expenses to see how they can make the math work. This will also help them identify who is going to pay for which expenses. In other words, will they split expenses equally or contribute based on their incomes? Will they have a single joint bank account or maintain their own personal accounts as well? Finer details like this are better to address well ahead of time.
If cash flow is tight, they are going to have to figure out where they can reduce expenses. Michael is already pretty good at bringing his lunch with him and eating at home, and when he eats out, he tries to keep it under $30. One thing for Michael to consider given he is self-employed is trying to make as many of his expenses legitimately tax deductible as he can.
For example, if Michael goes out to lunch or dinner with an industry contact, as opposed to his partner or a friend, the meal cost may be tax deductible. Only 50% of meal and entertainment expenses are tax deductible, but Michael will probably save 15% tax on his business meal expenses. This is a way to save money without spending less — simply spending differently.
I would encourage him to try to figure out the incremental cost of living with his partner in a new rental and have that extra amount go into a Tax Free Savings Account (TFSA) each month. In other words, pretend like he is already paying the higher rent. This will get him into the discipline of living without his means with the new higher costs, and also help him build an emergency fund in the interim.
It may not be a bad idea to talk to his landlords to see if they would be open to having his girlfriend live with him for a period of time. If they offer to pay a higher rent for the room, it could work out well for the landlords, and allow Michael and his partner to save some money in the meantime.
Results: He spent less. Spending in week one: $781. Spending in week two: $417.
How he thinks he did: “I think I did very well,” Michael says. He spent roughly half as much in week two compared to week one. “I made a conscious effort to eat out less.” While he spent slightly more on groceries, the money he spent on food went further, he adds.
Take-aways: Michael says the exercise was “interesting,” because it forced him to confront where the money he spends every day was going. Heath’s advice was “very helpful,” he says.
“I’m planning to sit down with my partner soon to work out a budget,” Michael adds, but said he is still worried about the fluctuations in his monthly pay causing issues down the line.
He says Heath’s advice on keeping receipts for tax purposes has reminded him to be better about documenting work outings. “While it doesn’t decrease my weekly expenses, it still means more money down the line,” he says.
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