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rob carrick

I would never spend my hard-earned dollars buying a latte from a coffee chain.

Have you tasted those things? They're basically a cup of hot milk, with hardly any espresso flavour. Yuck.

I wouldn't buy a latte, but you go right ahead. Lattes are possibly the most unjustly persecuted luxury item on earth. It's as if buying them on a regular basis is the perfect metaphor for the excessive consumption that has left us with record high levels of household debt.

If you listed all the reasons for high debt levels and low savings rates, lattes rank would rank closer to the bottom than the top. It's understandable why the emphasis on saving more focuses on small things such as lattes, though. Small things are easier to control and less painful to sacrifice.

It can't hurt to be more frugal with your day-to-day spending, and it might even be trendy in a contrary sort of way. But if you want to make a real difference in your personal balance sheet, you need to think big. Houses and cars: These are the purchases that keep you from saving.

No, I'm not telling you to stop buying houses and cars so you can save more. My message is that spending less on massive purchases – and thus borrowing less – will leave you with enough money to save, and to afford small luxuries such as lattes, dinners at nice restaurants now and then, a good bottle of booze and whatever else turns your crank.

Our problem is that we take out mortgages and car loans and then see how much money we have left to save. But if you combine the cost of financing a home and one or two cars, there isn't much left for many families.

A standard affordability measure used by lenders is called the total debt service ratio. The TDS compares your monthly mortgage costs, property taxes, heating bill and all other loan payments against your gross income. If your TDS comes in at 40 per cent or less, you're golden in your lender's eyes.

Let's play around with the TDS and say you're in good shape to borrow if your mortgage, housing costs and other debts, plus a savings commitment of 10 per cent of your paycheque combine to account for less than 40 per cent of your gross income. If it were me, I'd probably try for 30 to 35 per cent, but never mind.

Adding a savings component to to the affordability picture will reduce your buying power in the housing market. In Toronto or Vancouver, you might be priced out of the market altogether. But if you can't buy a home and keep up a decent level of savings, then you can't actually afford the home.

The reason people often ignore this point is they've bought into the idea that housing is, at best, a good investment and, at worst, a forced savings plan. A house can be both those things, but mostly it's a forced spending plan.

I say this as the owner of a home where one of the bathrooms is being repaired and renovated after long years of wear and tear. In the past five or so years, we've also put a new roof on and fixed up the kitchen. Next up: rebuild the driveway. It never ends when you own a home. So if you expect to buy as nice of a house as you can afford, don't plan on having money left over for a proper level of saving.

Cars worsen the savings crunch caused by mortgage payments and other housing costs. It's laughable for families with two car payments to think that small measures such as cutting lattes will make a difference. Sell a car, enjoy the lattes.

Spending less on cars is easy. You can buy used one, or you can take advantage of the wide range of models and prices available. Instead of looking for ways to move up to a higher model, move down a notch or two and save some money.

Housing is tougher. You'll almost immediately feel pressure to increase whatever spending limit you decide on when you start your search for a home. Resist it. What you sacrifice in the number of bedrooms you get will be more than offset by the flexibility you have to pay your mortgage, save sufficiently and enjoy life.

As for lattes, try a macchiato instead. It's cheaper, and you can actually taste the coffee.

For more personal finance coverage, follow me on Twitter (@rcarrick) and Facebook (Rob Carrick).

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