The definition of an affordable home is one that leaves you room to save and invest while paying your mortgage and other costs of ownership.
But how, exactly, do you approach saving and investing when you’re just taken on the biggest financial responsibility of your life? This is the question a reader asked recently, just a week after buying a home. “As a homeowner (feels surreal saying it out loud), what's the right proportion or strategy of having cash in hand for emergencies versus investing in TFSA/RRSPs for retirement? Or, do I keep building cash to pay off my car loan or mortgage faster? Just looking to learn what is the right balance.”
As a homeowner of 27 or so years, I can report that the biggest financial adjustment of home ownership is not the regular mortgage payments. Rather, it’s the surprise expenses you incur to keep your house in good working order. So let’s say that starting an emergency fund should be the first priority for this new home owner. Even a few thousand dollars is a helpful cushion against a leaky roof, burst pipe or water-logged basement.
Next steps require some thought about raising a family. If there are plans to have children in the next few years, it makes sense to put some money away to top up maternity/paternity benefits and pay for baby equipment such as a crib, carseat and stroller.
Putting at least a bit of money into tax-free savings accounts or registered retirement savings plans is ideal because the contributions will benefit from decades of compounding. Another benefit is that you learn early on to make room for retirement saving, rather than trying to cram it in later on in life. You’ll likely make more money as you get older, but your expenses will also rise. They call this lifestyle creep – you live better as you make more.
The lowest priority is paying down the mortgage. If you make accelerated bi-weekly mortgage payments, you’ll squeeze a 25-year amortization down to about 22 years. That’s a great start in killing off your mortgage. As for car loans, they tend to have exceptionally low interest rates these days. You can often get a bigger bang for your buck by investing for retirement than paying down a car loan.
Whatever mix of saving and investing this reader chooses, I suggest they implement their plan immediately by setting up automatic electronic cash transfers into savings and investment accounts every payday. Nothing soaks up extra cash sitting in your bank account like a just-purchased home.
Rob Carrick