As is the case for many others, I graduated from university at the age of 22 with a fancy piece of paper in hand, a general idea to what I wanted to do in life, and a sizeable amount of student debt to go along with it. As a Canadian that had a supportive family, I was lucky enough to graduate with only $25K CAD of student debt that had an effective interest rate of roughly 5%. Fast forward two and a half years and I have been able to leave my job having no debt and enough savings to maintain my current lifestyle for a year even living in one of the most expensive cities in Canada.
This was not a happy accident, while I have been very fortunate in the employment I enjoyed over the past two years my savings rate has stayed around 45% of my net income for the entirety of this period due to my conscious effort to stick to a constant budget. While many of my coworkers allowed their lifestyles to creep upward with spending on things such as condos, luxury cars, and extravagant experiences I focused on enjoying life in a modest fashion. While the draw to enter into this kind of spending in your 20’s is alluring, it’s very difficult to then lower your expenses once you become used to a certain standard of living.
Now as with most things in life balance is important to establish. Focus too much on saving and you’ll be rich but many of the valuable experiences that you could’ve enjoyed will be behind you. The desire for further education, exotic trips to remote destinations that may be psychically straining, or even enjoying creating new friendships over an evening out here and there, will have come and gone. Too much in the other direction will leave you quickly saddled with debt working harder and harder to support a lifestyle that is beyond your means. To help achieve this balance below are the techniques that I used and am currently using to get the most value out of my spending in two categories in which young professionals typically spend the most.
The way I approached choosing where to live was through getting to know my city well and minimizing my commute times as much as possible while still living in a desirable area. I considered looking into buying sooner rather than renting, however, this proved to be more expensive when I factored in transaction costs, costs of borrowing, and the overall flexibility I would sacrifice. I ultimately decided on a well-kept older building in a quieter part of midtown in Toronto. Not being downtown or directly on a subway line saved me about $700 / month at the time I signed my lease. While I did sacrifice certain things such as indoor parking, a pool, and a balcony I gained others such as more space due to the older design, dealing with a rental company instead of a single landlord, and a quieter more residential area.
My advice on the ever-changing nature of housing is to really open your mind to where you would be willing to live while still keeping your commuting time below 45 minutes. Really get to know the market before you commit, go on a number of showings to see what your options are, take a walk in the area to know what you are getting into, and ask current residents in that building/neighborhood to see what they have to say.
As a side note on the rent vs. buy debate, there are a number of great resources available that offer a balanced analysis of the situation to determine what would be right for you. The Money Geek Canadian Rent Vs. Buy Calculator is a very useful tool that factors in many variables, while Ben Felix’s Rule of 20 is a fast way to determine what would currently be cheaper in your area.
With both my parents and my girlfriend’s parents living out of the city and my workplace being in a suburban area, I decided that a car would still provide me with a great deal of value in my day to day life. I did consider going without one when I was signing my lease however due to the fact that I already owned a vehicle in good working order I decided on keeping it and living off the subway line instead. The difference in rent and a monthly metro pass would be roughly equivalent to the insurance and gas I would pay monthly.
Now had I decided to upgrade to a new vehicle during this time my costs with a car payment and an increase in insurance premium would’ve had easily turned the tables on this decision. Instead of going with a new lease that would’ve added an additional $400+/month to my expenses, I stuck with my trusty 2007 Toyota Camry and only plan on buying cars that are reliable while being 5+ years old going forward.
Now the real test of discipline with cars is resisting the urge to drive something new off of the lot when you get that first impressive paycheque. Dave Ramsey outlines that leasing is the most expensive way to access a vehicle. While the monthly costs are lower than the equivalent financing decision, you are not left with any equity and will be hard-pressed to get into a used vehicle after you’ve become used to a new one every time your lease is up. My advice would be to find a well-kept used vehicle that you can buy with cash in order to eliminate the cost of depreciation of a new vehicle and the high cost of financing a used vehicle. Scotty Kilmer, a great mechanic on Youtube, outlines 5 of the best-used cars you can buy. A great place to start your search!
Housing and cars are two major spending categories that if you get right in your 20’s you’ll earn financial freedom/independence a lot sooner than if you spend lavishly. There are hoards of people from real estate agents, car dealers, and the banks that will gladly take your hard-earned cash in these categories in exchange for what seems to be an appealing jump in quality of life. However, if you resist that temptation, you’ll be much better off in the long-term and have much more financial security in the case you need to make a change in your career or life due to unexpected shifts.