Rent Vs. Own

Rent. People say it like it’s a dirty word but it doesn’t have to be that way—especially in today’s economy.

There’s no doubt about it, purchasing a home gives you equity. Equity is good.

In theory, it’s great to save up a 20% down payment and buy a lovely home that your monthly cash flow can sustain. Over time, you easily pay off your mortgage as the value of your property goes up with lots of income left each month to save for your liquid retirement assets. In retirement, you’ll live mortgage-free while sitting on large investment portfolios to fund your daily needs.

Sounds brilliant, right? Well, in a perfect world it is!

But the world isn’t perfect. The cost of living is rising, wages are stagnating, and housing prices in the GTA are climbing steadily.

It’s time to face facts: most of us can’t afford to buy a home, and may never be able to.

I see many first time home buyers with only 5% for a down payment, a $300,000 mortgage, and a monthly income that cannot sustain the costs. Young couples get stuck with 80%+ of their after-tax paycheck tied up in housing costs because they bought a house they simply can’t afford.

Just because the anticipated mortgage payment is the same amount you pay in rent does not mean you can afford the house. There are mortgage payments, condo fees, property taxes, insurance, phone bills and utilities, not to mention other costs of living like transportation, weekly groceries, and any other monthly debt payments.

It adds up. Houses eat money.

The consequence? House poor young people with no money left over for any fun, regular life expenses, and long-term or emergency savings. All the money is spent before it even hits their checking accounts.

As a home owner, if something breaks – it’s on you to fix it. When the roof leaks, or the basement floods, it’s 100% your cost. No landlords. With no emergency savings fund, home repair and maintenance expenses go straight onto credit cards and home equity lines of credit and debt starts to rise. Daily living expenses such as food and entertainment go directly on credit as well—and are never paid off. Month after month. Year after year.

You might think that even though you can’t afford the house now, your income will go up over time. This is probably true – but so will the cost of living. So, unless you’re counting on major income adjustments your wages will rise with inflation, just like your utilities, property taxes and fees. If this is the case, your income may rise, but you will always be spending 80% of your income in bills.

When you buy a home that your monthly cash flow cannot sustain, you run the risk of not being able to save for retirement and worse – accumulating tens-of-thousands in consumer debt. After a lifetime of this, you could end up in retirement with a house that still isn’t paid off and no savings portfolio.

New School Advice

Buying is great, but wait until you can actually afford it. Ideally, your new home would leave all of your monthly fixed bills around 50% – 60% of your after tax income, leaving 30% for life and at least 10% – 20% for savings.

Until then, or if you don’t think that day will ever come, rent proudly – but be smart about it. Rent is actually a smart financial choice, but only if you take advantage of the fact that you don’t have to do renovations, repairs, maintenance, or taxes. SAVE THE MONEY

Rent Rules

1. If you rent, keep your total monthly fixed costs at 50% of your after-tax income.

2. Ensure you are able to save 20% each month for your retirement.

3. DO NOT spiral into consumer debt.

ADVICE FOR HOUSING

Ideal: Buy a house with monthly fixed costs at 50% – save 20%

Middle: Rent and keep monthly fixed costs at 50% – save 20%

Not good: Buy house with fixed costs higher than 70% – unable to save

Worst: Rent over lifetime with fixed costs > than 50% and unable to save 20%

WATCH MONEY AWESOMENESS HERE

Stop Fearing Tax Time

Guest Post for The LRMC

Tax season is a scary time for a lot of people. This year, take charge during tax time with these four important things you should know about your taxes.

1. Do your taxes on time – April 30th.

I know this sounds like a no-brainer, but many people don’t actually file on time—or at all. This is a big no-no. If you owe money and you don’t file, the late penalties are terrible. You end up spending more money in late fees and interest than you would have in the first place.

First Time Late Filing Penalty: If you owe taxes and do not file your return on time, the CRA will charge you a late-filing penalty. The penalty is 5% of your tax balance owing, plus 1% of your balance owing for each month to a maximum of 12 months. So, if you don’t file for a full year, you will have 17% of tax owing for the penalties alone.

Most people don’t file if they’re afraid they owe and don’t have the upfront money. File anyways. Then call the CRA to work out a repayment schedule or opt for tax relief. Believe it or not, they’re actually quite willing to work with you and your financial limitations to get your taxes paid.

2. Don’t file late again.

It’s not the greatest idea to be continually “non-compliant” when it comes to government agencies. In extreme cases, legal action can be taken – garnished wages and bank freezes are no picnic. Filing late repeatedly can be financially devastating; if you file late within three years of a previous late filing, the penalties nearly triple!!!

Repeatedly Late Filing Penalty: The late-filing penalty becomes 10% of your tax balance owing, plus 2% of your tax balance owing for each month that your return is late, to a maximum of 20 months. That is a late filing penalty of 50% of your tax owing.

3. File your taxes yourself – if it’s basic.

I’m not saying everyone should file their own taxes. Tax professionals are important. However, if you have a relatively basic tax situation and usually use mall tax kiosks or non-accountant tax stores to do your taxes, you could do them yourself and save a bundle.

Nothing can replace the work of a CA, CGA, or CMA, but these services can be very expensive. Most of the time, people working at tax kiosks are not certified accountants; they’re simply employees working on some sort of tax software. If this sounds like your tax guy, you should do it yourself.

Online tax software is cheap and even free for people below certain income thresholds. Software like Ufile or Turbotax offer free tax advice as you go and they’re set up to prompt you with questions for all tax credits and deductions you may be eligible for so you don’t forget. Check out this list on the CRA website.

4. Educate yourself

Educate yourself on the tax deductions and credits available to you, not only so that you feel confident to file for yourself, but also to ensure you are taking the proper steps during each tax year to qualify for certain tax breaks.

Most people aren’t educated about the deductions and credits available to them and therefore don’t claim or optimize these expenses. For example, if you have recently moved, you can often deduct certain moving expenses including the costs of transportation, packing and storage costs. If you are preparing to move, it’s best to know about these deductions before so you know which receipts to hold onto. It’s often more worthwhile during a move to pay for various services that are tax-deductible rather than doing them yourself.

Get educated and take control. Go to workshops, read books. Find ways to learn about what tax credits and deduction exist and find ways to use them throughout the year.

Learn more about all filing info on the CRA website.

Happy Tax Season!