We’re all familiar with the phrase “life happens when you’re making other plans.”
Discover how pandemic-driven budgeting led to a re-assessment of my future goals and lifestyle priorities, and how I utilised my years of experience as a financial advisor to manage my own budget, plan my future expenditure and bring our finances back on track towards owning our own dream home.
My new home plan
Two years ago, I wrote about how I was working toward achieving one of life’s major financial goals — buying a new home. I had a financial plan for achieving this goal, which at the time included increasing savings, and a more deliberate approach to reducing spending and eliminating debt — a monthly budget. As with all goals (whether short, medium, or long term), I set my time frame for purchasing a home, which was five years.
I was excited to have a clear vision of the path before me, and that by the end of 2024, I would have saved enough money for a 20% down payment on a home in Toronto, plus closing expenses. This amount would also ensure that I did not have to spend additional money to buy default mortgage insurance.
Crunching the numbers
To calculate the money I would need to save for a down payment, I made two assumptions:
- I assumed that the average home resale price in Toronto increased at the rate of inflation on an annual basis.
- Based on historical information, I assumed a 2% average annual rate of inflation to calculate the increase of the resale price of a home in Toronto over the next five years.
In 2019, the average cost of a home in Toronto was approximately $800,000. Therefore, with inflation my dream Toronto home would increase to approximately $900,000 by 2024. This meant that my down payment would have to be approximately $180,000 (20% of $900,000), plus closing fees.
With that goal amount and the next five years in mind, I proceeded to work on my financial plan, and from the fall of 2019 through to the first two months of 2020 I was on track. But then, something that no one could have foreseen happened. COVID-19 arrived on Canadian shores in late January 2020, and within weeks everything changed for everyone — including me and my family.
Pandemic problems
The pandemic forced us to relook at our expenses — with surprising results. Here is how the outbreak changed our lives and our plan to buy a new home:
- Because of the strict lockdown of all nonessential businesses, my wife and adult children were all furloughed from their jobs until further notice. Thankfully, I was able to continue working to support my family as the financial industry was deemed essential.
- Before the pandemic we kept a monthly budget that tracked our fixed expenses: rent, utilities, phone bill, internet, car lease, groceries, pet food, etc.
- We tracked our discretionary spending which included a gym membership, personal trainer, online streaming and magazine subscriptions, monthly trips to the LCBO, ordering take out and the occasional meal at a restaurant.
- We were also able to afford monthly savings into RRSP accounts and TFSAs, paying off credit card balances, and paying down a line of credit debt.
But, almost overnight, our combined household income was reduced by 31% (approximately $1,500), which meant that our family had to find ways to reduce our expenses by at least $1,500, if not more.
Collectively cutting costs
In the first weeks of the pandemic, my wife and I reviewed our budget daily to find expenses that we could cut out. We took an almost “cold turkey” approach to anything that was not considered fixed expenses.
The gym membership and personal trainer were cancelled immediately. All online streaming sites and magazines, but one of each, were also cancelled. Take out orders were reduced as we started cooking more meals at home. We stopped consuming alcohol for a while as the LCBO lineups were so long. We even prioritized clearing out a small storage unit, so we could eliminate the cost of the monthly lease.
We managed to cut our budget by approximately $1,500 per month ($350 gym and personal training, $600 take out and online subscriptions, $300 storage unit, $250 alcohol). Finding the additional $1,500 in expenses to cut out was enough to make up for the drop in income we experienced when my wife and children were furloughed from their work.
The new normal
Over time, my wife was able to get back to work, and our combined income is now almost back to pre-pandemic levels, but eighteen months later, with the pandemic still here, we continue living on that “cold turkey” budget.
Though we have managed to continue contributing to our RRSPs and TFSAs, our focus has shifted from the home buying goal to paying off credit card balances and eliminating line of credit debt. Every free dollar that is not earmarked for fixed expenses or savings is being used to pay down debt. Our credit cards are all paid off and within the next twelve to sixteen months we should be completely debt free.
A disciplined, collaborative and communicative approach to budgetary planning and management, helped us to continue investing, and paying-down debt, even in the darkest times of the pandemic.
Summer thoughts
Over the summer, I’ve gone back to assessing our goal of buying a home in Toronto. Given our reduced spending, and reduced debt, the prospect of saving more for a down payment on a new home seems manageable again. But here is how our plan to purchase a home in Toronto has changed.
The average cost of a home in Toronto today is approximately $1,100,000, which is nearly a 40% increase since 2019 ($1,100,000 – $800,000 / $800,000). This means that our down payment amount has also increased from the initial $180,000 to $220,000, so now we need to increase our savings by an additional 22%.
As we work to eliminate our debt, I believe we will be able to accelerate our savings to meet the additional amount needed, but it may take us a little longer to achieve our goal. So we may have to extend our timeline to 2026, accounting for the pandemic and 12 to 16 months of eliminating debt.
Turbulent GTA realty
It may be that home prices in Toronto continue increasing, past the 2% annual inflation rate that I initially assumed. If so, then we may have to reassess other variables in our financial plan.
For example, we may have to decide whether it is feasible for us to buy a home in Toronto, and whether relocation to a less expensive area is a more realistic option. But relocation brings with it a host of other variables to think about.
Stay tuned as I continue to update you on our home buying financial plan.
Reflections
In the meantime, some parting thoughts on what I’ve learned from my experiences over the last 18 months. Having to review our budget to find areas where we would cut expenses was a challenging task. It was challenging because of the initial fear, anxiety, and grief my wife and I both felt.
Fear that we would not be able to find enough money in our budget to be redirected to meet our fixed income expenses. That everything we were spending on, we needed. Anxiety around how we would manage to keep up with our household expenses on a single income. Grief that by cutting expenses, and living without, we were losing out on the lifestyle we have been enjoying up until then.
Ultimately, what helped us overcome these emotions were the constant conversations we were having with each other and our children, and our willingness to be open to changing our thinking around what we truly value and giving ourselves enough time to make the changes that were needed.
Communication was key to getting all the fear-based thoughts and feelings out of our heads and into the open. It also helped each family member to be more creative around what expenses they were willing to cut.
Little by little, day by day, we were identifying expenses we were all willing to cut out, and with that, our anxiety dissipated.
And, as we were talking each night about our “lean budget”, something else happened. We started to rethink what was important to us. Enjoying life was important, but being safe and secure in our living situation, namely being homeowners, was even more valuable to us.
Rethinking our values helped us to let go of the feeling of loss around our lifestyle of enjoying the here and now. And our focus and energy were shifted to the determination of making our goal of being homeowners achievable.
If you have a goal in mind that requires some financial planning but are struggling with where to start, reach out to our team. We have the expertise and life experiences to help guide you to achieving your goals.
Lora.
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