This past summer, Anthony, 36, was laid off from his six-figure job, and burned through much of his savings while looking for a new position.
He has managed to land a new gig as an IT program manager with an annual salary of $85,000 — much lower sum than his former job.
In the five months Anthony was unemployed he says his chequing account “significantly decreased from approximately $43,000 (including my severance) to $13,000.”
“At the beginning of last year, I had approximately $45,000 in my chequing,” he said, adding that in the late spring last year, he moved out of his parents’ house and bought a small studio condo in North York.
Anthony said he is finding it hard to sock away money now even though he spends little on entertainment or dining out. He makes his lunch “95 per cent of the time.”
“How can I improve my budget and savings plan with a recent major change in income?” he wonders. “Do I need to think about a side hustle business to support my needs and wants?”
Anthony says he has $5,000 in his RRSP.
“My new job’s pension doesn’t kick in until next year,” he says. “Should I prioritize RRSP?”
How can Anthony rebuild his savings and budget on his new income? We asked him to share his expenses with a financial adviser to see what he can do.
The expert: Jason Heath, managing director at Objective Financial Partners.
Anthony lost a six-figure job recently and though he received a severance, the time between jobs led him to draw down his emergency savings. He is hoping to rebuild those savings but due to a lower income of $85,000 in his new job, he is finding it tough to save by the end of the month.
His idea to pursue a side hustle to build up some savings as well as fund some needs and wants is common these days. A recent H&R Block survey found that about one in four Canadians are taking on side hustles. An Accenture survey reported that four in 10 Canadians are planning to take on a side hustle, so Anthony is not alone.
One challenge at Anthony’s income is his tax rate. If his income rises above $90,000, he will be paying 31 per cent tax and incrementally higher rates on that extra income up to 43 per cent at $112,000 of income. This makes RRSP contributions particularly advantageous for someone at his level of income so he can keep more of what he saves, since RRSP contributions will reduce his income. He can invest 100 cents on the dollar into an RRSP compared to roughly 60 to 70 cents of after-tax money into a savings account or TFSA.
He may only have $5,000 in his RRSP but he used some of his savings to put a down payment on his condo recently. He is only 36 so still has lots of time to save for retirement. The sooner the better, of course, but he will have a pension plan available next year at his new employer.
He should review the terms of the pension, the contributions he must make, and whether he can contribute more to get additional matching contributions from his employer. If the pension is a defined contribution (DC) pension, this typically comes with a certain percentage of employee contributions that are matched by the employer up to a percentage or dollar limit. Defined benefit (DB) pensions tend to be more rigid with predetermined contributions by both employees and employers as a percentage of income.
Maybe in the short run he rebuilds his emergency fund, but he should be prepared to maximize his company retirement plan by next year.
A couple big recurring expenses that stick out in Anthony’s budget are $300 a month for fitness and $450 a month for charity. I hesitate to criticize either of these because they are both well-intentioned. He brings his lunch to work 95 per cent of the time and does not spend a lot of eating out or entertainment, the typical discretionary expenses that tend to be wasteful.
Maybe he should reconsider his charitable commitments given his income has fallen and decrease those donations proportionately. This could free up a little cash flow to top up his own savings and put himself first. If his side hustle is successful, he could reconsider increasing his philanthropy.
As a condo owner and a car owner, he should try to have a bit of a buffer for repairs and other extraordinary expenses. I think that is a good goal for the next year.
Spending in week one: $2737. Spending in week two: $387
Take-aways: Anthony said he appreciates the sound advice. “It was good to learn more about the tax rate at my current income level and the benefits of RRSP contributions,” he says.
“While I want to rebuild my emergency, as advised, I’ll prioritize preparing to maximize my company retirement plan and learning more about the terms of the pension.”
Anthony says he will “definitely need to pick up a side hustle because giving up my fitness, hobbies and philanthropy will be very, very hard.”
Anyone can read Conversations, but to contribute, you should be a registered Torstar account holder. If you do not yet have a Torstar account, you can create one now (it is free).
To join the conversation set a first and last name in your user profile.
Sign in or register for free to join the Conversation