The Biggest Expense Affecting Your Budget
It’s no mystery that many young families have stretched their family budget to the limit. You can see why when you tally up living expenses, childcare, auto expenses, diapers, food, etc. Some families might try to alleviate the budget by clipping coupons or cutting back on eating out so often. While these strategies can be useful for saving a buck or two, there may be other areas to cut back that will have a much larger impact on your bottom line. The culprits: your house and your vehicle.
The Second Vehicle
I recently read a study that the annual cost of owning a second car could fund the purchase of $530,000 in additional RRSP’s. This was calculated over 35 years and when calculated in reverse, means an annual outlay of $15,142 per year for total auto expenses, which includes fuel, repairs, and a second set of tires. Many of these additional expenses aren’t factored into the family budget when thinking about shopping for a second vehicle.
If the vehicle is needed to commute to a second job, it may be totally worthwhile and practical planning should be done to take some of the second income to contribute to the RRSP to offset the expense.
Even buying a low mileage automobile can cut the initial cost down 10-12%. I took a look at a local car dealership website today. You can buy new at $36,000+ or slightly used at 25,000kms for $20,000+. Alternatively, you could look for a 5 year old vehicle at just $12,000. What if you took the third option and invested the difference (at least $24,000 plus some interest) into your RRSP? Over time, the income tax deferred would almost pay for the vehicle.
The Family Home
Owning a home is the ultimate family goal for many. But with prices skyrocketing, it’s also putting a strain on the family budget. Higher prices often means higher mortgage payments, and while interest rates are low right now, an increase would affect the budget too! Don’t neglect the fact that larger homes have higher taxes, heating bills and insurance costs.
Sure a home with 3+ bedrooms and 3+ bathrooms would be spacious enough for the whole family, but at what cost? Are you leaving enough room in the budget for your retirement funding, or even family vacations? These are just as important in your planning!
The benefit of home ownership is the equity you build as your home increases in value over time. Home ownership isn’t all bad news, we just want to make sure you consider some factors you may not have thought of before purchasing the largest asset you’ll ever buy.
There are certainly benefits to owning a seconds vehicle and nice home, but make sure you consider the overall impact both will have on your family budget and your finances. The recommended allocation from your budget for housing is 35% and for transportation 15%. If you crunch some numbers and find these out of line, it may be time for a change.