How to make financial sense out of rentingMay 28, 2019
In today’s housing market, it’s increasingly difficult to argue that buying is more financially rewarding than renting. News items that highlight certain economic risks, like housing bubbles, the looming recession, record high household debt, for example, tip the rent vs buy debate in favour of tenants.
This doesn’t mean, however, that homeownership is no longer a great investment. No one can diminish the advantages of owning a home: freedom from landlords, equity growth and tax deductible interest, just to name a few. Nor should you pay too much attention to negative media hype when assessing your own financial situation. Because who really knows what will happen?
We just think renting is sometimes underrated.
Homeownership is still part of the Canadian Dream
Despite a considerable slow-down in real estate sales, a large portion of renters (36 per cent) still believe that “paying rent is a waste of money”. Our recent Twitter poll also found that most people rent (47 per cent) because they can’t afford a down payment to put towards a home. In other words, renting isn’t a strategic move; people rent because they have to. In fact, homeownership continues to hold appeal: eight-in-10 Canadian millennials still aspire to own their own home.
No one can deny that homeownership is still part of the dream. But contrary to popular opinion, lifelong renting is definitely OK. Renting is not throwing your money away either.
Indeed, there are many inspiring stories out there about the simplicity and financial viability of lifelong renting. That said, renters still need more discipline than homeowners do when it comes to taking those extra steps to ensure they’re saving and building wealth outside of their homes.
Here are some ways lifelong renters can feel more secure about their finances.
1. Create more wiggle room in your budget
The first thing you can do as a renter is to stop living paycheque to paycheque, if you can. With increasingly high rents across the country, it can be especially easy to fall into this trap. If you receive your pay on a bi-weekly basis, your end-of-month paycheque may be covering the vast majority of your rent, leaving your mid-month paycheque to cover living expenses, entertainment and savings.
This leaves you vulnerable because as soon as your money comes in, it’s leaving again.
The budget site YNAB has a great tip for extending the life cycle of your income, it’s called “ageing” your money. The goal is to use last month’s money to pay for this month’s expenses. The concept is simple and a key component of financial security.
How do you do it? Start by tracking your expenses so you have a good idea of how much money is leaving your account each month. Put money aside to reach your monthly total and then some. Once you have saved 1.5 times your monthly expenses (it may take a little while), you can start automating all your bills, debt payments and savings at the beginning of every month. This way you’ll be more financially secure and you won’t need to worry about missing any payments.
2. Get into the savings habit
The main disadvantage of renting is that your rent qualifies as an “unrecoverable” expense. You’re never getting that money back.
Being “house poor” because of a high mortgage payment is one thing, but being “rent poor” is another. As a renter, you’re not building equity or wealth in your housing, so the need for savings is much greater. It’s important to live somewhere that enables you to save every month. But how much?
A good rule of thumb is the 50/30/20 rule, where 50 per cent of your income goes towards rent and living expenses, 30 per cent towards discretionary spending and 20 per cent towards savings and debt payments.
Of course, everyone’s financial situation is different and constantly evolving. There will be times when saving 20 per cent of your income seems impossible. This is where cementing good habits comes in handy. There’s nothing wrong with 10 per cent or five per cent with the hopes of contributing more in the future. The key is allocating a portion of your budget to savings and continually assessing your spending and your needs and wants. Once you’ve mastered this habit, you can learn about putting your savings into the right accounts (like an RRSP and a TFSA) and the right investment vehicles for your risk tolerance.
3. Don’t forget about tenant’s insurance
Many renters don’t think they need insurance because they figure their landlord’s insurance will cover them in case of any damage to their unit. This is a common misconception. In reality, you are responsible for all the contents of your home; your landlord’s insurance only covers the structure of the building.
According to the Insurance Bureau of Canada, only 50 per cent of renters in Canada have tenant insurance.
This is a problem because emergencies and unexpected costs can result in heavy debt, which makes renters financially vulnerable. Remember, the key advantage to being a renter is that you are mortgage-free. The last thing you need is to pay for an emergency with an unsecured line of credit, or worse, a credit card. Tenant insurance is very affordable, ranging from a few hundred dollars a year to a few thousand, and is a must-have for maintaining your financial security and wellbeing as a renter.
If you want to look into tenant insurance, The Insurance Bureau of Canada offers free, unbiased advice.
4. Be flexible and realistic with your financial goals
Perhaps the greatest benefit of renting is the flexibility of lifestyle it affords you. When you haven’t invested a considerable amount of your savings in a home, you’re free to upsize or downsize as often as you like, pursue professional opportunities afar and diversify your savings.
This flexibility may often lead to new financial goals. Maybe one day you will consider homeownership, if it’s right for your lifestyle and if you enjoy the personal and financial stability that it requires. If you’re at peace with lifelong renting, you can look at the prospect of homeownership more objectively than most. You’ll be doing it because it’s right for you and not because you’re afraid of being priced out of the market or under the illusion that housing is a fool-proof investment.