Saving for a cottage
A waterfront cottage with land access starts at $170,000 in the Gananoque-Kingston area of Ontario, and goes for as much as $8 million on sought-after Lakes Joseph and Rosseau in Muskoka. Makes you wonder if a family already carrying a $290,000 home (the province’s average price) can even dream of affording their own cottage. We looked inside one young couple’s finances to find out.
Growing up, Suzanne and Callum Shaw spent their summers at family cottages and have always wanted one of their own. The Shaws are young (he’s 34, she’s 31) and hard-working (he earns roughly $58,000 a year in construction; she’s in financial services, with a salary of $53,400), and so far haven’t hit any barriers to their major life goals. Last September was a big month for the Shaws (whose names we’ve changed to protect their privacy), marking son Kieran’s first birthday, Suzanne’s return to work after maternity leave, and their move up the street (and up the financial ladder) to a newly built home with stunning rough-hewn hardwood floors and a kitchen tailor-made for entertaining. The downside? Very little outdoor living space. The yard, not yet sodded or landscaped, could handle maybe a dozen little-boy leapfrog jumps. “Having the nice house is great, but it doesn’t come with much land, unless you’re a millionaire,” says Suzanne, who was raised on a horse farm nearby and loves the idea of giving her kids a place to run and play without the worry of cars coming around the corner.
The Shaws are eager to know how soon they can start living their cottage dream. They’ve talked at length with their very good friends, a family with three boys a few years older than Kieran, about buying a property together, making the purchase more affordable for both. Neither family feels that sharing the place will be a problem. “Every Friday night we’re together for supper, every Saturday night we’re together, often Sundays. We already spend our weekends together,” says Suzanne.
The Shaws admit they aren’t quite sure how much they should expect to pay for the kind of property they envision: lakefront, with enough room to sleep five kids and four adults. “Three hundred thousand is the number that comes to mind,” says Anthony vanLieshout, a certified appraiser and broker with Royal LePage Lakes of Haliburton, which has four offices in Ontario. “There are so many variables that come into play. Maybe this cottage is nicer, but this other cottage has a better sand beach.” Since both husbands are handy, the cottage itself can be a fixer-upper, as long as the lot is large enough to accommodate a future bunkie and there’s potential to winterize the main building (Callum is itching to snowmobile with Kieran when he’s old enough). So the Shaws agree to aim for something in the neighbourhood of $275,000. To avoid the extra expense of mortgage loan insurance, the two families will have to purchase with a down payment of at least 20 per cent, or $27,500 from the Shaws and $27,500 from their friends. That’s a significant chunk of money, particularly for a young family starting out with very little extra cash in the bank.
With a combined income of just north of $6,000 a month after taxes, the couple earns a comfortable living. But there are some wrinkles to work out. They would like to have another baby before the decade is out, so their kids grow up close in age. “We’re trying tonight!” Callum announces unabashedly. Suzanne would like to know whether she needs to return to work full-time after her mat leave with baby No. 2 or if she could work just part-time, without derailing their cottage savings plan.
What the experts say
Saving up enough money for a down payment is only the first step involved in buying a cottage with friends—and the Shaws will have to make some lifestyle changes if their vacation property is to be the source of fun and escape they desire. But they can do it, says Gail Vaz-Oxlade, author of 10 books on personal finance and the host of TV’s Til Debt Do Us Part. “It is possible. Anything is possible! It’s all a matter of what you’re prepared to do to have what you want.”
The first step, she says, is for Suzanne and Callum to get their budget under control. “They aren’t carrying any balances on their credit cards, so they’re trying to live within their means,” observes Vaz-Oxlade, who has analyzed bank statements and budget figures provided by the Shaws. “The problem is that they seem to be spending almost every penny they have, and they haven’t run into any problems yet. If the car broke down and they had to put $2,500 into it, that would be on their credit card because they have no emergency fund.” She also notes that they aren’t putting any money aside for home maintenance and improvement—a must, even with a house that’s brand new, like theirs. “Crap always happens,” Vaz-Oxlade says bluntly. “That’s the nature of owning a house.”
“They are breaking even on a monthly basis,” agrees certified financial planner Patricia Lovett-Reid, senior vice-president of TD Waterhouse Canada and the author of Live Well, Retire Well: Strategies for a Rich Life and a Richer Retirement. After covering their usual expenses, the Shaws have $422 left over each month, which she says “would not leave enough for the cottage.” And if Suzanne goes back to work full-time after her next maternity leave, daycare for their second child will swallow that sum and more.
Vaz-Oxlade recommends the Shaws immediately start setting aside $400 a month for home maintenance, and an additional $500 a month toward an emergency fund, which should ultimately total three months’ worth of their net income, or about $18,000. She’d also like to see them keep their wallets closed a little more often, noting that they are spending almost $1,300 a month on groceries and another $200 a month on restaurants. “Two people and a baby, on their income, shouldn’t be spending more than $800 a month for food.”
She says their housing costs don’t match their income, either. “As a rule of thumb, you should not spend more than 35 per cent of your net income on housing. Right now they’re spending 40 per cent, and when you add in the maintenance fund, it goes up to 47 per cent—which is way high.” (Here’s the math: Their mortgage payment, property tax, utilities, and home insurance total $2,440, eating up 40 per cent of their combined $6,081 in monthly after-tax income. When you add the recommended $400 a month in maintenance savings, their home expenses jump to $2,840, or 47 per cent of their after-tax income.) Since the Shaws are talking about adding to their housing costs by purchasing a cottage, both financial experts agree that if they really want that to happen, they’ll have to find another $1,500 or so each month by earning more money as well as finding places to trim their spending (see “Getting to the Cottage,” below, for details).
“It’s not that hard,” Vaz-Oxlade assures. “Routinely I tell people to make more money, and they do it. Maybe she opens up a small consulting business in which she puts people on budgets. Maybe she does tax returns. He picks up a couple extra shifts a week and he’s golden.” She suggests they aim to earn an average of $500 extra per month, after taxes; however, those additional paycheques will also boost their income-tax bill, so the experts recommend making regular rrsp contributions to help keep more of their hard-earned money for their cottage fund. If they can find $600 a month for their currently under-attended retirement savings, Lovett-Reid notes, “they will receive approximately 30 per cent back in the form of a $2,160 annual tax rebate.” To help the money grow faster, they should invest the rebate—and for this purpose, his-and-hers Tax-Free Savings Accounts would serve Suzanne and Callum well. tfsas, which just came into effect January 1, 2009, will allow each of them to sock away $5,000 a year without having to pay income tax on the return on their investments, whether they decide to go with the safety of a high-interest savings account or gic, or purchase stocks or mutual funds within the account. And because there’s no penalty for withdrawals, tfsas are a great place to start up their emergency fund too.
If the Shaws prefer to funnel as much cash as possible directly into the cottage fund, they might also think about making more modest rrsp contributions now, knowing they will need to ramp up their retirement savings when the kids are older and their household expenses are lower.
The Shaws are anxious to complete their family by giving Kieran a brother or sister in the next year or two. So their cottage savings plan has to account for not only the cost of a second child, but also Suzanne’s drop in income while she’s on mat leave. (Her employer will pay a top-up to her government benefits, but only for six weeks after the baby is born.) This, Vaz-Oxlade says, is where the emergency fund comes in—to ensure that “she has the money to supplement their budget, so that they don’t go into debt while she’s on mat leave.”
Staying on track with their savings plan will also require Suzanne to go back to work full-time when her mat leave is up. At this point, the Shaws will have to cover a larger monthly child-care bill (double their current cost of $435, or more if they are no longer able to relyon their friends to provide discount babysitting). However, if they can continue saving that $500 a month once Suzanne has returned to work, and earn a modest (about three per cent) return on their investment, Vaz-Oxlade says they should have their half of the cottage down payment in six to seven years, by the time Kieran’s sibling turns five.
To erase the temptation to spend spare cash, the Shaws can arrange to have money automatically deposited at the beginning of each month, or every time they get paid. Toronto couple Natalie Locke Milne and Patrick Milne swear this simple “pay yourself first” technique was the key to helping them save for the cottage they purchased in 2008. Although they don’t have children, like Suzanne and Callum, they are in their early 30s and had just bought a home when they started building a cottage fund. They set it up so about 10 per cent of their after-tax salary went into their savings account every Friday, with the option to bump up the amount if they felt flush that week. Without the help of purchasing partners, they saved 20 per cent of the purchase price in a little over four years—but, Natalie stresses, that’s largely because they kept the cost down by choosing a property with deeded access rather than exclusive lakefront. “Otherwise,” she says, “we wouldn’t have been able to buy at this point. A comparable waterfront cottage would cost at least $100,000 more in our area. We share the lakefront with about a half-dozen other cottagers, but we can see the lake from our cottage. We have a shared laneway that leads from the highway to the water and the cottages. Each cottager owns the land on which their cottage sits, and pays into a laneway association for road maintenance.” The Shaws might consider similar options to make their dream even more affordable.
Saving for the down payment will require discipline, and so will setting aside sufficient funds for their share of mortgage payments, property tax, utilities, maintenance, and repairs—totalling $1,000 a month, Lovett-Reid estimates. “Toys like a boat or Sea-Doo also add up, as does entertaining family and friends,” she says.