Christian Dy is a financial planner, but he prefers the term “financial educator.” In addition to guiding his clients on issues around financial planning, investment, and insurance, Christian also gives workshops to educate the public on how to make better financial decisions. He works in Vancouver, BC where the cost of housing is prohibitively high, creating a real challenge for young people and families who want to buy a home.
I asked Christian what advice he gives to those who want to purchase a home in this high-cost area.
He tells them that saving for a down payment on a home needs to come first, before they begin to consider other things like their 401k or college for their children. “Once you have a down payment, these other things are easier,” he says. “But if you put a little away each month, it takes forever to save up for a down payment, because the cost of living is so high.”
His next piece of advice is not to upgrade your living conditions until you have the full down payment. Even if you have a change in income, keep all expenses the same as they were before. If possible, consider living with relatives for a while, or buying a home and then renting out part of it for additional income.
He emphasizes that it’s not your income that matters when calculating the cost of a home; it’s really your income-expense ratio.
Christian says it’s all about transitions. “It’s hard to go backwards,” he says. “If you’re already in transition, it’s not a big deal.” By living at home for a while rather than renting, you are just extending the lifestyle you already have instead of radically changing it by moving in with your parents after living on your own.
Sometimes, this isn’t possible. It depends on individual situations. With couples, the decision is far more complex because you must convince the other person. But the sacrifice is well worth it; in most cases, it can take you just 18 months to save enough for a down payment.
Another sacrifice he recommends when purchasing a home is choosing location over space, thus protecting against market fluctuations. “You can always make a smaller home larger,” he says, “but you can’t put a bigger home in a different location.”
We discussed cultural changes that affect this desire for space. Our culture loves big houses! A generation ago, the average size of a home was 1100 square feet, and the average number of children was 3.5. Today, things have changed dramatically; the average home size is now 2000 square feet, while the average number of children has dropped to 2.5. As Christian jokingly points out, we have “doubled our homes and lost a child.”
A more serious statistic is the average income to housing cost ratio, which a generation ago was 3 to 1. Today, that average has increased to 6 to 1. And in high-cost areas like Vancouver, it’s closer to 9 to 1.
In this circumstance, can housing still be considered an investment? Or is it just a burdensome expense?
Christian cautions that you should never “put all your eggs in one basket.” The value of a home should not represent your entire life savings. It’s critical to free up some money to invest in other things, such as your 401k or even family vacations.
“Family is an investment,” he says. “Invest in your first spouse.” Excellent advice, considering the financially crippling effects divorce can have on your financial future.
Unfortunately, it’s tantalizingly easy to avoid the sacrifice and discipline necessary to plan effectively for the purchase of a home, especially with the added burden of student loans. Christian strongly advises young people to stay in their family home until these loans are paid off. “Sacrifice in your twenties,” he says, “and you will appreciate it for the rest of your life.”
He suggests a kind of “stress test” for determining whether you can afford a home. When a bank tells you how much you can afford, he suggests chopping off a third of that number. Although the bank will ask you questions about your income and debt, they will not ask about other issues of importance, such as your plans for having children. A problem arises when banks give couples a number, and they fall in love with homes in that price range. Homes that are more affordable will not seem as nice.
A financial planner/educator can help you formulate a plan for saving, and to figure out how much you need and how long it will take you to save it.
Christian’s personal vocation of financial education arose from his own early experiences. When his family lost their home, it gave him the drive to avoid that outcome for himself. After living on his own for three years, he moved in with a relative and was able to pay off his student loans in 1.5 years. It then took him one more year to save for a down payment, and another six months to save for his wedding. “I sacrificed three years to get a huge head start,” he says. In his marriage, they got into the habit of living on one income and banking the other to invest in real estate. When his children came, there was little need to change their lifestyle, as they were already accustomed to living on one income. Christian feels strongly that this early period of sacrifice was well worth it: “It’s the correct way to live.”