How much should renters set aside for the future?

You don’t have to own a home to enjoy the future you want.

A young woman uses her computer to research investments. A young woman uses her computer to research investments.

For generations, Canadians have prioritized financing a home above virtually all other forms of investment.

There are a few key reasons for this: first, it forces people to set money aside every month, potentially discouraging overspending. Second, it helps people build up equity they can use to take out a bigger loan down the road. Third, once the mortgage is paid off, one can live rent- and mortgage-free in their home – a particularly helpful situation for those approaching retirement.Footnote 1

For these reasons, Canadians have long viewed purchasing a home as the start of a long but steady journey towards financial independence.

Owning a home: mission impossible?

But homeownership may no longer be the best way to save for the future, particularly for Canadians living in the country’s larger cities, where even “starter” homes are often priced well beyond the reach of people with typical incomes.Footnote 2

Take the Greater Toronto Area, for example, where the average housing price increased more than 20% from 2016 to 2017, reaching $727,300. With many people still paying off student loans in their late 20s and 30s, skyrocketing housing prices make purchasing a home virtually impossible for all but more affluent Canadians.Footnote 3

How to save when you don’t plan to buy a home

Although it depends on where you live, rent and mortgage payments are generally similar. But that’s not an entirely fair comparison, since renting helps you avoid many of the costs that accompany owning a home, including regular maintenance, repairs, property taxes and higher utility bills – extra expenses that, together, can amount to a few hundred dollars each month or more.

It’s this amount renters should focus on when determining how much they need to set aside for investing in the future. According to experts like The Globe and Mail’s Rob CarrickOpens a new website in a new window, this leaves renters setting aside about 1.5% of a home’s overall value each month. How much that amounts to depends largely on where you live and the value of homes in your area.Footnote 4

In an affordable city like Halifax, where average home prices hover around $300,000, that would be about $350. However, in Canada’s most expensive city, Vancouver, where the average home price is now over $1 million, that would mean setting aside a whopping $1,500 each month. Chances are you’ll fall somewhere in between – Canada’s average home price these days is about $500,000, which means a monthly investment of roughly $750.Footnote 5

How to invest your money

If you can commit to setting aside about 1.5% of the cost of a home in your area, that’s great – but it’s only half the battle. Now you need to decide what to do with your money.

The most obvious choices include the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP). The former will allow you to withdraw money without paying any taxes at the time of withdrawal, meaning it could be useful if you do decide to buy a home or find yourself shopping for another large purchase, such as a new car. RRSPs, meanwhile, offer an excellent way to set cash aside for retirement, with taxes deferred until money is withdrawn.

These are just a few of the options available to you. A financial security advisor with Freedom 55 Financial can help you determine how much you can afford to invest and help you update your investments as time goes on and your priorities change.

Ann McAfee, “Housing and Housing Policy,” The Canadian Encyclopedia, March 17, 2009.
The median individual income in Canada is roughly $30,000 per year. “Wealthiest 1% earn 10 times more than average Canadian,”, Sept. 11, 2013.
Setting aside an additional 5 to 10% of each paycheque for retirement is also advisable. Rob Carrick, “The renter’s guide to successful investing,” The Globe and Mail, May 16, 2014.
National Average Price Map, The Canadian Real Estate Association (CREA).