Standing outside of a pub in the countryside on the outskirts of London, a 23-year-old retail worker we’ll call Melanie made a decision that could radically alter her future. The scene was picturesque — she remembers watching wild horses gallop through the open fields as the sun set, and it was in that moment that she knew she wanted more than a vacation out of the U.K.: She wanted to make it her home.
“It feels like it’s where I’m supposed to be,” said Melanie, explaining that nearly her entire extended family lives in the U.K. and that she is hoping to move to London from Toronto in five years. “I fell in love with it. Everything about it calls me there.”
The thought isn’t exactly a pipe dream, but even she admits that at this stage of her life, it doesn’t seem very plausible. How could it? For starters, we’re in the middle of a global pandemic and without a vaccine, the only horses in Melanie’s future may be at the racetrack. Financially, there’s an even bigger barrier. Melanie only just earned a post-graduate certificate in advertising and account management after spending the past four years completing an undergraduate degree.
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Her schooling has left her with $74,117 in debt — an amount she suspects will take more than a handful of years to pay off. She certainly can’t make much of a dent while earning the minimum wage of $14 per hour in Ontario for an average of 16 hours per week. Never mind a move to the U.K., even a vacation would be out of the question on that income in normal times.
Ask her about her five-year plan and you’ll know she’s not buying into that narrative. Melanie is working toward finding a full-time entry-level position at an ad agency. The yearly salary for such a position is usually only about $40,000 — but still quadruple what she earns now.
Many of these agencies have global businesses and after climbing the proverbial ladder in the sector over the next five years, she plans to leverage her experience to be transferred to an office in London.
What her plan doesn’t account for is the capital needed to both pay off her debt and fund the move. She’s never been much of a saver and that’s probably obvious when you look at the combined $1,394 split between her chequing and savings accounts. The reason is because she’s always had what she describes as a “need” to spend it all on clothes, home decor and food.
In a recent month, she stayed true to that habit by spending $1,001 when she only earned $637 and deposited another $200 in gifts. Her largest transaction, $283.25, went to her last tuition payment. Melanie also spent $260 at the hair salon, although $100 of that was provided by her parents, and $181 to pay the interest on her student debt. The rest went to food.
Working at a mall comes hand-in-hand with temptations, which are often too appealing for her to ignore. She’s had similar issues in the past. When she worked at Disney World during a recent summer, she ended up spending most of her earnings in the theme park.
Melanie has some bad habits that she’ll have to eliminate if she wants to afford a move to London, BMO Private Wealth portfolio manager James McCreath told me.
“She can do it,” McCreath said. “It’s a matter of discipline … and if you’re as keen as you say you are, you’re going to have to pull your socks up from the financial planning perspective.”
The first step in McCreath’s plan is for Melanie to get the entry-level job she’s targeting. Without it, the move is not possible. With a job paying her $40,000 in hand, Melanie will have to save $50,000 over the next five years to make the plan work.
While earning $40,000, she’d likely make around $2,500 after tax per month, McCreath said. To get to $50,000, she’ll have to save $833 per month. She can’t boost her spending too far beyond where it currently sits. Her parents still pay for her cell phone ($50 per month) and her transit pass ($151.55 per month). Adding those expenses would bring her monthly total to over $1,200.
Of the $50,000, half will go to paying off her student debt. Expecting Melanie to pay it all off before making the move isn’t realistic on the salary she’d be earning, McCreath said, but she can aim to pay off at least one-third.
She can do it. It's a matter of discipline
About $5,000 of the other half, according to McCreath, would be spent on her plane ticket (a one-way ticket with Air Canada pre-pandemic was more than $1,000), her visa (about $1,100) and a damage deposit on her new apartment. The remaining $20,000 will serve as a nest-egg to live in a city where the cost of living is even higher than Toronto.
According to Numbeo, a crowd-sourced database, rent prices are 40 per cent higher in London than they are in Toronto, while consumer prices are about five per cent higher. A person who earns $6,700 per month in Toronto would need $7,915 to maintain the same lifestyle in London, the website says.
“People you talk to that live there almost entirely concur the sticker shock for anything from a sandwich to an apartment is substantial,” McCreath said.
To afford to live in the city, Melanie will likely have to make some concessions when it comes to where she decides to stay. McCreath has heard stories of up to eight people living in the same apartment in an arrangement where two would divide a regular bedroom down the middle with a curtain for privacy.
The key, he said, is to find a way to live that doesn’t require dipping into her nest egg every month.
“You can eat through half of that capital in a city like London in a matter of months, if not weeks,” he said. “If you dip below $10,000, you’re going to be in a sticky spot. If the dream is to live there and you’ve only got $10,000 left and you’re having a tough time finding a job, the dream can end quickly.”
Melanie was expecting McCreath to kill her dream and so hearing that a move was indeed possible was met with excitement. The plan McCreath set out for her is realistic, she said, and she’s already begun to put more of an emphasis of savings. Only two weeks after I first interviewed her, Melanie paid off her credit card and added another $200 to her savings. She’s already shifting her mindset in preparation to save the $50,000, as McCreath suggested.
“To do that felt really good and even small amounts get me closer to my goal,” Melanie said. “I think that will transfer over to when I’m putting larger amounts in.”
Financial Post
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