The normal rules of thumb for asset allocation in Canada are as follows:
1. Registered before Unregistered
2. Foreign Stuff goes in RRSP
3. Domestic Equities are the best things to have Unregistered
4. If you expect to have a higher income in retirement than you do now, skip the RRSP (ie, you expect to be in a higher tax bracket) - the RRSP is all about deferring tax, so there is no point saving 20% now to pay 30% later.
So what a normal Canadian Couch Potato does is figure out an asset allocation, and go from there.
Retirement in Canada is, as you may know, pretty generous - OAS (Old Age Security) is the state-funded part, added to GIS (Guaranteed Income Supplement) for those with very low incomes; CPP (Canada Pension Plan) is for people who have worked and contributed to it (this is mandatory for the employed and self employed). If you've lived in Canada your whole life and get to retirement age, you're going to get $12k a year (today's money) no matter what.
Cruises? Fancy cars? Perhaps not. But if you've paid for a house, you should be alright. If you don't have a house and have no savings in its stead.. what have you been doing for the 40+ years you could've been earning?!
But - we're not talking about retirement. We're talking about *early* retirement. Compound Interest works its magic on a 40-year portfolio. If you're trying to go from zero to hero in ten years (perfectly possible), there is much much less time available. It also makes the 'what goes where' a lot harder.
If you have passive income, enough to retire on before the government stuff kicks in, presumably that will continue into retirement. And, if so, when you add the government stuff to the early retirement stuff, you will - at the least - be taxed. During early retirement it's entirely possible to live without paying tax - again, assuming you don't insist on the cruises or fancy cars.
I'll make a bold statement: The TFSA is fantastic. Fan. Tas. Tic. Yes, it's after-tax income (ie, no rebate), but it grows tax free. If the Conservatives get in again, and balance the budget, there is a good chance the yearly allowance will be doubled - to $11,000. A year.
I'll say it again: it's fantastic. While you're earning, saving, investing, this money invested (don't put the money into a crappy saving account! The best TFSA out there, People's Trust, gets a decent 3%, but this is FAR below what stocks will return over the longer term!) will grow at - perhaps, on average - 8% a year. Oh, it'll dip some years, jump like crazy other years, but that doesn't matter - over the longer term it will far far far outpace any 'fixed' product.
And that money is usable when you want to. You can draw as much down each year as you need to to live on with absolutely no tax consequences whatsoever! This continues into retirement, OAS & GIS don't take the TFSA into account at all.
If you are in a very high tax bracket, the RRSP is good too. You don't *have* to wait until retirement to draw money out; it will just get taxed as normal income. In fact, a very good early retirement would be to load up the RRSP with money you think you'll be able to withdraw *before* the government income starts.
In other words:
Before retirement: Invest in RRSP (high tax bracket)
Early retirement: Live on RRSP money (low tax bracket)
Traditional retirement: Live on government money (low tax bracket)
Canadian equities that are eligible for the Enhanced Dividend Tax Credit (which means most large companies and 'full replication' ETFs or mutual funds - that actually hold the stocks making up the index, but NOT REITs) are the best thing to hold unregistered in Canada simply because the tax break is awesome. You are not protected from Capital Gains (TFSA is totally protected from CG, RRSP treats CG as *income* on withdrawal so that is actually a negative - as CGs are taxed at half the rate of income!), but - unless you are earning big bucks - the income can tax free, depending on your province (in Ontario, for example, you'd still have to pay the Health Premium on this money). We're talking $55k in Ontario. That is a *lot* of tax (nearly) free dividend income!
The issue of foreign withholding tax in the TFSA vs the RRSP is tricker for early retirees. If you are going to use the RRSP to a significant extent, then foreign stuff should go there. But if you're not, and still want to hold foreign (you should - the Canadian market is very concentrated into just a few sectors, and diversification is every investor's friend. Well - every index investor anyway, stock pickers would no doubt beg to differ!), the withholding tax should be seen for what it is - in the case of US-listed stocks, the withholding will be 15% of the dividends. Capital gains are still safe. In the case of an ETF yielding 2% (which is what the S&P 500 does, at the moment), that's the same as increasing the MER by 0.3%. Great? No. But when you compare managed funds often have MERs in excess of two percent vs index trackers having half a percent - or less! - this is a small price to pay.
My own plan is complicated because I throw real estate into the mix (another post!), but I can live on ~ $12,000 a year, so I would follow the following path:
Put some money into an RRSP, that I can draw down before traditional retirement
Use all my TFSA room each year - especially for REITs, bonds, etc; my foreign allocation will move into here as my RRSP is drawn down
Invest in Canadian ETFs in an unregistered account
Phew - that's it. All that waffle just for three lines? Well, I hope it was useful!
Monday 27 January 2014
Sunday 26 January 2014
Which Car Should I Buy?
This is an easy one. Unless you are a car fanatic and willing to delay your escape from the office, the answer is simply "as little as possible".
Cars depreciate, they break, and they require maintenance and insurance. The 'more' car you have, the more each of these is likely to cost.
My rule of thumb would be to pick the least expensive vehicle that can do what you need it to do 90%+ of the time.
So, if you live in a large city with good public transit or bike routes, but need to get somewhere by car once a month, renting a car when you need it (there are discounts available for weekend use, as well as loyalty programs, plus with the right credit card you'll be insured through the card company rather than having to take out separate insurance), and using that public system the rest of the time probably makes sense. If you live, or need to get somewhere, out of the way regularly, then move on to the next option. Going car free will save you an absolute ton of money.
If you must have your own wheels, then pick the option that comes out cheapest. If you don't do a lot of miles, picking the least expensive to *insure* is likely better than going for better fuel efficiency - I'm talking about 'grampa cars here' folks. Sexy? Mm, no.. but probably cheap to fix, spacious and quite luxurious, and often low mileage. Buicks, for example. Town Cars. Thanks, grampa!
If you commute a fair distance, then fuel efficiency is the way to go. Manual transmissions are usually more efficient (plus cheaper to maintain and repair), and (in my opinion) more interesting to drive. But also, *how* you drive is important. Gently, dear reader, is how to drive to save money. Braking is like throwing money out the window - allowing the car to decelerate naturally, and accelerating modestly, leaving space enough between you and the car in front will save you a packet over time, both directly (fuel) and indirectly (wear & tear).
If you have a family of four, there is nothing wrong with a Honda Civic or Toyota Corolla. Once you get up to five, a minivan may be required - but again, check your options. We were able to fit three children in car seats across the back of my Crown Victoria quite happily - and we could fit three adults in the front if we needed to.
Honestly, even if you have three children, how often would you be overloaded in a mid/large sedan? If not often, look into a trailer hitch rather than a big ole' minivan. A trailer provides an awful lot of flexibility, and when you don't need it - you don't pull it!
Get mulch or gravel? You can do that in a trailer. Move furniture? Yup - you don't need a truck.
I mentioned in my first post that I think trucks are cool. I do. My grandparents were farmers, and I'm into small-scale organic growing, so hauling around manure in the back of my vehicle? Cool! (But as I said above, I have a Crown Vic and a hitch). The number of trucks driving around with literally nothing in them but one person is really sad to me - where I live, maybe 1/3 of the vehicles are trucks, and probably 80% of them are empty (finger in the air guesstimate!). *Everything* is more expensive - tires, fuel... no, I guess insurance can be pretty good. Ok. Everything but insurance.
When should you buy a truck? When you need it, of course. If you 'do stuff' in your truck that only the truck can comfortably do - hauling masses of stuff. Contractors - lawn care, etc. I don't need to tell the people who need trucks to get trucks - they know damn well they need it. But everyone else..? Well.
This blog is about early retirement. I'm not saying you can't have a truck. I'm saying that, for most people, it is a truly horrible choice all round - if they want to get out of debt, save and invest, and retire.
Ok, so - the least vehicle you can that does what you need it to. In my opinion, the hatchback is far superior to the sedan. Cars like the Toyota Matrix or Pontiac Vibe are an excellent configuration for the average family, and would be my starting point when looking to find what fits. The fuel economy is pretty good, though not the best (equivalent Corolla is slightly better); but in exchange, you get a nice hatch, fold-down seats with a huge amount of room.
If you do few miles, a Buick Century in good condition (GM 3800 engine) will serve well. For long distance commuters, a diesel probably makes sense, though it would make more sense to reduce the commute.
Now - in order to get best value, you're not going to buy new. 0% deals are not really 0% financing - the cost of the financing is simply built in to the price you pay (ie, if you pay cash, it will be less than the 0% financing price). Cars depreciate like mad in the first few years.
If you absolutely hate cars, car maintenance, and so on, a gently used, certified three year old car will be much better value than a new one and almost as good. Otherwise, a ~6 year old vehicle is a good age to aim for - the rapid depreciation has all happened. Obviously, get a good inspection before you buy, but there is nothing to be 'afraid of' with older vehicles, if they have been maintained well. *Any* modern car should go to 300k km at an absolute minimum. I'm talking 2000 and newer.
Personally, I think $5k is a good price. You are not getting 'end of life' cars here. Aim for 200k km or fewer, and you have a *lot* of life left in a vehicle.
Do check the model and year at car complaints though, and avoid any with specific problems - but remembering that if a certain year has, say, a faulty automatic transmission, you can buy the manual quite happily!
Good luck!
Cars depreciate, they break, and they require maintenance and insurance. The 'more' car you have, the more each of these is likely to cost.
My rule of thumb would be to pick the least expensive vehicle that can do what you need it to do 90%+ of the time.
So, if you live in a large city with good public transit or bike routes, but need to get somewhere by car once a month, renting a car when you need it (there are discounts available for weekend use, as well as loyalty programs, plus with the right credit card you'll be insured through the card company rather than having to take out separate insurance), and using that public system the rest of the time probably makes sense. If you live, or need to get somewhere, out of the way regularly, then move on to the next option. Going car free will save you an absolute ton of money.
If you must have your own wheels, then pick the option that comes out cheapest. If you don't do a lot of miles, picking the least expensive to *insure* is likely better than going for better fuel efficiency - I'm talking about 'grampa cars here' folks. Sexy? Mm, no.. but probably cheap to fix, spacious and quite luxurious, and often low mileage. Buicks, for example. Town Cars. Thanks, grampa!
If you commute a fair distance, then fuel efficiency is the way to go. Manual transmissions are usually more efficient (plus cheaper to maintain and repair), and (in my opinion) more interesting to drive. But also, *how* you drive is important. Gently, dear reader, is how to drive to save money. Braking is like throwing money out the window - allowing the car to decelerate naturally, and accelerating modestly, leaving space enough between you and the car in front will save you a packet over time, both directly (fuel) and indirectly (wear & tear).
If you have a family of four, there is nothing wrong with a Honda Civic or Toyota Corolla. Once you get up to five, a minivan may be required - but again, check your options. We were able to fit three children in car seats across the back of my Crown Victoria quite happily - and we could fit three adults in the front if we needed to.
Honestly, even if you have three children, how often would you be overloaded in a mid/large sedan? If not often, look into a trailer hitch rather than a big ole' minivan. A trailer provides an awful lot of flexibility, and when you don't need it - you don't pull it!
Get mulch or gravel? You can do that in a trailer. Move furniture? Yup - you don't need a truck.
I mentioned in my first post that I think trucks are cool. I do. My grandparents were farmers, and I'm into small-scale organic growing, so hauling around manure in the back of my vehicle? Cool! (But as I said above, I have a Crown Vic and a hitch). The number of trucks driving around with literally nothing in them but one person is really sad to me - where I live, maybe 1/3 of the vehicles are trucks, and probably 80% of them are empty (finger in the air guesstimate!). *Everything* is more expensive - tires, fuel... no, I guess insurance can be pretty good. Ok. Everything but insurance.
When should you buy a truck? When you need it, of course. If you 'do stuff' in your truck that only the truck can comfortably do - hauling masses of stuff. Contractors - lawn care, etc. I don't need to tell the people who need trucks to get trucks - they know damn well they need it. But everyone else..? Well.
This blog is about early retirement. I'm not saying you can't have a truck. I'm saying that, for most people, it is a truly horrible choice all round - if they want to get out of debt, save and invest, and retire.
Ok, so - the least vehicle you can that does what you need it to. In my opinion, the hatchback is far superior to the sedan. Cars like the Toyota Matrix or Pontiac Vibe are an excellent configuration for the average family, and would be my starting point when looking to find what fits. The fuel economy is pretty good, though not the best (equivalent Corolla is slightly better); but in exchange, you get a nice hatch, fold-down seats with a huge amount of room.
If you do few miles, a Buick Century in good condition (GM 3800 engine) will serve well. For long distance commuters, a diesel probably makes sense, though it would make more sense to reduce the commute.
Now - in order to get best value, you're not going to buy new. 0% deals are not really 0% financing - the cost of the financing is simply built in to the price you pay (ie, if you pay cash, it will be less than the 0% financing price). Cars depreciate like mad in the first few years.
If you absolutely hate cars, car maintenance, and so on, a gently used, certified three year old car will be much better value than a new one and almost as good. Otherwise, a ~6 year old vehicle is a good age to aim for - the rapid depreciation has all happened. Obviously, get a good inspection before you buy, but there is nothing to be 'afraid of' with older vehicles, if they have been maintained well. *Any* modern car should go to 300k km at an absolute minimum. I'm talking 2000 and newer.
Personally, I think $5k is a good price. You are not getting 'end of life' cars here. Aim for 200k km or fewer, and you have a *lot* of life left in a vehicle.
Do check the model and year at car complaints though, and avoid any with specific problems - but remembering that if a certain year has, say, a faulty automatic transmission, you can buy the manual quite happily!
Good luck!
Saturday 25 January 2014
Cellphones
There are plenty of ways to spend a lot of money having a portable form of communication, and a few ways to make it very cheap.
First, you need to figure out how much time you spend near a wireless network; second, how much hassle you are prepared to put up with; and finally, how much you actually use in three categories: airtime, text messages, and data - when NOT on wifi.
There are plenty of programs (I hate 'app' as a word) that will allow you to send and receive texts for free in Canada, and at least one that will allow you to make and receive phonecalls for free. You get a real number for these services, but they need internet access (either cellular or wifi) in order to communicate. This is where the hassle comes in - to save $40 a month, are you willing to manage your data connection?
Here's what I do. I use Wind Mobile http://windmobile.ca/ on 'Pay Your Way'. I top up for $40 + tax every 180 days (or when my balance reaches $0, but usually the $40 will last me).
I am *not* in a 'Wind Zone' so I am always 'roaming' on to the Rogers network, but it doesn't matter - the price is the same, $0.20 a minute to make and receive calls, and $0.15 to send a text (incoming is free). Data, however, is *very* expensive at $1 a megabyte - so I don't ever use it.
Now - I work from home, so I am almost always on wifi. I use the following three programs on the phone:
Fongo/Dell Voice - you get a free number that can make and receive free calls to all Canadian numbers (except premium rate, of course!)
Text+ - again a free number, but this time it is free to make and receive texts. Calling is 2c a minute or so. Calling doesn't seem to work correctly on my phone, unfortunately.
Skype - I use this for free video and skype calling, as well as free calling 1-800 numbers - this is great as it works on free call numbers the world over. Calls are very cheap as well, so I do pay to use the service. I go through about $30 a year.
I have just upgraded my phone, at a cost of about $50 - in the Boxing Day sales I got a lower-end Android phone, which I am very happy with.
Actually, cell phone 'plans' are all pretty much a joke. The whole system is digital so there is no good reason a 'phonecall' is billed differently from browsing the internet - it should all just be on the amount of data used. Pricing for text messages is ridiculous - bear in mind each one is 160 characters, which is 140 bytes - even with all the overhead, probably less than 1/4 of a kilobyte! Even the $1 megabyte would be enough to send 4,000 texts - but you get charged $0.15 each - $600?! Madness.
One slightly illicit option is to get a 'tablet plan' SIM card and an unlocked phone. Then you JUST use data - never give out the SIM card's phone number - and have Fongo and Text+ on all the time (but use wifi where possible). It is no doubt against the phone companies' terms of use, but that's simply because you're circumventing their horrible prices. There is no technological distinction between a tablet with 3g/cellular connectivity and a cell phone, nor indeed a computer with a 3g card - they are all 'computers', they all have an operating system, and programs.
Note: don't do this with a phone and SIM from the same company: The company will have a record of what device the phone in question is (by the IMEI, or phone's unique serial number), and be very unsympathetic... either cancelling the plan, or forcing you onto a phone plan.
Does my heart bleed for the cell phone companies? Hardly. I'm even a stock holder, so it is in my interest for people to keep paying the ridiculous prices the 'big three' charge! But really I'd rather have reasonable prices for all, without the 'long distance' charges (hello, I can stream videos from all over the planet, my ISP doesn't charge me extra!), overage fees, etc, etc, etc.
Now, if you talk a lot during the business week, and aren't near wifi, you're stuck. But in all other cases, if you are paying > $50 a month, there are probably smarter solutions - if you choose to use them.
How much do you earn an hour? Is it worth your time to deal with all this? If you're earning a lot, and you use a good portion of your monthly minutes, texts, and data then no, you're probably fine the way you are. For everyone else, it's probably worth at least a cursory glance.
First, you need to figure out how much time you spend near a wireless network; second, how much hassle you are prepared to put up with; and finally, how much you actually use in three categories: airtime, text messages, and data - when NOT on wifi.
There are plenty of programs (I hate 'app' as a word) that will allow you to send and receive texts for free in Canada, and at least one that will allow you to make and receive phonecalls for free. You get a real number for these services, but they need internet access (either cellular or wifi) in order to communicate. This is where the hassle comes in - to save $40 a month, are you willing to manage your data connection?
Here's what I do. I use Wind Mobile http://windmobile.ca/ on 'Pay Your Way'. I top up for $40 + tax every 180 days (or when my balance reaches $0, but usually the $40 will last me).
I am *not* in a 'Wind Zone' so I am always 'roaming' on to the Rogers network, but it doesn't matter - the price is the same, $0.20 a minute to make and receive calls, and $0.15 to send a text (incoming is free). Data, however, is *very* expensive at $1 a megabyte - so I don't ever use it.
Now - I work from home, so I am almost always on wifi. I use the following three programs on the phone:
Fongo/Dell Voice - you get a free number that can make and receive free calls to all Canadian numbers (except premium rate, of course!)
Text+ - again a free number, but this time it is free to make and receive texts. Calling is 2c a minute or so. Calling doesn't seem to work correctly on my phone, unfortunately.
Skype - I use this for free video and skype calling, as well as free calling 1-800 numbers - this is great as it works on free call numbers the world over. Calls are very cheap as well, so I do pay to use the service. I go through about $30 a year.
I have just upgraded my phone, at a cost of about $50 - in the Boxing Day sales I got a lower-end Android phone, which I am very happy with.
Actually, cell phone 'plans' are all pretty much a joke. The whole system is digital so there is no good reason a 'phonecall' is billed differently from browsing the internet - it should all just be on the amount of data used. Pricing for text messages is ridiculous - bear in mind each one is 160 characters, which is 140 bytes - even with all the overhead, probably less than 1/4 of a kilobyte! Even the $1 megabyte would be enough to send 4,000 texts - but you get charged $0.15 each - $600?! Madness.
One slightly illicit option is to get a 'tablet plan' SIM card and an unlocked phone. Then you JUST use data - never give out the SIM card's phone number - and have Fongo and Text+ on all the time (but use wifi where possible). It is no doubt against the phone companies' terms of use, but that's simply because you're circumventing their horrible prices. There is no technological distinction between a tablet with 3g/cellular connectivity and a cell phone, nor indeed a computer with a 3g card - they are all 'computers', they all have an operating system, and programs.
Note: don't do this with a phone and SIM from the same company: The company will have a record of what device the phone in question is (by the IMEI, or phone's unique serial number), and be very unsympathetic... either cancelling the plan, or forcing you onto a phone plan.
Does my heart bleed for the cell phone companies? Hardly. I'm even a stock holder, so it is in my interest for people to keep paying the ridiculous prices the 'big three' charge! But really I'd rather have reasonable prices for all, without the 'long distance' charges (hello, I can stream videos from all over the planet, my ISP doesn't charge me extra!), overage fees, etc, etc, etc.
Now, if you talk a lot during the business week, and aren't near wifi, you're stuck. But in all other cases, if you are paying > $50 a month, there are probably smarter solutions - if you choose to use them.
How much do you earn an hour? Is it worth your time to deal with all this? If you're earning a lot, and you use a good portion of your monthly minutes, texts, and data then no, you're probably fine the way you are. For everyone else, it's probably worth at least a cursory glance.
Friday 24 January 2014
But I Can't Afford to Save!
So you have $2,000 coming in a month, after tax; you have no savings, your car just broke, and you really want a new handbag.
Ok. I can't wave a magic wand and fix everything for you. In some ways, this is hardest for the people who need help most. Mr. Money Mustache (see link on right) is really good for *middle income* people - people who have lots of money coming in, and who just fritter it away. Go there, and prepare to be Facepunched into Badassity (yes, really).
The same tenets are true, though, no matter your income, net worth, and expenses.
Spend less than you earn. Clearly any other option is long-term unsustainable! But just *balancing* your budget is only the first step. If you want to retire early, you have to save *hard* and, ideally, *start early*. The general rule of thumb is that, if you can save half of your income, you should be able to retire in ten years.
For a twenty-something or thirty-something person, that is a HUGE deal, in my opinion. All by NOT buying new cars and the latest phone every year - surely not?!
It is much harder for someone with less disposable income, but still doable. We have but few needs, really, and only a few of those are expensive.
Housing. Housing is not cheap. At the moment, in Canada's major cities at least, renting is almost certainly a better deal. Remember, just because you live in an expensive place now, you don't have to retire in one. There are plenty of (beautiful) places in Canada where housing is very affordable; geographically, the vast majority of the country is affordable. But, where the people are, the prices rise - it makes sense. And you have to work where the jobs are (right? Well... not necessarily. If you can start your own business, there is a very good chance you can work from home, and there are all sorts of benefits from doing so.. but that is another post).
In my opinion, if it is *impossible* to save > 50% of your take-home pay, and you want to retire early, you must move or get a better paid job. There is simply no way to do otherwise. So if your take home is $2,000 and your rent is $1,000 you have to make changes.
Family and friends will make this difficult, of course. I certainly don't advocate just shooting off to Fort McMurray without planning it out. But, if you can earn $100k a year there, and $30k in a big city... well. You could work out there for a few years and retire, quite easily. Are you willing to make that choice? How much do you *not* want to be in an office in 20, 30, 40 years from now?
But let's put all that crazy talk to one side. The first step to finding out why you can't afford to save is to make a budget, and track your spending - down to the last cent, every month for a couple of months. The next step is to plug leaks (again, this is all a choice - you *can* have your Starbucks, your beer - but each dollar you spend is a dollar not working for you).
A sample $2000 budget might go something like this:
$700 rent
$125 food
$15 cellphone
$35 internet
$50 utilities (assuming water + heat are included)
$75 misc
$200 car (gas, insurance, maintenance)
$100 emergency fund
$700 savings
Yes, this is only 35% savings, but it's a good start. Once the emergency fund reaches a number you're comfortable with (or you have access to a Line of Credit), push that money into savings. Live in a big city? Take the bus, ride a bike, and use car rentals ($10 specials!) to get about. Hopefully the 'misc' category can also go into savings.
$15 cell phone am I crazy?! No... but that, too, is another post.
The next step is to get a side gig, bringing in extra cash that you can either split 50/50 between fun and retirement, as a great incentive to do it... or just invest it, if that *is* incentive enough for you.
There are countless side gigs out of there, from the literal (join a band and go gigging!), to teaching students to get them through their exams, or a foreign language... to buying and selling on eBay and the local classifieds... to blogging, knitting, growing your own food (low return on investment, but it serves more purposes than just money).
Over time, salaries rise. The key to early retirement or financial independence is *not* letting your lifestyle rise with it. A key phrase is 'pay yourself first', and that means making sure money comes out of your chequing account and goes into your investment account *before* you are tempted to spend it, and come to no longer miss it. Your budget says you have $x dollars a month for 'fun' so that's all you're going to spend!
As I mentioned in the Credit Card post, high-interest debt is a killer. Debt that costs less than it earns you is good (especially in the case that it makes financial sense to buy a house rather than rent... but that is not the case in Canada. Not saying it is a bad thing to own a house, but mathematically speaking it is probably more sensible to rent - especially in the large cities). Credit card debt will eat up a stupid amount of money and should be avoided - transfer it if you can. But if you do, make sure you pay off the new card and do NOT start racking up more debt on the old one. Really, 20% is very 'convenient' - for the credit card company.
Ok. I can't wave a magic wand and fix everything for you. In some ways, this is hardest for the people who need help most. Mr. Money Mustache (see link on right) is really good for *middle income* people - people who have lots of money coming in, and who just fritter it away. Go there, and prepare to be Facepunched into Badassity (yes, really).
The same tenets are true, though, no matter your income, net worth, and expenses.
Spend less than you earn. Clearly any other option is long-term unsustainable! But just *balancing* your budget is only the first step. If you want to retire early, you have to save *hard* and, ideally, *start early*. The general rule of thumb is that, if you can save half of your income, you should be able to retire in ten years.
For a twenty-something or thirty-something person, that is a HUGE deal, in my opinion. All by NOT buying new cars and the latest phone every year - surely not?!
It is much harder for someone with less disposable income, but still doable. We have but few needs, really, and only a few of those are expensive.
Housing. Housing is not cheap. At the moment, in Canada's major cities at least, renting is almost certainly a better deal. Remember, just because you live in an expensive place now, you don't have to retire in one. There are plenty of (beautiful) places in Canada where housing is very affordable; geographically, the vast majority of the country is affordable. But, where the people are, the prices rise - it makes sense. And you have to work where the jobs are (right? Well... not necessarily. If you can start your own business, there is a very good chance you can work from home, and there are all sorts of benefits from doing so.. but that is another post).
In my opinion, if it is *impossible* to save > 50% of your take-home pay, and you want to retire early, you must move or get a better paid job. There is simply no way to do otherwise. So if your take home is $2,000 and your rent is $1,000 you have to make changes.
Family and friends will make this difficult, of course. I certainly don't advocate just shooting off to Fort McMurray without planning it out. But, if you can earn $100k a year there, and $30k in a big city... well. You could work out there for a few years and retire, quite easily. Are you willing to make that choice? How much do you *not* want to be in an office in 20, 30, 40 years from now?
But let's put all that crazy talk to one side. The first step to finding out why you can't afford to save is to make a budget, and track your spending - down to the last cent, every month for a couple of months. The next step is to plug leaks (again, this is all a choice - you *can* have your Starbucks, your beer - but each dollar you spend is a dollar not working for you).
A sample $2000 budget might go something like this:
$700 rent
$125 food
$15 cellphone
$35 internet
$50 utilities (assuming water + heat are included)
$75 misc
$200 car (gas, insurance, maintenance)
$100 emergency fund
$700 savings
Yes, this is only 35% savings, but it's a good start. Once the emergency fund reaches a number you're comfortable with (or you have access to a Line of Credit), push that money into savings. Live in a big city? Take the bus, ride a bike, and use car rentals ($10 specials!) to get about. Hopefully the 'misc' category can also go into savings.
$15 cell phone am I crazy?! No... but that, too, is another post.
The next step is to get a side gig, bringing in extra cash that you can either split 50/50 between fun and retirement, as a great incentive to do it... or just invest it, if that *is* incentive enough for you.
There are countless side gigs out of there, from the literal (join a band and go gigging!), to teaching students to get them through their exams, or a foreign language... to buying and selling on eBay and the local classifieds... to blogging, knitting, growing your own food (low return on investment, but it serves more purposes than just money).
Over time, salaries rise. The key to early retirement or financial independence is *not* letting your lifestyle rise with it. A key phrase is 'pay yourself first', and that means making sure money comes out of your chequing account and goes into your investment account *before* you are tempted to spend it, and come to no longer miss it. Your budget says you have $x dollars a month for 'fun' so that's all you're going to spend!
As I mentioned in the Credit Card post, high-interest debt is a killer. Debt that costs less than it earns you is good (especially in the case that it makes financial sense to buy a house rather than rent... but that is not the case in Canada. Not saying it is a bad thing to own a house, but mathematically speaking it is probably more sensible to rent - especially in the large cities). Credit card debt will eat up a stupid amount of money and should be avoided - transfer it if you can. But if you do, make sure you pay off the new card and do NOT start racking up more debt on the old one. Really, 20% is very 'convenient' - for the credit card company.
Credit Cards
Credit cards, as with other types of credit, are a tool. Use them to help *you*, not the credit card companies.
The first is pretty obvious: If there is any danger of you not being able to pay your bill in full by the time interest becomes payable, don't use the card. 20% interest will break your budget in no time flat - it is a disaster, and should be avoided at all times.
Second, don't get cards that cause you to spend more than you would otherwise choose to. So for example, there is nothing wrong with getting a Hilton-branded credit card that gives you deals on or free nights at hotel stays. But if it means you end up staying at much more upmarket hotels than you would normally just to get the points...
I have so far gone for cash back type cards, where there are few to no hoops to jump through in order to get your rewards.
Third, use the right tool for the job. If you buy things from overseas, make sure you get a card that has zero percent forex (foreign exchange) fees and use it for those purchases. If you buy online, use a card that has warranty extension. Or for car rentals, flights and hotels, look for cards with insurance built in.
Fourth, fees. There is nothing wrong with paying for a credit card - if it's worth it. For example, there is a good free 2% gas/groceries credit card, and one that costs $120 but gives 4% cashback. For that extra 2% to become worth paying the $120 for, obviously you need to spend enough to get you that $120 back! And in this example, that means a total of $6000 *in those categories* a year.
As you might've guessed, I'm not a big spender. Our household spends much less than the $500 a month needed to make the fee-based card worth it. The card in question *does* come fee free for the first year, and with a cash signup bonus too, so I may go for it at some point.
There have been many articles written about credit scores, but the gist is this:
There are 5 categories that make up the score
35% payment history - if you make your payments on time, full marks. Always pay on time!
30% payment utilisation - this is the percentage of your available credit that you are using. It is based on when the credit issuer reports to the credit bureau (ie, your *bill*, not whether or not you carry a balance). More than roughly 30% utilisation will bring down your score.
15% length of credit history - having had cards for years is good. Closing those accounts is bad.
10% types of credit - credit cards, lines of credit, auto loans, instalment loans...
10% 'new credit' and enquiries - each time you have a 'hard hit' on your report, it knocks your score a few points. Lots of hits in a short time multiplies that effect. But, shopping around for mortgages in a short period gets amalgamated into one hit
Before doing a *big* application (mortgage), it is worthwhile keeping your score as high as possible by not applying for new cards, making sure your utilisation is as low as possible, and so on. Once your score is high enough, though, it simply doesn't matter - all applicants above a threshold will get the best mortgage rates.
Anyway, back to credit cards as tools. I carry the following:
A card with good cashback on gas/groceries
A card with zero forex fees
A card for other situations
It just so happens that these three cards are on the three different networks (VISA, MasterCard, American Express), so in the case that only one type is accepted I am still covered.
If you have old but unused cards, keep them - use them occasionally so they don't get closed - but keep the account open, as it does help your credit score. Alternatively, see if you can upgrade them to a different product that is more useful to you.
Hint: 1% should be the minimum reward target. There are cards that give 0.25%, 0.5% but there is no good reason to go with them - as 1% cards are plentiful. I will go through churning, app-o-ramas and so on in another post.
And to recap - credit is a tool. There are lots of fancy cards out there (just as there are lots of fancy trucks!), but that doesn't mean you should use them. Your financial health - and your early retirement - depends on you using them when appropriate, but keeping your wallet closed otherwise!
The first is pretty obvious: If there is any danger of you not being able to pay your bill in full by the time interest becomes payable, don't use the card. 20% interest will break your budget in no time flat - it is a disaster, and should be avoided at all times.
Second, don't get cards that cause you to spend more than you would otherwise choose to. So for example, there is nothing wrong with getting a Hilton-branded credit card that gives you deals on or free nights at hotel stays. But if it means you end up staying at much more upmarket hotels than you would normally just to get the points...
I have so far gone for cash back type cards, where there are few to no hoops to jump through in order to get your rewards.
Third, use the right tool for the job. If you buy things from overseas, make sure you get a card that has zero percent forex (foreign exchange) fees and use it for those purchases. If you buy online, use a card that has warranty extension. Or for car rentals, flights and hotels, look for cards with insurance built in.
Fourth, fees. There is nothing wrong with paying for a credit card - if it's worth it. For example, there is a good free 2% gas/groceries credit card, and one that costs $120 but gives 4% cashback. For that extra 2% to become worth paying the $120 for, obviously you need to spend enough to get you that $120 back! And in this example, that means a total of $6000 *in those categories* a year.
As you might've guessed, I'm not a big spender. Our household spends much less than the $500 a month needed to make the fee-based card worth it. The card in question *does* come fee free for the first year, and with a cash signup bonus too, so I may go for it at some point.
There have been many articles written about credit scores, but the gist is this:
There are 5 categories that make up the score
35% payment history - if you make your payments on time, full marks. Always pay on time!
30% payment utilisation - this is the percentage of your available credit that you are using. It is based on when the credit issuer reports to the credit bureau (ie, your *bill*, not whether or not you carry a balance). More than roughly 30% utilisation will bring down your score.
15% length of credit history - having had cards for years is good. Closing those accounts is bad.
10% types of credit - credit cards, lines of credit, auto loans, instalment loans...
10% 'new credit' and enquiries - each time you have a 'hard hit' on your report, it knocks your score a few points. Lots of hits in a short time multiplies that effect. But, shopping around for mortgages in a short period gets amalgamated into one hit
Before doing a *big* application (mortgage), it is worthwhile keeping your score as high as possible by not applying for new cards, making sure your utilisation is as low as possible, and so on. Once your score is high enough, though, it simply doesn't matter - all applicants above a threshold will get the best mortgage rates.
Anyway, back to credit cards as tools. I carry the following:
A card with good cashback on gas/groceries
A card with zero forex fees
A card for other situations
It just so happens that these three cards are on the three different networks (VISA, MasterCard, American Express), so in the case that only one type is accepted I am still covered.
If you have old but unused cards, keep them - use them occasionally so they don't get closed - but keep the account open, as it does help your credit score. Alternatively, see if you can upgrade them to a different product that is more useful to you.
Hint: 1% should be the minimum reward target. There are cards that give 0.25%, 0.5% but there is no good reason to go with them - as 1% cards are plentiful. I will go through churning, app-o-ramas and so on in another post.
And to recap - credit is a tool. There are lots of fancy cards out there (just as there are lots of fancy trucks!), but that doesn't mean you should use them. Your financial health - and your early retirement - depends on you using them when appropriate, but keeping your wallet closed otherwise!
The Beginning
Gentle reader (don't you love that?), I want to help you. I want to take you on a journey leading to... well, I don't know what it'll lead to, that's up to you. But what I want to do is this: to lead you to a place where you are free to choose what to do with your life, rather than a place where you are locked into a life of work whether or not you love, or even like, it.
The truth is that your life is in your hands. There are many, many options out there, but most fall into the trap of debt/consumerism. It's a cycle - the more debt you show yourself as able to handle, the more credit you can obtain (and, at the moment, oh-so-cheaply!). And so. You buy a new TV, a new kitchen, a new truck. Add it to the pile of debt. To be cleared by the time you retire.. or after the children are through college.. or when you win the lottery.
Life goes on, the bills come in, some things get paid off, other things get replaced, but you never feel like you're actually making progress. Oh, sure, there is some money going into the RRSP, and of course your CPP entitlement will grow with each year. But, oh man, at what age will you be able to claim it?
70? 75? Who knows, by the time *you* get there!
Now. I'm not Dave Ramsey. I'm not (hopefully) going to preach. Here is my core belief: it's a choice.
There is nothing wrong with buying a new truck (but, in *my* opinion, there are alternatives that might suit you better). There is nothing wrong with getting a new TV.
But you have to look at the price. And no, not just the price tag. You have to account for all the extras - the tax, and if you're buying it on (longer term) credit, the cost of borrowing that money.
So, it's a choice. You can have that new truck (the salespeople will be so happy to help you with the loan!). You can have it every three years, and you will always have a payment. It's ok - it's a choice.
There is one thing in this life that is finite, and that is time. Every time you buy something before you are financially independent, you are trading your time for that thing.
In a really simplified example, if you earn $75k a year before tax/$60k a year after tax, and you buy a new truck for $30k, you are trading half a year of getting up, getting yourself to work, working. 100 days, more or less, will revolve around the workplace.
Is that bad? Again - it's a choice. Do you *really really* want that truck? Then sure - buy it. But it is a depreciating asset. In ten years, it will be worth a mere fraction of what you paid for it (and the worst thing is that after 3 years, most of that depreciation will have happened). You have to do a proper cost/benefit analysis.
What are the alternatives? Buy a 'beater' truck for a few $k - yes, more maintenance, but probably you'll worry less about throwing a whole load of gravel or topsoil in the back of it! Or maybe a car with a hitch and a small trailer would accomplish what you need?
Maybe not. Maybe you do *need* a truck, and you absolutely *need* it to be reliable, and maybe you have had bad experiences with secondhand trucks - ok. Buy the new one. But realise what it means - it means you are that much further from retiring, or rather, from having the freedom to choose whether to work or not, to play golf or start a business without the stress of mortgage payments.
You can afford to buy a new truck and retire early, if you are earning a decent wage, and make that choice. It's cool - and I think trucks are pretty cool (though I don't own one myself). But if you want early retirement, saving money and investing it have to become your initial thoughts when spending any amount of money. Habitual. A little checklist:
1. Do I need this?
2. Do I need to pay this much for it?
3. What is the optimal way of buying it?
The truth is that your life is in your hands. There are many, many options out there, but most fall into the trap of debt/consumerism. It's a cycle - the more debt you show yourself as able to handle, the more credit you can obtain (and, at the moment, oh-so-cheaply!). And so. You buy a new TV, a new kitchen, a new truck. Add it to the pile of debt. To be cleared by the time you retire.. or after the children are through college.. or when you win the lottery.
Life goes on, the bills come in, some things get paid off, other things get replaced, but you never feel like you're actually making progress. Oh, sure, there is some money going into the RRSP, and of course your CPP entitlement will grow with each year. But, oh man, at what age will you be able to claim it?
70? 75? Who knows, by the time *you* get there!
Now. I'm not Dave Ramsey. I'm not (hopefully) going to preach. Here is my core belief: it's a choice.
There is nothing wrong with buying a new truck (but, in *my* opinion, there are alternatives that might suit you better). There is nothing wrong with getting a new TV.
But you have to look at the price. And no, not just the price tag. You have to account for all the extras - the tax, and if you're buying it on (longer term) credit, the cost of borrowing that money.
So, it's a choice. You can have that new truck (the salespeople will be so happy to help you with the loan!). You can have it every three years, and you will always have a payment. It's ok - it's a choice.
There is one thing in this life that is finite, and that is time. Every time you buy something before you are financially independent, you are trading your time for that thing.
In a really simplified example, if you earn $75k a year before tax/$60k a year after tax, and you buy a new truck for $30k, you are trading half a year of getting up, getting yourself to work, working. 100 days, more or less, will revolve around the workplace.
Is that bad? Again - it's a choice. Do you *really really* want that truck? Then sure - buy it. But it is a depreciating asset. In ten years, it will be worth a mere fraction of what you paid for it (and the worst thing is that after 3 years, most of that depreciation will have happened). You have to do a proper cost/benefit analysis.
What are the alternatives? Buy a 'beater' truck for a few $k - yes, more maintenance, but probably you'll worry less about throwing a whole load of gravel or topsoil in the back of it! Or maybe a car with a hitch and a small trailer would accomplish what you need?
Maybe not. Maybe you do *need* a truck, and you absolutely *need* it to be reliable, and maybe you have had bad experiences with secondhand trucks - ok. Buy the new one. But realise what it means - it means you are that much further from retiring, or rather, from having the freedom to choose whether to work or not, to play golf or start a business without the stress of mortgage payments.
You can afford to buy a new truck and retire early, if you are earning a decent wage, and make that choice. It's cool - and I think trucks are pretty cool (though I don't own one myself). But if you want early retirement, saving money and investing it have to become your initial thoughts when spending any amount of money. Habitual. A little checklist:
1. Do I need this?
2. Do I need to pay this much for it?
3. What is the optimal way of buying it?
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