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Today’s reader case hails from the Canadian oil patch. Albertan reader cases are always interesting, in that Alberta has experienced such a boom-bust cycle in the oil sector that it’s affected nearly every person who lives there. Let’s find out how.
First off thanks for sharing your book and inspiration! This was the first “Finance/Investing” book I had read in quite awhile. It was inspiring, entertaining, engaging and presented in a way to be easily implemented. What a breath of fresh air! And your Blog takes it to another level! What a wealth of information and experience.
Several years back my wife and I realized that we had to change our finances. As a newly married couple we followed the path of buying the house, having the baby, renovating the house and on and on. We were making good money but we didn’t seem to be saving much of it. And we do want to retire. Hopefully early!
The few investments I was involved in tended to be primarily equities. So working in the oil patch, downtown Calgary, Alberta…you get all sorts of great “tips” of “the next big thing” from family, co-workers and random strangers. As it generally played out locally, the “next big thing” was a massive downturn in our local economy that started at the end of 2014 and hasn’t actually recovered. Many of those great tips are today worth ten cents on the dollar.
In 2016 I wasn’t sure if I was going to be able to hold my job. There were layoffs everywhere and I had already taken a roughly 40% pay cut. The real estate market was still strong enough so we sold our house, as we didn’t want to be paying that mortgage and potentially looking for work at the same time.
We bought the house in 2010 for $495,000. We sold in 2016 for $575,000. Not bad right!? Well, I did rough math (I don’t keep exact detailed reports like Wanderer and Fire Cracker), and when the smoke cleared, the numbers said we rented that house for 6 ½ years for ~$1740/month. When I read your position on how home ownership is expensive, it mirrored our personal experience.
Ultimately, I did keep my job and after renting for a couple years, we did buy again. In this case we paid $350,000 for a duplex where we rent out the basement as a separate rental suite.
We would love to be “retired” in ten years. What could that look like for us?
- We are 49 years old
- Our son is done high school and has a RESP worth~$80,000 to take care of his post secondary education.
- Our dog will be 11. She could last a few more years to hold us back from world travel.
- Our home is totally paid off. Most likely paid off by the time we are 45.
- Probably keep this as a home base and as a small rental income stream.
- We can still rent out our basement suite. Or not. Maybe our son will live there if he stays local for post secondary.
- We pursue inspiring work where and when we want. It is not primarily finance driven.
- We could take a year (or more!) off and travel together.
- Possibly spend 6 months a year abroad. I think we still qualify for Alberta Health care this way. And we still like it here.
Here is where we are now:
- We are both 39 years old.
- Gross Annual Family Income: ~$224,950
- Net Annual Family Income: ~$158,143 (does not include rental income below)
- I’m Sales & Marketing in Oil & Gas. My wife is an HR Manager for a company that services mostly oil & gas.
- Monthly family spending: ~$7,000
- No debt (other than mortgage)
- Mortgage details:
- Principal Amount: $145,000 (purchase price was $350,000, we put $205,000 down)
- Annual Interest Rate: 3.14% fixed for 5 years
- Closing Balance as of Dec 27, 2019: $122,000
- We plan to put RRSP tax refund of ~$15,000 plus another $6,000 cash towards this in April.
- Maturity Date: May 15, 2023
- Estimate ~$280,000 in home equity (home should sell for more than $400,000)
- We have two vehicles (paid off):
- 2013 Ford Explorer worth ~$14,000
- 2015 Buick Encore worth ~$15,000
- I don’t really see these as assets. These two vehicles cost us ~$9,500/year in operational costs. That does not include depreciation.
- We have some gold, silver & platinum stuffed under a mattress somewhere. Current market value of Bullion ~$31,000
- Our son’s ( he is 8 years old) RESP: $32,000
- Annual rental income from basement suite: $11,500 (gross)
- Managed Mutual Fund Investments:
- Cash (money market): 6%
- Cash (money market): 6%
- TFSA (Me – just opened): $4,000
- TFSA (Stocks): $2,290 (down 90%) (my wife stock shames me for this; which I probably deserve)
- Crypto: ~$10,000 (this is pretty much gambling and I wouldn’t include it in assets)
- Cash on hand: ~$18,000
- Net Income: $158,000. Does NOT include ~$11,500 (gross) annual rental income.
- Spending: $76,000. (I’ve added a cushion beyond the expense table)
- Assets: $161,600. Does NOT include RESP, home equity, vehicles or crypto.
- Debts: $0. Mortgage Payments built into spending
- Mortgage: $757 Per Month, $9,084 Per Year
- Utilities: $350 Per Month, $4,200 Per Year
- Property Tax: $192 Per Month, $2,304 Per Year
- Home Insurance: $97 Per Month, $1,164 Per Year
- Buick Insurance: $110 Per Month, $1,320 Per Year
- Buick Fuel: $125 Per Month, $1,500 Per Year
- Registration: $8 Per Month, $90 Per Year
- Licence: $3 Per Month, $36 Per Year
- Buick Maintenance: $75 Per Month, $900 Per Year
- Explorer Insurance: $110 Per Month, $1320 Per Year
- Explorer Fuel: $275 Per Month, $3,300 Per Year
- Explorer Maintenance: $75 Per Month, $900 Per Year
- Explorer Registration: $8 Per Month, $90 Per Year
- Groceries: $1,200 Per Month, $14,400 Per Year
- Dog (food, groom): $70 Per Month, $840 Per Year
- AMA: $15 Per Month, $180 Per Year
- Internet: $63 Per Month, $756 Per Year
- Netflix $14 Per Month $168 Per Year
- Son’s RESP: $170 Per Month, $2,040 Per Year
- Before/After School: $510 Per Month, $6,120 Per Year
- Son Activities: $125 Per Month, $1,500 Per Year
- Meals Out: $200 Per Month, $2,400 Per Year
- Meals In: $200 Per Month, $2,400 Per Year
- Bank Fees RBC: $16 Per Month, $192 Per Year
- Cell Phone: $65 Pre Month, $780 Per Year
- House Cleaners (Marriage Insurance Policy): $130 Per Month, $1,560 Per Year
- Misc: $100 Per Month, $1,200 Per Year
- Annual Trip: $500 Per Month, $6000 Per Year
Ah, the oil patch. For you Americans out there, Alberta is basically Canada’s Texas. They have three major industries: oil, gas, and strip clubs for oil & gas workers. They wear cowboy hats and drive pickup trucks, and is one of the few places in Canada where you can find Trump supporters (due to his support of building pipelines down into the US). Curiously, they were also home to a fringe political movement for Alberta to secede from Canada and join the US. That movement has been…strangely quiet ever since the coronavirus hit for some reason. Can’t imagine why.
They’ve also been whacked badly by the oil price’s slide from over $100 a barrel to $40 today, which is why OilFIRE made a reference to potential job cuts in 2016. Their real estate market also took a big hit around then and has never recovered, so it’s quite common for us to see people from Alberta sitting on investment properties that are underwater. Fortunately, this reader has avoided being in that situation.
So, what jumps out at me when I look over OilFIRE’s numbers?
Where Did All Their Money Go?
People who work in Alberta’s oil patch are known for two things: Big salaries and big spending. Because the people who work in this sector often get massive salaries right out of school. it’s really common for them to go nuts with their spending. Easy come, easy go, right?
But in this case, their spending isn’t too bad. I mean, it’s still high compared to our budget, but in relation to their earnings it’s pretty reasonable. With net earnings of $158,000 and total spending of $76,000, they are saving $82,000 a year, which means a savings rate of $82,000 / $158,000 = 52%!
So that begs the question…where did all of it go? If we take into account how much money they put down on their house ($205,000) and their other investable assets ($161,600), we get $366,600, or only 4.5 years worth of savings at $82,000 a year. Their net worth should be way higher at this point in their lives. I’m not seeing any yachts or helicopters in their assets, so where did it all go?
Investments Are All Over The Place
And I think the biggest clue to answer this question is in their investment strategy, in that they don’t seem to have one. Some of the money is in managed mutual funds (yech), some of it’s in their duplex, some of it’s in gold and precious metals “stuffed under a mattress somewhere” (his words), and some of it’s in crypto (!!!).
And then there’s this line: So working in the oil patch, downtown Calgary, Alberta…you get all sorts of great “tips” of “the next big thing.” Followed by this line in their assets: TFSA (Stocks): $2,290 (down 90%).
So what this is telling me is that they’re doing random things with their money without a coherent investment strategy. And the investment strategy that we recommend is not to invest in individual stocks, precious metals, high-fee mutual funds, or cryptocurrencies, but rather invest in a diversified portfolio of low-fee index funds.
So that’s the first thing our reader needs to do. Go back through our Investment Workshop and learn about how to manage an ETF portfolio yourself. Then, when you feel you have a reasonable grasp on the material, gather all of the “investments” you’ve accumulated, sell it all, and build your portfolio.
If we do this, OilFire’s investment portfolio will be $92,715 (RRSP) + $13,600 + $4000 + $2290 (TFSAs) + $31,000 (precious metals) + $10,000 (crypto) + $18,000 (cash) = $171,605. We won’t be including the RESP since that’s earmarked for his son’s education.
Math Shit Up
OK so assuming that our reader gets his investments under control, how are they doing? For some reason in his summary table he makes a point to say that he’s not including his basement suite’s rental income as part of his earnings. I’m not sure why, it should absolutely be included as part of his earnings, though we do have to account for taxes on that income. Let’s be super pessimistic and say that his $11,500 gross annual rental income becomes $6000 after tax (damned Canadian taxes!). So his net family annual income is $158,000 + $6000 = $164,000.
Now how much is his spending? The answer? I DON’T KNOW!
His own email doesn’t even agree on the answer. At the top, he claims he’s spending $7000 a month. Then later on, he says he’s spending $76,000 a year, which is $6,333 a month, not $7000. And if we throw his broken down expenses into Excel and add it up, it only adds up to $66,744 a year, or $5,563 a month.
So I have a low degree of confidence OilFire actually knows how much he spends. But he’s given us 3 sets of numbers, so let’s see what each scenario implies for his FIRE plans.
At a spending level of $7000 a month, or $84,000 a year, he would need his portfolio to hit $84,000 x 25 = $2,100,000. His savings would also be $164,000 – $84,000 = $80,000. With these numbers, we can project he will hit FIRE in…
…15 years. Not bad, but it’s not hitting his goal of retiring in 10 years.
Now let’s see what his numbers look like using his second spending estimate of $76,000. At this spending level, he would need to hit a portfolio value of $76,000 x 25 = $1,900,000. His savings would be $164,000 – $76,000 = $88,000 (Ooh! Lucky Chinese number!). With these values, OilFIRE can retire in…
…13 years. Better, but still not quite there.
Now let’s see what happens with his final spending number that comes from that big long broken-down list of monthly spending items. If we add all that up, we get $66,744. At that spending level, he would need to hit $66,744 x 25 = $1,668,600. And he would be saving $164,000 – $66,744 = $97,256. With those numbers, he would be able to retire in…
…11 years! Close enough. With a few minor tweaks to his budget, he’d easily be able to bring that down to 10.
Usually, this is where I give the person suggestions on what to do with their budget to hit their target, but oddly enough his detailed budget already gets him there. If he can stick to his own detailed budget and not the vague hand-wavey numbers he was using earlier, then he should be able to retire within 11 years, which is close enough to his goal that even a minor tweak will push him across the finish line.
But before he does that, he absolutely needs to get his investments under control. This go-in-five-different-directions strategy has wasted a lot of time and, more importantly, money for OilFIRE. He’s got to put a stop to that and start investing his money in a balanced and diversified index ETF portfolio or he’ll never hit FIRE. Once he has that under control, then all he needs to do is track his spending ruthlessly and make sure he’s hitting his own budget consistently each month, and he’ll hit his goal of retiring in 10 years.
What do you think? Is there anything else OilFIRE should be doing? Let’s hear it in the comments below!
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