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- Return of the Bear Market: Are You Ready? - March 16, 2020
It’s Friday, and you know what that means…another Reader Case!
This one’s from someone who’s just starting off in their FI journey, which is always awesome since the earlier we reach people with our message of early retirement and infinite freedom, the sooner we can get people there!
So without further ado, let’s get into it, shall we?
Hi Firecracker & Wanderer,
I’m a single 25 year old, living in one of the most expensive cities in Canada, and looking for some direction to be financially independent. While I’m not burnt out and planning to retire soon, I’d like the luxury to choose to pursue other things besides a 9-5 when I do get burnt out and also get to travel and experience other countries. I’ve read probably a thousand personal finance articles, blogs, and followed related instagram accounts, and your website resonated the best with me. You guys seem to be doing a good job of living a full life, and not pushing the idea of the traditional approach to saving and home ownership, which I appreciate.
Here’s some information about me, I’d love your input/direction:
- Your gross/net annual family income : $65,000 before taxes
- Your monthly family spending: $3,000 per month
- For any debts you have – Car Loan only
- The interest rate: 6.99%
- Your minimum monthly payment: $280
- The outstanding balance: $13,997
- Any fixed assets you have (house, car, etc.) Car
- And investments or savings you have (cash, bonds, stocks, etc.) $20,300 in a TFSA, $1,600 emergency fund for car, $2,300 in mutual fund TFSA- less than 1% return over 2 years, $2,200 in RRSPs. I also have critical illness and life insurance policies that have a payout at 50 years old.
Okie dokey. First of all, what do our FI-eyes notice that’s strange here?
The car loan. Yeesh.
A $13,997 loan at an after-tax interest rate of 7% makes no sense, since you’re currently sitting on way more than that in cold hard cash.
This is a classic rookie money-mistake. Having debt while holding cash. Unless that debt’s interest rate is really low and/or tax-deductible, it never makes sense to hold both debt AND cash. Take one and kill the other!
If TwentyFiveToLife were to continue paying off that car loan at the minimum payment, she’d take 60 months to pay it off completely, and according to this Loan Calculator site, that would end up costing her almost $2600 over the course of the loan.
Why, TwentyFivetoLife? WHY would you do that to yourself?
Immediately take a chunk of your savings and kill that car loan NOW. You pay interest when it’s either very low, or you have no choice because you don’t have the money. She is in neither of those situations.
OK so now that we’ve dealt with the debt, where is TwentyFiveToLife sitting on her path to FI? As we always do here, let’s MATH SHIT UP.
First of all, she included her gross salary, but not net. Seeing as how she’s claimed to be living in one of the most expensive cities in Canada, I’m going to assume she lives in Ontario. Canada’s California.
Given her current earnings level, and assuming she starts maxing out her RRSP (which she hasn’t but should absolutely start doing), she’d be earning $52,635, according to SimpleTax’s Tax Calculator.
If I’m wrong on this by the way, the numbers don’t change much if I pick British Columbia, home of the OTHER crazy-expensive city in Canada, but for now we’ll assume Ontario.
|Expenses||$3000 monthly, $36,000 annual|
|Assets||$22,600 (TFSA) + $1600 (emergency fund) + $2200 (RRSP) = $26,400|
At her current spending level of $3,000, or $36,000 a year, she will need $36,000 x 25 = $900,000 to retire. Her current savings rate is $52,635 – $36,000 = $16,635, or 32%
And how long will it take for her to get there?
While 26 years sounds like a lot, don’t forget that she’s just 25 years old. Her current trajectory puts her at retirement age at 51, which is already really good considering the standard retirement age is 65.
But still, 26 years is a long time. What else can we do to make that time-to-retirement faster?
Well, the first thing I noticed is that her expenses are relatively high. She’s spending $36k annually as a single person. By comparison, we’re spending $40k annually for the both of us while travelling the world. So there’s some unnecessary spending buried inside that number.
Unfortunately, because TwentyFiveToLife didn’t provide a detailed breakdown of what that spending looks like, we can only guess where all that money’s going. But one thing we DO know is she’s got pretty hefty car-related expenses.
I get that sometimes you need a car to survive. If you live in a tiny rural area where there’s no bus system to speak of, or your work involves hauling firewood around in a truck, then yeah you absolutely need your own vehicle. But one of the nice thing about living in a high-cost city is that there tends to be a pretty good transit system. Unless you’re in L.A., of course. Ugh. Stupid L.A.
ANYHOO, while we lived in Toronto we never owned a car, instead relying on public transit and using a car-sharing service called AutoShare (now called Enterprise CarShare) whenever we needed to haul groceries or what-not. Total cost per month was $145 (for the transit pass) + $20 (Car Share) = $165 per month.
Now compare that to the cost of owning a car. According to Global News, the average cost of a compact car, when taking into account insurance, gas, and depreciation, among other things, is $8600 a year.
$8600 a year equals $716 a month (which is almost our rent when we were living in Toronto). If TwentyFiveToLife were able to restructure her life so that she wouldn’t need car and instead rely on public transit + car sharing, that would reduce her monthly living expenses to $3000 – $716 (cost of car) + $165 (cost of public transit/car sharing) = $2449 per month, or $29,388 per year.
How does that affect her retirement numbers?
With annual expenses of $29,388, that means her FI target is $29,388 x 25 = $734,700.
At the same time, her savings rate jumps up to $52,635 (after tax earnings) – $29,388 = $23,247, or a respectable 44%.
How does that affect her time-to-retirement?
From 26 years to 19 years, down 7 years just with that change alone.
Now, TwentyFiveToLife is just starting out in her career, so there are still lots of things that could change. When FIRECracker got her first job out of university, she was making around what TwentyFiveToLife was making as well. Her salary didn’t stay there, it went up as she got promoted. And of course, we got married, which doubled our earning power while not doubling our costs since we combined rental costs and other things. So lots of life-events are still coming down the pipe which could dramatically shorten TwentyFiveToLife’s time to retirement.
But as we can already see, she’s already on pretty solid footing. At a retirement timeframe of 19 years (if she can eliminate the car costs), she’s already at a great start, and can expect to retire in her mid 40’s, which is more than two decades earlier than the average worker.
Unless of course she buys an overpriced house, in which case everything blows up.
So what do you guys/gals think? Is TwentyFiveToLife doing well? Or do you think more tweaks can be made? Let’s hear it in the comments below.
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