Reader Case: Twenty Five To Life

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Wanderer

The Wanderer retired from his engineering job at a major Silicon Valley semiconductor company at the age of 33. He now travels the world, seeking out knowledge from other wealthy people, so that he can teach people how to become Financially Independent themselves.
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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.

–TwentyFiveToLife

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.

That means…

Summary Amount
Income $52,635
Expenses $3000 monthly, $36,000 annual
Debt $13,997
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?

Year Balance Savings ROI Total
1 $10,103.00 $16,635.00 $606.18 $27,344.18
2 $27,344.18 $16,635.00 $1,640.65 $45,619.83
3 $45,619.83 $16,635.00 $2,737.19 $64,992.02
4 $64,992.02 $16,635.00 $3,899.52 $85,526.54
5 $85,526.54 $16,635.00 $5,131.59 $107,293.13
6 $107,293.13 $16,635.00 $6,437.59 $130,365.72
7 $130,365.72 $16,635.00 $7,821.94 $154,822.67
8 $154,822.67 $16,635.00 $9,289.36 $180,747.03
9 $180,747.03 $16,635.00 $10,844.82 $208,226.85
10 $208,226.85 $16,635.00 $12,493.61 $237,355.46
11 $237,355.46 $16,635.00 $14,241.33 $268,231.79
12 $268,231.79 $16,635.00 $16,093.91 $300,960.69
13 $300,960.69 $16,635.00 $18,057.64 $335,653.33
14 $335,653.33 $16,635.00 $20,139.20 $372,427.53
15 $372,427.53 $16,635.00 $22,345.65 $411,408.19
16 $411,408.19 $16,635.00 $24,684.49 $452,727.68
17 $452,727.68 $16,635.00 $27,163.66 $496,526.34
18 $496,526.34 $16,635.00 $29,791.58 $542,952.92
19 $542,952.92 $16,635.00 $32,577.18 $592,165.09
20 $592,165.09 $16,635.00 $35,529.91 $644,330.00
21 $644,330.00 $16,635.00 $38,659.80 $699,624.80
22 $699,624.80 $16,635.00 $41,977.49 $758,237.29
23 $758,237.29 $16,635.00 $45,494.24 $820,366.52
24 $820,366.52 $16,635.00 $49,221.99 $886,223.52
25 $886,223.52 $16,635.00 $53,173.41 $956,031.93

26 Years.

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.

Own a car? You won’t believe how much that’s costing you each year.

~~Global News

$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?

Year Balance Savings ROI Total
1 $10,103.00 $23,247.00 $606.18 $33,956.18
2 $33,956.18 $23,247.00 $2,037.37 $59,240.55
3 $59,240.55 $23,247.00 $3,554.43 $86,041.98
4 $86,041.98 $23,247.00 $5,162.52 $114,451.50
5 $114,451.50 $23,247.00 $6,867.09 $144,565.59
6 $144,565.59 $23,247.00 $8,673.94 $176,486.53
7 $176,486.53 $23,247.00 $10,589.19 $210,322.72
8 $210,322.72 $23,247.00 $12,619.36 $246,189.08
9 $246,189.08 $23,247.00 $14,771.35 $284,207.43
10 $284,207.43 $23,247.00 $17,052.45 $324,506.87
11 $324,506.87 $23,247.00 $19,470.41 $367,224.29
12 $367,224.29 $23,247.00 $22,033.46 $412,504.74
13 $412,504.74 $23,247.00 $24,750.28 $460,502.03
14 $460,502.03 $23,247.00 $27,630.12 $511,379.15
15 $511,379.15 $23,247.00 $30,682.75 $565,308.90
16 $565,308.90 $23,247.00 $33,918.53 $622,474.43
17 $622,474.43 $23,247.00 $37,348.47 $683,069.90
18 $683,069.90 $23,247.00 $40,984.19 $747,301.09

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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42 thoughts on “Reader Case: Twenty Five To Life”

  1. Hi, I’m a huge fan of you guys, and you are a true inspiration!
    However there is one thing that really bothers me: When you do yours MATH SHIT UP how come you do not account for inflation?! A 36K income in 25 years time will need to equal 59K @ 2% inflation just to retain real purchasing power.

    1. The 4% “rule” already accounts for inflation. The real return of the total stock market is closer to 7% even when accounting in inflation.

    2. We use a 6% return rate which is a real return rate on the stock market, accounting for a 2% inflation rate. The nominal mean return rate on the S&P 500 over 15 year periods is closer to 11%.

      1. The problem is people focus on the FU number (for example 900K in your first example), but if that person stopped at that point they would not have enough money to cover their inflation adjusted costs. The point when they can retire early is when their inflation adjusted yearly costs * 25 is less than their investment portfolio. But I guess 900K seems more achievable than the actual $1.4M she would need in 25 years @ 2% inflation.

          1. 4% Rule does account for inflation, but when you say someone needs 25 times their costs today in 25 years then you are wrong. This is not the 4% Rule. The 4% Rule is about the decumulation phase. In 25 years @ 2% inflation she needs $36K * (1.02^25) * 25 = $1.48M

            You get to the right answer with respect to time using inflation adjusted returns but the FU number is in today’s dollars and not adjusted for inflation.

            1. I see your point Piggy. Wanderer doesn’t account for inflation at all. She makes an assumption that whole her portfolio is earning 6% over inflation! 8% in reality on all her money for 25 years in a row. That’s a lot.

              You however, take inflation into account only from the point of view of expenses. That’s true that with inflation at 2% she’ll need 59k. However, with the inflation she’s likely to get a payrise to cover for it (she’s thinking about FI, she must be smart enough to get one).

              So the unwritten assumption is that all the percentage values in any calculations are given above the inflation, and hence it allows to compare the numbers in “today’s” dollars.

              P.S How come can Wanderer assume ROI of 6% above inflation on the whole portfolio?

  2. The expense of car ownership should not be understated… especially with a 7% loan. Get that sucker paid off quick-like.

    Here’s my rule of thumb for determining if I should hold a loan on something: That *thing* must be an asset. Meaning, it must appreciate and spit off positive cash flow.

    If it doesn’t, then no getting loans for it. If you really want it bad enough, then save up for it.

  3. This reader’s case really speaks out to the young ones just starting out in the workforce and those who are already a few years in. I think most of her spending goes to rent and basic essentials: food, bills, and probably social activities. Currently, the living cost and rent are HIGH and most of the income goes to that. I’m not surprise that her spending is $3000 a month. It is probably typical for those who are renting in a high cost city.

    Hopefully, we can follow her journey and see how she plans to bring her spending cost down.

  4. Good start in life for TwentyFiveToLife. She’s a bit too early to be running numbers, I think. Definitely a good time for her to settle what she wants in life, and why, though. I found that knowing there’s such a thing as FI greatly encouraged researching how to use my finances to reach my chosen goals — and that first, I had to choose those goals!

    Finishing that debt off is a good stepping-stone towards whatever’s next, TFTL. It’s perfectly fine to lay out a destination for yourself, some likely waypoints along the way, and only flesh out how you want to get from “here” to that first waypoint or two. Don’t fret if you find the destination changes as you continue to grow, learn more about yourself, and adapt to changes that life throws at you.

    1. This is awesome advice. And while her life will inevitably twist and turn, I think it’s great that she’s thinking all of this through now and can make truly informed decisions at every bend – I wish I’d been armed with that Networthify calculator at 25 [instead of 35]!

  5. I think she needs a break to take a step back and decide on her options. She is burnt out and maybe needs to take a week off, rest at home and start running some numbers when she is not stressed out.

  6. I am also concerned about :”$2,300 in mutual fund TFSA- less than 1% return over 2 years”. With the markets doing so great in the last 2 years 1% return is too low. I wonder what funds she is invested in.
    Just a thought…

  7. I think the interest is already factored into a car loan. By that I mean the cost of the car plus the interest is the total of the loan and paying it down faster actually doesn’t save any money. You might want to check that before paying off the car.

    1. Er, no that’s now how loans are reported. The balance is how much you still owe on it, and interest is added every month on the outstanding amount, so paying off the balance right now means no future.

  8. You’ve now attacked the two fundamentals of Canadian society(and money-suckers); owning an overpriced home, and driving unnecessarily..what next, no more timmy’s or excessive apologizing

  9. Totally agree with you guys, kill the car loan ASAP.
    Having a car is definitely expensive but it doesn’t have to be that expensive!
    I hope she provide you (us) with a breakdown of her expenses, it would be interesting to see where the money is going.
    One of my daughters , who is 20 and pays for her tuition, always tells me how her friends spend so much money on food and outings! It adds up quickly.

  10. Actually its called precomputed interest. Most of the big lenders prefer this type of loan for cars because they get the interest on the loan no matter what. Just something to look into.

  11. She could trade that car in for a van and live close to work and not have expensive rent payments. There are lots of people in my city (Victoria,BC) that will rent out their driveway and include water garbage and 15amp power for $100 a month… some people even don’t pay rent and do yard maintenance instead. Shower at work/gym and make healthy low cook prep meals like salads soups fruit nuts etc.

  12. wanderer?

    are you dipping into your cash cushion? looks like the portfolio may not make 3% this year. Perhaps a new normal is forming. Bogle called for the SPY to make 4% per year for the next decade. Bond bull market is finito with rising rates

  13. That is surprising about how much a car costs each year. We decided to keep our car back in the US even though we live in Mexico. It is only driven once a week by a family member while we’re gone but we are still paying the registration and insurance on it. It’s nice to have something to drive when we come back to visit (our family does not live where there is good public transportation) but renting a car would definitely be cheaper… might have to make some changes soon!

  14. So according to Global News a compact car costs an average of $716 per month to own? I find that questionable. I completely agree with the idea that cars are a large expense which should be scrutinized, but there’s no need to overstate it. In many situations a car can also range from being a useful convenience to an absolute necessity.

    Bear with me, I’m going to try to math shit up. TL;DR: a new car can be leased for well under $716/month and I owned a rather large old one in the city for under $300/month.

    Let’s say you’re looking to preserve liquidity and want the luxury of never having a car that’s older than 5 years old. Now let’s say you want a “compact” with more than enough room for 4 people and a reputation for quality, so you get a base model Civic sedan on a 5 year lease. According to Honda’s website, that’ll cost $280/month, all-in, $0 down.

    Let’s assume you drive a moderate amount, 1,000 km per month. If you match the Civic’s combined fuel consumption estimates (7.1 L/100 km) you’re out just shy of $90 for gas at $1.25/L.

    So far we’re at $370 per month for a new car which is hardly a penalty box. That leaves maintenance cost (for a car which will never be more than 5 years old), title, insurance, and possible parking costs. I guess you might exceed $346/month on those items if you live downtown and have crazy parking and insurance costs, but in that case you wouldn’t really need a car in the first place, would you? For me personally, all those combined would be closer to $100/month, for a total of $470.

    And that’s to lease a new car, a strategy which is often regarded to be the most expensive way to go about “owning” a car.

    I scrapped my 2004 Concorde two months ago after driving it for two and a half years. When it was given to me its market value was maybe $1,500 if I’m being generous – the dealer had offered my parents $250 for it on trade-in. During the time I owned it I put a total of $100 into it for maintenance (oil change and replaced some rounded off lug nuts). When I decided to scrap it after a brake line rusted through, a company came and towed it away, and gave me $320. Insurance was about $14/month. Title about $20. Let’s say gas was $100, but I drove it so little it was surely less despite sucking down 12 L/100 km.

    Crunching all the numbers, I estimate the car cost me about $175 for each of the 30 months I had it, assuming I had paid market value for it – it was actually a gift from my parents – plus parking. I paid $125/month to have a parking spot in my Montreal apartment, but that was a sunk cost because I’d already rented it in order to have it to park my old convertible (same model as what you have pictured in this article’s photo) for half the year.

    Let’s say I paid $80/month to park the Chrysler for a total of $255/month to own a full-size, 3.5 L engine car in the city. I’ve also ignored money that the car saved me in the form of allowing bulk shopping at Costco – which would’ve otherwise necessitated a taxi ride every month or so – or visiting my parents 60 km away – which would’ve necessitated a poorly-timed train ride in addition to a taxi ride. I’ve also neglected the $80/month the car saved me by not buying a transit pass to get to work, in addition to saving me about 3 hours per month of commute time.

    1. I buy my vehicle with cash, never lease or finance, its not neccessary, but people will try to justify.

      2001 Jimmy $6000.00 5 years ago, cash. This is the camping, and towing vehicle. Maintenance… Only 3 major expenses, rear brakes, and a front rotor, and tires. Normal stuff… total about $2000.00. I have driven to San Fran and Jasper no problems.

      2005 Pontiac g5 $5000.00 3 years ago, cash, only expense, a steering connector, and new tires and brakes. Got a deal as I bought it Christmas eve, eve… Dealer was glad to make a sale.

      I bought a brand new Vehicle in 91, biggest mistake of my life… spend more time in the shop getting warranty work done.

      Costco is overrated, only some things are cheaper, and you have to buy a shitload to get a deal…

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