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Another day, another reader case! This time from a fellow Canuck. Let’s take a look:
“Would you assess my financial situation?
Family: 5 members (2 adults {married}, 3 kids {all under 10})
Income (combined): ~ $100K (net)
Monthly Expenses: $8K (average)
Debts:
(Note: I bought a brand new 2012 Dodge Grand Caravan with the arrival of my youngest child. I bought it for $35K. It’s payments are included with my house mortgage)
House details:
* 20 year row town-home (1180 sq. ft)
* Purchase price: $340K
* Interest rate: 2.39%
* Monthly pmt: ~ $1,750
* Outstanding balance: $205K
Assets:
* Car: 2012 Dodge Grand Caravan
* House: 1180 sq. ft row town-home. Current value is $450K. FYI: Our neighbour sold their house for $600K. The housing market is getting ridiculous in Vaughan. We live here because of my wife’s family is very close by.
Investments:
* TFSA (mine): $55K (ETFs – VCN, VRE, VUN)
* TFSA (wife): $55K (ETFs – VRE, VUN)
* RRSP (mine): $100K (ETFs – VSB, VTI:US)
* RRSP (spousal): $3K (ETFs – VTI:US)
* RRSP (wife): $8K (ETFs – VTI:US)
* RRSP (company sponsored): $5K (company shares)
* Cash (invested in company shares): $1,500 (company shares)
* Cash (combined savings): $100K
* Cash (Vacation): $8K
* RESP (for 3 kids): $35K (ETFs – VXC, VUN)
* Cash (Trust accounts for each child): $3K (ETFs – VTI:US)
Note: My wife is scared of the stock market and doesn’t see our investments growing much currently. So, she prefers to keep a good chunk of it in savings, so that it won’t take any market hits. For the vacation account, I try to save at least $1K each month from my paycheque.
So, how am I doing so far? I think we have a decent amount of cash making just peanuts from a savings account in the bank. Would you recommend we invest around $80K from our combined savings? Also, should I invest $7K from my vacation account? FYI: I work at a bank. So, I’m forced to use their brokerage. I cannot use TD eshares or Questade. 🙁
2) I work downtown, but I predominantly work from home. My wife commutes around 25 mins 1 way to & from work. She doesn’t like her job but she is valuable to the company & very loyal to the company. Should we sell our house and rent a place close to her work? What about our van? I didn’t find options for Autoshare in our area. I don’t know if there is an alternative to selling our van. Or maybe downsizing?
3) What else do we need to achieve FIRE? I’d like to retire my wife from her job. But we also don’t want to deny my kids extracurricular activities & birthday parties, if possible.
Once again, I love your blog. I think your vision is very encouraging and something that people should aspire to.
Thank you for sharing and I look forward to hearing back from you.
HowAmIDoing“
Okay, let’s look at his overall net worth:
House: $450K – $22,500 (5% real-estate agent fee) – $205,000 (outstanding balance) = $222,500
Car: $35,000 depreciated over 4 years (assuming remaining balance already accounted for in house) = $17,500
Investments: $55,000 + $55,000 + $100,000 + $3000 + $8000 + $5000 + $1500 + $35,000 = $262,500
Cash: $100,000 + $8000 + $3000 = $111,000
Total: $222,500 + $17,500 + $262,500 + $111,000 = $613,500
Using the 4% rule, this would generate a passive income of $24,540. Given that their yearly spending is $96,000 ($8000/month), this means an after-tax income of $71,460 (or pre-tax income of $90,000) would be required to make up the shortfall.
In the e-mail, HowAmIDoing mentioned that he’d like to retire his wife. But unless he makes a pre-tax income of $90,000/year, that simply isn’t going to happen.
So really, dude, I don’t think your wife should be scared of the stock market. She should be scared of your SPENDING. You’re spending $8000/month, or $96000/year, which is fine if you’re making $300k but you’re making $100k.
How the heck are you spending $8000/month when your mortgage plus car payment is only $1750/month?!
Is that just the mortgage? Or does this also include property taxes, maintenance costs, utilities, and insurance?
Somehow your housing expenses is only 22%, while a WHOPPING 78% is being eaten up by food, activities, and misc?! Is most of that cost daycare? Because if it is, that all goes away once you retire and you won’t need to generate a passive income of $96,000/year anymore.
The thing that scares the Hell out of me is that at a $100K/year after tax salary and a yearly spending of $96,000, your savings rate is a paltry 4%, or $4k a year! Which means at this rate, you’ll need $2.4 million to retire, and with a current net-worth of $613,500, you need to save an additional $1.79 million, and at a savings rate of 4%, that’s going to take you over 400 YEARS to get there! I hope you have a pension at work and you don’t get laid off, because if you don’t. you’re going to need either a time machine or you get bitten by a vampire and become immortal. And take it from me, that has its down sides.
As for “should I rent a place close to work or keep the house”, we need to know 2 things:
1) How much is the total cost of ownership/month (including property taxes, insurance, maintenance). So far you’ve only included mortgage of $1750/month.
2) How much does it cost for you and your wife to commute (I get that you work from home most of the time, but we still need the cost for when you do go into work).
Feel free to answer this in the comments, so we can all crunch the numbers together.
Okay, so to recap, you have 3 options for FIRE:
Option 1: Both FIRE-ing
In order for you both to retire, you will need $2.4 Million, an additional $1.79 Million from your current net-worth of $613,500. And at your savings rate of 4%, you’re better off retiring at 65 with a pension from work (assuming you have a pension and won’t get laid off for the next few decades).
Option 2: Wife FIREs
In order for your wife to retire right now, you will need to make $90,000/year pre-tax and invest your current net-worth of $613,500 to generate 4%.
Option 3: Eliminate Childcare Costs
Assuming that most of the $8000 is taken up by daycare, this means that $3600 (childcare costs are around $1200/kid/month) will no longer be required once one of you retires, which means you can bring down your yearly costs to $52,800. So with a portfolio of $613,500 generating 4%, you’ll only need an after-tax salary of $28,260 to make up the shortfall. Or if you both want to retire, you’ll need $1.32 Million.
That’s it. What do you guys think? Sound off in the comments.
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Interesting case. I largely agree, overall net worth isn’t too bad, but it’s the spending that I’m confused about. According to the math, their current savings rate is 4% as Firecracker mentions, but if that is the case, then how the heck were they able to save so much? Must have had a higher savings rate at one point I would think. FIRE is going to be so much easier if the spending-side of the equation gets under control, I know many people out there that are FI with children and keep their yearly expenses under 40k, so it’s definitely doable. I would start there.
They could’ve had a higher savings rate before the kids. But yeah, given the fact that they want to FIRE, it’s easier to reduce spending, which has the double effect of reducing the portfolio size need AND increasing savings, which would get at least one of them to FIRE faster.
@Matt: I think we are pretty frugal. I’ve posted our overall expenses with the categories for this year. What would you recommend that I cut out?
With 3 kids in daycare $8000/month doesn’t seem totally out of whack. That could quite easily be $4000/month right there. Cost of childcare in Vancouver ranges from $900-$2000/month/kid, for example. Saying that, if their net income is only $100k/year probably someone should be a stay at home parent… it’d probably be less expensive than having both parents work.
The information in the post implies that the youngest of the three was born in 2012… highly unlikely that all three are in daycare.
However, if that’s not the case, where the heck is 8k of spending coming from? We need a better breakdown.
Even at that point that could put 1-2 kids in daycare.
I’ve not looked at the cost of after school care, but from what I gather, that can still be pretty expensive if both parents are working. It isn’t entirely improbable that $3000-4000/month goes to child care.
@Alex: Yes, our youngest is the only 1 in daycare. We’ll be pulling her out since I’m able to work from home often. So, for next year, we’ll be eliminating the daycare costs.
However, we do put our kids in extracurricular activities, such as swimming, music, camps & summer programs. In our area, these activities are pricey. Their prices have been increasing steadily per year.
If I might suggest, it sounds like one way to really change the FIRE equation would be to take a serious look at ‘kid activity hacking’ (less fun, I admit, than ‘travel hacking,’ but strangely, many of the same principles apply….hmm, millennial, perhaps a guest post in there somewhere?). I admit, we’ve only got 1 (currently 8 yrs), but when I did a serious evaluation a year and a half ago on what we were spending, it was…well, stunning. Amazing how that crap adds up…and sneaks up even on those who like to think of themselves as being vigilant (argh, damn you!!!). Thankfully, also amazing what a number of tweaks could do. And we live in downtown Toronto, which is fairly similar to Vaughan in terms of cost. Maybe we’ve got the best kid on the planet (well, I think we do, but then, I’m biased), but we had minimal resistance to the changes so far (and a couple enthusiastic thumbs up too).
One ‘kid activity hack’ we did was switching to a family Y membership after I did the math on our annual spending on swim and (at the time) dance lessons…now, our whole family makes use of a membership for less than what we were spending on 2 activities for our daughter. And summer programs really are all over the map…it may well be worth doing a bit of extra legwork there as (just my experience) ‘cost’ definitely does not necessarily equate to ‘a better camp experience’. Find those gems! Or, take some of your vacation in the summer and spend part of that ‘camp’ money on a family vacation instead!
I’m hoping that is the case, because if most of the cost is childcare, then it’ll be WAY easier to reduce the expenses after she quits.
Let me get this right. These guys make $100k (a bit better than average), spend $96k, have a savings rate of 4%, are scared of investing in stocks and buy brand new cars for $35k.
What, from the above, gives them the impression they are a couple who are capable of FIRE? They show literally no signs of being efficient with their money.
I have to wonder how on earth they built up their net assets to $600,000. I can only assume blind luck as they don’t seem to be very good savers.
If I had to guess I’d imagine they recently just stumbled upon early retirement and thought “that’s neat, can we do that with zero effort?”
Probably they got a lot of inheritance from parents.
I wouldn’t just assume that. They could’ve had a higher savings rate before having kids. Especially if right now childcare is taking up most of their costs.
Actually, he mentioned that SHE doesn’t like her job, not him, and that he would like to help her retire early. Doesn’t mean they both want to leave their jobs. In which case, that is an attainable goal if most of the $8000/month is childcare. Then they should have enough to attain their goal if childcare is gone and he continues working.
I think we need WAY more information here to make informed commentary.
First and foremost, we need a breakdown of how much money each of them makes pre-tax, how much they’re spending on childcare, and the actual ages of the kids. If Mr. AmIDoing (a.k.a. “Howie”) makes significantly more than his wife, and they’re spending a lot on daycare, they may actually be *paying* money for Mrs. AmIDoing to go to work.
There’s a lot of costs involved in both parents working that aren’t immediately obvious. Assuming that Howie has the higher income, right off the bat, there would be a decent-sized tax refund from the spousal allowance for people with a spouse making less than the basic personal amount. If the Mrs. quits and her income for the year is zero, they’d get a few thousand back right off the bat. Then there’s childcare costs, as well as the cost of commuting back and forth to work, which is often drastically underestimated. Finally, you need to re-calculate the change in Canada Child Benefit that would result from a lower household income.
If they add up all these numbers and it’s more than her after-tax income, then not only is it *possible* for her to retire, but they’re wasting money and a great deal of personal time by having her go to work. Even if it’s a little less, consider how much net benefit you’re getting with the full-time job. Is it worth it?
Some of the other details are confusing as well:
– Car payment is lumped in with house payment?
– What’s the outstanding balance on the car loan?
– Howie has a significant RRSP balance despite the nominally low savings rate, is there an employer contribution/matching plan that we don’t know about here?
– What’s the breakdown of the 8k/month in spending?
– How much to they plan on contributing to the RESPs in total? That money is in trust for their kids, so it’s a bit odd to include it as an asset, but hey, at 35k over 3 kids, they’re already doing pretty good.
Overall, we’ve got a fair amount of irrelevant information here, and a lot of essential stuff missing. The numbers don’t seem to add up at face value – as you mention, it will take 400 years to save what they need at their current savings rate, but by the same token, considering the amount they have saved now, they’re presumably well over 100 years old already.
The most important consideration as far as the original question, frankly, is that whether or not Mrs. AmIDoing can retire (or quit for now) might have nothing at all to do with their savings, and everything to do with cash flow. They need to make sure that there’s a net financial benefit to her job, then look at the longer-term planning for retirement.
Between an assumption of $3000/month in childcare costs, probably about $4000 net increase in Canada Child Benefit, and around $500 for the spousal amount ($40500/year), it’s highly likely that one of the two is paying to work, unless their incomes are 100% symmetric.
Yeah I read about it – called effective marginal tax rate- where claw backs of government benefits cause extremely high tax rates of up to 70% – 100% so in many situations it’s best for one of the spouses to quit as it doesn’t make sense to work!
Childcare costs are easily the lion’s share of things though, particularly as they mostly come out of your net income. A kid in daycare is anywhere from 900$ to 2000$ per month. Assuming it’s around $1200/kid and forgetting about the other bits your before tax income requirements (in BC, where I live) to cover this are:
1 kid = 15000$
2 kids = 33000$
3 kids = 52000$
You get a bit of a rebate on this, but once you factor in your working expenses and your loss in child tax benefits it means that unless you’re both making a decent income there’s no point. (fwiw, I consider $52000/year to be a pretty marginal income in Vancouver :P)
All very good points. Those are the same questions I had in mind as well (plus some additional ones I didn’t think of).
Like you, I’m also concerned that if most of the $8000 is childcare costs, she might be losing money by working. That being said, sometimes people need a purpose outside of taking care of their kids, so she could be working for reasons that aren’t monetary. That being said, there could be a middle ground where she finds a position that allows her to work from home or start her own business.
He says he’d like to retire his wife. What does his wife think about this? Sounds awfully controlling.
Well his exact words are “She doesn’t like her job but she is valuable to the company & very loyal ….I’d like to retire my wife from her job.”
I don’t think he’s trying to force her to retire or anything like that. More like he’s trying to help her because she doesn’t like her job anyway.
I don’t think I see the spending breakdown- I bet there’s a lot of optimizing that can be done there. Probably pointless to look at the numbers without seeing where money actually go.
I bet there’s room for retiring his wife, cutting the crap expenses in half, getting increase child benefits from the government, enlisting parents’ help with kids.
Agree. Spending breakdown would definitely be helpful in this case.
If the youngest is 3, then the other two are probably of school age, so they are spending at least $1000 a month for daycare/babysitting. That drops their monthly nut to $6000, minus housing/etc drops their monthly nut to $4000. The vacation fund drops the nut to $3000. They probably need to spend the rest on groceries, utilities, clothes, etc etc.
Even if she retires and looks after the kids, they’re only saving a $1000 or so a month, and she’s probably bringing in $3000 a month with her salary and he brings in $5000. (My thinking is he wants the adult with the lowest salary to retire, leaving the bigger salary to pay off the monthly expenses.) They still need to cut $2000 from their monthly expenses in order to not miss her salary, and I can’t see them budgeting that well.
And if he loses his job – the banks are cutting staff – they will find themselves with no salary at all coming in.
But if he gets the mortgage paid off, and then one of them retires/is laid off, then there are savings of almost $3000 to be found (child care of $1000 plus the $1750 for the mortgage/car payment), the monthly nut drops to $5000. Cut out the vacation fund, and the nut drops to $4000. Then they only need to come up with an extra $1000 a month from savings in order to cover their expenses, if they only rely on her paycheque.
At the least, they need $205,000 to pay off the mortgage and not have that worry hanging over their heads before they consider FIRE. Paying off their mortgage while interest rates are low should be their priority. Renewal time might see an extra percent or two added to their mortgage rate.
Even if they pay off the mortgage and the car, they will still have property taxes, maintenance, and insurance cost that won’t go away. So it will help but won’t solve the problem unless they can get their spending under control.
I think this really boils down to the breakdown of the $8000/month spending. We won’t have a clear picture of where the efficiencies will come from if we don’t know where the money is going.
I’m also worried about one of them losing their jobs. They spend pretty much every penny they earn. That’s scary.
FIRECracker went too easy on you, “HowamIdoing.” If you really want to FIRE, you need to make a drastic change to your way of living and spending. I know that is very hard to do for someone who has been living the way you guys have.
1. Sell that car and never buy a new car again. You can buy a Japanese car closer to 10 years old that will still carry your family many thousands of miles. Invest the difference in the stock market. Then adapt your family to be a walking and biking family, let the car sit in the garage unless you really need it for a longer trip or big grocery run.
2. Overcome your fear of the Stock market and get at least 80%, preferably 100% of all available funds in a Total Market Index Fund. Right now all that cash is just wasting away due to inflation and your ridiculous spending.
3. Put a stop to your ridiculous waterfall of rapper style spending. You didn’t think to provide a spending break down, but we don’t really need to see it to know that $8,000/mo is absurd. Make a budget. First write what is absolutely necessary from your current spending to keep; food, utilities (no, not delux cable TV package), shelter. Live for a month on the bare essentials, then next month add back what you feel really added value to your life. Look for ways to make things you consider essential cheaper, like a much cheaper phone plan.
4. If part of this spending is on child-care, and you want to FIRE anyway; who-ever’s making less money QUIT your job and take over watching the kids.
You can certainly FIRE down the road, your net worth is getting up there, but it’s time to enter the market at full force, tear your spending a new one, and make sacrifices until your NW gets to 25 times your new drastically reduced annual spending. (for the 4% SWR to work, you GOTTA have those funds earning interest. Good luck.
“Live for a month on the bare essentials, then next month add back what you feel really added value to your life.”
This is really great advice! I hope they follow it. Most of the time when the spending goes nuts it’s because people aren’t even aware of where it’s all going. So cutting back to basics and then adding back only the things that add value is a great idea. You end up realizing what you actually need to be happy. And it’s way less than you think.
FIRECracker replied to me! *breathes heavily into paper bag.* I do something similar to the “bare essentials” suggestion I made; every year I have a “No Restaurants Month.” We cook all month and it really does a good job of resetting your dining out habits when the month is over. Plus it lets me send a fatter check to my investments that month.
I say keep the car and the town home because these give 2 things give you peace of mind that people without kids don’t get yet (I say that as an ex-globetrotter).
Add to those sunk cost payments, the cost of kids extracurricular activities, family vacations, and birthdays. Make a budget for these for the year and stick to it.
Now, do your best to reduce your fixed costs (stuff you have to have but may get cheaper), like mobile phone and Internet, etc. Netflix is all a family needs-cable van and should go.
The last and most important place to attack your expenses are what we call variable costs-they vary from month to month. Eliminate except for special BUDGETED occasions eating out, fast food, Starbucks. Budget alcohol. And reduce your grocery bill by 40% by meal planning, Cosco, and cooking large batches to freeze.
You have to reduce your spending to what you want to live on per month once retired right now. That’s the only way you can figure out how much you need to retire. So take a year to track your expenses (super easy if you pay for everything on a free points collecting credit card like PC financial), then create a tight but realistic budget, and a timeline to FIRE. If you know what you’re working toward, you won’t feel deprived.
Also don’t let commenters here discourage you. I’m a single parent of 2 who spends $2400/month in addition to housing costs to feed, clothe and care for my kids. That does not include childcare, and that is after eliminating everything possible and doing most clothing shopping at thrift stores. (US readers this is Cdn $). We never eat out, the kids do one extracurricular activity each, and they’ve never been on vacation. So what this family is spending ($7000 after $1000 saving) for four is not outrageous if kids are in childcare.
Thanks for sharing your perspective as a parent! I also think that most of the cost is from childcare. If that’s the case and one of them wants to FIRE anyway, that might fix a big part of the spending.
Just a point of order here, I don’t think it’s daycare costs as it was stated in the comments that:
….Yes, our youngest is the only 1 in daycare. We’ll be pulling her out since I’m able to work from home often. So, for next year, we’ll be eliminating the daycare costs….
So, speaking as someone who lives in the same general geographic area, if there’s only 1 preschooler, and, at most, 2 kids in after care programs (although the above comment makes this unclear…aftercare is still daycare so maybe no?) the math should be:
* pre-school @ $1k/mo
* aftercare @ $400/mo times 2 (maybe?).
Unless I’m missing something, this still leaves at least over $6K/mo unaccounted for…how is this ‘most of the costs’?
I guessed that it was the daycare before he broke down the costs. Turns out daycare isn’t the one blowing the budget. It’s everything else. Best to prioritize what’s most important (and the answer is not EVERYTHING), and then hack the rest. Your suggestions for reducing kid activities makes sense. Sometimes you just gotta see where you can optimize without sacrificing too much quality and the YMCA family membership is a great place to start. Thanks for sharing!
Doesn’t the government give them 500 per kid per month if they make under a certain amount? So one income say 52,000 minus 4 basic personal amounts ~(11600 each) they would never pay tax and receive 1500 per month total for having kids with low income family. So they would only need about 40,000 a year which is doable on one income. So the wife can stop working.
You don’t get à tax credit for children in Canada, only for your spouse-their income. Child benefits are based on your total family income to guard (somewhat) against child poverty).
You don’t get à tax credit for children in Canada, only for your spouse-their income. Child benefits are based on your total family income to guard (somewhat) against child poverty, and disappear at a certain level of income.
The $8,000 per month expenses can’t be correct, as he says he is saving $1,000 per month in the vacation account. So, the $8K must include his various monthly savings also.
Nowhere near enough detail has been provided to do a proper analysis.
You asked and here’s a breakdown of our expenses for the year (so far)
Car Maintenance $ 5,000
Car Parking $ 40
Gas $ 2,100
Clothing $ 1,000
Restaurants $ 1,300
Movies $ 20
Gifts $ 2,100
Groceries $ 6,500
Charity $ 9,600
Mortgage $ 21,000
Property Tax $ 3,000
Utilities $ 2,200
Internet $ 600
Property Insurance $ 650
Property repair $ 2,500
Life Insurance $ 2,000
Medical $ 65
Misc $ 1,300
Education $ 1,900
Phone $ 600
Transportation $ 800.00
Kids $ 9,700
Lending Club Experiment $ 2,500.00
Vacation $ 7,500
Total: ~ $83,000
Notes (on some of the above categories):
* Charity: Includes sponsoring 2 kids in third-world countries
* Kids: Includes daycare, camps, swimming lessons & music lessons, etc.
* Lending Club experiment: Trying to get my feet wet with MMM’s suggestion: http://www.mrmoneymustache.com/the-lending-club-experiment/
* Vacation: Flight, hotel, food, Disney parks & shopping to Florida
Based on the info above, what’s your analysis?
Sorry. I forgot to expand on a couple more categories.
* Car maintenance: includes car insurance as well.
* Miscellaneous: includes kids birthday parties.
My thoughts:
1) You previously mentioned you spend $8000/month, but now your number is $83,000/year which is $6917/month. Was the $8000 previously given incorrect?
2) Why is “Lending Club Experiment $ 2,500.00” included as part of your costs? That should go into the investment section.
3) Without lending club, your yearly expenses would be $81,475. Now, let’s look at some of the categories where we can find efficiencies:
a)Housing: $2446/month or 36% of your spending (housing should not exceed 30%). And since approx 1/3 of your mortgage is interest, when you add that to the maintenance, insurance, property taxes and utilities, you are throwing away $1273 per month on ownership costs that don’t add to your equity at all.
b)Car: $595/month or 8.8% of your spending.
If you rent close to your wife’s work, would you be able to get rid of the car? If so, you’d be looking at $2500/month for rent versus $3041/month for your current housing costs. Try to see if you can find a place to rent near her work for $1868/month (see if you can compromise by having less space or an older rental. Since you’re renting, you don’t need to care about re-sale value). Then renting would be a clear win.
c) Gifts/Donation: $975/month or 12% of your spending.
Kudos for this. I appreciate the generosity, I really do, but given your salary, this is 12% of your spending. Is there anyway you can figure out a way to give back using time instead of money? Or earn some side income and use that extra money for donations instead of adding it to your base expenses?
3) Vacation: $625/month or 9% of your spending.
I’m all for travel, but I’m wondering if you can decrease this cost by using points to buy the plane tickets or going to lower cost locales. Also, keep in mind that after you retire, vacation costs aren’t extra costs but rolled into your regular spending.
4) Life Insurance: $167/month, Education: $158/month, Transportation: $67/month. Total = $392/month or 5.8%.
I’m not sure why an additional $67/month is needed for transportation when you already have $595/month costs for the car? Also, what are the education costs for? Can you take courses from work instead? That way the company would cover it. As for the life insurance, if you’re trying to become FI, the portfolio would be your life insurance since the passive income would cover your expenses. Once you become FI, this expense is no longer needed.
If you get make the changes suggested above, your spending would drop down to $45,000 and your savings would increase to $55,000/year or 55%. At this point, you would only require a $1.125Million portfolio to support it. In that case, you would only need an additional $512K, which will take you less than 10 years to FIRE.
As you can see, the more you can drop your expenses, the faster you can become FI. But if you’re only planning for your wife to retire and you want to continue working, you can keep more of those expenses, as your salary will cover them.
@FIRECracker Some thoughts/questions about your comments:
Regarding your comments:
c) Gifts – presents for weddings, birthdays, etc. Charity – includes sponsoring the 2 kids. For weddings, we figure $250 ($50/person) as a gift. For birthdays, we spend around $30/gift. For Charity, are you suggesting that I only sponsor 1 child & get involved in volunteering?
3) Vacation – After a year of saving up, we planned a Disney trip with the family and also attending my cousin’s wedding. For a year, I saved up aeroplan miles. Unfortunately, I was able to get free tickets (plus taxes) for 3 members of the family. Two of us had to pay for our tickets. Cost breakdown of our vacation:
* Flights (2 tickets) – $540. Note: Toronto – Orlando
* Airport taxes (3 free tickets) – $210
* Hotel for cousin’s wedding – $280
* Disney Tickets – $2,370 (ouch!!)
* Rental Car – $650
* Time share rental (cheaper than AirBnB) – $720
* Disney parking – $80 ($20/day)
* Restaurants – $250
* Shopping (clothes) – $200
* Groceries – $120
* Souveniers – $50
Based on this, what do you suggest that I could’ve cut down? I want to be ready for my next trip. Mind you, we won’t be doing Disney. Probably we might try Universal. But we will not plan for any major theme parks. Do you have any tips on how to save more miles? We just closed out our AMEX Gold & TD Aeroplan Visa cards (about 3 months ago).
4) Life Insurance – are you suggesting that we stop our life insurance payments now? My wife has a grandfather policy where she will get cash back when she turns 40. We both have term life insurance with Primerica. It is a segregated fund that acts as a mutual fund as well.
Transportation – $800. That is for my GO transit before I started working from home pretty much full-time. The gas includes my wife’s commute to work & all our driving to see family & friends.
On the issue of gifts vs. sponsoring vs. expensive family vacations, I appreciate your generosity in that you’re spending so much money to make other people happy. But it’s just too much. Either scale back, or pick one type of “other people spending” to concentrate on and cut the other two. If you go “I must have a big house AND a car AND sponsor kids AND throw big birthday parties AND go on a big family vacation every year AND etc etc,” then there will be nothing left for your retirement.
As for life insurance, I’m not an insurance expert but personally I’ve never found a need for it. Being FI is it’s own life insurance policy since your family’s living expenses are covered by your portfolio and not your job. I’d figure out how much money you need to become FI by getting your expenses down to a more manageable figure, then multiplying it by 25 (as per the 4% rule). Then buy only enough term life insurance to make up for the difference between that number and what you currently have.
For example, I just got a quote from http://www.insurancedirectcanada.ca/ for a 10-year term life insurance with a face value of $500,000 for a 40-year old male who doesn’t smoke and the premiums came out to $18 a month. If you’re paying any more than that you’re paying WAAAAY too much.
Their housing is too expensive. He mentions he works from home. That is the solution. Work from home somewhere else. Vaughan is just a massive subdivision anyway, so they aren’t losing any culture or entertainment value by leaving it.
Head north. You can get houses for under 100K CDN. Pay cash for one. Then just continue on as you are, mortgage free, earning your work from home salary and your wife can quit her job. Spend some quality time with your kids. They will be teenagers soon and they won’t want to have anything to do with you. Now is the time to get to know them.
Your house is too expensive for your income. That is your problem.
Also a Dodge Grand Caravan? You need some lessons in vehicle value. That thing is NOT worth $17,000.00 It likely is not worth $1700.00. Next time buy something that has resale value……
You bring up a good point. If he’s working from home anyway, doesn’t really matter where he is. That being said, the kids might be attached to the community where they are now. But if that’s not the case, and they’re too young to be attached to the community, bringing their cost of housing and allowing her to retire early to spend time with the kids makes perfect sense. Especially since she doesn’t like her job anyway.
Very good point! There are only 2 things that are holding us down to this location: family & convenience. Most of my family is within 10 minutes of where we live. We don’t have to drive far for family parties. Also, our church is about 20 minutes away. So, it is very convenient for us since we love the location.
But it is definitely something for us to consider. We are still tinkering with the idea of renting in the same area.
Thanks for the idea.
Not sure if renting would work for you. You’d still have the same problem (your house would be too expensive for your income). Renting works if you have a high net worth and you can just pull out your monthly rent payments from dividends and distributions on your asset base. 600K is not enough to do that (at 6% that is only $36,000 per year, and it is not a guarantee that you’ll get 6% each year – more likely is around 3-4% ).
Also you’d have to put each and every penny into income producing assets.
Basically you are in a situation where if you want to have somewhere to live, you both have to work. Either you qualify for a mortgage based on 100K a year income, or you can get a rental contract based on 100K a year income. Take away 1/2 the income and you likely no longer qualify for either.
I would say either just both keep working, or find a cheaper house in a less desirable area that you can pay cash for without the need for a mortgage.
The benefit you have right now is the house you “rent from the bank” is a little gold mine that likely has doubled in value or more since you bought it. So cash out, buy a cheaper house somewhere further north and invest what remains. Then you can really start to enjoy life without the necessity of having to work.
There are churches everywhere.
Driving to see family beats not being able to see family at all because you’re working all of the time….
Other thing to remember about this situation on a more “Global” scale is the good folks running this web page are index fund investors. They calved off so to speak from one of Canada’s most vocal supporters of this type of investor, namely former MP Garth Turner (greaterfool.ca).
Investing in the funds has its benefits. There are a lot of people doing it who however don’t have a full understanding of this manner of earning income from savings. Many will tell you that the various indexes historically always go up and you can’t really go wrong with doing this.
Index funds are a cool way of riding the markets. But you have to understand what you are doing. The funds suffer from a number of pitfalls, one of which is a phenomena I like to call “market shift”. For example, if you look at the major indexes from say, 1950 and compare them to 2016 you will see some differences. There are indexes that no longer exist and there are new ones that could not exist back then. That results from the change in consumer tastes over the years (owning stock indexes, or stocks, or investment trusts, or any other vehicle that provides funding to entities that produce for the consumption of the public always requires, if you want to make money, that you own the means of production of the products consumed by the masses – so you have to go where the wind blows things and move with the times).
We have also had a bit of a bull run with a few major corrections since 2008, when most of the index fund bloggers got started on their portfolios. Again, the right funds always go up at the right times, but you have to get used to corrections. Sometimes corrections take years.
Lastly North American and Western European financial systems face a real problem in the form of excessive government debt. Most of the Eastern world has already had its currency crises and its debt defaults. North America and Western Europe still continue to teeter on the brink of default, with a constant patching together of “to big to fail” banks and securitization of government borrowing holding the whole debt monster together. Sooner or later this situation is going to break down. Then you will see rapid currency depreciation, very high taxation, and very high interest rates as the North American and Western European government debt system gradually implodes.
The never ending rising value of the major Western stock markets can be attributed to a large extent (especially in the USA) to massive government borrowing (mainly for military purposes). Canada just fed off this as a socialist nation, benefiting from the government cash machine down south of us that kept private companies (the “Military Industrial Complex”) running on borrowed government cash since the end of the second world war.
We are not going to see this kind of growth based on borrowed public money again in any of our lifetimes.
So index fund investors might not get the kind of linear upwards returns that would have made Bernie Madhoff into an honest man, again anytime soon.
However at the moment due to the Trump bump we are going to have some fun earning double digit gains in stocks and funds, at least for the short term. The long term outlook is not as certain.
The point?
You can’t live in an index fund. If you have three kids and a wife, you need a house. It would be better if you owned that house outright.
@AceGoodheart Interesting point. Are you suggesting that I should first own a house outright, then go get some rental properties? Do you think rental properties will beat index funds? I’m a complete noob when it comes to the real estate market. Do you recommend any good resources for me to learn? I’ve read that REITs is a better investment for noobs, rather than actually getting into the real estate market.
Any thoughts on any of these?
No I would not suggest owning rental properties. REITs are a better choice. As with all investments, don’t own more than 10% of your total portfolio in any one thing (ideally no more than 5% in any one thing, but that depends on how much you have to invest). I would suggest owing your house as quickly as possible. Put all of your effort into doing that. When you own your house, most of your monthly income becomes discretionary (no mortgage means no big mortgage payments) and also you can work only as much as you need to because you don’t need to keep a large enough annual income to re qualify for a mortgage every five years.
Rental properties are a difficult thing. I have them but I would not recommend them. They are a long term “play” that involves correctly betting on the real estate market in a particular area, on at least a 10 year spread. If you are wrong you lose tons of money potentially. If you are right you clean up. They are not a way of earning monthly income and they can be potentially quite dangerous to own depending on what tenants you end up getting.
What you need to do is identify your “bottom line” in terms of how little money per month you actually need, and then hold to that, applying all extra funds to paying down your house. You are likey in a situation, due to rising interest rates, where you can pay down your house in potentially lump sum amounts, without much of a penalty (ask your bank) due to the “interest rate differential” applying only if you are going from a higher to a lower interest rate (which won’t happen now for a long time as rates have bottomed). Get out from under the mortgage then you have a lot more financial freedom.
When you do start investing talk to someone about what you are doing. It is not an easy thing. Main things are diversification (most people put all their money in one or two places and then lose most of it when those investments don’t do well). You need to be broadly diversified. Force yourself not to put everything in one spot.
Why is investing difficult? If diversity is important what is the flaw in index investing in the S&P, of the entire US stock market ETF? Doesn’t this accomplish full diversification while being a couch potato investor?
Well that’s not exactly what index funds do. They “seek to replicate” an index by buying and selling either its constituent elements or buying and selling secondary instruments that are somehow connected to the elements of the index, from time to time. You can’t just buy an entire index (and the index changes every quarter anyway). There are a large number of index funds and they are not all the same. They don’t all go up 6% per year and they don’t all pay predictable dividends (or any dividends at all). So I wouldn’t say you could just buy whatever index funds you like and then sit on your couch and wait as the money rolls in. That is not likely to happen.
I am not a big fan of index fund investing. All a fund investor is really doing is investing in a venture capital corporation, that funds an index. The investor could just invest in the individual companies that he/she finds attractive, in each sector and then collect capital gains and dividends, distributions, directly from these companies.
But there are a lot of people who like the funds. I would say have a close look at them and understand them before you start purchasing them. There is no point purchasing things that you don’t understand, on the principle that “the index always goes up”. This is a very flawed investment method.
Interesting. Is it safe to say that your view of index investing is the antithesis of this blog?
I do think that black swans are scary and that most of the bloggers riding the post 2008 stock market bull run have been very fortunate thus far. I think your assessment of US debt and the consequences for it will translate into a less lucrative investing environment all around in the future. Gosh, I hope I’m wrong. 🙁
“Interesting. Is it safe to say that your view of index investing is the antithesis of this blog?” – I thought this was a travel blog. Goodness gracious. Is that what all of this is about?
“Why is investing difficult?” – if you have to ask, I won’t be able to explain. If you think it is easy you are on your way to losing a lot of money.
“If diversity is important what is the flaw in index investing in the S&P, of the entire US stock market ETF?” – that’s not what index funds do. So the question doesn’t make sense.
“Doesn’t this accomplish full diversification while being a couch potato investor?” – No
Thank you for shedding light on the pros and cons of real-estate investing! It’s quite worrying that people think they can just jump into real-estate investing and make a killing without knowing what they’re doing. Good to know the real facts from someone who’s actually done it.
True that people can’t live “an index fund”. BUT, they CAN live in properties where the rent is PAID for by the dividends and fixed income from a balanced and diversified portfolio. (nowhere did we ever advocate for just 1 index fund or 100% equities).
That way their wealth is diversified rather than all locked up in 1 property. And yes, I did say “locked up” because you can’t sell a brick or window to pay for your living expenses where as a portfolio pays you without you having to sell everything.
Owning a house outright is better than being in massive amounts of debt, but it still costs you money (even with house paid off, you still have to pay for maintenance, property taxes, insurance. Those costs NEVER go away), is NOT diversified and pays you nothing until you sell it.
They can move out somewhere and buy a cheaper house, but it won’t appreciate much because other people won’t want to live there. That’s the double edge sword with housing. it’s either too expensive and you’re sinking too much money into it, OR it’s cheap but won’t appreciate.
That being said, if they downsize to an affordable house and own it outright as a lifestyle choice rather than an investment and don’t care how much it appreciates, then that would make sense.
Firecracker: totally agree with your way of living. Being nomadic is the ideal human condition. Things go to crap in one location (like they are currently doing in Ontario) you just go somewhere cheaper/better. Move with the seasons. Why stay somewhere if the climate is not what you want, or the prices are too high or if you like summer better than winter. Nomadic life is the ideal life.
I question index funds because the fund is not actually the index. The fund is an attempt by a fund manager to replicate an index. Some attempts are better than others. It takes a while to learn who the good fund managers are and get your money with all the right people. There are a lot of dogs out there in the index fund world. I don’t have a lot in the funds just because it adds a layer of complexity to what I am doing. I prefer to buy company debt and equity directly. I do like bond funds and simple funds that hedge currency or government debt. Those are easy to manage and I don’t need to worry too much about whether the fund manager is top shelf or not.
My other problem with index funds is my age old problem with all managed investments, namely it is very difficult to determine what the fund actually holds at any given time, meaning valuation is a form of vague science which resembles more abstract art work than mathematics. With a company give me 15 minutes, I can tell you exactly what the stock is worth. It is easy. I do it for fun. I find constant errors in valuations. Stock is usually either too expensive or too cheap. REITs for example are almost always undervalued (they have no spin value or goodwill value and they are going for less than book most of the time).
When I try to value an index fund I get a headache. It is virtually impossible. The calculations take pages and pages and you can’t achieve any level of accuracy. So I’d still be purchasing something on good faith, hoping everyone else knows what it’s worth and the market has priced it correctly. As I indicated above, this is never the case. The market price is always wrong.
With regard to the poster with the three kids and a wife, have you tried to rent a three bedroom in the GTA recently? What a horror show. It is probably worse than when you were here. I do not envy renters in the GTA. It is really bad. And if he tries to purchase another town house he is standing on the lawn in a line of like 40 people putting in bully bids. Again, total crap show. Ideally, move away from the GTA (and if possible, Ontario) but kind of hard to be nomadic with a wife and three kids in tow.
Okay, so to address your concerns about index funds:
1) “because the fund is not actually the index. The fund is an attempt by a fund manager to replicate an index.”
– Correct, but all you need to do is pull up the price history of the ETF on a graph, compare it to the price history of the underlying index it’s trying to replicate and make sure they match up.
2) “it is very difficult to determine what the fund actually holds at any given time”
– Not really. The prospectuses show you this.
3) “With a company give me 15 minutes, I can tell you exactly what the stock is worth. It is easy. I do it for fun.”
– Not everyone (including myself) has the time or experience to actively pick funds. And even if you do, you could be wrong. We advocated index ETFs because they can never go to zero (eg funds that track the S&P 500). When one company goes bankrupt, it gets replaced by the next one. So at any given time, you have 500 of the US’s biggest companies. For the index to go to zero, every single company in the States would have to go belly up. This is exactly why Warren Buffet has advised his heir to use index investing when he’s gone.
We also diversify by buying index funds that track the TSX, S&P500, and EAFE, and balance it with fixed income (bond funds and preferred shares funds). This is also why we’re not worried when the market plummets because a) the index can never go to zero and b) our expenses are covered by the dividends + fixed income.
As for the reader, I wouldn’t advise that he rent or buy in central Toronto. Since he mostly works from home and his wife is considering retiring, they could move further out and rent. Rents are cheaper outside the GTA and I don’t see the point of buying a house farther out since it won’t appreciate much. Renting and investing would make more sense from a financial point of view. Especially given the rising interest rate environment. But if he’s doing it as a lifestyle decision that’s difficult to quantify mathematically.
1. – Correct, but all you need to do is pull up the price history of the ETF on a graph, compare it to the price history of the underlying index it’s trying to replicate and make sure they match up. – doing this will tell you whether everyone who’s bought the ETF recently believes that the ETF is worth the same as the index. This is often the problem. The price is based on bidding so it is what people believe it is worth, not what it is actually worth. There is no easy way of running the metrics of an index fund.
2. “it is very difficult to determine what the fund actually holds at any given time”
– Not really. The prospectuses show you this. – the prospectus shows you what the fund likely will hold or what it may hold, depending on what the manager is doing. They are all replication funds. Some of them get quite creative in doing this. Often they buy other funds to replicate a certain portion of the index, so then you have to see what underlying funds hold. Often you will hold a feeder fund made up entirely of other funds, some of which in turn are also feeder funds. It gets interesting when you actually dig into these things and play connect the dots.
3. – Not everyone (including myself) has the time or experience to actively pick funds. And even if you do, you could be wrong. – very true. Really no one has the time or experience to correctly pick funds. I can vet companies financials and tell you whether they are stars or dogs. Funds are different. Really what you are vetting is the manager. You look for quality people. It is almost impossible to do the metrics on an index fund. You have no idea what you are purchasing. You rely on the skill of the manager to correctly replicate the target index using different strategies.
“For the index to go to zero, every single company in the States would have to go belly up.” – not really. This is mostly accurate but it depends on what the fund is trying to replicate. The fund is tracking an index. But it is impossible to actually buy the index. So the manager figures out how to best track the target index and then goes ahead and does this. You are relying on the skill of the manager. I can also invest so as to track an index, just by purchasing its constituent parts, however whether I make money or not also depends on my skill in doing this.
“This is exactly why Warren Buffet has advised his heir to use index investing when he’s gone.” – I think Warren just doesn’t really fully trust the investment skills of his heir. Best let experienced fund managers deal with the Buffett fortune. Warren actually made his money buying insurance companies and then playing the odds. This is a brilliant thing to do. Consider that everyone is purchasing insurance and paying premiums, but very few people actually use the insurance. So purchasing the insurance company is like buying a very high interest multi billion dollar bond against the general public. Everyone pays the interest on it, but very few ever actually collect. He was brilliant to see this. Prem Watsa followed his method basically doing the same thing with Fairfax.
“they could move further out and rent. Rents are cheaper outside the GTA and I don’t see the point of buying a house farther out since it won’t appreciate much. ” Totally agree. No point putting your money in real estate right now. It is a dead game. Too many players and no one has any money. It is like the 1930s stock market, everyone is borrowing money to play a market that will always go up. It is a fool’s game that is about to end.
I understand what you guys are doing with all the index funds. It makes sense to a point and it is way easier than running the metrics of the individual companies and trying to figure it out. Might as well make the man work for you. No one else does that. You have enough that as long as you are spread out over your sectors and you diversify your fund managers and funds you should be fine.
One note – buying outside of the GTA may not appreciate as much (but Hamilton and Guelph prove thus isn’t necessarily the case), however if you’re able to put down a small amount to own a rental property, it may give you consistent rental income. Cash flow is the equivalent of dividends in real estate.
Real-estate investing is one way to get cashflow. However, it does come with stars and asterisks.
1) The rent will be taxed.
2) When you sell the property, you’ll have to move back in and live there for 2 years to convert it back to a primary residence, otherwise you’ll get taxed on the property appreciation.
3) The law is on the side of the tenant, NOT the landlord. So if you end up with a bad tenant, they could totally screw you over by not paying rent and squatting or destroying your property.
4) As a landlord, you will need to be on call to resolve tenant issues. If you don’t like being a landlord, you will not enjoy this.
5) You need to account for scenarios where it becomes vacant for a long period of time. How does that impact your bottom line?
So while it can be a great way to turn a liability into an investment with cashflow, it’s not easy free money like people think it is. It takes lots of work and research. Especially in the beginning when you are not experienced. If you know what you’re doing, you could do very well (like Financial Samurai or Paula Pant), but you could also lose big if you don’t. It’s more complicated than index investing, which is relatively simple and passive.
True. I’m leasing my house (which is almost 100 years old) in Toronto, and I got a call from the tenants about a leaking gas pipe (fixed by furnace rental provider at no cost to me fortunately), new chimney liner for the water heater (replaced by water tank rental provider at no cost to me fortunately), and now a leaky roof (at a cost of $400 for a company to look at it and hopefully “fix” it completely on Monday – or else it could be much more $$$) all within the span of a week! And the roof is not old by any stretch (about 10 years old – they should last 15 – 20 years).
Before that I had to replace the kitchen patio sliding door (the old one was foggy – the gas between the glass panes somehow leaked out), re-caulk the bathtub due to mold growth, get rid of a wasp nest, hire somebody to cut the grass between old and new tenant occupancy (tenants don’t take care of the landscaping anyway…), among other things.
Likewise, in my condo which I share with roommates, there was a small flood due to a blockage in the toilet ($100s of dollars for plumber to clear it) which destroyed a bit of the hardwood floor in the hallway to the bathroom, and replaced old tile in the shower that started falling off the wall. I replaced the bathroom floor tile and toilet at the same time to update the everything aesthetically. When I bought the place I repainted it all myself, changed the baseboards, and got proper (up to safety code) electrical installed in the den.
Income properties are certainly not carefree. Thus far, the saving grace is that on paper, the properties have appreciated by $830k since I bought them – the house for 11 years, the condo for 2 years – and generated over $124k in rental income (starting 2 years ago). The house is mortgage free and the condo will be too hopefully within a month as I’m in the process of selling my business to begin living the FI dream.
Yikes, those are a lot of headaches! This is why you gotta like being a landlord. Otherwise, it’s a nightmare. It also helps if you like fixing things yourself, because that helps your bottom line a lot…but not everyone has the time to do so.
Thanks for sharing your experience with rental properties! Like I said, you could do well if you time the market properly, but if you don’t know what you’re doing, you could really shoot yourself in the foot.