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Saturday, October 25, 2014

Going Small?

Posted by Dave on April 22, 2014

Dave is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.

My wife and I are what could be called “Unmotivated Homeowners”. When we bought our place 5 years ago, we did it because it seemed like a good idea. We bought a condominium, which allowed us to not have to either maintain or have responsibility for the exterior portion of the house. Our friends have commented over the lack of anything in the house that would make things look kind of lived in (pictures, decorations or otherwise) – it’s kind of a shell that we watch TV, eat and sleep in rather than something that I guess we would be proud of.

Now that the place is almost paid off, and we have paid several thousand dollars to financial institutions in interest over the 5-year term we are currently completing, we were kind of wistfully thinking about our previous life as apartment dwellers. We lived together in an apartment for three years together, and didn’t have any real complaints. All living expenses were covered, we never had to worry about fixing anything, and it was a more ideal size for the belongings we actually needed. The previous building we lived in had underground parking as well, which after the winter we just had would have come in very handy.

If we sold our house and invested the money into a “rent” fund, interest and principal would almost cover the monthly cost in the small-ish city we live in, as well as the approximate 1% allowable increase per year that landlords are able to raise the rent annually in the province of Ontario. This plan would also be in alignment with the current situation of home-value inflation, (written about by bloggers such as Nelson at Financial Uproar, who did an excellent job explaining his hypothesis last summer) exiting the “long” play I have by owning the asset.

The risk of the asset that took me 5 years to attain is (possibly) going to lose a significant amount of value over a short-term period if interest rates increase in the next few years isn’t an entirely pleasant thought.

The one reason I am a little hesitant in moving to a smaller space is probably also the reason why we like the idea of downsizing – less space. Less space to store things like hockey equipment, golf clubs, tools, and beer-making gear (all of which I like), but there is also less space to store “stuff” that we are constantly trying to rid ourselves of.

My wife and I were back and forth about our living situation for a week or two and have decided to stay where we’re at for now, mostly because we’re too lazy to move, but also because we would have to deal with more people, living in a rental situation.

What I like about my current situation is that I have flexibility in the decisions I can make for my living situation. My mortgage has acted as an enforced savings plan that I paid interest to take part in, which should cover most of my housing expenses for the rest of my life.

Would you downsize your house? What would stop you from doing that?

Transition Year

Posted by Dave on January 7, 2014

Provided nothing major happens, sometime in the middle of this year, my wife and I will have achieved the first of our major financial goals – paying off the mortgage on our house. Our intention is to pay off the full balance by the end of the 5-year term in May, but that is dependent on our savings level the next few months, and we may end up finishing off the debt in the middle of the summer.

This portion of our financial plan will probably be the easiest to complete. To me, it’s the most risk-free portion of our entire 15-year Early Retirement goal. There were no decisions to be made, monitoring to be done, or money to be moved around. Our mortgage just needed to have a persistent payment made against it and we were getting closer to our goal. The next 10 or 11 years will require much more “work” on our part in order to reach our goal , rather than just throwing money at the large amount of debt we took on in our decision to own a house.

Being completely debt free will give my wife and I a psychological boost – not owing anyone for anything we do is a bit of a relief. When this last debt is paid off, our “real” cash flow will increase significantly.

If at any point we decide that we would prefer to change careers to something not as lucrative, or work part-time, it will be much easier to do this, with fewer “fixed” bills owing at the end of every month. Not that we exactly feel encumbered by our current lifestyle, but the knowledge of added freedom will help our peace of mind.

For me, I realize I will become much more interested in investing – partially out of necessity (due to increased funds available to do so) but also because I can actively invest over the rest of my life. I am currently aware that there are other places I could be putting my money towards – I have just been avoiding it to date. This part year will be a bit of a learning curve for me I think – learning an investor’s mindset, tolerating risk, and being involved in the market. I can read tons of books about investing, but (as I’ve learned through sports betting) without anything to lose, it’s difficult to judge how I will react to a significant swing in the market in the short and long term.

I’m glad I went about my plan the way I did – I think having $0 in debt will bring me (an individual who is not comfortable owing money) much more peace of mind than the alternative of taking longer to pay off my house and concurrently investing in the market.

Have you made this kind of transition in the past? Was it a significant change in mindset?

A Saving Government?

Posted by Tim Stobbs on November 13, 2013

So the Saskatchewan Provincial government has realized something important…it is addicted to non-renewable resources revenue.  How addicted?  Well in the last provincial budget a whopping 30% of the money used to keep the government running came from non-renewable sources.  So needless to say there is a huge risk for anyone basing almost a third of their spending on commodity prices like oil and gas or potash.

I give the government credit for at least realizing they have a spending problem.  So they are rolling around the idea of creating a sovereign wealth fund where money will go in, but they won’t take the principle back out …ever. Similar to what Norway has done to build their 760 billion dollar fund. Of course Saskatchewan does plan to spend the interest income which is typical.  The only problem is they don’t appear to be considering taking any big steps towards solving the issue…at least based on their consultant’s report which merely recommends capping their current spending of resource revenue to…wait for it…26% of their annual spending.  Then splitting that mere 4% between paying down debt and saving it.   Ugh, it’s like rewarding yourself and having a press conference for deciding to not spend a coffee today…it’s a drop in the bucket.

Then it occurs to me that perhaps our government officials aren’t familiar with how to save.  After all taking on debt is much more their style.  So perhaps they need a little motivation…so might I offer the following goal: a zero tax provincial government…no income tax, no business tax and certainly no sales tax. None, nil, nothing for tax.

How the hell is that possible?  Well you just use the same math on how a person can save for financial independence.   You see if you saving 5% of your income (all income here, not just resource based) and get a nice 5% return (after inflation) which you re-invest, with compound interest in 66 years you won’t need to tax anyone ever again.  Your investment portfolio will be producing enough income that you should be able to run your current budget without taxes. Oh wait it gets better, if you pull off saving 10% of the government income and reinvest the interest  you can be a zero tax province in a mere 51 years.  In a generation, you can alter the very way people think about government.

In effect with a bit of will power and a long term plan you can actually have a government that lives in its means and actually saves instead of taking on debt for everything.  I fully understand the odds of this occurring isn’t that good, but I thought I would at least point out the option exits.  After all when you spend your entire life using credit cards and having a mortgage being debt free is largely incomprehensible.