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Tuesday, November 24, 2015

Extremes Make Poor Examples

Posted by Tim Stobbs on November 5, 2015

I have to admit I’m a bit torn by a recent article in CBC about Sean Cooper paying off his mortgage in three years. On the one hand I’ve met Sean before and his a nice guy and I am thrilled he managed to pull off this feat of being mortgage free by age 30.  On the other hand, I think that the media attention is bad for most people’s self confidence on doing better in their own financial life.

I understand that from a reporting perspective that showing off the extremes is good way to get interest in your article and provide an example of how far people can go towards a goal if they put everything towards it.  Hell, I’ve been in some of those articles.  So I do get the idea, but I feel that people that go to the extremes don’t tend to be great models for others.  The reason being is largely the fact the duplicating the results is largely impossible for most people.  In Sean’s cause, working 100 hours a week over three jobs just ain’t possible for someone with kids if you actually want to see them.  Or even in my case, I bought my house at a bargain price of $190,000 (back in 2006) that most people can’t potentially get close to in most of urban Canada today.  So while I think these tales can be inspiring to some it also becomes discounted by many as being impossible for others to achieve anything even close to it.

Yet perhaps I’m odd that way, I want to show people what they can do with their lives and not focus entirely on my particularly odd quirks that helped me along my path.  While yes, Sean did some extreme things to reach his goal he also did several very normal things like taking a lunch to work rather than eating out each day.  Or riding a bike to work.  These are not unrealistic changes, but often get ignored in terms of trying to discount why someone can’t do something to be a bit better at paying off their debt.  I’m not talking about paying off your mortgage in three year (like Sean) or eight years (like me), but can you take your 25 years down to 18?  Likely yes, and without too much effort.

Yet stories like that are common and don’t get much fanfare, so they largely go unnoticed until the person manages to retire 10 years earlier than their co-workers which everyone tends to write off as ‘luck.’  Yet the true of the matter is building a more secure future is the produce of a bunch of minor decisions over the course of decades.  Taking your lunch to work isn’t sexy and doesn’t save a tonne of money in a year, but compounding that over three decades and it starts to add up.  Repeat that in 25 different ways and add in a touch of taking advantage of a good break during your life and suddenly you are that ‘lucky dog’ that every talks about in the office for a few weeks.

The truth is being financial responsible is rather boring on a day to day basis.  Occasionally you do hit those highly emotional milestones which you should celebrate but most of the time it is rather boring and routine.  Taking your lunch most days won’t get you in the evening news, but over the years it can make your life considerably better.  So don’t get upset at the extremes and remember even they do the boring stuff just the sames as you.

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?