For  your memory the goals were fairly damn straightforward:

Goal #2 was the publish my book, Free at 45.  This was completed back in March of this year. Sales were relatively modest, but I didn’t go broke doing it, which was the main idea.

Goal #1 was to pay off $39,000 of  my mortgage.  While it isn’t the official year end yet, I can project that the final mortgage balance will be about $43,000.  That means I would have paid off $40,500 over the year.  Yep, I exceeded my goal by $1500!

This now sets me up nicely to go after my 2012 goal of paying off the mortgage completely.  So that will be a bit of stretch for us given what we paid off in 2011, but as the balance keeps dropping so does the interest portion of our payments which should assist us in bridging that gap.

So how have you done on your goals for 2011? Pass, fail, or did you have to switch them along the way?

I read a funny “tweet” (funny to me, my wife tells me I’m a dork) from @BradPilon a couple of weeks ago “How boring would the Biggest Loser be if I was one of the coaches? Today we’re gonna do something super fun…not eat and go for a walk…”  For those of you who have never seen an episode of the Biggest Loser, essentially what happens is a group of morbidly obese people are put together in a house and are tortured for a few weeks until they get kicked off the show because they aren’t losing weight fast enough (which seems cruel to me) or win a bunch of cash for losing the most weight.

Realistically, rather than killing themselves the people on the show would probably lose about the same amount of weight by watching what they eat.  I realize that it just isn’t compelling television when people aren’t crying or puking or screaming at a personal trainer, but as this video shows you can’t outwork a bad diet.  In addition, I’m thinking that the workouts being done are just not sustainable in the “real world” or the contestants would not be having the weight issues they were having.

When I graduated University 7 years ago, I was about 65 pounds heavier than I am now.  I was super enthusiastic and planned on going to the gym for about 2 hours a day until I got down to the weight I was comfortable at.  About 4 months later, when I hadn’t lifted a weight in 6 weeks, I realized I had to change my plan of attack.  Since then, I have cut down my time exercising to about 20-30 minutes 2 or 3 days a week and make sure I go for a walk once in a while.  I’m 5’11 and weight about 170 lbs, where I have maintained since I initially lost.

I know that if I made my workouts any longer or complex I wouldn’t do them.  In the same way, my finances are super-simple.  If my plans were too elaborate or difficult to stick to, I probably wouldn’t follow the financial plan at all.  I have an end-goal in place (to be financially independent by age 45) and have essentially automated my finances otherwise in order to achieve this goal.

I think, to a certain extent that most people in poor financial shape are just overwhelmed initially by the seemingly daunting task of getting out of debt and into the “black”.  Instead of creating an elaborate budget plan, it may be better to simplify as much as possible – keep 1 goal in mind and work towards that.  In the end, the best plan might be to not “eat” (spend) and go for a walk.

Have you been overwhelmed by your personal finances?  How did you resolve the problem?

I have financial tunnel vision.  My main goal right now is to pay off my mortgage as quickly as possible.  I’m not sure if this is the wisest way (I’m sure Nelson at Canadian Finance Blog would agree it isn’t wise) to run my finances, but to me, becoming debt free is important to my “core” financial plan.  That “core” plan is to be financially free as quickly as possible, owing money on my house is not helping me become financially free.

There are several reasons I am focusing solely on paying off my house:

I don’t like debt: I understand that I could leverage the record low interest rates and jump start my stock portfolio by attaining higher than the 3.59% in interest I am paying right now.  I just hate seeing the amount owing, and paying banks interest.  I have never been comfortable owing money, and having tens of thousands of dollars left on my mortgage balance does not let me sleep well at night.

Compounding over time doesn’t really make a difference to my financial plan: My investment plan is based on making all my retirement investments over a 10-year period (after my house is paid off).  The added 5 years would allow for some compounding, but if I left my house unpaid with an end-date 13 years from now (when I turn 45), I would need to use a considerable amount of my portfolio to pay that off.  To me, this seems like a trade-off.  I would rather have the entire debt paid off and just be done working when my investments have created enough cash-flow to live off of.

It seems like a safer bet to have my house paid off: If my wife and I have no mortgage payment, our approximately $25,000 per year budget could easily be supported by either one of us at a full-time job, or alternatively 2 part-time jobs (at basically minimum wage).  From a financial security standpoint the lower monthly costs also provide for significantly more flexibility.  The ability to change careers to basically anything I wanted to do without having to worry about money is very freeing.  A mortgage and higher monthly bills reduce this ability, and force me to continue working (which is not something I’m terribly interested in doing).

As a result of these reasons, I have one goal in mind.  When this goal is achieved (which should be in under 3 years from now), I will focus on saving and investing for retirement.  Having paid for my house, I would hope that I will never have to pay for a roof over my head (wherever I decide to live), I would just sell my current house and find one the same price or cheaper somewhere else.

Do you have tunnel-vision with your finances, or do you have a different method to get to your goal?

After several years being in a dysfunctional marriage that ended in divorce, I’m now working towards the life I feel I is my true path, and I feel that I am at the best part of life life to date, except financially.  The end result is that the last 20 years has left me with a negative net worth (any assets from the marriage were consumed by lawyers, and a few other bad decisions).

When I signed the mortgage in February for my residence, that was a real awakening.  Do I really still want to have a mortgage when I’m over 70 years old?  That terrifies me, and I know I am the only one who can change that.

Life sometimes feels like a long stream of choices. When we are faced with an income that’s not unlimited, our personal finances are defined by the choices we make. There are lots of things we can do with our money, but they can mostly be categorized into three groups: spending, debt service, and saving and investing. In order to have a certain outcome, such as retiring at age 45, we need to make tradeoffs between these three groups of choices.

Spending. The reason we work is to provide for our needs and the needs of those we care about. We use money as a medium of exchange to reduce trading costs. Money has no inherent value, except to enable consumption or to store value for future consumption. We spend on our needs and wants, but we also have other spending obligations and choices. We spend on taxes, because it’s mandatory and because the government provides services. Some people gamble and others buy insurance, for the possibility of either future gains or protecting future losses. Spending money produces our quality of life.

Debt service. This group should probably have come first in the list, because it is the least flexible. Before a person can make any other spending decisions, they need to make their debt payments to their lender, with interest. For every $1 borrowed, $1.05 (more or less) must be paid back. The interest is a leakage that represents money  you never get to make choices about. It’s effectively money that you earn, but don’t get to spend or save. Sometimes debt is necessary, but the interest cost should always be minimized.

Saving and investing. For every $1 saved, $1.04 (more or less) is available for spending in the future. With a goal to retire early, saving becomes important because it allows future spending without working. But the goal is still to spend the money. Money that is saved but never spent is wasted. Most people that I’ve spoken with appear to have a goal to smooth spending over their lifetime, not being able to spend far more either now or in old age.

I’m the kind of person who would rather have my cake than eat it. My personal values are to keep spending low, in order to pay back debt quicker and also save and invest for the future. Some people would rather not plan to retire, but spend and enjoy their earnings now. I wouldn’t say that’s “wrong”, only a different set of priorities.

What tradeoffs do you make between spending, debt service and saving? What would you do differently?

If the outcome of a decision progressed in a straight line (eg. getting consistently better and better or worse and worse), it would be simple to act in ways that produce good outcomes. But that’s not normally the case, and our fortunes often bounce around, going from better to worse and back. When debt is used to magnify the outcomes, this cycle might produce ruin in an storm that otherwise could be waited out.

As an example, let’s consider a person who buys a car. They have a steady job with a healthy paycheque, but they have no savings. They are faced with two choices: save for the car from each paycheque or buy a car using a loan. Suppose they choose to save $500 per month for a year, or they can get a bank loan that will charge $500 + $25 interest per month for a year. The interest cost makes the loan a less efficient choice, but the car can be enjoyed now, not one year in the future. The problem comes if the employer has a problem with their salary payments and is a week late with a single paycheque. In the “saving” scenario, the employee can dip into their savings, postpone a deposit to the car account, and continue successfully. In the “loan” scenario, a single missed payment might cause the bank to repossess the car, causing the money already paid to be lost.

The risk of borrowed money exists regardless of the purpose of the loan. Whenever a loan is arranged, the risk of default should be protected against by having the ability to make payments (or complete repayment) if other sources of income fail. If a person is satisfied that they are suitably protected against the risks of a loan, they can decide whether or not the purpose of the loan justifies the cost.

The problem, it always seems like a good idea at the time (or no one would ever take on debt). I don’t think it’s always easy to identify good debt, however. I recommend starting from the assumption that debt is always bad. From there, debt may be acceptable if it is an investment in producing future income in excess of the interest cost. As an example, buying a business using debt could make sense. The income from the business should pay the investor’s salary, the interest on the debt and a little profit. Buying a car could be good debt, if it makes it possible to get a job with a generous salary. Buying a more expensive car than necessary mixes bad debt with good debt. Buying a house isn’t really good debt except that it avoids losing money by paying rent; it still doesn’t make sense to buy more house than necessary.

When do you think student loans good or bad debt? Have you had other debt that you consider “good” or “bad”?

This post is now part of the #323 Carnival of Personal Finance.

Despite the initial reaction to the contrary I do get vacation property lust myself once in a while.  My parents have had a cabin now for about a decade so I’ve been very familiar with the lifestyle and even I have to admit there is something about the place that is just relaxing to be at.

Yet what is is really like to own a second property?  Well to be honest from what I’ve seen it is a bit of pain in the ass if you already have a house to look after.  Maintaining two sets of yards sucks when you have a short summer already, you will likely have a little trouble remembering what is in each fridge, you will wash a lot of sheets if you have guests, and you can bet your insurance bill just got a lot higher with another property.  Yet is it worth it?

The answer strangely enough can be: yes. You just have to accept up front that a second property will not be an investment, but rather a decision purely based on what makes you happy.  Just don’t have any delusions about the decision being a financially smart one.  Unless you have a huge annual vacation budget already and are willing to give up almost all other travel, you are likely not to break even.  Also your ongoing costs will likely be substantial so your retirement plans will also likely take a setback if you choose to have that vacation property.

Yet a second property doesn’t have to be so bad with a little careful planning.  I’m familiar with one family that recent got a little lot in a wooded valley just 15 minutes from their house.  The yard does not have a lawn to maintain and it is just big enough to have a trailer on the site.  So their total investment is a mere $60 to $80K to have a place they can visit every single weekend in the summer if they want.  It is somewhat of an odd setup, but it does keep their costs down and keeps in mind the big issue of having a cottage is making sure it is close so you use it.

So if you really want that vacation property, go ahead and look at your options.  I would caution that you should interview several existing vacation property owners prior to buying to make sure you know what you are getting into.  Do you have a cottage or cabin?  If so, it it worth it?  If not, do you want one?

Sometime in the middle of the 40+ hours of studying for a taxation exam I wrote last Thursday I gained a roommate.  My sister moved cities and is now living with my wife and I for the foreseeable future as she can’t afford to live on her own due to her finances (debt) being out of control.  It seems that in the couple of years since she got out of college she has managed to rack up a considerable amount of debt, to the point that living by herself at and being able to eat is now a choice between the two.

So, I have essentially become a “parent” to a 24-year-old girl.  From a financial perspective, it is most definitely not ideal because of the extra cost of supporting another person.  It’s nice hanging out with my sister, since the last time we lived together was when she was 11 and I was 18, which meant we really didn’t have much in common, so we have a chance to connect now as adults.

Due to her financial state and the fact that she is now living for free in my house we have essentially taken over running her finances, mostly through setting up “rules” that we expect her to follow.  If she doesn’t follow the rules, we’ll give her a couple of months to get first and last month’s rent and she is welcome to live her life how she would like.

So, what are the rules?

1) Pay off the debt as quickly as possible.  We looked at her monthly expenses, her wages at her current job, and her debt.  We gave her $50 a month to spend on whatever she wanted and told her to the rest needed to go to pay down her debt.

2) Follow Up on progress. We told her that we would like to see a copy of her pay stub and credit card statement to ensure that she was doing what she said she was doing…..We figure if we are going to be supporting a roommate we would like to ensure that she is carrying out her end of the bargain.

3) I’m not the bad cop. Not really a rule, but we explained that we weren’t the bad guys here.  What we are intending to do is to help her get out of debt, an opportunity to start fresh – we would prefer that she takes it and not resent us for being the “heavy” in this situation.  I’m sure at some point she will, but we thought we would discuss it prior to it happening.

So far (it’s been a week) the arrangement has been agreed to, I’m not sure how it will go over the next year or so she will be staying with us, I guess we’ll have to see.  My wife and I understand that someone who has lived with very little financial structure or discipline this will be a big change, but we hope she makes the most of the opportunity.

Have you helped a family member out before?  How did it work out?

My question is about how you manage to keep your “eye on the prize”? How do you keep strong during your end-game? Have you had to deal with any of these major temptation delays? Do you fear being debt free and potential let down you might feel once you have attained that goal?

I have literally asked myself almost the exact some questions several times in the last couple of years.  Perhaps not all at once, but almost the exact same wording.

The answer depends heavily on your motivation for becoming debt free in the first place.  My personal motivation for becoming debt free has largely for the desire to have that added flexibility once we hit that state.  At that point I can either continue to work at my current job or switch careers to something else that pays less if I want.  Since I’m personally still not sure about if I will fully go for full financial independence or just a semi-retired state I personally put a greater value of paying off my mortgage that people with other plans.

Yet the one issue that seems to keep coming up is should I accept some debt for investment purposes.  In this case I have been faced some major temptations over the last year as I’ve looked around at some investments which potentially could earn me more than paying off the mortgage.  While I keep considering stopping the additional payments to do this, I keep reminding myself of my motivation of getting rid of the debt in the first place.

In Rochelle’s case the motivation might be different, so an investment might make sense if being debt free isn’t essential to her plans.  If being debt free is desired, then here is how I’ve dealt with the issue: keep busy with other things.

Honestly, that is the best idea in the world when you have a problem you aren’t sure how to solve.  By working on the other areas of your life, you make progress on things that are important to you but also free up your mind from the treadmill of your current thought to realize how you feel about it.  Problems like this are often best solved when you come at them sideways, the emotional part of the decision is actual the major issue.  On the money side it is usually more clear cut: will you make more money going into debt than staying out of it?  The emotional side is where the problem lies thus logic here won’t be particularity useful.

So while at times the decision seem obvious that I should push off paying down the mortgage to invest instead, I’ve chosen a different path because it feels right to me.  It took me a while to realize that the issue was not in my logic, but rather how I felt.  I hope that helps.

Anyone else got some ideas on what Rochelle should do?

So that is what I’m going to do and try and have my mortgage completely paid off by Dec 31, 2012.  Yes, I’m going to try and pay off a $68,000 debt in just 20 months.  It isn’t impossible, but I know it will have some challenges as I’m cutting into my usual margin of error.  So to get that extra $5500 paid off I’m going to have to either divert money from other items or just earn more.  Yet the amount is still reasonable since it works out to an extra $275/month.

To get that done, I took a recent minor raise and dumped that into my mortgage payment for about $75/month (or $1500 in total).   Then I am taking some extra cash from our investing accounts and moving it over as well for another $750.  So without too much effort I’m already 40% towards that extra $5500 being paid off.

The rest of the extra money will now have to come from either my wife or my businesses earning more or savings on other items.  While not impossible, it will provide some motivation for the next year and a half to get creative on what we do.

Now an obvious question on this plan would be: why bother?  I’m going to be done in a few more months, why bother pushing it.  The reason in this case is simple: I like a challenge.  Saving for a long period of time is well, boring as hell, so you have to get creative on making the journey interesting at times.  So this is why I think we get these odd experiments like the 100 mile diet, owning just 100 things or paying off large amounts of debt in short time frames.  You won’t know what you can do unless you push yourself.

So what is your thought on the 20 month dash? Pointless or interesting?  Would you ever do something similar and push yourself further than you think you can go?