Posted by Canadian Dream on August 24, 2011
This is a guest post from Gwen in Ontario, who is 39 years old with a grown daughter, and is trying to rebuild her retirement dream just 20 years too late for early retirement.
Allow me to introduce myself, my name is Gwen and although I love the concept of retiring early: I’m starting about 20 years too late. I’m now 39 years old, don’t play the lottery, and have no wealthy people about to pass their fortunes to me, so my “early” retirement will be before I’m 60.
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.
Now, by educating myself by reading books and blogs such as this one, my goal is make my future different. I am currently not married, but am in a committed relationship with a man who shares my views on money (although we do not combine our money). I also have a child on the edge of adulthood. That being said, until anything changes in my personal life, I will be doing this on a single income.
Over the next several years, I plan on getting out of debt, increasing my net worth, and generally steering my life towards the future I want. I know there will be bumps along the road (for example my residence is a condo in a 25 year old building that still has all the original appliances), and I hope that by sharing my story, I can encourage others to change their lives as well regardless of their age.
Posted by Robert on August 22, 2011
This is a guest post by Robert, who lives in Calgary and works as a financial adviserretired at 34. He is married, has three kids. Robert and his wife then plan to return to school and become teachers, eventually living and working overseas.
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?
Posted by Robert on August 15, 2011
Some commentators on personal finance like to repeat that there’s good debt and bad debt. They talk as though the nature of the debt itself changes, which is nonsense. Debt is debt, and adding good debt or bad debt to a decisions doesn’t make it a good decision or a bad decision. Debt is a magnifier, used to leverage resources. Debt will magnify the outcomes of good decisions and bad decisions equally.
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.
