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Thursday, August 21, 2014

Capital vs. Cash Flow

Posted by Dave on August 19, 2014

An early retirement plan is an inherently risky thing to take part in. The risk in following through with the plan is that money will run out before you are readily able to make more of it, but there are still bills remaining to be paid. On the other hand, there is the risk (although less detrimental) that I could be one of those guys that drop dead at 52, while walking up a steep hill, or shaking my fist at a bunch of punk kids to get off my lawn.

My wife and I live fairly cheaply – beyond my golf habit and my wife’s desire for warm vacations, we really don’t have expensive lifestyles. Beyond the possibility of health problems causing significantly increased monthly expenses, I wouldn’t expect much in the way of lifestyle inflation to take place.

I like measuring sticks to show progress. In the past, I have written about slowly knocking off individual bills through investment returns – slowly taking chunks out of monthly expenses until they’re all taken care of (with a buffer). From my standpoint, it will be difficult to tell myself to keep working (especially on a full-time basis) at the point when all of my annual expenses are taken care of. The risk at that point will be that my investment portfolio gets wiped out and I’ll end up sitting in a dark, cold house eating beans and rice.

I’m sure I’ve read this somewhere else, but I’m not sure who to attribute it to, but living off a portfolio of 20+ diversified stocks and bonds does seem to be a lot less risky than my current dependence on a paycheque. Even though this pay has been continually deposited for over a decade, and I don’t expect it to end, it is dependent on me continually showing up and working for the next 10 or so years.

If I have adequate cash flow to cover my lifestyle at age 45, with enough of a buffer built in to cover major expenses within a diversified portfolio how much risk exists? If, for example, I have $750,000, yielding annual returns of $25k, and my household expenses are only $20k – should I work until I get to $1 million?

How long would you stay working? How did you arrive at your comfortable “exit number” ? Did you err on the side of caution, or plan on exiting the workforce as quickly as possible?

Change in Savings Plan

Posted by Dave on July 29, 2014

In order to pay off our mortgage at the end of May, my wife and I had to almost zero out our entire cash savings we had. I will be the first to admit that the amount we had sitting in a 1.3% ING (or Tangerine account now) was probably too much. There were relatively safe alternatives to the interest rate we were getting that were just as liquid to access, for example iShares XBB is yielding almost 3x my Tangerine account right now, at 3.2% (previous year trailing yield).

I have what could possibly be described as an irrational angst towards running out of money. As of this April, I’ve worked for the same employer for over 10 years and have no real concerns for my prospects in long-term employment – whether I continue working where I’m at or with a different firm in the city I live in. With no mortgage payments, our monthly bills have been reduced by around 50%, leaving less of a reason to have a significant amount of money set aside.

My largest concern is a significant expense that I can’t pay – something like a furnace breaking, a major car repair or a pipe bursting somewhere in my house. Going forward I think we will still keep some cash on hand in a savings account, but we will lose a majority of the previous “buffer” we had prior to the mortgage being paid off in exchange for hopefully higher returns on our savings account.

The question comes down to how much money is a reasonable amount to keep in cash savings. Is $1,000 enough? Should we even bother keeping any savings in cash, or just invest 100%? I currently have an unsecured line of credit along with a pretty good limit on my credit card. Between the two options, I should be able to manage any significant expenses. I could turn the unsecured line of credit into a secured, reducing the interest rate and monthly insurance requirements prescribed in the agreement.

A couple of years ago, I was very comfortable having a bunch of money sitting around. With no debt, I think I am willing to be a little more risky with my finances. This type of change will initially take me out of my comfort zone, but I have to remember that I’ve kept a bunch of cash sitting around and it’s essentially been losing me money over the past decade or so.

Is there a particular expense that you keep money around for “just in case?” Are you comfortable borrowing to cover emergencies?


Combating Constant Second-Guessing

Posted by Dave on July 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.

I have a hard time pulling the trigger when it comes to major purchases. I drove my wife nuts a few years ago when we were shopping around for a used car because it took me weeks of reviewing prices, makes, and models before spending the $10,000 the 2008 Nissan Versa eventually ended up costing us (going on 4 years and around 60,000 kilometers).

Most times, I think it’s more I’m worried about buyer’s remorse than I am about the actual purchase and dollars out of the bank. With our car purchase, what finally swayed my decision was we found the model of Versa we wanted at about the cheapest price we could find over the weeks of reviewing different cars of that size. I was basically ensuring that I would not feel ripped off a few weeks or months later.

Sometime in the next month or so, I’ll be starting the “Investment Phase” of my retirement plan. I’m hoping to accumulate enough capital over the next decade or so to retire at or around age 45. For me, one of the major traits I’m going to have to overcome is the feeling of buyer’s remorse after making a stock purchase. It is more than probable that I will make some terrible stock purchases over my investing “career”. I’m hoping that some of these terrible purchases will be balanced by stocks that follow whatever hypothesis I have when I decide to buy.

As with all major purchases, I’ll be discussing it at length with my wife (whether she wants to hear it or not). So far, she hasn’t shown any real interest in much of our financial journey, beyond asking “are we done yet?” I will essentially be teaching my wife what I’m doing while I go, whether she wants to learn or not (I read her this paragraph and she rolled her eyes at me). I hope that we will both learn a lot in this process. I find this kind of new stuff really interesting, and although I’m doubtful it will happen, hope she will gain some level of enthusiasm for it as well.

To a certain point, cautiousness while investing will hopefully help me avoid most large errors I could make that would stop my wife and I from achieving our financial goals, but I need to have some level of confidence in the investment decisions.

How do you overcome second-guessing in your investing? How do you stop the hesitation before pushing the “buy” or “sell” button?