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Friday, April 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?

Financial Procrastination

Posted by Dave on April 15, 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 will be the first person to admit that when it comes to spending money – even if it’s a small amount, I hesitate. I drive my wife nuts over the amount of research I’ll do over a $20 widget that she knows I’ll like, or the fact that there have been times when we’ve gone somewhere to buy something only for me to pick it up in my hand, hold it and put it back on the shelf. She is much more of a spender than I am and enjoys new things. I on the other hand hate to waste money, and would rather do without that widget most times rather than part with money in my account.

Where I run into trouble at times are when deadlines become involved with the spending decisions I need to make. Recently, we just accepted the house and car insurance package given to us, instead of shopping around a bit (a serious personal finance no-no). My upcoming mortgage term is approaching (I need to finance the last 10% of our house) and I really haven’t even looked into my options at all.

I know I’m procrastinating, but like most things of this nature, it’s hard to talk myself out of. I think that I get paralyzed by the many choices available and don’t want to make the wrong choice. I experienced the same thing when I was doing Accounting courses – if I left the assignment until the last minute, anything I put together was better than the alternative (a mark of zero) and I was able to get working and get it done (usually resulting in a lack of sleep for the evening).

With school, at a certain point I had enough of the late nights, which was affecting my ability to concentrate at work and also putting unrequired stress on me during the final late-night burst. I started getting the assignments done days before they were due so that I could at least have an opportunity to read them over and check the math on them (not that I ever did, but the option was there). I think I need to make the same type of effort when it comes to personal finances, as a significant change is going to happen. I am going to have to make many different transaction, when I have to buy income producing assets.

The multitude of purchases (in relation to what I am used to) will need to be thoroughly researched and thought about before making the investment. A significant amount of money is going to be spent on the stocks or bonds that are going to make up my retirement portfolio, and these decisions shouldn’t be made hastily or at the last minute, making my current method of procrastinating ineffective.

So, much like I did when I was in school I have to change the way I’m doing things to become more pro-active in the financial decisions I make.

Have you ever found yourself procrastinating on a financial decision?

Maxed Out

Posted by Tim Stobbs on April 9, 2014

While I was having coffee the other day with some co-workers it came out that I was maxed out…no, not on credit cards, but rather RRSP contribution room and last year my wife and I maxed out of TFSA contribution room.

Until that moment I had forgotten how unusual that state of being is for most people.  The older people around the table all had unused RRSP contribution room of $30,000 to $50,000 and all of them make an healthy salary.  So it wasn’t the fact they couldn’t save, but rather they had chosen not to.

In total Canadian’s have $600 billion in unused RRSP contribution room, which is a lot of tax savings people are leaving on the table. Put it another way, if everyone used that up in a single year at a mere 26% tax rate the government would be out $156 billion in revenue.  That doesn’t even touch the used TFSA contribution room out there as well.

So why is saving such a difficult thing to do?  After all the amounts aren’t huge in the case of RRSPs it is 18% of your previous year income (less pension adjustments).  So if you had a defined contribution pension you could likely get 5 to 10% there, which leaves anywhere from 13 to 8% left to be saved.  Yet you get a tax refund on that money, so as long as you keep putting your refund back into RRSPs you really only have to save around 10% or less.  Can you not live on 90% of your income?

Granted if you don’t have a pension plan this takes a bit more planning to really pull off.  18% of your income can seem a big difficult, but that is why you need to get the tax refund at once rather than waiting until tax season.  How? You can use that handy tax form T1213 Request to Reduce Tax Deductions at Source.  By having a regular contribution plan setup, you can fill this out and send it in then a few weeks later you can start getting your refund on each paycheck rather than waiting the full year.  This helps keep your cash flow up while saving.  The downside of this trick is you do have to file it every year (in most cases).

I should also point out I also had extra RRSP contribution room for a number of years (~$30k).  It was only between some planning and adding extra money for years that we managed to catch up.  Yet it can be done and when you put your mind to it.

So have you ever maxed out some contribution room?  If so, how did you do it?  If not, what is preventing you?