Posted by Tim Stobbs on May 3, 2012
Isn’t it funny how something to me is so incredibly obvious that I almost laugh out loud when I read the following comment from Nelson over at Financial Uproar.
But, I’d like to see less of the psychology behind why you want to retire early and more of the specifics of what you’re actually doing. How do you achieve such a high savings rate?
Um, I hate to give circular answer, but how can you achieve a high savings rate…see the obsession with psychology. Really that is the reason, but perhaps I should explain that a little better.
My current saving rate is about 50% if you ignore my highly inflated and accelerated mortgage payments, if you include those it jumps up towards 75% of my take home pay. Yes, it’s a HUGE number. That comes about from two main reasons. First off with all income sources my wife and I earn about $110,000/year, so start with a higher income and then do some good tax planning to keep most of it. Then second don’t spend that income, instead get a low set of expenses that are perfectly balanced to your particular needs and wants so I feel just as content as many people who spend double what I do. How?
Ah, now we are into the psychology part of the answer. Being somewhat obsessed with psychology of happiness and spending I’m actually aware of how people can spend money like water and not be happy. We buy things on impulse, we treat ourselves (because we deserve it), we lust over the latest movie or gadget or shoes or (…insert obsession of choice here…) but we still aren’t happy and go buy more. The main difference is I know what I need to buy to be happy and what won’t make me happy. Now what works for me won’t work for you so you have listen to your own subconscious, but here are some general hints.
1) Buy Experience over Stuff. New hardwood floor or that kitchen reno won’t bring lasting happiness, in all likely hood it will turn into your new baseline in under a month. Then the happiness is gone. So save up for a trip instead, you likely will be more happy with your memories than the new floor. (Or in my case next year…do both. As I said these are hints, not rules, you can break them.)
2) Delay Buying Things. Well most people understand that not buying on credit is a good thing, since you save the interest cost. What we often don’t know is the lusting after your purchase prior to getting it can bring just as much happiness as buying the object. So even when I could just pay cash for something, I tend to save up for it. Why? To drag out the happiness and make sure I buy the right thing. So more often than not I don’t screw up and instead I buy the right thing for my wants and I’m more satisfied with my spending.
3) Focus on Equal Outcomes. I tend to really like to watch movies, but I’m often just about 3 to 6 months behind what came out in cinemas. Why? I realized I really don’t care when something was released, when I get around to watching it. So yes I do hit up the cinema, but only like once or twice a year for the movie that I’m REALLY WANT TO SEE. Otherwise, I hit up the library or Netflix to feed my habit. I focus on the equal outcome for me: I just want to watch the movie, I don’t care about where that much. So I spend like a fraction of what others would for a similar movie habit.
There are obviously more tricks, but that should get you started on why I have a high savings rate. I focus on what matters most to me and screw what other people think. I am the Joneses of my life, so I don’ t have to keep up with anyone.
So how about you? What do you do to keep up your savings rate?
Posted by Tim Stobbs on March 8, 2012
I had an interesting request from a reader, Jacq, in regards to wondering what I thought of Home Equity Lines of Credit (HELOC) since I have one. Like many things in personal finance depending on your point of view people tend to consider HELOC as a great tool or an evil way to get sucked into debt forever.
So what the hell is a HELOC anyway? While the process may vary at your bank, this is how mine is setup. My mortgage is referred to a STEP (Scotia Total Equity Plan), which means I can use the existing equity in the plan to have either multiple mortgages or secured lines of credits. So for example, I could have a fixed rate mortgage for part of my mortgage and another part as floating rate and then several different lines of credit. The mixture can be anything I want as long as my total debt doesn’t exceed the total pre-approved STEP grand total, which in my case is about $150,000. If I wanted I could pay for an appraisal on my property and crank that total up towards 90% of my houses value (if my memory is correct, the limit may be 85% now).
Right now I have only one line of credit (LOC) right now of $12,000 and a mortgage of around $35,000, that means I could request a second line of credit of $100,000 with a call to the bank and signing a little paperwork. Somewhat ironically I have been considering doing that very thing. Why? Because secured lines of credit tend to have cheap interest rates associated with them, often you can get a rate just above the bank’s prime interest rate. This then would allow me to selectively pick off investments as opportunity arise regardless if I don’t have the cash saved yet. Then I can just pay back the LOC over a longer period of time.
Traditionally this is exactly what I use my LOC for, as my current balance on it came about from me dumping some cash into our TFSA in order to pick up some investments. After all sometimes a good company has a crappy amount of press that results in a abnormally low share price and therefore high yield. I don’t really do that all that often, but it does come up at times. For example, I do believe I picked up some Riocan a while back when it was yielding almost 10%.
I will point out if you have a separate LOC which you only use to invest in a taxable account it is possible to write off that interest cost on your taxes. I usually don’t bother with this as I only borrow small amounts for short time frames. So yes, a HELOC can be a great way to grow an investment portfolio if you are short on cash and the market just tanked.
Yet HELOC can also be evil. Since a bank doesn’t care what you borrow the money for, it is possible to abuse this tool. After all, you can renovate your kitchen right now and then just pay it back later with a LOC. In some regards it can function as a low interest credit card since your repayment options can be set as low as interest only payments. So in reality I could put in my wife’s beloved cork floor in our kitchen next week and slap the entire cost on our HELOC, I don’t have to wait for us to pay off the mortgage first. Yet I’m choosing to wait.
Or another good example is I know a couple that is retired and building a new cottage. They plant to use a HELOC to even out their costs over a number of years to keep their income taxes lower than taking all the money out of their RRSP in a single year. They have the money set aside already for the project, they are just using a HELOC as a tax planning tool.
So like all good tools, like a knife, a HELOC can be useful to make supper or you can cut yourself fairly badly with one and leak good money all over the place in interest costs. I tend to classify HELOC as similar to credit cards, if you can’t resist using you card to buy stuff and you have to cut up your card or keep it frozen in a block of ice in the freezer then you shouldn’t have a HELOC. Yet if you are responsible with your debts you can use them to make yourself a little more flexible, I just suggest having a plan in place on how you will use it first.
So do you have a line of credit? What do you use your LOC for?
Posted by Tim Stobbs on June 3, 2011
I have an interesting email earlier this week which I won’t post the entire email, but in summary Rochelle asked:
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?
