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Tuesday, December 6, 2016

Non-Linear Spending Models

Posted by Tim Stobbs on September 28, 2016

‘I’m wrong.’ I thought to myself the other day as I was building out a more detailed model of our spending for the next five or so years.

The reason was for a very long time I had always done my spending models based on a linear spending plan and ran the calculations on an annual basis.  Basically I just assumed I would spend $30,000/year regardless of the year. The year 2020 was the same as 2021 or 2022. It was a conscious choice to simplify things when I started but now that I’m looking at modelling my spending but as I looked closer I realize that assumption really doesn’t hold up.

Spending is actually a non-linear function.  Some months are higher and others are lower, that I’ve always know from my previous net worth posts where I track our spending. Yet what I didn’t consider is how that applies to years of spending as well.  This became particularly obvious when I ran a test case where I assumed I started my early retirement in 2018 and after adjusting for other income sources (like my wife’s business and government benefits) I ended up the the following planned investment withdrawals by month (assuming I don’t bring in any income from a job).

non-linear-withdrawal

So you can see it, while I still averaged our monthly spending over the calendar year the requirements to take money from our investments isn’t a constant stream on a year to year basis.  This is partly why I started down the idea of semi-retirement since because of our non-linaer spending our investments should actually continue to grow even after I’m not at my day job. In fact we will be pulling out less than $1000/month for a period of about two years. This becomes a bit of neat trick as it allows us to keep saving towards full retirement even when we are only semi-retired. Of course any additional money I earn other than investments will further drive down those numbers and allow us to shift to full retirement sooner if we wanted.

Overall I estimate that because of this fact we only need to be semi-retired for about five years or so and then we have the option of shifting to full retirement.  Or alternatively we could keep working beyond that time and put the money into a slush fund for travel or other fun things.  The point would be we really don’t need the money for day to day spending.

In the end, it was nice to know that my idea of semi-retirment looked more than reasonable and put my mind at ease with the entire plan, all because I stopped thinking about things in a linear fashion.  Have you ever had an ‘ah’ moment with your retirement planning?  If so, what was it?

Don’t Like Your Cell Bill, Then Buy Stock

Posted by Tim Stobbs on May 26, 2016

Perhaps the issue is Canadians are too polite? Or more likely we have a market so dominated by a handful of companies that the telecoms can and do charge what they want for your cell phone.  A fairly good analysis of the issue is available in this story.  Yet the author missed one entirely major point in the story in my mind. If you can’t beat them, just buy them instead.

At least that is part of my own strategy when it comes to dealing with high telecom bills.  Rather than complain, we took a two fold approach.  First up was buying all you actually use.  For example, my wife almost exclusively texts with her phone (rarely a call and no data as she usually uses her tablet at home instead).  So we got her a prepaid phone and signed up for a basic plan with Rogers.  So for $5/month she gets enough texts to be happy and has a bit of cash on the account if you wants to make a call.  It works for her at the moment.  As our needs change we can look for something else.

I’m not saying we are perfect here, I still pay too much in my mind for cable and internet, but overall we have made some progress over the years getting a handle on what we actually use and then buying as close to that as we can.  The trick is to come back to the issue every once in a while and see if any changes could help you lower your bills.  I’m currently keeping an eye on the ‘skinny’ cable packages and playing around to see if we could use one of those to help lower our bills a bit.  The bane of my existence right now is getting CFL games on some kind of steaming package, then I could get rid of our cable bill entirely, but alas that doesn’t exist yet. Sigh.

The second part of our plan was to buys some shares in those previously mentioned telecom companies and get a nice stream of dividend income form everyone else paying too much for their cell phones.  After all a few hundred shares at a yield of 4 to 5% (which is roughly where we bought in with Rogers and BCE) and you suddenly have some income to help pay those cell phone bills with money for the very company that is sending you the bill.  I sort of enjoy the irony that Rogers pays us money to help pay our bills.

In the end, I’m happy with our current setup.  It’s not perfect, but I don’t feel so bad about paying my bills when they keep sending dividends to our trading accounts.  So how do you cope with your cell, cable or internet bill?  Any other ideas on how to save money?

Getting Everything You Want

Posted by Tim Stobbs on January 13, 2016

So over the holidays I was a bit shocked to realize I literally got just about everything on my wish list.  The only missing items were socks and a bottle of scotch (which no I didn’t go Boxing Day shopping for instead I waited to almost the new year to buy when the stores were less busy…oh its official my scotch is now as old as my career at 15 years *grin*). I think it helps that my wish list in the first place was small, but it did occur to me that despite getting just about everything I wanted I wasn’t suddenly like ten times happier.  In fact, things went on very similar to how they went on before over all for my happiness.  Within a week I wasn’t any much happier than when I got it all.

That of course is a minor example, but the same thing does end up applying to those that have sudden windfalls of money.  The lower amount you might easily miss it, but the effect does kick in regardless of how much you win (yes even the poor soul that will win the $1.5 billion dollar lotto in the US).  Because of one very simple little fact: money doesn’t change who you are.  In larger amounts it just more obvious to see your personality based on your spending.  So if before you have a windfall you can’t keep track of your spending and suck at understanding you taxes, then afterwards it will be the same.  Just you will buy bigger things and not keep track of them and get even more confused on your taxes.  The shift just may be more obvious with a sudden windfall of money.  Feel free to search out a few documentaries on this fact, they tend to be rather interesting to see how someone can blow through several million dollars in less than five years.

Saving to retire early is a very similar process, it just takes longer to have it happen and smaller amounts.  So before having a lot of savings, I tended to value quality items and not buy cheap things that break easily.  I also tended to keep things until they actually break or can no longer be used.  And now with over $400,000 in investments, I tend to buy things that last and avoid cheap crap that breaks easily. And despite it all I still tend to save money, even when I really don’t have to it.  For example, most of the time I don’t spend all my spending cash in a month.  Savings is a habit with me that I fully expect not to really break even when I don’t have to do it anymore. Why? Because something always comes up…good or bad and the cash is usually handy to have at that point.

This isn’t to say you never change, because saving for retirement has changed me. Just not my core values and beliefs in life.  Rather I just seem to become more of myself as I get older and have more saved.  I dislike kissing ass to people in charge and I even dislike it more when I’m in charge of something.  Now I just be honest with people and tend to push the edge of what would be socially acceptable when someone is trying to make themselves look good or be impressive.  I’m not mean about it, but I just won’t put up with it. Or the fact, I tend to judge people less for their spending choices now.  I get some people REALLY value that annual trip to Mexico, so if that is what they love so be it.  I just personally don’t have that much interest in it (or more precisely I don’t get going to the same location every time).  People just value different things and that is okay.

In the end, you can get everything you want in life and be happy or miserable because the money or things really don’t matter too much.  It’s what’s going on in your head that matters the most.  So yes, please save something for your retirement, but more importantly ask yourself what exactly you plan to do with it.  Start a business that you had in your head for years with no pressure of making a profit.  Or perhaps learning some skills you never had time for.  In short, you need a why…why am I doing this…without that it’s just a big old pile of money.