I recent had a conversation with a friend who had a nice problem. He had a big cheque coming to him for retro pay for a raise that he got. The amount was several thousand dollars and he had decided to pay off some debt (Great idea!). The question was which debt would he pay off first. He has a car loan for about $20K (5.9%), the mortgage for over $100K (6%) or a student loan at $5K (8.5%). He was concerned about paying off the student loan since he can use the interest as a tax deduction.
My personal thought was screw the tax write off and get rid of that student loan because the satisfaction of finally paying off your loan is a great emotional high which can be used to inspire you get rid of more debt. I think people tend to get so tied up in the numbers that they forget that money is a very emotional topic.
So next time you get a windfall, try to remember that some emotion in your money decisions can be a good thing.
Thursday, November 30, 2006
Wednesday, November 29, 2006
About Me
I'm a chemical engineer in my late twenties working for a consulting firm in Regina, SK. I enjoy reading, writing and saving money. After being the unoffical 'money guy' in my family for years I decided it was time to share some of my thoughts with others as I try to save enough cash to retire when I turn 45.
Tuesday, November 28, 2006
Changes to the Banks
The Federal government is hard at work avoid issues again around their review of the Bank Act . They have decided not to look at bank mergers or in bank sale of insurance, but they did address a few interesting points that could effect me.
1) Electronic cheque images to speed up the time it takes for a cheque to clear. I know I would love this one. I hate giving someone a cheque and then having it take a few weeks to clear out of my bank account.
2) Reducing the size of down payment required on a mortgage to avoid mortgage insurance. This one sounds good in principle, but I’m not too sure how much good it will do. I know that I put down 20% on my current house and is I could have saved the mortgage insurance it would have saved me $1500 overall. I suppose this becomes a more significant act as you get into higher priced homes
1) Electronic cheque images to speed up the time it takes for a cheque to clear. I know I would love this one. I hate giving someone a cheque and then having it take a few weeks to clear out of my bank account.
2) Reducing the size of down payment required on a mortgage to avoid mortgage insurance. This one sounds good in principle, but I’m not too sure how much good it will do. I know that I put down 20% on my current house and is I could have saved the mortgage insurance it would have saved me $1500 overall. I suppose this becomes a more significant act as you get into higher priced homes
Monday, November 27, 2006
Retirement Calculations - Part III
Well now that I determined how much money I’m getting out of the government, my work pension and RRSP’s. I have one last source of cash to fund my retirement: taxable accounts (or investment accounts outside of an RRSP).
To determine how much I need to retire by 45 I just have to do a few simple calculations. First off from 45 to 55 I’m only using RRSP’s and taxable accounts. So for ten years I need to make up $20,500/year with my taxable account.
Then from 55 to 60 I’ll be using my company pension, RRSP and taxable accounts. So I will only need $9,100/year for those five years. That brings me to a total of $250,650 in my taxable account to allow me to retire at 45.
Ok, that does look like a lot, but I do have some time to save it up. So if I save $550/month at 6.5% interest for 16 years I should have $196,215.
So I’m a bit short as it stands now. I have a few options:
1) Save more. This might happen as I get older if my salary increases out pace inflation.
2) Work during early retirement and earn $5000/year from 45 to 55. That would offset about $50,000 off my quarter of a million requirement and it would only take a day or two a week to earn that kind of income. So I’ll consider that.
3) Downsize the house and pocket $50,000. That will depend on the local housing market at that time.
I have yet to decide what I’m going to do, but at least I have an idea of where I stand. As I get closer to my goal I should be able to improve these estimates with my personal rate of return on investments and pension projections.
To determine how much I need to retire by 45 I just have to do a few simple calculations. First off from 45 to 55 I’m only using RRSP’s and taxable accounts. So for ten years I need to make up $20,500/year with my taxable account.
Then from 55 to 60 I’ll be using my company pension, RRSP and taxable accounts. So I will only need $9,100/year for those five years. That brings me to a total of $250,650 in my taxable account to allow me to retire at 45.
Ok, that does look like a lot, but I do have some time to save it up. So if I save $550/month at 6.5% interest for 16 years I should have $196,215.
So I’m a bit short as it stands now. I have a few options:
1) Save more. This might happen as I get older if my salary increases out pace inflation.
2) Work during early retirement and earn $5000/year from 45 to 55. That would offset about $50,000 off my quarter of a million requirement and it would only take a day or two a week to earn that kind of income. So I’ll consider that.
3) Downsize the house and pocket $50,000. That will depend on the local housing market at that time.
I have yet to decide what I’m going to do, but at least I have an idea of where I stand. As I get closer to my goal I should be able to improve these estimates with my personal rate of return on investments and pension projections.
Friday, November 24, 2006
Federal Economic Update
Well after all the news stories on income splitting and other great things we expected from the fed's on Thursday. We got: nothing. You can read an article on it, but I'll give you a summary.
Pay down the debt. Ok this is a good idea, but at $3 billion a year this will take a while.
Use interest savings on the debt to reduce income tax. Again a good idea, but really this will amount to something like $20/person in Canada next year. Oh yes, I can finally retire an entire minute sooner than I planned.
Reduce the GST to 5%. Hell SK managed to reduce their PST to that already. Besides your already told us about reducing the GST to 5% when you dropped it to 6%.
The rest of it was, well, hazy and vague. Here's hoping the new budget is better.
Pay down the debt. Ok this is a good idea, but at $3 billion a year this will take a while.
Use interest savings on the debt to reduce income tax. Again a good idea, but really this will amount to something like $20/person in Canada next year. Oh yes, I can finally retire an entire minute sooner than I planned.
Reduce the GST to 5%. Hell SK managed to reduce their PST to that already. Besides your already told us about reducing the GST to 5% when you dropped it to 6%.
The rest of it was, well, hazy and vague. Here's hoping the new budget is better.
Thursday, November 23, 2006
Retirement Calculations – Part II
The other day I started discussing how I plan to fund my retirement with government benefits. With CPP and OAS I determined my wife and I can fund about 88% of my retirement goal of $25,000/year after I turn 65. Today I’m going to look at other sources of funding my retirement so I can leave work at 45.
1) Company Pension
When you first started with your company you most likely received a package with details on your benefits. If your one of the lucky ones you will have some information on a pension plan.
I recently switched jobs and was told I had accumulated about $10,000 in my previous pension plan. My new pension plan starts in the New Year is defined contribution. I pay in 5% of my salary and they match another 5%. So if I’m saving 10% of my salary and I have $10K starting I should accumulate $173,531 at 5% interest when I turn 45. Then if I let that grow for another 10 years (with no contributions) until I turn 55, I should have around $285,800.
If I take that money and use the safe withdraw rate of 4% I should be able to generate $11,432/year for my retirement. Which if you have been keeping score puts me $33,539 when I pass 65, or past my goal by about $8k a year. So for all those people who worry about having enough in retirement, you can do just fine on CPP/OAS and a pension.
2) RRSP’s
Registered Retirement Saving Plan (RRSP)’s have been sold to us as a great idea to fund our retirement. I disagree. I think they are a great idea to help fund your early retirement if you already have a company pension or your retirement if you have no pension. Otherwise they can be down right dangerous to a person who is over 65 with a pension. Why? You first get taxed at your normal rate and then if you are earning too much you get claw backed on your OAS and disqualify yourself from other government programs. Overall it has been estimated that your marginal tax rate with claw back is upwards of 52% . I know I do not like the idea of work hard for all that money just to give up half of it to the government in my retirement.
So for me I’m going to use my RRSP to mostly fund my early retirement. If it so happens that I have some leftover when I get to 65 that will be fine. So using a similar idea with my pension calculation, I estimate I can generate about $4500/year with my RRSP’s from age 45 to 65.
I’ll wrap up my calculations for retirement in my next post where I cover taxable accounts.
1) Company Pension
When you first started with your company you most likely received a package with details on your benefits. If your one of the lucky ones you will have some information on a pension plan.
I recently switched jobs and was told I had accumulated about $10,000 in my previous pension plan. My new pension plan starts in the New Year is defined contribution. I pay in 5% of my salary and they match another 5%. So if I’m saving 10% of my salary and I have $10K starting I should accumulate $173,531 at 5% interest when I turn 45. Then if I let that grow for another 10 years (with no contributions) until I turn 55, I should have around $285,800.
If I take that money and use the safe withdraw rate of 4% I should be able to generate $11,432/year for my retirement. Which if you have been keeping score puts me $33,539 when I pass 65, or past my goal by about $8k a year. So for all those people who worry about having enough in retirement, you can do just fine on CPP/OAS and a pension.
2) RRSP’s
Registered Retirement Saving Plan (RRSP)’s have been sold to us as a great idea to fund our retirement. I disagree. I think they are a great idea to help fund your early retirement if you already have a company pension or your retirement if you have no pension. Otherwise they can be down right dangerous to a person who is over 65 with a pension. Why? You first get taxed at your normal rate and then if you are earning too much you get claw backed on your OAS and disqualify yourself from other government programs. Overall it has been estimated that your marginal tax rate with claw back is upwards of 52% . I know I do not like the idea of work hard for all that money just to give up half of it to the government in my retirement.
So for me I’m going to use my RRSP to mostly fund my early retirement. If it so happens that I have some leftover when I get to 65 that will be fine. So using a similar idea with my pension calculation, I estimate I can generate about $4500/year with my RRSP’s from age 45 to 65.
I’ll wrap up my calculations for retirement in my next post where I cover taxable accounts.
Tuesday, November 21, 2006
Retirement Calculations – Part I
As I previously mentioned, I have determined that I need about 40% of my current income in retirement which would mean I need about $25,000/year net income in retirement for my wife and I (in today’s dollars). Now how I’m going to obtain that money from age 45 onwards is a long process, so I’m going to divide it into parts. Today is Part I – Government benefits.
The good news is getting a $25,000/year income is easier than you think. The government is going to give me a lot of money through various programs, especially if I’m in a low income bracket. Here are some of the details.
1) Canada Pension Plan
You’ve seen the deduction on every pay cheque for years and now here is the good news. You get to have it all back over a long period of time. The earliest you can collect is age 60. Since you don’t know when your going to die I suggest that most people just take the cash and accept that your going to have a pension reduction of 30%. The 30% reduction is worth it when you consider you are being paid for any addition five years.
I suggest you request a statement of your CPP contributions to date to determine where you currently are. If you take that you can plug it in to an online calculator and get an estimate of what you are going to earn. In my case I got $7094 for me and $3897 for my wife. I know that doesn’t look like a lot but combined, the $10991/year is 44% of my net income for retirement. The added tax benefit of a CPP pension is income splitting is allowed.
2) Old Age Security
I know that some ‘experts’ don’t suggest depending on OAS for your retirement calculations. I disagree. I believe that any government that tries to remove this program will be voted out so fast that it will make their heads spin, after all seniors tend to have a high voter turnout and lots of time to be interested in politics. Based on the current rates, I expect my wife and I will collect an additional $5558/year each after I we turn 65.
So that would take me up to $22,107/year combined income or 88% of my goal. Not bad for not including any RRSP or company pensions. Tomorrow I’ll cover the rest of the plan.
The good news is getting a $25,000/year income is easier than you think. The government is going to give me a lot of money through various programs, especially if I’m in a low income bracket. Here are some of the details.
1) Canada Pension Plan
You’ve seen the deduction on every pay cheque for years and now here is the good news. You get to have it all back over a long period of time. The earliest you can collect is age 60. Since you don’t know when your going to die I suggest that most people just take the cash and accept that your going to have a pension reduction of 30%. The 30% reduction is worth it when you consider you are being paid for any addition five years.
I suggest you request a statement of your CPP contributions to date to determine where you currently are. If you take that you can plug it in to an online calculator and get an estimate of what you are going to earn. In my case I got $7094 for me and $3897 for my wife. I know that doesn’t look like a lot but combined, the $10991/year is 44% of my net income for retirement. The added tax benefit of a CPP pension is income splitting is allowed.
2) Old Age Security
I know that some ‘experts’ don’t suggest depending on OAS for your retirement calculations. I disagree. I believe that any government that tries to remove this program will be voted out so fast that it will make their heads spin, after all seniors tend to have a high voter turnout and lots of time to be interested in politics. Based on the current rates, I expect my wife and I will collect an additional $5558/year each after I we turn 65.
So that would take me up to $22,107/year combined income or 88% of my goal. Not bad for not including any RRSP or company pensions. Tomorrow I’ll cover the rest of the plan.
Monday, November 20, 2006
Tax Changes for the Better in SK
Well it happened and I didn't even notice until I was reading on taxtips.ca that SK finally changed their tax laws to account for the federal enhanced dividend tax credit.
What does it mean? Well if your like my wife who collects all the dividends (taxable accounts) it means she actually gets a reduction on her other income by getting dividends. I love the government! If your happen to have a low income, you get all the breaks. Which is partly how I plan on retiring at 45. If you get most of your income from capital gains and dividends you are paying way less tax for the same net income.
What does it mean? Well if your like my wife who collects all the dividends (taxable accounts) it means she actually gets a reduction on her other income by getting dividends. I love the government! If your happen to have a low income, you get all the breaks. Which is partly how I plan on retiring at 45. If you get most of your income from capital gains and dividends you are paying way less tax for the same net income.
Friday, November 17, 2006
Retirement Myths
Most of the retirement planning people provide advice like:
-You need 70% of your pre-retirement income in retirement to keep the same standard of living
-You are going to live longer, so plan to live to 100 years old.
-You can't count on government pensions
All of the above is bullsh!t.
If you are following my previous post guideline of the 30-30-40 budget, you need exactly 40% of your pre-retirement net income to keep the same standard of living. After all your house should be paid for so you don't need 30% and if you are not saving for retirement you don't need another 30% of your net income.
Check out the government's average life expectancy (~75 for males and ~81 females) and you will be a bit overly optimistic to assume that you medical science will keep you alive for another 20 to 25 years.
The entire myth about the CPP running out of money is a bit of carry over myth from the US where social security is on rocky ground. We have been assured that the CPP fund has enough money to keep going.
So remember to take any 'advice' from someone selling you a mutual fund or other product with a grain of salt. After all they are just trying to earn a living by making you work longer than you need.
-You need 70% of your pre-retirement income in retirement to keep the same standard of living
-You are going to live longer, so plan to live to 100 years old.
-You can't count on government pensions
All of the above is bullsh!t.
If you are following my previous post guideline of the 30-30-40 budget, you need exactly 40% of your pre-retirement net income to keep the same standard of living. After all your house should be paid for so you don't need 30% and if you are not saving for retirement you don't need another 30% of your net income.
Check out the government's average life expectancy (~75 for males and ~81 females) and you will be a bit overly optimistic to assume that you medical science will keep you alive for another 20 to 25 years.
The entire myth about the CPP running out of money is a bit of carry over myth from the US where social security is on rocky ground. We have been assured that the CPP fund has enough money to keep going.
So remember to take any 'advice' from someone selling you a mutual fund or other product with a grain of salt. After all they are just trying to earn a living by making you work longer than you need.
Thursday, November 16, 2006
Holiday Spending
Can you hear it in the air? Tiny bells and beeps indicating you’re spending far too much money at Christmas again. Well it doesn't have to be that way; you just have to adjust your thinking a bit.
I personally like to start shopping for Christmas starting the week after Christmas. Why? Wrapping paper and cards are cheap and if you have the storage space it is a great cost saver.
Then on Jan 1, I start putting away $150 a month into my ING savings account, so by next Christmas I have my $1500 saved for buying presents before I buy my first present. When I go to actually buy the presents I look for things people will really enjoy rather than worrying if I'm not spending enough. If I end up under budget I just get a nice present for myself on Boxing Day when the sales are on.
Happy holidays every one.
I personally like to start shopping for Christmas starting the week after Christmas. Why? Wrapping paper and cards are cheap and if you have the storage space it is a great cost saver.
Then on Jan 1, I start putting away $150 a month into my ING savings account, so by next Christmas I have my $1500 saved for buying presents before I buy my first present. When I go to actually buy the presents I look for things people will really enjoy rather than worrying if I'm not spending enough. If I end up under budget I just get a nice present for myself on Boxing Day when the sales are on.
Happy holidays every one.
Wednesday, November 15, 2006
The Art of Being Broke
As I mentioned in a previous post, I often find myself running out of spending cash for a couple of days a month. The really strange thing is I don’t notice it most of the time. Why? I plan for it.
During those few days of being broke I plan activities that cost nothing and by filling up my time during that period I don’t even notice the days that I’m broke.
Some of my favorite activities include:
- Go the library and check out a few books and a couple of DVD’s.
- Clean the house/yard or do some other chores I’ve been avoiding
- Go through the house and write up the monthly grocery list and then go shopping (the food budget is separate from my spending cash)
- Write (either a blog entry, short story or get back to that novel idea)
- Dig into your home DVD collection and watch an old favorite
- Visit family/friends and drink their coffee (it even cheaper than drinking your own coffee)
So next time your broke for a day or two, I suggest looking at it as a challenge. You might even find you enjoy not spending money.
During those few days of being broke I plan activities that cost nothing and by filling up my time during that period I don’t even notice the days that I’m broke.
Some of my favorite activities include:
- Go the library and check out a few books and a couple of DVD’s.
- Clean the house/yard or do some other chores I’ve been avoiding
- Go through the house and write up the monthly grocery list and then go shopping (the food budget is separate from my spending cash)
- Write (either a blog entry, short story or get back to that novel idea)
- Dig into your home DVD collection and watch an old favorite
- Visit family/friends and drink their coffee (it even cheaper than drinking your own coffee)
So next time your broke for a day or two, I suggest looking at it as a challenge. You might even find you enjoy not spending money.
Tuesday, November 14, 2006
Know Thy Self and Index Investing
Over at the Canadian Capitalist, he has an interesting post on index investing and investor average rate of return. The general idea is that it is hard to beat an index (TSX, S&P 500, etc) by choosing your own stocks. The main reason for this is the index cheats. It picks up the winning stocks and dumps the sinking stones for you.
Early this year I changed my retirement mutal funds over to all index funds because I realized that I'm not that good at doing my own research yet. To cover myself from being tied to just one index I have the following breakdown:
25% Bond Index
25% TSX Index
25% S&P500 Index
25% International Index
This is the high growth version of the Couch Potato portfolio which I read about in MoneySense magazine. Overall I'm very happy with the results to date. Even with the big income trust bomb I'm still ahead with about 8 months into the new portfolio.
I think the major thing about doing a system like this is being honest with yourself. How much time can I put towards investing and can I really beat the index? If you don't know or you know you can't beat the index I would suggest using index funds.
Early this year I changed my retirement mutal funds over to all index funds because I realized that I'm not that good at doing my own research yet. To cover myself from being tied to just one index I have the following breakdown:
25% Bond Index
25% TSX Index
25% S&P500 Index
25% International Index
This is the high growth version of the Couch Potato portfolio which I read about in MoneySense magazine. Overall I'm very happy with the results to date. Even with the big income trust bomb I'm still ahead with about 8 months into the new portfolio.
I think the major thing about doing a system like this is being honest with yourself. How much time can I put towards investing and can I really beat the index? If you don't know or you know you can't beat the index I would suggest using index funds.
30-30-40 Budgeting
Ok, budgeting does have bad reputation. Who really likes tracking every little cent you spend? So over the years I have tried a few different things, but I found a nice rule of thumb to see if you are on track: 30-30-40.
Basically it goes like this you should be spending about 30% of net (take home) pay on housing, 30% towards retirement savings and debt repayment, and the remaining 40% all other living expenses.
That first 30% toward housing should be used to pay off your mortgage. If you don’t own your house I suggest looking for one. After taxes the next biggest monthly expenditure for most people is their housing cost. Once you remove that monthly cost you are a lot closer to retiring early.
The next 30% for savings/debt payment may seem like a lot, but you are most likely a lot closer to this level than you think. For example, if your net pay is $3700/month and you have the following monthly payments: Car $300, RRSP Savings $100, Spouse RRSP Savings $100, Student Loans $610, you would be at the 30% level. The real trick with this 30% is to take any extra cash you get and pay down those debts faster to leave more of the 30% for savings.
So after you’ve been responsible enough with the first 60% of your net income, the last 40% becomes fairly easy: you spend it. The only real trick I found for this amount is to limit those little daily purchases on things your really don’t care about (coffee or a lunch out at work). An easy way to limit these is to just use cash (No credit cards or debit cards). That way when the cash is gone you stop spending. My wife had the idea to take cash out twice a month. That way you typically are cashless for a few days in the middle and the end of the month.
Now isn’t that a relatively painless way to budget?
Basically it goes like this you should be spending about 30% of net (take home) pay on housing, 30% towards retirement savings and debt repayment, and the remaining 40% all other living expenses.
That first 30% toward housing should be used to pay off your mortgage. If you don’t own your house I suggest looking for one. After taxes the next biggest monthly expenditure for most people is their housing cost. Once you remove that monthly cost you are a lot closer to retiring early.
The next 30% for savings/debt payment may seem like a lot, but you are most likely a lot closer to this level than you think. For example, if your net pay is $3700/month and you have the following monthly payments: Car $300, RRSP Savings $100, Spouse RRSP Savings $100, Student Loans $610, you would be at the 30% level. The real trick with this 30% is to take any extra cash you get and pay down those debts faster to leave more of the 30% for savings.
So after you’ve been responsible enough with the first 60% of your net income, the last 40% becomes fairly easy: you spend it. The only real trick I found for this amount is to limit those little daily purchases on things your really don’t care about (coffee or a lunch out at work). An easy way to limit these is to just use cash (No credit cards or debit cards). That way when the cash is gone you stop spending. My wife had the idea to take cash out twice a month. That way you typically are cashless for a few days in the middle and the end of the month.
Now isn’t that a relatively painless way to budget?
Friday, November 10, 2006
Up To The Start Line
Well in any race you need to define where you are and where you are going. In this case I need to understand where I am right now. So I’ll use my net worth to provide a benchmark (which is basically: what you have minus what you owe).
What I have (Assets)
House (Market Value) $195,000
My RRSP $11,000
Wife RRSP $4,000
Wife Investment Account $4,000
ING Savings Account $2,000
Asset Total: $216,000
What I owe (Liabilities)
Mortgage $150,000
Line of Credit $0
Student Loans $0 (Just paid off!)
Liabilities Total: $150,000
Net Worth = $216,000 – $150,000 = $66,000
All in all I’m fairly happy with that number. After all I’m under 30 and I have a positive net worth. By the way, I had $60,000 in student loans between my wife and me about six years ago.
What I have (Assets)
House (Market Value) $195,000
My RRSP $11,000
Wife RRSP $4,000
Wife Investment Account $4,000
ING Savings Account $2,000
Asset Total: $216,000
What I owe (Liabilities)
Mortgage $150,000
Line of Credit $0
Student Loans $0 (Just paid off!)
Liabilities Total: $150,000
Net Worth = $216,000 – $150,000 = $66,000
All in all I’m fairly happy with that number. After all I’m under 30 and I have a positive net worth. By the way, I had $60,000 in student loans between my wife and me about six years ago.
Thursday, November 09, 2006
In The Beginning
About two years ago I read several books on retiring early. They got me thinking, why am I planning on working until 65? I've got better things to do than work. Then I thought better yet, why not retire at 55! I'm young (under 30) so I should have lots of time to save money for this.
Then I starting coming across news stories on those who retired very early. Like under 40. Well I'm not that well off so I changed my freedom 55 to freedom 45. It's not going to be easy, but your welcome to join me on the ride.
Then I starting coming across news stories on those who retired very early. Like under 40. Well I'm not that well off so I changed my freedom 55 to freedom 45. It's not going to be easy, but your welcome to join me on the ride.
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