Category: FIRE

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Should I pay off my mortgage first before saving and investing?

At around the time I was about to turn 30, at the gentle urging of my parents and with a little help from them I entered the real estate market. Their advice was that real estate was always a good investment (something that now most people realize is not always true) and it’s better to own property and “pay yourself” via paying down a mortgage rather than “throw it away” via paying rent. I have my own thoughts on this way of thinking and I there are some points on which we definitely disagree. Regardless, I took their advice, accepted their help, and took the leap into home ownership. I’m glad I did and I will be forever grateful for their help and advice. 

At around the same time I started saving money and investing in mutual funds. I met a financial advisor through a common acquaintance and he asked me if I would be willing to chat with him about investing and let him give me his spiel. I didn’t really need too much convincing. I always understood the benefits of saving and the magic of compound interest. Namely, that money invested today will earn interest, and that interest will earn interest, and so on and so forth meaning ultimately that even small amounts invested over time can accumulate and grow exponentially. Nonetheless, I let him give me his standard “why you should invest and why you should start today” presentation. There were a couple of things that he showed me that day that really made an impression.

One element of his presentation showed a line chart featuring different lines representing the growth rate of different types of asset classes over time, going back several decades. There was a line for cash (essentially what you would earn by putting everything in a checking account, or under your mattress), a line for stocks, etc., etc. The message was pretty straightforward: a person who invested their money in the stock market would be a gazillionaire while the person who stuffed his money under his mattress would be on the street holding a sign saying “will dance for food”, while wearing a barrel with suspenders. Relatively speaking.

The other element that really drove the message home was a hypothetical example comparing two pretend young people. Young person #1 (YP#1) understood the value of investing and the benefits of compound interest, and YP#1, who graduated from college at 21 and got a job was able to save $2000 per year, and invested that much every year over a period of approximately ten years or so, at which point we can assume that YP#1 became overwhelmed with living expenses and “life happening” and stopped saving altogether. Meanwhile, Young person #2 (YP#2) wasn’t really in a position to do the same thing at the young age of 21, and wasn’t able to start squirrelling away any savings until the ripe old age of 29 or 30, at which point YP#2 began to save $2000 per year, every year, until age 60. So when both YP#1 and YP#2 were 65 years old and ready to retire, who do you think had more money saved up? YP#1, who started early but only saved for about ten years before stopping, or YP#2 who saved for much longer but started ten years later?

Well if you guessed YP#1, then you understand the power of compound interest, and you would be correct. Mind you this hypothetical example was of course cooked up to drive home a point and it only works if you plug in the parameters just right, but they’re actually all pretty reasonable assumptions. I understood all this, but I also understood the moral of the story: I had to start saving right away. In fact, I was already almost certainly too late. But as the saying goes, better late than never, right?

Since I was about 30 years old at the time, a lot of my friends were in the process of making similar moves. This was around the time a lot of my friends started buying their own houses. But when the topic of savings and investing came up, I could see that it was far less common than buying property.

There were a few conversations with friends that I did have, however, and one in particular that stuck out to me. In this instance, one of my friends stated that being the owner of a new mortgage, he would rather pay down his mortgage aggressively and then at that point he would be in a position to save and invest. After all, “saving” was what you did when you had “extra” money left over, and if you were in debt, then no money was ever “extra” so long as you were in the red, right?

Two different approaches: simultaneous investing with mortgage payment vs focusing first on mortgage and investing after the mortgage is paid off. Which one is better? We can use math to find out!

Let’s assume for our example here that we have a mortgage with $200,000 owing on it, and 25 years to maturity. Approach #1 will be what I actually did; mortgage payments based on the normal amortization schedule, and $400 a month or $4,800 a year invested at the same time. Approach #2 will instead take that $4,800 per year and pay down the mortgage faster. We will further assume that once the mortgage is paid off, each person will take the mortgage payment amount and add it to the investment amount for savings, so that total monthly savings will be constant over the 25 year period. For simplicity we will also assume a constant mortgage rate and a constant investment rate of return. What rates will we use? Based on rates over the past 10 years or so, 4% for a mortgage seems like a reasonable average, so we’ll use that. As for a reasonable investment rate of return, Mr. Money Mustache has a good explanation for why 7% seems like a reasonable but conservative estimate. And if I go back and look at my statements of my own investments over the past ten years, I can see that 7% is pretty close. So we’ll go with that.

invest70mort40v2

The above chart shows Approach #1 (invest plus mortgage) in blue and Approach #2 (mortgage, then invest) in red. So we can see with this chart the relative performance of the two approaches and conclude that Approach #1 wins. Better to invest and earn 7% while paying off your mortgage than to pay the full mortgage off first and invest later.

Okay, you might be saying, but what if your mortgage rate is higher than that? And what if your investments don’t earn 7%, but instead earn less? Good question. Let’s find out! My first mortgage was actually 6.05%, so we can use that for our second scenario. And let’s assume in this scenario that you’re saving your money in a savings account offered by your bank that’s only paying 2%. Now what?

invest20mort605v2

In this case, paying off the mortgage first wins. Weird. Why the difference?

The difference all boils down to the two rates used in the calculation. If your mortgage rate is higher than what your investments are earning, then it makes sense to pay down your mortgage first. If your mortgage rate is nice and low, there’s a good chance you can do better by investing. Conceptually it helps once you realize that a mortgage, or any debt, is the same thing as negative savings. The interest rate you pay is the cost of the debt, and determines how quickly your debt grows, just like the interest rate earned on savings is the payment received for your savings and determines how quickly your savings grow. You may have also noticed that the blue line in the first chart reaches the highest value of all four lines between the two charts. That’s why; because it represents the highest interest rate. Simple enough.

This is why you always always always must pay down your high interest debt as soon as possible. Because if you don’t, the interest rate will keep you paying it off forever. If left alone, it can balloon out of control in no time. Likewise, an opportunity to earn high rates of return should not be overlooked.

“But how do you know what rate of return an investment will earn?” you might be asking. Fair question. Bonds will tell you exactly what sort of return you will be getting, as will low interest savings accounts, but it’s not like stocks, index funds, or mutual funds advertise their rates of return, because that is unknown. It’s true that most investment assets (including real estate) are volatile; sometimes they go up, and sometimes they go down. Depending on a number of factors (including luck), a portfolio can earn 30% over one ten year period but next to 0% or even go down over a different ten year period. That much is true. But while past performance is not necessarily indicative of future performance, we can get a pretty good idea of what to expect over the long term. And like Mr. Money Mustache explained ever so eloquently in the link posted, it turns out that 7% a year is a pretty reasonable, conservative estimate of what a balanced stock portfolio can earn, on average. It helps if you can stomach some losses in the short term just by reminding yourself that when things go down they usually go up afterward.

Everyone knows how much risk they can tolerate and how much of a gamble they think any form of investing might be, so I’m not about to give any universal advice that will apply equally to everyone. But I will say this: focus on chasing higher interest rates, both in the form of high interest debt repayment, and investing in higher interest earning assets, and you’ll probably do okay.

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The Lost Art of Fixing Things, Vol 1: How to fix a freezer leaking water into the fridge

The key to achieving financial independence is reducing or eliminating any spending that you can practically avoid. Life comes with a lot of expenses that can’t be avoided. We all have to eat, so unless you’re growing or raising all of your own food, you gotta spend money on food. We all have to live someplace, so unless you own your home outright, we all have to spend money on rent or a mortgage. If you have a place to live, you probably want to keep the lights on and the appliances running so unless you have solar panels or wind turbines, we have to spend money on our electricity bill. You get the idea. Some expenses you can’t avoid. But there are a lot of expenses you can avoid.

Sometimes things break. Unless the thing that broke was useless or you decide you can live without it, now you have a situation where an unforeseen expense has arisen. This is what is known by many as “life happening”. So now you have to spend a bunch of money that you weren’t planning on spending to replace or fix your broken thing, right? Well… maybe. Maybe not.

Once upon a time, things were more expensive. And credit was harder to come by. People had to save up to buy things, and those things cost a lot more in relation to one’s salary. So when things broke, replacing them was often not even an option. You had to fix those broken things, or learn to do without them.

Today things are a bit different. A lot of things are so cheap that replacing them is often the more sensible option. My favourite example is printers. When home computers were new, and people generally made less money than today, a printer cost hundreds of dollars. Today you can get a pretty decent printer or all-in-one for about $50. If it breaks, well… Can you mould plastic? Do you have a soldering iron? Do  you have the ability to handle tiny, specialized, electronic components? Do you even know how to fix a circuit board? And if you find someone who can fix it, do you think they’ll charge you less than $50 for their time plus any parts? No, you’ll go out and spend the $50 and get a brand new printer and save yourself some time and hassle. Or you’ll learn to live without a printer.

But there are still a lot of household items or appliances that are expensive enough that you’re not necessarily going to go and just buy a new one when they break. Like a refrigerator, for example. So if your fridge isn’t working properly and you need to fix it, you have two choices: call a repair person, or fix it yourself.

Well it just so happens that after we moved into our new house a couple of years ago, we discovered a problem with our new fridge. Solid ice was forming on the bottom of our freezer, and water was dripping into our fridge, forming little pools on the shelves and generally making a mess.

I consider myself fortunate because I have a dad who is handy. He could build, make and fix all manner of things. And even though as kids we hated it, he insisted on helping whenever possible. His hope was that we might learn a thing or two from the old man. He was right. Us kids gained a lot of knowledge and confidence and the attitude that we too could make or fix things when necessary. Way to go dad! And thank you.

So how do you fix your fridge when you know nothing about fixing fridges? Google! YouTube! I’ll say it yet again: we live in a golden age for access to information. Type your question into your favourite search engine and you’ll get several answers to your question. Then if you like you can go to YouTube and watch a video showing you how it’s done. Or go straight to YouTube if you like. However you like to do your research is up to you. Maybe Google is how you found this page, in which case I’d say my point is well proven. However you got here, I’m going to tell you what I learned and save you a bit of trouble.

The Problem

Moisture has a tendency to build up in freezers, which is why another common problem is when frost starts to form on freezer walls or floors. Food tends to have water in it and through sublimation some of that water can escape as vapour. When the vapour is trapped in your freezer, which is cold, it can turn into ice crystals which is how you get the frost buildup. So to combat this, some freezers have defrosting coils in them, to basically turn that ice into water. These freezers will also have a drain in them to allow the water to drain out, thereby removing the problem. Look at the pic at the top of this post and you will see a small round hole. That’s the drain.

Unfortunately, sometimes the water doesn’t make its way into the hole and out the drain properly but instead will pool nearby and freeze. If more water starts to accumulate, you end up with more ice. Eventually you end up with a sheet of ice completely covering your drain hole and now it can’t drain anything at all. Warmer air from the drain line will even cause some of the ice to drip water into the drain line ever so slowly, and then freeze, like the way an icicle forms. And then you have ice in your drain line completely clogging the works. See that other, larger, square hole in the pic, next to the styrofoam? That hole leads below, to the fridge. Warmer air from the fridge below then causes the ice to melt slowly and drip into the fridge, because it can’t drip into the drain hole that is now frozen over.

The Solution

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My great innovation

The goal is therefore to prevent ice from blocking the drain hole. Look at the pic again. See the copper wire wrapped around the dark tube and then leading into the drain hole? That is what it is doing. The dark tube is the defrosting coil. It heats up. The copper wire conducts the heat from that defrosting coil and gets warm enough that any water nearby won’t freeze, thereby keeping the drain hole open and doing what it’s supposed to do, which is drain water, and keep it out of your fridge. Problem solved forever.

Where do you get the copper wire? I happened to have some lying around from some spare electrical wiring. If you don’t, you can go to your local hardware or building supply store and buy some. You might need to strip your wire to expose the copper, but it should only run you a few bucks or so for more than enough wire.

How to fix, step by step:

  1. Unplug your refrigerator. Empty the contents from your freezer and place them in a cooler. They should be fine, since this whole operation should take you only an hour or two. Likewise you’re probably fine leaving the food in your fridge as long as you keep the door shut through all of this. If you’re really nervous about it go ahead and empty your fridge too, but pesonally I wouldn’t worry as long as you don’t leave it unplugged for more than 3 or 4 hours. Just think of it as a brief power outage.
  2. Using the appropriate screwdriver, remove the cover at the back to expose the coils, and any covers on the floor of your freezer that may be covering the drain hole if necessary.
  3. Using a hairdryer, melt the ice on the bottom of your freezer. Alternatively you can break it, scrape it, chip it, or melt it with warm or hot water. Just get rid of all that ice.
  4. To remove the built up ice in the drain line, you will need hot water and a turkey baster (or eye dropper, or syringe, or anthing else you can use to pick up and squirt hot water). Using your turkey baster, pour hot water onto and into the drain hole until it is clear of ice. You will know when it’s clear because at that point you will hear the water pour down the drain line and into the drain pan. Once you hear that, add a few more loads of hot water just to make sure you have cleared the line of all the ice.
  5. Remove all the excess water out of your freezer using towels or sponges or whatever you like. Make sure you get it all nice and dry.
  6. Get at least 6 inches or 15cm of your copper wire. More is fine too, but I wouldn’t use a length any shorter than that. Insert one end a couple of inches into your drain hole. Wrap the other end around the defrosting coil, as seen in the pic above. It doesn’t have to be super tightly wound, as long as you have one or two good points of contact, to conduct the heat.
  7. Replace all covers, plug fridge back into the electrical outlet, put your food back into the freezer and enjoy.
  8. Take all the money you would have spent on a repair person or new fridge and put it in a savings or investment account, to get you closer to your goal of early retirement.
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Wait, what is this blog about? Career or early retirement?

It’s about both.

Good talk. Thanks for coming by.

Alright, I’ll elaborate…

It’s a valid question. For anyone who is following along, you would be forgiven for asking. “This guy starts off talking about retiring early, then spends a bunch of time talking work and career… what gives?” Fair point.

Let me clarify: the ultimate goal for me of course is early retirement. In order to consider retiring, one needs enough savings on which to comfortably live. In order to accumulate savings, one needs to maximize income and/or minimize expenses. The only way to save is to spend less than you earn. Retiring early implies you need to save more, or put a different way, to accumulate savings faster. There are only two ways to save faster: make more, or spend less. Or both.

If you don’t have enough saved yet to retire, you still have to work a while longer. This is the boat in which I find myself. I have to continue working for a few years more at least, but of course the hope is to make “a few” as few as possible. So given that I have to work, now I have some choices to make. I could choose to focus on earning as much money as possible right now, so I can ramp up that savings rate. This is the approach employed by J.P. of The Money Habit and it’s how she managed to retire at 28 (she is much better at this early retirement thing than me… or most people even). The other option is to decide that since I have to keep working for now, why not spend all that time doing something I at least enjoy, or find engaging?

I have worked jobs (yes, plural) where I was miserable. I spent most of my working days bored. When I did have work to do, I often felt the work was menial, or tedious, and largely pointless. In short, I regularly felt like I was wasting my life. Not a nice feeling. Because I have spent a lot of my working years not liking my job (and once again, I know I’m not special; I realize how common this is), my tendency is to focus on the second option, finding enjoyable or interesting work.

Don’t get me wrong, option one is great. Make the most money possible? Who wouldn’t sign up for that? But of course if it were that simple everybody would be doing it. It’s not like they’re handing out super high paying jobs on the street corner to whoever wants one. There’s a reason why we don’t all have the same high paying jobs. We have different talents and different interests. Option two is about aligning our talents with our interests. Option two can be hard enough.

What is retirement anyway?

For anyone who is familiar with the growing number of FIRE (financial independence, retire early) blogs out there, you’ll understand that retiring early does not necessarily imply that we spend our days lounging on the beach, drink in hand, and never lifting a finger ever again. If this is how you plan to spend your retirement, then good for you! Sounds fantastic. I just hope you have enough saved to spend the rest of your days living like this, because it sounds like a good way to go through a lot of money fast. We should all be so lucky.

For those not familiar with the concept, who are new to the FIRE approach, let me break it down for you. There’s a great old Simpsons episode where Homer quits his job at the nuclear power plant so he can fulfill his dream of working at a bowling alley. You could make the argument that for all intents and purposes, Homer retired when he did this. (The analogy doesn’t quite fit because in this particular episode Homer was still dependent on the income he earned from the bowling alley, but it’s close enough for illustrative purposes and it lets me incorporate a Simpsons reference.) If you separate your life into your working years and your retirement years, then your working years are spent working because you have to. In our working years, our primary concern is paying the bills and supporting ourselves or our families. If you have enough money saved that you can live off your savings, but you’re doing some kind of work because you want to, then whether or not you’re earning a paycheque doing it, you are effectively retired. In this case, you’re working by choice, presumably because you enjoy the work.

Now, imagine that there is work you can do 1) that will pay well (or well enough), 2)  that you find interesting and engaging, 3) that aligns with your values, and 4) that will give you good experience to do that thing you love during retirement. Sounds like a good idea, right? Maybe you can work toward a career today that could help you pursue a passion during retirement? Now that sounds a lot better than being miserable for 40 hours a week if you ask me.

I would love to be able to retire tomorrow, but it’s going to take me longer than that. In the meantime, I’d rather not dread going into work. I’m not an authority on careers by any stretch of the imagination. But over the years I’ve come across some good advice. And I’m happy to pass it along when I can. I also have made many mistakes, and I’ll tell you about some of those too, so hopefully you don’t have to make the same ones. Ultimately this is meant to be a space to chronicle my efforts in minimizing my remaining working years. Part of that involves making those remaining years bearable, or better yet, enjoyable. I’ll keep you up to speed on how that is working out for me.

 

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Hello world!

 

Every journey begins with a single step, right?

Thanks for stopping by. Nice to meet you.

Who am I? Just a guy, really. A guy who is tired, frustrated, and not sure if he has it in him to wait until 65 to retire from his current day-to-day. But I guess that doesn’t really tell you much.

Here’s a bit more about me. I’m originally from a mid-sized city. I started working when I was about 15. When I finished high school, I went to more school, and then some more again. Then my working life really began in earnest, since that’s what you’re supposed to do. Several years ago, I got a job in the big city, so I moved to the big city. Then I met the love of my life, who actually lived in a neighbouring city about an hour away. So I moved for love, and got married. We compromised, and the end result for us was a house in the ‘burbs. And with it, for me at least, a 90 minute commute. I know… gross, right? Also, a mortgage, like just about everybody else.

Oh, we also have a toddler, and another on the way. The bun is set to pop out of the oven in early January.

I have a job that I don’t like very much (again, like just about everybody else). As I said, it takes me 90 minutes to get to this job I don’t like very much, and then another hour and a half to get home again at the end of the day. So I would like to find a new job, preferably one closer to home in the ‘burbs where I live. Well there are a couple of problems with this. First, there just aren’t as many jobs in the ‘burbs. It’s the main reason why so many people move to the city for work. That’s where the work is. The second problem is that for a number of reasons (increased demand, increased competition, higher cost of living, etc.) jobs in the city tend to pay more. So the reality is that if I manage to find work closer to home, it is likely to come with a pay cut. Did I mention I have a family with a toddler and another baby on the way? Maybe signing on for a pay cut is not the wisest or most responsible thing for me to do. While it is true that finding a job in the ‘burbs will seriously reduce and potentially even eliminate my cost of commuting, I need to find work that pays at least as much as my current job, minus my current cost of commuting, or else I’m no better off. One could argue (and I probably would) that I would gain a lot of value from the time I would get back from not commuting, but that’s a different discussion for another day. The fact remains, at this stage in our lives, we need the money. So I am not happy with my job but because of my current situation, obligations, and preferences I am somewhat trapped. Like golden handcuffs.

So where does that leave me? I have a job that I don’t like very much, but a young and growing family to provide for. I’m awfully close to 40 but not sure I want to carry on like this until I’m 65 and can retire. Well, to stop working earlier, or at least find work more fulfilling or less demanding, I need more savings. Currently I don’t have enough (mortgage, remember?).

There are only two ways to increase one’s savings rate: earn more, or spend less. The former, as I already touched on, is difficult, but I intend to work at it. The latter has a lot more room for improvement for most families, and ours is no different.

This little space on the internets will ultimately be about both. I hope you like it. Please stay a while, and visit often.