Tag: early retirement

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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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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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My philosophy of work, and how I got here

I currently have a good old fashioned, nine to five desk job. I do not like it very much. Surprise! The guy who started a blog called “Can I Quit Yet?” doesn’t like his job. Big shock, right?

Obviously the ultimate goal is early retirement. With a tip of the top hat to Mr. Money Mustache, and others like him, I am aware this is possible. But this is one of those goals that is simple, but difficult. Simple because the formula is straightforward: maximize your savings by minimizing your expenses and/or increasing your income. But saying “minimizing your expenses” is one thing and actually doing it is another. There are lots of areas where the average family can trim the fat and live more cheaply; I’ll get to a lot of those in future posts (or go back and follow that Mr. Money Mustache link… seriously, he’s great) but in my case there was a pretty obvious elephant in the room, and that is our mortgage. We have one, and it’s kinda big. And I know we can do lots to chip away at that mortgage and pay it down faster but it’s going to take a little time. What it all boils down to is this: for now, I gotta keep working.  It’s the only way we’re going to reduce and ultimately eliminate that mortgage so we can live more cheaply and achieve financial independence.

So I have established that I have to work, but I don’t like my current job. So the simple solution is of course to try and find another job. Well that’s proving to be a little difficult. To explain why, allow me first to explain how I got here.

I have always felt there are three things that make a job good, or worth having. 1) Interesting or fulfilling work; 2) Good pay; and 3) Good people.

Interesting or fulfilling work – In the simplest of terms, do you enjoy what you do? Are you spending your working hours doing the type of work you enjoy, or that motivates you? This is the big one for most people, and according to a lot of the stuff I have been reading lately about millennials and “kids these days” it’s more commonly becoming the most important factor. This of course makes sense because if you’re spending approximately eight hours a day doing a thing, it’s best that you enjoy doing that thing. Of course in many ways it’s also a first world problem, as the opposing viewpoint is that work is work, a job is a job, we all need to make money, so suck it up buttercup quit your whining and be thankful for your paycheque. Fair enough. That’s why I personally see it as only one of three major factors to job fulfillment.

Good pay – This one is a bit obvious to me. The pay is the main reason why most of us are working in the first place. Is money everything? Of course not. But to think of things a different way, if you’re working a job and finding that the pay just isn’t enough, that you’re struggling to get by and barely making it to your next paycheque, don’t you at that point start to consider looking for a new job? I figure for a lot of people the answer to that question is yes. On the flip side, if you’re working a job that isn’t necessarily your dream job but the money is good, you’re likely to stick around a bit longer than you otherwise might. I know that for me at least this is true.

Good people – For anyone who has ever worked a job where they had serious issues with their coworkers or managers, they’re likely reading this and nodding their heads vigorously. At the same time, a boring job with great coworkers can easily become a pretty good job. I find that if I like the people I work with, I like the job a lot more. It really can make all the difference, especially when you consider the fact that a lot of people spend more time with their coworkers than their families. If you don’t believe me ask yourself a few questions: How many hours do you sleep on the average night? How about your family members? Are you at home the same time as the rest of your family? Do you and the rest of your family ever do things separately? Do the math and then let me know if you think you spend more time with your spouse or the person you sit next to at work.

So those are the three things. In my estimation, if you have all three of those things in your job, then you’re laughing. Good for you! You’re probably in no hurry to retire early and therefore most likely not reading this right now. If you have two out of those three things, then you’re probably still pretty content. But if you have only one out of three… well if you’re like me, then at that point you’re probably starting to at least browse job ads. If you’re oh-for-three, well then I’d wager you’re not very happy about things and maybe doing more than just browsing job ads. And if you’re not, maybe you’re thinking about it. Maybe you should?

So that’s our scorecard. Now let’s see how I am doing based on these criteria.

Interesting work? Not so much. When I was first hired, I was brought in to help on a project that I thought was very interesting. Unfortunately, that project met an untimely death about six months into my jew job. After that happened, I was brought onto a project that was way behind schedule and needed help. It was in serious trouble and needed people. I never really cared too much for the project, nor did I have much in the way of expertise going in. In addition, the people in charge didn’t need or want the kind of help I like providing. I’m more of a big picture guy, who thrives in strategy, planning, and problem solving. I like to be invested, to have skin in the game. The role I was tasked to play on this project is basically that of a grunt; do what you’re told and let the adults in the room make the tough decisions. I was okay with helping out when help was needed, but now it’s been over five years. This project is still a going concern and I’m still stuck in it, not making what I consider to be any meaningful contributions. It’s definitely not doing my career any favours, unless I want to keep doing what I’m doing forever, and I don’t.

Good pay? Well this one is tricky… When I first started this job I was able to negotiate a salary that was a significant jump for me, compared to my last job. Part of the reason was due to the new job being in the big city as opposed to a smaller one, and that usually means a jump in money for reasons outlined in my last post. Another part of the reason was probably due to the fact that I was moving along in my career, now a more experienced hire, and the fact remains that a jump in salary is often the reason why people decide to switch jobs in the first place. When I made the switch, I was pretty happy about the money. Well it’s now over six years later. How many raises have I earned in that time? Zero. As I already hinted at, I’m not exactly in a role where I’m able to thrive and have a real impact, so there have been no performance-based raises or promotions. There also haven’t been any inflation-based or cost-of-living-based adjustments either. It’s become pretty obvious to me that pay increases at my current job just don’t really seem to happen very often at all. Do I think I’m entitled to the occasional raise? Well, no, not necessarily. But the fact remains that even if inflation over the past 6+ years has only been in the 1-2% range, a dollar earned today is worth less than it was 6 years ago. It doesn’t go as far. Plus when I started this job I was a freewheeling bachelor. Now I have a family to provide for and that family is growing. So if my pay hasn’t changed, but a dollar is worth less today, then in real terms, I’m actually earning less today than I was when I started. Let me be clear: I know that I am fortunate, that I do earn a very decent salary, and that I realize there are a great many people out there who are worse off than I am. But my goal in life is to get ahead, so that one day I can retire and have more time with my family. Right now it’s fair to say I’m not moving ahead.

Good people? At one point, I definitely would have said yes. Emphatically. I do work with some great people who I consider friends and not just work friends. The people were, and still are the best thing about my job. But I’m afraid the situation there has deteriorated somewhat as well. When I first started in this job, our team would go out to lunch on a daily basis. We would have after-work drinks almost as frequently. So what happened? Well, my life and priorities changed. The daily lunches were getting expensive, so I started brown-bagging. The after work drinks all but stopped too. When I was a local bachelor, they were fun and easy. Now, I think twice about spending too much on beer. Plus, living in the ‘burbs means I’m a commuter, and even staying for a single drink often means putting me on a much later train which means potentially not seeing my daughter before she goes to bed. It seems a much bigger sacrifice, because I actually really like my family and spending time with them. Some work friends have left the company and moved on to other things. But unfortunately my unhappiness with my job has affected some of my work relationships. My frustrations with my role and career have caused some resentment toward some of my superiors who I used to think of as friends. It’s a huge bummer.

When I started in this job, I was excited about the work, ecstatic about my coworkers, and happy to be earning more than I was before. When the work became less interesting I told myself that at least it was an easy job and I was still working with great people and better off than I was. That’s probably why I stuck around as long as I did. But before I knew it, years had passed, I was bored, frustrated about my stagnant career, losing hope for future progress, and then working with good people just wasn’t enough. On my three-point scale, I was barely scoring a 1/3. Just barely. Time to move on.

So now what? How do I fix things? What’s my game plan?

I’ll save that for next time.

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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.