In the old days, or so I'm told, people used to save up for something before they bought it. Sometime between the good old days and now though, society has shifted to a buy now pay later model. Don't pay for 3 months, credit card use, etc, etc. Unless you have at least a quarter million lying around, you probably still need a mortgage for a home, however, I believe its possible to save first and spend later.
The problem with all our borrowing is that there is a cost to it called interest. Even if you don't see it, its there. For example, I'm paying for a car with 0% financing. However, if I had paid cash for it they would have taken $2,000 off the price. So, that tells you even at 0% I'm going to pay $2,000 in interest over the 5 year loan.
Not only is there a lot of self-satisfaction in having the money to buy something outright, there are also a few extra benefits. One, you earn interest instead of spending it. Don't think of it as just what you're making, but also what you're saving. Getting 2% instead of spending 6% gives you an extra 8% in your pocket. Less taxes of course, but that is what I'm using the TFSA for currently. Another benefit is that you think about what you are going to spend your money on. It may turn out that when you do this you don't actually need it. I'm sure there are other benefits, but the biggest one for me is that you'll always be able to afford your payments this way. If you lose your job or some other financial difficulty strikes you'll have savings to pull from and won't have debt to pay other than a mortgage.
I've talked about it before, and this wasn't exactly a new goal, but is one that I've been working on for awhile. The frustrating thing is that there always seems to be something new coming up. Something that I hadn't budgeted for that forces me to search for ways to get the money together. The most recent example of that was my wife's CRNBC dues coming due this month. The good news is that it becomes easier and easier to do as time goes on. The only real challenge left in this goal is to figure out how to pay cash for the next car, but I'll discuss that more later.
The biggest challenge I faced was trying to catch up. Using credit cards meant I was using this months income to pay for last months bills. Which also made the budgeting a much more challenging process. We eventually got caught up by using our tax return, which alleviated a lot of my stress.
So now I look forward to Christmas and vacations knowing, the money is already in the bank waiting. It was a tough goal, years in the making, but I think we're basically there. Things still crop up, and they probably will continue to do so, but they happen much less frequently now. So hopefully this is encouraging to anyone else trying for the same goal. I definitely think it is worth it.
Friday, February 25, 2011
Tuesday, February 15, 2011
The Retirement Goal
OK, time for the far into the distant biggest goal... retirement. It is easy to say I don't want to take a pay cut when I retire, but how much is that going to cost me now. After some number crunching, the news seems better than I expected.
I've gone back and forth over the RRSP vs TFSA and while still struggling with the concept, I've decided at least for now to continue to contribute to RRSPs. I'm using the TFSA for other investments and savings so if I used it for retirement as well I'd quickly run out of room and be taxed on my savings interest (mind you not a lot). Also, with my current tax bracket vs predicted future bracket calculations I've done, the taxes will end up being pretty much the same whether I pay them now or later. I may change my mind yet, but that is where my head is at currently.
Rather than trying to figure out what I need and working back from there, I decided to start with what I can afford. At first, I came up with $400/month. Given that I'm using an RRSP vehicle though, I have the advantage of getting a tax break now. After crunching the numbers for a bit, I found I could drop $200/month from my savings and replace it with the tax return. That was the perfect number and any more than that and I ended up increasing my expenses. So time to see what $600/month does to get me to my retirement goal.
Anyone that has ever tried to do retirement planning knows that it is full of assumptions, so here are mine:
According to the Service Canada site I should have $13,017/year in my OAS and CPP income. Assuming I don't have additional income above my RRSPs (which I hope is a bad assumption). I'll use that number for now though and I'm already almost a quater of the way to my goal.
That site also tells you the income from the RRSPs, but it presumes I'm going to die at 78 and won't need any funds after that point. With that assumption, I'd have over 95,000/year. Assuming I do have additional income and I'm less mobile at 78 I probably could use their number, but I'd hate to be at 78 with increased medical costs and be forced to lower my income. I'd rather error on the high side and leave money to my family though than to out live my funds. I realize I could do an annuity, but I'd hate to give my money to an insurance company if I die early.
Using Mackenzie Financial's calculator I see that with my assumptions my funds will actually last until I'm 100 (more than enough!) with me drawing out $60,000/year (in today's dollars). So I could probably give myself a raise and still be OK. I'll discuss this more as the day approaches, but my best bet may be to use a combination of an annuity and a RRIF. That way I can draw more from my RRIF expecting it to last until I'm 85 and if I live longer I'll have the annuity to fall back on, and if I die sooner I won't give all my money to an insurance company.
Not bad considering it was just a first pass with only what I can afford now. There is a little room to play with too in case some of my assumptions go sideways.
I've gone back and forth over the RRSP vs TFSA and while still struggling with the concept, I've decided at least for now to continue to contribute to RRSPs. I'm using the TFSA for other investments and savings so if I used it for retirement as well I'd quickly run out of room and be taxed on my savings interest (mind you not a lot). Also, with my current tax bracket vs predicted future bracket calculations I've done, the taxes will end up being pretty much the same whether I pay them now or later. I may change my mind yet, but that is where my head is at currently.
Rather than trying to figure out what I need and working back from there, I decided to start with what I can afford. At first, I came up with $400/month. Given that I'm using an RRSP vehicle though, I have the advantage of getting a tax break now. After crunching the numbers for a bit, I found I could drop $200/month from my savings and replace it with the tax return. That was the perfect number and any more than that and I ended up increasing my expenses. So time to see what $600/month does to get me to my retirement goal.
Anyone that has ever tried to do retirement planning knows that it is full of assumptions, so here are mine:
- I'm going to retire at age 65. I could aim for earlier, but I'd rather just get a job I love to do.
- I want the funds to last at least until I'm 85. More about this below.
- I'll receive 10% on average on my funds up until retirement. The funds I've selected are so far on track with this.
- I'll receive 8% on average on my funds after this. Actually I expect to continue to earn 10% on much of the funds while earning much less on the funds needed immediately. No calculator I've found accounts for this though.
- Inflation will increase on average about 2% per year and my contributions will increase with inflation.
- Income required using today's numbers is $60,000. I don't actually know what my income at retirement will be and maybe I should be using a higher number, but my contributions will also increase as my income increases. So for now I think this is a fair assumption.
According to the Service Canada site I should have $13,017/year in my OAS and CPP income. Assuming I don't have additional income above my RRSPs (which I hope is a bad assumption). I'll use that number for now though and I'm already almost a quater of the way to my goal.
That site also tells you the income from the RRSPs, but it presumes I'm going to die at 78 and won't need any funds after that point. With that assumption, I'd have over 95,000/year. Assuming I do have additional income and I'm less mobile at 78 I probably could use their number, but I'd hate to be at 78 with increased medical costs and be forced to lower my income. I'd rather error on the high side and leave money to my family though than to out live my funds. I realize I could do an annuity, but I'd hate to give my money to an insurance company if I die early.
Using Mackenzie Financial's calculator I see that with my assumptions my funds will actually last until I'm 100 (more than enough!) with me drawing out $60,000/year (in today's dollars). So I could probably give myself a raise and still be OK. I'll discuss this more as the day approaches, but my best bet may be to use a combination of an annuity and a RRIF. That way I can draw more from my RRIF expecting it to last until I'm 85 and if I live longer I'll have the annuity to fall back on, and if I die sooner I won't give all my money to an insurance company.
Not bad considering it was just a first pass with only what I can afford now. There is a little room to play with too in case some of my assumptions go sideways.
Wednesday, February 9, 2011
Worldmark Points and the Goal Making Process
Part of me feels like I should have it all together before I start writing a particular article. I want you to feel like I'm at least informed on the topic of which I felt inclined to communicate to the world about. On the other hand, I never implied that I knew it all and I'm in fact just a student trying to learn as I go. So, the other part of me doesn't mind fumbling along and sharing my experiences with the learning process. If you have an opinion on this though, I'd love to hear it.
The reason I stated the above is that I'm really seeing the benefit to writing out my goals and coming up with a plan to achieve them. One of the biggest lessons I learned so far in this process is that something I may have initially desired and set as a goal may become less important as I write out what that goal truly is and what it will cost to get it. That became very apparent as I sat down and tried to figure out how to reach my WorldMark goal.
For those of you that don't know, WorldMark is a vacation ownership company. I can practically hear you groaning now, but this is different than a time share in several ways. Time shares generally give you one location, one property size, and one time of year. Also when you die (or even after some time period like 20 years) you lose access. WorldMark has many locations, beautiful properties, you can will it, and choose the time and number of rooms as you need them. My parents are members and I've gone with them several times and the rooms are just beautiful.
To get started you need to buy credits which are not cheap. The maintenance cost after that is about the cost of a normal hotel room a year (depending on the number of credits). Instead of a normal hotel room, though you get a beautiful home away from home. Washer and Dryers that allow you to cut down on the luggage you bring on a plane (expensive nowadays) and a fully equipped kitchen so that you don't need to eat out every night.
We love to travel, so this seemed like a good fit. I figured I needed about 10,000 credits/per year in order to book a 1 bedroom at most places. However, at the prices that WorldMark was charging I didn't think I could ever justify it. That is until I found Vacatation Credits; a site that people are selling their credits at a reduced rate. So I came up with the plan to use our vacation budget to buy the credits and use them to go somewhere local next year.
Here is where the planning process started to change my mind. First I noticed that even with our healthy vacation budget and the cheaper credits we could only afford 7,000 credits after 1 year of saving. So that means delaying the next vacation as well or borrowing more money. Second, it means giving up on a trip now when we're without kids and are more easily able to travel. The savings won't be recognized for some time, so its hard to justify giving up that trip just now. Especially when my parents so graciously invite us along occasionally and we can also buy credits through them for some short getaways.
Once we have children, I think the credits make more sense as we'll need a larger place and the hotel rooms and dining will start to get more and more expensive. In fact I don't imagine we'll be doing a lot of vacationing at all while my wife is pregnant or the baby is young. I can't believe I'm talking about kids I don't have yet! So, why not put the vacation money away at that time when we can't travel, so that when we're ready to go again we'll have the option of staying at these gorgeous condos.
For now though, this goal has been postponed, but hasn't disappeared. If you're interested in my experience with WorldMark, or want to comment on anything I've written here, please ask away.
The reason I stated the above is that I'm really seeing the benefit to writing out my goals and coming up with a plan to achieve them. One of the biggest lessons I learned so far in this process is that something I may have initially desired and set as a goal may become less important as I write out what that goal truly is and what it will cost to get it. That became very apparent as I sat down and tried to figure out how to reach my WorldMark goal.
For those of you that don't know, WorldMark is a vacation ownership company. I can practically hear you groaning now, but this is different than a time share in several ways. Time shares generally give you one location, one property size, and one time of year. Also when you die (or even after some time period like 20 years) you lose access. WorldMark has many locations, beautiful properties, you can will it, and choose the time and number of rooms as you need them. My parents are members and I've gone with them several times and the rooms are just beautiful.
To get started you need to buy credits which are not cheap. The maintenance cost after that is about the cost of a normal hotel room a year (depending on the number of credits). Instead of a normal hotel room, though you get a beautiful home away from home. Washer and Dryers that allow you to cut down on the luggage you bring on a plane (expensive nowadays) and a fully equipped kitchen so that you don't need to eat out every night.
We love to travel, so this seemed like a good fit. I figured I needed about 10,000 credits/per year in order to book a 1 bedroom at most places. However, at the prices that WorldMark was charging I didn't think I could ever justify it. That is until I found Vacatation Credits; a site that people are selling their credits at a reduced rate. So I came up with the plan to use our vacation budget to buy the credits and use them to go somewhere local next year.
Here is where the planning process started to change my mind. First I noticed that even with our healthy vacation budget and the cheaper credits we could only afford 7,000 credits after 1 year of saving. So that means delaying the next vacation as well or borrowing more money. Second, it means giving up on a trip now when we're without kids and are more easily able to travel. The savings won't be recognized for some time, so its hard to justify giving up that trip just now. Especially when my parents so graciously invite us along occasionally and we can also buy credits through them for some short getaways.
Once we have children, I think the credits make more sense as we'll need a larger place and the hotel rooms and dining will start to get more and more expensive. In fact I don't imagine we'll be doing a lot of vacationing at all while my wife is pregnant or the baby is young. I can't believe I'm talking about kids I don't have yet! So, why not put the vacation money away at that time when we can't travel, so that when we're ready to go again we'll have the option of staying at these gorgeous condos.
For now though, this goal has been postponed, but hasn't disappeared. If you're interested in my experience with WorldMark, or want to comment on anything I've written here, please ask away.
Thursday, February 3, 2011
My Mortgage Goal
OK, finally got that second assignment out of the way! What a relief. So many formulas swimming around in my head and I'm feeling slightly nervous about the fast approaching final exam. So calculating my mortgage plan seems like a break in comparison.
Looking at the difference between a $315,000 town home and a $350,000 town home, I couldn't really see that much of a difference. So I've decided to modify the goal a little bit and shoot for $315,000 in 2 years instead of $350,000. The goal should be much more easily attainable. Even if I could afford the $350,000 place, I'd prefer to still buy the $315,000 place and have that much smaller of a mortgage.
Currently I have a 20 year amortization with a variable rate and I'm making approximately $800 in monthly payments. For these calculations, I'm going to assume that the variable rate will remain unchanged. I realize that is unrealistic, but I have no idea when the rates will increase and by how much, so I need to make some simplifying calculations in order to come up with some reasonable estimates. I'm also going to assume a 3% increase in value per year, in both the home I have and the one I want to buy. Finally, I'm going to assume about $10,000 in realtor fees based on some guidelines found on the web.
Given the above assumptions, the current home will be worth approximately $220,000 and the desired home will be worth about $334,000 at the end of year 2.
If I was to leave the payments as they are, at the end of two years, I should have approximately $143,000 remaining on the mortgage. Leaving a difference of $69,000 (less realtor fees) as the down payment for a new home. Which would be a 20% down payment on a $295,000 home ($59,000/20%). So, that doesn't quite get me to my goal.
I think I can comfortably afford to increase the monthly payments to $1,350. So, let's see how that changes things.
The mortgage at the end of 2 years now becomes approximately $129,000. That leaves $73,000 for a down payment after realtor fees. Assuming that is 20% of the purchase price, the price of the new home is $365,000. That leaves a bit of a cushion for rate increases and possibly renovations of the new home.
This may look pretty straightforward now, but I had to do a lot of re-working on this article to come to this conclusion. I'm definitely seeing the need to have a plan in place to get to where I want to go. I struggled with several aspects of this, but I'm now pretty happy with the result. According to conventional wisdom I should be able to afford $2500 a month on the mortgage, but I'd have to change things drastically to make that happen.
OK, another goal set in motion and the payments are already increased. Onto the next goal.
Love to hear your thoughts and stories.
Looking at the difference between a $315,000 town home and a $350,000 town home, I couldn't really see that much of a difference. So I've decided to modify the goal a little bit and shoot for $315,000 in 2 years instead of $350,000. The goal should be much more easily attainable. Even if I could afford the $350,000 place, I'd prefer to still buy the $315,000 place and have that much smaller of a mortgage.
Currently I have a 20 year amortization with a variable rate and I'm making approximately $800 in monthly payments. For these calculations, I'm going to assume that the variable rate will remain unchanged. I realize that is unrealistic, but I have no idea when the rates will increase and by how much, so I need to make some simplifying calculations in order to come up with some reasonable estimates. I'm also going to assume a 3% increase in value per year, in both the home I have and the one I want to buy. Finally, I'm going to assume about $10,000 in realtor fees based on some guidelines found on the web.
Given the above assumptions, the current home will be worth approximately $220,000 and the desired home will be worth about $334,000 at the end of year 2.
If I was to leave the payments as they are, at the end of two years, I should have approximately $143,000 remaining on the mortgage. Leaving a difference of $69,000 (less realtor fees) as the down payment for a new home. Which would be a 20% down payment on a $295,000 home ($59,000/20%). So, that doesn't quite get me to my goal.
I think I can comfortably afford to increase the monthly payments to $1,350. So, let's see how that changes things.
The mortgage at the end of 2 years now becomes approximately $129,000. That leaves $73,000 for a down payment after realtor fees. Assuming that is 20% of the purchase price, the price of the new home is $365,000. That leaves a bit of a cushion for rate increases and possibly renovations of the new home.
This may look pretty straightforward now, but I had to do a lot of re-working on this article to come to this conclusion. I'm definitely seeing the need to have a plan in place to get to where I want to go. I struggled with several aspects of this, but I'm now pretty happy with the result. According to conventional wisdom I should be able to afford $2500 a month on the mortgage, but I'd have to change things drastically to make that happen.
OK, another goal set in motion and the payments are already increased. Onto the next goal.
Love to hear your thoughts and stories.
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