Sunday, March 9, 2008

Monthly Debt Elimination Progress Report

Since my last post I decided that I needed to track how close I am to meeting my debt elimination goals. I made another spread sheet that shows me what my debt balance should be on the first of a given month and where I actually am. Below is a screen capture of my first report. This first progress report is for January 1st, February 1st and March 1st.

I am a little bit disappointed to end up almost $730.00 behind my debt elimination goal. The main reason for this is that I had an expensive month in February. There are a few expenses that are worrying me, the main one, is the gas expense for my car $225.00/month should have been close to what I would expect. Possible explanations for the discrepancy maybe some kind of mechanical problem (I hope not because I already had an $800.00 problem in February that thanks to Visa is only being paid in the month of March along with car rental) or I am underestimating my commute, I will be investigating this closer because $400+/month is too much! I also had high entertainment and miscellaneous expenses, my wife and I will need to take a closer look at why we spent so much.

I'm afraid that March will not be a better month with my car troubles of February. For a better view of what has happened on the budget see our envelope budget below.

There is some positive news, my wife and I should get a tax return of approximately $4700 between both level of governments. The main reason is because of a substantial investment loss in some rental units that my family and I bought. Obviously applying this to my debt repayment will help but the advantage will be consumed unless I can lower our expenses.

Wednesday, February 27, 2008

Tax Free Savings Account for Canadians

For those of you that are Canadian you know that yesterday the government of Canada introduced a Tax Free Savings Account!

Basically all Canadians over the age of 18 will be able to put aside up to $5000 in an account, the interest earned will be tax free, even when withdrawn. Whatever money is withdrawn creates contribution space for future savings. The contribution amount will also be indexed to inflation in $500. increments.

This is great news in light of the kind of analysis related to ROI, I was doing in my post Debt vs Savings.

The details can be found at the following link.

Tuesday, February 26, 2008

Lost opportunity

This past weekend I learned the most costly part of not being financially independent. I learned that the cost is lost opportunity. When I woke up for the third time this Saturday (Brandon, my son hasn't full caught on to the idea of sleeping when it is dark out:) ) I had no idea the lesson I was going to learn.

It started like all other Saturdays, getting the house in order while Anita, my wife, got Brandon ready to go grocery shopping with her. Anita and I were making sure to get an early start because we were hosting for one of my co-workers and his wife and wanted to make sure that our house was presentable for our guests.

When our guests got to our home we made small talk, I showed my guests the renovations that I had done and have had done. Later during a supper of chicken fajitas my friend's wife tells us about a new fancy tea store that they saw in the US and that she thought it would be a great business opportunity. I have to say that I was intrigued by this business opportunity, but I knew that there would be no way for me to invest in something like this with the debt that I am carrying.

I know that some will say if you really want you will find a way. I agree but at what risk? I have to protect my house from risk because it is also my home. I hope in five to ten years to be in a position to answer the door when opportunity knocks.

If you remember in the past I talked about the definition of financial independence being the ability to live on the passive (non-employment) income you generate. For now I am mainly in the debt elimination phase which will be followed by an investment and/or savings plan to generate passive income. That being said I am pursuing other passive income streams; notice the Google Ad Sense on this blog. When I have more time I will explore affiliate programs where links from my blog that result in sales will pay commissions.

As always I welcome any comments to this post.

Monday, February 25, 2008

Monday Debt Elimination Meter 3

This week I will be reporting the state of my debts, you may have noticed that I didn't post any info last Monday, the reason is that I think that it is more useful to describe the state of my debts on the Monday following Anita's (my wife) and my payday which is on the same week every two weeks. Below is the state of my debts to date:

As you can see I have almost eliminated my second line of credit since September 2007 and have started picking away at the third one :).

I think that I am pretty much on track but I am a bit worried about my expenses I will be posting at the end of every month how my budgeting is going.

I'm going to try posting more but I find my off line life is taking a lot of my time.

As always if you have any comments feel free to do so.

Monday, February 18, 2008

What is a dollar worth?

I have been trying to figure out what is a realistic budget for my house holds expenses. I first started by looking at the past year's expense tracking then I made some modifications based on the new present day realities. Below is my first real budget attempt:

Monthly expenses
Bank Fee 12.95
Car Repairs 100.00
Gas 225.00
Car Regist.(AB) 21.42
Driver Lic.(AB) 3.58
Driver Lic.(AL) 3.58
MelocheMonnex 99.92
School Tax 29.16
Property Taxes 145.65
Grocery 600.86
Hydro 146.38
Fireplace 42.50
Videotron 96.61
Primus 13.91
Entertainment 101.64
Gifts 194.29
London Life (AB) 45.83
London Life (AL) 31.31
Primerica (Life Ins) 103.81
RESP 245.09
Safety Box 3.31
Misc 133.20


I have already had an 800$ car repair meaning I can not have anything happen until august of this year!

Last summer I wasn't careful with my electricity usage and I used more than what Hydro Quebec expected (I have a pond that had a pump using 0.5kWhr 24hrs a day) so they increased my monthly rate and I opted to pay the amount I owed over the next 6 months (about $35/month). I have been making sure to not waste electricity over this winder and as of January there is nobody home during the day so my thermostats are set low. This should translate into a lower hydro bill.

During my search to find ways of lowering my expenses I stumbled on a philosophy of voluntary simplicity. The idea in a nutshell is to look at everything we buy as costing a portion of our life. When looked from that perspective there maybe a lot of things that are just not worth that price. This is a way to asses on a personal level what a dollar spent is worth to us. I am hoping that this can help me stick to my budget.

I am probably going to start a spread sheet that will help me stay on budget and allow you to see what difficulties, if any, arise from trying to stick to a budget. I think that I will also start exploring different passive income streams that can help me an my journey to financial independence.

Tuesday, February 12, 2008

Monday Debt Elimination Meter 2

This weeks meter is late by a day but there isn't much to report other than the fact that I have lost some ground as can be seen below. Since last week I actually added $60.46 to my debt. Part of the reason for this is that now Anita's and my pay checks are on the same week every two weeks and when we get paid we put as much money towards our debts as possible and then slowly take from our line of credits to pay our expenses.
I'm going to suppose that the longer I track this the less fluctuations I should see in the Debt payment per month field. Last Monday I had $1923.95 and this week I have $1828.27. I have also updated the interest of my debts to reflect the new lower interest on my debts; they have all decreased by 0.5% since September 2007 except for the fixed portion of my line of credit.

I don't think that I can do much more than I am currently in my debt elimination phase. I think, that in future articles, I will be focusing more an the kinds of cuts to my expenditures I can make to increase my debt accelerator.

As always feel free to comment on what I'm doing and what you would do or have done differently on your journey to financial independence and wealth.

Friday, February 8, 2008

Hybrid Debt Elimination System

Looking carefully at the last post you will notice that something isn't quite as you'd expect. What are the clues that this isn't actually a Cascading or Snowball debt elimination system? Well for one thing it almost looks like I am not making minimum payments since some of the debt doesn't seem to be shrinking. Of course I am making my minimum payments,always make at least your minimum payments, otherwise you will damage your credit!

What I am actually doing is that periodically, usually once a month, I take the available credit at a lower interest to pay the higher interest debt. I haven't done the math yet to see if this makes a significant difference but I find it intuitive to pay off the higher interest debt with lower interest available credit. Also, I think that over time by doing this Cascading or Snowball debt elimination will actually give the same list order of debts.

You should note however that in my case I have the 5.47% mortgage decreasing while the 6.25% home equity line of credit growing, the reason is that both are actually make up my $187500.00 mortgage. The 5.47% principal from my payments is being added as available credit to my open variable rate home equity line of credit. BTW all of my interest rates are actually 0.5% less except for my fixed and closed 5.47% mortgage.

As always comments are welcomed.

Monday, February 4, 2008

Monday Debt Elimination Meter

The point of my blog is to record my progress towards financial independence. Currently I am in the debt elimination phase of the journey. I find it helpful at a regular interval to take a snapshot of my debt level just so that I can properly monitor my progress and make corrections if necessary.

I have been doing this now since the first Monday of September, Labor day here in Canada (fitting day for the start of my labor). Below is a screen shot of the spread sheet I use to do this.

I am a little bit off target $1923.95/month average that the principal is lowered by what I need is $1950.00/month accelerator on top of the principal from the minimum payments. Part of this is due to the fact that until January 7, 2008, Anita (my wife) was on maternity leave and earning approx. $700.00 bi-weekly. The other reason has to do with the fact that my budget is a normalized budget, my expenses are averaged equally over 12 month even though some are paid in one, two or three installments. If my budget is accurate then it should all work out as expected by September of 2008.

Please feel free to comment and share your ideas or views.

Sunday, February 3, 2008

Debt vs Savings

Is it better to solely save or solely pay off debts or is there a better combination? As with most financial questions the answer is it depends. You need to consider what is the after tax return on investment compared to the cost of the debt. Another thing to consider is the risk involved in the savings; is it a GIC or is it a medium or high risk mutual fund?

After tax ROI (Return On Investment)

It is important to understand that the amount of money generated by an investment will probably be taxable. For example I put $2000.00 in a 3.65% in ING's ISA I will end up with after one year with $2074.23 or a taxable gain of $74.23 at my tax bracket of about 40% I will owe in taxes $29.69 this can be calculated to be an after tax ROI of approx. 2.21%. It is pretty obvious that if your choice is between saving the $2000.00 or paying off a $2000.00 credit card debt at 18%+ then pay off the credit card. Especially since you are not taxed on the interest saved.

What if the debt is not a credit card but a home equity line of credit at 5.47% and it is an RRSP (Registered Retirement Savings Plan) in Canada (or its equivalent in another country)? It will again depend on what is the return on the RRSP and what tax bracket you are in.

I found a RRSP vs. Mortgage Calculator to figure out for my case what is better. I entered the following into the calculator:

Mortgage rate : 5.47%
Principal Outstanding: $148134.44
Monthly Payment: $913.22
RRSP ROI: 4.5%
Lump sum: $0
Extra Monthly: $1950.00
Marginal Tax Rate: 40%

The calculator result:

Based on the mortgage information provided, we have calculated that you have 24.00 years remaining in your mortgage amortization period.

If you increased your monthly mortgage payment by $1,950.00, it would result in your mortgage decreasing by $128,703.93 and your mortgage amortization period will be reduced to 4.83 years.

If you increased your monthly RRSP contribution by $1,950.00, it would accumulate over 4.83 years to $125,800.48. The tax savings over the next 4.83 years should be approximately $42,900.00.

Of course, if you used your tax savings to pay down your mortgage, it would result in your mortgage decreasing by a total of $111,636.81 and your mortgage amortization period will be reduced to 9.25 years.

Based on the information provided, you would be better off paying down your mortgage.

Risk Assesement

I am sure that there will be those of you out that will say that 4.5% return is too conservative and that I should be able to get a better return than 5.47% of the mortgage. This maybe true but this is speculative and I need to make sure that I compare apples with apples and not oranges; the debt repayment impact is guaranteed but investing in anything other than 0 risk RRSP is not.

Noticed that if with my low interest home equity line of credit it is better to pay off the mortgage first than this will be even more true with my higher interest debt.

I also tend to be getting less risk tolerant as I get closer to my target age for financial independence which I had set earlier to be age 55. This for me is just over 15 years from now.

I hope this article was useful to you and hope to hear any comments you may have.

Thursday, January 31, 2008

Debt Elimination Strategies

In this article I will be describing two debt elimination strategies that can be implemented with the Debt Accelerator software that I mentioned in my last article. The two strategies are the Snowball and the other is the Cascading Debt.


  1. Make a list of all the debts that you have. Include as information the current balance, the interest and the minimum monthly payment due.
  2. Re-organize list smallest balance to largest.
  3. Make your payments.
  4. When the debt at the top of the list is paid add the payment of that now paid debt to the next debt on the list.
  5. Each time a debt is paid repeat step 4.
Cascading Debt

The only difference is that the list needs to be organized from highest interest to lowest interest.

Mathematically the Cascading Debt is the method which saves the most interest however by using the Snowball you may see faster results which may keep you from giving up on this strategy.

The Accelerator

Is an extra amount of money that is added to the debt at the top of the list (for either strategy) to help accelerate the debt elimination. Obviously the greater the accelerator the greater the acceleration:) This makes having a budget to insure that the accelerator is maximized is very important.

My Numbers and Projections

click on images to view larger

Figure 1 Screen Shot My Numbers using Cascading Debt Elimination

Figure 2 Screen Shot My Numbers using Snowball Debt Elimination

Figure 3 Screen Shot My Numbers using my accelerator

Comparing the results of Cascading (Figure 1) to Snowball (Figure 2) we see that in both cases all debts would be paid in 14 years except that with the cascading strategy we save $151.81. This is negligible in my case but $151.81 is $151.81.

Figure 3 shows the power of the accelerator which in my case would allow me to pay off all my debt in 5.5 years! I know some of you reading this will say things like "Sure if I had $1950/month extra to put towards my debts it would be easy.". This would show a misunderstanding of the way debt works. The reason is that your creditors lend to you according to your ability to pay. This means that their may be among you that earn significantly more than me and have much more debt than me but have more money to put towards their accelerator and therefore could be debt free as fast as me, Of course the same is true for those that earn less. The exception are people who end up in a situation where there earning significantly decrease from when they made the debt.

John Commuta author of Turning Debt into Wealth ebooks asserts that for most people they should be able to pay all their debts including their mortgage in 5 to 7 years.

In my next article I will give you my view on debt elimination vs savings.

Wednesday, January 30, 2008

Importance of Debt Freedom

Two reasons for working towards being debt free:

  1. The less debt one has, the less passive income is needed to pay for it. As shown in my last post, I need $1900.00/month of passive income just to make up for my debt obligation.
  2. Money spend on debt can be used in investments which generate passive income. We all know that it takes money to make money. In my case, if I always make minimum payments it will take almost 54 years to pay my debts and during that time I will pay almost $222000 in interest alone!!!!

Imagine $222000 that could be better spent towards generating passive income will be gone! The worst part is that my total debt today is about $220000!

Can I have a show of hands? Who thinks that I am totally and utterly done for?

The good news is that there are things that can be done to help us back on the path to financial independence. The most important tool is an application I found, Debt accelerator. To give you an example of how useful this piece of software is, it shows me how with the same money that I spend today towards my debts can pay off the debts fully in 14 years rather than in 54 years and save just over $124000 in interest! That is money saved that can be applied towards investing in passive income stream.

This software even shows you the impact of applying a monthly acclerator to your debts. An accelerator is an extra amount that you budget to attack debt.

The strategies that Debt accelerator makes use of are known as cascading debt elimination and snow balling. I will explain these strategies in the next post.

How do you know when you are financially independent?

You can consider someone to be financially independent if they bring in more income from non-employment (passive) income than what they need. Of course 'need' can be a rather subjective word. Some of us need an expensive home theater system or expensive car, while others need remarkably little.

It is obvious that the more we need, the harder financial independence will be to achieve. In my case, my household expenses are $2400.00/month and $1900.00/month of debt. This means that in order to declare myself financially independent, I need to find passive income sources amounting to $4300.00/month!

I am lucky enough that I get rental income (passive income) of $775.00/month from my duplex, but this is gross passive income: before taxes and expenses. I'm going to estimate it as a net passive income of $500/month, which means that I still need to increase my passive income by approximately 900%.

I think what we are learning here is that the debt is keeping my dreams of financial independence further out of reach. If I could find a way of eliminating my debt obligation, I would only need to increase my passive income by approximately 500%.

At this point you may think that I am leading you on a predetermined path, that is because I am. I have actually started this path in September of 2007 and I really believe that debt is a big hurdle to financial independence.

In the next posts, I will discuss more about how bad debt is for your financial health, and techniques that can be used to eliminate it.

Journey to Financial Independence

How many of you reading this have wondered how can I achieve financial independence? What is the secret that alludes so many of us? Is it possible for the average person to set themselves up to be financially independent? Or is the deck stacked up against us?

If you have come here to have expert advice from someone who is financially independent ..... well, you have come to the wrong place. I am not wealthy and I am very dependent on my income as an embedded hardware designer.

The purpose of this blog is actually to try and find a path to financial independence for myself and to record the journey which I hope will lead to financial independence. I hope this blog can become a useful source of what to do and (hopefully not) what not to do.