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over the age of 18 will be able to put aside up to $5000 in an account, the interest earned will be tax free, even when withdrawn. Whatever money is withdrawn creates contribution space for future savings.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.