October, 2018 - Millionaire on the Prairie

Pay cash for your cars

Buying a new vehicle is not a decision to be undertaken lightly since the financial ramifications can put a serious crimp in your cash flow for a very long time if you’re not careful.

Check out this article on how Canadians are taking out lengthy car loans to minimize the monthly payment. Think about it for a minute. Canadians want expensive vehicles and they’re willing to finance them, but the required minimum monthly payment over a 5-year period is simply too much for their budgets to bear so they agree to repay the loan over 7, 8 or even 9 years! These kind of lengthy repayment periods are lunacy! Like eating too much of your favourite dessert, long-term loans promise delight in the short-term and guarantee regret over the long-term.

Vehicles are expensive! A brand-new pickup truck in my corner of world can run $70,000 or more. Brand new SUVs start around $25,000. Luxury sedans start at the $39,000 mark. Even on the second hand market, a nice vehicle with fewer than 100,000kms will run you atleast $10,000. I’ve seen financing offers last as long as 96 months for new vehicles – 96 months is 8 years! It should never take anyone 8 years to pay off a car loan. Depending on the driver, a vehicle may need to be replaced at the end of the 8 years and the whole cycle of paying a car loan has to start again. Or, even worse, a vehicle may have to be replaced before the loan period expires and the old loan value has to be rolled into the loan on the next vehicle.

I’m here to tell you that there is a way to live without car payments, to go years without ever having a car payment while driving cars that you can afford. This fool-proof alternative path to vehicle ownership completely eliminates the need for financing. It’s called paying cash for your vehicle by saving the money before you buy. It’s not a particularly popular method, and the car dealerships will never advocate for this method. You can rest assured that the Ad Man and his trusty sidekick, the Creditor would have fits if great swaths of the population decided to follow this method for purchasing motorized transportation. Yet, I guarantee that this method will work for you every single time. If you save up to pay cash, you will benefit twice by acquiring a vehicle without acquiring any payments!

Nearly twenty years ago, a woman from a book club to which I belonged gave me advice about how to buy a car. It was exceptionally good advice, which is why I still remember it. She said that her grandfather had taught her how to pay cash for all of her vehicles. I was most intrigued!

Essentially, the advice was to save the equivalent of a car payment in a separate account until the next desired vehicle could be purchased with cash. At the time, Book Club Lady was setting aside $350 each month in a bank account dedicated to buying her next car and she planned to do so for five years until she had enough to buy her next vehicle in cash. Bingo-bango! At $350 per month, she’d have $21,000 in place to buy her next vehicle in 5 years. And after she purchased her vehicle, she would continue to set aside the amount of money (or more if she wanted) in the bank so that she would be in a position to pay cash for the next vehicle. Technically, one could argue that she was still making a vehicle payment but so what? The fact was that Book Club Lady was making a payment to herself and she wasn’t paying any interest on a car debt.

How many of us prefer to finance a car and pay interest to a creditor? Don’t be shy! Raise your hand. Yes, you’re in good company. Car companies make oodles of money through their financing divisions. Why? Somehow, we as a populace have decided that cars are to be replaced and upgraded regardless of whether they are still roadworthy. Replacing one financed vehicle with another one is far more important to us, collectively, than preserving our money for a period of time and buying something outright with cold, hard cash.

I speak from experience. I’ve twice bought brand-new vehicles. The first one was held for 7 years, and I took the full five years to pay it off at a rate of $325 per month. The second one still sits in my garage, 10 years old this year. I was smarter the second time around as it only took me 6 months to pay off the loan. Despite the wise advice of the Book Club Lady’s grandfather, I financed both of my cars and didn’t give a single thought to setting aside my former car payment so that I could buy the next car in cash.

Let’s face it – vehicles cost money to buy. We can either pay a lender to finance the vehicle, or we can put ourselves in the shoes of the lender and simply pay the same amount to ourselves. Either way, we’re still getting a vehicle out of the deal.

My 10-year old SUV is not going to run forever, so I’ve finally started a dedicated vehicle-replacement fund. Every two weeks, $250 from my paycheque is set aside for the purpose of buying my next vehicle. I’ve committed to driving my SUV until the wheels fall off, so hopefully they stay firmly in place for atleast the next 5 years. If my SUV fails me before my chosen time, the money in my vehicle replacement fund will serve as a good down payment on the next vehicle or it might be enough to buy me something that I don’t completely and absolutely love but can live with until I have enough cash to get what I really want.

“So how do you get the first vehicle without financing it?”

Good question. The first option is to figure out how to live without a car – ride a bike, take public transit, walk, Uber. Some of these options might work some of the time, but they’re not all free. I harbor no illusions that everyone can live without a car. If you’re a person who needs a vehicle to live the life you want, then you might be stuck with financing the first car. But that doesn’t mean that you finance the best car available! It means that you finance the cheapest car you can find that meets your basic needs. You keep that car payment as low as possible so that you can shovel money into the vehicle replacement fund.

Let’s say you finance a $5,000 over 3 years at 2.99%. Your car payment budget is $350 per month but your required car payment over three years is only $85. You’re not thrilled with the vehicle but it safely takes you from A to B, which is really all a vehicle is supposed to do for you. While you’re paying $85 on your car loan every month, the other $265 (= $350 – $85) is going into your vehicle replacement fund.

At the end of three years, you have $9,540 (= $265 x 12months x 3 years) in the bank to go towards a new car. You can either buy a new vehicle for $9,540 or you can keep driving the first $5,000 car while socking away the full $350 into your car replacement fund. Since the car loan ended after three years, that $85 dollar payment can now be paid to yourself instead of to the lender. If you save $350 per month for two more years, you’ll have $8,400 which can be added to the $9,540 already in place, giving you a total of $17,940 in the bank to buy your next vehicle in cash.

Alternatively, you decide to pay off the 3-year car loan as quickly as possible. At $350 per month, your $5,000 car loan is gone in 14 months. At that point, you continue to pay that $350 to yourself while you get accustomed to a life without debt. At the five year mark, which would be 46 months later, you’d have $16,100 (= $350 x 46 months) in the bank waiting to go towards your next vehicle.

To my way of thinking, you should keep driving the $5000 vehicle until the wheels fall off! In the meantime, you continue to squirrel that $350 away every single month until you need to buy another vehicle. However, some of you will want to get rid of the $5000 car as soon as you can. Who am I to stop you? You’re an adult so buy whatever you want. Just make sure that you pay cash!

Cutting the Cord

In 2015, I decided to eliminate my subscription to cable TV.

Was it easy to do cut the cord? NO! It honestly took me close to a year to call my cable provider to cancel my subscription. It took me another 6 weeks to return my cable box and the various cords that connected my TV to the world of limitless channels, endless commercials, and the repeated experience of there being nothing on TV that I wanted to watch.

That first Sunday without The Walking Dead was torture. I was very consumed by thoughts of Rick and Darryl and Maggie and Glen and Michonne and Carl, and the many other hangers-on who hadn’t yet been killed by the zombies. Fear not, Dear Reader! The human mind is such that nearly any change can be accommodated once it has been in place long enough. By my third cordless weekend, I was asking myself why I’d ever cared so much about fictional characters who were being chased by zombies. Amazingly enough, my life was still completely satisfying without knowing all the details of the challenges, tribulations and triumphs of the merry band of imaginary folks who devoted their time and energy to avoiding the jaws of the ravenous undead.

So why did I get rid of cable?

Believe it or not, my reason for doing so wasn’t driven by my budget. I have the money to pay for cable television but I chose to cut the cord anyway.

My choice to eliminate cable was driven by my spending priorities, one of which is to not spend money on things that don’t make me happy. Many TV shows are simply garbage – I no longer wanted to pay for garbage. In the same way that I wouldn’t spend money at the grocery store on rotting meat, I didn’t want to direct my hard-earned money to the purchase of subpar television shows.

Despite the increase in diversity on TV (yay!), the vast majority of the plot lines continue to be unrealistic (boo!). I cannot relate to them. The storylines are not reflective of my life or my priorities, so I was no longer invested in the characters or their particular challenges and conflicts. I found myself watching TV to solely kill time – I definitely wasn’t being entertained! I’m not likely to be engaged in a foot pursuit of bad guys down busy streets, nor will I be trying to uncover various conspiracies week after week. Everyone in my world is human so plot lines with extra-terrestrials or mythical creatures aren’t always relatable to me, although they can admittedly prove to be entertaining every so often. As for sitcoms and rom-coms, they generally wear thin after sooner or later since there are only so many ways for the they-used-to-hate-each-other-now-join-in-the-celebration-of-their-wedding-story to be told.

For example, I love Grey’s Anatomy! As with everyone on television, except the news, the people populating the screen are exceptionally attractive. The good doctors at Grey Sloan Memorial Hospital are forever finding empty closets or lounges at the hospital where they can have sex with each other. And when the hospital is full, they’re inclined to have sex in their cars in the parking lot. More often than not, I wondered how the hospital wasn’t sued for sexual harassment every week. In my world, my employer has very strict rules against sex in the work place!

The questions that I had about the characters were never asked or answered. Specifically, I could never stop wondering about the money aspect of Grey’s Anatomy. Exactly how much did the doctors earn as they progressed through their residencies? How did the hospital make money as a private business? Most importantly, how did their emergency room patients pay for their treatments? No one ever asked them about insurance or sought any kind of payment, yet they received topnotch care from everyone at the hospital for weeks or months on end depending on the storyline. Did they all have supremely good health insurance? On top of the compellingly-written storylines and their associated emotional traumas, were any of the patients or their families thinking about the money?

One of the more beautiful aspects of TWD is that money was no longer a concern so I easily believed that those folks had no financial worries. One season, they even found a newly-built subdivision that had been completed just before the zombie apocalypse so everyone was able to move into a brand-new beautiful home without the hassles of saving for a down payment, arranging for financing, and paying to hook-up their utilities. Even for a show about zombies, this was a bit un-realistic.

Have no fear – I still watch TV. I simply do so on Netflix and CraveTV.

Truth be told, I can consume most of the same programming for a much cheaper price through Netflix and CraveTV. (And if I ever learn how to stream over the Internet, I’ll be able to watch even more shows!) It’s simply smarter to pay the lower amount for the same thing. I looked at cable television the same way that I looked at toilet paper prices. If one grocery store has the same brand on sale for a lower price, why would I go to a different grocery store to pay more? My favourite shows on Netflix are the same whether I’m paying several hundred dollars a month to a cable provider or whether I pay $11 per month to Netflix. Why pay more for the same product?

The exact same shows on Netflix are devoid of advertising. Hooray! I’m now able to watch an episode of my favourite show from beginning to end without the interruption of loud commercials at critical points. Of course, there’s nothing to be done about the embedded advertising within the TV program itself. As a result of consuming fewer commercials, I find that I’m also a lot less inclined to go shopping or to believe that my life is sorely lacking because I don’t purchase a particular shampoo. For me, consuming less advertising translates directly into consuming less stuff. How awesome is that?

And while my decision to cut the cord wasn’t motivated by money, I cannot ignore the fact that saving over $100 per month has been very good for my other financial priorities. Since cutting cable, I’ve saved atleast $3400. It might even be more since I’m sure that my former cable provider has implemented a couple of price increases since 2015 when we parted ways.

And what did I do with that extra $100 per month? Like I said, fewer commercials has translated into less shopping. My former cable TV payment was re-allocated within my budget. I used some of it to pay for my Netflix subscription and I used the rest of it to increase the amount of money that I contribute to my retirement and investment funds.

How about you? What would you do with the money that you’d have if you were willing to cut the cord?

The Fund & the Index

The first time I learned about a F*ck You Fund was when I read an online article from Paulette Perhach. I was blown away by the idea and immediately went to my own numbers to see if I had inadvertently created such a fund of my very own. Short answer – yes, I have!

Props must also be given to one of the grand-daddies of the financial independence moment, J. L. Collins, who gifted the world with this wonderful article about F*ck You money and why everyone should have some. Mr. Collins also shared this delightful and instructive video on the importance of being in the position to say “F*ck you!”. This video is not safe for work, nor is it particularly suitable for children. However, it is very suitable for anyone who is looking to ensure that they have options for walking away if the need should arise.

A few months ago, the wise couple known online as FireCracker and Wanderer at www.millenial-revolution.com posted an article about how money in the bank limits your employer’s ability to f*ck you over. I’ll call it the Index. In short, there is a strong suspicion among those of us who have worked for a long time that employers are more inclined to exploit employees who don’t have the option of walking away. The exploitation might be job-related, as per the charmer interviewed by Wanderer in his article, or the exploitation might be of the illegal variety, such as the various forms of harassment that are no doubt experienced by countless employees who cannot simply walk away from their paycheques.

Both of these ideas were incredibly powerful to me! I’ve been pursuing financial independence for a very long time because I want to know that I don’t need my job to survive. I want to know that I can take care of myself without having to put up with intolerable situations at work. Thankfully, I work in a bright office with smart & friendly people and I get to solve challenging problems for a great salary so I haven’t felt the need to storm out of the building while giving everyone the double-birds…yet.

No one knows what tomorrow will bring, right?

Having a decent-sized F*ck You Fund provides me with a sense of peace about my decision to go to work every day. I don’t have to go. I can quit and bum around for a little while before finding another position. If the circumstances warranted it, I could take a dream job for a drastic cut in pay and still reach my retirement goals thanks to having met my Coast FI number. Building this particular pot of gold one dollar at a time alleviates the frustration that I sometimes feel at work because I know that I don’t have to stay – I don’t feel trapped because I know that I have options! Even if I never have to storm out of my office, it’s very comforting to know that I would be okay if I did.

I would suggest that you create a F*ck You Fund for yourself, if you haven’t already. Unlike an emergency fund, the fund gives you options beyond mere survival if you find the need to part ways with your current employer. It puts a little bit of power back into your hands so you can say “No” to your employer when it’s reasonable to do so without having to worry about how to put food on the table and a roof over your head. This is where the Index comes in. You’ll gain the confidence of knowing that you won’t have to eat whatever crap is dished out your way because you will have a feasible option for taking care of yourself until you find your next job. Near as I can tell, the size of your fund has an inverse relationship to the amount of grief and misery that you’re willing to put up with at work. The more F*ck You money that you have, the less poop you have to eat.

Please do not mistake an F*ck You Fund for being financially independent. Being FI might mean never having to work but a F*ck You Fund definitely means never having to work for a jackass. The distinction is subtle, but ever so important.

Create Your Own Pension

Yes, really. This post is about the fact that that employees without employer-provided pensions bear the responsibility of saving enough money to ensure their own financial comfort once they’ve stopped receiving a paycheque. All employees should be setting aside a chunk of money from every paycheque so that the money is still around when the paycheque ceases to exist.

Everyone justifiably laments the fact that employers routinely fail to provide pension plans for their employees. A pension used to be part of the compensation package. In other words, a pension was a form of deferred compensation. The loose contract between the employer and the employee was that the employee would do the work today and the employer would provide compensation via a pension payment tomorrow, i.e. when the employee retired.

Way back in the day, employees had the luxury of allowing their employers to set aside money for the day when the employees became retirees. For the vast majority of people, those days are over. Employees are being forced into the position of thinking about their own futures and of making the decision to set aside a portion of today’s money in order to turn it into tomorrow’s money. Employees are fiercely howling about this situation because this turn of events means that they have to be responsible enough to say no to some of their present-day desires. Way back when, the employer said no on the employees’ behalf, squirrelled away the money, and then doled it out to the employee-turned-retiree in monthly allotments. Essentially, the employees were liberated from the requirement to discipline themselves to saving money for a future beyond the next allotment.

Today, pensions for the vast majority of employees are a daydream. Today, employees do the work and they get a paycheque for their time. The employees bear the onus to defer spending some of their money today so that they have the ability to spend it tomorrow. They are responsible for paying for themselves when they are retired and they cannot rely on their employers to take care of them in the future. In short, there is no longer an agreement between employees and employers that there is any deferred compensation waiting for employees after their last paycheque. An employee’s compensation is immediate and employers are not holding any of it back for later.

The responsibility now lies on employees to create their own pensions. The duty to take part of today’s paycheque and set it aside for tomorrow’s expenses rests squarely on the employee receiving the paycheque.

I’m not here to debate whether this shift is fair or effective. My purpose with this post is to impress upon you that every paycheque you receive is an opportunity for you to set aside money for your retirement so that you can stave off poverty when you finally stop working.

If you’re in the camp of not having money to save after today’s expenses are satisfied, then you need to reduce today’s expenses so that you can save for your future. Alternatively, you need to find a way to increase your income without increasing your lifestyle so that you have some money to set aside for Old You. The government is not going to have enough money to pay for your old age unless you learn to enjoy living in conditions that you wouldn’t tolerate while earning a paycheque. You have to prioritize your future and you must save some of today’s money in order to accumulate tomorrow’s money.

How do you start? I would suggest that you start with $10 per day, which translates into $3650 per year. That money should be invested in passive index funds or exchange traded funds (ETF). Fill up your tax free savings account (TFSA) and your registered retirement savings plan (RRSP). Fill up the TFSA first, then make your very best effort to max out your RRSP – both of them allow for tax-free growth so long as the money stays put. Invest this money in equities and bonds. The younger you are, the more money should be directed to equity investments. As you age, the percentage of your portfolio going to equities should gradually decline. Keep in mind that you will need the growth from equities for your entire life so even when you hit your 80s and 90s, no less than 30% of your portfolio should be invested in equities.

A great book to read was written by J.L. Collins, called The Simple Path to Wealth. I strongly encourage you to read this book and put its principles for investing into practice. (I don’t get paid if you buy this book. I’ve read this book and I liked it a lot. I wish I’d read it 20 years ago, but what’s done is done. I can still implement the author’s advice now and benefit from it going forward. So can you.)

This next part is crucial to the success of your plan. Keep your mitts off your investments until you retire! Do not use it for vacations or home renovations. Do not use it to supplement your grocery expenses or to fill up your car. Give up cable – slice your own pickles – cook your own food – cut down on your smoking – drink less alcohol – cut back on entertainment – host more potlucks – throw more card parties! Do what you need to do in order to find $10 per day to set aside for your retirement. Your retirement money is only for your retirement, nothing else.

Sadly, you cannot rest on your laurels at $10 per day. Unless you start this program at age 15, you won’t accumulate enough money for a comfortable retirement on only $10 per day. You will have to do whatever is necessary to increase your income and thereby increase your savings. If you get a raise, allocate half of your new net income to increasing your retirement savings and the other half can go towards your day-to-day living expenses. Life is about balance so I don’t expect you to save every penny for the future. You only get one life so you have to find ways to enjoy the journey.

What I want you to do is increase your contributions to your TFSA and RRSP until you’re putting away 25% of your net income. If you max out your TFSA and your RRSP on less than 25% of your net income, then I want you to invest the difference in a non-registered investment portfolio. Your goal is to be living on only 75% of your net income and investing the remainder in your retirement plan, aka: your self-created pension.

I also encourage you to keep learning about money. Financial literacy is not taught in schools, nor is it available in every home. The television’s job is to present you to the marketers who want your money so you definitely won’t learn about sound financial principles from the media or its minions. For your own benefit and that of your loved ones, you should be reading and learning about investing throughout your lifetime, starting right now. So many people have written so many good books on the topic of personal finance that I can’t name them all but you should start by visiting the personal finance section of your library.

David Chilton, “The Wealthy Barber”
Gail Vaz-Oxlade, “A Woman of Independent Means” (and many others)
David Bach, “The Automatic Millionaire” (and many others)
Suze Orman, “The 9 Steps to Financial Freedom” (and many others)
George S. Clason, “The Richest Man in Babylon”
Mary Hunt, “Debt-Free Living” (and others)

These are just a few of the authors and books who have changed my views on personal finance. (Again, I am not getting paid for mentioning these authors in this blog post.) Much like everything you’ve learned to do up to this point, you won’t know everything about investing from just one book but I promise that you will start to figure out the basics as you continue to read and learn from a variety of sources. While you are learning, start putting the money aside in a dedicated retirement kitty. You can both save and learn at the same time. When you’re ready to make that first investment, the money will be there. I promise you that no one has ever regretted having money set aside for their retirement.

There’s no way around it – you will need to create your own pension so it’s best that you get started right now. Start funding your future today!