Month: March 2019

A Little Bit of Wisdom

I’m sharing the following bit of wisdom respecting the mortgage cash account. I don’t think this is a particularly good option for mortgage-holders, but I’m trying to keep an open mind.

The Mortgage Cash Account

My bank holds the mortgage on my rental property. I make bi-weekly payments on my rental property because I want to have it paid off sooner rather than later. By making bi-weekly payments, I’m prepaying my mortgage. Essentially, I’m paying it back faster than required under my mortgage contract.

The mortgage cash account is the accumulation of those extra payments. It’s a visual reminder of how much principal I’ve repaid since starting my bi-weekly payments.

The account is also a visual temptation to spend that money. My bank spins this account as a good thing. They tell me that if some kind of emergency crops up, then I can withdraw money from my cash balance account and that money gets added back to my mortgage. In short, the mortgage cash account allows me to get my extra payments back at a moment’s notice.

Why the Mortgage Cash Account is generally a Bad Idea

At face value, it sounds like a good benefit. In reality, it’s not. This option works best for the bank because it means that I can go back to paying the maximum amount of interest on my mortgage loan. This is not a good thing for me, nor any person who wants to be free of their mortgage debt as fast as possible.

The reality is that I can use that money to go on vacation, buy lollipops, or set it on fire. The money doesn’t have to used for an emergency. There is no obligation to use it on a new roof, or a sewer line repair, or to remove downed trees from my property. The bank doesn’t care how I use that money – they only care that I eventually use it so that they can charge me more interest on it.

Do you see how this could be an impediment to achieving my goal of being mortgage-free? Is it as obvious to you that the bank’s goals are adverse to mine?

Let’s be very honest – most people will simply spend the money from the mortgage cash account on whatever they want. However, if the goal is to pay off the mortgage ASAP, then people should not be spending their prepayments and simultaneously increasing the size of their mortgage!

Emergency Funds are the Better Option

Again, the emergency fund is for emergencies. This is the little bit of wisdom that I want to share with you. No one should be in the position of having a mortgage without also having an emergency fund in place. When the emergency hits, and it eventually will, you shouldn’t be looking to your home to cover the expenses resulting from the emergency.

If you’ve used your emergency funds to pay off the emergency, then you need to re-organize your priorities so that you replenish your emergency fund as quickly as you can. Easy? No, not really. Necessary? Yes, definitely! You always need an emergency fund, no matter what. So do what you have to build one and to keep it funded.

Taking money from your mortgage cash account means increasing your mortgage balance. It means that all your hard work to make prepayments to save on the interest is vitiated. Don’t do that to yourself! If getting rid of your mortgage is a priority, which it should be, then do not use your mortgage cash account. Instead, build and maintain an emergency fund while you’re simultaneously paying off your mortgage.

My Army is Growing

Longtime readers of this blog are familiar with my plan to build an army of little money soldiers. Each soldier is a dividend-producing unit in my investment portfolio. Every month, I direct money to my brokerage account and buy as many units as I can afford in my preferred exchange traded fund.

I’m not proficient at reading income statements or at assessing whether it’s a good time to buy a stock. There are people who are exceptionally good at doing this, like the magnificent fellow who runs the Tawcan website. I’ve chosen a different path to building cash flow from dividends – I simply buy units in two dividend-paying exchange traded funds every single month.

I’ve been doing so for the past 8 years. And I’m seeing the rewards of my diligence. My dividend cash flow covers 50% of my monthly expenses! This is fantastic news! This means I can cut back my hours at work, or move to a lower-paid position, and my lifestyle will stay the same. My dividends are supplementing my day job, but they could also be re-deployed, if necessary, to replace my income!

When I first started building my army of little green soldiers, I’d been hoping that the dividend funds would kick off a few hundred dollars a month by the time I retired. That had been my only goal. However, as I started reading blogs and learning about ETFs, I realized that my dividend cash flow could become a viable alternative to working.

I expect that by the time I’m ready to hang up my hat, the cash flow from my dividends will be several thousand dollars per month. Woohoo! Consistent monthly cash flow is the lifeblood of retirement. And whatever’s not needed can be reinvested to even even more little money soldiers. I don’t spend on things I don’t need or want right now. I’m hardly likely to change this aspect of my personality after I retire.

If you’re interested in building your own cash-producing dividend army, consistent investing in dividend ETFs is one path to take. There are many others! If you’re more inclined to learning the technical aspect of buying individual stocks, then I would strongly encourage you to visit the Tawcan website and learn how Mr. Lai built his portfolio. You’ll then be in a better position to decide which option is more appealing to you.

Make Hay While the Sun Shines

This week, I was very sad after reading an article in the Walrus about how so many people in Canada go hungry on a regular basis.

The article reminded me that being able to eat every day is a privilege that I take for granted. I have enough money so I can go to various grocery stores and buy the food I need to eat three good meals each day. I have money to go to restaurants with my friends. I have sufficient funds to eat fast food when I’m too lazy or too disorganized to have done my meal prep. I have money and, therefore, I have food.

However, eating shouldn’t be a privilege accorded only to those with money. Without food, people die. It’s that simple.

There are many reasons why people don’t have money, why they can’t afford to feed themselves. Unemployment, mental health problems, evictions, rental increases, homelessness, family conflict… These are just a few examples that readily spring to mind. Regardless of the reasons for lack of money, that article from the Walrus made me question if we, as a society, are really willing to let people starve to death for lack of funds?

I don’t have the answer to that question, nor do I have any particular wisdom on how to eradicate the pervasive presence of poverty. My purpose with this article is to encourage you to think about what you can do today to minimize the risk of starvation becoming something that you have to face.

First things first – be grateful. If you have food, shelter, family, health, then you’ve already been blessed with what’s most important. Be grateful for what you have and never take your situation for granted.

After reading this blog for some time, you know that I’m a huge advocate of squirrelling away your money. Yes, it’s important to enjoy each day as it comes but not if it means spending every penny you have. You don’t know when the next emergency will hit, when you’ll get sick, when you’ll lose your job, etc…

The time to save for tomorrow’s emergencies is now. Money is the buffer between you and many bad situations. Money in the bank gives you options when you need them most. Having money in the bank means you can survive between employers, between contracts, between assignments, between paycheques. It means that you can continue to live somewhere with a kitchen and a fridge and a stove and a place to store the food that you will be cooking for yourself. Having money set aside means that you’ve created a bigger gulf between yourself and a situation where you don’t know when you’ll next have something to eat.

Once you’re in that situation, it’s very hard to get out of it because you’re too focused on daily survival to make plans for the future. Take my advice – start now!

I want you to calculate your personal per diem, ie. your daily cost to survive. Track all the money you spend in a month then divide that number by the days in the month. For example, if you spend $3000 per month, then your per diem is $100/day.

Then figure out how long you think it would take you to find another source of income if you lost your current one. Double that timeframe! Finding good paying positions – whether through freelancing, self-employment or working for others – isn’t easy. Be conservative! Assume that it will take longer than you expect and plan accordingly.

Then look at how much money you already have set aside in a savings account. How many days could you survive off what you’ve saved?

Having per diem money put away is your safety net. It should go without saying, but I’ll say it anyway, that the more money you have then the stronger your net.  Per diem money will help you to avoid the risk of starving if your income disappears for a time.

There is no perfect fix to the issue of poverty. However, there are steps you can take to lower your risk of falling into a poverty so deep that you cannot feed yourself.

As a Singleton, there isn’t another breadwinner in the home to supplement your income. It’s all on you, which is both a blessing and a curse. It’s a blessing because you don’t have to save as much money. It’s a curse because you do have to build and reinforce your safety net all by yourself. It’s my experience that the unexpected expenses of life still crop up while you’re building your cash cushion. It won’t always be easy but you’ll have to find a way to save money and also have funds to cover unexpected items without relying on debt.

The cash cushion won’t be built overnight. Depending on how much disposable income you have, it could take you weeks, months, or years to set aside a big ol’ bucket of money. Do not let that deter you! Trust me when I say that this is a goal worth pursuing – no matter how long it takes!

Never ever forget that money is the barrier between you and poverty.

All Hail the Octopus!

This week, I had the pleasure of reading a fantastic article about saving for financial independence and early retirement that was written by Mr. Tako of www.mrtakoescapes.com***. In this magnificent article, Mr. Tako discusses his surprise that anyone would view his choices as “hardcore” on his pursuit to financial freedom. By following his own plan, Mr. Tako was able to retire on his own terms. What some may view as hardcore, others may view as tweaks. It’s all in the eye of the beholder!

While I loved his article, my take-away was slightly different. I was simply happy to know that every small step makes a difference. Sometimes, it feels like saving and investing is a treadmill that’s going nowhere. The destination is so far away, and why can’t I just win the lottery and be done with it already?!?!?! However, articles like Mr. Tako’s remind me that there is an endpoint and that every little step I take gets me closer and closer to it.

Unlike Mr. Tako, I haven’t had many bad jobs nor many bad bosses. For the most part, my career has a many great attributes. I work with very smart people. My work is mentally challenging. I have autonomy over how my tasks get accomplished. I have a nice office filled with natural light. My office plant is big and beautiful, healthy and happy. I’m even happy with my salary since, without debt, my paycheque is more than sufficient to meet my needs.

Still…

At the end of the day, I want to retire and the sooner, the better. When I’m not at work, I’m much, much happier. It’s as simple as that. I have a great circle of friends – I love my family – I’m a bit of a homebody when I’m not travelling. Working gets in the way of that, despite all of the really great facets of my job. When I work, I’m on someone else’s schedule. I’m doing things that mean little or nothing to me. I’m attending meetings that have little palpable purpose. Despite all of the good things that I listed earlier, working means that I have to sell my time to someone else in order to survive financially. If I can find a way to retire early, then I get my time back.

Much like Mr. Tako, I’ve taken steps over the years to find ways to save on daily costs so that I can retire sooner.

At this point, I’d like to fully acknowledge that there is no one plan that will work for every single person. Each of us has to figure out what we’re willing to do in order to achieve the financial freedom that we want for ourselves.

The first big step in the right direction was my decision to take transit. I gave up the daily drive to work way back in 2001. I’m not a huge environmentalist, nor am I troubled by rush-hour traffic. The commute is the same whether I’m behind the wheel or a passenger on the bus. No – my main reason for choosing transit was so I could save on my commuting costs in order to invest money for early retirement. I’m fortunate to live in a location that has excellent transit service for commuters. For nearly two decades, I’ve driven to the park-n-ride, shown my bus-driver my pass, and have happily ridden in safety back and forth to work.

This one small decision 18 years ago has saved me thousands of dollars because I don’t pay hundreds of dollars each month for parking. I fill my tank every 10-12 days. My insurance premiums are lower, and the wear-and-tear on my car is less that it would’ve been with a daily round-trip drive to work.

The second step in my march to financial freedom arose due to a health concern. A sensitivity to caffeine required me to cut down on coffee during my work breaks. Many years back, I went to my doctor and complained of a racing heart. She asked how much coffee I drank. I told her that I had coffee with breakfast, at my mid-morning break, and during my afternoon break. She told me to cut back to one coffee a day and see how I felt. My doctor’s a miracle worker! Within a week, my heart had stopped racing. The upshot was that I was also saving money to be re-directed to my retirement.

Step #3… In 2016, I took the big plunge and cancelled my cable subscription. Again, this wasn’t a strictly financial decision. It wasn’t a money decision at all! I simply got tired of paying for garbage, so I decided to stop. But whatever would I do with the additional money each month that wasn’t going to the cable company? You guessed it – I funnelled the extra money into my investments!

Finally, in 2018, I made another commitment to myself which has positive financial results. I decided to start taking my lunch to work more often than not. Again, it wasn’t really a money decision. Fast food and restaurant food doesn’t taste as good to me as my own cooking. It suddenly struck me one day that I was paying for food that I didn’t enjoy. Taking my lunch to work earns me a double-whammy: good food to eat and more money saved for financial independence.

Like Mr. Tako says in his article, these small steps don’t feel extreme. They feel normal. I didn’t try to do everything all at once. Knowing myself as I do, that’s a challenge that I would have failed. Instead, I added these changes gradually until I reached my satisfaction point.

How about you? What steps have you taken in pursuit of funding your own dreams?

(***Update 2024 – sadly, this website is no longer available.)

What is a HELOC?

What is a Home Equity Line Of Credit? Short answer – it’s a debt trap that’s best avoided.

At its heart, a HELOC is a debt product that banks offer to homeowners which permits the homeowner to go into debt by spending the equity in their home without selling it first.

For example, if you have $200,000 worth of equity in your home, you can get a HELOC for an amount up to $200,000 depending on the lender. Without a HELOC, you would have to sell your home to get your hands on the equity. In other words, someone would give you money in exchange for your house and you could then spend that money however you wanted. There would be no fees or interest payable on that money because it would be yours.

The HELOC is a completely different beast. With a HELOC, you get access to the equity in your home via a loan from the bank without first having to sell your home. This sounds like a good thing, but it’s a debt-trap that you would be wise to avoid.

Banks charge interest on outstanding HELOC balances

You must keep in mind that the banks will charge you interest if you use a HELOC. Again, you’re spending your equity via a loan from the bank. Any bank loan is accompanied by an interest payment. Interest accrues until such time as the HELOC balance is repaid in full and it runs from the moment that you use it.

The interest rate on a HELOC is usually lower than the interest rate charged on a regular Line Of Credit. A regular LOC is an unsecured product, whereas your home secures the HELOC. If you don’t pay back your LOC, the bank cannot initiate foreclosure proceedings and take your home away from you. This is why they charge you a higher interest rate on a LOC.

Banks can foreclose on you if you don’t repay your HELOC

Before extending you a HELOC, the bank puts a charge on the title to your home. This charge against your title is similar to a mortgage. It ensures that if you ever sell your home, the bank’s HELOC will be repaid from the proceeds of the sale. You’ll get whatever’s leftover after the mortgage debt and the HELOC debt have been repaid.

Again, this particular debt product is essentially a loan against your home. It allows you to spend the equity in your home however you want. No one will be watching you to ensure that you don’t spend your equity on items which will not increase your financial security.

Having a charge on your title makes you vulnerable. Should you fail to make your monthly payment on the outstanding HELOC balance, the bank has the right to foreclose on your home to get its money back. Also, the bank has the right to demand full repayment on an outstanding HELOC balance whenever it wants. If you can’t repay the balance when asked, the bank has the right to foreclose on your home to get its money back.

Let’s say that your housing market goes down and the amount of equity in your home drops simultaneously. You house used to be worth $350,000 but now it’s only worth $250,000. Effectively , you’ve lost $100,000 worth of equity in your home. The bank may get nervous because their loan to you, in the form of the HELOC, is no longer backed by an asset that can fully repay the outstanding balance. The bank may decide to cut its losses, which means that they will demand full repayment of the outstanding loan balance. Should you not repay that balance, then the bank can proceed to foreclosure in order to get its money back before all of the equity in your home disappears due to market conditions.

HELOCs facilitate the siphoning of your home equity in dribs and drabs

When you use a HELOC, you are spending the equity in your home instead of increasing it. You are increasing the debt owed on your home each time you spend its equity.

One of the most dangerous ways to use a HELOC is to have it attached to your debit card. There is nothing stopping you from spending your home’s equity on mundane items. Think of trips to the coffeeshop, to purchase concert / sports tickets, to buy clothes, to finance your daily life. If you need a HELOC to survive from on paycheque to the next, then you’re living above your means. You’re working your way into a severe debt trap. Figure out how to free yourself and stop digging a bigger debt hole.

If there is ever a good use for a HELOC, it’s to make major repairs to your home that are required for your safety, i.e. replacing the furnace or the roof.

There is nothing wrong with you spending your home equity on the costs of your daily life if you need to. Just don’t do it via a HELOC! The wiser course of action is to sell your house and get the cash. That way, the entire amount of your home’s equity is available for your life’s expenses. You won’t be paying interest and fees to the bank for the privilege of spending your own money. You won’t run the risk of foreclosure. You won’t be indebted to the bank. And the money is still yours to spend as you wish.