Month: September 2022

Can You Save Too Much Money?

This question recently came up, and I’ve been noodling on it ever since. My whole adult life, I’ve been following the habit of maxing out my RRSP, my TFSA, and saving another chunk of my paycheque in my non-registered investment account. However, yesterday, someone asked me what I was saving it all for and whether I would still be able to achieve my retirement goals if I saved slightly less and spent more money in my day-to-day.

Mind blown!

In all honesty, I have never seriously considered that possibility. When it comes to my own money, I’m very rigid and allow for little, if any, deviation from my money rules. I wanted to hit certain savings targets in my life, and I’m pleased to say that I’ve hit them. It simply never occurred to me that doing so would mean that I would be saving too much money.

Bridget Casey, Ramit Sethi, and Bill Perkins are three people whom I’ve started following online in the past few years. Each of them, in their own way, discusses the importance of operating from an abundance mindset instead of a scarcity mindset. All of them encourage their readers/followers to live a rich life today and to avoid putting off today’s happiness to save for tomorrow’s.

It was brought to my attention that, though I read those books, there’s a very, very, very teensy-weensy, itty-bitty, little chance that I might not be putting their advice into practice. It’s quite possible that I’m operating from a scarcity mindset. Maybe I’m operating out of a place of fear that I won’t have enough, despite all the evidence to the contrary? A very wise and very good friend has suggested to me that I’m in a position where I have enough invested for the future. (Truth be told, I’ve heard that same message or a variation thereof from other people who love me.) The suggestion was made that continuing to save for tomorrow will prevent me from having what I want today. My friend’s words threw me for a loop and I’ve been thinking about them ever since she uttered them.

So again, my question is can you save too much money?

This question leads me to more questions. According to calculations I trust, I will die with several million dollars in the bank if I stick to my current Rigid Rules. I’m a Single. No spouse, no kids. Strictly speaking, I have no natural heirs of my own issue. Does it make sense for me to die with that much money when I don’t have my own children? Isn’t there the slightest possibility that I could cut back on my saving right now and let my current investments ride? After all, I would still die with a nice fat cash-cushion, but I could have a little more fun along the way if I spent more of my money day-to-day.

Yet that viewpoint leads me to the next question that I think is important. Am I unhappy with how I currently spend my money?

My honest answer is that I’m not. In all honesty, when I want something, I buy it. Do I save for it first? Generally, yes – saving comes before spending. Do I stop or reduce my investment and retirement contributions to spend money? No, never. Is this a bad choice?

Until yesterday, I would have emphatically said “No – it’s not a bad choice.”

Today, I’m not so sure. If my retirement will still be quite comfortable, even if I spend a little bit more today, then does it make sense to continue with the same savings habit? Alternatively, should I be forcing myself to spend more money today just because I can?

The goal of life isn’t to simply die with a whole lot of money. Even I can appreciate that such a life is a wasted one. I don’t feel that I’m wasting my life by following my Rigid Rules. Right now, I go out with my friends. I travelled a lot before the pandemic. I spend a lot of time with my family. Buying what I want, when I want isn’t an issue. Could I spend more money on stuff for the sake of doing so? Sure, but I don’t want to fill my house with stuff that I don’t need or won’t use.

My whole life, I’ve been a money planner. I’ve been saving since I was a small child. My parents started us on an allowance. When I started working, I kept up the habit. Never once did I question whether I was doing the right thing by saving something from every paycheque. As my paycheques grew, so did the percentage that I saved and invested. Lifestyle inflation was never a problem for me. Living below my means has always be my guiding financial principle. I created a very large buffer between myself and the financial edge.

Now, I’m entering the second half of my life. The lessons that got me here might not be exactly the right ones to get me where I really want to be. It’s time for me to consider the possibility that I’ve moved into the “and” stage of my life. Up until now, I’ve always believed that I have to choose between various options. However, it’s starting to come to my attention that maybe there are situations where I don’t have to choose. Maybe I’ve reached a point where I can have both.

I can spend money today and still retire comfortably. It might be time for me to force myself to spend, in just the same way that I forced myself to save. Maybe I can cut my daily saving amount and still reach my financial goals. I get one life, and I want it to be as good as I can possibly make it. This means that I need to get back to assessing if what I’m still doing will continue to be the right choice. The strategies that I employed when I was younger may not be the strategies that will benefit me going forward.

Can you save too much money? The question will stick with me for a good while. I’m happy with how I live my life, but I have to consider the possibility that I could be happier. There’s a chance that I could be spending my money in a way that brings me more joy today while still ensuring that I’ll be taken care of tomorrow. And that’s the goal that I should be striving to fulfill.

Fixed Rate Mortgages Offer a Measure of Safety

Last week, I wrote about the challenges of having a variable rate mortgage when mortgage rates are increasing. This week, I’d like to discuss how fixed rate mortgages (FRM) offer a measure of safety. Depending on when your FRM is up for renewal, you have some breathing room to figure out how to handle the increased mortgage payments that are coming your way.

The generational low mortgages, i.e. rates below 3%, are pretty much gone for good. For very brief blip of time, you could get a discounted 5-year rate for 1.39% in 2021! That’s an incredibly low mortgage rate for a 5-year term, one I doubt that I will see again in my lifetime.

Even if you were able to snag a 5-year rate lower than 3% in early 2022, I can pretty much guarantee that you’ll be paying atleast 2% more when you renew in 2027. For my money, I think you should take the following steps to prepare yourself.

Gather information

First of all, start playing around with mortgage calculators. Plug in your own numbers so you can see the difference that a higher rate is going to have on your mortgage payment. It should be obvious that a higher rate on your FRM means that the payment is going to go up. The mortgage calculator’s job is to inform you of the size of that increase.

Armed with that knowledge, you can start making a plan on how to pay for your property when your mortgage costs go up. The last thing you want is to be surprised by a $500 increase in your mortgage payment, or to face a future foreclosure because you can’t pay your mortgage debt.

Build a lumpsum payment

Secondly, start saving the difference between what you’re currently paying on your FRM and what you anticipate paying at renewal. How you save the money is up to you. Here are a few suggestions:

  • Get a part-time job.
  • Bring in a roommate.
  • Cut your expenses.
  • Obtain a promotion or raise at work.
  • Start a cash-flowing side-hustle.
  • Use an insurance payout or inheritance.
  • Sell things you no longer use.
  • Take transit to save on parking fees.
  • Cook at home most days of the week.
  • Save your tax refunds and work bonuses.

Open a separate bank account for this money. Set up an automatic transfer so the money goes into the new mortgage account without any further decision-making on your part. Remove the temptation to spend this money – do not get a bank card for this account! If it’s your priority to be in a position to handle your increased mortgage payments, then you should not be touching whatever’s in this account.

This money is meant to be in place so that you can make a lumpsum payment against your mortgage at renewal time. Lumpsum payments decrease the amount of money being borrowed. Applying a lumpsum to your outstanding mortgage balance will lessen the impact of the higher interest rate’s impact on your mortgage payment. The more of the principal that you pay down, the less money you have to borrow from the bank to pay off your remaining mortgage debt.

Increase your mortgage payments

Thirdly, you can increase your mortgage payment. When I had a mortgage, my bank allowed me to increase my mortgage payment by up to 20% every year. It was a fantastic feature, and I used it religiously. Of course, my initial mortgage payment was something like $300 bi-weekly, so it wasn’t a hardship to find an extra $60 every two weeks. A friend of mine took a different path. Every two weeks, she determined whether to make a lump sum payment against her mortgage. Since her expenses were far more variable than mine, she needed that flexibility. However, the both of us managed to pay off our mortgages way earlier than the 25 years that our lenders had allotted to us.

Your mortgage payment might be over $1500-$2000-$2500, so a 20% increase will pinch a bit harder. However, if you can increase it by any percentage, then do so. The sooner you repay the principal balance owing, the lower the balance that you have to renew. A lower renewal balance results in less of an increase in your future mortgage payments.

Renew now instead of later

Finally, determine if you can lock in a mortgage renewal rate today. This step is for people whose FRMs are coming up for renewal in the next 90-days. Most lenders allow people to renew their mortgages early, usually within 90-120 days from the expiry of the mortgage term.

While it’s not a 100% guarantee, you can confidently assume that the Bank of Canada will be raising the prime interest rate again on October 26, 2022 then again on December 7, 2022. When they do, lenders will take the opportunity to increase their mortgage rates. If you lock in a renewal rate before these dates, you should definitely do so.

A Measure of Safety

I’ve always relied on fixed rate mortgages. I think they’re great for allowing borrowers to know the fixed costs of their shelter for a defined period of time. Having a fixed mortgage payment goes a very long way towards understanding where your hard-earned money must be allocated. My father once told me that, when you know the cost of your shelter, you can build the rest of your budget around it. He was right. Having a place to lay your head is a fundamental necessity so paying for it must always be top of mind.

Assuming that you do not want to sell your property or lose it to foreclosure, it would behoove you to start thinking about how much your mortgage payment is going to be upon renewal. Knowledge is power so use knowledge to your advantage. In this post, I’ve shared a few tips with you on that steps you can take to minimize the impact of increase rates that are headed our way. You will need shelter until the day you die, so please do not procrastinate. Take steps today to ensure that you can shelter yourself tomorrow.

You Need to Know About Trigger Rates

As I understand things, people with variable-rate mortgages should be very worried about their minimum mortgage payments increasing. They are facing trigger rates on their mortgages. These rates force people to make higher minimum mortgage payments.

A variable rate mortgage (VRM) payment covers interest and principal. However, when the mortgage rates increase on VRMs, the portion of each payment going to interest increases too. This leaves a smaller portion of the payment going to the principal on the mortgage loan. Let’s say your payment is $500 at X-interest rate, and $300 goes to interest while $200 goes to principal. When the interest rates goes to X+Y%, then your payment stays at $500 but now $375 goes to interest and only $125 goes to principal. If Y is high enough, then you’re in deep doo-doo because all of your $500 payment will be going to interest.

I’ll say it louder for the people at the back. If the mortgage rate on a VRM gets high enough, then the entire mortgage payment is going towards interest on the debt. None of the payment is going towards mortgage principle. This is a very bad situation because it means that the mortgage balance is not being paid down at all.

Enter trigger rates. These are the mortgage rates on VRMs which trigger an increase in the mortgage payment on a VRM. The increased mortgage payment ensures that atleast some of the new, higher mortgage payment goes towards the principal. In other words, the borrower will be paying down the mortgage balance instead of seeing their entire payment going to interest. Once the trigger rate has taken effect, borrowers are now legally required to pay the higher mortgage rate. If borrowers fail to pay the new, higher mortgage payment, they face the prospect of foreclosure.

If you have a variable rate mortgagee, talk to your lender about trigger rates. Find out if you’re close to yours. The lower your variable-rate mortgage is, the more likely you are to see an increase in your minimum required mortgage payment. You need to do two things at this point. First, find out from your lender what you new mortgage payment will likely be. Second, ensure that your budget can handle the increased payment.

Should your mortgage payment be on track to increase, then there are a few things you can do to stave off foreclosure. The first one is to start making extra payments on your mortgage to bring down the principal balance. Do not deplete your emergency fund to do this! Instead, pick up a part-time job or start a side hustle. Put all of that money towards your mortgage. If you earn a promotion at work, apply your additional take-home pay to your mortgage balance. Should you receive a lump sum of money, put it against your mortgage balance.

A second good option is to cut the extra fat from your budget. Eating at home more often will reduce costs since the food you make for yourself is generally less expensive than restaurant & take-out. Maybe you give up some monthly subscriptions. Perhaps you start hosting more potlucks. If possible, perhaps you switch to transit for your commute to work if working from home is no longer an option. Assuming that keeping your home is a priority, the money to pay the higher mortgage payment has to come from somewhere.

Your third option is to get a roommate & apply their rent to your mortgage. When it’s time to renew your mortgage, carefully consider the option of a fixed rate mortgage. (In the interest of transparency, I will tell you that I’ve always had fixed rate mortgages on my properties. I paid a little more in interest but the peace of mind was worth it to me. You may make a different choice.)

Fourthly, get rid of your mortgage completely. Pay off your mortgage, if you can.

Finally, sell your house before you’re underwater on your mortgage. If you don’t think you can pay the new, higher mortgage payment, then you can always sell your home before the bank does. A foreclosure will do significant damage to your credit rating. It stays on your credit report for seven years. If you sell your home, then there’s no foreclosure and you can preserve your credit. I’m not suggesting that you do this if you don’t want to but I want you to know that it’s an option.

The impact of trigger rates are just slowly seeping into the collective consciousness of those with mortgages. For the past 20 years, mortgage rates have simply been falling. No one has had to worry about their minimum mortgage payment increasing if they held a variable rate mortgage. Trigger rates were a theoretical idea – they simply didn’t impact anyone.

Today, the mortgage landscape is much difference. Those of you with VRMs are likely facing trigger rates. You need to start calculating how your budget is going to accommodate the higher minimum mortgage payment that is likely in your future. Be proactive and gather the knowledge you need to make an informed decision about your next steps.

You Should Always Be Saving Money!

There is no way around it. You should always be saving money – some way, some how. Life is expensive, and it only gets more so. Name one essential thing in your life that has gotten cheaper over the years. Food? Nope. Rent or housing costs? No! Gasoline? Not a chance. Utilities? Not a bit. Transit? Slower increases but increases all the same.

Even if you have a fixed mortgage on your home, the cost of borrowing money will go up when you renew. The central banks are on a tear because they want to get inflation under control. That means mortgages are more expensive. Even with a fixed mortgage, the other costs of home ownership have gone up over the years.

While it’s important to live in the present, I would argue that you owe it to yourself to resist the incessant urging of the AdMan and his trusty sidekick, the Creditor, to always be buying. You need to save money for Tomorrow, and there’s a good chance that you don’t know exactly how much you’ll need.

For example, if you own a house, then you should definitely be saving. At some point, your house will need an expensive repair or costly maintenance. It could be a new furnace, a new hot water heater, new windows, new roof, or a new foundation. It’s unlikely you’ll be able to buy another of those things for less than $100. And while a new hot water heater doesn’t cost nearly as much as a new roof, it’s best that you have the cash-money on hand to buy it outright. Your water heater should not be the reason you’re paying interest on your credit card.

And while a new roof is likely going to run you 5-figures, the same principle applies. Start saving money now so that you have the cash in place in 10-15-20 years when you’ll need to replace your roof. Much like successfully saving for retirement, owning a home requires long-term financial planning. I love my home but I’m the first to tell everyone that it’s a money pit.

Saving for retirement should be obvious. Your bills won’t disappear until you die. In other words, you may have parted ways with your employer but don’t assume that means that your bills will have parted ways with you. Whether 25, 45, 65 or 85, you’ll still need to eat and have shelter. Society still demands that you be clothed. No matter how old you become, you will need money for the basics.

You need to invest today so that Tomorrow You will be okay financially. Remember that most people don’t have pensions, i.e. their employers are not saving for them. It’s up to you to save and invest. For those few who do have pensions, there’s a chance that your pension is not indexed to inflation. This means that your employer will pay you a fixed amount when you retire, but that amount will never go up since it is not indexed to inflation. Prices will continue to increase but your pension amount will be set in stone until you die. This is not a good situation to be in if your retirement is going to last a long time. And since very few us know our expiry date in advance, it’s best that you start investing your money ASAP and ensure that your portfolio mix is built for growth.

Maybe you own your vehicle. You should definitely be saving. Oil changes, brakes, tune-ups, various repairs, insurance, registration – all of these things cost money. Ideally, you’ll pay cash for your car. And if you can’t pay cash, then pick the least expensive vehicle you can find that will do the job so that your financing costs are as low as possible. Once your loan is done, continue to pay that loan amount into your Next Car Fund. When the wheels fall off your current vehicle, hopefully you will have enough in your Next Car Fund to pay cash. Then repeat the cycle. This method works best if you can get 5 years or more between vehicle purchases.

Do you have loved ones with whom you like to celebrate things? Are they the people you call when you want to do things? Concerts? Sports games? Picnics? Wine tastings? Movies? If the answer is yes, then you should have some fun-money set aside for those times together. It doesn’t have to be a lot, but every paycheque should see $40-$50 going towards these outings. Life is better when it’s shared with those we love. And while there are free things that you can share with loved ones, there are also times when you might want to spend a little bit of money on them too.

One of the very best benefits of always saving your money is that you can live in a state of debt freedom. Your entire paycheque, after taxes, is completely yours. You need not send any of your hard-earned money to a creditor for a purchase made in the past. You get to keep your money! This is an exceptionally good thing considering how hard you’ve worked for it.

So just remember to always be saving. Whatever it is that you want, try to save for it in advance then pay cash. You won’t ever regret depriving your creditors of interest payments. Trust me on this one!