Tough Choices

Try as I might, I still haven’t figured out a way to get everything that I want. There are always tough choices to be made about money. I honestly believe that tough choices are the foundation of the non-financial side of personal finance.

While the Single Ones among us do not have to fight with anyone about money, it’s still incredibly important for us to identify our spending priorities. Being single does not eliminate the requirement to take responsibility for our money. Setting priorities helps us figure out what to do when tough choices have to be made about how to spend our dollars, and which goals to pursue.

Last weekend, I found a wonderful house. It’s a 1500sqft bungalow with main floor laundry, a double-car garage, and – wonder of wonders! – a large foyer that opens into a beautiful, bright living-space. Did I mention the large composite deck, the spacious & fully-furnished basement, and the fabulous ensuite off the master bedroom? It’s even in the neighbourhood that I’ve been watching for the past ten years!

So why didn’t I jump on the change to buy it?

Here’s why… Doing so jeopardizes my retirement plans.

The house is almost perfect for me. It’s main drawback is that it would require me to commit to working for at least another 5 years. Time is precious. I’m not one of the Very, Very Fortunate who loves their job and would do it for free. While my job has a great many benefits, I’ve long dreamed of the days when I can spend my time doing what I want and not what my employer pays me to do. I don’t want to sacrifice 5 years of my retirement for a house.

And it wouldn’t just be losing 5 years of retirement. Having a mortgage again would mean that I would lose the financial flexibility that I have right now. In pre-COVID times, it was so nice to be able to say yes to spontaneous invitations without worrying if my budget could handle the expense:

  • Dinner with friends to celebrate the warmer weather? Sure.
  • Can I afford the Rimrock to attend a good friend’s wedding? I’ll be there with bells on!
  • How about a last-minute theatre performance? Not a problem!
  • Why not pop over to the Emerald Isle in six weeks? I’m on my way!

Taking on a six-figure mortgage at this stage of my life would mean giving up the little extras that bring me joy. Those little extras are my reward for having been diligent and focused in my younger years, when I was paying off student loans, car loans, and the mortgage on my current house. Back then, I said “No” a lot more than I do today. Friends and family often chided me for the financial choices that I made, but I don’t regret following my plan. After all, I was the one who had to live with the consequences of my spending choices.

So as much as I wanted to buy the very awesome new house, I had to make a tough choice between two competing priorities. I could stay on track to retire, and continue to live in my current home which is perfectly suitable for me. Staying in place means that I don’t have to forego time in retirement. Alternatively, I could go back to having a mortgage and living on a tighter budget. In addition to all its lovely features, this new house’s property taxes are twice what I pay now. I’d have a higher heating bill each month, and I expect that the other costs of running a house would be higher too. Also, little renovations that I would want – a railing for the deck, new paint in the dining-room – would have to be put off. My budget wouldn’t handle renovations and mortgage payments at the same time.

At the end of the day, I chose to say “No” to the new house. The truth is that I’m not prepared to give up my goal of retiring when I want. I don’t hate my current house but I’m also not enamoured of the idea of never living anywhere else before my long dirt nap starts. Part of me is craving to be the Joneses, to buy another house, to set up a new little spot to call my own. It seems that everyone I know has bought a new house in the past 5 years – family, friends, colleagues, acquaintances. Why should I be the only one who doesn’t get to buy a new house?

The last question is a stupid one. I am not being deprived of a new house! I’m simply making a different choice. Those who have bought won’t have the option of retiring a wee bit sooner. They’re committed to repaying the bank or losing their home to foreclosure. The choice for them was to buy the house and to work longer than I’ll have to.

When it comes to money, tough choices have to be made sometimes. I’d already defined my priorities so it wasn’t too, too hard to walk away from the new house. I know what’s most important to me.

Ideally, you’ve also defined your priorities and you’ve figured out how to spend your money so that you can meet them. You’re the one who works hard for your money so make sure that you’re pursuing your priorities whenever you spend it. Whether you want a new vehicle, a new home, a new book, or new clothes, just make sure that your money is going towards the priorities you’ve set for your life.

The tough choices won’t go away completely. Knowing your priorities will better equip you to choose the alternative that gets you closer to the life you want to live.

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Weekly Tip: Update your net worth every month, or on a regular schedule that best suits you. Net worth is determined by adding up your assets and subtracting your debts. If you have a negative net worth, that means you’re in debt. If you have a positive net worth, then your assets exceed your debts. Your net worth is a snapshot of your finances at a given point in time. Knowing this number will help you to determine what your next steps need to be on your financial journey.

It Never Hurts to Ask

When it comes to money, it never hurts to ask for what you want.

Case in point – the mortgage on my rental property comes up for renewal this spring. For the first time ever, my bank sent me my renewal instructions 6 months before the renewal date. Usually, I get my renewal letter 3 months before I have to sign on the dotted line. In any event, I was somewhat surprised by their eagerness.

Naively, I’d thought they would be more than happy to renew at my same rate. For the past five years, I’ve been paying 2.79% on my mortgage. It’s a sweet, sweet rate and I’ve loved it. The mortgage before had been at 2.99%, so I’d gotten very comfortable with a rate of less than 3% for a 5-year term.

I girded my loins. I straightened my crown. I softly repeated my mantra to myself – “It never hurts to ask.” And I made the first strike.

Round One

My first call to my bank resulted in the perfectly-pleasant customer service representative telling me that the best my bank could offer was 3% for 5 years. I gently reminded him that I’d been a good customer for over a decade and that I also had a significant portfolio with their investment arm. Mr. Perfectly-Pleasant appeared not to be moved. We courteously discussed my ability to take my mortgage elsewhere, a move I was secretly loathe to make. We also discussed the fact that the Bank of Canada would be making four more rate announcements before I had to renew my mortgage.

(Of course, this means very little since the 5-year mortgage rate is far more heavily influenced by the bond market than it is by the prime rate. The prime rate has far more impact on short-term and/or variable mortgage rates.)

At the end of the call, Mr. Perfectly-Pleasant had stuck to his guns. My bank wasn’t going to offer me a 5-year rate at less than 3%. I’d asked and the answer had been “No”… which I’d chosen to interpret as “Not just yet.”

I’d been knocked on my bum and was no closer to my goal of getting another 5-year mortgage interest rate of less than 3%. Luckily for me, this wasn’t my first time at the Mortgage Rodeo. I knew that this was simply part of the dance that always exists when one wants to borrow money without enriching the creditor too, too much.

It never hurts to ask… but there’s never any guarantee that you’ll get the answer you want.

Round one went to the Bank… but, much like the Terminator, I would be back.

Attempt No.2

The second call to the bank didn’t go too terribly differently except for one incredibly distasteful detail – my bank now wanted to charge me 3.05% for a 5-year rate. Wait one damn minute – 3.05% is even higher than 3%!

I nearly fainted from shock!

How on Earth could my bank even consider charging me a higher rate than the one they’d offered before? Did they not understand that I wanted a rate of less than 3% for another 5 years? Had I not been explicitly transparent by stating “I’d like to have another rate of less than 3% for the next 5 years”?

It had never occurred to me that my bank would try to raise my mortgage renewal rate a second time! Was this some strange ploy to scare me by planting the seed that the rate would keep going up before my actual renewal date?

If so, their plan had failed miserably. I knew I was a great customer with a spotless repayment history and excellent credit. Let’s not forget that both my bank and I were well-aware that many other banks would be happy to have me as a new customer… and that they’d be willing to offer me their Shiny-New-Customer rates.

Still, finding another bank to finance my mortgage wouldn’t be exactly free. I’d have to pay an appraisal fee. Someone would be running a credit check. There was also the fact that I’d had to meet the requirements of B20 Stress Test, which I could easily do. There might even be fees associated with moving my mortgage from one bank to another since my bank would do what it could to extract money from me in lieu of all that mortgage interest they would no longer be getting from me. All of these were little hassles that I really didn’t want to endure if I could avoid them.

My bank was simply doing what banks do: trying to fleece me like they try to fleece all their customers. It wasn’t personal – it was simply business.

Sticking to my Guns

I refused to be deterred from my goal of renewing my mortgage for less than 3%. Just because other people were renewing at higher than 3% rates was no reason for me to do the same. If they jumped off a bridge, was I going to jump too? I think not – my parents had raised me better than that!

Ignoring the also-pleasant customer service representative’s statement that I could get a 5-year fixed mortgage of 3.05%, I asked her if there was any way that the rate could be lowered. Like my wise aunty has often said, them’s that asks are them’s that gets.

Ms. Also-Pleasant did her employer proud. Once again, she repeated that my bank was willing to offer me a 5-year rate of 3.05%. She said that her computer told her that this was the bank’s best rate of the day. Much like her predecessor, Ms. Also-Pleasant told me that I was free to check back in the future. She even added a teaser by stating that the rates might go down in the spring since a lot of people would be buying houses.

The trouble was, I didn’t want to have the task of renewing my mortgage hanging over my head until the spring. I wanted to get this chore crossed off my list, but I wasn’t going to renew unless I got a rate of less than 3% for the next 5 years. Why couldn’t they just give me what I wanted?

I held my tongue and I kept my cool. If I’ve learned anything during my few, precious years on this little Blue Ball of ours, it is this: The person who talks to the public is never the person who has all of the power. There’s no sense yelling or cursing at those on the front lines because they can’t override the decisions made by those who are higher up on the chain. However, they do have the power to put in a good word on my behalf to the people who make the decisions. And this means that it never makes any sense to be rude, mean, or un-kind to the front-line soldiers. (Also, they’re human beings doing a job so you shouldn’t be rude, mean or un-kind to them in any event.)

Again, I ignored the offer of 3.05% and I again asked – politely! – if there was any way for that rate to be lowered. You see, Life has also taught me that it never hurts to ask for whatever it is that you want. If anything, asking for exactly what you want exponentially increases your odds of getting it.

Ms. Also-Pleasant’s response to my polite inquiry thrilled me to the core. She stated that she could forward my request to the Pricing Department and see what they could for me.

Success!!! I had no idea what the Pricing Department was, nor did I have any clue as to what it could do for me. All I knew at the end of the second call was that I didn’t have to start shopping the market for another mortgage nor had I yet reached the point of calling a mortgage broker.

Round Two is what I’d like to call a draw. I hadn’t gotten what I wanted, but I hadn’t landed on my bum either.

Victory!

Phone call number three can legitimately be categorized as a late Christmas present. When I got back to my office after the holidays, my bank had left me a voicemail. Returning their voicemail resulted in unbounded glee for the rest of my first day back in the office.

The mysterious folks of the previously-unknown Pricing Department had finally understood what I wanted… and they’d granted me my wish. Finally, my bank was offering me a rate that I could live with for 5 years = 2.84%. My new rate from the Pricing Department was even lower than the rate my bank was advertising to its own Shiny-New-Customers.

Woohoo! This was more than I’d been paying, but still less than my acceptable upper limit. As much I’m not a fan of banks, even my bank should be allowed to make a wee bit of money from me. I truly feel that I’ve been quite generous by allowing my bank to increase my mortgage rate by the equivalent of 0.01% for each of the next 5 years. I’d allowed my bank to save face by charging me a slightly higher rate. My bank can still hold its head up and participate when all the banks stars talking trash about customers on the playground.

At the end of the day, I’d gotten exactly what I’d wanted. And the cherry on this particular sundae was that my name would not be flagged as a Problem Customer because I’d been polite during all of my interactions with everyone.

So you see… it never hurts to ask for what you want.

Could I have gone back to the Pricing Department and asked for a lower rate? Sure.

Would I have gotten it? Maybe…or maybe not.

Do I feel foolish for not asking for more of a discount? Not in the slightest. My life isn’t about looking to save every single penny. I had a goal and I’ve met that goal. Now, it’s time for me to direct my attention and my energy towards satisfying other goals.

After all, I was one of them’s that asked and now I’m one of them’s that’s gots! ;-}

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Weekly Tip – If you’d like to have $1,378 by the end of the 2020, then I invite you to participate in the 52-Week Savings Challenge. You can complete the weeks in order or however you see fit. Just make sure to make every required contribution then enjoy/invest/donate/whatever-you-want-do-with your money on December 31, 2020.

Renting vs. Owning

I’ve been a big fan of Garth Turner, who blogs over at Greater Fool, for a few years now. He’s a big proponent of creating cash flows for retirement. Towards that end, he has written many, many persuasive posts about why people should sell their homes, invest the equity, and live off the investment income.

It’s not necessarily a bad plan. For a very long time, I thought it was a great plan.

But…

Lately, I’ve come to question how feasible this plan is for everyone who owns a house. If you’ve been in Vancouver or Toronto for a few decades, then your house could likely sell for a high 6-figure amount, possibly even a 7-figure amount. And if you’ve been there for a few decades, then hopefully your mortgage is gone.

Take that sweet, sweet cash and invest it – in a properly balanced and diversified portfolio, a la Garth Tuner. Now you’ve got cash flow coming in from your investment portfolio to pay your rent. If you’re really fortunate, your investments might even kick off enough money for you to live on. Easy, peasy, lemon-squeezy!

Yet I still have doubts…

My only concern with Mr. Turner’s advice is that not everyone has a home that, when sold, will generate enough money to live on. If a person’s in that situation, and sells, then they face the prospect of ever increasing rents. While their portfolio is growing in the background (hopefully!), it’s quite conceivable that their rental increases outpace the growth of their investment income. In this situation, portfolio income isn’t enough to pay your rent. Mr. Turner’s plan no longer works.

Are people really in a better situation if they’re renting and their employment income has to go towards rent, instead of towards buying more investments, because their portfolio’s returns won’t cover the bills?

In that situation, isn’t the portfolio more like a part-time job than a reliable cash-flow on which one can live and eventually retire? And I use the term “part-time job” to convey the idea that, while the income from a part-time job nice to have, the annual amount of money generated isn’t enough by itself to keep body and soul together.

And if their employment income and investment income are both used to pay the rent, then what happens when the employment income goes away?

Then they’re without a home, and their portfolio’s not generating enough money to cover all that needs to be covered.

Renting might not be the answer

One of my greatest financial fears is being an elderly person who rents. Once employment stops, then all expenses have to be covered by pension payments and investment returns. Pensions are disappearing at an incredibly rapid clip. Investment returns aren’t guaranteed, even if you’re one of the lucky ones who managed build a multi-million dollar portfolio before retirement.

It seems to me that a paid-off home is a cornerstone of a secure retirement. People who own their own homes don’t have to be concerned with rental increases or eviction. They can stay in their homes for as long as their health will allow.

This is great!

And yet…

Houses are so damn expensive today! Even if you’re not in Vancouver or Toronto, a $350,000 house isn’t exactly cheap when you’re earning less than six figures. If it takes you 20-25 years to pay off your mortgage, and your employer isn’t promising you a pension, when exactly are you going to have that extra money to set aside in an investment portfolio?

If you’re not one of the people who earns enough money to pay off a mortgage while simultaneously saving for retirement, then maybe Garth Turner is right.

After all, you might avoid rental increases and eviction but let’s face facts. A paid-off house won’t help you buy groceries and heat and medicine in your dotage. Reality being what it is, a person cannot spend their house one doorknob at a time in order to buy what they need, when they need it. Only money can be spent on stuff. A paid for house represents locked-in money. It’s money that cannot be invested or spent unless the home is sold or otherwise mortgaged.

So what’s the right answer?

I have no idea. The older I get, the less I really know for sure.

For many people, housing is ridiculously expensive and it requires a paycheque-to-paycheque existence until the mortgage is gone. Funding one’s own retirement by creating a reliable cash flow is also ridiculously expensive, yet it’s a task that few of us can afford to ignore.

I can certainly see the allure of living off of investment income after liquidating the equity in your home. But so many things have to go right for a very long time for this plan to be feasible. One, you have to properly invest the money. Two, you have to hang on to your investments even when the market drops during a recession. Three, you have to know what to do when black swan events have a negative impact on your portfolio.

Yet, I can also see the hazards of spending most of your working life paying for a house. One, you don’t have significant retirement savings because it took so long to pay off your mortgage. You didn’t have enough time to re-direct your former mortgage payments towards your investment portfolio. Two, you’re making a long-term bet that you’ll always have an income over the 20+ years it might take you to pay off your mortgage. Three, you forever foresake the growth that your money could’ve provided had you invested it in a well-balanced & diversified portfolio.

Again, I don’t know what the right answer is. By way of this article, I simply want you to be aware of the options, the benefits, and the drawbacks. Start figuring out what’s best for you and for your future.

Whether you choose to rent or you choose to own, make that decision with your eyes wide open and fully aware of the opportunity costs of your choice.

Money Mistake #2 – My Mortgage

Looking back, I’m certain that I made a money mistake when I chose to pay off my mortgage instead of focusing on investing.

At the time, I was in my 30s and my mortgage was less than $100,000. I had bought my first home when I was 28 years old. I had a 25-year amortization and my bi-weekly payments were $750, if memory serves. That amount was probably $450 more than I was required to pay since I had routinely increased my mortgage payment by the maximum allowable percentage each year. I was able to handle the costs of running my home, and my budget fortuitously still contained a significant bit of disposable income.

Hindsight is 20/20

I wish I had known then what I know now. Had I become wiser sooner, I would have invested that extra $450 bi-weekly into the stock market. Hindsight is always 20/20, right?

So how do I explain my choice? A good deal of my reasoning at the time was founded on fear. I’m a Singleton. That means I don’t have a second income coming into my household. I knew that if something were to go catastrophically wrong, then I would lose my home. My family’s not wealthy. They would have done what they could, but I would have most likely lost my home eventually. Having a paid-off home seemed to be the smartest move for me.

I was also a huge fan of Dave Ramsey’s book – The Total Money Makeover. I read that book diligently and wholeheartedly subscribed to his teachings of becoming debt-free as soon as possible. After adopting his teaching, I put it into practice and attacked my mortgage with a vengeance.

With the benefit of time, I’m wondering if I didn’t make another money mistake. My goal had been to retire at age 50, not a particularly young age in the world of F.I.R.E. but certainly younger than the traditional age of 65. I’ve crunched the numbers and I won’t be able to hit my target without a large lottery win, or without developing a taste for cat food. I don’t want to retire simply to stay in my house due to financial constraints.

What could have been

If I’d known then what I know now, I would have stuck to my minimum required mortgage payments. Doing so would have allowed me to invest all that extra money into the stock market. Obviously, I would have taken part in the roller-coaster ride of the 2001 crash. And I would have gone through the other one that we had in 2008. Yet, I would have been be sitting quite pretty by now. My investment portfolio would be much fatter even though I would still have my mortgage.

I should not fault myself for not knowing everything about money in my thirties. Blogs were just beginning to take off. Unlike today, the Internet wasn’t a ready source of debates about the benefits of paying off a mortgage versus investing for the future. I picked a path, believing that I could do just as well if I started investing in my mid-30s. I wanted the security of a mortgage-free home before directing my funds towards my investment portfolio. It seems kind of weird to write that down. Today, I realize that if I had invested first, my portfolio would be throwing off enough income to pay my mortgage.

Take it for what it’s worth

What worked for me won’t necessarily work for you.

Today, 5-year mortgage rates are less than 3.5%. When I took out my first mortgage, I was overjoyed to have a 5-year rate of 6.5%. Today, my first condo would sell for approximately $240,000. I’m the first to admit that my condo wasn’t anything special even though I fell in love with it on sight. (That’s another money mistake that I made!) When I bought that condo, I paid $74,000.

My advice to other Singletons with a mortgage is to crunch your own numbers very carefully.

Like I’ve written elsewhere on this blog, you’re the one who is responsible for your income security in old age. You’ll need a place to live and your goal should be mortgage freedom before retirement. At the same time, you need to invest your money for growth so that you have a nice, fat investment portfolio to get you through the thirsty underwear years.

Even though I now believe that everyone should be investing for long-term growth while paying off their mortgage, you know the particulars of your circumstances better than I do. As such, you are the person best situated to make the choice that you think is best.

My money mistake was a doozy, but I’ll still be okay. I’ve got a mortgage-free home and a solid portfolio. I would have had more if I’d known better, but I still have plenty so I can’t complain too loudly. Life presented me with a choice between two sacks of gold. I chose one over the other, but I still wound up with a sack of gold.

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.