Another 26 year old looking for advice to get to FI. Comments/Advice welcome!

[panthalassa]

Hi everyone, I'm new to the forum.  I've been reading MMM's website for about a week now.  It's really been speaking to me that I don't have to work until I'm 65.  It's not something I ever thought was even possible.  That said, I'd like to lay out my financial picture and ask for your advice on how to get there.  Please don't hold back.  I know I've made some mistakes but I'm willing to fix them.  I don't know how far I'm willing to go but if you can give me some suggestions I'll try to follow them.

I'm 26 years old and single.  I graduated with a health professional diploma in early 2011 but was unable to find a job until late 2011.  In between that time I lived off my credit card and racked up $10000 debt in addition to the $19000 I had taken out from my RRSPs under the Life Long Learn Plan to pay for college.  I had no other savings other than that $19000 in RRSPs.  I have to start paying back that money to my RRSPs, interest-free, over a period of 10 years beginning in 2013 (I have to pay 10% each year but can pay more if I want to).

Since working I have been able to eradicate my credit card debt and am proudly carrying $0 on it.  I use it like a debit card; I will never carry a balance again and I transfer money from my cheqing account to the credit card a few minutes after I use it so it truly acts like a debit card (I use a no-fee chequing account of course!).

To get the job I have now, I had to move from one province to another.  I didn't have a car so I stupidly bought a new one.  I had bought a used car years before and had nothing but problems with it.  It soured my thinking toward the opinion that I "needed" a new car that would be reliable since I would be completely on my own in a new province away from family and friends.  I ended up agreeing to much more than I wanted to spend at the dealership because I needed a car within a week because my start date at my new job was a week from my interview (I tried for more time but they were desperate to have me and I didn't want to make a poor impression).  The interest rate is 1.9%; the total cost of the car is $26~, I make biweekly payments and I'm down to $23~.

Instead of waiting to pay back my RRSPs, ever since I finished paying off the credit card, I've been aggressively putting money back to my RRSPs.  I try for $1000-1500 a month and as of right now I've repaid $4500 of the $19000.

I am full-time employed and do shiftwork.  My net pay is anywhere from $3500-4400/month although lately with new hires I haven't been offered any extra shifts so I'll be making $3500/month from now on with an occasional bump every couple of months of $500, sometimes more but it's not something I will count on, it will just be extra cash I put to debt or savings.

Here is my monthly budget.

Rent: $1000 (ridiculous, I know, but it's a 5 minute walk to work, includes heat+water, in a city with the lowest vacancy rate in the country)
Car Payment: $314, twice a year I pay $470 because it's biweekly)
Car Insurance: $111
Cell Phone: $72 (yes, it's a smartphone and I'm locked into the contract until August)
Gym: $61 (1 year contract left.  Hoping to sell it, probably will have to do it at sale)
Internet: $58 (bill includes netflix)
Groceries: $600 (this includes eating out/toiletries/anything I buy at the grocery store)
Gas & Fuel: $50 (I have been driving 1400 km round trip to friends/family every 4-6 months which increases the budget)
Power: $20-60
Laundry: $20
Movies: $40

Here are my assets:

$4500 in RRSPs
$5500 in emergency fund TFSA
$1000 in travel fund (there won't be any travel for a good long while until I get debt-free)

Here is my current plan of attack: I am expecting to receive quite a large tax refund in April to wipe out the rest of my obligation to my RRSPs and then put the remainder to my car and be extremely aggressive in paying down my car.

I plan to move back to my original city in 6-10 months to be closer to family/friends and also will receive a substantial pay increase when I get a job there (their union has the highest wages in Canada for my profession).

So at the end of all this:  what needs to be changed?  My budgeting?  My goal to even pay off my car (that is, should I sell it?  my plan is to drive it until it dies).  Any and all comments or questions to clarify matters welcome.

[AJ]

Here is where I would start:

• Food!!!! Is that $600 for one person? Surely that is the first and easiest place to cut back.
• Sell the car. If you are underwater, pay it down and get out of it. Since you are walking distance from work, go car free until you can save up the cash for a used vehicle. Or better yet, stay car free and just rent one for your bi-annual visits home.
• What is the cancellation fee for breaking your cell contract? It might be worth paying it and finding a cheaper plan.

[jpo]

I agree, if you are paying $1k rent to be a 5-minute walk from work... why do you even have a car? Renting one on an as-needed basis will be much cheaper than spending another $23k.

[twinge]

I concur on the food--yes Canada is more expensive, but others here feed a family on less than you do in Canada including all the same things.

We did the car rental thing as needed for about 12 years! It was amazing--I felt so focused and organized because I would rent a car for a day 1-2x a month to do all my errands and so I could plan ahead for all the things in my life that really needed a car.  I would also rent a car for trips.  It's amazing not to have your life structured around a car.  I had so much time.  We did this as a family of 3, but now as a family of four in a different city with different work/school/daycare schedules it's not possible--and I miss it dearly!

[simonsez]

Do you need the internet + a smartphone with a traditional plan?  That's $130 a month.  It seems like you could a) maybe do something similar to the recent MMM phone article (where you could use your smartphone picking up the wifi from your internet) or b) drop the internet and use the data that comes with your smartphone plan.  I guess it depends how flexible your plans are and how important Netflix is to you.

[Self-employed-swami]

I'm not sure where in the great white north you are, but start shopping at superstore/no frills/extra foods if possible.  The savings in produce alone will amaze you.

If you aren't tied to your ISP, there are some low-cost ones as well.

[cko]

This is pretty straightforward. Food spending is too high - I'm spending a bit over $300 a month on myself (and occasionally for the lady) and I'm wondering what is wrong with me. Can't you sell your car? And longboard/bike to work?

[cdngb]

The question that I have is do you have a pension plan at work? 

I assume that you do since it is a union shop.  I assume that it is a non-contributory plan, but if it isn't, do maximize the contributions as soon as possible.  This is especially important if you plan to retire from this job and get a monthly pension.  If you do not plan to retire from this job do not maximize it beyond their matching amount.

Before you pay anymore on your Registered Retirement Savings Plan, (RRSP) loan, maximize your Tax Free Savings Account (TFSA), including the January 2013 amount of $5,500.  Note that the allowed contibution will increase by $500 next year.  As you know all income is tax free and you can make withdrawals for any purpose so that you can treat it as as emergency fund.  So it has two functions even three if you use it for your travel fund.  For your long term planning this will be a major part of your long term income in your retirement.

At the same time pay of your car as soon as possible.  I will assume that you keep it although others have mentioned the advantages of selling it.

If you have a pension then you will have little use for RRSP's for retirement funding purposes.  You will need them for tax savings though.

As there is no interest on the RRSP loan I would suggest that you only pay the minimum each year so that the loan is paid off in the ten years.  The other amounts that you are currently paying in excess of the minimum can be used for other investments.

When you need to reduce your income taxes then contribute to your RRSP for only the income tax savings.  If you do not have enough cash then take it out of the TFSA and then repay it with the tax refund and be sure that the loan is paid off by the next tax year.  You will lose a year of tax free growth but it is better than not putting money into the RRSP for the tax savings.

With a fully funded TSFA you will be able to use it for supplementing your pension in your post age 65 retirement.

I am going to assume that you are going to retire prior to age 65 when your Old Age Pension begins.  Note that it may be reduced if you have too much income, called a Clawback.  That is why the TFSA is better as the income from it does not contribute to the Clawback while RRSP income does.

Start your Canada Pension Plan as needed.  There will be a reduction prior to age 65 and a supplement between 65 and 70.

The question is what do you do from the time you retire and age 65 when you can get your Old Age Pension.  I would suggest that you take out lump sums out of your RRSP.  You will pay little tax as they are taxed in the same way as employment income, that is 100% is taxable.  If you are at a union shop there may be an option or retiring at 55 with a reduced pension.  This will give you a base income which you will be able to supplement with other income such as the RRSP's as well as a benefit package for your medical. 

You should consider purchasing rental units which would also supplement the pension.  This can be done on a favourable tax basis as you can live in the house, pay it off, buy another and then rent the first one.  There will be a deemed disposition of your first house when you change it from a principal residence to a rental.  There will be no capital gains, but the cost base of the rental will be the fair market value at the day of the change.  You then should continue to do this time and time again.  If you are not landlord material consider buying vacant land and then deal with the taxable capital gains wen you sell it (In Canada we are only taxed on 1/2 of the gain).  This rental income will supplement your pension income and allow you an early retirement.

Obviously a spouse will change this senario.  If she does not have a pension at work then you can contribute in a Spousal RRSP where you get the deduction and she gets the income later when she starts to collect it by way of a Registered Retirement Income Fund (RRIF).  She should also maximize her own TFSA.  Any rental unit or vacant land should be jointly owned to share the income tax liability.

If you retire with no pension from work, you will have to rely on RRSP's as retirement income not just for income tax purposes.  Any pension will be transferred to a locked in RRSP from which you will have to draw a monthly pension.  You will have to supplement your provincial medical plan with a private one untill age 65 unless you have spousal coverage.

In conclusion"
1. Maximize your TFSA
2. Only pay the minimum on your RRSP loan
3. Use RRSP's for income tax reduction, not for pension purposes
4. Buy and pay off a house with great rental possibilities
5. Buy another and pay it off
6. Retire with an early pension
7. Supplement your pension and rental income with lump sums from your RRSP
8. Keep as much of your CPP and OAP (no clawback)
9. Get a Will and a Power of Attorney now

With more details I can give you more exact information.

Good luck.