Author Topic: Introduction and request for investment advice (long-ish)  (Read 4483 times)

Senor Spondulicks Stubble

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Introduction and request for investment advice (long-ish)
« on: January 20, 2013, 12:33:29 PM »
Greetings fellow Mustachians!

In the spirit of frugality I'm combining my introductory post with one requesting advice.

I'm Canadian, pushing 40, and other than a mortgage have no debt.  I first heard of Mister Money Mustache last year on the radio.  After investigating his website it dawned upon me that I'm already doing most of what I should be doing to be on the road to early retirement.  I drive an 18 year old car when I'm not commuting by bike.  The missus and I do all of the repairs & maintenance on the car and house (the only stuff I won't touch is the roof and the gas side of the furnace).  I have a background in electronics, we're both mechanically inclined and I don't think I've ever purchased a major appliance new.  As much as possible is purchased 2nd hand.  We don't buy into the absurd North American consumerist bull$hit and are baffled by people who carry a balance on their credit cards.  In the early days I missed a payment and paid interest on my credit card ONCE.  After having to fork over $20 for the privilege of borrowing $100 for a month I said "never again!".

This may sound like I've got it all figured out, but the fact of the matter is that I've come into this frugal lifestyle a little later in life than I'd like.  My 20's and early 30's involved a lot of spending and not much saving.  I was lucky to be in a position where major living expenses were taken care of (I left the nest very late!).  There is still room for improvement and I have much to learn.

What I'm having trouble wrapping my head around is the savings and investment side of things.  I went to my bank a couple years back and discussed retirement plans & investments (based on a "traditional" retirement age of 65).  I set up some fairly vanilla GIC & mutual fund investments in a TFSA and RRSP. 

Unfortunately I have not continued to add to these.  I have some very lazy dollars in my chequing account and a pile of slackers in inheritance in another savings account(for which I just got charged $20 for inactivity! Grrrr!).

Here's where I'm at:

My net salary is $36,000.00/yr  Partner sporadically works government contracts.  We go from "break even/save a little" to "can save lots".  Overall spending & saving efficiency is an ongoing project.  Frankly I'd like to retire about 10 years ago.

Mortgage principal balance of $108,452.61  Currently around 3 years left in fixed rate 5 year term at 4.25%.  This is the 2nd term in a 25 year mortgage.

Registered savings of around $24k in Long Term Non Redeemable GIC at 2.3%.  Currently around 12 months left before maturity.

Around $10k in "Scotia Canadian Canadian Income Fund" Mutual Fund

Approx $1.5k in TFSA ($1k in GIC and $500 in Scotia Canadian Canadian Income Fund).

Chequing account has about $1k more than it needs for daily use.
The big slackers are the approx $10k in a daily savings account.  It's making about $0.50 a month and costing over $20 a year.  I have to fix this.

I know I can do better than this. I have gone through all of the MMM posts from the beginning and read over the Canadian Couch Potato site.  I am curious about TDs e-Series index funds and ETFs but my mind glazes over when it comes to the details of investing.  I believe I lack a frame of reference for risk & return when it comes to investments. 

What I would like to figure out is:

How should I better invest my savings?
Should I add to my RRSP & TFSA and if so, how do I determine how much?
Should I be paying my mortgage down sooner?

I suspect the solution is likely a mix of all three points, but I am baffled at how to balance things out or where to start.

If you've managed to read all the way through this (or just skipped to the bottom) I thank you profusely.  Any advice would be greatly appreciated.

Senor Spondulicks Stubble



sol

  • Walrus Stache
  • *******
  • Posts: 8492
  • Age: 42
  • Location: Pacific Northwest
Re: Introduction and request for investment advice (long-ish)
« Reply #1 on: January 20, 2013, 05:03:35 PM »
Investing is easy, at least the way it is commonly preached around here.  Invest in low-fee index funds of the type that track the broad stock and bond markets.  It's as easy as picking up the phone and having your checking account numbers on hand.  Contribute the same fixed dollar amount every week or two, and then dump in extra whenever you have a windfall or banner income month.

The mortgage at 4.25 is decently low, you would do better to prepay it than to let your money sit in that savings account but you might (I think probably) do better investing it in the market instead, if you're not getting the US-style tax deduction on your mortgage interest.

Also, I'd set aside 3-6 months of expenses in non-sheltered accounts, which could be a savings account or could be a taxable investment account.  It sounds like your income is pretty variable, so unless you're pretty confident in your future short term cashflow it would be good to have a bit of a buffer.

Senor Spondulicks Stubble

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Introduction and request for investment advice (long-ish)
« Reply #2 on: January 21, 2013, 06:49:07 PM »
Thanks for the info.  Looks like I'll have to do more studying.  Being Canadian I don't have the option of tax deduction on the mortgage interest.  I'll probably focus on the investment side of things.  I had considered the cash laying around as a kind of emergency fund but it's a bit excessive and the dollars are kinda stale at whatever ridiculously low interest rate I'm earning.

KMMK

  • Handlebar Stache
  • *****
  • Posts: 1472
  • Age: 42
  • Location: Edmonton, AB, Canada
    • Meena Kestirke Insurance
Re: Introduction and request for investment advice (long-ish)
« Reply #3 on: January 21, 2013, 08:12:59 PM »
First thing I'd do, as sol suggested is determine what your monthly expenses are and have 6 months readily available in a savings account. However, I disagree about the non-sheltered part. That $10,000 should have been in a TFSA 3 years ago. There is no reason to not use your TFSA for your emergency fund and it will save you a bit of money. To get a higher interest rate, check out credit unions. Here, in MB, that's the best way to go for short term accessible savings with a decent interest rate.

With whatever money you have left for investing, I would encourage you to continue checking out the Couch Potato website and TD e-series funds. That's what I'm doing. It does take a little bit of effort to set up and you have to be willing to self manage your money, but it's not hard if you are used to doing any online banking stuff.

As far as TFSA vs. RSP, the general rule of thumb I've heard is that TFSAs are better if your income is lower and RSP better when it's higher. It is very unclear from your post what your partner's income is. Do you have a rough average of annual income? It sounds like it's lowish, but I might be wrong. If you aren't making much more than $40,000 between two people your tax rate is quite low and it's likely beneficial to max out your TFSAs first, if you think your future income will be higher. If you don't think you'll make more money than that in the future and want the tax refund, then do RSP or split the difference and do 50/50. The main thing, is to not have any currently taxable investments. I think the TFSA limit is now at $51,000 for two people (someone correct me if I'm wrong) so you have lots of room.

As far as your mortgage, I know for new mortgages the rates are lower. I haven't ever renegotiated myself so don't know how it works in Canada. You may be locked in, but it never hurts to ask. If you can get a lower rate, make sure you are making the same payments so it will get paid off faster.

Since we are lacking information on total income vs. total expenses this is speculation, but it sounds like you have more of an income problem than an expenses problem. Is there a way for you or your partner to make more money? You can play with interest rates, investments, and tax shelters all you want, but nothing helps early retirement like a nice big paycheque.


Senor Spondulicks Stubble

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Introduction and request for investment advice (long-ish)
« Reply #4 on: January 22, 2013, 08:08:03 AM »
Quote
That $10,000 should have been in a TFSA 3 years ago
and
Quote
To get a higher interest rate, check out credit unions

The kicker is that this money has been in a low interest savings account AT A CREDIT UNION! (The line to kick me in the a$$ starts to my left).

I've recently entered all of my finances into AceMoney Lite and can post some details later.  The first thing that jumped out was that I was spending way too much on beer (1/4 to 1/3 of my food expenses!) and have cut back to a mustachian rationing system (I like premium beer!).

With regard to the RSP, my current taxable income just pokes into the 2nd marginal tax rate.  If I contribute I could expect a refund which could be invested elsewhere.  What I'm having trouble wrapping my head around is this:  In a typical mustachian retirement scenario does one expect to be in the lowest tax rate?  In other words can I realize any tax shelter benefits from contributing while my salary is as low as it is?  I'm having difficulty juggling more than 3 money/finance concepts in my head at once.

My partner is currently working a 4 month government contract.  Total gross pay will be around 16k.  There's a possibility that it could become full time but this is the Canadian government and the job is in the Arts.

Overall yes, I don't think I'm making enough money.  I'm working on that.

Thanks again for your help.


KMMK

  • Handlebar Stache
  • *****
  • Posts: 1472
  • Age: 42
  • Location: Edmonton, AB, Canada
    • Meena Kestirke Insurance
Re: Introduction and request for investment advice (long-ish)
« Reply #5 on: January 22, 2013, 05:25:25 PM »
Hopefully some other Canadians will respond. I think my planned income is probably lower than average. When I'm retired I plan to "earn" about $20,000, in today's dollars. I plugged that into my tax spreadsheet and determined if that was all taxable, at the interest/employment income rate it works out to about $1475/month net income. Last year I spent about $1570 and that number would be a bit lower if I was retired and a bit more careful with my money. So, I do intend to be in a very low tax bracket when retired, but still paying some tax. Hopefully the personal credits will sort of keep pace with inflation.

However since I'm 10-15 years away from full retirement and my plans are flexible, those numbers are very rough. But basically, any mustachian will plan to spend less in retirement than their income currently is, or how else would they save money? There's no reason anyone would spend more in retirement, unless they oversaved or had that as a specific goal in mind. So, if you think you will need less than your current annual income to live on when retired, there is definite benefit in contributing to RSPs now. I guess the best example of the opposite would be if you purposely worked less in one year and knew for certain the following year you would make a lot more money - if you went back to school or were on leave from a high paid job. Then it's better to wait to use your contribution amount for a future year when your taxes are extra high. But that doesn't sound like your situation.

As far as credit unions - it's weird like that. We have some that pay virtually nothing on savings accounts and then a couple that pay 2%. I don't know why they don't seem to try to or have to compete with each other in that way. It seems the major banks have to keep their rates for the same types of products more consistent between themselves than the credit unions do. But that's just my research in my own city.

mensa

  • 5 O'Clock Shadow
  • *
  • Posts: 98
  • Location: Ontario, Canada
Re: Introduction and request for investment advice (long-ish)
« Reply #6 on: January 23, 2013, 05:57:31 AM »
Hola, Senor:

If I'm reading this correctly, you've invested a total of 35.5k, 24K of which is in an rrsp gic, which barely keeps up with inflation. You have a further unregistered 10k in a bond mutual fund (for which you pay about 1.5% per year, per Scotiabank's fund sheet). This bond fund has returned 4.75% over the last 10 years. So, you're making 4.75, paying out 1.5 on that, then losing ~ 2.5 to inflation. So that's a whopping 3/4% real rate of return (obviously being very simplistic with the maths here, for illustrative purposes). You are currently paying 4 1/4 on your mortgage. Scotiabank must love you (assuming your mortgage is with them)!

You mentioned that you may lack a risk/return framework. From what you've said, all of you money is in ultra-conservative (gics and saving accounts) to conservative (bonds) investments. There is really no chance for growth. That being said, the only risk with these investments is inflation risk - you lose more to inflation than you earn.

You mentioned e-series funds, which are index-trackers (as suggested by sol). The bonus to these is the low fee you pay (.33 - .53%), thereby keeping more of your money in your possession. Other low-cost index investments are ETFs, but I don't think you have enough money to offset the costs of purchasing these, yet. E-series is likely the way to go at this point if you decide to invest in indexes. Note: they're stupidly convoluted to buy. Find an online step-by-step on how to open and fund 'em.

Respectfully disagreeing with Kestra on TFSAs. TFSAs are fantastic vehicles to grow your money tax free. Many suggest keeping your emergency funds in this vehicle, but you then lose the opportunity for tax free growth. Since emergency funds must be kept safe & liquid, you will end up earning some crappy interest in a saving account, instead of investing and making tax-free gains. Please don't squander the gift of the TFSA by using it for "savings". Why bother shielding 1%/year on 10k (ie $100) from tax, especially at your marginal tax rate?

Is there a cost to get out of your unregistered bond mutual fund? If not, consider the index alternative, with TFSA registration. The nice lady at Scotiabank won't like it, but you'll be saving yourself ~1% in fess, year in and year out. Over 20 years, that's a fair amount of doughnuts. A decent asset allocation (include equities!) should return some gains over time.

Re: your mortgage. You have 3 years left in your term. When the term is up, what do you anticipate your balance to be? It's entirely possible that in three years, you'll be looking at higher interest rates (though we've all been saying that since 2009...) A blend (of rates) and extend (of term) may suit in this case, as you might be able to achieve a low rate for a longer period of time. On the other hand, as you seem to be a conservative type (given your investment mix) perhaps paying down the mortgage with your existing funds would suit you better than investing. It is traditionally seen to be "safe", although if your house drops in value, as it may well do, you'll curse yourself (and me).

It's difficult to make meaningful suggestions without having concrete goals stated, and without a wall of text. I'll leave it there for now. If you've questions about this, by all means ask!


KMMK

  • Handlebar Stache
  • *****
  • Posts: 1472
  • Age: 42
  • Location: Edmonton, AB, Canada
    • Meena Kestirke Insurance
Re: Introduction and request for investment advice (long-ish)
« Reply #7 on: January 23, 2013, 07:56:53 AM »

Respectfully disagreeing with Kestra on TFSAs. TFSAs are fantastic vehicles to grow your money tax free. Many suggest keeping your emergency funds in this vehicle, but you then lose the opportunity for tax free growth. Since emergency funds must be kept safe & liquid, you will end up earning some crappy interest in a saving account, instead of investing and making tax-free gains. Please don't squander the gift of the TFSA by using it for "savings". Why bother shielding 1%/year on 10k (ie $100) from tax, especially at your marginal tax rate?


You're misunderstanding me. Of course he should use TFSAs for investments, but he only has $1.5 K in them, when the limit is currently $25,500, not counting his partner's. There is tons of room to move that $10,000 into them, plus have an emergency fund, plus have room for future investments like index funds. It doesn't matter what interest rate he's making on what, it's still better to not have to pay tax on that. And if he gets to the point of having more investment money than room in TFSAs and RSPs he can always just move the emergency fund portion out.

Senor Spondulicks Stubble

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Introduction and request for investment advice (long-ish)
« Reply #8 on: January 23, 2013, 08:11:59 PM »
Just crunched the numbers on my cash flow for the last 6 months and it is negative.  Expenses outweigh income by about 1k.  This does include an unexpected water heater replacement requiring basement renovations (on which I saved a pile of money by doing all the electrical and plumbing myself) and a not as frugal as I'd liked Christmas.  Regardless, it looks like the priorities are:

1. Set up emergency fund, rejig existing "investments" to something that will actually benefit me, and talk to the nice lady at the bank about my mortgage (she really seemed like a nice lady!)
2. Cut more fat from spending (i.e. spend more wisely) & establish a more effective budget (i.e. a budget)
3. Make more money (partner's job will help here, but not guaranteed for the long term).

Thanks again