Author Topic: Day 1: Peach fuzz  (Read 5600 times)

MustacheMike

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Day 1: Peach fuzz
« on: December 17, 2012, 02:07:47 PM »
I just introduced myself in the intro thread in the general discussion. I put together a story of my first day after reading this blog and decided to share:

It was innocuous enough and not a sight to be unseen in East Vancouver: A line up of hungry folks waiting for a warm soup and bun from the back of a truck. It was the people distributing the food that I took note of. It wasn’t an outreach society. It wasn’t a charity with a bunch of volunteers. It was a man and his family; a roofing contractor, his wife and kid, who had just loaded up the truck, pulled up to the curb and popped the tailgate next to a park just off Hastings Street. It was a scene I wouldn’t have discovered if I had been driving, if I hadn’t discovered this blog.

I always thought I lived frugally. Yes, I’d splurge here and there when my cash balance got bloated enough, but I thought I was doing pretty well: no debt, owned car, restaurants only occasionally. When I found this blog, I found out I was wrong.

I’m not maxing out my RRSP (although I believe I could without being terribly moustachian), but...but, my wife and I are driving our own cars on massive round-trip commutes daily, and I’ve not changed my accumulating mentality, despite my perceived frugality. My mentality was such: I love my job; I want to climb the corporate ladder; who cares if I become an working elder statesman at 85? When I read this blog, I had a change of heart. I want freedom more than that.

Day 1 of Junior Moustachhood led me to doing a few calculations about the cost of driving two vehicles. While the wife and I are renting our shelter for now, I’ve always wanted to move closer to work, even before I met this blog.

If I calculate our milage with the formula my work uses (.53 per KM) and add in the daily toll, according to my calculations, we’re spending a total of $925 per month.

What if we carpooled? That means deleting my car and the toll, adding more KM travelled in my wife’s car. I will have to throw in about six $11/day transit days (2 hours each way) for the times my wife commutes somewhere other than work. That would amount to a monthly total of $785, a savings of $140, not to mention the added benefit of decreased insurance for my car.

What if I put some growth tonic on the moustache and took transit every day (taking responsibility for only my actions only. I am still easing my wife into Moustachianism)? We go back to my wife’s regular commute, minus mine, my toll and adding a $170 monthly bus pass for a total of $567 per month, a savings of $359, with the addition of an insurance reduction. Keep in mind, this version would have me in transit 40 hours per month at two hours a day.

Not wanting to spend a working week’s worth of time on the bus and train each month, I will opt for the carpool with the occasional transit ride. Ultimately, moving closer to work is the optimal solution that we have been considering now for some time.

Which brings me back to walking. Not owning a bike for some time now (and probably  not owning one until we move closer to work), I decided that transit and walking will be my new discipline, not only more often for the commute but also for all types of tasks. Rather than just seeing the condo parkade then the parking lot at work – with a lot of road and aggravated drivers in between-- I will now have the chance to take in the stories that are told around us – like one man and his family giving out soup in East Vancouver.

I hope to learn a lot from you guys. Comments and questions welcome.

Blackbomber

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Re: Day 1: Peach fuzz
« Reply #1 on: December 17, 2012, 03:53:58 PM »
Wow, well written, and inspiring. Life is different afoot, that's for certain. I'm new here myself, but from another direction: I knew my finances were not in line with where I wanted them, and I was searching out ways to improve. Best of luck, and keep us apprised. Also, don't worry if the missus doesn't come on board as quickly as you'd like. I find that leading by example works best in my case. And that takes time. I also found that worrying aloud about the finances doesn't help matters with the spouse. It just paints me as worried and pessimistic.

MustacheMike

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Re: Day 1: Peach fuzz
« Reply #2 on: December 17, 2012, 08:24:20 PM »
Thanks for the advice! I find I'm getting excited about what I can do and want to share it. I've found sharing isn't always received with the enthusiasm I'm expecting. I think I should just keep quiet and see how far I can get.

strider3700

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Re: Day 1: Peach fuzz
« Reply #3 on: December 17, 2012, 08:51:35 PM »
nice.   I'd just add that I'd max out the TFSA before the RRSP.

Blackbomber

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Re: Day 1: Peach fuzz
« Reply #4 on: December 17, 2012, 09:01:16 PM »
As with most things, bringing the spouse on board does not have a one-size-fits-all solution. When I read MMMs "Having the Talk" blog posts, I felt powerless. I didn't think I could win my Louis Vuitton carrying wife (gift from Mom, but that just shows where she comes from) over. But I just discuss what I'm doing, and the results are surprising. I bought an Ultra Gauge, and started driving conservatively, and shared my results, as well as demonstrated some techniques. A few weeks later, she says she's been calculating her average, and asks me to put her on my Fuelly account. I showed her Mint the day I signed up. I had some trouble getting everything sorted (still am). The next day I came home from work and mentioned I'd solved one issue. She was already ahead of me with her own Mint account. Oh, and she has been wanting to trade her mid size sedan for a GLK. Totally on her own, she decided she'd be happier with a Mazda, and didn't want to spend more than $15k. AND, decided to wait three more years (her car is a 2003, and definitely has more life left in it). Those are just three examples, there are more, and I trust will be more.

MustacheMike

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Re: Day 1: Peach fuzz
« Reply #5 on: December 18, 2012, 09:00:14 AM »
nice.   I'd just add that I'd max out the TFSA before the RRSP.

Thanks! I have a TFSA through my family's financial advisor that I will need to get the details on -- the one at the bank costs $50 per withdrawal -- screw that!

So you are suggesting I max out the 5,500 per year on the TFSA, then fill up the RRSP? Sounds reasonable -- do you have any thread or info you can point to?

As with most things, bringing the spouse on board does not have a one-size-fits-all solution. When I read MMMs "Having the Talk" blog posts, I felt powerless. I didn't think I could win my Louis Vuitton carrying wife (gift from Mom, but that just shows where she comes from) over. But I just discuss what I'm doing, and the results are surprising. I bought an Ultra Gauge, and started driving conservatively, and shared my results, as well as demonstrated some techniques. A few weeks later, she says she's been calculating her average, and asks me to put her on my Fuelly account. I showed her Mint the day I signed up. I had some trouble getting everything sorted (still am). The next day I came home from work and mentioned I'd solved one issue. She was already ahead of me with her own Mint account. Oh, and she has been wanting to trade her mid size sedan for a GLK. Totally on her own, she decided she'd be happier with a Mazda, and didn't want to spend more than $15k. AND, decided to wait three more years (her car is a 2003, and definitely has more life left in it). Those are just three examples, there are more, and I trust will be more.

I love success stories! My wife's a Coach bag girl. Definitely loves the finer things, but can be reasoned with if I line up my argument well enough. More work on my part is needed I think to make things feel compelling.

Togoshiman

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Re: Day 1: Peach fuzz
« Reply #6 on: December 18, 2012, 10:11:28 AM »
TFSAs and RRSPs are both worthwhile in my opinion (I work in this field).  They're just "buckets" to hold investments of almost any kind, so long as those are qualified.  The fees are likely related to the investments, e.g. mutual funds or securities, which have trailer or transaction fees, not the account itself.  Over-simplification, but it stands.  One easy avenue is selling to cash or other easily-convertible investment inside the bucket and/or doing an in-kind transfer to another account which doesn't trigger a deemed disposition or fee.  All things being equal, however, I'd live the money there until retirement.

The best plan is usually to max out both.  There may be some tax reasons not to if you are older and have fewer working years left.  That's a discussion for an accountant and/or a good financial planner (rare in the latter case).

For TFSAs, you contribute after-tax income, so there is no tax or penalty for withdrawals.  The only caveat is that you cannot withdraw and re-contribute in the same calendar year due to the way contribution room is calculated.  Note that in addition to annual $5500 increases in contribution room ($5000 until this year), your ceiling in the account can also be raised by investment gains.  So, if you have $25,500 in 'standard' contribution room (2008-2011 x $5000, 2012 x $5500) but had investment gains of $10,000, then your total contribution room would be $35,500.  Similar to Roth IRA in the US.  Because of this reason, my TFSA is my riskier account where I hope to ride a big investment gain to increased contribution room.

RRSPs, on the other hand, are made with pre-tax money and are taxable only on withdrawal, likely many years hence.  You withdraw from the RSP itself or from a RIF (essentially a private pension plan with required annual payouts).  The catch is that if your income is higher while working and lower while retired, then your taxation of your RSP will be lower.  If, however, a large RSP would put you over what you earn now, you might see your tax bill go up.  For this reason, some planners will look at your total holdings, earnings, likely future of both and may recommend that you NOT max your RSP and instead have a non-registered (i.e. taxed annually) account.

For me, it's sort of like MMM's reasons for owning a house: while not always the maximization strategy, it feels pretty good to have it maxed out (as in, while owning your own home is not always the absolute best financial plan, it sure feels good).  So, I max out both my RRSP and my TFSA, own my own home (still paying off) and sleep pretty well.

Apologies if you knew all of this already, just trying to frame the question of which is 'better' to contribute to - my answer is that it really depends on each person's situation and what your financial goals are.

MustacheMike

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Re: Day 1: Peach fuzz
« Reply #7 on: December 18, 2012, 11:28:16 AM »
I appreciate it! Thank you. I feel that I would want to max out both for the mere reason that while I've been saving moderately and have no debt I have not been focused.

Now another question: do I want to contribute to a company-run pension plan as well? I've actually been putting more (by accident, not on purpose) into the pension plan instead of my RRSP. The plan is matched up to the 3% minimum required. I pay a bunch extra over this 3% minimum, though.


strider3700

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Re: Day 1: Peach fuzz
« Reply #8 on: December 18, 2012, 12:42:57 PM »
Like Togoshiman said the fees on withdrawls from your TFSA is likely to be related to whatever product you had the money in.  I pulled cash from my TFSA and other then it taking a day it was just a standard transfer with no fees from my bank.

I agree,  my goal is to max out both.  Looking at the current tax brackets any savings by putting my money into RRSP's vs paying the tax now is pretty minimal.  There isn't a huge gap between my expected income bracket and the lowered bracket.    I also look at our current deficit and expected debt of the country,  view the medicare system and what's left of the economy after the babyboomers finish with it and picture things 30 years out when I can draw a pension and I expect tax rates to be far higher then today meaning my RRSP money will be worth even less then it is today.     On the other hand I put 10k in the TFSA and I know that it's 10k I will have in the future no matter what.

I don't know the specifics about your company pension.  I'm the paranoid type and would be worried about what happens to it when/if the company goes under like nortel.

Togoshiman

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Re: Day 1: Peach fuzz
« Reply #9 on: December 18, 2012, 01:03:33 PM »
A company pension plan can be a defined benefit plan (DB) or a defined contribution plan (DC).  DB plans mean you pay in and eventually (when the pension vests) get the same amount each month in retirement.  This is similar to CCP/OAS.  Good ones are indexed to inflation, so you get the same each month in real terms.

A DC plan is where you pay in and the company gives you a set of investment options, usually underwritten by another provider, e.g. Sun Life.  The value of your pension and the eventual payout are determined by the performance of the investments you have chosen.  This makes them more volitile, generally tend to pay out less, but they are fully-funded (DB plans can run short if projections don't live up to reality as is happening in the current low-rate environment).

Each of these can also be contributory (you have deductions for an amount you agreed upon in advance from your paycheque) or non-contributory (you get a baseline benefit determined by your salary only).  High income earners and generous plans can safely by non-contributory, but most people contribute (for DC plans).

It sounds like you have a DC plan, with a portion of employer matching.  Most of these are say 3-5% of your salary, matched 50% by your employer, so if you contribute $100 every paycheque $150 is going into your pension.  From there, this money is invested in whatever you choose.  For most plans, if you do not choose anything, the plan administrators choose a safe mixed portfolio.  While the investments available are not always the greatest, you are getting an immediate 50% return on your investment - likely the best you will ever get.  For this reason, you should maximize your matched contributions.  What I'm not clear on (and you should schedule a sit-down with your company's HR/pension planner - they always have them) is whether you are voluntarily contributing a significant amount above this.  A safe rule of thumb is to max the company matched portion but no more than this.  Use any extra to pay your mortgage, debts or make other investments.

Lastly, company pensions make use of your RRSP room.  Put another way, your plan IS your RRSP or at least part of it.  You can determine this by looking at your T4s and you will see pension adjustment and RRSP adjustments.  When you get your annual return, you will see an adjustment for RRSP contributions and limits - the company's pension plan will be making use of part of your RRSP room.  Most Canadians have a very hard time maxing out their RRSP room even one year, let alone lifetime, so it is unlikely you are over anywhere.

MustacheMike

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Re: Day 1: Peach fuzz
« Reply #10 on: December 18, 2012, 10:17:26 PM »
Massively good advice from you both. Thank you.

The pension is a mandatory 3% and is matched by the company. I am definitely putting more into it, and the contributions outweigh my RRSP contributions by a significant amount. So I will do a re-balancing in the New Year, when I'm back at work.

Cheers!

eldub

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Re: Day 1: Peach fuzz
« Reply #11 on: December 20, 2012, 04:19:18 PM »
Available contribution room aside, I look at where to contribute in these simple terms:

If you are in a higher tax bracket at contribution ---> contribute to the RRSP
If you are in a higher tax bracket at withdrawal ---> contribute to the TFSA

It's my opinion that the ideal contribution is a mixture of both (so as to spread the risk, we can only guess at what tax bracket we'll be in 10, 20, 30 years hence).

Overly simplified perhaps, but I find it helpful!