So for those that are curious the stats stand as follows:

• 2 writers as of this month
• 765 posts (including today)
• 4209 comments
• 178,942 site visits
• 344,426 page views (including 49,311 from the old blogger site)

If you estimate a modest word count of 300 words per post that would mean I’ve written about 229,500 words which would translate to a 918 page book.  Damn that’s a lot of writing, but really it’s only a fraction of what you have done in the comments.  Collectively if we assume 100 words per comment all of you have written about a 1683 page book. Yikes!

What’s really mind blowing is if you track my net worth posts to the beginning.  I started off this blog with a net worth of about $66,000 in Nov 2006 by Oct 2009 it was $281,400, which works out to a compound increase of about 62% a year.  Obviously that includes the house value going up so I can’t take credit for all of it, but I’m still blown away it is that high.

So a big thank you to each and every one of you.  For every idea, debate and laugh that you have given me over the last three years.  You really are the reason that I do this.  And to thank you all I’m giving away a $75 gift card ($ CDN) to a store of your choice to one lucky reader (provided I can order the gift card online or pick one up where I live).  To enter just leave a comment on this post before Nov 19, 2009 (8pm CST).  Limit one entry per person and please use a valid email so I can contact you if you win.  Winner will be selected by a random number generator.

Best of luck and thanks again for reading.

My current monthly budget is approximately $1,500.   If necessary there is an opportunity to reduce this number in both big in small ways, such as:

• Cable (which includes both our phone and internet):  Internet could be removed or downgraded to a lower package - if removed this would be a savings of $50.   We would probably keep a land-line, but downgrade to the lowest level and use it only for finding a new job, this would save about $5, which would mainly mean cutting long distance minutes.
• Groceries: Currently we budget around $50 per week.  This amount could be reduced significantly.  Large portions of the world survive on minimal staples of beans and rice - we would probably buy some vegetables and other small things, but if need be, this amount could probably at least be halved savings about $100.
• Gas and Electricity: These expenses are what could be called small wins.  Our house is generally fairly efficient in our usage - everything’s off and sometimes unplugged when nobody is using it, but this could probably be reduced significantly by just not using electricity and lowering the thermostat just high enough in the winter to make sure pipes don’t freeze - uncomfortable yes, but if I’m broke these are things that need to be considered.  These changes would perhaps result in savings of $25 to $50 per month.
• Automotive: If I was unemployed for an extended period of time, I would probably sell my car, which would remove insurance, fuel and maintenance costs.  The city I live in has a reasonable transit system which I would use.  This would allow for savings of approximately $200 per month.
• Subscriptions and memberships: I pay for a gym membership, subscribe to zip.ca(for movies) and gameaccess.ca(for video games).  My spouse and I also both have cell phones.  If these expenses were removed, it would total a savings of $125 per month.

There are some expenses I can’t  touch:

• Mortgage: Our mortgage expense is approximately equal to any small apartment we could find in the city we’re living in.
• Life Insurance: This expense is important to me, I would rather eat less then leave my spouse in a terrible spot if she was left alone.
• Condo Fees: If I live where I am at now, I have to pay this.
• Water Heater Rental: $25

In general, I live a pretty stripped down life to start with, I have no debt payments other then the mortgage, but I could cut approximately 40% of my monthly budget if need be.  This exercise was useful in calculating how much money I needed to have saved to survive six months or so (hopefully the maximum length of time it would take to find new employment).  Additionally, it helped me by looking at what I was spending, or in some cases wasting money on monthly expenses.  The calculation brought to light that housing costs (mainly our mortgage payment) is making up over 50% of our monthly “fixed” expenses, and gives incentive of reducing or eliminating this expense quickly.  Additionally, I’ll acknowledge there are things that I am spending money on monthly now that I would freely admit are a waste, but accept the expenses as they are essentially my entire entertainment budget.

I’m curious if I’m the only one who thinks like this.    Do you have a “Plan B” if your current income were to be reduced/removed, how much could you cut out of your monthly budget, and how quickly could you cut this out if your income were reduced (or removed)?

1. Save 10% of what you earn for retirement.  Someone obviously forgot to tell the person who came up with this one that your saving % is a sliding scale.  When you earn more it is easier to save way more than 10% and when you earn very little even 10% can be hard.  Also you age, family situation and a thousand other factors will determine what you can do.  Find what you can do regardless of it is 60% or 5% and adjust as you go.
2. You need about 70% of your working income in retirement.  This is one is so wrong I’m always not sure where to start.  First off your required income in retirement has nothing to do with your working one.  Instead it is related to your spending prior to retirement.  Then depending on your retirement lifestyle you could need anywhere from 30% to 110% of your working income.  It all depends if you want to vacation for six months of every year or stay at home most of the time and read library books.  Do a budget based on your spending and you should be a lot closure than this rule.
3. The 4% rule.  Which states that you can typically withdrawal about 4% of your portfolio each year on an inflation adjusted basis and not run out of money in your retirement.  I do use this one for quick back of the envelop type of analysis.  I would not hang your entire retirement plan on this number, because again things slide around depending various factors.  If you retire at 50 or younger you might need to plan for around 3%, while if you retire at 70 you might want to use 5%.  The reality is this rule is a function of age at retirement, stock/bond split in your portfolio, when you die and your comfort level with risk.  Do your homework prior to assuming you can use this one.
4. Everyone should… If you every hear these words prior to advice about retirement your brain should automatically generate the following message: bullshit.  The reality is retirement planning is a unique thing.  There are certain trends and helpful hints, but there is nothing that applies to everyone in every situation.  It sucks for everyone when it comes to planning to realize this, but it is true.

I think perhaps that last point is key to all rules of thumb.  Your retirement plan will be unique.  It might have certain similar things to others, but it won’t be the same.  We are all different and so must our plans.  Read what you can and expand your exposure to ideas and make up your mind what will work for you.  Yes it means work, but it’s better to do a bit now and avoid a big surprise or two later on.

You see we don’t need a second vehicle all that often, perhaps a couple times of month.  So rather than keep a second car for those odd times I invest $18 in a sheet of 10 bus tickets and keep them in my wallet (they don’t expire ever).  That way I’ve never looking for change to take the bus (also it’s cheaper than the $2.25 per fare).  So at the upper limit I spend $172 per year on bus fare, which compared to $4000 is steal of a deal.

Then there is the time factor.  Yes it takes me longer to get to and from work by an hour in total, but I also get some extra reading done on those days.  So all in all I consider the whole thing a small price to pay to save around $3800/year.  On a hourly basis per year that works to $158/hour in savings which is certainly a hell of a lot more than I make at my job.

So yes you can call taking the bus good for the environment in lowering greenhouse gas emissions, but really I’m doing it to save a small fortune in costs.  So don’t always think that reducing your carbon footprint makes you spend more, often it is about fattening your wallet.

So now a chance of direction, let’s talk about plans.  Plans are like maps useful, but in the end sometimes you have to just ignore them if they are out of date or you just don’t care exactly where you are anymore.  I’ve had some many different plans in life shot to hell it hasn’t even been funny, so that begs the question: if we know plans often don’t work out why do we do them?

You see this is where I like to separate two concepts: first there is a vision of where you are going.  For me with this blog I want to be retired or financially independent by age 45.  Vision is often very long term and some what vague on the details of how.  Then there are plans which are often more shorter in nature and more detailed in nature like a goal for a year.  Plans should change depending on what happens in a year.  That is ok, the situation you started with often doesn’t stay that way.  Plans to me are the short pieces to achieve your vision.  You might find a better piece to get your to your long term vision than your current plan so it’s ok to change plans.

So a key piece of happiness to me has been not worrying so much about plans.  I make them to help get to my vision but I’m not really that attached to any of them.  So when things change or I have to give up a plan as being unworkable I don’t get too upset.  It’s like getting too attached to writing my link post and then having ‘but daddy I’m not tired anymore and I can’t read the clock yet’ boy wake up early.  Life happens so do have a vision where you are going, but do not  panic about a specific plan.  Otherwise you will be very unhappy over something in the end you really can’t control.

So what plan for you lately hasn’t worked out?

This was a interesting realization for me since I haven’t been there for such a long time now.  When you living that near the edge life really is just more expensive.  It’s hard to buy some items in bulk and save some money in the long run on food.  It’s hard to avoid extra fees when you are almost always paying everything on a monthly basis.  For example, my insurance for my car is 2% cheaper a year since I pay it off in one lump sum.  Then if anything goes wrong it ends up on a credit card where it takes months if not years to pay off.  To get out of that situation really takes a lot of work at paying back debt and then focusing on creating a small emergency fund.

On the other end, I can’t believe that families making $100,000+ are not saving more.  Since starting my second job our combined family income will now exceed $100,000 on an annual basis and I’m almost overwhelmed by how much money I can save in a month.  Yet families making this much still manage to get in over their heads in debt, if you don’t believe me watch a few episodes of Til Debt Due Us Part (one of my wife’s favorite shows).  How do you waste more money in a month than most families even take home?!?  I mean really folks at that kind of income level even with taxes saving 25% of your tax home pay should be drop dead easy.  Yet it isn’t for a lot of people.

So what gives?  I suspect the two sides are more related than people realize.  At lot of people spend some point in their early life as a student living month to month or start at a low paying job.  At that point a lot of your money habits get formed (let’s face it when you are young you are so impressionable it’s not even funny).  So once you get older and start making more money I think people don’t realize the options they have to save money.  They have always paid their insurance month to month and don’t think about it.  Not to mention we often fall into the trap of “I’m worth it” where we buy things just because we can rather than really wanting or needing the item.  Compound that with a lack of interest in their finances (after all you are making good money) and before you know it people are spending thousands of dollars in a month with not much to show for it.

So in the end it’s all about bad habits compounded on bad habits that stretch back to your first job.  The difference between saver and spenders is savers realized some of their bad habits and fixed them.  Spenders on the other hand still haven’t learned.  So what bad habits have you overcome to start saving?

I figured out the rough math: in a conventional career I would work from the time I’m 20 until I’m 65. Over those 45 years, I would work for an average of 8 hours a day for 200 days a year or 72,000 hours.  These numbers seem fairly overwhelming after a while which gave me an incentive to look for alternatives. This is not to say that I dislike my job, which in fact is the exact opposite. I enjoy the work I do, and for the vast majority of mornings don’t regret the time I give up to do it.  Yet at some point though, there is probably something else that will interest me more that doesn’t involve my work.

Up until the last few years, I hadn’t really put a lot of thought into my saving or spending habits.  I generally bought what I wanted and saved the rest either through RRSPs or high interest savings accounts, with no real end goal in mind. But when I started looking at what I was trading my time at work for and found that I wasn’t really getting anything back.   I had a few cool toys and a car, but really I wasn’t really getting much return given the amount of time I was working.  Essentially giving up about 60% of my waking hours 5 days per week and getting very little in return. So I decided to try to achieve financial freedom early rather than later.

So what am I doing to get there?

1) I lowered my expenses (a lot)

By a lot, I mean by approximately 40%. Everything that wasn’t needed to survive was examined and a good chunk of expenses were removed. For example, the grocery bill was cut in half, our cable television was cancelled (instead we stream shows off of the internet), I changed phone companies and pared down our cell phone plans. Essentially any expense that could be lowered, was lowered.

2) I bought a house and intend to pay it off within six years

This may be a controversial point, as there is a great debate on the internet and books whether it is more cost effective to rent or buy. The way I look at it, if there is no mortgage or rent payment, that is free cash to be used in savings/investing and it results in lower overall expenses. I realize the money spent on the house could be used to invest, but at the same time, I’m going to need somewhere to live in the future.  Also living at nearly zero cost is better than the rising cost of rent that would have to be dealt with living in an apartment or rented house.

3) Invest like crazy

While the house is being paid off, the majority of investing I had been doing will be put on hold (down to approximately 10% of my net income).  After the house is paid off, basically any free money will be invested, with the intention of getting a large enough nest egg to pay for the expenses we incur (probably closer to 70% of net income).

A question I received from my significant other is: “How do I know this will work?” The fact is, is I don’t know if it will work or not.   I may get to 45 (15 years from now) and find out that I need more money saved, or (hopefully) get to 42 or 43 and find out that I’m already there. There aren’t many books out there telling you how to go about doing this, leaving sites like this one to provide the majority of reference. I guess my reason for attempting to achieve financial independence is for peace of mind. I don’t like to be essentially chained to a paycheque, and although I like my job, I would like to choose to do it, not have to do it.

One thing I’ll mention here is that I do have a backup plan to my early retirement goal. On top of the simplified plan outlined above, I have a company defined benefits pension plan that I’m not really including in any calculations.   Which if included with CPP and OAS should provide more than enough to survive on even if my investing doesn’t work out (I will outline my strategy in the coming weeks).

So that’s my simplified plan.  So what’s your goal and how do you plan to achieve it? If you are on an early retirement path, what do your friends and family say?

First a little history lesson, recall back in 2007 when 0% down payment and 40 year mortgages were introduced.  This fulled the initial rush into the housing market until August 2008 when those rules were scaled back to 5% down payment and 35 years.  You would have though the banks would have got some of that risk right? Actually the banks mortgage debt from the start of 2007 until Jan 2009 has grown by a mere 0.01%, so that means almost every mortgage in Canada from 2007 to 2009 was backed by CMHC.   Then guess what CMHC has been packaging some of those loans up and selling them off in pools (if this sounds familiar it should Mortgage Backed Securities is what caused a lot of this mess in the US).  So if people fail to pay their huge mortgages the banks are off the hook, but CMHC picks up the tab and CMHC is government backed.  So in the end we the taxpayers are on the hook.

If your curious how big of an issue this is let’s look at the dollars.  In 2007 the CMHC had $138 billion in mortgages or about 17.8% of all mortgages.  By June 2009 CMHC had $290 billion in mortgages and the government has raised it’s leaning limit again from $300 billion to $600 billion since CMHC is predicting they will have about $500 billion in mortgages by the end of 2010.  Currently CMHC has issued $114 billion of those loans as guarantee pools.  Also keep in mind at the end of 2008 the net federal debt was about $480 billion.

Now this is the important bit, CMHC is not a bank.  Therefore those wonderful conservative regulations that our banks have had praise for from around the world don’t apply to CMHC.  Effectively meaning if the real estate market goes south on us that $56 billion deficit this year is starting to look damn small.  Are you starting to get a little bit nervous?  Good because so am I.

So what can the government do about this potential mess?  Well so far they have done almost nothing (other than back away from those 40 year mortgages).  After all things are going well so it’s not a big deal.  Yet if they tried to tighten the mortgage rules back down to a maximum of 30 years you cut off the new home buyers, you do that and construction falls and the economy slows even further.   If that happens mortgage defaults could go up.  You can see the bind that they are in.  If they try to fix it they would likely burst the bubble if they do nothing the bubble could keep growing.

So what do you think?  Do we have a problem or not?  If so what can we do about it?

Assets

House $322,000
RRSP $22,300
LIRA $9,900
TFSA $7,000
Pension $11,500
Wife’s RRSP $11,400
Wife’s Investment Account $11,500
Wife’s TFSA $6,200
My Investment Account $5,600
High Interest Savings Account $2,000

Debt
Mortgage $128,000
HELOC $0

Therefore my net worth now stands at $281,400 for the end of Oct 2009. That is an increase of $8,000 or 2.9% from my last update.  Of that my investment net worth was $87,400 which was an increase of $5,600 or 7%.

On a year to date basis net worth is up 28.1%, while investment net worth is up 78%.  Wow, that’s a damn good number so far.  I likely won’t double my investment net worth for the year, but I will get within striking distance.

The mortgage continues to fall at a good pace.  During the next few months that will increase since I’ve decided to take all my money from my second job and put it on the mortgage.  In the longer run I’m thinking about after paying off the mortgage I’ll stop tracking my house value.  Instead I’ll shift over to just purely my investment net worth since at that point that will be more in line with my overall goal.

(Click for a larger image)