FI Interview #6 – Create a Net Worth Statement

I’m still recovering from the sickness. I went to the doctor last week and was told I got bronchitis and was put on 7 days of antibiotics. So I’ve been taking it easy and working on getting better. I’m feeling better the last few days so hopefully I can start going to the gym and work out later this week. For today, I have prepared an excellent financial independence interview with a fellow Canadian called Teacher R from Alberta. As you may know, I have started a Financial Independence interview series where I interview fellow Canadians that have reached financial independence and some of them have also retired early. I really enjoy learning and hearing from fellow Canadians that are further along on the FIRE journey than us. I also really like the Canadian perspective as there are so many American FIRE stories out there, but not as much Canadian stories. So, if you are a Canadian and have reached financial independence retire early or close to this key milestone, I would love to hear from you!

Take it away Teacher R!

Thanks for allowing me to share. Please realize I am not a financial expert and I have made tons of mistakes. This is my journey and the goal is to encourage people to think, ask questions and maybe look at finances from a different perspective. I know some readers will find errors, be critical and disagree with my thinking and that’s ok. There are many paths to the same destination.

I am leaving full-time teaching, will make $60,000 after tax without working (that’s 80+% of our current after-tax income) and still have a large debt. I plan to work part-time substitute teaching or perhaps pick up a temporary teaching contract. I would love to work one semester per year. That is by choice, not due to necessity.

Our money will come from teacher pension, RRSP withdraw, stock dividends and CPP. We never made more than $110,000 combining our income.

 

Q1. It is amazing to hear that you have reached financial independence retire early (FIRE) in your mid 50’s. Could you speak about your path on how you got to this point?  When did you become interested in personal finance and realized that FIRE is possible?

Interest in personal finances really became a focus when I got married and the kids came along.  Now there was more than myself to be responsible for. I had no idea what FIRE was until I started reading financial blogs a few years ago. My parents were a great example as my dad stopped working full time in his early 50’s and worked just enough to keep the wolf from the door. Good thing as he passed away in his mid 60’s.  Glad he got to live his dream. His example planted the seed.

I had also heard a statistic early in my career that indicated that teachers who work to 65 rarely live to 70.  Not sure it is true but it was something to think about. My original plan was to work to 60 but as I got closer to 55, when I was eligible to take my pension, I started crunching numbers in earnest. I realized that buying back my sub days and pension splitting made FIRE very feasible.

Alberta teachers at the top of their pay grid have had one small 2% raise in 6 years while inflation has grown by over 10%. By collecting my pension it actually gives me a slight raise annually. The raise is not fully indexed but it is something. I will essentially be double dipping since I can collect my pension and still work at something.

Another key was meeting an older couple who lived in a trailer park. They owned the land and the trailer and it was beautiful. They were the happiest people I have ever met.  They played music, travelled, had tons of friends and told great stories. I realized that their simple life was amazing and we could do that. They showed me that the quality of life is not necessarily measured by the size of the bank account.

 

Q2. You have always enjoyed teaching, but you are moving to teach part-time later this year. Since reaching financial independence, do you see teaching the same way as before financial independence?

Teaching has never been just a job to me. I love the interaction with the kids but this career is exhausting. When asked what I teach I often respond “manners and civilized behaviour.” I have had countless wonderful and amazing experiences over the years and hope that I have had a positive impact on many young lives. I don’t feel I’m ready to give that up yet but I find I am mentally, physically and emotionally tired. It is harder to find the energy each day. Working in education part-time will give me a chance to still have an impact but also have more time to pursue other interests.

I got into teaching because I love young people and wanted to make a difference. I stayed in teaching for almost 30 years because I still love young people, saw I was making a difference, time off with my family, job security and the pension at the end of the run. I have always taken exception with teachers who complain about their salary. I also take exception with people who complain about teachers. Teachers can choose to be something else and the others could choose to become teachers.

Tawcan: Sounds like a good idea to work part-time to give yourself a break mentally, physically, and emotionally. I didn’t realize how tiresome being a teacher can be. I have had some great teachers who had helped shaped who I am today. I can’t say enough thanks to teachers. It is a very important profession. Working part-time once you achieve FI is also a great way to let you take a breather and re-evaluate what you want to do. I think it’s a great idea!

 

Q3. You mentioned that you have started a financial management class for high school kids. Can you tell me what you teach them in this class? Do you think that the Canadian educational system should put more emphasis on financial literacy? As parents, is there something we can do to put financial literacy into the Canadian school curriculum?

It was a Junior High option (grade 9) with the intent of just introducing basic concepts.  We discussed how to make money, budgeting, stocks and stock markets, compound interest, DRIPS, RRSP, TFSA, RESP, taxes, the real cost of living outside their parent’s house. The major project was to pick some stocks and track them for the term. The second project was to explore the cost of living on your own. Course only lasted a couple of terms.

In Alberta, financial literacy curriculum already exists at the High School level. It likely does in other Provinces as well. All High School students in Alberta must pass a required course called Career and Life Management (CALM). Some of the topics in this course include: use of credit, financial planning, budgeting, the banking system, taxes, insurance, investing. Students usually have to make a living on your own plan.

Alberta also has many mini courses (modules) in their Financial Management options. These modules are grouped together to make 3-5 credit courses. Most modules are accounting focused but other module names include: Personal Financial Information, Personal Taxation, Financial Statements, Personal Investment Planning 1 & 2, and Special student designed Projects. Don’t these sound exciting?

If the curriculum exists why has it not been emphasized? Every teacher and student I talk to agree this is important stuff!  Here’s why. Unless a teacher is passionate about this stuff they won’t find a place in their curriculum. Kids not interested – they would rather take something fun like Physical Education, Drama, Music, Shops, Cooking, Computers. Not enough room in the timetable because they have to fill their schedule with other important stuff like math, biology, chemistry, physics, social studies, language arts.  High School kids allowed too many spares in High School. There is so much available to learn now compared to 30 years ago.  Whenever you add something to the required curriculum you need to take away something else. I saw an interview with Alberta’s’ Education Minister that they were meeting with bankers to explore how to bring more financial literacy into the classroom.  I think that will be aimed at the lower grades and it will be interesting to see what comes of it.

It really does take a village to raise a child. Your kids will learn more at home than at school as you model both good and poor behavior. I think the best place to teach financial literacy is at home. Schools can’t teach everything to your kids, parents need to do their part as well and thank goodness most do.

Tawcan: That sounds like an amazing program and I’m sure it was super beneficial to the kids. Too bad not every teacher is passionate about personal finance. It would be wonderful if these courses are incorporated as part of the Canadian K-12 education program across Canada.

 

Q4. You mentioned that you have been interested in financial things since you were very young, like counting your piggy bank, rolling coins as a little kid, and telling your mom that you are going to be a millionaire at a young age. What got you so interested? When did you start investing your money?

I have always put a little away each month when I could.  It feels good watching savings grow. Been interested in financial things forever. One of my favourite characters was Scrooge McDuck. Studied accounting in High School and considered that as a career path. Had a small RRSP when I was a young adult but things really became focused when I got married and we had kids. Now I had a pension plan I needed to learn about, RESP, retirement thoughts, down to one salary, mortgage payments, mouths to feed other than mine, life insurance, trying to figure out how taxes as a couple worked. I had read the Richest Man in Babylon before marriage but reading the Wealthy Barber early in our marriage was key. David Trahair wrote a book called Smoke and Mirrors that had a CD in it that allowed you to calculate future retirement income. I was fascinated to discover I didn’t need a million dollars to retire and that it was very possible to retire before 65. We also received some stocks as a gift early in our marriage which really sparked my interest in the market. After receiving a few small dividend cheques we set them up as DRIPS. We now have 2.5 times more total stock just from DRIP. As I learned more I no longer felt the market was for gamblers but a great way to make some money. I love the concept of creating passive income.

Tawcan: That’s amazing that you kept the stocks and DRIP them for so many years and now you have 2.5 times more total stock just from DRIPing. That’s the power of compound interest! And you are right, depending on your expenses and timeline, you may not need a million dollars to retire.

 

Q5. What is your investing style? Do you invest in mutual funds, index ETF’s, or dividend growth stocks? Are you always looking to diversify your investments?

Seems like my investment style is buy something and lose money. Buy a GIC and lose to inflation, buy a stock for the dividend and watch as the value drops, buy another stock for capital appreciation and it goes to zero, buy a mutual fund and lose to high fees.

Over the years I have had CSB, GIC, Mutual Funds, Index Funds, Stocks, ETF, and real estate.  Currently, I have stocks in a self-directed non-registered account and some held only with Transfer Agent. Hold one bond mutual fund (which I plan to dump soon), two ETF and dividend-paying stocks all inside our RRSP. RRSP are all self-directed. Also have a small coin collection and recreational real estate. Everything is Canadian based. My teachers’ pension will be the fixed income piece and gives me international exposure. Everything in RRSP will be equity based and pay a dividend.

I started looking at what holdings were in my mutual funds and realized most large Canadian Equity funds were all holding the same things. So I decided to build my own fund in my RRSP. I will only buy Canadian stocks that pay a dividend and they must be on the TSX 60 list. Current holdings include 8 companies and two ETF. Combined total dividends will exceed $7,000 per year.

 

Q6. Can you tell me some of your financial and investment mistakes and what you have learned from them?

Well, that’s a long list! Paying for high fee mutual funds, buying high and selling low in the market because I panicked, thinking I could day trade and swing trade during full-time work – I still think there is money to be made doing this but you should only use money you can afford to lose, watching my stock purchase go to zero because I knew it was a winner, thinking the large financial institutions had my best interests in mind, not diversifying internationally, tinkering with the portfolio to much, selling a stock early and leaving money on the table, not using TFSA to it’s full advantage, chasing a high dividend only to see it cut, missed the IPO for VISA.  Here’s the thing I learned – it’s ok to make small mistakes that don’t dramatically change your life or finances.  Mistakes are how you learn.

Tawcan: We all make financial and investment mistakes. I sure made a number of them when I was younger. In the late 90’s, I was convinced that Google was going to be huge but missed out on the IPO. Oops!

 

Q7. Where do you see yourself in 5 years and 10 years from now? What are the top 3 things you look forward to once you have more free time?

Hopefully teaching our Grandkiddies to love the outdoors. I will have the option to fully retire at 60 and never work for money again but I will always be doing something to make a little money. My wife once called me a pirate as I’m always after the bounty. My top three from a very long list may include: spending more time in the wilderness, volunteering, fixing up our house. I now get to work on my terms. Work less and play more is the goal.  I can actually earn more by working less and starting to unwind our investments. How crazy is that?

 

Q8. Are you taking advantage of tax-sheltered accounts like RRSP and TFSA? Do you plan to withdraw early from RRSP before age 71? If so, do you have any early withdrawal strategies to minimize tax penalties?

Absolutely! Everyone in our family has RRSP, TFSA and RESP’s for the kids. I realized my marginal tax rate will drop from over 30% to between 8-12% as a result of being able to split my pension income with my wife. Borrowed from the LOC to max RRSP contribution this year. Using the tax refund, TFSA money and monthly payments to pay it back within the year. I will probably repeat that move next year.

A secured LOC is a great tool to have at your disposal. It is also an easy way to overextend yourself so you have to use it carefully. At one point the interest rate on my LOC was cheaper than my mortgage.

I don’t use TFSA for retirement savings. We put a little in each month and save it up for something fun. I love the TFSA (thank you GOC) but I find the money is too easy to access and I end up spending it. At some point, any inheritance money will go into our TFSA’s and we may use one for fun spending and one to supplement retirement.  Plan to buy some sort of dividend producing a financial vehicle like ETF or Blue Chip stock.

Since I have a great pension that guarantees me income for life we have several options for our RRSP’s.

Wind down the RRSP’s between now and age 75. Withdraw between $10 000 to $15 000 per year. There is a 10% withholding tax on amounts under $5000 and 20% on amounts between $5000 – $15 000. Take out chunks of money under $5000 two or three times per year randomly and pay the 10% withholding tax. If you set up regular patterned withdraws the withholding tax is established on the assumed total at end of year. (The withholding tax on $1000 per month would be 20% and not 10%). Reconcile at tax time. Transfer that money into TFSA and withdraw what I need. I hate getting a large tax refund as that means the Feds got to use my money before me. I prefer getting a small refund or owing a bit. One of the issues I have to figure out is how to make sure that not too much tax is held back from my pension.

Second thought is to withdraw a lump sum from RRSP to just below the next tax bracket, pay the withholding tax, put that into TFSA and reinvest, reconcile at tax time. In my situation, it makes little sense to hold a large amount of money in an RRSP/RRIF until later in life.  It will get tax whacked when you die.  The concern with this strategy is that the money is too easy to access and I’ll blow through it quickly. It’s important to know your spending habits.

Third thought is to wind down RRSP by age 65 or 70 and delay taking CPP. That gives you an automatic 7.2% annual raise from 60-65 and 8.4% from 65-70. Don’t forget to add cost of living adjustment (1.5%) so for 2018 the actual raise is 8.7% and 9.9%. That way we had a blast spending our RRSP money, I have more guaranteed pension, if I live to a normal age I leave no CPP money on the table and if I die early it won’t matter to me and my wife would likely receive the maximum CPP.

What I will probably start with is only withdraw the dividends and leave the capital intact. See how it goes for the first year.  A lot will depend on how much I chose to work. Then probably do a combination of all the above.  Little nervous that the market is overdue for a major correction. I don’t want to be drawing down the capital in a bear market which is one of the reasons I won’t set up a RRIF until I have to.

I will not buy an annuity as my pension is one. I want control of RRSP/RRIF money.

Tawcan: Wow, those are some great insights to RRSP early withdrawal strategy. RRSP early withdrawal is something we have made some assumptions before but still need to iron out the details. Interesting that you are not using TFSA as the retirement vehicle, although I can understand why you aren’t. For us, we are treating TFSA as one of the retirement accounts. We only plan to use money from TFSA once we are financially independent and living off our passive income.

 

Q9. You are one of the lucky ones that have a pension. What would you say to people that have a pension? What would you say to people that do not have a pension?

I actually have two pension plans. Teachers and CPP and I am incredibly grateful for both of them. Semi FIRE is not possible without my teacher pension.

If you have a solid DB pension be very grateful for you have won the lottery dream home. If you have an employer matching defined contribution pension congratulations for you won the early bird prize. Learn everything you can about how they work. Example: Teachers who substitute taught early in their career, may have the opportunity to purchase back at that time. I can transfer money from my RRSP to my teacher pension to buy back my sub year. This increases my annual pension by 4.6% but it works out to be an 11%+ annual return on the money transferred for the rest of our lives.

If you have the opportunity to withdraw your pension money as a lump sum before you are eligible to collect the pension, take a long hard look before you do.  I have never met a teacher who did it who didn’t regret doing so.  You likely can’t take all of the accrued value out without a huge tax hit and you likely can’t match the returns you’ll get by leaving it.  Example: we put $250 000 plus into the pension over my working career but if either of us live 25 years we will take over 1.1 million dollars out. That’s an annual return of over 6% without inflation adjustments. The original contribution is also guaranteed to come back to our estate if we both die tomorrow. I’ll take that guarantee. Even if you have a pension you should be putting some money into a self-directed RRSP or TFSA that you can control.

Everyone working Canadian has an amazing Pension Plan already. The Canada Pension Plan is ranked as one of the top ten in the world with a fund value of $337 Billion and growing. CPP is fully indexed to inflation, has a 10 year annualized rate of return of over 7%, has 32% of its value invested outside of North America, and is sustainable for the next 75 years. Wish I could have put more in. But understand this – CPP was never designed to cover full retirement, it’s just one piece of the puzzle.  Here is some interesting math.  My statement of contributions tells me I have contributed about $48,000 to CPP and that if I take CPP at 60 I get about $700 per month. Putting those rough numbers into an online calculator shows me I will get all my contributions back within 6 years, and if I live to be 80 I will collect over $220,000 (8% annualized return). If I delay CPP until 65 the numbers are even better; receive $1200 per month, contributions back within 5 years and collected over $270,000 (12 % annualized return) by age 80. I realize these numbers are very rough and there is more to consider such as drop out periods and that the Statement of Contributions assumes you keep contributing at the same pace but the point I am trying to make is that Canadians should collect substantially more from CPP than they ever contribute. If we die early and don’t get our money back, well that will help stabilize CPP for my kids. I believe CPP is solid.  It’s OAS that might run into difficulty as that money comes from general revenue.

If you don’t have another type of pension, take advantage of RRSP, TFSA, set up a pre-authorized withdraw and start contributing. Set a target of between 10-15% saving rate but if you have to start smaller that’s ok. Put aside something from every pay cheque. My pension contributions were forced savings and although I grumbled early on about how I could make more on my own, I’m glad for it now. Learn as much as you can about personal finances and as you learn more set up a self-directed account.  Buy quality ETF’s and blue chip stocks, avoid GIC’s as they don’t even come close to inflation and tie up your money. Avoid speculation on penny stocks.  Been there and lost that.

Does your province have a Pension Plan that you can join? Consider the Saskatchewan Pension Plan. Although it has some limitations such as a $6,000 annual contribution limit, your money is locked in until age 55 and the annuity you receive appears to be fixed, it has been around for 30 years and anyone in Canada ages 18 – 71 can join. It has several withdraw options once you reach 55. The average rate of return since inception is 8% and the MER is under 1%. I think it is worth a look.

Tawcan: I have never included CPP in our FIRE calculations. I just see it as the extra gravy. But it’s nice to know that you can rely on CPP in retirement as well.

 

Q10. What is the best financial move you can do as an individual to set yourself up for financial success?

When you receive money there are several things you can do with it. Spend it, save it, invest it, pay down debt and give it away. Do them all. Spending helps the economy, save for emergencies and fun stuff, invest for your financial future (retirement) and your children’s education. If you have a house, a car and some savings in the bank you are part of the top 10% of the wealth on this planet! Be grateful for the blessings in your life and learn to share.

Create a reasonable Net Worth Statement. I was amazed at how encouraging this was as I tracked our progress. If your net worth is growing-well done, If it’s shrinking, figure out why and do something about it.

Save something from every pay cheque, have reasonable expenses. Don’t allow your debt to income ratio to go above 40%.

Tawcan: Tracking your net worth so important. It helps to keep you stay motivated but also allows you to analyze what is going well and what isn’t going well. I do think tracking your expenses is as important. That’s why we review our annual expenses and net worth every year.

 

Q11. Money is one of the top causes for divorce. How did you get your spouse on the same page as you financially? Do both of you discuss money openly? Are you both savers?

We actually did some pre-marital counselling which helped us discover that we had similar views on finances.  My interest in personal finance is deeper than hers and I track how we are doing but we frequently sit down and review our progress. Larger purchases like cars, appliances, home repairs etc. are always discussed. My wife is a very smart lady (she married me) and I have always respected and appreciated her opinion. We believe in spending money on creating family memories. We understand that money is a tool that can help enrich our lives and the lives of others. We spend, save, invest and give.

Tawcan: I can’t agree more. Getting on the same page as your partner financially is so important.

 

Q12. You mentioned that frugality is good but extreme frugality isn’t. Don’t let a lifetime opportunity pass because of financial concerns. What’s your motto when it comes to frugality? How did you find your personal balance between saving for tomorrow and enjoy the present moment?

One of our life motto’s is don’t ask, don’t get. It’s ok to ask for extras but you must be able to accept NO for an answer without whining or arguing. That’s what children try and do. Examples: ask for an extra bit off your mortgage rate. We didn’t pay bank fees for several years simply because we asked to have them removed. Ask for free delivery on major purchases like appliances.  I was grocery shopping and the size of the item I wanted was on sale but out of stock (12 Pack for $3), I asked to buy the 24 Pack for $6 and the store allowed it. We don’t do it all the time but when the opportunity presents why not ask? The worst is that someone says no. Smile, say thanks anyway and carry on. Bartering is common in many cultures yet we don’t practice it enough.

Saving is easy. Set up an automatic withdraw and pay yourself first. Start small and gradually increase. You probably won’t even notice. Enjoyment of the moment is a choice. Practice gratitude and learn to try and live in the moment. Try and find the joy in each day. Of course some days you feel like you can hardly breathe, as you deal with the bumps in life, but most days are awesome. Learn to put things in perspective. My dad used to say to “Quit your b____ing’. Most people in the world have more problems than you.”

As I walk to work I often listen to positive music and make a mental list of 10 things I am grateful for. Many of the activities that bring Joy into my life don’t cost a lot of money. Time with friends and family, a nice meal at home together, walks with the dog, kayaking on the lake, reading a good book or hiking.

Tawcan: Great life lessons from Teacher R here. Love it!

 

Q13. What kind of financial lessons are you teaching your children? Is money a taboo subject in your household? Did you give your kids allowance? What are your thoughts on providing financial help for post-secondary education?  

Money was never a taboo subject. I would often sit the kids down and show them our Net worth statement and pay cheque stub. I wanted the kids to see what and how we were doing.  I wanted to model our financial behaviour for them to learn from. The kids did get allowance for household chores when they were little. They also had a piggy bank with different sections they had to contribute to: Free spending on anything they want, Savings for bigger items, Charitable giving. They got to pick the charity. As they grew older they did work for our neighbors to earn extra and took on part-time jobs in junior high and high school. I actually didn’t want them working as I think that kids should be kids and they have most of their lives to work and it cut into family time. Working part time was something they wanted to do so I supported it as long as they did their best in school.

If an optional expensive ($1,500) major school trip was coming and they wanted to participate, the kids had to earn about 1/3 of the cost and we would cover the balance. If they couldn’t meet that target we paid the difference as long as we felt they were trying to meet their goal. We paid for all the minor trips.

One of our teenagers wanted a cell phone but we said no until he had $1,000 saved. He worked hard and did it.  Good thing as his first bill was over $400. He was getting charged for every text sent and every text received. I called the service provider, they reduced the bill and we immediately signed up for a texting plan.

Every family should have an RESP as there is free money to be had. We cashed in some CSB received from grandparents before maturity to move into the RESP to take advantage of the CESG. Parents should help their kids if they can with obtaining a post-secondary education but kids should contribute as well. They might value it more with a bit of sweat equity. Parents should encourage their kids to pursue a personal interest and find an employable passion. Don’t force them to take on jobs they hate. Would the FIRE movement be growing if we did work that we enjoyed? Student loans are acceptable if they are of a reasonable size and are used to pay for real student expenses such as food, shelter, tuition, books. If the loan was used to buy the latest high tech phone or take a trip that’s stupid.

I would rather my kids have borrowed some money to receive a quality, employable, post-secondary education than borrow the same amount to finance a new car. Average post-secondary student debt In Canada is around $26,000. If you look at it from the perspective of lifetime earning potential, it’s likely a bargain.

Look for scholarship money. Alberta has the Rutherford Scholarship worth $3,500 for every student who can maintain honors for three years, my Community Association gave each child $1,000 just for going, employers and unions often have scholarship money as well. Likely won’t cover everything but it adds up. Recently saw a news report about how much financial aid is available to students but students don’t even apply for!

Here’s a thought. Before you spend big bucks at University let them try a similar program at a technical school.  It’s a lot cheaper and they might discover something.

 

Q14.What would you tell someone like me who is trying to achieve financial independence retire early?

Honestly, Bob, there are not too many like you. Your numbers and plan are impressive and I love the way you talk about more than financial topics. I love your blog. Keep up the amazing work.

I think most FIRE enthusiasts like being productive. They just want more control of their time to pursue other interests. Productivity and work are good! Working like a robot or doing work you hate isn’t. Take pride in a job well done. Be patient and enjoy the ride towards FIRE, SEMI-FIRE, MISFIRE whatever you want to call it. Learn to distinguish wants from needs. Your kids both want and need time with you. Kids will cherish and remember the time you spent with them more than the stuff you bought them. We chose to live on my salary and my wife stayed home to raise the kids. She never returned to full time work but took on occasional side jobs.  We obviously would be farther ahead financially but will never regret that decision.

Tawcan: Both Baby T1.0 and Baby T2.0 still talk about our trip to Maui every other day. The time we spent together as a family was amazing. Experience over things, no doubt.

 

Q15. Do you have anything else you would like to share with me and my readers?

Learn to look at the big picture. Debt is not a terrible thing unless you cannot service it.  You can retire with debt if you plan for it. Of course, it’s best not to. Most of the debt we carry was used to create appreciating assets (real estate, stocks etc..) while some of it was to create lifetime memories. We try hard to limit consumer debt. I will never buy a new car. We bought our last TV at a garage sale. I probably won’t be debt free until I die but that’s ok. Sure I would love to be debt free with hundreds of thousands of dollars in the bank just waiting to be spent on my every whim. If my wife and I are gone tomorrow our children inherit several hundred thousand dollars each.  Our debt to asset ratio is between 20% and 25%. Our debt to income ratio will be between 25-30 %. It blows my mind that Canadians average debt to income ratio is 170%. We can cover our debt 4-5 times. I sleep fine.

I once read an article that said many rich people carry a mortgage. I thought that was counter-intuitive at the time. Have you heard the term house rich but cash poor? If the house is nearly paid off why not leverage a SMALL portion (say 5-10%) of the paid off value to invest. Buy a quality dividend paying Bank. Collect the dividend and chip away at paying it off in a few years. Set up a DRIP and let it grow. The dividend will likely increase and hopefully, the stock value will also increase. You have an asset to sell if times get tough, hopefully at a profit. Do this outside a registered account and the interest is tax deductible. Use your assets to help create more assets. I have watched several downturns in our economy, tech bubble burst, oil bounce up and down, the Loonie go to parity with the Greenback several times, two Gulf wars and other international conflicts, 9/11, housing bubbles, world financial crisis, trade wars, family crisis, friend’s family crisis etc…  We are still here, healthy, happy and wealthy. If assets minus liabilities equal a small bit left over to cover your final costs and you leave some to the kiddies, you did well. Life is not a spectator sport.  Be smart with your finances and get out there and live.

 

Thank you Teacher R for such amazing interview with lots of golden nuggets. Dear readers, are you enjoying the Canadian FI Interview Series? Are you a Canadian that is financially independent or retired early from your career? Or close to reaching this key financial milestone? If so, I would love to have a chat with you. Give me a shout!

And in case you want to read the other interview series.

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16 Comments

  • Reply
    Angela @ Tread Lightly Retire Early
    June 25, 2018 at 9:20 am

    Even the very best jobs can be pretty draining when you do them full time. This example of working half a year at a passion job sounds about as perfect of an “early retirement” as I can imagine.

    • Reply
      Tawcan
      June 25, 2018 at 3:15 pm

      Ha, even playing as a professional athlete can be pretty draining. 🙂

      Stepping back and working half time sounds pretty awesome to me.

  • Reply
    Mr. Tako
    June 25, 2018 at 11:39 am

    Great interview series Bob! I really liked Teacher R’s positive attitude and thoughts on teaching. It reminded me of some of my own teachers over the years that taught me “Manners and civilized behavior”!

    • Reply
      Tawcan
      June 25, 2018 at 3:17 pm

      Thank you Mr. Tako. I really like Teacher R’s perspectives and the valuable life lessons he shared in this interview. I have been fortunate enough to have many great teachers over the years as well.

  • Reply
    David from Toronto
    June 26, 2018 at 8:10 am

    It’s good for you to have nice people around you. Thanks for this interview.

    • Reply
      Tawcan
      June 26, 2018 at 1:20 pm

      You’re very welcome!

  • Reply
    Mr. Groovy
    June 26, 2018 at 9:14 am

    “Create a reasonable Net Worth Statement. I was amazed at how encouraging this was as I tracked our progress. If your net worth is growing-well done, If it’s shrinking, figure out why and do something about it.”

    I love it, Teacher R. Great advice. As Peter Drucker noted, “What gets measured gets managed.”

    • Reply
      Tawcan
      June 26, 2018 at 1:21 pm

      Exactly, I love how simple this statement is yet it’s so very powerful. It’s great when your net worth is growing well but if it’s not, it is ultra important to analyze the reasons and see if you can do anything about it.

  • Reply
    moneyhelp
    June 28, 2018 at 11:30 pm

    Great article and interview Bob! Really enjoyed the read.

    One question for anyone, but I got a little puzzled when Teacher R said, “Do this outside a registered account and the interest is tax deductible.” Was he referring to interest payments against a standard LOC loan? and in a Margin account, as opposed to a registered account? OR does he mean as opposed to a RRSP loan?

    Just a little confused and would appreciate clarification. Thanks again Bob!

    • Reply
      Tawcan
      June 29, 2018 at 1:37 pm

      If I understand correct Teacher R meant the interest payment against a standard LOC loan. He suggested taking out a small amount of LOC loan and use the money to buy dividend-paying stocks.

      • Reply
        moneyhelp
        June 29, 2018 at 5:15 pm

        That’s what I thought, but just from a learning perspective, as I’ve never needed a LOC, are interest payments tax deductible on a standard LOC?

        • Reply
          Tawcan
          July 3, 2018 at 10:27 am

          A standard LOC is not interest tax deductible.

        • Reply
          Tawcan
          July 4, 2018 at 9:43 am

          This is what Teacher R replied when I asked him about this question:

          Hi Bob and Moneyhelp;

          Interest paid for an investment loan is tax deductible under CRA rules. It gets recorded on line 221 under carrying charges. You can make a claim for most interest you pay on money you borrow for investment purposes, but generally only if you use it to try to earn investment income, including interest and dividends. However, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid. You cannot claim the interest you paid on money you borrowed to contribute to a registered retirement savings plan, a pooled registered pension plan, a specified pension plan, a registered education savings plan, a registered disability savings plan, or a tax-free savings account (TFSA).(CRA Website)
          There are generally two types of LOC in Canada; secured by your house or other assets and unsecured. A secured HELOC has a better interest rate than an unsecured LOC. My HELOC rate is under 4%.
          Record keeping is very important and some HELOC’s allow you to partition the loans into different pools such as mortgage, renovations, vacations and investments. The banks will do the record keeping for you. You can get a non secured standard LOC but the interest rate will be higher and record keeping could become a nightmare as we tend to use the LOC for more than just investing such as car repairs, house repairs and balancing the books at the end of the month. You can use a standard LOC for investing and make the interest tax deductible but don’t ever use it for anything else! If CRA audits you it would be very difficult to differentiate the investment portion from the part used to pay for your child’s new braces. Your record keeping would have to be meticulous.
          Carrying charges are in the same section of your tax return as RRSP contributions. That means your interest loan deduction has the same power as your RRSP contribution.
          Example: Tony has taxable income of $95 000 and lives in Alberta so his Tax rate is 36%. He borrows $20 000 from his HELOC and has the bank set up a section of his HELOC strictly for investing and record keeping. His interest in year one of the loan averages 4% so he pays $800 in interest. He claims that interest on his taxes and gets a $288 tax refund ($800×36%). His actual cost of borrowing is 2.56% after the tax deduction (512/20 000).
          Tony buys $5000 each of four dividend paying assets (ENB, CM, REI.UN, BCE) in his self directed non registered account. He also sets up the DRIP feature of his account so the number of shares of each company will grow. Tony also decides he can afford payments of $500 per month so he sets that up as an automatic payment. His only legal obligation is to pay the interest every month.
          On July 3, 2018 those four assets had an average dividend payout of 5.49%. It will take just over 3 years to pay back the loan.
          In four years Tony has paid just over $2000 in loan interest BUT collected back over $725 in tax refunds. He has collected about $4700 in dividends assuming no dividend cuts or increases. He now owns more shares from his DRIP that pay him over $1200 per year forever assuming he never sells and that the dividend is never cut.
          I assumed interest rates went up by 1% per year on the LOC since we are in a rising interest rate environment. Year 1-4%, Year 2-5%,Year 3-6% Year 4-7%.
          Once I crunched the numbers I realized Tony would likely be better off putting the borrowed money in his TFSA. He would lose the tax deductible portion on the loan but he more than makes up for that by never paying any tax when he wants to withdraw money. Just make sure there is contribution room for the loan.

          • moneyhelp
            July 4, 2018 at 2:01 pm

            WOW! Thank you Bob and THANK YOU Teacher R for the massive detailed explanation! and of course for your time to compose that, I and I’m sure others here, appreciate it!

  • Reply
    GYM
    July 1, 2018 at 2:16 pm

    My dream would be to work part-time!

    Great interview, hope you get better soon!!

    I like the quote: Defined benefit pension is like winning the lottery dream home

    I have a DBP and am not going to take it out to invest for myself. I love looking at my DBP statement every year!!

    • Reply
      Tawcan
      July 3, 2018 at 10:27 am

      You’re lucky that you got a DBP. 🙂

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