Monday, January 31, 2011

Would you retire if you won $2.1 million?

There was an interesting story in the Toronto Star last week: A group of seven construction workers claimed a $14.85 million lottery payout after nearly being cheated out of their prize by an unscrupulous ticket-seller. That's not what caught my interest, though: Several of the men who were interviewed said they would continue to work. "Maybe I'll retire at 45," one said. Five of them are in their mid-to-late 30s; one is 40.

Beyond the obvious "work ethic" argument - you know, to keep working for the sake of doing something useful, I'm not sure I understand. It would seem that $2.1 million would be enough money for anyone to retire on (unless you're in a million or more dollars of debt). Even if you have a family, you would still be able to make enough income off the interest to cover your expenses, plus some nice "extras" if you so desired. You would simply need to make smart financial decisions.

I don't know any of these men, so I can't say what's motivating them to continue working after such a massive, life-changing stroke of luck. They have stumbled into what many of us can only dream of: financial independence long before age 65. Perhaps they feel they need more than $2.1 million to sustain a particular kind of lifestyle? Or maybe it is difficult to see yourself not reporting to work every day? If it's a routine you have followed all your life you might not be able to picture yourself in a different scenario.

I'm all for work ethic. But I'd probably quit my job and use that time to do something I wasn't able to do before, like write, help other people or start a business. Maybe that's what the one fellow meant by "continue to work." I hope so.

Finally, and most worrisome, none of us knows how much time we have left. $2.1 million could be a great nest egg for the next thirty or forty years of your life, or a windfall that you'll only have a week to enjoy. I always think of *time* as actually outranking money in terms of its value to me, only because it's such a fragile asset. None of us know how much we have; all we can do is try to spend it wisely. Given the chance to spend it exactly as I wanted, a 9-5 job wouldn't likely be on the top of my list.

Friday, January 28, 2011

Paying yourself first

If you read financial planning books - and maybe even if you don't - you'll have heard of "paying yourself first." It sounds simple, right? At the beginning of the month, or whenever you're paid, you take a set amount of money and immediately direct it towards savings, before you have the chance to spend it. A well-known proponent of this method is the author of The Wealthy Barber; his book advised young people to set aside at least ten percent of their earnings to invest for the long-term. This is still sound advice today, decades after the book was first published, however, times have changed: levels of personal and household debt have risen, and our lives (frequently referred to as "lifestyles" by those who are trying to sell us something) are padded with gadgets and services we don't really need. Simply put, more is available, and so, we feel compelled to have more. The question is, how do you pay yourself first with so many competing interests out there, all waiting to tear a chunk out of your hard-earned money? How can you come up with ten percent if you are coming up short every month, and how can you possibly save more?

The first step, obviously, is to pay off debt. In order to pay off my credit card bills, I learned to set aside $600 a month, which is slightly more than 20 percent of my take-home income. In the process, I learned what was really valuable to me in terms of how I spend my money. I think "value" - or lack of it - is why many budgets fail. Simply earmarking a certain amount of money for various categories of your life - housing, food, clothing, transportation, entertainment - isn't going to stick unless you address two major issues: why is it important to you to save money, and what is the value of any given product, service or activity to you, relative to your goals? When I applied this formula to my situation, I discovered the following:

-Saving money is important to me because I value my independence and the more money I have, the less and less I will have to work - at least at the things I don't enjoy.

-In light of this future freedom, I realize certain other things are of little value to me. For example, having Internet at home. Some people would say that you need it. I view it as an unnecessary expense. If I need it there is a library up the street. What will I use it for if I have it at home? Mostly for Facebook and other time-wasting activities, which may further prevent me from reaching my goals by sucking up valuable time I could be using to improve my life. Not having internet does not detract from (and may well improve) the quality of my life outside of work.

-By the same logic, housing is a huge expense for me, as it is for most people; a cheaper monthly cost would accelerate my savings. But, what is the value of my home to me? My condo is a retreat from the insanity of the city. I feel safe and secure here. To me, it is worth every penny I pay in interest (though the same might not hold true if I was paying rent, as the ownership aspect is part of what makes me feel secure). Do I need to spend $1500 a month on housing? (That's the total cost of my mortgage, condo fees, taxes and utilities). Of course not. I could rent a room for$500 a month and save that extra thousand dollars. That may be feasible for some people. Having lived that way, I know it's not worth it for me; I'd rather cut other areas, or do freelance work to make up the difference. Additionally, as a long term investment, real estate is generally a good bet, and so far I have been lucky. There will be people who disagree with me and say that you should slash your biggest expense - housing - first and foremost, and if that works for them, that's great. The thing about paying yourself first is that you get decide what's important to you and why. I don't look at it as making "sacrifices" even; it's not a straight equation of one thing for another. It's a strategy as opposed to a tactic - one that will help you build the kind of life you want rather than one that makes you chip away at vague or dubious goals within restrictive parameters.

Another thing that is completely unimportant to me is having a car. I don't think it impacts my quality of life not to have one - certainly not in a city like Toronto - and I have planned where I live and work to be congruent with public transit and walking. But, I know people who simply cannot give up the idea of the car because it represents freedom to them. I, on the other hand, see everyone (except cyclists and pedestrians) stuck in the same traffic jam.

By working through this value exercise, the act of paying yourself gets easier. You will see what you can comfortably afford - be that ten, twenty or even fifty percent of what you make. Any percentage you can afford, no matter how small, represents progress. Currently I have a sum of thirty percent in my sights - or roughly $1,000 a month. This will be my first month on this schedule; I'll see how it goes. I don't anticipate it will make me miserable or cause me to really miss out on anything socially, but if it does, I may have to readjust my value assessments. Money doesn't buy happiness - but it can improve your quality of life in the long run, if you take the time to figure out what you really want and what you think it's worth to you.

Thursday, January 27, 2011

Debt-free and ready to roll

January 27, 2011 is a momentous day: I am officially free of debt.

Before I get to the story of my new financial reality, I'll tell you my old story first. I suspect it will be similar to that of many young(ish) Canadians:

I graduated university, got my first "real" (read:low-paying) job and started the quick and seemingly painless process of racking up debt. Even as I progressed to higher-paying jobs, I still found myself barely scraping by. The actual amount of debt I accumulated was not enormous: roughly $12,000, yet still it felt like a weight around my neck. Not all of it was wasteful or stupid. A good portion, let's say half of that sum, was accumulated in the process of purchasing my first home, the first truly smart financial decision I made in my 31 years. Much of the other half was just plain waste (I'll detail this later. Disclaimer: it will be amusing to you and highly embarrassing to me). Thankfully -- and this is where my story differs from that of many young Canadians -- I did not have student debt on top of everything else. I worked diligently to pay my way through university, splitting costs with my parents. In essence, many of my good financial habits were already in place. I had been living a bare-bones existence to the point that my friends nicknamed me "bag-of-rice Mel," a nod to my rather spartan diet.

The problem was, once I had actual money to spend, it was as if some fundamental disconnect occurred in my brain: all the frugal habits I'd developed shorted out, igniting a rabid desire to finally have and do "really nice" things. I felt as if I'd won the lottery and I acted like it too. I was practically handing out money on the street. I gave the lady at the laundromat a huge tip for no apparent reason, despite poor service. I moved from my mice-infested apartment to a condo that was so brand new, there was shrink-wrap on the toilet. But then why did I need a $70 monthly gym membership when there was one right in my building? Well, the "other" gym was better and, after all, it was for my health... On and on it went.

This is what is commonly known as lifestyle inflation; your standard of living rises with your pay. The upshot is that I arrived into my thirties without having saved a single cent -- well, almost. I'm forced to participate in our pension plan at work, but to say this is actively "saving" is like comparing military conscription to volunteering to go to war; the mindset is completely different. I'm reasonably certain that if I had that extra money on my paycheque each month, I would have spent that, too.

My thirtieth birthday was an eye-opener for me in many ways: I had bought a fancy dress and shoes, and got a fancy haircut, because I was turning thirty and damn it, I *deserved* it. Really, who can put a price on your entry into capital 'A' adulthood?

It rained. Not the kind of rain you can really shelter against; a light mist that you could barely see. It occurred to me there were a few things about my life that needed to change: Getting out of debt was one of them.

For the next 20 months I pounded away at it, paying whatever I could and directing any windfalls towards the stubborn, slowly-dwindling sum. In the process, I learned how to stop wasting money and developed new and better habits that can now be applied to saving rather than "paying."

Today I made my final credit card payment and am free of all "bad" debt (I still have a mortgage and must continue to make those payments). Finally, I am in a position to aggressively save money. I would like to say this is the first time I have been here; the reality is that I could have been squirreling away funds for the last decade, had I handled things differently. Let's just call those the lost years, and move on.

Obviously none of us can change the past or undo our financial mistakes, only guard against those same errors in future. So, this blog will cover my ongoing quest to save money, in the hopes of reaching financial independence over the next decade, as I move further and further away from the spending habits of my contemporaries in the "buy now, save later" generation.

For many people my age (and younger) it seems the time to start saving is always somewhere in the future, like a faraway mountain range, which just might be located in the village of Not Until It's Too Late. Who wants to wait until they find themselves there? I know I don't.