All I Would Need Is…

One PercentDespite what I wrote in my previous post, I continued on and off to do more research and number crunching to figure out how far my projected retirement savings would take me if I retire at the end of 2025. The conclusion I’ve reached is that, on my current course, all I need is for the Bank of Canada (BoC) to increase its overnight rate by a measly one percent by 2020 — even leaving it at that level forever after that! — and that would let me stretch my retirement savings for 40 instead of 30 years — not that I’ll live that long. However, it could better shield me from inflation.

Fortunately, such a modest increase is very likely to happen, but at the same time, the hypothesis that rates might not ever go up very much is also very plausible.

On the one hand, many financial talking heads have been saying following this week’s financial markets volatility that investors might be looking again at bonds instead of stocks given the expected rise in interest rates as a result of increased wages and low unemployment in the United States. That being said, here in Canada, the January 2018 employment statistics came out last Friday and the number of jobs lost was far greater than expected — 88,000 instead of the expected 9,000 — but that number hides a healthy increase in full-time jobs (part-time jobs down 137,000 but full-time jobs up 49,000). While these disappointing numbers might moderate the Bank of Canada’s desire to further increase interest rates, the forecast at Trading Economics still has the expected rate by the end of 2018 at 1.75 percent from the current 1.25 percent reached this January, and 2.75 percent by 2020.

Then, on the other hand, there’s the history of the Bank of Canada’s rates since its inception in 1935, which I’ve compiled for you to consider if you follow that link. Basically, the BoC’s rate was very stable for its first 20 years. It slowly started to creep upwards by the late 1950s and then did so more forcefully in the 1970s, reaching dizzying heights in the very early 1980s which led to many people losing their homes. But the current period of low interest rates we are in now actually began as early as the mid- to late-1990s, returning to levels common in the 1950s and early 1960s. By the time the 21st century rolled in, rates were even lower than the previously historical lows of the mid-’40s to mid-’50s.

What’s instructive in this analysis is that having the BoC’s rate remaining fairly low and stable for long periods of time is not without precedent. That is why I’m “baking” into my number crunching a mere one percent increase that would remain there for a long, long time. At the same time, it makes me feel better, because I know my wish for much higher rates would be a calamity for those who owe money, like a mortgage.

I’ve found after a few years of observation that a 0.25 percent fluctuation usually translates as follows in my savings world, for such fluctuation does not translate literally depending on the financial institution and the type of investment.

Type of Investment Financial Institution
RBC Tangerine Implicity
% BoC >> +0.25 –0.25 +0.25 –0.25 +0.25 –0.25
Savings Account +0.10 to +0.15 –0.15 to –0.25 +0.10 to +0.15 –0.15 to –0.25 +0.15 –0.15
5-Year GIC 0.00 to +0.10 –0.15 to –0.20 +0.10 to +0.15 –0.10 to –0.20 +0.15 to +0.25 –0.15 to –0.20
Return Rate on February 10, 2018 (with BoC @ 1.25%)
Savings Account 0.90% 1.10% 2.00%
5-Year GIC 1.60% 2.60% 3.10%
Projected Return Rate in 2020 (with BoC @ 2.25%)
Savings Account 1.50% 1.70% 2.60%
5-Year GIC 2.00% 3.20% 4.10%

It’s little wonder, therefore, that Implicity (a credit union) is the cornerstone of my retirement savings plan.

Again, it’s the arithmetic of exponential growth — see the video of Albert Allen Bartlett I posted in the last part of my “How to Get Out and Stay Out of Debt” series — that explains how such a small percentage increase could extend my savings by about a decade. I would hope that the notion of exponential growth and my number crunching should dispel once and for all the myth that there’s no point in saving when, on the surface, the returns are as low as they are now.

Savers are not being “punished” as I so often read online. It’s just that we savers have to put more effort into achieving our goal. The days of setting aside a modest amount of money for 20 or 30 years and watching it double or triple may be gone, but a modest amount of money with modest growth is still better than just having a government pension which is designed to give only one third of your income at retirement.

A Little Realignment

LSSThe proverb that nothing is certain but death and taxes is one that I think we’ve all heard and agree with, begrudgingly. Certainly I recall how much I hated filing my taxes when I was a freelancer, not because I resented having to pay income tax but because it just seemed so damn complicated to gather all the numbers in order to fulfill one of my civic duties. That period of my worklife left such a bad taste in my mouth that it took me years to settle my situation (i.e., finally filing retroactively) even though I was only a regular worker with a few simple tax slips.

Now I’m the total opposite of how I used to be. As of December 23, I downloaded the Studio Tax application and prepared my 2017 return because I already know all the numbers to fill in except one or two which will be confirmed when I get all my tax slips. In the meantime, I entered educated guesses for those few unconfirmed numbers based on my last three previous filings, and the one certainty I do have is that the final result won’t be wildly different once I get the accurate figures in late-January or early-February.

Decisions, Decisions!
My thinking has changed a little since the last of my eight-post series last year on how to get out and stay out of debt. In that post, I explained how, once out of debt, I distributed my savings so that I could live well before retirement yet be assured of having a comfortable retirement starting at 60. Then, in the “Counting My Blessings” section of my “disjointed thoughts” post last October, I wrote that “it’s not like I’m deferring toward retirement every dollar I save like a zealot praying to a skybound entity in the hope of gaining entry into a blissful afterlife.”

Sometime after that post, however, I stared at the numbers in my spreadsheets and began wondering two things:

  1. Will I really have enough when I retire?
  2. If I did max out my RRSP contributions, would I be cutting too close to the bone?

So I made copies of my spreadsheets and used them to work out alternate scenarios. If I didn’t like how the numbers played out, I would toss out those copies and not think about it again. But I did like what I saw, I would alter my originals to reflect the new scheme I came up with.

Although the last year at work has been challenging, there’s one thing I can safely count on: I’ll still be there by this time next year. That’s an important point because one principle of my financial strategy has been to ensure not only that I don’t live paycheque to paycheque or month to month but also that I should have access to at least six months’ net salary should the unthinkable (being dismissed from my job) happen. Thus I made a few styling adjustments to one sheet of my workbooks in order to highlight how often and how long I would:

  1. be under that 6-month minimum figure, and
  2. have less than $2,500 unsheltered, easily accessible cash on hand for emergencies and unplanned incidentals.

It turns out that, under my new distribution scheme, the former would only happen twice (from January to mid-July 2018 and from September 2020 to early-May 2021) and the latter would only happen twice as well (from January to late-June 2018 and two of five two-week periods from January to mid-March 2019) — and that’s all based on very conservative income estimations and the continuation of ultra low interest rates. Then, thinking back to the 23 months (November 2011 to October 2013) during which I held the reigns so very tightly in order to get out of debt, I realized that this new scenario is not only bearable but in fact infinitely better than when I was struggling out of debt since the two conditions are at least partially met right through retirement in late-2025.

How lucky I am! I can max out both my RRSP and TFSA by late September 2018 and still live well. There are definitely perks to being single and having a decent job.

Pensions and Savings
The other way in which I’m lucky is that I’m among the last ones at work who has a defined benefits pension, meaning that I already have firm figures on how much I’ll receive from it per year if I retire at 60. It would obviously be a much nicer amount if I stayed until 65, but by now I can’t countenance the thought. The last estimate I could get my hands on dates back to a year ago and is likely slightly better now. Then, one morning this December, the Québec government pension plan sent me a statement showing me how much I would get at 60 or 65 if all remains roughly equal. And, starting at 65, I would get Old Age Security from the federal government, which is currently just under $584 a month and will likely be a bit more by the time I retire since it’s indexed to the Canadian Consumer Price index.

All these amounts are taxable, but even if I add up the raw numbers, I wouldn’t have nearly enough to get through a year at the level to which I’ve become accustomed.

Year Work Québec Canada Total
2026-2029 17,520 6,876 0 24,396
2030 16,150 6,876 2,335 25,361
2031 + 14,232 6,876 7,005 28,204

Remember that unlike a lot of people, I won’t need a pre-retirement period to get used to earning less since I already know exactly how much I need per year to sustain my current (comfortable but not outrageous) lifestyle. That’s where the retirement savings will need to kick in, but I couldn’t help wondering, “How long would they last?”

The Certainty of Taxes
The idea behind an RRSP is that you will have to pay income taxes when withdrawing from it, but given how one would be at a much lower tax bracket by that time (aided as well by extra breaks from age 65 and older), the amount of taxes paid will be much less than it would be now. And while any interest on savings in a non-registered account is also taxed, those in a TFSA never are since contributions to it are made after tax. The best situation, if it can be achieved, would be not to touch the RRSP until forced to convert it to a RRIF at 71 and withdraw a certain percentage every year as shown below.

But the need to convert to a RRIF would be 11 years into my planned retirement date, so could I pull off waiting until 2037 before starting to withdraw from it?

Enter my 2017 tax return, my geekiness, and my almost infinite patience to work out a long and complicated idea.

After carefully studying the forms for several years of tax filing in Studio Tax, I noticed that as much as there are some changes over time — new taxes or breaks, an ever-increasing personal deduction amount, and varying maximum deductions amounts and percentages of allowable deductions — the calculation from year to year is eerily similar and some changes are easily predictable. For example, the annual factor applied to the personal deduction amount is 1.013 federally and 1.0109 provincially.

So, I added a new sheet in one of my two financial workbooks and replicated all the formulas that would summarize exactly my 2017 return in Excel, simplifying it by entering only the lines that I would ever be likely to use and ignoring all the others. Then, since I have worksheets predicting my income for every pay period until my retirement and what will likely be my allowable contribution room in my RRSP, I calculated the likely results of all my filings up to and including 2025, highlighting the cells that will likely require an edit to a different amount or percentage when that time would come. As a result, any change in future calculations — major or minor —
can easily be integrated into that sheet. The only variable that’s up in the air right now is tax on dividends, as I’ve put off joining my employer’s shares savings program to 2018, meaning I don’t yet know the impact of that at tax time.

Still, when that all seemed to work well and make sense, I added the rows that would be applicable when my income would consist of pensions or would become applicable once I reached 65. My goal is to have $42.5K per year of spendable cash plus whatever income tax I would need to pay for the previous fiscal year. As expected, as I started plugging the numbers, since no deduction would be taken at the source from that point, I would have to start paying taxes rather than receiving returns from 2026 onwards. That being said, I got to see with my own eyes the veracity of Québec government officials’ assertion that a sizeable percentage of people here don’t pay any income tax because there’s not only an age-based deduction but one for people who live alone year-round and earn little. (That’s about the only tax break singles get given politicans’ constant emphasis on “middle-class families.”) In fact, it would seem that Québec will only be wanting its pound of flesh from me once I reach 71.

I then entered the percentages in the second table above to my RRSP worksheet and added another sheet to that workbook to replicate the first table above for each year in order to see how much I would need to take from general or TFSA savings and find out if indeed I could hold off to 71 before touching my RRSP/RRIF, and how long would my TFSA and other savings would last. All my predictions on interest earnings were based on today’s historically low rates of return and my legendary low-risk appetite when investing. However, since most experts agree that the currently low interest rates won’t be staying that way for much longer, I’m confident that my estimate on that front is very low-balled, which is consistent with my approach of underestimating income and overestimating expenses.

Just so you know, I didn’t grab that figure of $42.5K/year plus the previous year’s tax bill out of thin air. I have three projected revenue figures in one of my spreadsheets: all sources of income including interest (taxable and non-taxable), take-home pay if I don’t participate in my employer’s share savings program, and take-home pay if I do. I also know from another spreadsheet how much I spend on average each year, which excludes what I sock away in savings, not to mention the percentage of all income I tend to save on a normal year (i.e., 27-30 percent, which I gather is higher than the average Canadian). So that $42.5K figure is based on my projected 2025 take-home pay and is roughly the median between if I were and I weren’t to participate in my employer’s program. In other words, it should be an amount far greater than what I’d be accustomed to spending each year.

How These Calculations Led to a Little Realignment
Many financial planners out there seem to agree that you need to prepare to have 70 percent of your income at the time retirement. Some say it can be a bit less since some of your expenses will disappear upon retirement, like work clothes and transportation, not to mention that your days of setting money aside for retirement will be over. Others try to come up with a more firm number along with a reminder among all of them that you have to plan on living 30 years into retirement.

Frankly, what I was never able to understand in that piece of advice is whether they were saying that you needed 70 percent of your pre-tax or after-tax income. It seemed to me it should be the latter since that’s what you’ve always had to work with (assuming you didn’t foolishly spend your tax return instead of reinvesting it), not to mention you’re supposed to be in a lower tax bracket by then, which is said to be the benefit of having saved into an RRSP. But having spent so much time figuring out exactly how much cash I could have spent actually ended up in savings, I realized, as I just stated, that I’m already shaving off nearly a third of any net income each year that I could have spent elsewhere if I didn’t pay as much attention as I do.

How Much “Paying Attention”
Precisely $76.75 of all my revenues in 2017 (or 0.16%) can’t be traced, but much of that is probably change I used to feed the clothes dryer, and the remainder of that are nickels and dimes that I just throw into a jar. (I have remarkably few nickels and dimes in there.) That goes to show why I’m better not handling actual cash and relying on paying everything electronically or from my debit or credit card which I consistently pay off well before the 21-day grace period on purchases.

 

The other thing financial planners go on about (almost to the point of scaring you) is how inflation will affect your savings. There’s a valid point there, but only to a certain extent. As I explained in my “Get Out of Debt” series last year, taking a yearly approach to your budget provides a lot of absorbency when prices do go up. In fact, that’s the reason why I don’t think my most recent number crunching was a fool’s errand in any way. I know that prices will go up by the time I retire, but I will have gradually adapted to them already and thus they’ll be buffered in. What’s more, when one of the financial institutions I use increased the return on savings by a tiny bit (0.15 percent, to be precise), the positive impact was surprisingly noticeable, just like when the Québec government decreased the tax rate by 1 percent for the first slice of one’s earnings. So even if rates go up only 2 percent by 2025, which I suspect is a conservative estimate, my savings pot by that year will be considerably greater than what I’m now predicting it will be. Plus, if you followed my logic for selecting that $42.5K/year target, that gives me a HUGE buffer for inflation right there.

So in the end, what I found is that, based on my current savings projections, my TFSA would dry up in 2040 (the year I would turn 80) and I would have used nearly $55K more than the amount I invested into it, while my RIFF, from which I would need to start withdrawing a minimum percentage in 2037 (the January 1st I will have turned 71), would dry up by 2055 (the year I would turn 90) and I would have used more than $150K than what I invested into it. Given my bad health habits and the genetic predisposition on both sides of my family, I seriously doubt I’ll reach 90, but this calculation nevertheless demonstates that I could live quite well for 30 years into retirement.

That being said, it’ll be interesting to see what will be the effect of rising interest rates in the coming years. The first three of eight announcements from the Bank of Canada in 2018 will be on January 17, March 7 and April 18, and I expect at least one 0.25 percent increase by April at the latest, and most analysts expect a total increase of at least 0.5 percent by the end of 2018, meaning two increases in that year alone. I plugged in a single 0.15 percent increase as of January 24 and that alone would extend my TFSA by a year, so all the signs are pointing to my having more than enough to retire at 60.

The bottom line is that I’m no longer in the least bit worried about retirement, if everything else stays relatively constant. This little realignment will be a minor short-term adjustment or “sacrifice” that will yield a major long-term gain — not to mention, complete peace of mind.

How to Get Out and Stay Out of Debt
Part 8–Saving in the Real Sense of the Word

Financial ChoicesA few cases of extreme personal financial success have made headlines in Canada recently. About a year ago, there was the case of Toronto’s Sean Cooper, who paid off his mortgage in 3 years by age 30. More recently, there was the case of Kristy Shen and Bryce Leung, who opted out of home ownership and into retirement by their mid-30s.

Both those cases are admittedly extreme. That’s the reason they made headlines. However, I was struck by the number of haters these stories attracted. Some critics ridiculed Cooper’s choice to live almost as a pauper in the basement of his own house. Other critics assumed Shen and Leung must have had a head start and pointed out that they had far higher paying jobs than most people so it was “easy” for them to get rich so quickly.

On the opposite end of the spectrum, my reaction was, “Good for them!” Moreover, I can’t understand why some people can be so resentful of other people’s success. It’s as if they feel entitled to the same thing but without making the least effort or sacrifice to get it. That said, for me those cases demonstrate a point that my own mother taught me when I was just a kid or teenager, and that point is that you need to learn how to save — in the “not spend” sense of the word — if you want to get ahead.

You might find the anecdote I’m about to share with you really, really weird, but one year I got a $500 GIC (term deposit) from my parents at Christmas. I was perhaps 11 or 12 years old, so I remember not quite understanding what the gift was when I opened it, and I remember my mother looking over to me and saying as she continued distributing gifts from under the Christmas tree, “I’ll sit down and explain it to you later.”

It was at a time when returns on bonds and GICs were very high and government incentives like a registered education savings plan didn’t exist, yet my parents knew that I would be seeking a post-secondary education. I still remember that talk with my mother as we sat on the couch in the den, in front of the Christmas tree: “The gift is that your dad and I are giving you $500. That’s yours, but it’s for when you’ll be going to university. And since you’re still years away from university, we put that money for you in a certificate, which is like a special account, so that this $500 will grow to $850 in five years just for promising to leave it there and not touch it. Then, since you won’t be ready for university yet in five years, we’ll take that whole amount and put it into another certificate for another two years to make it grow even more.”

I understood her explanation — I totally got that $500 was a huge amount back then — but I admit it didn’t seem too sexy when my classmates were all comparing what they got for Christmas when we went back to school in January. When I look back to this gift today, I’m in awe because that wasn’t just a huge sum for me but for my parents as well back then. I only figured that out as a young adult when I discovered just how modest my father’s yearly income was. Clearly, having been children during the Great Depression and World War II had taught them valuable lessons.

* * * * * * *

Exponential Growth
My mom was also pretty good with math. She could do fairly complex mental calculations quickly. She also turned out to be an excellent bookkeeper in her senior years.

That said, she wouldn’t have been able to explain to you (or even know what was) exponential growth as explained so clearly here by the late U.S. physicist Albert Bartlett, but she understood it instinctively. While Bartlett applied this notion to express his concerns over population growth and the exhaustion of petrochemical resources, exponential growth, even if modest, is the cornerstone of generating wealth.

Listen to this clip. Pause and rewind as many times as you need to, but don’t plead that you just can’t get wrap your head around math. This is NOT a difficult concept.

So the deal is this: Put something aside and find a way of making that something grow, even modestly. Remember that even setting aside a little bit at a time adds up quickly, and the more you have saved, the more growth you can generate.

I tried mutual funds within my RRSP (see below) for a very short while but, even though I stood the chance of making a lot more money over 15 years if I stuck to them, I couldn’t stand two things:

  1. not knowing exactly how much I would have at the end of 15 years, and
  2. the possibility of having zero or even negative growth when I’d be ready to cash in.

In other words, as far as financial planners are concerned, I’m your classic scaredy-cat when it comes to investments, but I own that label and I’m fine with it. Maybe I wouldn’t have been that way had I started to save in my early-30s and thus had a 30-year timeframe to work with. But once I’d gotten out of debt and was ready to save, I only had 15 years to work with and I’ve since reduced that timeframe to only 10 years. In short, I had no tolerance for wild market fluctutions and what-ifs; I wanted certain results.

At this date, through looking carefully at how much I spend and on what, I have managed to set aside in 2016 just a hair under $14,000, which includes interest earned and tax refunds. From cash I could have spent had I not been paying attention and wrongly assumed to be my discretionary income, the figure is more along the lines of $8,500 — on average, one out of five dollars that I get in net pay. My plan is to repeat this in the next 9 years — that is, up to and including 2025, at the end of which I plan to retire. With numbers like that, however, if something comes up one year and I don’t get to save nearly as much, I will still be in good shape as long as I’m able to get back on track after that “bad” year. By eshewing credit, saving and paying cash even big-ticket items like my car, and investing all tax returns and unexpected income (like the estate from my mom), I will by retirement day have three times more than the sum of that one-in-five dollars from my take-home pay.

The sad truth is that, in today’s economy, savers don’t get the rewards they used to. After much research, the best rate I can find in Canada on a non-refundable (5-year fixed-term) GIC today is 2.3 percent — it was 2.5 percent at the beginning of 2016, which wasn’t extraordinary either — so using the formula to figure out how long it will take my investment to double, I come up with the figure of about 30 years (70 / 2.3 = 30.43). Right there, that makes many people throw in the towel, figuring there’s no use.

I disagree, of course. Some financial planners have told me, “You’re hardly keeping up with inflation,” as they tried to lure me into what I deem their Russian-roulette world of mutual funds. But in fact, exponential growth at a rate ranging from 1.7 to 2.3 percent will in fact keep pace with inflation, assuming it stays at roughly the same rate as we’ve seen in recent years. As to those who assume that there’s no point in saving for such paultry returns, I retort that I would rather have $100,000 (assuming near-zero growth) in 10 years than $0 to top up my two skimpy monthly pension cheques, thank you very much!

* * * * * * *

Safe Diversification for Scaredy-Cats Like Me
While retirement nine years from today is the main focus of my efforts, I would be foolish to stash everything into a registered (closed and inaccessible) retirement fund. On the one hand, I do plan to have a life before retirement and, on the other hand, I have to plan for a disaster before then, like losing my job.

From everything I’ve read, I gathered that you should have a minimum of three months of your current net income saved up in case you lose your job overnight. Six months would be better; nine to 12 months would be glorious. After careful study, I opted for six months and that’s excluding what would be in my “reserve account” at that point.

So here’s how I distributed my savings to balance enjoying life while having a calamity fund and a retirement fund at the same time.

(1) Dividends Sharing Plan (DSP)
This is an option your employer might not offer, but if it does, try not to ignore it, although I would argue that if you’re curerntly in debt, you should first get out of debt before entering a scheme like this one.

For the next nine years starting in 2017, my employer claws back 6 percent of my official annual salary that will be used to purchase common shares. Given that I’m opting for a non-registered plan, that 6 percent will be taken from my pay after deductions — I could have chosen 100 percent registered for retirement or 50/50 for savings and retirement, but I figure I had retirement covered already (see Points 3, 4 and 5 below) — but it’s amazing how quickly you get used to not having access to that 6 percent. For participating in this plan, my employer matches 50 percent of my contributions up to a maximum of 3 percent, effectively giving me a 3 percent pay increase, which also goes into purchasing common shares. Then, every quarter, dividends get paid.

Of course, that number could be postive or negative, but it would have to be a HUGE negative before it would start eating into my initial 6 percent and historically it hasn’t taken such a nosedive — even during the Great Recession of 2008-2009. That’s as much risk as I’m prepared to take and you have to admit: Given the 50 percent match up, it’s hard to even call that a risk!

There are a bunch of conditions governing when I can touch the money (i.e., when the employer’s share becomes “vested”) and what happens if I do, but I’m just viewing this thing as an account I can never touch until I retire in December 2025. Everything becomes vested when I do retire, so I’ll have a whack of shares to liquidate at that point but will only do so in January 2026 so that I’ll be taxed on capital gains only in 2026 — when my income will have taken a dive.

Also, the 50-percent match-up will be taxable but my employer won’t be making any tax deductions on that portion, so I’ll arrange to have Payroll take about $30 extra per paycheque toward income tax in an attempt to more or less break even at tax time. Dividends will also be taxable but at a totally different rate than income, so I’ll play it by ear for the first year or two and determine later if it’s worth having more than $30 retained each paycheque.

(2) Electronic-Only High-Interest Savings Account
When my bank introduced its electronic-only high-interest savings account, the annual interest rate was somewhere between 4.2 and 4.5 percent. That was before the Great Recession. Today it stands at only 0.5 percent. It was 1.1 percent as recently as two years ago today. Still, this is the bank account I use as my reserve account into and from which I move money each paycheque for near-future needs spending, plus a $1,000 contingency fund.

Given the ridiculously low “high” rate at my bank, I looked for similar accounts at other financial institutions to put away a good part of my “loose” savings (i.e., my “if-I-lose-my-job” fund). I opened an account at Tangerine Bank but then, about a month later, I found a credit union in Manitoba called Implicity that offered much better rates. The thing about deposits in a federally regulated bank is that you’re guaranteed up to $100,000 by the Canada Deposit Insurance Corporation (CDIC), but the guarantee for deposits in a credit union is determined provincially. In Manitoba, that guarantee is 100 percent, which is incredible but fantastic. On the other hand, twice and sometimes three times per year, Tangerine offers a considerably better rate than Implicity for a few months at a time on new deposits, so that motivated me to keep both accounts.

In late 2014, the rate was 1.1 percent at RBC, 1.3 percent at Tangerine, and 2.0 percent at Implicity, giving Implicity a 0.9 percent edge over RBC and a 0.7 percent edge over Tangerine. Since then, with the Bank of Canada’s prime rate having gone down twice by 0.25 percent in 2015 to settle at 0.5 percent, the rate at RBC has gone down 0.6 percent (more than the BoC) to 0.5 percent, Tangerine’s has gone down by 0.5 percent (same as the BoC) to 0.8 percent, and Implicity’s has gone down by 0.3 percent (less than the BoC) to 1.7 percent.

That gives Implicity a 1.2 percent edge over RBC and a 0.9 percent edge over Tangerine and it shows that banks are certainly meaner than credit unions! (Remember my rant in Part 3? “‘Loyalty’ is a word that has meaning to banks only if it helps their bottom line, so you owe banks shit in terms of loyalty [once you’re out of debt] when it comes to your financial health.”) However, whenever Tangerine runs one of its short-term offers that makes its rate at least 0.5 percent better than Implicity’s, I take the time to move my loose savings there since those funds are just as easily accessible from either account.

Date RBC Tangerine Implicity Better Comment
Autumn ’14 1.10% 1.30% 2.00% + 0.70%  
01 Jan–02 Feb ’15 1.10% 2.50% 2.00% + 0.50% Worse differential so far.
03 Feb–31 Mar ’15 0.80% 2.50% 1.85% + 0.65% Bank of Canada drops from 1.00 to 0.75 percent on 21 Jan 2015.
RBC’s normal rate drops from 1.10 to 0.80 percent.
Tangerine’s normal rate drops from 1.30 to 1.05 percent.
Implicity’s normal rate drops from 2.00 to 1.85 percent.
01 Apr–30 Jun ’15 0.80% 1.05% 1.85% + 0.80%
01 Jul–22 Jul ’15 0.80% 3.00% 1.85% + 1.15% Bank of Canada drops from 0.75 to 0.50 percent on 15 Jul 2015.
RBC’s normal rate drops from 0.80 to 0.65 percent on 20 Jul 2015 and from 0.65 to 0.55 percent on 2 Dec 2015.
Tangerine’s normal rate drops from 1.05 to 0.80 percent.
Implicity’s normal rate drops from 1.85 to 1.75 percent.
23 Jul–30 Nov ’15 0.65% 3.00% 1.75% + 1.25%
01 Dec–31 Dec ’15 0.55% 0.80% 1.75% + 0.95%
01 Jan–17 Mar ’16 0.55% 2.50% 1.75% + 0.75% Implicity’s rate drops from 1.75 to 1.70 percent on 18 Mar 2016 without any clear external factor.
18 Mar–31 Mar ’16 0.55% 2.50% 1.70% + 0.80%
01 Apr–30 Jun ’16 0.55% 0.80% 1.70% + 0.90%  
01 Jul–30 Sep ’16 0.55% 3.25% 1.70% + 1.55% Best differential so far and a full 1% more than RBC’s basic!
01 Oct–31 Dec ’16 0.50% 2.95% 1.70% + 1.25% RBC’s rate drops from 0.55 to 0.50 percent on 9 Nov 2016 without any clear external factor.
01 Jan–?? ??? ’17 0.50% 0.80% 1.70% + 0.90%  

In late-spring 2016, seeing that I still found myself using my Tangerine account more than I thought I would after finding Implicity, I decided to deposit and maintain my annual $1,500 gas fund in the Tangerine account so that I can earn at least 0.8 percent on that amount, and I tabulate the “new” deposits separately in my Tangerine ledger so that I can easily identify the funds to move back and forth between Tangerine and Implicity. The Tangerine account is also where my monthly pay back on my new MasterCard gets deposited, so since 2016, those paybacks plus any interest from any of my three high-interest savings accounts go to replenish my gas fund.

Interest in such an account is considered income; therefore, it is taxable. Financial institutions do not emit a tax form if that income is under $50, but you are still responsible to report ANY income at tax time. So don’t be foolish: I declared the $28 I made last year in one of these three accounts because the last thing I want is to get in trouble with the Tax Man for a measly $28! It’ll only be about $13 on that same account for 2016, but again I’ll declare it. The trick is to move as much as possible into legal, totally transparent tax-sheltered accounts.

(3) Tax-Free Savings Account (TFSA)
“Account” is not the right word for this instrument introduced back in 2009. It’s more of an umbrella under which you can have a savings account, GICs, or any other types of funds. Whatever you earn in this account is, as the name suggests, tax-free. But the catch is that there’s a ceiling, and beware: a TFSA is not automatically a panacea. The returns can be lousy if you don’t shop around, so you could end up legally not paying tax on an insignificant amount — and what would be the point of that?!

When this instrument was introduced, the cap was $5,000. The following year, another $5,000 was added, giving a cap of $10,000. There were blips over the years, but the cap on January 1, 2017 is $52,000.

Year Increment Cap
2009 $5,000 $5,000
2010 $5,000 $10,000
2011 $5,000 $15,000
2012 $5,000 $20,000
2013 $5,500 $25,500
2014 $5,500 $31,000
2015 Jan $5,500 $36,500
2015 Apr $4,500 $41,000
2016 $5,500 $46,500
2017 $5,500 $52,000
In late-April, the Conservative government increased the yearly increment to $10,000 effective immediately, but the Liberal government that took power later in the year returned the yearly increase to $5,500 for subsequent years but let the 2015 increment stand.

The cap is one’s contribution room, meaning that when I opened my TFSA in January 2015, I was allowed to start with a $36,500 deposit if I had it. Then, when $4,500 was added in April, I could top it up, too. The catch if you are able to max out your TFSA is that you cannot register deposits exceeding the annual amount between 1 January and 31 December. In other words, I’m free to withdraw from my TFSA, but given that I had reached the cap at the time of my withdrawal, I couldn’t deposit it back until 1 January of the following year.

I opened my TFSA at Implicity in January 2015 as a simple savings account earning 2.0 percent. Unfortunately. that rate dropped to 1.85 percent in February when the Bank of Canada dropped its rate by 0.25 percent and again to 1.75 percent in July after another BoC rate drop of 0.25 percent to 0.5 percent. By early-September, I drained that savings account and placed the whole amount in a 5-year GIC earning 2.5 percent per year, which will increase the capital not by 12.5 percent but 13.15 percent at the end of 5 years, meaning I will definitely have kept up with inflation. Subsequent deposits for 2016 and 2017 simply go in the savings account portion, whose rate is now 1.7 percent.

This one little move means that I will have earned $1,777 more in tax-free interest at the end of that 5-year period than if I’d just left that amount in the savings account. Then later, apply more exponential growth to the nearly $5,450 I will have earned just for swearing off spending that money… If yearly increments remain at $5,500 and I max out every year, and if rates remain roughly where they are now, I project that I will have increased my capital by 20 percent by the end of 2026 or by 29.4 percent by the end of 2030. It’s far from doubling but I’m fine with that.

What distinguishes a TFSA from a Registered Retirement Savings Plan (RRSP) (see below) is that TFSA contributions are made from after-tax money, which means you don’t get a tax break when you deposit into a TFSA. Your tax break is that you don’t pay any tax on the revenue your deposit generates under the TFSA umbrella.

A lot of people use their TFSA to save for big purchases or emergencies; others use theirs as a complement to their retirement savings. I fall in the latter group, but the part of my TFSA that isn’t locked into GICs forms a portion of my six-month if-I-lose-my-job fund, the other portion of said fund being in either of my high-interest savings accounts depending on which one gives a better rate at the time.

(4) Registered Retirement Savings Plan (RRSP)
Like a TFSA, an RRSP is an umbrella under which you can have a savings account, GICs, bonds, stocks, mutual funds, and so on. You pay no tax on whatever you earn under this umbrella while it’s under this umbrella, but that’s not all.

When you drop money into an RRSP, that amount becomes deductible at tax filing time. You then take that tax refund and reinvest it into your RRSP. When you retire and start withdrawing from your RRSP, you’ll have to pay the tax you’ve been given back but, by the time you retire, you’ll be in a considerably lower tax bracket than the one you’re in now, so you’ll pay less tax than you would have to pay today plus you will have considerably more to draw from than the amount you socked away because it will have grown.

You get a contribution room in your RRSP just as you do in a TFSA, but unlike the one-size-fits-all room under a TFSA, your RRSP room is determined by your income in that it increases by 18 percent of your taxable income in the year for which you’re filing, to a maximum (currently) of $26,010. But that amount is reduced by whatever you and your employer pay into its pension plan, if you’re so lucky as I am to have a pension plan at work (see below). I had some extremely bad years as a freelancer between 1996 and 2006, which means that there was about a decade when my contribution room didn’t increase very much, but there’s nothing I can do about that now and I just deal with it.

Some who have a pension plan at work assume they won’t need RRSP income upon retirement. That might be true for them. However, the question you need to answer to be sure is how much income do you need to sustain your current lifestyle. If you followed me this far, you should already know what you need (minus food).

The rule of thumb is that your income when you retire should be about 70 percent of what it was just before you retire. Based on that rule and what my current needs are, I realized that my work and government pensions wouldn’t quite cut it. However, I figured out that if I only contribute decreasing amounts to my RRSP until 2020, I could (a) fill about 70 percent of my projected RRSP contribution room, (b) still have a life before retirement, and (c) be ready in case of an employment disaster before the end of 2025 even if it’s unlikely to occur. Just like some people overspend in the purchase of a house and end up house poor, it’s possible to sock away too much into an inaccessible RRSP fund and end up deferring “life” until retirement, and I definitely didn’t want to do that.

As for which instruments you should have under your RRSP umbrella, most financial advisors will steer you toward managed mutual funds; however, because I have no risk appetite, I couldn’t stand them. Then in January 2016, Implicity got into the business of RRSPs with a simple choice that I could totally grasp: a high-interest savings account (currently 1.7 percent), GICs (currently 2.3 percent for five years), or a combination of both. If current rates stand until 2031, low as they are, I should still be able to add 33 percent on my capital by then, which is a whole lot better (and certain …and safer) than putting that capital under my mattress!

If I have a point in all of this, it’s this: I’ve done the math, and while bonds and GICs are a shadow of what they were some 15 or 20 years ago — let alone 30 years ago when they went through the roof — they do end up yielding more than what they seem to promise on the surface. However, if you have more risk appetite than I do, which most people do, then go for mutual funds for a while. For your sake, though, don’t go overboard!

(5) Employer’s Pension Plan (EPP)
If your employer offers a pension plan, it falls into one of two types: defined benefit or defined contribution, but no matter the type, it’s always registered. The former is the type that was standard until the last decade or so but is a fast-disappearing breed. Today, if an employer offers a pension plan, it’s the latter type. I would have the latter if I had joined my employer just a few years later, but I’m extremely lucky to have the former.

Under my defined benefit plan, my employer contributes to my pension and I have the option to contribute to it or not. If I decide to contribute (which I do), I do so at the rate of 6 percent of my official annual salary. My choice is all or nothing — 0 or 6 percent — no other figure — but, by contributing, my pension will obviously be better. But the reason it’s called defined benefit is that, come what may, the amount I’ll get is assured based on how much was contributed to it.

Under a defined contribution plan, my employer would contribute a lesser amount to my pension than under a defined benefit plan and I could choose to contribute any whole number from 0 to 10 percent of my official annual salary. The amount I would get would be determined on how well (or not) the contributions grow. I was given an opportunity to play out some scenarios in case I wanted to switch from defined benefit to defined contribution and found that even if I contributed the maximum of 10 percent, I would get only a little bit more than if I stuck to defined benefit and contributed 0 percent!

It was a no-brainer for me but, unfortunately, I have colleagues who didn’t do their homework and fell for the employer’s offer to switch and were influenced by other colleagues who aren’t risk-adverse and convinced them that defined contribution would be better. It never is for the pensioner; it only benefits the employer who pays in less and pays out MUCH less in pensions. A better name for this scheme would be undefined benefit but no one would fall for it because the negative would be in plain view, so an obfuscating term was coined for it instead.

No matter the type, your contribution is deducted from your gross (i.e., before tax) which is unlike the flavour for the Dividends Sharing Plan (DSP) I chose, so it’s like an RRSP in that you’re getting a tax break and that’s why what you and your employer contribute to it is counted against any RRSP contribution you can make. In other words, when I chose to set aside 6 percent on my DSP, my net (take-home) pay dropped by 6 percent; however, when I chose to contribute 6 percent on my employer’s defined benefit plan, the effect on my net was closer to 4 percent — and again it didn’t take long not to miss that amount on my net. My benefits won’t be as rich as some of my colleagues who got to contribute for 35+ years because I started my career at this employer at age 40, and that’s how I figured out that my employer and government pensions wouldn’t be enough — thus my need to save otherwise through an RRSP, a TFSA, my DSP and any other savings I could manage on my own.

But I’m not complaining! At least I have a defined benefit pension from my employer, for I’m of the last generation who’ll get that.

Add It All Up and You Get…
Three years ago, just two days after I officially dug myself out of debt, I asked myself, “Indeed, Now What Do I Do?” I think I knew that part of the answer was that I had to finally start thinking about retirement, but I didn’t really know where to begin on that front. It took my mom’s passing and finally getting my tax situation cleaned up to galvanize me into action, but now I actually get to enjoy my life and not worry about finances (other than keeping them organized).

I might be a scaredy-cat when it comes to how I invest what I have, but I’m no longer a scaredy-cat about my financial future. And boys do I sleep well at night because of that!

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How to Get Out and Stay Out of Debt
Part 7–Red Circles and Blue Circles

Peel ItOkay! Maybe my capacity for frugality is greater than most people’s. Maybe it’s true that I lack the gene that makes people want to own things. But perhaps more true is that I was brought up that way.

When I was a kid, the federal government gave mothers a universal monthly per-child “family allowance.” I believe it was around $26 per month by the time I reached 18, by which point my mom wasn’t eligible for it anymore.

Until I reached my teens, she gave me $5 of it as my personal spending money and I wasn’t allowed to ask for any more for the rest of the month. Of course, $5 went a lot further in the 1970s than it does now. She increased my allowance to $10 by the time I became a teen and, when I started high school, she gave me the whole amount. But that was it!

Thus I learned to start saving my monthly $5 from September onwards so that I could buy Christmas gifts. I don’t remember specifically but I’m pretty sure as I look back as an adult that she “subsidized” the gifts that passed as being from me. However, she still took the $20 I’d saved up by December as my contribution for those gifts she purchased in my name and, in so doing, she taught me not only the value of money but the virtue and positive outcomes of saving. Indeed, because I had saved, I could buy my siblings and grandfather some Christmas gifts.

My siblings and I never felt needy because my mother, especially, had a knack for stretching every dollar as well as a kind of stubbornness that brought her to try her hand at anything and everything before throwing in the towel. I think I was 13 or 14 by the time I had my first pair of jeans because Mom made a lot of my clothes. She cut my hair without a soup bowl in sight until I was well into high school. But she was a very proud woman and would give in when she knew she’d reached the limit of her considerable abilities, for appearances also meant a lot to her. I guess you could say that she fell victim to the syndrome of keeping up with the Jones, but she did so with ingenuity rather than by spending money she didn’t have.

That’s how she taught us about money in the sense that it’s all about making choices. Sometimes it’s better to pay a bit more for something because the quality of that thing is measurably greater than the difference in price compared to its cheaper equivalent. Other times, however, there’s little or no difference or the difference is so small that you can live with it. In other words, she taught us that a higher price tag didn’t necessarily translate to higher quality, but if it does, you can take what you didn’t spend on other things and use it where it matters.

Sure, I still managed to get into financial trouble once I became an adult but, whenever I did have a steady income, my instinct was to apply in my own way what she had taught me. I remember coming up with my first electronic budget in the early ’90s with some DOS-based application whose name I forget. Interestingly, there are tiny echoes of that first budget in the way I budget today. My second serious attempt lasted about 18 months from March 2006 during which time I cleared over $20K in debt, and then I got back on the wagon in late-October 2011 and haven’t stopped since. So when I announced to my mother on October 17, 2013 that I had reached debt-free status, I wasn’t just telling my mother: I was telling my mentor and I think that’s the reason why she was so pleased to hear the news.

* * * * * * *

Tough but Valid Questions
Part 3 of this series was all about listing in detail your outputs (spending) and inputs (income). But my fixed amounts per category that I showed you in Part 4 became firm only after I looked at each line and asked myself:

  • Do I really need this AND that or is just this enough? (If I figure out that I can afford cable TV, is having a package with 30 extra stations going to make my life that much better than settling for the 20-station package, even if the former is only $5 more per month?)
  • What’s the lowest I can bring a given needed expense, assuming I can bring it lower at all, and is it worth the trouble of going as low as I can go? (For example, is saving 50 percent on something that costs you about $500 a year going to make that much difference?)
  • If I reduce something to just what I need, would I feel more miserable than the cut is worth if I can actually afford the present level of spending on that thing? (Recall my haircut example in Part 3.)
  • Do I have needs I long neglected by dismissing them as wants simply because I wasn’t able to afford them at one time? (Example: That sofa is ugly as sin and isn’t even comfortable, but I can’t afford new furniture right now.)
  • Have some wants become needs because I’ve put them off for so long? (For example, I have only one pair of jeans I can wear outside the house and even they are starting to wear out!)

Yes, I did reach points in my ultra-low-income days and then my high-debt days where those were valid questions and I had no choice but to make due with what I had.

* * * * * * *

The Red and Blue Circles
Some expenses glared at me after I listed all my “Necessary Outputs” per Part 3 of this series, and a lot of them were there simply because I’d never bothered questioning them from one year to the next. So I decided to trace a red circle around expenses that could be eliminated entirely and a blue circle around those that could probably be reduced.

When I lived in Halifax until 2008, I got my Internet connection with my telephone landline and I didn’t have cable TV. I wanted to replicate in Montréal what I had in Halifax, but dealing with the equivalent phone company here (Bell) turned out to be so utterly disastrous than I resorted to getting my Internet connection from the local cable company, but no cable TV. However, when I discovered after a few months that the cable company was charging me for basic cable TV, I asked that they come hook it up. To their credit, they reimbursed me (at their insistence) for the months I paid for cable TV but hadn’t actually used it.

Three years later, when I found myself listing all my expenses, I noticed that I was paying as much per year for my phone line as I was for Internet and cable TV, yet I nearly never used my phone line because, even by then, I’d often call my mom through Skype. It was also around that time that I discovered MagicJack — a VoIP device — that would, over three years, reduce my cost for a quasi-landline by over 90 percent. So, realizing I had a cell phone (as well as my work-paid landline) in case of emergencies even if my Internet connection were down, I drew a big red circle over my landline expense, tested out MagicJack’s reliability over the next two or three months, and finally got rid of an expense of over $1,000 per year. When my MagicJack broke some three years later, I decided to replace my dumb cell phone with a smart phone and gave up on any kind of landline entirely.

I then drew a blue circle around how much I paid for web hosting. By that point, I’d essentially gotten out of that business but had neglected closing several accounts. I finally pulled the plug on them, keeping only one that wasn’t technically mine, and my web hosting bill dropped by nearly half — just for doing some cleaning up I’d neglected for far too long. Then I drew a red circle around my web hosting at another company that I had as an emergency backup, which was essential when I was in the biz but served no real purpose anymore.

I’ve never gone without apartment insurance in the 30 years or so I’ve lived on my own — I strongly advise you against NOT having home insurance — and when I got my first car in 1991 and had to have some coverage on it, I got a discount for pairing up my car and home insurance. But aside from switching to another insurance company in the mid- or late-1990s, I just glided along and let it renew automatically from year to year. As much as my insurer had always been there for me when I needed it, it occurred to me that I might be able to get a better deal with my work-based insurance. I did the research and the difference was about 1 or 2 percent less, so I didn’t bother. I did the research again in 2016 and it would have cost me about 5 percent more. So, while I questioned this expense initially by tracing a blue circle around it, I ended up keeping what I have had for 20 years because it’s still the better deal.

In October 2011, I not only had to come up with an effective debt repayment plan but I also needed to pay interest on my line of credit (LoC) on which I had transferred all my debt, and that came out automatically from my main chequing account every month. This line alone represented about $840 per year, so the faster I could reduce my debt, the faster that monthly amount would go down until finally disappearing, which it did after two years. I would also move any expense I had to put on my credit card within 21 days or less to my LoC, for the interest rate on that card was more than twice the rate on my LoC. It’s been more than five years since I’ve paid a penny of interest on a credit card, for today my attitude is, “If I can’t pay for it right now, I’m not getting it right now.”

Only once I had peeled away as much as I could did I run the tally again to figure out two numbers: how much should I give myself for food and life’s incidentals every pay day and how much should I pitch at the debt (and eventually savings). The latter figure can vary for one paycheque to the next and sometimes it’s only a theoretical figure: I offically put it aside on the spreadsheet but I immediately dig into it if I need to cover “unscheduled” expenses. If I overspend the former figure in a period, I can either reduce that figure by as much in the next period or bring down the latter figure by as much, but if I underspend the former figure, the latter figure definitely goes up by as much the next period.

* * * * * * *

Ain’t That a Lot of Work?
Yes, this all makes for a lot of arithmetic and I probably saved a few bucks here and there over the last five years by virtue of not going out because I was too busy (and obsessed) with working the numbers. However, now that I mapped everything out until the end of 2025, I just have a bit of maintenance to do as I go. The most time-consuming event is when the price for a need changes, for I have to change all the amounts on my reserve account spreadsheet in the affected need‘s column, but then I eventually came up with a set of formulas that automatically ajusted (plus or minus) the new per-period savings amount from that point onwards.

For example, recently I managed to get a $20/month reduction on my garage rental in exchange of taking on the responsibility for snow removal. That translates to a $9.23 per period less to put on reserve for that rental and an equivalent amount per period of extra savings, which I’ll probably end up spending on the said snow removal. If I didn’t bother doing the math and treated the $20/month as new money to spend however I wished, I would feel that the new responsibility I accepted is yet another financial burden. The snow removal might end up costing me more than $240/year, but at least I have that much covered, if only in my mind (and on my spreadsheet). Similarly, an increase of $20 or $25 per month, as was the case with my car insurance last year, wasn’t so bad once I ran it through this arithmetic grinder.

* * * * * * *

Generic Versus Brand Name
I probably won’t shock you when I tell you that if you were to go through my cupboards or my fridge, you’d find very few brand-name products. This is a legacy of my poverty days but even now when I could afford brand-name products, I don’t bother with them because I rarely notice a difference. Only when I notice a substantial difference do I get brand-name products — like when I discovered that I get a rash when I wear clothes on which I used the generic fabric softener, or a certain generic store-branded toilet paper was thin as hell and only marginally better than sand paper.

So there are definitely times when a brand-name product is measurably better — and by “measurably,” I mean you have to take out any subjectivity in your assessment. However, brand loyalty for some people clouds their assessment: it has to be Kraft macaroni and cheese or peanut butter; it has to be Heinz ketchup. But after comparing a lot of both, I’ve rarely detected a difference that justified the higher price tag. That said, especially in the grocery store, it’s definitely worth looking at the price per unit. If the difference in the per-unit price is so small and you honest-to-god prefer by a lot more the brand-name product, why bother with the generic brand?

That’s one of the many things my mom taught me: sometimes the quality justifies the higher price. But for me, Québon or Beatrice homogenized milk that goes for $3.65 per 2-litre container tastes the same as Lactancia that costs at least a dollar more for the same format. Same thing with butter and cheddar cheese. But going back to my fabric softener and toilet paper examples, there are times when there is a negative correlation between (lower) price and quality. The trick is NOT to assume that a higher price tag is always a sign of higher quality.

By the way, you can also apply this to wine. Yes, I’ve tried some of the cheap stuff and, yeah, it’s pretty bad. It’s plonk; it’ll get you drunk and that’s about it. But you’d be surprised what you can get here in Québec without spending more than $15 on a bottle — often less.

* * * * * * *

Buying Versus Renting
One thing I pondered at length as early as 2011 is whether or not I should eventually buy a condo and get out of renting once I’d clear my debt. The difficulty for me soon became apparent: How long would it take me after debt repayment to have a down payment for a condo?

I came to this pondering too late and at the wrong time. Even in Montréal where housing prices haven’t gone into the stratosphere as they have in Vancouver or Toronto, home prices have more than doubled in 15 years. Even though at the time I was still thinking I would have to work until I reached 65, I couldn’t make the numbers work so that I would have the mortgage paid off by the time I retired. And speaking of retirement, while I will get an okay pension from work plus a government pension I’ve paid into all my working life, the projection on that front would have me, upon retirement, go well below the recommended 70 percent of net earnings when working. Because I started my current job at age 40, my pension from work paled in comparison with my colleagues’ whose career will have spanned 30 to 35 years compared to my 25. So I might have a nearly “free” roof over my head if by some mean feat I managed to pay off my mortgage by age 65, but I’d be stuck under that roof unable to afford anything beyond subsistance.

The received wisdom for several decades has been that owning one’s home is always better than renting for life. However, given where the housing market has gone in Canada since the beginning of this century, that isn’t necessarily true anymore for some GenXers like me who’ve had a checkered career and it’s probably not true anymore for Millennials. The risk of being house poor while paying off a mortgage and then house poor at retirement is greater than it has ever been. You can’t eat a house.

Besides, who wants to work only to pay off a mortgage and get in debt because you need vacations you can’t afford because of the stress from work and that mortgage? And if, by the grace of Dog, you do get to reach retirement age, what do you hope to do then? Sit back in a rocker in that nice home that may have outgrown you by then?

Now I’m NOT saying that buying a home is not a good choice. Perhaps my method will help you demonstrate that you have the means to buy one, have a comfortable retirement, and have a life while you’re working. If so, go for it! But what I AM saying is that you shouldn’t assume that owning a home is the given that it used to be.

* * * * * * *

On the Other Hand, There Are Five Fingers
Once I figured that I, at least, couldn’t do both — own my home and have a comfortable retirement — I switched gears and focused on living well while still working and making sure I could live well for 30 years of retirement. I went even further and crunched the numbers to see if I really would need to work until 65 as I always assumed or if I could retire sooner.

It turned out that, despite my aversion for risky investments but because of my inherent frugality, I could very realistically plan on retiring at 60. Lately, I’ve fantasized about retiring as early as 55, but those five extra years will make the difference between a pauper’s retirement and a comfortable one. So, unless I win the lottery, which is unlikely since I don’t buy lottery tickets, and even if I decided to go for a promotion at work, in which I have no interest, my last day at my job should be December 22, 2025.

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How to Get Out and Stay Out of Debt
Part 6–So the Bank Said “No Way, José,” Huh?

Oh Dear...So you asked your bank for a line of credit (LoC) but they looked at you and laughed, huh? Gosh, I’m sorry to hear that! It would have been helpful but either the bank rep you spoke to is an asshole or your credit is so bad that it was high time that you started doing something about it.

Well okay… *SIGH* No point crying over spilled milk. At least if you’re still reading through this series, it means you’ve done your homework and you know that there’s more money coming in than there needs to go out, so you’re not a candidate for bankruptcy …at least not yet. That’s if you told me everything, right? For if indeed your needs including minimum payments on your credit cards have you right up against the wall with no room to move, then yeah, maybe you came too late to the realization that you’re in deep financial trouble.

Maybe that’s why the bank laughed at you.

Oops! Sorry… Oh cheer up! Perhaps my method can be applied in the framework of a consumer proposal plan or, if it’s really bad, outright bankruptcy. If you’re well behaved, you’re likely to be given very limited credit in a year or two to prove you can be responsible with credit and at the same time start rebuilding your credit history while you’re still under bankruptcy (NOT under a consumer proposal, though), which typically last 7 years. And you’ll definitely be able to use my method to do that and stay out of debt afterwards.

Wait! What’s that? You’re not up against the wall? My method showed you that you DO have some manoeuvring room but it’s just that the bank didn’t buy into your idea for a LoC?

Well then, in that case, there’s a well-known tried-and-true alternative for you. I don’t like it as much as the LoC method because you’ll end up having paid a lot more interest by the time you finish getting out of debt, not to mention that you’ll have to keep your eyes on several balls at once. However, if those are the cards you’re being dealt, you’ll just have to grin a bear it.

The Debt-Stacking Method
Here I’m just going to point you to Wikipedia.

The debt-snowball method is a debt reduction strategy, whereby one who owes on more than one account pays off the accounts starting with the smallest balances first, while paying the minimum payment on larger debts. Once the smallest debt is paid off, one proceeds to the next slightly larger small debt above that, so on and so forth, gradually proceeding to the larger ones later. This method is sometimes contrasted with the debt stacking method, also called the “debt avalanche method,” where one pays off accounts on the highest interest rate first. (emphasis mine)

As you have guessed from what I’ve written previously, I prefer getting rid of the debt with the highest interest rate first, regardless of whether it’s the smallest or the largest. I understand that it might not reduce your number of debts quite as fast, but the interest rates are the real killer.

Before you even start, you should also see if you can transfer the balance from your high-interest cards to the lowest-interest card you have, effectively still attempting a kind of consolidation. In fact, while the bank may not have wanted to give you a LoC to consolidate your debt, it might accept to replace your current card with one with a low-interest option and transfer the balance onto it. Since this card will become your LoC substitute, you can only add extreme “contingency” spending on it, like a flat tire or something you couldn’t reasonably see coming because, from now on, that’s the only way you’ll ever be using credit.

The bank will probably try to talk you out of their low-interest option card if you’re the one who brings it up, though. They’ll say stuff like, “Oh, but there’s an annual fee of $20 on that one and yours has no annual fee, plus it doesn’t give you any air miles/cash back,” but just give them your best “Are You Seriously Kidding Me” look because $20 is a drop in the bucket compared to how much you owe and how much interest you’ll have to pay on your lousy current card. They’re making more money on your back in the pickle you’re in now, thus why they’ll resist the idea of the low-interest option card.

So here’s a simple illustration. Let’s say that you have 5 accounts to which you owe and $225 per paycheque to distribute. Instead of doing one payment per month, you’re going to use my reserve method which is every 2 weeks (assuming you get paid as I do). The most “expensive” debt (highest interest rate) is in the first column, the second-most “expensive” next, and so on. If two are as “expensive,” then put the smallest amount owed first so that you can get the kick of seeing that one fall off sooner.

Description Debt 1 Debt 2 Debt 3 Debt 4 Debt 5
Minimum Monthly Payment 45.00 27.00 160.00 9.00 31.00
Week 1 Minimium Payment 22.50 13.50 80.00 4.50 15.50
Week 1 Top Up 89.00 0.00 0.00 0.00 0.00
Week 2 Minimium Payment 22.50 13.50 80.00 4.50 15.50
Week 2 Top Up 89.00 0.00 0.00 0.00 0.00
Paid Over Two Periods 223.00 27.00 160.00 9.00 31.00

Assuming you’re not adding any more to these debts (ahum!), the next series of minimum payments should be lower, although the difference should be most noticeable for Debt 1. Repeat half the minimum payment per period on all cards and the remainder of what’s left to distribute on Debt 1.

Eventually the balance owed on Debt 1 might be the minimum payment plus a portion of the available “top up” amount, so in that case you’ll be in a transitional period when you’ll be able to put some extra on two debts. (The minimum payments below are for illustrative purposes only and could be higher or lower depending on balance owed, interest rate, time, and so on.)

Description Debt 1 Debt 2 Debt 3 Debt 4 Debt 5
Minimum Monthly Payment 5.00 24.00 145.00 5.00 28.00
Week 1 Minimium Payment 2.50 12.00 72.50 2.50 14.00
Week 1 Top Up 98.78 22.72 0.00 0.00 0.00
Week 2 Minimium Payment 0.00 12.00 72.50 2.50 14.00
Week 2 Top Up 0.00 124.00 0.00 0.00 0.00
Paid Over Two Periods 101.28 170.72 145.00 5.00 28.00

Be careful, however, with Debt 1! There might be residual interest to pay from the last month during which you had a balance owing, so you’ll have to throw a few final dollars on it before you can finally consider it really done.

It’s also possible that a debt like Debt 4 in the illustration above might be ripe to be wiped off by topping it up now rather than waiting for its time mathematically. I know that it would make me feel good to knock it off if part or the entirety of the Week 2 top up would be enough to do so even though that debt is not as expensive as Debts 2 and 3. So I leave that up to you!

There’s another thing you need to consider. Maybe the amount you can put toward your debt is so low that, although you can implement this debt-stacking scheme, it will take you more than 3 years to find yourself debt-free. If so, you’re risking debt repayment fatigue.

In that case, if I were you, I would use this scheme for one year and then go back to the bank and try again for a LoC so that you can benefit of the much lower interest rate it imposes. Always paying all your minimum payments for a year — and possibly having paid off a debt or two — will have done a remakable amount of good to your credit rating. And maybe — maybe! — the bank will see that you’re serious about restoring your financial health, so this time they might not laugh you out of the bank when you ask for a LoC.

If they do, change bank.

Your Credit Score = Your Profitability, Not Your Financial Health
Unlike what you might think, your credit score is not about your financial health. In other words, it’s not as much about your trustworthiness with credit as it is about your profitability to lenders. They WANT you to carry a balance. They WANT you to pay only the minimum balance. That’s how they make money on you.

Ironically, while you’ll be following this scheme for a while and pay all your minimum payments and then some in a few cases, your credit score might eventually become better than mine! That’s because lenders don’t like someone like me (and what you’ll eventually become) — someone who pays off his cards in full every month. I’m not profitable in the eyes of lenders. In fact I’m their worst nightmare because I make money off my main credit card!

Your credit score might even take a hit for a few months after you close an account you’ve paid off, so instead you might consider keeping those cards but sticking them under the fridge. However, when you get to be my age and reach not only debt-free status but also have real savings socked away, you won’t really care about your credit score because you won’t need credit that much anymore. Yet if you do need to get a big loan, you’ll be able to point to your assets instead of relying on that score which, quite frankly, is biased since it doesn’t represent what you perhaps always thought it represents…

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