Thursday, October 28, 2004

My $15k budget

Many people have asked how I can live now with $15k.

To simplify things (for me), all amounts are in canadian dollars (CAD). Currently, $1USD ~ $1.23CAD. But as the cost of things in Canada is different than that of the US, doing the conversion might be irrelevant. For instance, my condo here is worth $85kCAD and could be worth over $400kUS if it was located in Manhattan but gas is almost twice the price here than in the US.

Some preliminary informations:

- I'm married. For many expenses, we share payments, that is the case for the condo mortgage, for instance. I specify when expenses are shared or not. Whenever they are, I display my share.

- I am a part-time student at the university, but Quebec has the lowest scholarship fees in North America (less than $1800 a year in most universities). I already have put aside $1000 which will cover my last session. Since it will be the last time I will ever pay for scholarship fees (hopefully, since I will then have a Ph.D), I did'nt include it in my budget.

- I own a five years old car (small sized sedan), last payment on the loan was made two months ago. I don't use my car much (I go working using public transportation and walk a lot), so car maintenance and gas costs are low.

- We have a 2 bedrooms condo valued at $85k with a mortgage of $63k on it. My wife and I both contribute to that, thus the low amount. I show the figures for my half.

- For expenses that vary one month to another, I maintain "virtual accounts". That is, I keep track of my real expenses. If my expenses are lower than my budget for a given month, the difference is kept in the account to use for future months. If my expenses are higher, I "borrow" money in the account. From time to time, I modify the budget value according to keep the balance just over the real expenses. I've been doing that for almost 10 years, thus the amounts are reasonably accurate.

- For one-time expenses related to furniture acquisitions, I have estimated how much money we need to invest each year in order to keep furniture (tv, computer, sofa, appliances, etc.) at their current value. I will no show the details of this estimation, since it is fairly complicated. For instance, a computer loses its value fairly fast and will need to be replaced more often than our micro-wave oven. Some items keep most of their value after an initial loss (ex. a guitar). Some items can be completely worthless after a period of time (ex. my digital camera will have no value in 10 years) while other keep some value almost forever (ex. books)

- Health care is provided by the province universal health insurance, which is free and paid by the government. In counterpart, we pay much more income taxes than in the US.

- Life insurance, travel insurance, invalidity insurance, medication insurance are paid by my employer

All expenses are monthly figures.

Car-related expenses (partly shared)
- I put aside $100 (shared, my wife also puts aside $100) to pay for repairs and to grow a down payment for our next car. We plan to keep our car for two more years. The car value should be over $3500 at that time and we should have put aside in this account about $2500 (hopefully, repairs should be much lower than the $5500 the budget sums to in two years). Thus, when it will be the time to buy our next car, we should be able to pay down $6000 and keep our mothly loan payment to about $200 (thus, my half would be ~$100). Account currently contains $400.
- car insurance: $40
- public transportation: $45 (discount fee as a student)
- gas: $25 (shared)
- car maintenance: $30 (shared) (which I cumulate in a special virtual account; there is currently $650 in this account). Includes normal maintenance (oil and filter, check-up) and other car-related expenses such as driver licence.

Condo (shared)
- Mortgage: $190 (includes life insurance)
- Taxes: $80
- Insurances (furnitures): $13
- Condo fees: $68 (includes insurance, heat and warm water)
- Electricy: $15 (electricity is cheap in Quebec, does'nt include heat and water, see above)

Other expenses.
- Phone, Internet: $30 (shared)
- Grocery: $200 (shared)
- Provision for contingencies: $50 (not shared) (as of today, I have cumulated $6000)
- Summer vacations: $50 (shared)
- Furniture acquisition/replacement: $60 (shared)
- Charities: $20 (I volunteer two hours a week)
- Other expenses $300. Includes everything else, from clothes to gifts, wine, books, cds, restaurant, theater, newspaper, etc. Some of the expenses are shared with my wife, some other aren't. That allows $3600 a year.

The "Other expenses" is difficult to break down, since it varies much as time goes. Approximately:

  • Gifts: $500/year (my wife and I have decided a few years ago that we would not give gifts to each other for Christmas since we believe this holiday has become too mercantile). We often buy each other subscriptions to theatre or music lessons, for instance, for our birthdays. Thus, the values below will sometimes be lower.
  • CDs and books: $100/year (we already have >400 music albums at home and >1000 books in our bookshelves, so we have decided a few years ago to limit acquisitions)
  • Movie rental: $100/year
  • Theater: $100/year
  • Restaurant, bar: $1000/year
  • Lessons: $200/year
  • Clothes: $400/year (I have few clothes. That way, I throw them away when they become too used, not when they are out-of-date)
  • Newspaper, magazine: $200/year
  • Wine, alcohol: $700/year
  • Others: $300

Total = $14,952 a year.

To insure that I have not underestimated my budget, I've calculated how much money I had a year ago and how much money I have today, from which I removed interests gained on bank accounts, return on investments and other gains. Then, I compared the result with my disposable income. It turned out that my expenses where last year a bit lower than my budget. I probably had spent a bit less than the $300 in the "Other expenses" category.

So now, your turn. Doing your budget, you'll know where your money goes, where you can save and how much money you'll need to retire. What are your yearly expenses?
Later, I will post my after-retirement budget.

Monday, October 25, 2004

Give a money value to your time

Time is money.

Money and time are connected by two distinct ways: the time value of money and the money value of time. The former is related to the fact that $1 today is better than $1 dollar next year. Why? Because of what you can do this year with the $1 that you cannot do if you have to wait one year to get it. For instance, you could put $1 in a 2.5% return saving account and have $1.03 the next year instead of $1. Or you could reduce your 6% interest mortgage by $1 and save 0.06$ for the year.

Just as $1 today is worth more than $1 next year, 1 free hour today is worth more than 1 free hour in 1 year. That is, for the same reason, this is true because of what you can do during the year with this free hour. Let us suppose for instance that you have the choice between 100 free hours today and 100 free hours when you will be 80 years old. If you use your 100 free hours today, you could learn Spanish now and benefit from it for tens of years, provided you are currently young enough. If you wait until you are 80, you will learn Spanish and benefit from that for a few years only. Or you could die before reaching 80 and never use these free hours.

As a general rule, the later in your life you use your “time”, the lesser this time has money value. Keep that in mind. If you spend 1 hour of you time to save 0.25$ by comparing prices at different stores before purchasing a soap and that this saving will allow you to retire 1 hour sooner (that is, give you one free hour later in your life), you are not even, but you lost some time (and thus money). It is just like if one gives you the choice between having $1 today and $1 in 20 years: you better take the money and run.

Thus, just as well-invested money worth more with time, well-invested time worth more with time. Time is money, money is time. After all, what is money, if not the promise of exchanging some of you own time with the some of someone else?

The money value of time is much more difficult to define than the time value of money, mainly because people are used to give value to money and not to time. How to value what one hour of you time is worth? Let us do the math in an early retirement plan.

Suppose you earn $60,000 a year, from which $40,000 remains after taxes. Suppose you work 40 hours a week, 50 weeks a year. Thus, each hour you work provides you with $20 available for expenses and savings. Savings, on the other hand, can help you retire earlier, that is, it will pay later by providing you with free time.

We said earlier in our example that each hour gives $20 available. Let us set the money value of one hour to $20. Suppose that the value of this $20, if properly invested, is $60 when you will be ready to retire, after returns. Thus, one hour saved today is worth (in terms of money value) three when you will retire. That is, each additional hour you save at this $20 rate will allow you to retire three hours earlier, in this example. The earlier you retire, the higher the number of hours you need to save today to save hours at retirement. For instance, if I plan to retire tomorrow, each additional hour saved today will allow me to retire... one hour sooner tomorrow.

Now, what does that means in terms of savings? Well, it means that if your goal is to reach early retirement, you should not seek savings that make you work more today than the working time you will save later. That is why little savings that make you work make no sense. If you need to get saving coupons, printing them and go to 4 different stores to save 10$, you are not likely saving at all. Actually, you are working now, at very low wages, to retire earlier, yes, but how much earlier? Hardly the time you will have lost to save $10. You better pay $10 more and enjoy your spare time now instead.

Some rules and thoughts:

- Give a money value to your time. For instance, use your hourly disposable wages (the amount you earn each hour after taxes). Use your after-taxes wages since savings you make are also after-taxes amounts;

- Savings that make you work are worthless if the money value of the time you have to work in order to achieve the saving is greater than the money actually saved;

- The later you retire, the more value one hour saved today will have in the future.

Note that these rules don’t suit to everyone. I’ve said that you better not work one hour more today if it only allows you to retire one hour earlier, since the value of your hour today is greater that the value of your hour in some years. But this is only true if we talk in terms of the money value of time.

Time has other features than its money value. Suppose for instance you work 40 hours in an assembly line and you dislike the job, but you have no other choice. Suppose you earn a disposable $20 an hour on this line and that you can work one additional hour by repairing yourself something broken in your house instead of paying someone to do it and save $10. According to what I’ve said before, you could think: I better not work this additional hour to repair my house, since I work one hour now to save one hour in the future by retiring earlier.

However, if you like working on your house more than working on the assembly line, maybe you better do the house repair, even if both have the same money value. You are actually not only exchanging one hour doing something you dislike with one hour doing something you like.

Remember that retiring only is not only a matter of stopping working. It is also a matter of working on things you like, when you want, if you want and where you want.

Jack

Thursday, October 21, 2004

Using Cash-Back Credit Cards to retire earlier

I received a few weeks ago a new Cash-Back credit card with no annual fee. This credit card gives 1% cash back on any purchase made with the card. No points to collect and exchange against useless (and overvalued) items, no restriction on what or where you need to buy to receive rewards, no balance to get the reward and no annual fee.

Now, I try to put as much as I can on my credit card. But to do so, one need to be much disciplined: you should keep track of what you buy (in order not to buy more that before) and you should always pay your bill entirely each month. You should not use your credit card to increase your survival debt.

I’ve calculated that I am able to put about 35% of my actual total yearly expenses on my card. Among things I cannot put on the card are: mortgage payments, city taxes and car loan payments. Groceries, furniture, restaurant, fuel, cell phone bills, etc., all go on the card. The ratio would be higher if I consider only my post-retirement expenses. At that moment, the mortgage should be paid, thus the higher ratio.

As a consequence, the total expenses I would be able to put on the card would be about 50% of all my expenses. That is, my expenses would be reduced by 0.5% when I will retire, thank to the cash-back plastic. That is a modest $80 at today money value, since my expected expenses after retirement (the amount I plan to withdraw each year from my portfolio) is $16 000. A small, negligible amount, you say? $80 a year for 51 years (up to my expected age of death at 80), inflation-adjusted (using 3% yearly inflation increase), invested in a bill that return a real 3% (say a nominal return of 6% - 3%), means a total saving of nearly $10 000 (today’s dollar). If you buy low-energy bulbs, you total savings reach over $20 000 using the same time span. This might be enough to retire some months earlier than planned.

Simple and small savings that bring no feeling of deprivation is one major step towards early retirement.

Jack

What is inflation? Inflation is the most pitfall ahead for your ER plan, make sure you understand what that means exactly.

Friday, October 15, 2004

Putting as much as you can in your RRSP, IRA or 401k plan

If you are already familiar with IRA/401k/RRSP plans, you will not learn much from this post. Otherwise, if your early retirement plans are serious, you should consider contributing as much as you can in an IRA (or 401k or RRSP) as the first major step of you ER plan.

I don't know much about fiscality related to IRA and 401k plans in the US. I know they are similar to canadian RRSP. I believe that for most people seeking ER, most of your savings should be put in these tax shelters, unless you already have reached the maximum contribution allowed. If you are a Canadian citizen, RRSP is a must, particularly for early retirers. This is likely to be true also for Americans with IRA (or 401k).

Let me explain why early retirers would benefit more than others from these saving plans.
Let us suppose that as of today, I earn $65 000 a year. In Canada, I'll pay about $18 000 in taxes (about half to the province, the other half to the federal government). In Canada, taxes are highly progressive. There are four tax brackets in Canada, three in Quebec. If I put aside $10 000 a year in my RRSP, the tax saved will be that of the highest tax backet. At $65 000 income, the tax bracket is 46% in Quebec (counting for both government taxes). That is, to put aside $10 000, you only need to invest $5400.

The idea behind a RRSP or IRA is that you are supposed to pay back the taxes when you withdraw the money at your retirement time. Money thus withdrawn from you plan is taxed as standard income. The magic, for early retirers, is that you will likely withdraw such a small amount that you will be taxed at a much lower bracket or not at all. For instance, if I withdraw $10 000 at retirement time (and suppose I have no other income), I will pay no tax at all in Canada. Not only have you gained the initial $4600 in tax reduction, but all incomes generated by your investments inside the RRSP are also tax-free.

Keep in mind that this is true only if you withdraw a small amount from the RRSP. If you follow "experts" advice and withdraw 80% or you pre-retirement income, you will not likely benefit as much from your RRSP. Only the tax-shelter (incomes inside the RRSP are only taxed at withdrawal time, thus delaying tax payments and allowing the nest egg to grow faster) benefit will then remain. I don't know for IRA and 401k plans, but there is a maximum contribution you can put in a RRSP. It is the smaller amount between 18% of your gross income and $14500.

Sunday, October 10, 2004

Retiring early and being environment-friendly

Have you ever thought that seeking to retire early could also mean being more environment friendly?

There are two ways to get around ER: increase income and decrease expenses. Increasing income is much difficult, since you have almost no control on it, but decreasing expenses is rather easy. You can even reduce expenses without any sacrifice, with no change in you daily life. And as a general rule of thumb, if it costs you less, it might also be ecological.

I bought five low-energy bulbs last week. Their electricity consumption is 11 watts and produce as much light as a 60 watts bulb. They are more expensive, but they last much longer: 10 000 hours for the ones I bought. Thus, the extra-cost to buy these is offset by their much longer lifetime, and you will not need to change the bulbs for a while, saving time, particularly for bulbs that are difficult to reach.

The bonus: you save about 50 watts to get the same light. For their 10 000 hours lifetime, this is 500kw. Depending upon the cost of electricy where you live, this could help you save over $40 each bulb. If you multiply this by say, 10 bulbs, this sum up to $400 each three or four years (it depends how much you use them each day). Consider a $100 saved each year. That is the amount you will save forever if you switch to low-energy bulbs.

How this helps you with your retirement plan? Use FireCalc. Chances of success according to it and the default value is now 93.9% from 93.2%. Not bad for such a small, environmental action.

Saturday, October 02, 2004

The Man Who Plans to Retire at 37 (MPR37) Reports Strong Quarter Results

MPR37 today reported that net earnings for the quarter ended September 30 has increased 55% at $7000 from $4500 compared to the previous quarter ended June 30, resulting primarily from better return on investments.

Wages were stable. Expenses has decreased 4.2% from $4707 to $4506 on lower insurance costs, lower television cost, lower electricity costs, lower credit costs and marginally higher condo tax.

Assets increased $5000 to $210,000 from $205,000 in the previous quarter. Liabilities amounted to $129,000, down $2000 from $131,000. Liabilities include $25,000 as provision for contingencies, up $500 from $24,500 in the previous quarter.

Net earnings for the three months ended September 30th 2004 were $7000. Total wealth (net assets) amounted to $81 000.

Stronger results from investments in the quarter compared to the previous quarter
Yield on stock investments were a healthy 11% (44% annualized) due to good market conditions and tight investment strategy. Total stock shares amount to $26,000. RRSP return were a non-annualized -0.9% on a nest egg of $33,000 during the quarter. Other investments include $20,000 cash in an INGDirect account yielding an annual 2.25%. This amount has been reduced to about $17,000 in order to increase investments in mutual funds, which sums to $15,000, yielding -3.2% during the quarter.

Next quarter previsions
The net earnings in this quarter are not likely to be sustainable, since a large part of it resulted from good one time investments returns.

In the next quarter, an increase in wages is expected. This increase is projected to be 3%. The mutual fund market are projected to give positive results in the next quarter, particularly after the American elections. Stocks are projected to yield 2% during the next quarter.

Risk assessment
There are some clouds ahead, but overall, the situation is quite under control. My wife could loose her job soon, since the organization she works for have financial problems. This could occur in the beginning of January. The effect of this would be noticeable in less than 12 months, after employment insurance expires. Such a job loss would imply much higher expenses. My job is also at risk, since the company I work for is loosing money. However, job loss is not likely for the next 6 months.