I like saving money. No, I mean I really love saving money. You know that feeling that you get when you get something accomplished that you've been working at for days; or the rush that you get after a good run or workout at the gym? Saving money gives me that feeling. I don't mean to sound corny at all but I consider it fun when I electronically move money into investment portfolios from our chequing account.
We recently refinanced our residential mortgage in order to lump in our home equity line of credit, which was the result of borrowing money to invest during the financial crisis in late 2008, early 2009. At the same time we increased our amortization to 35 years and changed our payment frequency to monthly instead of accelerated bi-weekly. My plan with this strategy is to do what I love to do and save more money. Since interest rates are currently low, we will be lowering the priority on paying our mortgage off while socking the extra funds in dividend paying investments. Our mortgage rate of prime less 0.60% (currently 1.90%) will enable us to save more capital and invest it. At any time we have the freedom to switch gears and make larger payments toward our mortgage if the circumstances change. For now though saving is the priority and I plan to ramp it up!
One of the main reasons why I like saving money now is that it really pays off years down the road. I am 31 years old; I want to put dollars to work now so that they can pay us in spades later in life. I don't need too much stuff right now to be happy in life, and coincidentally I have big plans for any extra funds that don't contribute to that happiness. A $500,000 portfolio of dividend paying stocks can easily pay out $25,000 per year in income. Wouldn't it be nice to make an extra $25,000 a year before dividend taxation?
Having saving on my mind every time I log in to my banking site is something that lends itself to my saving prowess. Moving money around is easy and it gets it out of the way, and out of my sight which inhibits wasteful spending. I don't like seeing money just laying around, I like putting it to work.
14 comments:
Very interesting! Good for you to make an unconventional plan and following through it.
Out of curiosity, does your plan include a timeline by which you would like to have your house paid for? By 50, 60 ? I don't know how big your mortgage is so I can't see how long it would really take to pay it off once you put your mind to it.
Consequently, did you consider selling and renting?
My plan does not include a timeline to have our current home paid. I expect that we will sell our current home before we pay it off. We plan to have a mortgage for the foreeable future. I see a manageable mortgage as a good thing as we are leveraging the borrowers funds to own a stable and slowly appreciating asset.
I have never considered selling and renting. Why do you ask?
Great post MG!
Finally someone doing the math and taking the more sensible approach. Pay down debt when interest rates are high, and slow down payments when rates are low.
I'm always amazed how there are so many people that spout nothing but pay down the mortgage first, pay down the mortgage first. By maintaining my investing over the past 2 years, I've easily grown my investments more than the interest I will be paying over the term of my mortgage.
Great work! Great to read the thinking behind your decisions.
I couldn't agree with you more, put money to work now so you don't have to (later on).
A passive dividend income of $25,000 per year would be amazing to say the least.
If you don't me asking, how far along are you on that journey? Are you going to "be there" in another 5, 10 or 20 years?
Thanks for the great comments. Looks like our mortgage just got more expensive -- 2.15% as of today.
FC,
I should do an update post on this, and have a look at our progress, but we have a goal (recently revised upwards) to achieve a value of $195,000 in outside of RRSP dividend paying investments by Feb. of 2014. I will be 35 that month. This should pay us nearly $10,000 per year in tax advantaged income.
Current value is around $88,000. By my rough math the goal has become more challenging since I set it a few years ago but I still believe that we can do it.
@MG
I was asking about renting because I heard someone doing that in Vancouver to avoid more costs. I was just curious if you ran the numbers to a conclusion.
I have not run the numbers.
I have a dream....
To be mortgage free and live off dividend income by mid fourties.
You and i are of similar age so its interesting to watch as we progress.
I like the idea of living of Canadian public companies dividends only because tax is near to nil so $25k is more like $45k for normal tax payers.
good show.
Derek
Hi MG,
I'd also be interested in your projections. You list the $195k outside RRSPs by 35, but what about non-registered accounts and TFSAs? Where will you be with your RRSPs at that age?
Just curious, because your snap shot and my household snap shot are in many ways quite similar.
Sampson, The $195K includes TFSAs. I could estimate our RRSP values by that age as they are virtually on autopilot. I expect that combined our RRSPs will be valued at around $120,000 by this point. Hard to judge though.
did you get the variable mortgage where the payments are fixed but the amortization changes?
I refinanced my home and some rental properties to a variable 35 years amortization mortgage when prime was 2.25 so now with 2.75 prime my amortizations are now at 40 years!
I like it because I can enjoy the low payments and reinvest this extra free cash flow for the next 5 years :)
DL, The payments are not fixed, so I end up paying the same principle with every payment.
Hey MG - sounds like another, future post: your progress to reaching ~$200K outside your RRSP by 2014 in dividend-payers.
Whatta great goal!!
I'd like to be at that target myself, although my wife and I are a couple of years older than you I think. Needless to say, it sounds like you're well on your independence journey as are a few of your frequent contributors here.
By 55, my targeted retirement date, I'd like to have $500K in dividend-payers; my unwritten goal.
As they say, saving is always a forced saving. I am not too sure if it is fun for anybody, even if you have log term goals.
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