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Friday, July 31, 2009

Analyzing Paying Off Loans

We all have loans that we have to pay off. The question always rests with us is "which should I more aggressively pay off"? This post will analyze some of your options.

Option 1 - Pay more than the minimum on all loans We all know that by paying just the minimum on your loans it will take forever to pay them off. This option suggests that you pay more than the minimum on all your loans. Let's say that you have loans with minimums of $96, $105, and $113, every time you get a raise you will split the difference equally. So if you get a $60 raise, your new payments will be $116, $125 and $133 (a $20 raise to each).

Option 2 - Pay more quickly the one with the highest interest rate - This is the mathematically best way to go. Whatever loan has the highest interest rate (usually your credit card) you should put the priority on. So in the scenario above, with minimums of $96, $105, and $113, you should put your extra $60 to the one with the highest interest rate, and pay the minimums on the rest of your loans. As I said, mathematically this makes the most sense.

Option 3 - Pay off the lowest valued loan first - The theory behind this is that the reason that people have loans is because of cash flow problems, so your efforts should be to pay off the loan that has the least value, thus increasing your cash flow and then you can put this money towards your other loans. The second benefit is that you feel good for each loan that you pay off. My example will be three loans: one for 3% for $3000, one for 5% for $4000 and one for 7% for $5000. This option says to pay off the $3000 one first, to improve your cash flow and then put the extra money that you have onto the $4000 loan.

Option 4 - Dead On Last Payment - This is recommended by David Bach in "The Automatic Millionaire" when choosing between which bills to pay. The following table is taken from page 181 from his book:

Account Outstanding Balance Monthly Minimum Payment DOLP (Outstanding Balance divided by
Monthly Minimum Payment)
DOLP Ranking (Lowest DOLP number is ranked
Visa $500 $50 10 1
MasterCard $775 $65 12 2
Bay Card $1,150 $35 33 3

The idea behind this is that it combines the highest interest and the lowest value of the loan. You should pay the minimums on all your balances and all your extra money on the loan with the lowest DOLP. Another good option.

For me, my personal priorities are to pay my credit cards off first (since the interest is triple my other loans) and then to pay off my lowest valued loans after that. Feel free to comment and share what your strategy is to paying off debt.

Edit: Sorry about the spacing with the table. HTML doesn't quite work perfectly in this blog.

Thursday, July 30, 2009


We all want to pay the least taxes possible. With RRSP contributions, and taking courses, and donations I always get back several thousand dollars in income tax in the spring. Starting this year, I will have to re-pay my Home Buyers Plan, which will only be a few hundred dollars from my RRSPs deducted.

The question that I am asking is this: "Is it better to receive several thousand dollars at income tax time" or "Is it better to have your employer reduce the taxes withheld on each paycheque giving you more money every paycheque" or "Is a balance better (a slight drop is taxes and a smaller income tax cheque in March)". I will analyze the three options as best as possible.

Option 1: Receiving money at income tax time - Up until now I really liked this option. Getting an extra paycheque (or two) in March would always do wonders for my net worth spreadsheet and it was nice to put some savings and pay off some loans with that money. The problem is that this is not the most efficient way.

Option 2: Is it better to have your employer reduce the taxes - For ease of calculation, lets assume that I get back $2600 at income tax time. This averages out to $100 per paycheque that the government has taken from me. Mathematically, it makes much more sense (both for my cash flow and total net worth) to have my employer drop by taxes by $100 per paycheque and then get back no money in March. Remember that the government isn't paying you interest on the money it holds, so whether you pay it on credit card bills, or on your mortgage, or invest it, you will be way ahead.

Option 3: Have taxes reduced now and get some back in March - Unfortunately, we really have little idea how much money we will be getting back at income tax time. My biggest fear is always to have to write any cheque, and a cheque to the government in March would not be pleasant. This third option (the one that I will go with) will be to take whatever your income tax credit was last year, and divide it in 2 (and then by 26) and have your taxes cut by that amount each paycheque. In my above example, I got back $2600. I will cut this in half to $1300, and then divide it by 26, giving me an extra $50 per paycheque. In this way, I will also get $1300 back at income tax time. Even if there is a slight change in taxes (positive or negative), there is a guarantee that my paycheque will be larger and I will still get money back at tax time.

Does this make sense? I will go with Option 3, but Option 2 is much more optimized. Leave a comment with your opinion.

Sunday, July 26, 2009

Four Books I Highly Recommend...

For those interested in personal finance, or just looking for some inspiration to get their financial journey to retirement started, here are four recommendations:

The Wealthy Barber by David Chilton - the first financial book that I ever picked up and still one of my favourites. The concepts of "pay yourself first" is what is highly stressed in this book, and through the characters and narrative at the local barbershop, it stresses how anyone can end up wealthy. An easy read and very informative!

The Automatic Millionaire by David Bach - very similar to the Wealthy Barber: talks about paying yourself first and the concept of the "Latte Factor", which is the rejoinder to people who say that they are unable to put aside $50 per week for savings. By cutting out the little expenses in your day, you can easily do this! One of the differences between Bach's book and Chilton's is that Bach recommends home ownership as a requirement to being wealthy, while Chilton says that by saving the difference between your rental expenses and buying a home will make you equally wealthy. The difference, in my opinion, is that paying a mortgage is a forced savings, and thus much easier. This book (and its many sequels) is highly recommended!

The Richest Man In Babylon - The concept behind this book is that all of the financial ideas that are popular now have worked for millennia. All of the financial rules about paying debt and saving and investing and ownership versus working are discussed in parable-type debate. I really enjoyed this book, but because of the language it is less personable than the first two on my list. For the frugal among us (and those who can read off the computer), this book is available as a .PDF (because of its age) right here.

Rich Dad, Poor Dad - Another excellent book that will hopefully shift your way of thinking about money. You become rich by increasing your assets. You become rich by ownership in things that make money. A house is not an asset because it doesn't make you any money (for the most part). Money should be working for you rather than you working for money. It is an excellent book because he uses his two "fathers" as comparisons: the formally educated father who has no financial sense but is a hard worker, versus the financially educated father who works hard and is wealthy but has no little education. It is a shift in thinking of putting all of your energy into being wealthy. Before you make a decision, ask yourself "how will this make me more profitable". Another great book.

All of these I read about every six months to re-inspire myself, and I heartily recommend any or all of these to you!

Thursday, July 23, 2009

Budgets...who needs them?

I was sitting having a coffee the other day celebrating the end of summer school for another year when I overheard two people in the booth next to me talking about budgets. As I have a keen interest in personal finance, my ears perked up and I listened in.

One person was complaining that her husband was making her have a budget to track her spending for the month. She complained and said that "she felt like she was a kid having to do this". The other person, who was trying to sell her something, was sympathetic, but I thought to myself, "Everyone hates to budget for themselves, so what can be done".

Here is my philosophy on budgets: if you are able to save 10-15% for your retirement and on top of that spend less than you make every month and have no credit card at the end of the month, you don't need a budget. So the question is then, how do we accomplish this?

For most people, some planning is required, and that's why the budget is a good thing. But just by trimming your expenditures each month, or making some extra money on the side, you can do this. For myself, I need to track things electronically, so that is how I track my spending. As well, I now formally have a budget by only spending cash for items. As soon as I run out of cash, I can no longer spend.

The system works for me, but the point is that you have to determine what system will be successful for you. No one likes to be told what to do with your money, because it feels like some of your power is going away. If you can find a way to spend less than you make in a month without a budget, then great! Keep it up! But the reality is that for most of us, we need something to limit our spending.

Tuesday, July 21, 2009

What A Math Teacher Can Do For The Future...

As a teacher, I hope that I have some influence over students’ decision-making in the long term. So I bring my love of numbers and of money into the classroom every day. I just thought that I would share with you some questions off of my final exam from my MCF3M Summer School class.

3) Mr. Sadler purchased a house this spring for $217,000. He makes monthly payments at 5.25%.

a) Give three suggestions that I can use to pay off my loan sooner (3 marks)

We discuss this in class during the lessons, and I hope that these stick with them. Some solutions that I will accept are:
- pay bigger payments: I talk about rounding up your payments from the minimum (ex. if my bill is for $191.28, I will pay $200)
- pay more frequently: I talk about linking your payments to how frequently you get paid. Of course it is cheaper if you may every day on your mortgage, but if you get paid every other week, it makes sense to have your mortgage come out this day (rather than once per month)
- put down a lump sum payment: we talked about how the no-deposit loan has really hurt the United States, and that a 20 or 25% deposit will lower your interest rate on your loan as well.
- find a lower interest rate: I took this for a mark, because if you negotiate your mortgage to a lower rate (either at another bank or your current bank), you will save tonnes of money. Additionally I talked about credit cards in class and how you can call up your company and ask for a lower rate!

b) His mortgage is for 30 years. What are his monthly payments?

This is just a straight calculation question for my class, which most of them are happy to do.

c) Mr. Sadler is a smart guy and wants to pay off his mortgage in 11 years. What will his new monthly payments be, and how much interest will he save (as compared to paying it off in 30 years)?

This (along with part a) are the questions that I hope will stick with the students through the years. The answer is that for a 30 year mortgage you pay $431,380.80 and for a 11 year mortgage you pay $286,117.92 for a savings of 145,262.88. The only problem is that the 30 year mortgage payments are $1198.28 and the 11 year mortgage rates are $2167.56 (almost double) so it is not always feasible.

I also discuss with my class about slowly raising your minimum payments with raises, and slowly raising your savings, etc. We'll talk more about this in future posts, but I'd thought I'd share this as I finish marking these exams!

Monday, July 20, 2009

My Current Investment Vision...

This post will be concerned with my current short term plan for my investments. My suggestions to anyone getting started with investing will be to make it as boring as possible. The first $10,000 that someone has should go into basic index funds. An index fund models the ups and downs of the stock market and is the cheapest kind of mutual fund to purchase. Historically, there have been far more ups in the stock market (I believe an average growth of about 12% over the last 100 years) and in the long term equities have beaten every other investment so that is my suggestion.

The other options are to go for a bond index fund (which I am in) or some other kind of fixed investment. There are many theories on how these should be balanced, but a popular one is 90% - your age in equities and the rest in bonds. For example, if I am 31 (which I am), I would have (90 - 31) = 59% in equities and 41% in fixed investments. The idea behind this is that your portfolio will be less risky as time goes on. Others use the 100 - your age. Either way this will make your portfolio more protected as time goes on. Others say that about 5-10% of your investments should be in "fun" things: penny stocks, or individual stocks or things that are more risky that you can tell your friends about over lunch or at the golf course. These things are risky for a reason though, so only a small percentage of your investments should be in here (if any).

My current theory will be this: use dollar cost averaging (regular deposits that average out the highs and lows of investing) of 90% TSX index funds and 10% bond index funds. Once the TSX gets to a two year high, I will balance my assets so that 50% are in TSX Index and 50% are in bond index. I will continue to always deposit 90% in the Canadian Index and 10% in the bond index, but by rebalancing when the TSX is at a relative high, I will have collected my long term gains.

The idea behind this is to take your money out of the market when the stock market is at a relative high, and then when it drops (as in the last two years), less of your money will be in it. I consider that bonds are a relatively safe positive investment, so that is why the other half will be in that (it could really be in any fixed investment).

I haven't worked out all the numbers yet, but I consider that a high in the stock market over the last two years is enough to pull some money out to keep my gains, and that a 50-50 split is safe enough in the long term. Maybe as time goes on, I will go to a 90-age split as described above (to be more conservative).

Feel free to leave a comment about the validity of this investment strategy. By having a plan in place, I feel that all emotion will be taken out of it. It is difficult to sell when the market is moving in the right direction, but by having a plan in place it should be easier.

Saturday, July 18, 2009

Net Worth Update

Every time I get paid (every two weeks), I update my net worth. The idea behind this is that my goals are that my liabilities drop every two weeks, and by tracking them in this way, I am able to get a nice picture of where I stand financially. Its not a perfect balance sheet that I have (because of student loans I have a negative net worth), but the progress is what I am looking for.

- up $280.56 from July 3rd
- up $5433.69 from July 18th, 2008 (one year ago)

These assets include my house (I give it 1% appreciation each year in my appreciation), my RRSP and my TFSA.

- better $1303.56 from July 3rd
- better $11,165.07 from July 18th, 2008 (one year ago)

These liabilities include my mortgage, student loans and a consolidation loan (mainly for my Masters Degree for teaching). Additionally, my credit card would be on here near, but it has had a (near) zero balance in 2009.

- better $1584.11 from July 3rd
- better $16,598.76 from July 18th, 2008 (one year ago!)

Those are excellent numbers! A few realities about my current situation though:

1) I am currently teaching summer school, basically giving me double paycheques throughout the summer. Although I haven't been paid yet, these will really drop my liabilities.
2) Because of the way the month fell, I had three major payments from July 3rd - July 17th (consolidation loan, student loan and mortgage). With all of these falling within one reporting period, it looks like a huge drop in liabilities for these two weeks, when in reality it is just my regular drop.

The last thing I am going to track is the value of the TSX. I have some asset allocation goals that I will share in future posts, and they are dependent on the value of the TSX.

TSX Graph
Current Value: 10,369.42
Highest Value in Last 2 Years: 15073.13 June 18th, 2008

Thursday, July 16, 2009

How to keep your spending down...

There are two ways to increase your cash flow in a month: either get more money in, or spend less money. I try to tend to do both. To get more money in, I teach summer school, rent out rooms in my condo, and tutor on the side. This post will be about things that I try to do to limit my spending in a month:

Pay for things in cash: This was discussed in a previous post, but by spending cash rather than on credit you tend to spend less. Additionally, by only hanging onto large bills you will be less willing to break them. As well, I save my change and put it in a big container on my front table.

Leave your wallet at home: For me, I tend to be a spender, unless I don't have my wallet with me. I know that if I am going for a walk and will be going by WalMart I will go in there and pick something up (or the video game store or the beer store or wherever). This goes doubly so at work: I never bring my wallet, and then there is no temptation to spend.

Pack your own lunch/coffee: This relates to above, but you can spend a horrendous amount in a day/week/month on this stuff. In math class, I always give my class a question that says instead of spending $3 per day at Tim Horton's, Billy saves this money in an account that earns 5% compounded daily over the next 30 years. How much will he have? I will spare you the math here, but the answer is $76,238. If you change the number to 8%, it is $137,153. If you change the number to 10%, it is $208,896.

Cut back your cable/internet:I did this when my girlfriend moved in and saved almost $50 per month!

Go to one car (or less!): I do not have a car, and walk everywhere I go. I bought my house so that it is a 20-30 minute walk from my school. Because of this, I am able to not spend a huge amount of my monthly money on gas, insurance, and the payments for the car initially

Cell Phones: As well, I do not own a cell phone. If you have to have a cell phone, please get the pre-paid option, so that you will not end up with large bills at the end of the month.

Shop Around: Finally, I try to shop around. That is, I buy things when they are on sale. Not that I will walk into a store when it says "Sale", but when I decide to buy something I shop around for a few weeks until I buy it. If you are looking for a hardwood floor, there is nothing wrong with putting a few weeks planning into the purchase, and then finally picking the best price for the best product.

Eat At Home:Although my girlfriend wants me to point out that I took her out for lunch today (it's true), we generally eat at home. The savings here are enormous (as compared to before where we would probably eat out once or twice a week). Two meals and a drink each and you are looking probably at $40-50 for the evening.

I hope this helps some people out (or at least gives them some ideas). If you have any agreements (or suggestions or contentions), please feel free to leave me know by leaving a comment!

Wednesday, July 15, 2009

Disposable Income (aka the Bucket Method)

In this post I will discuss how I deal with my disposable income. I try to limit myself so that I can control my spending, with the extra money left over goes towards extra debt repayment.

The idea is simply that you live on cash for your paycheques. This method is used in the show Till Debt Do Us Part, where the host of the show Gail Vaz-Oxlade comes into a person's life and rearranges their monthly spending forcing them to live on cash. It seems outrageous at first, but to live on cash, and then when you run out of money you stop spending makes a lot of sense.

I decided to do this beginning in 2009 and it has worked wonders. My goals involve me dropping my liabilities, and since I have limits on my spending, there is never a paycheque when I fall short and have to dip into savings. Here are the splits:

Groceries $100:My girlfriend and I share groceries and I budget $100 every two weeks. This is my share, so we will alternate grocery weeks and try to stay under $100 for the two of us. Our health related goals are to lose weight, so we have vowed (and stuck to it) to not eat anything out of a box (basically pre-made). We try to eat lots of vegetables, but although they can be expensive if you change your meals until the vegetables are in season you can eat reasonably.

Spending Money $80:That's right, I give myself $80 to spend on whatever I want every two weeks. I realize that most people who read financial blogs consider themselves to be frugal, so me spending $80 every two weeks in whatever way I want may seem extravagant to some, but to me it is a fair amount. I don't stop for coffee, and bring my own lunches. Another goal of my girlfriend and I is to not go out for supper anymore (before she moved in we probably went out for at least one breakfast and one supper per week). I now do the cooking (which she loves) and I am financially healthier for it. I have also given up pop and junk food, which used to help rid myself of my spare change.

The rest of my buckets are collecting money for long term expenditures. In this way, I will never have to make purchases for large amounts and then hurt myself financially. Some people will say that I should put this money in a savings account rather than under my bed (the buckets are actually on my night table), but if the money is in my account I can easily access it, but when it is in a bucket, I have to reach into it, thus "stealing" from myself.

Home Repairs $20:Every paycheque I deposit $20 into a bucket for home repairs. Then when I need paint, or a new faucet, or what have you, rather than taking it out of an emergency fund, I can just grab cash and pay for it. I live in a condo, so very expensive repairs are done by the condo board.

Gifts $20:Every Christmas I tend to go into the hole spending on Christmas. By depositing $20 every other week, that will give me $520 at Christmas to spend. Doubtless I will spend more than that, but not that much.

Clothes $20:Everytime someone says, "buy a new jacket", or "buy some new jeans", or "buy some new winter boots", I used to cringe and say "I don't have enough money". Now, by putting a little aside, its actually possible to go shopping for clothes and actually being able to look to buy.

School $20:This is to pay for extra courses that I will take. Each year, I take a course in the summer that costs $899, and then teach summer school so that I can afford it. In this way, I can get most of my course saved up for.

Video Games $20:Yes, I am 31 years old and play video games. But like everything else on this list, if you save up $80 over two months to purchase the new Guitar Hero, you feel less bad about it (at least I do).

So the questions for you are: does this make sense? Can you see yourself doing something similar? Finally, when I get a raise in September, should I adjust by buckets? I was thinking of making another bucket for "miscellaneous debt repayment", so that it is not a forced repayment, but when I get $100 I put it against one of my loans. Otherwise it could be a "vacation" bucket, or I could just ignore the extra bucket idea and put it in the "pay off your debt"!

Tuesday, July 14, 2009

What To Do With A Raise...

Money falls out of the sky...what do you do with it. Generally in your job you will get a performance review, or an annual raise or what have you. I tend to get about a $100 per paycheque raise every year. I will list what my current goals are to do additionally with the money.

25%: Up my mortgage payments: My property taxes are connected with my mortgage and they go up each year (I think it was a $6.25 increase last year). I will put my mortgage up $25 every two weeks, accounting for the increase in taxes and a small increase in my payments. By doing this last year, my amortization dropped almost 18 months because of it!

25%: Increase savings: Last year I added a $25 per paycheque increase to my RRSPs and I will do it again this year. It will go into a Canadian Index fund, which generally has good returns and a low MER (management expense ratio). I will discuss my investment philosophy in future posts.

25%: Extra loan payments: This will be an additional $25 payment on one of my student loans. It has been a difficult decision on how to deal with this, as the saver in me wants to see my assets go up, but the mathematician in me realizes that if I decrease my loans, I will have more disposable income and more future savings. My brother has decided to drop his RRSPs to almost negligible and pay off his loans and his mortgage. I think I will slowly increase my loans and my savings. For me, it is nice to see some additions rather than just lowering my negatives.

25%: Disposable income: The frugal people will not be happy with this, but the reality of the situation is that expenses rise with inflation. Even if I don't spend this money, it can go to an emergency fund or a floating cash fund so when I need it, it is there. I will talk about how I manage (and limit) my disposable income in future posts.

So how do people feel about this? Should I be trying to pay off all of my debt first before I worry about upping my savings? Am I doing the right thing in balancing? Feel free to leave a comment with your opinion!

Monday, July 13, 2009

Steps For Financial Freedom

In this post I will list my financial steps that I am taking in order to make myself financially independent by the time that I retire. My personal goal is to retire at age 45. I am a teacher, so the lure of a full pension will probably prevent that, but the goal remains that at age 45 I will be able to work as much or as little as I want.

What do I consider to be financially independent? That is to have enough passive income available to cover my expenses in a month. Passive income can be interest on investments, income from businesses, income from rental properties, or basically any way that I do not have to be active in order to earn money. Financially free means that I will have the choice to continue to work or not. I am a teacher and I love what I do (even so much that I teach summer school as well but more on that in the future), but I can see that the time would come that I would want to be out of the classroom. Some teachers go into administration (principal, vice-principal) or work at the local board of education or the Ministry of Education, but (as of now) these don’t have much of a pull for me.

Here is the list of what I am trying to do in order for this to happen:

Pay Yourself First: the age old adage, which is to give yourself part of your salary as a bill to yourself. Generally it is considered to be 10-15%. This would go into long term savings. In Canada, we are lucky enough to have the RRSP available to us, giving us a tax benefit now and long-term savings, and you have the opportunity to save up to 18% of your salary in this manner. As a teacher, my pension affects this, so I am only able to contribute 9% of my salary into RRSPs. The second option (which I prefer) is the Tax Free Savings Account. You pay taxes on your money now, but it can grow tax free in your investments and you can (most importantly), withdraw it tax free at any time. There is a limit of $5000 invested per year that you can put into here, but I think this is a great opportunity for people. For now, my index and dividend mutual funds are in the RRSP and my fixed investments are in the TFSA, but I will discuss in future posts what I hope to do.

Spend Less Than You Earn In Each Month: Although this is obvious, it is a goal that I live by. Each paycheque, I should owe less than I did the paycheque before. In order to get wealthy, this is what you have to do. I will talk about how I try to do this in future posts, but you can do it by cutting what you spend (some call this being frugal) or increasing what you earn.

Be Loan Free: Great advice that I read is that the only loans that could be considered good are for a house or education. These are assets that (should) appreciate in value or make you more valuable (with more earning potential). This means that anything else that I purchase, I have to save for. This goes for automobiles, winter coats, vacations, groceries, extra courses that I take, big screen televisions and everything else in between. I have a mortgage and am finishing off my loans for school, but I intend that these will be the last loans that I take in my life.

Increase Passive Income: I consider these investments to be ways to make money without doing anything (or not much). My personal goals will be to purchase a second house and rent it out at age 35 (when my current loans are paid off), and then purchase a third house and rent it out at age 40. The dream would be to have my current house and the two investment properties paid off at age 45, and then sell some of them and purchase an apartment building of some kind that could be managed for me. The other way is to increase your assets and have them earn money for you. My investing strategies will be discussed in future posts.

Limit Discretionary Spending: Right now I am living out of buckets, that is I choose to spend cash for all of my purchases every paycheque, and if I run out of cash, then I stop spending. My Master Card is now used only for medical supplies that I order online. This will be discussed in future posts.

Learn Constantly: One of the reasons that I started this blog was to help keep myself up on the world of personal finance. One of the reasons that I am a teacher is that I consider keeping your mind open and active to learning is the most important thing of all. I have an open mind towards most things, including finance, so if some new possibility opens itself up, I can change my fundamentals (with enough information). I take courses (for my job) every summer and teach summer school, and hope to eventually take some financial courses. I have at least a dozen personal finance books and go to the library constantly for old books to get new ideas (for me). Even if the fundamentals are the same, each book is unique and has some good ideas.

To conclude, feel free to leave a comment if you have something to add to my list, or have things that I am doing that you feel are incorrect. Thanks!

Sunday, July 12, 2009

Welcome To My Blog

Welcome all to Sadler's Financial Blog! The intention of this blog is to help people with their personal finance goals and to share mine with the Internet. A good financial background is something that the average person really needs, and it is a shame that more good free information isn't available to the average person.

My background is a high school math teacher with personal finance as a hobby. As a warning, I am well read in the topics, but have no formal training in personal finance or economics so my advice should be general in nature and individual stock and mutual fund advise and recommendations should not be considered.

Finally, this blog will help me to lay out my financial goals, expectations and progress for all to see. I want to retire early, and live a comfortable lifestyle as I do it. I will go through how I plan to do this, and continue to comment on how the progress is going. I will also post a monthly net worth listing, similar to Million Dollar Journey to show my progress over time.

Thanks for visiting, and feel free to drop a comment down to say hello!