One of my readers recently asked me to provide more information on my background. To be fair I have so far divulged little about myself, other than what’s on the ‘Start Here‘ page. While I might never provide a full curriculum vitae – as I must remain discrete – I will strive to give more insight into who I am and why I see the world the way I do. I’ll eventually put up a more ‘About Me’ page, but I will also strive to infuse more personal experience into my articles. Below is one of those articles.
It was February 2009. I was sitting in my boss’s office waiting for him to get off the phone with his car guy so I could talk to him about some competitor product research I was conducting. At the time, I worked for a big Canadian asset manager that managed retail and institutional money.
In 2009 the world was in the grip of a devastating financial crisis and my world was collapsing around me. Every day I feared for my fate, as I watched thousands around me get laid off. I had a baby, stay at home wife and a massive mortgage.
Unemployment wasn’t an option.
I had no fall-back. No parents to move back with and no family wealth to rely on if I was laid off. I had enough saved to survive a few months but the midst of a crisis was no time to be searching for a job. Frankly, if I were laid off I would have been unemployed for a long time.
My stress levels were off the charts. At the mercy of those around me was no way to live. My stress eventually manifested in what felt like an explosion in my head. I experienced a blinding headache that took 16 days to dissipate.
My neurologist’s diagnosis: stress. Fucken great. I honestly wasn’t sure if I was relieved I wasn’t dying or disappointed I had no choice but to head back into battle.
As I waited for my boss to finish talking to his car guy I used the opportunity to create a plan to achieve financial freedom.
Up until that point I had played the game by the rules. Study, get a job, buy a house, pay your bills on time. But the financial crisis abruptly taught me I couldn’t rely on the system to provide me income. I mapped out my escape plan on a scrap piece of paper.
My mortgage term was renewing that month and that felt like a good catalyst to create change. I was sick of depending on the kindness of strangers (employers) so I roughed out a 5 year plan to get me on track to financial freedom. The gist of the plan was to remove the thing that could sink me if I ever lost my job: my mortgage. My strategy wasn’t necessarily to completely pay it off. After all, mortgage rates were low and over the long run inflation would make my debts more manageable. (Inflation effectively erodes the value of the debt.)
Instead, my plan was to get to a point where I could cover my fixed costs with a minimum wage job.
While I sat in my boss’s office I quickly compared my monthly essential expenses with my take-home income. Any difference was deemed nonessential. I earmarked a portion of that nonessential expenditure to mortgage prepayments. I didn’t allocate all of it at once to ease my budgetary shock.
After my meeting I contacted my mortgage provider to increase my monthly mortgage payments and switch to bi-weekly payments. I started small by increasing my payment by 20%. Once I got accustomed to the higher payment after a few months I again increased my payment. I also plowed any salary increases into my mortgage payment. I increased my by-weekly payments every few months or so until I was eventually doubling every single mortgage payment.
By slowly increasing the payments and by using any salary increases the change was less painful. It just became a matter of fact that I didn’t have any money left for vacations or other pleasures and conveniences. My wife and I both committed to this 5 year plan. (Luckily my wife and I are very compatible when it comes to money.)
While life felt stagnant for those five years, I was actually putting a major dent in my mortgage principal. Five years pass by quickly. I made sacrifices but the outcome was worth it.
At the end of my five year mortgage term I re-amortized my mortgage back to 30 years to minimize the payments. My mortgage payments shrank to a level I could cover (and then some) with a minimum wage job.
Also, during those 5 years my house appreciated in value, salaries rose and inflation eroded the real value of what remained of my debt putting me in a better financial position. Effectively, after my 5 year plan my mortgage payment became so low that it could be viewed as super cheap rent that would never rise.
After minimizing my mortgage payments, I then used the freed up cash-flow to save, invest and live life.
As you’ve probably noticed, there’s no magic trick to this. I simply gradually but consistently increased my mortgage payments to an aggressive level and committed to the 5 year plan. By only increasing by small increments – say 10 or 20% at a time – and by passing any pay increases directly through to my mortgage I barely knew what I was missing. In fact, that 5 year experience taught my wife and I to live quite frugally, which we still do.
Note: The purists out there will say that I would have generated a better ROI by using funds put towards my mortgage to instead invest in the stock market. While I agree with this in theory, in reality the life-altering downside risk of mortgage default outweighed the incremental potential financial gain of investing. Today, with that life-altering downside risk removed I am psychologically equipped to invest in assets with higher reward potential.
While I wouldn’t necessarily say I am 100% financially free (not sure I would ever feel that way until my dividend income covers all my expenses) I feel secure. Life improves dramatically when you feel secure. I still work and I still get stressed, but now it’s mostly on my terms.
As for my boss? He’s still living paycheque to paycheque and remains wholly dependent on the kindness of his employer.