Categories
Wealth

5 Year Plan for Financial Freedom

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.

Categories
Wealth

Death of the Middle Class Dream

As world leaders (aka the 0.01%) fly into the exclusive economic forum at Davos to discuss how to run the world, numerous activist organizations are releasing data to show how the world is circling down the toilet.

These are depressing stats. The world is not in great shape and it’s getting worse. This could all lead to growing social conflict all over the world.

So why am I telling you? Because the traditional middle class dream is dead. That game is over. You need to understand how the system is rigged if you want to win at the new game.

I know this sounds like some conspiracy theory bullshit but it’s not. The fact is the world is not a nice place. It’s not a fair place and none of us can rely on others to make it fair. We have to fight to break past the trappings of the current system because the system doesn’t care about us and isn’t here to look after us.

It’s all up to you. And me. That’s why I’m doing this.

I know I’ll never be a Bill Gates or Monty Burns. Neither will you. But that shouldn’t stop us from trying to NOT be the guy that is one missed paycheque away from bankruptcy. Or that doesn’t have time to play with his kids.

So here we go with the depressing stats:

  • IMF says the outlook for the global economy ‘remains sluggish’ as it cuts growth forecasts.
  • 78% of respondents to Edelman’s Trust Barometer agreed that elites are getting richer while regular people struggle.
  • 56% of general population respondents to a study by consultancy Edelman agreed with the statement: “Capitalism as it exists today does more harm than good in the world.”
  • In the U.S., 43% of people believed they would be better off in five years’ time, a 7 percentage point drop on a year ago.
  • In the U.K., only 27% of people thought they would have more money in the same time period, a drop of two percentage points.
  • 48% of the general population said the “system” is failing them, relating to how governments behave. More than half (57%) said governments serve the interests of only the few.
  • The world’s 2,153 billionaires have more wealth between them than a combined 4.6 billion people.
  • Someone who saved $10,000 a day since the construction of the Egyptian pyramids would still be 80% less wealthy than the world’s five richest billionaires.
  • Nearly 40% of the world’s 195 countries will see civil unrest during 2020.

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So here’s the gist:

Since the dot com bust, real economic growth has slowed > competition for resources intensified and those with economic or political power consolidated wealth > wealth inequality widened > the masses became increasingly disenfranchised by missing out on all the “economic gains” (i.e. stock market gains) the news keeps raving about > now, animosity is growing, feeding the possibility that a seemingly unrelated catalyst will thrust the masses into rebellion.

Or something like that.

This is the fragile framework we have to play within if we want to build personal wealth or simply realize the middle class dream.

How do you do it when the world is becoming more politically polarized, many people can’t pay their rising bills and most feel they can’t trust the system? Wealth creation is still the game but the rules have changed.

Categories
Wealth

4 Gold Bullion ETFs in Canada for 2020

Dig gold? Gold is hot again and the number of supporters is quietly on the rise. Famously, billionaire investors Ray Dalio and Jeff Gundlach have both recently announced their support for the metal but there are many others coming out of the woodwork. After a multi-year hiatus it seems like the case for gold is strong again.

If you’re so inclined, you can read Ray Dalio’s entire article on the paradigm shift that will underpin gold prices.

According to Dalio:

“…the world is leveraged long, holding assets that have low real and nominal expected returns that are also providing historically low returns relative to cash returns (because of the enormous amount of money that has been pumped into the hands of investors by central banks and because of other economic forces that are making companies flush with cash). I think these are unlikely to be good real returning investments and that those that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold. Additionally, for reasons I will explain in the near future, most investors are underweighted in such assets, meaning that if they just wanted to have a better balanced portfolio to reduce risk, they would have more of this sort of asset. For this reason, I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.”

Ray Dalio

Canadian investors looking to buy gold first have to decide whether they want to own gold mining stocks or gold bullion. My preference is gold bullion since it is a pure play on the price of gold. In contrast, gold mining stocks are influenced by extraction costs and management decisions, in addition to the price of gold.

There are a number of ETFs in Canada that buy and hold actual gold bullion (not gold futures contracts). I prefer a fund that owns bullion to gold future contracts because I don’t want exposure to the added complexities introduced by the shape of the futures curve. (The futures curve is a problem for many commodity ETFs.)

What Gold Bullion ETFs Exist for Canadian Investors?

Below I have identified 4 low cost gold bullion ETFs available on the TSX:

1a) iShares Gold Bullion ETF CAD Hedged: CGL (MER = 0.56%)

1b) iShares Gold Bullion ETF Unhedged: CGL.c (MER = 0.55%)

2a) Purpose Gold Bullion Fund CAD Hedged: KILO (MER = 0.28%)

2b) Purpose Gold Bullion Fund Unhedged: KILO.b (MER = 0.28%)

3) Sprott Physical Gold Trust: PHYS (MER = 0.48%)

4) Canadian Gold Reserves Exchange Traded Receipt: MNT (MER = 0.35%)