We live here now.

From Toronto to the corner of Nothing and Nowhere: it's an adventure!

Home is where you pay your property taxes

This was Joe’s insight while we were out for coffee with the Sussmans last night. I think I’ll have to have this embroidered on a pillow for him. :)

People have been asking whether the move is permanent, how long we’ll stay etc. As Joe so elaborately detailed in the Why Dauphin? post yesterday, the move (we hope) promises to be a financial success, meaning that even if it sucks, we are setting ourselves up to be able to afford to travel to places that suck less.

So in a very real sense, home is where you pay your property taxes — and in Dauphin, that’s not much at all!

Personal Finance none

Why Dauphin?

Four more nights on this rotten sofabed. Four more nights in Toronto before we begin our adventure in Dauphin, Manitoba. We won’t be there until June 25, but there’s the small matter of a trip to Como, Italy in the interim, so that means only four more nights in Toronto. But why move?

It’s step one in a straightforward, four-step plan to retire early. Forget about Freedom 55, we’re looking at Freedom 40! We used to try for Freedom 35, but it looks like I’ll miss that by a few years. Here is the ionospheric view of our plan:

  1. Lower expenses to a minimum.
  2. Build enough passive income to cover expenses.
  3. Learn how to develop enough passive income to cover ten times our expenses.
  4. Move to wherever we might want to live, if not Dauphin, Manitoba.

Since it’s generally easier to spend less than make more, I imagined it we would reach a 1.0 wealth ratio quicker if we spent less.

Your wealth ratio is your net passive income divided by your expenses. A wealth ratio of 1.0 indicates that you no longer need to work at a conventional job to pay the bills. Be sure to include all your expenses, and not just the ones you might put into the typical optimistic budget.

We reasoned that our biggest expense would be a house, and we didn’t want to take on the liability of a house in Toronto, so we looked elsewhere. Sarah found houses under $50k (Canadian, of course) throughout the country, but Dauphin seemed to have a decent mix of what we wanted from semi-retirement, so we went there, and three years later we’re ready to move there. I digress. The point is that we could eliminate our single largest expense (rent or mortgage payments) by buying a house we could afford with cash, and that’s what we did: the house into which we are about to move cost us $38k including closing costs, compared to the $20k+/year we would pay in rent for a comparable space. Instead, we spend about $1500 on insurance and property taxes per year. In total, we estimate our annual expenses at about $20k, including lodging, communications, basic transportation, insurance and food. It’s like having everything but the lodging expense free of charge. Who wouldn’t love
that?

After we have lowered our expenses, the next step is to generate sustainable passive income streams worth more than our expenses on a month-to-month basis. Our current income streams include rental properties, interest on personal loans and interest on cash in the bank. Normally I wouldn’t include bank interest, but the amounts right now are not trivial, so they’re worth including. At the present moment, our passive income streams are worth in the neighborhood of $8k/year before taxes, which is at least $5k/year after taxes, representing a wealth ratio of approximately 0.25. This is a pretty good start, and includes only the most reliable, sustainable streams of income we currently have. Our passive income is at least $5k/year, but at most already well over $25k/year. This reflects the amount of uncertainty in some of our streams of income, either because the income is not reasonably guaranteed, the principal is at risk or the income stream is likely to disappear with a month’s notice or less. It would be possible to boast that we’re already out of the rat race, but it’s more reasonable to say that we are on our way. Once we reach a wealth ratio above 1.0, we can move on to step 3.

This is clearly the part where I start hand-waving, but the reasoning seems sound enough to move forward.

Once we have enough reliable passive income to cover our living expenses, we no longer need to work in the conventional sense. This means that we can do anything we choose with our time. While I’m sure I’ll spend some amount of time relaxing, the next step is to figure out how to “add a zero” to our passive income streams. The theory is that the time we used to dedicate to working to pay the bills can now be spent learning about more profitable forms of investing. This will include bigger deals of the types we now do (loans, real estate) and other, more sophisticated kinds of investing. Not only will we have more time to learn these things, but we can choose
to work to earn money to participate in these deals, rather than having to work to pay for living expenses. This is the phase during which we could choose to spend more, but if we instead re-invest in ourselves, we should be able to turn $20k/year in passive income into $200k/year in passive income. This would let us move on to the
final step of our plan.

Once we have, say, $200k/year in passive income, we should be able to live just about anywhere in the world we could reasonably want to live. Granted, that’s not enough to retire in places like Tokyo, the San Francisco Bay Area or London, England, but we probably don’t want to live there, anyhow. I would be surprised if we had difficulty finding a place we’d enjoy living that costs more than $200k/year. At this point, we’d be able to finance virtually anything we’d reasonably want to do. Would we live like royalty? Likely not. Still, we would never have to worry about paying our living expenses again. If $200k/year of passive income weren’t enough to retire, we would be doing something very wrong.

So that’s why we’re moving to Dauphin, Manitoba: it looks to us to be a good mix of cheap enough to fit into our plan, but not so remote or desolate as to be devoid of quality of life. It’s small, inexpensive and friendly, just like it says right on the licence plates. A good place to start our retirement and a safe place to learn how to go from semi-retired to indefinitely wealthy. With any luck, that’s only about seven years away.

Stay tuned to see how we’re doing.

Dauphin MB, Personal Finance, The Life Experiment , ,

Working hard: a cautionary tale

April 16, 2007 5 comments

Let me apologize in advance. This entry could be seen as rather depressing, but it’s important that you read it. Many of us were raised to work hard, get good marks, get a solid, dependable job, raise a family, and that would make us good citizens. My mother tried to do that, and I’d like to tell you what it got her.

My mother was born in May 1947 in Lisgar, Quebec, an English-speaking village surrounded by French-speaking villages. She moved to Ontario around the age of 20, and started working factory jobs in the automotive industry. Even from a young age, my mother had a strong work ethic. After I was born in 1974, and while her marriage was crumbling, she worked even harder, until in 1986, with no viable assets beyond a small amount of equity in their house, we left my father. Within 18 months, my mother, still working factory jobs, taking every hour of overtime she could get, had moved us into our own apartment, had bought a car with 50% cash down payment and was beginning to prepare to help me pay for my university education. I went to school on a generous, but not full, scholarship, so my mother continued to work hard, taking every hour of overtime she could get, to help pay the last thousand dollars per year for me to be at school. This was all something of which she could be proud: all this accomplishment for a woman operating in very much a man’s world. By 1997, her work was done: I was out of the house, working enough to pay my own bills, and she could start to take care of herself.

Around that time, however, she began hearing rumors of layoffs as the company moved its operations south, first to the southern US, then eventually Mexico. Within a few years, she was no longer earning over $20/hour with a strong pension and 20 years of seniority. By 2001, she was scraping by on less than $10/hour, having to move out of her own apartment and back in with one of her sisters. The two of them were in a similar situation, barely getting by between the two of them, each with jobs that paid half of what they had grown accustomed to earning in the 1980s and 1990s.

In 2004, my mother suffered three heart attacks in the space of six weeks. The first hit her while on break at work, reading the newspaper. The other two hit her in rapid succession, less than a week apart. The third one was the charm, as they say: she died March 20, 2004, more than 8 years short of her supposed retirement age of 65. When she died, her net worth was less than $25,000. She owned a car worth less than $1,000, had no equity in a home, no passive income of any kind. Only cash in a bank account.

So why tell this depressing tale? It explains why I will never again work for someone else full time. It explains why I spend so much time taking charge of my own finances, why I don’t just hand everything over to a company to whom I am loyal, or to a financial adviser whom I hire to do all my financial thinking for me. It explains why I’ve read dozens of book on personal finance, business building, investing and even accounting and tax. I would never want my mother’s fate. For all the truly wonderful things she did in her life, she spent the last several years of it essentially a corporate slave. I choose not to do that, and I wouldn’t want you to do it, either.

This is why I want to help rescue people from employment, something I do both through my professional work and just through everyday conversation. It’s something I do because whenever I see someone struggling with their finances, I think about my mother, about her death at age 56, about how much of her life was wasted making some other person rich while she barely got by. It simply isn’t just.

If you are struggling with personal finance, stuck working every hour of overtime you can, then I implore you to grab a few books off the library shelf, take a few hours to read them, then give them an opportunity to improve your life. Start with Your Money or Your Life, then try Rich Dad, Poor Dad. My mother was a lot like Robert Kiyosaki’s “poor dad”, as she bought into the job security myth. I only wish I’d known at age 18 what I knew at age 28. I could have really helped her. Don’t let your children, your spouse or your friends think the same thing about you.

Start today.

Personal Finance

We move at daybreak!

Sarah and I live in Toronto, Ontario with our four cats in a rented basement apartment below Sarah’s business venture, Mostly Math. It’s a fine existence, but it’s pricy. We don’t really take advantage of living in the city anymore. Our life revolves around a 5.5-km stretch of Sheppard Avenue East, from Yonge Street to Fairview Mall. I would estimate that we spend a few hours per month away from that stretch of road. This is one of the many reasons we’re moving to Dauphin, Manitoba this summer (2007).

Yep, the corner of Nothing and Nowhere. At least, compared to Toronto.

I would say the primary motivator for leaving the city is financial: we want to own a house, but are not prepared to pay $400-500k for “something decent”. That kind of mortgage is a death sentence for us, given that our goal is financial freedom before age 40 (the year 2014). Sarah, a born researcher and information junkie, found Dauphin on the web in 2004, so we visited it, looking for houses, a business, the possibility of a new life there. We liked what we saw.

In 2005, we acquired the Dauphin location of the Academy of Learning. This has been a definite learning experience for me, as I have never had employees before. Although our business is education, something both Sarah and I already do professionally, dealing with government education bodies is something Sarah already did and doesn’t want to do again. Not only that, but we’ve had to learn how to register for business in a new province and how to manage people from a distance of thousands of kilometers. Overall, I think we’ve done well. No-one has quit on us for incompetence, at least.

In 2006, we began renting out houses in earnest. We’d trifled with it previously, but we bought a second house in October and have happy tenants there. This has brought its own challenges, like dealing with highly transient tenants, handling late rent payments and the other joys of being a landlord. We are now preparing our first house for ourselves to move into this summer.

In 2007, we plan to simply make the transition and try to survive it. I’ll be frank: I’ve computed how long we need to stay in Dauphin before moving there and back becomes less expensive than staying here and renting. Still, I like the people I’ve met, I like the idea of a slower lifestyle and I like the idea of leaving in a well-renovated house we own free and clear. It will be enough, I think, to get through the first winter and enjoy our new life.

In 2008? Well, I have no idea. I’ll revisit that in about six months.

PS: If you don’t get the reference in the title, you must not be a fan of Frasier.

Changing your life, Dauphin MB, Personal Finance, The Life Experiment

Do you love a tax refund?

April 12, 2007 2 comments

I just received my quarterly statement from ING Direct, with whom we save our money. I like reading their newsletter, as it occasionally has something interesting for me, such as when I learned about high-interest US dollar savings accounts. This particular edition is geared towards tax time, since the deadline is April 30 to submit your returns. It begins, “Everyone loves a tax refund (well, maybe not the government).”

Not me, either.

A tax refund means the government, specifically the Canada Revenue Agency, had money that was rightfully yours, and they definitely don’t pay you interest for your over-contributions through source deductions! When you receive a $1,000 refund and enjoy it, you are willingly submitting to a short-term forced savings program that earns you no interest. No thanks.

The sweet spot seems to be owing the CRA just short of $2,000 per year at tax time, which I recommend paying exactly on April 30 and not a moment sooner! Owing them money means that you had their money interest-free for on average six months, and not the other way around. You can earn interest on that money, even at a measly 3%, rather than let the government do that. Anything more than $2,000, though, and they might sign you up for tax instalments, which is just another short-term forced savings program that earns you no interest. Avoid it.

If you are an employee, you can petition the CRA to reduce your deductions at source. I have never done this, so please contact someone who has done it to learn how. As I am my own employee, I can choose more flexibly when my source deductions are remitted, so I can keep my money out of the government’s hands longer than most employees can.

Stop loving tax refunds. Let them start to make you a little angry. Do what you can to avoid them.

Personal Finance
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