June 13, 2012, 5:00 am

What Would I Do if I Were Ottawa Guy – A Real Case Study

by: The Financial Blogger    Category: Financial Planning
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Wow… sometimes my adventures in blogging truly surprise me!

 

I receive many emails from fellow bloggers who have questions or want to improve their sites. This always flatters me as I’m very happy to help. I take the time to answer each email as I truly value the communication within our PF blogging community. But the email I’m about to share comes from a long time reader and commenter that doesn’t have a blog, his name is Ottawa Guy. I am honoured that he sent me his own personal profile and he wanted to know what I thought of his financial situation. He gave me his permission to publish his email and my answer to it. So here we go!

 

Note: everything you read in this article is based solely on my opinion. It should never be taken as recommendations or professional advice. I’m only sharing a few thoughts on someone’s situation.

 

Ottawa Guy’s Profile

 

Debts: 0!
Total Net Income: 3468

Budget:
$1000/m Rent
$55/m Internet
$40/m Phone
$50/m Hydro
$8/m Netflix
$118/m Motorcycle Insurance
$82/m Vehicle Insurance

Fixed Total: $1353

3468-1353=2115

Variable:
$400/m Gas, Food & Entertainment (this is a goal, sometimes goes higher)

Remainder: $1715

Savings goals:
$500/m Investments
$1056/m 1-year world travel fund (40K by 2015) currently at 5K
$159/m To yearly travel fund (or whatever the remainder is for the month) currently at 5K

$1500 emergency fund – for insurance deductible & vehicle repairs.

Variable Income:
I occasionally carry a pager for work. Over time it can workout to roughly an extra $10K a year. However this gets put directly into the yearly travel fund. Also, instead of being paid I can take time off instead which I often do. I do not count this in any of my budget since it is above & beyond my base salary. Before it was helping pay off debts.

Investments:
I am not very happy. I made a move from one investment advisor who had me in a mutual fund with a heavy MER. I moved to a recommended advisor who put me into individual stocks with a $22K portfolio. Well.. over the past two years I’m down about 9K. This year I told her I want income producing assets like bank preferred shares or REITs. Try to cover some of these losses. Attached is a CSV file that details the investments.

 

I am in no rush to save for a house given the status of this market. House shopping will happen in 2016 after the 1-year trip.

 

Ottawa Guy’s Portfolio

 

TFSA
Cash ($)Evaluation dateSecurityDescriptionSymbolCurrent quantityTotal quantityBook valueMarket valueUnrealized gain/loss
649.1622/05/2012991531ALTAMIRA HIGH INTEREST CASH PERFORMERNBC1002002.292002.292002.292002.290
649.1622/05/2012437832MICRON TECHNOLOGY INCMU4254254919.282473.1-2446.18
649.1622/05/2012644451SUN LIFE FINANCIAL INCSLF16016050463388.8-1657.2
649.1622/05/2012648546SUPERIOR PLUS CORPSPB40040049862860-2126
RSP
Cash ($)Evaluation dateSecurityDescriptionSymbolCurrent quantityTotal quantityBook valueMarket valueUnrealized gain/loss
38.0422/05/2012437832MICRON TECHNOLOGY INCMU4754755453.682764.05-2689.63

 

Ottawa Guy’s Goals

 

When you are making a financial plan, the first thing you must do is to make a list of your goals. The same situation could generate different advice depending on a person’s goals. Here are the main goals for Ottawa Guy:

 

#1 One year trip around the world

#2 Improve his investment return / establish an investment strategy

#3 Eventually buy a house

 

What I Would Do

 

One small note before I start with OG’s goals. This is regarding his emergency fund. I would also have a small line of credit (5K or 10K) on the side to make sure I can overcome a very bad month (you know the type of month where you have your washer & dryer breaking at the same time that your car is at the garage and you stand as the best man for a very expensive wedding?). This would allow more flexibility and avoid taking money temporarily from the “travel fund”.

 

Budgeting

 

As far as budgeting, I think that OG did a great job. He has an established budget with an additional $159/month available to cover his variable expenses (currently at $400/m) or to add to his “travel fund”. It’s a very good idea to have a buffer in your budget that results in additional savings when you can control your expenses. Kuddos to OG!

 

Travel Fund

 

At this rate of savings, OG will have enough money for his one year trip in 2015. Since the project is in two and a half years, I would probably split my savings like the following:

50% in “super interest” savings account (giving roughly 1.25% to 1.50% right now)

50% in a “super safe” mortgage fund (some funds can’t really go lower than -1% in a very bad quarter but could earn easily 3% over two-three years span).

 

Investment

 

Now this is where it gets interesting. As far as budgeting, saving and paying off debts, OG can probably teach me a few things . But when we look at his investment portfolio, we can see one obvious thing; this is not well diversified. That type of portfolio will either make you rich or make you poor. Since almost 50% of his holdings are in 1 stock, you can only hope that this is an home run. SunLife won’t be a huge growth stock either and the addition of 2K in an Altamira funds doesn’t make much sense in my opinion. He already has 5K in his travel fun in a money market fund. There is no point of investing more in money market in his TFSA and RRSP account.

 

With the size of his portfolio, I would be tempted to buy an index ETF or mutual for about 5K and buy 3-4 stocks (at roughly 2K per stocks). He would get a good diversification with an index ETF and could add some growth with individual stocks. Since he doesn’t have much in RRSPs, I would probably invest all his RRSP money into US dividend stocks, buy for 2,5K of Canadian index and 2,5K of US index in his TFSA and add an additional 2-3 stocks in his TFSA (probably Canadian dividend stocks).

 

This strategy would ensure a well diversified portfolio with additional dividend income from individual stocks. Depending on his investment knowledge, he could go see an investment advisor to get advice on which funds/ETFs to select (you must see a broker to get ETF and stock advice)… or simply read these 2 free eBooks that will give a lot of information on dividend investing and ETF investing:

Dividend Investing (via The Dividend Guy Blog)

ETF Investing (via My University Money)

 

Leverage?

 

Considering OG’s financial situation, I would be tempted to look at doing a small leverage loan. Interest rates are very low and the market is pretty shaky at the moment. He could do a small loan of 20k-25K and easily fit the payment in his budget. At 4% over 10 years, a 25K loan shows a monthly payment of $252.72. After 10 years, the 25K at a 5% investment return would show a total value of $40,722 and the total payment would add up to $30,326 with $5,326 in deductible interest. I’m far from advising OG to do it (I would need to know his risk tolerance and consider his complete financial situation) but this could be something to think about.

 

What about the House?

 

Since OG has strong budgeting abilities, I’m not too worried about him building cash down to buy his first property. The current market is not too favourable right now anyway. However, another strategy he could do instead of leveraging the stock market is to buy a condo now, lock in a very low interest mortgage and rent it during his one year trip. This is riskier as he would have little control over his tenant while being in Asia and need a bigger emergency fund to compensate for unpaid rent. But it doesn’t mean that he couldn’t find someone he can trust or rent to foreign students (I’m guessing he lives in Ottawa 😉 ).

 

Final Thoughts

 

Overall, I think OG has started his financial life on the right foot. Now it’s up to him to “leverage” his budgeting ability to generate more assets. He must remember to always seek diversification (among his investments, but also among his assets (condo vs leverage)). His one year trip is an awesome goal and it is usually awesomeness that makes people better individuals!

 

Good luck OG 😀

 

Note: this article is NOT to be used as professional financial advice of any kind. If you are curious about what I think of your situation, please send me an email (thefinancialblogger at gmail) and I can write a similar article. 

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Comments

by: OttawaGuy | June 13th, 2012 (8:19 am)

What a great article!

Thanks on the budgeting part! I learned this the hard way but I’m better at sticking to a budget because of it.

Diversification is definitely on my radar. Even more so after reading it on here. I really like the idea of a solid foundation of dividend and income producing assets.

The leverage part is tempting, my investment horizon is high so my risk tolerance is reasonably high (I’m not freaking out too much about how I am right now, just disappointed)

Not keen on condos given the saturation of them in the market in major cities. I’m still in the belief theres a bubble waiting for a hard landing 🙂

The suggestions you listed are great and will be considerations as my financial plan moves forward. “it is usually awesomeness that makes people better individuals!” I’ll keep this quote in mind to help me along the way.

Merci beaucoup pour votre temps et expertise TFB!

by: The Financial Blogger | June 13th, 2012 (8:36 am)

Hey OG!

I’m glad you liked it :-).

Buying a condo would not be my favorite avenue either. But still, it’s a possibility. You will get more students in Ottawa next fall as many Quebecers will leave our school system that is still on strike since they really value their education. I think there is a renting opportunity here 🙂 lol!

For the “super savings”, you can find a number of places at 2% or at least 1.85% with ally. I just did a review of high interest savings account and I was surprised by what some readers have actually found. That’s an extra .50% that you could possibly earn.

Based on his lack of success with investing so far (sorry OG), I would not recommend an investment loan. My opinion …

Best of luck! I love your plan to travel around the world 🙂

Great analysis! The only thing I am curious about is the “risk management” portion of his financial plan. Does his employer provide benefits? does he need to supplement these benefits? What are the risks if he gets hurt or sick? Being an active person myself, I always wonder what my own situation would be like if i hit a bit of a “speed-bump”.

That is awesome that OG wrote to you. I think you did a pretty good analysis and provided some good insights that he could consider. While I may not agree with all of your insights I’d say overall it looks pretty solid.

Nice points on diversification. Again, I am not willing to risk as much with the use of leverage (remember how I hate debt?), but it could be a great move depending on the outcome. Regardless, nice analysis.

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