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March 20, 2014, 5:00 am

The Only Secret to Paying off Your Debts is Really to Make More Money

by: The Financial Blogger    Category: Pay off your Debts

 

You know that already, I started a fight with my consumer debt back in… 2012. We will all agree that I lost the first round (2012) when I failed to go drop under 300K of debt. In 2013, I used a similar technique… and got similar results.

 

Einstein defined madness by doing the same thing over and over and expecting different results. I guess that there is always a little bit of madness in each of us!

 

But towards the end of 2013, I started to get very sick of seeing so many debts on my balance sheet and began to look around to find a solution. I sat down for hours looking at both columns; revenues vs expenses, and found out the solution wasn’t in the latter.

SETUP A SOUND BUDGET

 

When I decided to pay off my debts back in 2012, I did what made sense: I created a sound budget. I thought by looking carefully at how cash was flying out of my wallet, I would control my personal finances and my debt would drop. It didn’t happen in 2012 and the same result happened in 2013. I was very good at finding excuses:

#1 The addition of central A/C

#2 The addition of a pool

#3 Car repair$

#4 Vacation

#5 etc, etc, etc,

 

But I ignored the most important part of my budget during this exercise: my sources of income. I’ll go back to this point later on in this post but I want to finish about how to do create an effective budget first.

 

Making a good budget doesn’t require a fancy online app where you get 3D graphs in multiple colors. All you need is a pen and a piece of paper (or an excel spreadsheet if you don’t feel like using an old fashioned calculator!). I’ve made a list of all monthly expenses and classify them into three simple categories:

 

What I can’t do anything about: mortgage, taxes, electricity bill (you can’t cut that forever), healthcare (mainly products for kids), savings (pay yourself first!), gasoline.

 

What I can reduce: food, restaurant, wine, car payment, insurance, etc.

 

What I can waive: car expenses.

 

At that time, there was only one expense I could completely waive without affecting my lifestyle too much: sell my second car. I didn’t have a car payment on my RX-8 but it was costing insurance, gas and car maintenance bills on a monthly basis. By selling my old car, I was getting rid of a few hundred each month.

 

Then, I attacked what I can reduce. I actually sold my two cars to replace them with a new one back in September 2013. It has increased my total debt but my monthly payments were greatly reduced. Since my car value drops as fast as my new car loan, it had no effect on my net worth; only on my budget. I’ve slowed down on wine and cut out restaurants. I went to my own limit of my lifestyle.

 

After cleaning up my budget and reducing expenses, the numbers still didn’t work perfectly yet. I faced a dilemma: I had to either cut back on lifestyle or find another solution. I consider that I’ve worked too hard when I was younger to give away on my current lifestyle. I love the way I live and don’t want to sell my house, miss going on vacation or reduce my children’s activities. This brings me back to finding another solution.

 

THE KEY IS THE MONEY YOU MAKE NOT THE MONEY YOU SPEND

 

For several years, I was able to both increase my lifestyle and not increase my debt level. It just happened recently when I’ve lost control over my personal finance temporarily. My first reflex was to cut down on my expenses and try to manage my budget tightly. This was a mistake.

 

In fact, a few years ago, I accepted a new position at work. It was a promotion but also a long term move where I could make more money… but only in the future. Since I had to start a new book of clients from scratch, in the beginning bonuses would be smaller than in my previous career. This is exactly what happened in 2012 and 2013. On top of making less from my day job, I also started to make less from my online company. Back in 2010 and 2011, I was withdrawing some good amounts to support my lifestyle and enjoy life. In 2012, Google slapped us big time and we had to reconsider our business model.

 

While the business is now back on its feet, it wasn’t the right time to withdraw company money for leisure. So back in 2012, the issue I ran into was not a spending problem, it was an income problem.

 

The key with your personal finance lies within your ability to make money, not to reduce expenses. I can appreciate my “new” strategy as we are now making more money since September 2013 with the opening of a daycare at home. On top of this, the company is now generating more income and we can also benefit from it.

 

I saw the positive impact instantly on our budget as months are easier to get by and I see my debts reducing each month now. I don’t have to wait for a bonus or a tax refund to apply a lump sum payment on my debts.

VACATION + PAY CONSUMER DEBTS?

 

That’s right! This year, I will get rid of 15K of consumer debts and go on two vacations! We will have a couple’s vacation and a family vacation! Both can be done because we are making more money than ever.

 

So I won’t have to sell my house or get rid of my new car and will continue to live the way I want. On top of this, my debts are going down and I’ll be ready for more investments no later than 2015!

 

The morale of my story is simple: focus on your ability to make more money and you will pay down your debts. You can spend hours to reduce your expenses, do things by yourself to save a few bucks and burn yourself out in a miserable frugal life. Or, you can live the life you want, enjoy all the good things while making the money to pay for it. I’m done fighting with my budget. It’s time to make some more money now!

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September 9, 2013, 5:00 am

The Book I Read While Camping, My Debt Level Once Back Home

by: The Financial Blogger    Category: Pay off your Debts

 

 

During my vacation, I went camping for a few days with my family. For the first time since I have owned a Blackberry, I made a deal with myself: not to touch this devilish tool for 72 hours. If you have a smartphone, you know that 72 hours without your phone is longer than the entire ice age period.

 

Good news; I did it! It seems that canoeing, lighting a fire and eating marshmallows is so fun that I didn’t need my phone to see what was going on at work, at my online company and with my investments! During the afternoon, I pulled out a book that was recently sent to me for a review (one advantage of being a blogger… hehehe!). It’s called Give Yourself a Raise, written by Gordon Bennett Bleil. The title was cool enough to catch my attention, the rest of the cover page convinced me to open the book:

 

How to have

#1 More money

#2 Less Stress

#3 Financial Freedom

 

So Let’s Do It! What’s Inside?

 

I’ll tell you upfront – I was divided, some disappointment somewhat happy about the book. Disappointed because I thought that I would learn more about how to reach financial freedom by raising my income. This is why the title inspired me. I guess I should have read the back cover as well and discover that it’s more an entry level book about starting to manage your personal finance correctly. You know, the usual “control your spending”, “start saving”, “pay yourself first”, etc. These kinds of books are pretty helpful for people without any financial education but they can become boring pretty fast.

 

Wow… that’s some serious critique for a free book I received to review, huh? But at least, I was also half happy about the book too!

 

I was away camping and only brought one book. I didn’t expect to read much during these three days as my three children were around as well! So I kept on reading even though the topic wasn’t as exciting as I hoped. It turned out that Gordon is nailed down personal finance problems with practical answers. I have read so many books about personal finance that are quite entertaining and motivating but never put the tools in your hand. I don’t care about how to turn a screwdriver clockwise to screw something in properly – I want to receive the darn screwdriver with a box of screws! This is what this book does.

 

It has a financial quiz to determine how much you suck with your personal finance (I do suck at times! Especially when it comes to paying off my debts… but you know this already!).

 

It shows you how to build a bucket system from A to Z with online banking.

 

It provides you with a useful chart and checklist to track your goals and achievements.

 

The rest of the book will explain you the basics of credit, retirement planning, investing, insurance and so on. Basically, anything that has already been very well explained in the Wealthy Barber. Overall, I think it is a very good book for anyone who’s looking for an introduction book to control his/her personal finance. The practical tools will not leave you empty handed and provides motivation. You will have a chance to use what you have learned and apply it.

 

If you are looking to start taking control of your finances, buying this book it a great move!

 

 

Back From Camping

 

Can camping be so expensive that it increased my debt? Nope! That’s not it! While I was on vacation, I didn’t look at my computer and completely forgot about banking. This was a very good move as I disconnected totally from my day-to-day life. But when I came back home, I put my nose back into my finances and looked at my credit card statement… ouch!

 

During the month of August, we have incurred several expenses totaling several thousands. Just to name a few:

Furniture, toys and other goods related to the daycare opening

Children’s clothing for fall (not just the “back to school” frenzy, both kids grew so much, all jeans and shirts were too small!)

Children’s activities for fall and winter (gotta pay for everything upfront!)

A few expenses related to my 2 week vacation (hotel room, dining out, wine, gasoline and camping)

Furniture and paint for my kids’ bedroom (moving #3 and #1 into the same room)

Municipal and School taxes (why do they have to fall within 2 weeks of each other!)

 

This is why I have more debt now than I had before my vacation!

 

 

Here Are A Few Things I Will Do This Fall to Cut My Expenses

 

I don’t know if it’s related to “Give Yourself a Raise”, but I’ve decided to make a few more changes in my life to make sure that my year-end bonus combined with the new revenues from the daycare will pay off my consumer debts.

 

As the book says; you have to identify your leaking buckets. You need to know where you spend money that you could cut back on. And this is what I’m doing right now…

 

Eat less. I love eating and know that I exaggerate with at least 3-4 meals per week. I’m pretty sure I spend at least $100 per month on non-essential food items and I’ll start reducing my portions and eating habits accordingly. In fact, I’ve already started since September 3rd! I guess it will also help me dip below the 180 lbs psychological bar!

 

 

Drink less. Arf! By writing this; the smile on my face disappears. I love drinking wine but it’s darn expensive. From now on; no wine except on Fridays and Saturdays and never more than 1 bottle for my wife and I per day. It’s not rare that we open 3 to 4 bottles per weekend, since we pay on average $17 each bottle, this means I can save between $68 and $136 in wine per month. I guess $100 is a good target.

Skip Winter Soccer. This sucks too as I really like playing soccer. However, the winter season cost $260 and I really can’t dig my hole much deeper with such expenses. I’ll do my workout 5 days per week with my home gym that is 100% free and wait until my personal finances are better and maybe register next summer.

 

Put my RX-8 For Sale. I’m telling you, if it doesn’t hurt, it won’t do any good! Over next weekend, I’ll do a big clean up and make my car shine. I’ll put it up for sale on the internet and see how it goes. I know it’s a sport car so I might have to keep it until spring, but I will give it a try now. Since my wife stays at home during the day (with the daycare), it’s impossible for her to use the SUV anyway. I’m pretty sure we can manage with 1 car. The fact that I can save money on gasoline, insurance, car maintenance and can get a few thousand back from the sale was enough to convince me that I didn’t need a cool looking sport car to be happy in life ;-).

 

Life will surely be a little bit more boring with less food, wine, sports and a nice car but I’m sure it won’t be that bad. I hate making sacrifices and reducing my lifestyle but I think it has become necessary if I want to change my situation and not look after my next year-end bonus to close my budget. After all, I’m pretty sure I’ll be darn happy to  have made these choices in a year from now where I will see my debts melting!

 

I’m curious, what’s the biggest sacrifice you have made to pay off your debts?

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August 12, 2013, 5:00 am

Should I Invest or Pay Off My Debts?

by: The Financial Blogger    Category: Pay off your Debts

invest vs pay off debts

I recently said a lot about my debt repayment plan which will start this October with the arrival of new income (from my wife’s home day care). In one of these articles, Derek from Money Ahoy suggested that I not pay off my low interest debts (since most of them are under the rate of inflation). The idea is not that stupid as I’ve played around with the concept of low interest debts and investing many times since I started working back in 2003:

 

I borrowed 20K from my line of credit to invest in the stock market (which resulted in buying my first house with a 50K down payment!)

 

I borrowed 25K using a personal loan to buy a piece of land (which resulted in a healthy flip within 12 months)

 

I borrowed 25K from my parents to buy my second house (which resulted in a 75K profit within four years)

 

I remortgaged my house to invest in my online company (which resulted in a 6 figure income sideline)

So as you can see; to the question should I pay off my debts or invest, Ive often answered that you should invest your money instead of paying off your debts.

 

Pay Off Debts Vs Investing

 

Starting in October, I will be generating an extra free cash flow of roughly $1,000 per month. Therefore, I have two choices: I can pay off my debts quickly or I can invest that money in the stock market or in my online company. After all, I’ve been carrying these debts for a while and they don’t hurt my budget that much. Considering their low interest rates, I mostly pay principal owed when I make a payment.

 

The logic behind investing money is the difference between the investment return you could make versus the interest rate you are paying on your debt. For example, if you can invest at 5% and your debt interest is at 3%, you could think that you will be making an extra 2% return if you invest instead of paying off your debt.

 

THINK AGAIN – Personal finance is easy to understand but it’s still more complicated than that.

 

FIRST, there is tax: you pay your debts with after tax money while your 5% investment return is a before tax return. After tax, your 5% investment return is roughly 3%. Therefore, in my current example where you have the choice of investing at a net 3% return vs paying your debts at a 3% interest rate, you shouldn’t break a sweat about this decision and simply pick one.

 

THINK AGAIN There is another little factor you have to consider.

 

SECOND, there is the marvelous power of compounding interest. Let’s say you have $1,000 to use toward your debts vs investing it at 3% net in both cases. Let’s assume your debt balance is at $1,000. If you invest your money, you will be showing the following balance sheet at the end of the year:

 

Asset: $1,030 & Debt: $1,030. You then pay your $30 of interest (because it’s a due to the bank). The following year, you show the following:

 

Asset: $1,060.90 & Debt: $1,030. The magic of compounding interest made your $30 of investment return turns into $30.90 the following year while you still owe $30 in interest to the bank! Check out the result in 25 years:

 

Year Asset Total Investment Gain ($) Debt Total Interest Cost Net Worth

1

$1 030.00

$30.00

$1 000.00

30

$0.00

2

$1 060.90

$60.90

$1 000.00

60

$0.90

3

$1 092.73

$92.73

$1 000.00

90

$2.73

4

$1 125.51

$125.51

$1 000.00

120

$5.51

5

$1 159.27

$159.27

$1 000.00

150

$9.27

10

$1 343.92

$343.92

$1 000.00

300

$43.92

15

$1 557.97

$557.97

$1 000.00

450

$107.97

20

$1 806.11

$806.11

$1 000.00

600

$206.11

25

$2 093.78

$1 093.78

$1 000.00

750

$343.78

Out of nowhere, a 3% investment return makes more than a 3% interest debt. So what if you would have paid off your debt and invest the $30 per year of interest paid starting at the end of year 2? Here’s what happens:

Year Asset Total Investment Gain ($) Debt Total Interest Cost Net Worth

1

$0.00

$0.00

$0.00

30

-$30.00

2

$30.83

$0.83

$0.00

0

$30.83

3

$31.78

$1.78

$0.00

0

$31.78

4

$32.77

$2.77

$0.00

0

$32.77

5

$33.78

$3.78

$0.00

0

$33.78

10

$39.32

$9.32

$0.00

0

$39.32

15

$45.74

$15.74

$0.00

0

$45.74

20

$53.18

$23.18

$0.00

0

$53.18

25

$61.81

$31.81

$0.00

0

$61.81

 

As you can see, the end result after 25 years is a positive net worth of $343.78 (which is 34% of the $1,000 used in the first place) vs $61.81 if you decided to pay off your debt first.

 

Technically, if you can invest money and earn at least the same rate you are borrowing, it is mathematically better to invest than pay off your debts!

 

So Why This Time am I Paying Off My Debts Instead of Investing?

 

Yeah… I’m not really making much sense right now since I just wrote 800 words on how you should invest your money when you pay a low interest rate… this doesn’t make sense to still pay of my debts right? The logic is definitely killing me right now… hahaha! But there is more than mathematics in life!

 

FIRST, there is psychology. A few years ago, I really didn’t mind having debts over my head. I was confident to constantly increase my income and eventually pay them back with my big investment returns. It turned out that the more money I’ve made by leveraging, the more I spent and never use my profit to pay off debts. Today, I know I would feel better if I pay my debts instead of investing that money again.

 

SECOND, there is my financial freedom goal. I’m soon turning 32 (yikes time flies!) and I want to reach financial freedom early in my life. This means before 40 and hopefully at 35. I don’t expect to be debt free at 35 but I aim to be financially free. The freedom I seek is the one giving me the option to work when I want to work and to spend money when I want to spend money. It’s more about breaking my links with the corporate world and sitting on enough passive and semi-passive income so I don’t have to worry about my future. It doesn’t mean I will stop working, not at all. Still, I can’t reach financial freedom if I have tons of monthly payments attached to my budget. It’s impossible for me to slowdown and drop my income even momentarily.

 

 

I Still Believe In Investing Instead of Paying off My Debts… But Just Not Now

 

Once I will clear my consumer debts, I will most likely invest my extra cash flow instead of paying off my mortgage. On the other hand, if I wake up at 34 with only a $250K mortgage as a debt, I won’t mind carrying this weight on my back…especially since my house will probably be worth over $375K at that time!

 

What about you? Do you pay off your debts or invest your extra money? 

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July 17, 2013, 7:16 am

How to Pay Off Debts Efficiently – Here’s My Plan

by: The Financial Blogger    Category: Pay off your Debts

 

With my wife starting her daycare at home in September, there will be additional income coming in. I have the habit of reviewing my personal finance on this blog and thought I would share a few plans to pay off my debts in order to help you to do the same thing.

 

I usually manage my budget in a very uncommon way since I have been making important year-end bonuses over the past five years (read the chronology of my income here). This allowed my wife to stay at home while raising our three children but it has also given me a few headaches while managing a monthly budget deficit compensated by a lump sum payment in January. I’ve enjoyed life too much in the past three years with major expenses such as:

 

  • A sports car (my expensive maintenance RX-8) – $12,000 + $5,000 in repairs over the past four years
  • A trip to Disney World and another one at Virginia Beach – totaling almost $9,000
  • A brand new pool – $10,000
  • A central A/C – $8,000

 

With a single household income and additional expenses, you can guess that my total debts didn’t drop during that period. Surprisingly, I’m not doing as bad as my debts level is actually lower than it was when I first reported my net worth back in 2011. But now that we will be making more money, it’s time to establish a strong plan to get rid of debts. I’ve ran through different scenarios to see what my options are.

 

Listing my Consumer Debts

 

The first thing I need to do is to make a list of debts to pay off along with their current monthly payments. I’ve made a quick chart to have a good picture.

 

DebtsAmountMonthly PaymentInterest Rate
CREDIT CARD$5 781N/A19.99%
LINE OF CREDIT$19 592$1001.50%
HELOC$264 384N/A1.50%
CAR LOAN$9 982$4340.90%
Personal Loan$7 083$2303%
Pool Loan$5 173$706.45%
.

I didn’t put payments for my credit card and home equity line of credit (HELOC) since I play around the balance of both to never pay high interest rates on my credit card. I’m usually able to drop the HELOC balance with my year-end bonus but it goes back up during the year due to my monthly budget deficit. Thanks to the daycare, I won’t be seeing a deficit anymore!

 

Option #1 Sell My RX-8

 

Since my wife will be working at home during office hours, she won’t need a car anymore. I could sell my sport car and use the family SUV to go to work. If I sell my RX-8 this year, I should get something between $5,000 and $6,000. This is enough to pay off my credit card in full and concentrate on other debts. I usually play around between my home line of credit and credit card to not pay high interest. By selling my car, I wouldn’t have to play around anymore and I could use my liquidity to pay another debt. I would not only get at least 5K in my pocket but I would also save about $300 per month worth of gas and insurance costs (without counting maintenance!). I don’t really want to sell my car because I love it, but I think I would like to pay off my debts more at this point in my life!

 

Option #2 Using Daycare Revenues to Make Extra Payments

 

My Tribute car loan expires in 2015 with 23 payments left as of July. This is not my biggest interest rate debt (this is the pool loan) but this is my biggest monthly payment. The daycare should generate roughly $2,000 per month in free cash flow. Considering that I have to use a part of this money to cover for my monthly deficit, I estimated my free cash flow at $976 per month. In September, the car loan will be showing a balance of $9,114 (2 payments done in July and August). Starting in September, I could make a total payment of $1,410 (which is $434 from my regular payment + $976 in extra income). At this pace, my car loan will be finished within 7 months which leads us to end of March 2013.  At this point, I will be able to use my extra $1,410 to start a debt snowball and pay off another debt.

 

In March 2013, my personal loan balance should be around $5,211. Using the current monthly payment of $230 plus the $1,410, I could make payments of $1,640. In three payments, I could almost pay this debt off as well. This leads us to end of June 2014 to attack the pool loan. At this point, the pool loan should total roughly $4,600. With a monthly payment of $1,710 ($1,640 plus regular monthly payment of $70), I can clear it in three months as well. Therefore, in September 2014, I could show only my home equity line of credit along with my line of credit balance for a total debt of $284,000 or lower. With an additional payment of $1,710 per month, paying off my line of credit will be a piece of cake taking about a year to clear it up.

 

Option #3 Paying Off My Line of Credit ASAP

 

In order to make my life easier in terms of budget management, I think I will opt for option #3: paying off my line of credit ASAP. By increasing my monthly payment to $1,100 on my line of credit I will be able to drop its balance rapidly. Once I pay enough on the line of credit to clear another debt (e.g. my Tribute car loan), I will draw a check from my line of credit and pay it off. Then, I will increase my monthly payment on my line of credit and repeat the same process to attack my personal loan.

 

It will be much easier than playing around with my bank to increase payments. Plus, if I ever run into unexpected expenses (we all know it never happens, right? Hahaha!), I will have the liquidity on my line of credit instead of getting stuck with a huge monthly debt payment on a loan.

 

What’s Next?

 

According to this plan, I could be left with only my home line of credit to pay in 2016. At this point, I will most likely start saving $1,000 per month to invest and use the extra $710 to pay off my debts. However, I know there are other expenses that will come around that time too… My Tribute will probably due to being changed by 2019 (it’s a 2009) and I really would like to have a garage and finish my basement so my kids could have their own space. Therefore, I will most likely save $1,000 per month in investments and use the $710 monthly to build an emergency fund that will be used to pay for a new car and then pay for renovations. Private school will also arrive just around the corner so I better be ready for this (and increase my monthly savings in my TFSA to fund it!). The good side of things is that my income will most likely become bigger and I will be able to fund these projects with my year-end bonus.

 

Readers, have you ever done a plan like this? What do you think of mine?

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June 17, 2013, 6:33 am

Forcing People To Save – The Best Idea a Gov’t Could Never Have

by: The Financial Blogger    Category: Assets and Net Worth,Pay off your Debts

 

 

Don’t you remember your motherand  father telling you: “you don’t understand today why I’m doing this, but one day, you will be thankful.

 

This is exactly why Governments should force the population to save; because we will be thankful one day! Instead, most Governments are currently acting like other parents who may have told you “You just have to do the same with your kids when you have them to get revenge as spending without looking behind and you can always charge your kids for your own mistakes!

 

There Is No Money Left in the Till

 

The housing bubble burst in the US between 2007 and 2008. At that point, Americans thought their houses were the biggest ATMs they had ever seen. All they had to do was to sign a few papers at their local bank and walk away with plenty of cash in their pockets. This cash was used to buy useful andbbasic necessities in order to have a decent life such as a second BMW, a 50’’ plasma TV, a heated pool, vacations at Disney and several pairs of shoes. Tell me really, who can live with only two pairs of shoes?

 

People didn’t care and we all know the end of the story: Americans saw their house values melt by more than 30% within 12 months. Even worse: companies started to cut jobs, increasing the unemployment rate and reducing the State revenues collected in taxes.

 

After this Tsunami, Americans woke up and started to work hard and spend less. They switched their focus on paying debts above everything else. They went from a household debt-to-income ratio of 125% to nearly 100% in a short period of time. You can clearly see on the following graph what happened:

 

debt to income ratio

 

Canadians are Dumber than I Thought

 

While I switched my focus on paying down my debts over the past two years, it seems like most Canadians don’t see it this way. As you can see on the above graph, the household debt-to-income ratio in Canada never ceased to increase and we are now showing a 165% ratio.  Since January 2000, housing prices surged by 123%. There are more condo towers being built in Toronto than on the entire American East Coast. Are we richer than Americans or Dumber?

 

Such stats make me think about two very bad scenarios:

 

#1 There is definitely a housing bubble in Canada (don’t expect to sell your house with profit next year 😉 ).

 

#2 Most Canadians are NOT saving for retirement (which means YOU will have to pay for their retirement).

 

This is maybe why we should force people to save money.

 

The Hell With it! The Gov’t ain’t Going To Tell Me What To Do With My Money!

 

I’ve heard this train of thought many times recently. In capitalism, most individuals hate seeing Governments telling them what to do. With all the horror stories in our history, I can appreciate this reflex. On the other hand, the same individuals expect Governments to save them from their own crap when they fail.

 

As a society, we have two options:

 

#1 We force people to save for retirement. Then we make sure everybody will get a minimum income at retirement. If everybody has made their own pension while they live, they will continue to spend money at retirement instead of being at the expense of the society.

 

#2 We let people spend their money on TVs and such and we tell poor retirees to starve in the street and die quietly because we don’t want to miss our TV shows. Since the Governments can’t afford to pay a pension to each individual, there are no other ways to let those people die in the street at one point.

 

Since we live longer and we have few workers to pay taxes, we can’t just imagine that we can afford to pay for everybody. Math in general is pretty simple. If you produce 10 sandwiches per day in your bag and you need to feed 20 people, you either give a sandwich to the first 10 and let 10 people starve or you give half of a sandwich to everybody and we are all a bit hungry. What happens if your production drops to 8 and you have 25 people to feed? This is where we are heading right now. So don’t tell me I can’t tell you what to do with your money since you will be begging for money in a few years from now and we both know the Government can’t handle this demand.

 

The problem is that most adults are still living like teenagers and think their parents (the Government) will be there to pay for their mistakes.

 

The Solution? A Forced Retirement Saving Plan!

 

Let’s call it a FRSP and force each worker to put at least 5% of their income into it. I don’t think the Government should manage this money because it’s not their primary job and this would make the difference between acting as a good father and acting as the godfather ;-).

 

The FRSP should be quite similar to what we know as a RRSP (Registered Retirement Saving Plan). We should allow people the same flexibility in term of investments but the contributions would be obligatory and directly taken from their paycheck.

 

Over time, the FRSP could be increased to roughly 10-15% in order to make sure everybody has a good pension to live on. But to start with, I would copy the Australian approach (they started at 3% back in the 90’s and they are expecting to raise it to 12% in 2020).

What’s Your Household Debt-to-Income Ratio? Mine is…

 

Just for fun, I calculated my debt to income ratio… I can tell you I’m contributing to the 165% average! As my latest net worth statement, my debt level is at $312K. I’m making roughly $135K per year so it makes a ratio of 231%… yikes!

 

But… considering I’m 31 with three kids, I’m definitely at the moment of my life where my debt-to-income ratio is at the highest. It’s totally normal. In the next 10 years, I’ll be working on paying off my debts and reduce that ratio significantly. At the same time, I’m saving a lot of money for my retirement. Each year, I contribute $5,000 in my RRSP (which is 3.7% of my salary) combined to a defined pension plan which as an actuarial value of $10,000 per year at least. Therefore, each year, I’m saving 11.11% of my total income for my retirement.

 

This is why my debt-to-income ratio is not worrying me. The problem is when you have such a ratio and you don’t save for retirement or try to pay down your debts. Therefore, you wake up one day, you are turning 50 and you still have a ratio over 150%. This is where the problem is!

 

How would you feel if we would force you to save money tomorrow in a FRSP?

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