Sean Cooper (30) is a full-time pension advisor for a global pension benefits consulting firm earning $50,000 per year. He also earns approximately $20,000 per year as a freelance financial writer.

Sean has channeled much of his income into paying off his mortgage. His goal is to reach financial independence by his mid-30’s.

Current Assets

  • Home worth $550,000 (with $60,000 mortgage)
  • RRSP’s – $50,000
  • Non-registered investments – $340
  • Personal accounts – $25,260
  • Defined Benefit Pension Plan – $24,500

Goals:

  1. Be mortgage free by November 2015.
  2. Build-up his non-registered portfolio.
  3. Have a $1 million net worth by his mid-thirties.
  4. Write a book on personal finance and how he became mortgage free.

Financial Plan

Sean wants to diversify his assets. Here’s what he can do.

Be mortgage free by the end of the year

Sean purchased his home in Toronto in August of 2012 for $425,000 and took out a mortgage of $255,000. He rents the main floor of the house for $1,550 per month and takes advantage of the mortgage company’s prepayment policy by funnelling any extra funds toward his mortgage.

Personally, I am in favour of taking a more balanced approach to paying off debt versus saving for retirement (or financial freedom). Most of Sean’s net worth (80%) is tied up in a single non-liquid asset. While a house is an asset in that it can appreciate over time, it is also a consuming asset – property taxes, insurance, maintenance, and repairs – and indeed Sean has already spent a good deal on various upgrades with an upcoming costly foundation repair due.

Related: Do home renovations really pay off?

Sean could have used his rent money for additional payments and still been well ahead of most homeowners in paying off his mortgage early. He might have used his part-time freelance income to beef-up his portfolio instead. The TSX has increased by about 50% since 2009, so there’s some missed opportunity to invest and diversify his assets.

Nevertheless, Sean has been focused on his goal and is on track to be mortgage free by the end of the year, so kudos to a remarkable achievement.

Build up investment portfolio

Sean’s RRSP is made up of TD e-series mutual funds (30% each in Canadian equity, US equity and International equity, and 10% bonds) and CI Mutual Funds (Signature Select and Harbour Growth and Income). He makes new contributions to the TD e-series only and wonders if he should continue holding both the TD funds and the CI funds.

He is not inclined to purchase individual stocks and he is wondering if he should switch his money into ETFs.

On reviewing his funds I found the top holdings of the CI mutual funds are almost identical to the TD funds and have an MER of 1.3% (vs. an average of less than 0.5% for TD) and are underperforming in comparison. He should drop them.

Related: How to get started with an index portfolio

TD e-series are good, low-cost basic index funds, but should he switch to ETFs instead? There are more decisions to make in selecting from the many ETF choices available and a little more work to set up an account. Once his mortgage is paid Sean intends to make weekly contributions so he should open an account with a brokerage that has no trading fee for purchasing ETFs (such as Questrade).

Advantages of ETFs are:

  1. Slightly lower MERs, and
  2. More choices in sector and specialty funds if he wishes to diversify from the core indexes.

To reach a net worth of $1 million (assuming his house value remains the same) in the next 5 years will require a weekly contribution of $1,500 assuming a 5% rate of return.

Home Equity Line of Credit

Sean has been considering taking out a HELOC once his mortgage has been paid and using the money to invest.

“I like the idea of tax deductible interest.”

I’m not in favour of using a HELOC for investing purposes. The loan can be costly to set up and is not risk free. Sean has already indicated he is debt adverse. That said, there are people who have done well with them. It should be noted that the interest is only tax deductible if the investments are used to produce income (e.g. interest, dividends) not capital gains.

He should investigate all the pros and cons of this approach before committing to it.

Final thoughts 

Sean has shown a single-minded purpose towards his goal of becoming mortgage free in a little over 3 years. He then intends to switch his focus to achieving financial independence in 5 years. He works long hours and has a very frugal lifestyle that not everyone would tolerate.

He should think about what financial freedom would mean to him when it is achieved, rather than focusing on a dollar amount ($1,000,000). It’s easy to fall into the trap of eternal frugality and greater and greater savings goals.


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