The Easy Way Or The Hard Way

It’s hard to find a direct flight from Calgary to Dublin. WestJet offers one that leaves Calgary at 8pm and arrives in Dublin the next morning at 11am – a total flight time of eight hours. The problem was cost. A round-trip flight for our family of four was nearly $5,000.

I decided to try the Aeroplan route, knowing I had saved more than 200,000 miles for such an occasion. Surely I could do better than $5,000. The best Aeroplan option was an Air Canada flight from Calgary to Dublin with a short stop in Toronto. Total travel time of 11 hours and 30 minutes. The price tag was 240,000 Aeroplan miles, plus an additional $2,500 in taxes and fees. Better, but not good enough.

Next I researched how to get the most out of your Aeroplan miles, and specifically how to avoid fuel surcharges, which airlines like Air Canada impose on flight reward tickets. What I learned was that Aeroplan members can book with any of the 28 airlines in the Star Alliance, some of which do not charge fuel surcharges.

But how to avoid Air Canada, which Aeroplan naturally steers you towards, and which charges hefty fuel surcharges on its flight redemptions? The answer is to first fly to another airline’s hub. Say, for example, United Airlines, which has hubs in Chicago and Newark. A quick search of flights from Calgary to Chicago, and then from Chicago to Edinburgh showed availability on United Airlines with an Aeroplan flight redemption. Jackpot!

The total cost was 240,000 Aeroplan miles, plus $589 in taxes and fees. The trade-off was a multi-stop trip there and back with a total travel time of 16 hours each way. I traded time and convenience to save more than $4,000 in out of pocket flight costs.

How do you invest?

We make these trade-offs all the time. When it comes to investing, it’s fair to say that Canadian mutual funds are the equivalent to paying the full retail cost of a direct flight. It’s easy to get started. Just meet with a bank representative, fill out a questionnaire, and set-up a monthly pre-authorized savings plan with as little as $25. Voila, you’re on the road to financial independence.

Where this comparison falls short is that you see the full cost of the direct flight right upfront – and it’s extremely painful to pay $5,000 for those plane tickets. You may do it once for a dream vacation but if you plan on travelling more often you’re almost compelled to find a cheaper alternative.

Investing in mutual funds is not nearly as transparent. In fact, you might not think you’re paying anything at all for that portfolio of mutual funds. Even 2 percent sounds like nothing when you’re first starting out.

Then you realize it’s 2 percent of your assets each and every year, whether your portfolio is up or down. You might also realize that 2 percent of a portfolio that earns 6 percent is equal to one-third of your returns going to your advisor and fund manager rather than staying in your retirement account.

The Aeroplan via Air Canada route could be compared to using a robo-advisor. First off, you slash your total costs in half. And while you have to do some work to open an account, fund the account, and navigate the platform, for the most part your portfolio is managed for you.

For many people this is a terrific alternative to the expensive bank option, but for some there’s a nagging feeling that they’re still leaving money on the table. These are the do-it-yourselfers. The ones who will go above and beyond with their research and use low cost, globally diversified ETFs to meet their investing goals.

You’ll find me in this group – with my all-in-one portfolio of VEQT that costs a fraction of what a robo-advisor charges to manage a portfolio. The trade-off is that I do the buying and selling. No big deal with one fund to manage and nothing to rebalance.

Going the extra mile

Finally, there’s a select few who take investing one-step further; to find not only the cheapest discount brokerage with which to open an account, but also find the cheapest and best investment options to meet their goals.

These investors might use U.S.-listed ETFs to save on MER and foreign withholding taxes. They also might perform a strategy known as Norbert’s Gambit to convert their USD to CAD and save on foreign currency conversion fees. It can save a ton of money to be sure, especially for those with large six-and-seven figure portfolios.

I’m not in this camp yet and I’ll tell you why.

For this comparison I’ll share a quick story about our trip to Edinburgh. We had a long layover in Chicago and I wanted to take advantage of my Priority Pass membership to get access to an airport lounge. The trouble is we flew into terminal 1, and the lounges I had access to were in terminal 5. No matter, I thought. We have lots of time to shuttle over, enjoy the lounge, and get back for our next flight.

Well, we had to clear security again to get into terminal 5 – a stressful ordeal with children and when you are in an unfamiliar place. When we got to the lounge they wouldn’t accept my American Express Platinum Card to gain entry – I needed the actual Priority Pass card, which was tied to a different credit card that had recently expired.

We finally got into the lounge, after a call with American Express. We stayed for about 90 minutes and then got nervous about clearing security again so we made our way back. Several days later I check my American Express card statement and was shocked to find a charge for $88 CAD ($64 USD) for our visit! Apparently either the terms and conditions changed or this particular lounge only allowed one guest.

It was a kick to the gut considering we could have paid something similar to visit the United Airlines lounge right there in terminal 1.

The point is, you can save a lot of money by doing things the hard way. But be careful! Make sure that what you’re saving in money you’re not paying for with time. And watch out for pitfalls, such as foreign currency conversion or a mis-step on your tax return, that can derail the whole endeavour.

Net Worth Update: 2019 Mid-Year Review

I started posting my net worth updates several years ago with the audacious goal of reaching $1M in net worth by the end of 2020. It’s motivating to see this goal becoming a reality with each passing update.

Last year ended with a net worth of $691,000, falling short of my goal thanks to the stock market nose-dive in the last quarter of the year. Thankfully the markets bounced back early this year, once again posting new all-time highs.

I made a portfolio change this year, selling my two-ETF solution of VXC and VCN in favour of Vanguard’s new all-equity, globally balanced ETF called VEQT. This fund is now my lone holding inside both my RRSP and my TFSA. So far this year VEQT is up 6.43 percent – not bad!

Finally, I got a raise at work for the first time in five years! The modest increase added about $3,500 to my annual salary – not life-changing income but certainly a step in the right direction after years of wage stagnation.

Before I get into the numbers here’s a quick recap of my 2019 financial goals:

  1. Contribute to RRSPs – I’ve set up automatic monthly contributions to max-out my small RRSP contribution limit this year. My wife made a $10,000 contribution to her RRSP to help lower her taxes owing for 2018. She now only has about $8,500 in available room, which we’ll tackle next year.
  2. Contribute to TFSAs – We’re in catch up mode with our TFSAs and so I continue to put $1,000 per month into my TFSA until it’s fully maxed out (a few more years to go).
  3. Continue to max out RESPs – Another goal that’s on auto-pilot with continued automatic contributions of $416.66 every month. Our RESPs are invested in the TD e-Series funds.
  4. Don’t take on any new debt – One reason we are able to save at such a high rate is because we have no debts or monthly payments outside of our mortgage. We’ve kept it that way for the first half of the year and still don’t plan on borrowing anytime soon.
  5. Create my own raise – I’ve had to get creative with my income the past few years and find ways to create my own raise through selling used items, earning credit card rewards, and taking on extra freelance work. Getting an actual raise at work puts the icing on the cake, since I’ll just bank the extra income.

We also wanted to travel more and, in addition to our 32-day trip to Scotland and Ireland this summer, we have booked the following travel plans:

  • Seattle – 3 days in October
  • Vancouver – 5 days in October
  • Maui – 7 days in February
  • Italy – 17 days in April

We’re able to increase our travel budget specifically due to goal number four – don’t take on new debt.

Now, on to the numbers.

Net worth update: 2019 mid-year review

Total Assets – $967,946

  • Chequing account – $1,500
  • Savings account – $15,000
  • RRSP – $198,175
  • Defined benefit pension plan – $212,009
  • TFSA – $35,385
  • RESP – $46,877
  • Principal residence – $459,000

Total Liabilities – $207,565

  • Mortgage – $207,565

Net worth – $760,381

Now let’s answer a few questions about the way I calculate net worth:

Credit Cards & Banking

We funnel all of our purchases onto a couple of different rewards credit cards to earn points on our everyday spending.

Our go-to card is the now discontinued Capital One Aspire Travel World Elite MasterCard. We have a grandfathered version that pays 2 percent back on every purchase and comes with a 10,000-point bonus each year. Our secondary card is the new American Express Cobalt Card, which pays 5 percent back on ‘eats & drinks’ so we use it at any grocery store, restaurant, and liquor store that accepts Amex.

We each have no-fee chequing accounts at Tangerine, which we use for bill payments, email money transfers, and the odd debit purchase. The rest of our banking is done at TD, including our mortgage, line of credit, and investments.

Pension

Each month I contribute roughly 12 percent of my salary to a defined benefit pension plan that my employer also matches. The amount listed above is the estimated commuted value of the pension if I were to leave the plan today.

The plan pays 2 percent of your highest average salary multiplied by the number of years worked. So that means if I retired at 60 with an average salary of $100,000 I’d receive $60,000 per year from the pension plan.

RRSP / RESP

The right way to calculate net worth is to use the same formula consistently over time to help track and achieve your financial goals.

My preferred method is to list the current value of my RRSP and RESP plans rather than discounting their future value to account for taxes and distributions.

I consider a net worth statement to be a snapshot of your current financial picture, so when it comes time to draw from my RRSP and distribute the RESP to my kids, net worth will decrease accordingly.

Principal Residence

We bought our home in 2011 for $425,000 and developed our basement a few years later, increasing its value to $450,000. Last year I bumped up the market value by 2 percent (which is still less than its city-assessed value), but the local real estate market has since flattened and so I’ve left the value at $459,000 this year.

Final thoughts

It’s been easier to put our finances on auto-pilot now that we have fewer goals to fund. In the past we struggled to fund multiple financial goals simply because resources were finite. Now we have a laser-like focus on maxing out our RRSP / TFSA / RESP – which is simple to automate.

Our million-dollar net worth milestone is well within reach by the end of next year. I’m projecting a net worth of ~$830,000 by the end of this year and, barring a major market meltdown, we should cross the million-dollar mark by the end of 2020.

Of course, this goal is just an arbitrary benchmark to strive towards on our true path to financial freedom. We’re still on track for financial freedom 45, which is now just five years away. In fact, we’re at a point where I could realistically make the leap to full-time freelancer in the next two years. We’ll see how things go.

How have your finances fared so far in 2019?

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