Inspired by Warren Buffett’s folksy wisdom in his annual letter to Berkshire shareholders I decided to write my own letter. I don’t have any shareholders so this letter is written to my family, or my householders.
Alas, I don’t expect anyone to make the pilgrimage to Lethbridge for our annual household meeting, so instead you’ll get to read Engen’s annual letter to householders.
Engen’s annual performance versus the market
|Year||My personal rate of return||TSX Composite annual rate of return||S&P 500 annual rate of return|
To the Householders of Engen Inc.
The Engen family’s gain in net worth during 2017 was $103,304, which represented an increase of 19.4 percent over 2016. Over the last eight years (since I started this blog) our household net worth has grown from $102,200 at the end of 2009 to $635,700 by the end of 2017 – a rate of 25.7 percent compounded annually.
There are five building blocks that add value to the Engen family’s finances: (1) high savings rate; (2) aggressive debt pay down; (3) minimizing cost of living increases; (4) investment earnings from our portfolio of stocks; and (5) increasing income.
High savings rate
We’ve always tried to maintain a high savings rate and 2017 was no exception. Between our RRSP, TFSA, RESP, and my defined benefit pension plan we managed to save one-third of our income.
Looking ahead, these savings categories will have to be reassessed beyond 2018 as we have (finally) maxed-out my RRSP and future contribution room is limited to $3,500 annually because of the pension adjustment.
Thankfully, TFSA contribution room is plentiful and our focus for the next five years will be to max-out each of our tax free savings accounts through a minimum of $12,000 in annual contributions.
RESP contributions are currently maxed-out each year ($2,500 per child) and will be for the next decade.
Aggressive debt pay down
Interest rates finally ticked higher last year and are widely expected to continue rising into 2018. Higher interest rates affect our home equity line of credit, which is tied to prime, and will undoubtedly impact our mortgage when it comes time to renew in September of 2018.
The line of credit is a holdover from our $32,000 basement renovation in 2014. We started aggressively paying it off last year and should be rid of the balance by mid-2018.
Our mortgage balance is down to $225,000 and we’ve recently bumped up our mortgage payment by $100/month. We’re near the end of a 2-year fixed rate term at 2.19 percent. We hope to renew the mortgage at a steep variable rate discount (prime minus 0.80 or better) or lock-in another 1-or-2-year fixed rate.
Minimize cost of living increases
Raising a family is expensive. For the first time ever our annual grocery spending exceeded what we paid onto our mortgage. We tried to combat our household food inflation by cutting back on dining and alcohol purchases, saving $400/year in those categories.
Our spending on kids’ activities was up $1,000 year-over-year as both of our girls were in ballet, piano, and soccer last year – plus they each attended a couple of week-long camps in the summer. We expect these costs to continue to rise.
The largest reduction in expenses, however, was when we paid off our 2013 Hyundai Sante Fe in October 2016. That freed-up $9,600 per year in 2017 which we used to start funding our TFSAs again.
I’m a firm believer that Canadians spend way too much money on vehicles, as evidenced by the auto industry’s record sales every year. How many families have two brand-new leased or financed vehicles sitting in their driveway?
The Engen strategy for saving big money is to drive our paid-off vehicles for at least another five years before we even think about purchasing a new one. That will save us $10,000 per year, an amount that will be saved towards our early retirement fund.
The key to managing all of this is budgeting – something we’ve been mastering for the past decade and still find tremendous value in each year.
Investment earnings from our portfolio of stocks
Our RRSP portfolio has grown large enough (at $170,000) that market changes rather than personal contributions is now the biggest driver of performance.
You see, while our high savings rate is important, it mattered much more in the early years of investing. A 10 percent return on $10,000 is only $1,000, but a 10 percent return on $150,000 is $15,000. That kind of compounding starts to make a big difference once your portfolio reaches six-figures.
And while many investors like to focus on the amount of dividends a portfolio can generate, the way I look at it I’m still in the accumulation phase of my investing journey and so I’m most interested in the total returns from my portfolio. After all, if I were a dividend investor I’d be re-investing those dividends anyway, not spending them.
To say that wages at my day-job in the public sector have stagnated would be an understatement. Our employee group hasn’t seen a wage increase in five years, and the provincial government has mandated a continued freeze until September 2019.
That’s why it was fortuitous that I started this blog back in 2010 and since then, through a combination of hard work and luck, managed to earn more than $500,000 (before expenses) through advertising, freelance writing, and fee-only financial planning.
Not all of that goes back into our household finances, mind you, but we take about $3,000 per month out of the business to top-up our income and help meet our savings goals.
We also find other ways to increase our income each year; earning credit card rewards on our spending, and selling unused items on Facebook and Kijiji.
Increasing income has been the number one difference maker in our household finances over the last eight years. This hasn’t come from big bonuses or big jumps in salary. In fact, we’re a single-salary household and I’ve never earned six-figures in a year.
Instead I’ve hustled and found the right opportunities to turn my passion into a second and third income stream in my spare time. I hope to instil the same entrepreneurial mindset into our kids as they get older.
As we look to the year ahead we’ll continue to focus on these five pillars that have laid the foundation for financial success.
It’s these building blocks, stacked slow and steady, year after year, that help us reach such lofty ambitions as having a million-dollar net worth by age 41, and becoming financially free by age 45. They allow us to spend freely on things we care about, and save big on things we don’t.
More than anything, they’re the financial values we share as a household, a compass to guide us through life’s milestones and to our destination.
Next year we’ll be that much closer to it. Until then.