It wasn’t that long ago I was buried in debt and living beyond my means. Back then, financial planning was about when my next paycheque would arrive, what bills were due next, and how much I had left to spend at the bar. I remember checking my bank balance after midnight on paydays just to see if I could order another drink or pick-up a late night pizza.
My long-term financial plan was to daydream of a big raise or promotion at my next annual review, or simply bide my time until tax season where I would hopefully earn a juicy refund and pay off my credit card debt. I couldn’t see further ahead than a calendar year at a time.
When I finally had my financial awakening I tracked my spending for the first time, cut expenses to the bone, and took out a consolidation loan to pay off my high-interest credit cards. The loan came with a three-year term, so that became my long-term vision: Make these payments on time, control my spending, don’t take on any new debt, and when the loan is paid off in three years I’ll free-up that monthly payment and direct it towards savings.
And it worked. I made those $800+ payments every month for three years and got out of that debt spiral. I also earned a promotion that came with a decent salary increase. Suddenly, money wasn’t so tight anymore and I could start looking past my next paycheque and towards some long-term savings goals.
Finally, a Financial Plan
My employer had a group RRSP program where it would match 50 percent of contributions, up to 2 percent of my salary. My boss, a great mentor of mine who taught me a lot about personal finance and investing, encouraged me to contribute. I was earning $50,000 back then and so when I put $2,000 into my RRSP, my employer kicked-in $1,000. Add a couple of bonuses over the years and it wasn’t long before I had saved $25,000. I had a retirement portfolio!
Then life threw a curveball. My wife was diagnosed with Multiple Sclerosis and we had to sit down and really map out our priorities. That meant big changes in our lives, starting with the decision to have children right away and that my wife would stay home full-time. My career was also at a crossroads and I needed to earn more money to make this all work.
All of this prompted a career change to the public sector. I negotiated a substantial raise – a $10,000 per year increase from my then $65,000 annual salary – and the job came with other benefits such as more vacation time and less travel. The elusive work-life balance had been unlocked!
I started getting seriously obsessed with my personal finances and realized that financial freedom, and perhaps even early retirement, was actually achievable. It was an incredible feeling, especially given the sorry state of my finances just five years earlier.
The more I read about managing money, saving, and investing, the more I felt I had to share my story and help others get their finances in order. Boomer & Echo was born.
Writing a blog has been a great way to map out my goals and hold myself accountable to achieving them. While my long-term financial goals have changed over the years (remember, I wanted to build a portfolio that spit-out $90,000 per year in dividends, or retire by 40!), it’s the process that has really mattered most.
A Financial Compass To Guide The Way
Retirement, or financial freedom, whatever you want to call it, is just a signpost to stake into the ground miles down the road. Your financial plan is a compass or map to help you get there. The exact details of goals made for the distant future are less important than the positive habits developed throughout the journey.
Imagine you’re in Vancouver and you want to get to Halifax. It doesn’t matter whether you take an airplane, drive a car, or get there by pogo stick; the point is you need to get to Halifax. How long it takes will be measured by how much you earn, save, and spend over the years, plus how many detours you take along the way.
At first, you won’t be able to see your destination. You have to rely on your compass to guide the way. Years, or decades later, as your final destination appears on the horizon, you can adjust course to help you arrive on time or get their sooner. Financially speaking, this could mean ramping up savings in the final years leading up to retirement, matching your mortgage pay-off date to your retirement date, or extending your career by a few years to increase your pension benefits.
Final Thoughts
I prematurely planned for financial freedom by age 40. Then life gets in the way. Kids come along, they’re more expensive than you realize, and your goals get delayed. But what didn’t change was my commitment to the process. I kept saving, paying down debt, trying to control my spending, and looking for ways to earn more. I knew my compass wouldn’t let me down.
Whether I actually reach financial freedom by December 31st, 2024 is less relevant to me than the path I’ve taken to get there.
It’s amazing to see how far I’ve come with my finances in the last 10-15 years. Thankfully, I’m no longer the spendthrift I was in my twenties, living paycheque-to-paycheque and spending beyond my means. Now, financial freedom is on the horizon thanks to my financial plan and the good habits I’ve built over time.
My approach to credit card spending has evolved over the years. Once I got out of debt and got my spending under control, I quickly realized (if you paid off your card in full each month) that using a rewards credit card was much more advantageous than paying with cash or debit.
I started out years ago with a basic PC MasterCard and earned rewards in the form of free groceries. This was handy when our kids were still in diapers and we were grateful for every additional $20 we could get back on our spending. Then, with a little more research, I found a cash back credit card that helped us double our rewards on the very same purchases.
Now that our kids are older, and we’re travelling more often (Scotland and Ireland last summer. Maui and Italy next year), I’ve found travel rewards cards to be way more lucrative for our spending. I don’t mind paying an annual fee to unlock free flights, hotels, and other perks like airport lounge access and additional travel insurance.
Core Spending Rewards Cards
So what’s in my wallet today? I’m fortunate to have a grandfathered version of a Capital One Aspire Travel World Elite MasterCard (no longer open to new applicants) that my wife and I use as our primary spending card. That’s because it pays 2 percent back on every purchase and comes with 10,000 bonus miles each year on my card anniversary. That’s worth $100 and almost completely offsets the $120 annual fee. This card is particularly useful for grocery spending, since the majority is done at Costco, which only accept MC.
A No Frills grocery store and gas station popped-up nearby our house a few years ago and so we find ourselves shopping and filling-up our tanks there fairly often. That led me to getting the PC Financial World Elite MasterCard, where we earn additional PC Optimum points on our spending at Loblaw’s stores and Shoppers Drug Mart. I don’t track these rewards closely, but it seems I’m redeeming $20 at least once a month.
Rounding out my core spending is what’s arguably considered the best all-around credit card on the market today – the
Travel Rewards Cards
I’ve also found the American Express Platinum card to be extremely valuable, even at the outrageous $699 annual fee. I get an annual $200 travel credit, automatic gold elite status at Marriott hotels, plus unlimited airport lounge access for me and my wife. I use the highly flexible Membership Rewards points to either transfer to Aeroplan or simply to redeem points for travel purchases.
I mentioned the Marriott Bonvoy hotel rewards program – which is easily the best in Canada. I applied for the Marriott Bonvoy American Express Card last year to take advantage of the 50,000 bonus points and decided to keep the card and pay the annual fee because it comes with an annual free night at a category 5 hotel (35,000 points).
Finally, I hold the
These are the cards in my wallet throughout the year, however I often supplement my rewards by taking advantage of special promotions on other credit cards. My criteria for this activity is that the card must have an attractive sign-up bonus ($200 or more), be easily attainable (welcome bonus triggered at first purchase is great, but a reasonable minimum spend is okay, too), and offer the annual fee free of charge in the first year.
A good example of that, currently, is the TD Aeroplan Visa Infinite Card. You can earn up to 40,000 Aeroplan miles and the annual fee is waived in the first year.
This Week’s Recap:
This week I took an in-depth look at house down payment options, including the pros and cons of putting down 5 percent, 10 percent, and 20 percent.
Over on Young & Thrifty I reviewed the robo-advisor RBC InvestEase. From the article:
“For RBC clients currently invested in a managed mutual fund portfolio, switching to InvestEase is an absolute no-brainer to save on fees and achieve better investor outcomes.”
From the archives: Can robo-advisors hold up in a market downturn?
Promo of the Week:
I mentioned that we shop fairly regularly at No Frills and also at the Real Canadian SuperStore. I’m not sure what took me so long, but I recently signed up for the PC Insiders program. In my opinion, it’s one of the hidden gems in the Canadian rewards and loyalty space.
The annual subscription costs $99 and it unlocks some fantastic benefits, including:
- Extra points
- Free shipping
- Free online grocery pickup
- $99 travel credit
- Annual surprise gift
Plus:
- 20% back in points on all brands of baby diapers and formula
- 20% back in points on all PC Organics Products
- 20% back in points on all PC Black Label Collection purchases
- 20% back in points on all Joe Fresh® purchases, in store and at joefresh.com
- 20% back in points on all beautyBOUTIQUE online orders
Use my referral code – RE1483 – to join the PC Insiders program and take advantage of all of these benefits.
Weekend Reading:
The Scotiabank Gold American Express card got a refresh and now comes with no foreign exchange fees, in addition to 25,000 welcome points.
The streaming wars are about to begin, with Apple TV+ and Disney+ set to launch next month in Canada. Here’s a great look at all the streaming services soon to be available.
Studies show that for every retiree who is spending too little, there is another one who is spending too much. Will your savings outlive you, or vice-versa?
The Blunt Bean Counter Mark Goodfield with a great explanation of what to do when your spouse dies before you.
Is real estate still a good investment for Canadians? Why we shouldn’t be making property investment decisions based on headlines.
Is investing risky? PWL Capital’s Ben Felix takes a deep dive into what exactly you’re risking in his latest common sense investing video:
I loved this piece by Morgan Housel on why new technology is a hard sell:
“Convincing people that you can solve their problems is harder than it seems because people don’t want to be told that the way they’ve always done things is wrong.”
Rob Carrick tackles a controversial topic with a balanced look at the give and take of reverse mortgages.
This New York Times pieces takes a look at the advice in three of the most popular personal finance books ever sold.
Finally, I love Wealthsimple’s Money Diaries series and their latest explains why baseball legend Mike Piazza was successful because you booed him.
Have a great weekend, everyone!
Housing prices are ticking up again, with the national average price for homes sold in September reaching $515,500, according to the Canadian Real Estate Association’s latest report.
Rising prices puts prospective home buyers into a dilemma when it comes to saving for a down payment. Putting down the minimum five percent on a $500,000 home gets you into the housing market for a reasonable $25,000. Saving up a 20 percent down payment, on the other hand, avoids costly mortgage default insurance premiums (mortgage loan insurance from Canada Mortgage and Housing Corporation).
Note that the minimum amount required for a house down payment depends on the purchase price of your home. Homes valued at $500,000 or less need a down payment of five percent, while homes valued between $500,000 and $999,999 require five percent on the first $500,000 and 10 percent for the portion above $500,000. Home buyers need to put down 20 percent on homes valued at $1 million or more.
There are pros and cons putting down more or less on your home purchase. I reached out to Robert McLister, mortgage expert and founder of RateSpy.com, to discuss house down payment options.
Pros and Cons of a 5% House Down Payment
Pros: The obvious advantage to making the minimum five percent down payment is there’s less capital required to become a homeowner and reaching that threshold requires less time to save.
“So many young buyers stay on the sidelines scrimping for a bigger down payment only to see home prices run away from them,” says McLister.
He points to the past two decades of price growth as evidence that getting into the market quicker can pay off, “provided home buyers don’t overextend themselves.”
Putting down less than 20 percent requires the buyer to purchase mortgage loan insurance to protect the lender against default. While the borrower must pay those insurance premiums, McLister says an advantage to having an insured mortgage will give you access to the lowest interest rates available.
A five percent down payment is also compatible with the First Time Home Buyers’ Incentive – the shared equity mortgage with the Government of Canada – and other governmental home subsidies.
A deliberately smaller house down payment can leave a borrower with a larger cash cushion, saving for more immediate closing costs and furnishings, or simply retaining more money for emergencies and other needs.
Another advantage is that automatic monthly mortgage payments create a forced savings plan for those who might otherwise squander that money away as a renter.
Cons: The financial impact of putting the minimum amount down on your home is that it comes with a 4 percent default insurance premium. While this amount can be rolled into the mortgage, it creates a highly leveraged situation with risk of negative equity should home prices fall.
“On day one you’re almost 99 percent financed. It doesn’t take much of a home price selloff to trap you in your home, preventing a sale,” says McLister.
A five percent down payment also means more interest expense over the life of your mortgage, compared to a larger down payment.
Note that the amortization for buyers with 5 percent down is limited to 25 years. The property also cannot be a non-owner-occupied rental property.
Another caveat to consider: Prospective home buyers can borrow the 5 percent down payment (even from a credit card) so long as they meet the lender’s debt limit ratio. This means, “they can essentially owe more than their home price on day one,” says McLister.
Pros and Cons of a 10% House Down Payment
Pros: A down payment of 10 percent gets you all of the benefits of a 5 percent down payment, plus saves you money on insurance premiums (borrowers pay 3.1 percent instead of 4 percent).
An increased down payment also allows you buy a more expensive home. For instance, a 7.5 percent down payment makes it possible to purchase a $999,999 home.
Finally, a 10 percent down payment increases the chance you’ll be able to refinance at the end of a 5-year fixed term. That’s because refinancing typically requires a loan-to-value (LTV) ratio of 80 percent or less.
Cons: A 10 percent house down payment still means the borrower must pay mortgage default insurance premiums of 3.1 percent.
Your purchase price is also capped at $1 million, while your amortization is limited to 25 years. The property cannot be a non-owner-occupied rental property.
Also consider that 10 percent is the minimum down payment if
- The home has 3-4 units
- You want an insured stated income mortgage (for self-employed borrowers who can’t prove their income in the standard fashion)
- You’re buying a non-winterized or seasonal access vacation property
Pros and Cons of a 20% House Down Payment
Pros: The primary advantage of putting down 20 percent or more on your home is to avoid default insurance premiums, saving you thousands of dollars over the life of your mortgage.
A larger down payment offers more flexibility, giving buyers the ability to purchase a home priced at $1 million or more, and allowing for amortizations over 25 years, along with refinancing.
Putting 20 percent down gives buyers more product choices, such as re-advanceable mortgages, standalone home equity lines of credit, interest-only mortgages, and non-prime financing.
More importantly, buyers with 20 percent down avoid the federal mortgage stress tests if the borrower uses a credit union or alternative lender.
Cons: A 20 percent down payment ties up more of an investor’s capital, which comes with an opportunity cost.
It also subjects most borrowers to a stricter stress test, since the mortgage would be uninsured.
“The uninsured stress test equals the greater of the benchmark rate or your contract rate + two percent, whereas the insured stress test is just the benchmark rate,” says McLister.
Finally, a 20 percent deposit is typically required for many new build properties.
Final Thoughts
In summary, McLister says the size of your house down payment shouldn’t only be dictated by your available resources, but by your investment alternatives.
“Often times it makes more sense to put less down so you can allocate cash to purposes with a higher return on investment.”
My wife and I put 10 percent down when we bought our first home together in 2003. We committed to a 20 percent down payment before we built our current home in 2011. That meant waiting and saving for 18 months to come up with the cash. It was a good thing house prices didn’t run away from us like we’ve seen in Toronto and Vancouver.