Inspired by the folksy wisdom in Warren Buffett’s annual letter to Berkshire shareholders (scheduled for Feb 27, 2021), 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, Alberta 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

To the Householders of Engen Inc.

The Engen family’s gain in net worth during 2020 was $184,645 which represented an increase of 22.3% over 2019. Over the last 11 years (since I started this blog) our household net worth has grown from $102,200 at the end of 2009 to $1,013,141 by the end of 2020 – a rate of 23.2% compounded annually.

There are five building blocks that add value to the Engen family’s finances: (1) high savings rate; (2) no new debt; (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 2020 was no exception. Between our RRSP, TFSA, and RESP accounts, we managed to save one-third of our income. That’s in addition to the $100,000 we were able to invest inside our new Corporate Investment Account.

Looking ahead, these savings categories will have to be reassessed beyond 2021 as we have maxed-out both my wife’s and my RRSP contribution room along with my unused TFSA room.

Thankfully, TFSA contribution room is plentiful in my wife’s account and that will be our focus this year with a planned $50,000 in TFSA contributions for her account plus the $6,000 annual TFSA limit going into my account.

RESP contributions are currently maxed-out each year ($2,500 per child) and will be until our children are ready to attend post-secondary.

Our savings rate will actually tick-up to 37% in 2021.

No new debt

Both of our vehicles have been paid off for years and that has allowed us to direct more of our income towards our savings goals and for travel (ha!). We’ve also paid off our home equity line of credit that we used to complete our basement renovation.

We haven’t had any non-mortgage debt for two-and-a-half years. Even though rates are ultra low, we don’t plan to take on any new debt in the near term.

Speaking of our mortgage, we’re halfway through a five-year term with a 1.45% variable interest rate. We’re in no hurry to pay this down, although with the balance now well below $200,000 we believe the next mortgage renewal (in 2023) will be our last one. 

Minimize cost of living increases

Raising a family is expensive. Our annual grocery spending now far exceeds what we pay onto our mortgage. What we saved on dining expenses in 2020 was offset by an increase in our wine budget (sorry, not sorry).

Our spending on kids’ activities was down slightly in 2020, thanks to most sports being shutdown over the spring and fall. We expect these costs to continue to rise though as our kids remain in weekly piano and ballet lessons, plus an expected return of some sporting activities later this year.

As I mentioned, we haven’t had a vehicle payment for several years and don’t plan to upgrade our 2007 and 2013 model vehicles any time soon.

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 and planned spending – 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 ~$250,000) that market changes rather than personal contributions is now the biggest driver of performance.

You see, while our high savings rate is important, that mattered much more in the early years of investing. A 10% return on $10,000 is only $1,000, but a 10% return on $250,000 is $25,000. That kind of compounding starts to make a big difference once your portfolio reaches six-figures or more.

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.

With my one-ticket investing solution (Vanguard’s VEQT), my portfolio is automatically rebalanced and requires no maintenance from me besides adding new money from time to time.

Increasing income

It was a good decision to leave my day job in the public sector at the end of 2019. Wages had stagnated for years and the situation in post-secondary is far worse now thanks to the pandemic. 

It was fortuitous that I started this blog back in 2010. Since then, through a combination of hard work and luck, I managed to earn more than $500,000 (before expenses) through advertising, freelance writing, and fee-only financial planning. 

Not all of that went back into our household finances, mind you, but we did withdraw an extra $3,000 or so every month to help accelerate our savings goals. 

That side hustle has now turned into a full-time career for me and my wife, and we managed to double the business revenue in 2020.

We also found 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 10 years. This hasn’t come from big bonuses or big jumps in salary. In fact, we were a single-salary household and I had never earned six-figures in a year.

Instead, I’ve hustled and found the right opportunities to turn my passion into a full-time business venture. I hope to instil the same entrepreneurial mindset into our kids as they get older.

Final thoughts

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.

It’s easy for investors to get distracted away from their primary goals these days. Bitcoin is already up 94% year-to-date. The ARK Innovation ETF (NYSE: ARKK) has posted returns 19.45% so far this year. Meme-stock darling GameStop (NYSE: GME) is still up 133.68% on the year even after its historic rise and fall. Clean energy stocks and ETFs, while stumbling out of the gate in 2021, have soared year-over-year, including the Invesco Solar ETF (NYSE: TAN), which has eye-popping 1-year returns of 171.38%.

ETF providers are tripping over themselves to capitalize on the cryptocurrency, clean energy, and technology frenzy. Earlier this year, BMO launched a suite of ‘disruptive innovation’ ETFs to try to mimic ARK’s success. BMO, Horizons, and iShares have introduced more clean energy products to their line-ups. Finally, this week saw the emergence of Canada’s first (and second) Bitcoin ETFs from Purpose and Evolve.

It’s like the explosion of mutual funds all over again. Shiny new objects everywhere!

So, why not throw some play money into these sectors, as many of my readers and clients have done? 

Emotional robot investors like me aren’t swayed by shiny things. I’m fully invested in Vanguard’s VEQT across all accounts. Over the past year I’ve posted ho-hum returns of 18.31% in my TFSA and 14.32% in my RRSP.

Sure, those returns pale in comparison to some of these exciting new products and asset classes. But I’m not investing for the best 1-year returns. My low cost, broadly diversified portfolio is designed to give me the most reliable outcome over the long-term.

Besides, we know how this ends. A stock, ETF, or sector outperforms by a wide margin over a short period of time. Assets pile in as investors chase past performance. The stock, ETF, or sector then fails to continue the strong performance and reverts back to the mean. Rinse and repeat forever.

The last investors to get in typically get burned. We’ve seen this with oil & gas stocks, with cannabis stocks, with dot com stocks, with bio-tech and pharma stocks. It’s the same story.

Forget the notion of this time it’s different due to a technological revolution or paradigm shift. Railway mania was followed by a railway bust. The roaring 20s ended in the Great Depression. The infrastructure boom of the 1980s was followed by several busts. And the surge of IPOs in the internet bubble ended in a crash. This time isn’t different:

I don’t personally allocate ‘play money’ to my investments, but I understand why investors might want to. If you can’t resist the urge to play the markets, do yourself a favour and design some rules around this behaviour. Rules like allocating no more than 5% of your portfolio to play money. Have a “sell” target price to deal with your winners and losers so you know when to take profits and when to cut your losses.

I know it’s an exciting time to invest when seemingly everything is going up, including these shiny new products. You feel like an idiot holding a boring portfolio of index funds while investing newbies are striking it rich.

But ask yourself, do you want to be the greater fool who is willing to pay the highest price before a crash? We don’t know how long it takes for a bubble to burst, but we do know that it will burst eventually. Growth stocks fizzle out when earnings disappoint. Star fund managers fade when their assets become too large to maintain their advantage.

As for Bitcoin, well that story is still being written but the current price is more than 3 times higher than its last peak in 2017. That ended with a rapid 80% decline that took three years to recover. Maybe best to catch the next wave…

This Week’s Recap:

No new posts from me this week but I did want to share the winner of the Retirement Heaven or Hell book giveaway and the TurboTax free product code giveaway.

Congratulations to Dean, who commented on February 13th at 1:37 p.m. You’ve won a copy of Retirement Heaven or Hell.

And, congratulations to the following four readers who commented on my TurboTax Full Service Self Employed Review. You’ve won a free product code to try any of the three TurboTax Self-Employed products:

• Braden Bulmer
• Louie M
• Bruce
• Ashley

Thanks to everyone who entered to win these giveaways!

Weekend Reading:

Our friends at Credit Card Genius share the best instant approval credit cards in Canada – from no credit to excellent credit.

Here’s a great piece from Andrew Hallam about why he doesn’t include play money in his portfolio:

“If you want to play with money, spend it. Take a vacation. Buy something for a friend. Enjoy an activity you’ll never forget. That’s where “play money” should go.”

A Wealth of Common Sense blogger Ben Carlson shared 12 things he reminds himself of when markets go crazy.

Who really traded GameStop stock? And what happened to them? Wealthsimple digs into their own client data to find out how traders behaved.

Morningstar’s Ruth Saldanha with a great reminder to stay away from Group RESPs. I couldn’t agree more.

Most robo advisor platforms offer socially responsible investing options. The Corporate Knights blog looks at how green are your “responsible” robo advisors?

Are you sitting on a pile of travel rewards points? I know I am. Travel expert Barry Choi explains why cashing in your travel points now may not be the best deal.

I loved this post from Jesse Cramer of The Best Interest blog. He looks at something called bimodal spending, which asks you to say either “hell yes!” or “hell no!” to major expenses.

Speaking of spending, Michael James on Money looks at which accounts you should spend from first in retirement. His approach closely resembles what I recommend for my clients. Start with your non-registered money, but also spread out your RRSP withdrawals over a longer period of time (rather than waiting until age 72). TFSAs are last in line, and hopefully you’re still able to contribute to your TFSA to build up your tax free assets.

Here’s Ben Carlson again with the biggest difference between now and the dot com bubble.

And, here’s Andrew Hallam again on how wildly successful investments can also become a curse.

Finally, a spirited debate on advisor fees and whether a 1% assets-under-management fee is overcharging investors versus an hourly or pay-as-you-go fee:

New data by Kitces shows a comprehensive financial plan cost $2,500 when paid for stand-alone.

The average AUM fee on $1M is 1% or $10,000 for a plan and portfolio mgt (PM).

Vanguard, Betterment, Wealthfront charge 0.25% to 0.3% for PM only.

1% AUM is 100% overcharging! pic.twitter.com/8IdcPYYyaC

— Rick Ferri (@Rick_Ferri) February 8, 2021

The discussion came out of this new research from Michael Kitces on financial advisor fee trends.

Have a great weekend, everyone!

Retirement isn’t just about the numbers (have I saved enough, how much can I spend). It’s a new chapter in your life that can last 30 years or more. You need to consider what you’re retiring to, not just what you’re retiring from. That’s exactly what author Mike Drak explores in his latest book, Retirement Heaven or Hell.

Mr. Drak was a self-proclaimed workaholic, winning sales contests and focused on his decades-long career in banking. Then he got packaged out and forced into early retirement. Mr. Drak discusses how he was on the path to retirement hell – unhealthy, overweight, and missing the purpose that drove him throughout his entire career.

Retirement Heaven or Hell draws on the author’s previous book – Victory Lap Retirement – that he co-authored with Jonathan Chevreau. The Victory Lap is a re-birth of sorts. Rather than a full-stop retirement, it’s about finding a new purpose or passion to fuel the next stage of your life. 

Mr. Drak found his Victory Lap in writing two books and a blog, plus holding retirement seminars to help new retirees unlock their own passion.

His new book identifies nine principles for designing your ideal post-career lifestyle:

1. Nurture strong relationships
2. Foster good health
3. Achieve financial independence
4. Reignite your sense of adventure
5. Tap into your spirituality
6. Find your tribes
7. Make the most of your time
8. Adopt the right attitude
9. Discover your purpose

Throughout the book, Mr. Drak discusses retirement trends and research, shares his own experience transitioning from Retirement Hell, and offers some relevant lessons from the current pandemic.

The end of each chapter asks thoughtful questions for self-reflection, and readers will get the most out of this book if they play along and answer them.

My favourite part of the book was Chapter 17 – Retirement Lifestyle Design: Creating a Good Ending to Your Movie. This is where you really define who you are, what you want to do, and create meaningful goals for your retirement. The author emphasizes creating retirement goals, rather than retirement simply being “the goal”. Define your purpose.

There was one quote from the book that resonated with me:

“The three components of happiness are something to do, someone to love, and something to look forward to.” – Gordon Livingston

Retirement can be challenging for those who haven’t given much thought to how they plan to spend the next chapter of their lives. Spouses aren’t on the same page. Career-driven individuals lose their sense of purpose. Prolonged leisure time gets boring.

We need a book like Retirement Heaven or Hell to highlight these challenges and force us to think about how we want to spend our retirement years. That could mean becoming a ‘Retirement Rebel’ who plans to travel the world, climb mountains, run marathons, start a business, and never stop working. But it could also mean a more relaxing retirement surrounded by friends and family.

How do you plan to spend your retirement years? Are you and your partner on the same page? Leave a comment below for a chance to win a free copy of Retirement Heaven or Hell.

This Week’s Recap:

Check out this short interview I did on the Moolala podcast with host Bruce Sellery.

Last Friday I looked at your human capital versus your financial capital.

On Sunday I shared the beginner’s guide to RRSPs.

On Tuesday I reviewed the TurboTax Full Service Self-Employed software.

And on Thursday I featured Eirene Cremations, a new online funeral arrangement service.

A reminder to join our private Facebook group – Personal Finance Canada – where close to 1,000 members are having daily discussions about everything from saving, investing, and retirement planning. Get your burning questions answered by industry experts.

Promo of the Week:

CDIC is giving away $10,000 in prizes in this ‘Earn and Learn’ contest. My friend Barry Choi shared this with me and if you enter the code “BarryChoi” you’ll get an additional five entries.

This daily contest runs until March 22, 2021 and is offering 10 cash prizes ranging between $100 and $5,000 each.

Make sure to click ‘Login’ and then register an account before you start playing.

Weekend Reading:

Our friends at Credit Card Genius shared the best credit card offers, sign-up bonuses, and deals for February.

Global News reporter Erica Alini says Canadians opened 2.3 million DIY investing accounts in 2020.

On CBC Go Public, a class-action lawsuit against TD Bank alleges employees were pressured to drive up profits by selling customers services and products that were unsuitable or unnecessary.

With the recent rise and adoption of Bitcoin, central bankers around the world (including the Bank of Canada) are pushing to develop their own digital currencies.

Do you really want to be a landlord? Larry Swedroe shares a host of reasons why investing in individual real estate might not be the best idea:

“When you purchase a property, you become a landlord, with all the attendant headaches of property ownership. This is not a trivial issue. The “cost” of the time you would spend renting out and managing the property should be factored into the net returns expected.”

For dividend investors, here’s how the dividend snowball works.

The Canadian financial advice industry is a mess. That’s why young investors are turning to Reddit.

Millionaire Teacher Andrew Hallam explains why you shouldn’t turn your back on diversification now.

Here’s Squawkfox Kerry Taylor and Andrew Hallam on why material things won’t make you happy:

I loved this post by Of Dollars and Data blogger Nick Magguilli, who shares his 10 biggest money mistakes.

Michael James questions the research around spending naturally declining as we age. He suggests this is not a natural tendency but something forced upon us by spending too much early on and having to adjust spending. I can see both sides of this argument. No one is an average. I’d personally rather plan for ever-increasing (inflation-adjusted) spending as I get older rather than assuming my spending will decline in my 80s and beyond.

Jason Heath shares a thoughtful post on financial planning in your 70s.

Romana King explains everything you need to know about refinancing a mortgage.

Finally, Wealthsimple CEO Michael Katchen suggests that regulations around discount brokerage platforms offering advice to investors should evolve in the wake of the recent GameStop (and meme stock) frenzy. I disagree.

Have a great weekend, everyone!