Your next 10 years: The sensible decade
The kids are growing, but are your investments? At 40, it's time to take stock.
The kids are growing, but are your investments? At 40, it's time to take stock.
My husband and I are thrifty. The uncharitable might even call us cheap. Here’s the thing though. I’m a 50-year-old freelance writer. Paul, 55, is a freelance computer consultant. That means neither of us has a steady paycheque. We have two kids, a downtown Toronto house, no prospect of EI payments and no benefits.
We’re doing just fine, though. Actually, the past decade has been particularly good to us. By the time I turned 40, we were emerging from that tunnel where every dollar seems to be spent before it hits your pocket. At ages nine and six, the kids were finally in school full time, their ubiquitous ear infections had improved to the point where they no longer required constant prescriptions and, since I work from home, I was able to eliminate day-care bills from the budget. (Huge sigh of relief.) That meant we had a little more disposable income. Here’s what we learned about how to handle money in the all-important decade between 40 and 50:
The only way to accumulate assets is to spend less than you make. Paul and I have never been budgeters, but we both come from families that were careful with money if not with their children’s lives. (My depression-scarred father drove me and my three sisters around in a car with a rusted out patch under our feet. His only concession to safety? A piece of cardboard placed over the hole as a flimsy barrier to one of us losing a leg.)
My own kids had car seats, but other than that, Paul and I have adopted many of our parents’ strategies. We are a one-car family of do-it-yourselfers. When it comes to kids’ programs, we rely on the cheap versions offered by community centres. Eating out is a treat. On the rare occasions I haul my husband out to a restaurant that actually has cloth napkins (be still my heart!) he inevitably complains about the prices, leaching the pleasure out of the experience for me. The upshot: we don’t do it often.
I plan menus around the grocery flyers so I can shop the specials. I make sure I have everything I need to make each meal. That means fewer trips to expensive convenience stores and fewer last-minute “what-can-I-make?-oh-let’s-just-get-takeout” moments. Finally, at the risk of confirming myself as a dinosaur, I do not have a cell phone, nor do my husband or kids (the latter, of course, complain bitterly about it). I figure that our refusal to bow to the mindset that says everyone must be reachable at all times saves us $2,400 a year.
Now, before you conclude that we are hopeless tightwads, incapable of enjoying life, let me say this: I believe that at least some of the money you save by eliminating unnecessary expenditures should be reallocated to things you value. For me, that means travel. In the past 10 years we’ve taken family vacations to England, France, Italy and throughout North America. Here’s how we do it. I open a high-interest savings account with ING Direct that I mentally label as, say, The England Fund. Every time I get an unexpected cheque or save a little cash on some purchase, I squirrel it away. By the time our English vacation comes along, we’ve pretty much already paid for it. My latest account, dubbed The Reno Fund, should help me replace my well-designed, but distinctly ’80s kitchen — eventually. In the meantime I will fall back on the following philosophy: if your house looks too good, you just remind guests of their own home’s flaws and make them feel bad. Chez moi, everyone feels comfortable.
Since Paul and I have never exactly shot the lights out in terms of earning potential, we’ve tended to think carefully about how to allocate spare cash. By 1999, the No. 1 priority on our list was to pay off the house as quickly as possible.
We were fortunate because we got into the real estate market when prices were still low, paying $120,000 for an asset that has shot up in value. Still, we wanted to get out from under those monthly payments, so we did a couple of things to chip away at our mortgage faster. Initially, we rented out part of the house — any payments went directly toward the mortgage. Once our second child came along we needed the space, so that was no longer an option. Instead, we took advantage of the annual mortgage prepayment option.
Since my husband and I have never known exactly how much money we will be earning in the months ahead, we kept our monthly payments fairly low, just in case. But our prepayment option allowed us to take whatever refund we received on RRSP contributions and anything else we could stash away and pay down as much as we could every year. Pouring your spare cash into paying down your mortgage may sound counterintuitive to those who contend that investing in the stock market can yield a better return on investment than almost anything else. But as Lenore Davis, a registered financial planner with Dixon, Davis & Co. in Victoria, points out, “your mortgage is probably the largest financial obligation you will ever have and payments come out of after-tax dollars, so it’s very expensive debt.”
We reasoned that every additional dollar we paid on our mortgage came directly off the principal. Paying down the principal as fast as possible shortened the time it would take us to become mortgage-free and lowered our total interest cost by an amazing amount. Consider that, on a $100,000 mortgage at 6%, just by making a $5,000 prepayment each year, you can pay off the mortgage in about 11 years (compared to the usual 25) and reduce the overall interest you pay by $55,668. “That’s like getting an after-tax return on investment of 6%,” affirms Davis. “And there’s no risk at all.” That was certainly the case with us. By the time I hit my early 40s, we were mortgage-free.
With the mortgage out of the way, Paul and I finally had a bit of money left over to invest. We figured we needed a consolidated approach — up until then, we had each invested our own RRSP without consulting the other. We also figured we needed an adviser to help us grow our money. I had written enough about investing that I thought I knew which questions to ask, so off we trooped to one of those money fairs where a mob of money managers vie for your business.
We selected a guy who suggested that a 14% return on our investments was quite doable if we socked away about 80% of our cash in equity mutual funds. Even then I thought his promises were inflated. What I didn’t know was how little I really knew. Did I ask about management expense ratios (MERs) on the funds our adviser recommended? Nope. Did I ask if there was any overlap in the funds we chose? Nope. Did I ask if there was any special incentive offered to him for selling a particular fund? Nope. Did I ask how often we could expect to meet with him to reassess our investments, or even how regularly we could expect a statement of assets? Nope and nope.
Instead, we sat down with our adviser and chose a bunch of mutual funds that we knew a little about, but not enough to properly evaluate. Then we shut our eyes, put our fingers in our ears and sang lah lah lah lah la la-a-a lah. The sad reality is that as concerned as I am about the daily expenses of life, I’m a lazy investor. I really just want to put everything in the hands of someone else who will take care of it for me. It’s not a good approach.
As I’ve learned in the last 10 years, no one really cares about your money the same way you do. Unless you choose a fee-only financial adviser, the adviser makes a living by selling you products — stocks, mutual funds, bonds. His rationale for recommending an investment is not whether that product is the absolute best one for you, but whether it also contributes to his own pocketbook. I’m not being cynical here — most financial advisers are lovely people — but their bias is built in. Given the choice between an investment that pays low fees, and an investment that pays a lot, an adviser is likely to choose the investment that compensates him more heavily.
If there’s one thing I’ve painfully learned over the last decade, it’s that it’s our job as investors to look after our own money. Otherwise our biggest challenge in retirement is going to be figuring out how to spend time without spending money.
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