A young family's financial journey
I’ve been reading this forum for several years, but rarely contribute. I thought I would start a money diary to track the net worth of our family, establish some goals, and benefit from others poking holes in my family’s finances. I’ve modeled this off of nobleea’s excellent money diary thread.
I am 32, wife is 33, we have 2 young kids, and we live in Edmonton. My wife and I both work full time. Me as an engineer in the oil and gas sector and my wife in HR in the public sector. Our individual incomes are essentially the same and our gross household income is $245K.
Long term goals:
Achieve 1,000K net worth by end of 2018.
Pay off mortgage by end of 2020.
Catch up on TFSA. Between the wife and I, we have about $54K of contribution space.
Retire at 54 (me), wife at 55 (when she hits her DB pension’s magic number).
Goals for 2016:
Max out RRSP contributions. (automatic bi-weekly deposits, on track)
Max out RESP contributions. (automatic bi-weekly deposits, on track)
Contribute $5,500 each to TFSA. This is the last bucket to fill up after all the others, see note below. ($4,460 each to date)
Goals for 2017:
Max out RRSP contributions. (automatic bi-weekly deposits)
Max out RESP contributions. (automatic bi-weekly deposits)
Contribute $5,500 each to TFSA.
House - $446,185 (assume inflation increases of 0.13%/mo, based off annual property tax assessment year-to-year)
SUV - $18,525 (2013 model year. I depreciate it $175/mo)
Car - $7,225 (2009 model year. I depreciate it $75/mo)
Non-Registered Portfolio - $16,195 (work share purchase plan, I sell when ~$4K vests and put against mortgage, see notes below)
DC Pension (mine) - $92,720 (contribute 4% of salary, company puts in 6%)
RRSP (mine) - $86,190 (Couch Potato at Questrade)
DB Pension (wife) - $161,540 (based on rough extrapolation of annual statements)
RRSP (wife) - $19,635 (CP at Questrade)
TFSA (mine) - $21,460 (some cash, some CP at Questrade)
TFSA (wife) - $17,750 (some cash, some CP at Questrade)
Cash - $4,645 (I target to maintain no more than $5,500 for cash flow, see note below)
Total Assets $892,070
House mortgage - $151,945 (Fixed at 3.04%, renewing Feb 2017)
Credit cards - $3,880 (current snapshot, we pay off every month)
Total Liabilities $155,825
Net Worth: $736,250
- I don’t include RESPs as part of assets. We are maxed out for both kids though.
- RESPs are at TD in e-series mutual funds which have a target of 20/30/25/25 in TDB909/TDB900/TDB902/TDB911 (CDN Bonds/CDN Eq./US Eq./Int. Eq).
- We have about $26K for our emergency fund in the TFSAs. About half is cash, half is 70/30 VAB/ZCN at Questrade. This would cover 6 months if both of us lost our jobs.
- We have a live-in nanny for the kids, instead of daycare/day home.
- I’ve been tracking our net worth since October 2013. Our year-over-year NW increase has been ~$120K, hence the goal to have $1,000K at the end of 2018.
- Once we renew our mortgage in February 2017, we’ll be paying $15,700/year against the principal from bi-weekly payments. I’m also targeting lump sums of ~$15,000/year from selling my work shares continually. It should take something like 4.5 years at that pace to pay off the mortgage. I’ll probably renew with a 4-year mortgage (assuming better rate) as $10K of our emergency fund is to cover ~6 months of mortgage payments. We don’t need that if we don’t have a mortgage, so I can pay off the remainder of the mortgage with a lump sum payment!
- Almost everything but the TFSA contributions are automatic deposits. I determined a while ago that $5,500 in our chequing account was a good number to handle the ups and downs in cash flow throughout the year. If, for example, the account is sitting at $3,500 and I get paid $2,500, I’ll transfer the difference ($500) to TFSAs, split evenly between me and my wife’s TFSAs. I also try to pay credit card bills as soon as they are posted.
- Automated RRSP contributions also include Home Buyers Plan payback. I use the RRSP contributions to continually rebalance the Couch Potato ETFs which have a target of 15/30/55 in VAB/VCN/VXC (CDN Bonds/CDN Eq./World Eq.). I do this continually (rather than 1 or 2 times a year) because buying ETFs is free at Questrade.
- The $54K in TFSA contribution space between the two of us is going to take a while to catch up on. So far this year, we are just about to meet the $5,500 each, let alone tackle the $54K of space. This will likely not happen until after the mortgage is paid off.
- My job has an annual bonus but, due to the economy, we haven’t gotten anything in a couple years. If we start getting these again I’ll lump sum it against the mortgage.
- I sell my work shares when ~$4K has vested because the fees to sell are around $40, so I limit my losses due to fees to ~1% or less.
Last edited by coolbeans; 2016-10-02 at 09:25 PM.
Wow. I wish I had been this knowledgeable and focused when I was 32.
Hey coolbeans, welcome.
Your writeup is close to an exact copy of ours. We have a pricier house and pricier mortgage, but everything else (net worth, investments, even depreciation of vehicles) is spot on. We've got a few years on you. Given your jobs, age, and kids, I may have already met you! Edmonton is not the big city that population suggests.
Really interested in following your journey forward!
Question on the live-in nanny - what's the net cost per month? I assume they either pay rent or get a lower pay for the rooming. Is it a separate suite, or just a room in the basement or similar?
Yeah, I think I directly copied your vehicle depreciation numbers months ago. I wanted to account for it somehow, but I didn't want to do the research to get accurate numbers for my particular vehicles.
Live-in nanny is ~$2100/month all in including employer portion of CPP and EI. That'll go up again with the minimum wage increase. She has a room in the basement. She doesn't pay room and board. That isn't allowed anymore under the In Home Caregiver Program. It's very convenient for us. No getting kids ready in the morning, drop off/pickup at daycare. She also cleans the house, does laundry, and makes us dinner.
Nobleea, I noticed in your first post that you used to have a smith manoeuvre HELOC. Was it worth the trouble? I'll be renewing my mortgage and could choose a re-advanceable mortgage. I'd be willing to work towards investing ~$200K of the equity in my house, which is about half the value of the house. Just not sure it's worth the effort. Right now I could get prime + 0.5% (3.2%). After tax deduction that's just over 2% interest off any earnings. Using a typical Canadian dividend portfolio, I'd be lucky to get 3.5% yield, which I lose 7-15% depending on tax bracket. So I'd clear 1.3% after tax. On a theoretical $200K portfolio (which would take a while to get up to), that's only $2,600 per year. Am I missing something?
Rather than SM I'd consider topping off the TFSAs when you renew the mortgage. Much less hassle this way and the TFSA is completely tax free. Mortgage rates are rock bottom and investments are high so not the best time to drop $200k on a SM imho
Future 33/32 year old couple would have $160k TFSA room accumulated since age 18. I've been saying this would replace SM for the mass majority since TFSA came out
Seeing as you have large pensions, you should probably be considering TFSA (tax free) before RRSP (tax deferred).
Easy to do, just look on kijiji for the asking prices on the 2009 model year of the SUV and guess a selling price, take the difference between selling price of your 2013 now, and divide by 48. Rough approximation of your depreciation.
Originally Posted by coolbeans
Thanks for that. We already pay someone to clean the house, so that would be a savings. Laundry, getting kids ready in the morning and making some dinners would certainly have value.
Originally Posted by coolbeans
It will depend if you have the drive to stick with a proper investment plan or whether you'll start on one and then start dabbling in picks and trades. At the time, I did not. There was also a bit of a difference in how I treated money that was borrowed and invested vs money that was earned and invested. Numbers will say that it's actually better to just focus on growth stocks, not dividend. Capitalize the interest. The capital gains vs dividends makes it more tax efficient in the end. The goal of SM is really to get a much larger investment portfolio faster than you normally would. It's not to have the portfolio pay for itself from dividends though that's one way you could set it up.
Originally Posted by coolbeans
How are you suggesting to top off the TFSAs? With a HELOC (wouldn't be tax deductible, I understand)? Slow down on the mortgage payments? Slow down on RRSPs?
Originally Posted by m3s
The rates I'm seeing for 5 year fixed is 2.44%. Even at that low a rate, I see aggressively paying down my mortgage beneficial in a couple ways:
- I view a payment against our mortgage as the safest investment we can make, in that it's a guaranteed avoidance of paying the corresponding interest. For every $100 against our mortgage, we avoid $2.44 after tax per year for the remainder of our mortgage. Even at a marginal tax rate of 30.5% (We max our RRSPs and claim $16,000 for child care costs for the 2 kids, so that knocks us out of the 36% bracket pretty quick) we'd need a GIC paying 3.5% to equal the after-tax return. That's a pretty great GIC rate for the Fixed Income portion of our portfolio. Side note: We have RRSP contributions from last year we carried forward to this year to keep us on the 30.5%/36% tax bracket line.
- It feels really good knowing that I can be mortgage-free in 4 years.
Regarding slowing down on RRSP contributions: Our salaries aren't going up as fast is they used to, so it's going to be a while before either of us make it (if at all) to the (inflation-adjusted) 38% bracket. My understanding is that the benefits of the immediate tax refund, tax-sheltered growth, and the tax bracket differential when we retire at 54/55 seem to make sense to max out RRSP contributions before we think about TFSAs at this stage in our careers.
The idea of starting the Smith Manoeuvre was just to tap into the equity in our house and borrow money at a low interest rate. Building up our TFSAs is also a priority after mortgage/RRSP, but separate from the SM idea.
I'll have to do some quick Kijiji looking.
Originally Posted by nobleea
Yeah, we briefly (2 months I think) had both kids in daycare after the 2nd maternity leave. Once we got the nanny, the difference was striking. Having dinner ready for us when we get home and not having the basic house chores added a good hour each night to the time we had with the kids (compared to daycare). When they go to bed at 7:30pm, being done dinner and cleaned up by 5:15 instead of 6:15 is huge. The cost difference (at least initially) between 2 kids in daycare and having a live-in nanny were small. The difference is more now, but it's still worth the extra time with the kids.
I think I could swallow the ups and downs of the SM, its more the extra administrative time, and the relatively small return for a small portfolio, that makes me wonder if its worth it. It would be yet another chore I use up my free time on.
Wow, very impressive. To have that much net worth and income by that age is awesome.
A couple of things... at the rate you're investing, in the next year you'll max out all of your registered investments. Then you'll have to start thinking about re-balancing your portfolio to maximize what you keep non registered. Just something to think about as you balance stuff now.
The other thing to think about is with your goal to retire at around 55, assuming you keep growing your net worth at the same rate, you'll presumably have a lot more money than you are currently spending every year during retirement. It's a long time away, but try thinking about what you plan to do with that excess money. For example if you want charitable giving to be a big part of it, you may want to increase your contributions to charities a little bit now, and take advantage of the tax savings.
Also, don't save your life for retirement, way too many people do that, and then end up sick or even dying within the first few years of retirement and never get to enjoy what they toiled their life for.
In terms of the rate that we're investing, we're maxing RRSP and RESP with automated bi-weekly transfers. The leftovers look to be just enough to roughly cover the $5,500 each for TFSA each year, so we aren't really catching up on TFSA yet ($54K of contribution space). Unless the economy improves and we start getting raises/bonuses, we won't really catch up on TFSA until after the mortgage is paid off (in 4 years). But your point is definitely still a good one. How do you manage balancing your overall portfolio? Do you assume an average tax rate at retirement, and apply that as appropriate to get after tax balances? Then there are the the tax efficiency considerations in terms of where to keep different assets. If I recall correctly: Fixed Income in TFSA, US equity in RRSP, CDN equity in non-registered. Something like that.
Originally Posted by CalgaryPotato
Regarding over-saving, our lifestyle hasn't really been cramped significantly by our rate of savings. We are currently saving $550 bi-weekly ($14,300 annually) for vacations. I think we can afford splurging on this because we bought a relatively affordable house ($350K) and are pretty thrifty in terms of clothing/eating out. I don't think the aggressive savings will continue once the mortgage is paid off and the TFSA is filled up. We also have vehicles that will need replacing around then and the kids keep costing more.