# Without a Map



## Barwelle (Feb 23, 2011)

Originally, I was going to do this to track my networth, MDJ-style. But I don't quite know if I want to do that yet, I feel paranoid all of a sudden about posting too much information online. For this first post, I'll just state my plan and go from there.

I am 22 years old. Started a new job a month ago, pulling in around $45,000/year. No kids, no wife, frugal car with many miles left. I've set out a plan, with automatic contributions, to divy up my paycheque. It goes a little like this:

*Summary*
24% - Taxes and Deductions
10% - Retirement
20% - House/Land Fund
10% - Travel/Emergency Fund
5% - "Play" Money
31% - Expenses, Other

Now for more detail:

*Retirement (TFSA)*
This is an automatic weekly investment into TD E-series funds. I've saved 10% of all income earned since the day I graduated from college. I have a $2000 cash buffer, in case (a) I lose/quit job, so I can continue DCA, or (b) markets take a nosedive and I want to take advantage. Allocation here is:
- 40% Canadian Index
- 30% US Index ($CAD unhedged)
- 30% International Index (hedged)
I'll transfer these funds into ETFs every year or two as it builds up. 

*House/Land Fund*
This 20% will be saved as cash in a HISA. May put some of it into cashable GICs.

I would like some input specifically on this part: I have about $8,000 in mutual funds, this is leftovers from an education fund my parents started for me and I am now considering this as part of house/land savings. I am in the process of changing those into ETFs. I am still undecided about how to allocate them though. I am unsure if I should leave this 100% in something like XIU, XDV or CDZ, or perhaps BMO's low volatility ETF, ZLB? Or maybe 50% equity, 50% bonds.

I know everyone's first question will be what is your timeframe... the simple answer is, I don't know. could be this year, could be 5 years... I'm comfortable taking the risk of leaving this money in the market though. As I collect cash in the HISA, the risk factor for this fund will go down anyway. 

The cash portion will go in a regular HISA, the investment portion will go into TFSA.

*Travel/Emergency Fund*
This will go into regular HISA.

*"Play" Money*
I've decided to set some money aside to invest directly into companies. Starting with a lump sum of $2,000. I don't have a purpose for this money yet aside from exploring investing.


I have the fortune of living with my parents right now, so I am sure that my projected expenses will be less than 31%. I'm just going to leave it as it is now, and any extra money that builds up will be tossed into House/Land and Travel/Emergency. Oh, and if anyone is confused about why I say /Land right after House... you might say that I have connections in the ag industry. I will have opportunities in the future to purchase farmland, so that's what that's about.


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## m3s (Apr 3, 2010)

After tax, you're aiming to save about 50% of your income. This is what I've always done and it's worked out well. When you're young saving some money is really all that matters imo (nearly all of your net worth growth is brute savings, not investment yield at this point). How you invest is more critical later on, but you learn a lot by starting early.

If the education fund is non-reg and you already have HISA money and you are comfortable with the market, I would move it into into some tax efficient investment (such as Cdn dividends). Farmland is a great opportunity imo (possibly the best investment period) but at 22 I would say you should stay very flexible (plans can/will change) If it's non reg just look to avoid tax, or use HISA for max-flex

If you can save more than 50% after tax that's great, but I would put that towards travel or fun at least. Avoid the mortgage culture until the prices come back to Earth. Put some money aside and find a job you enjoy.


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## b_foot (Dec 16, 2010)

Good early start. I wish someone had told me about saving money when I was 22. I remember I spent $4K from my summer job to buy a top of the line computer. ehem


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## the-royal-mail (Dec 11, 2009)

Where is that computer today? Where would that money be today if it had been invested at an average 1% per year?


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## humble_pie (Jun 7, 2009)

this is an excellent plan. Everything moving in the right direction. Super-amazing that it comes from one so young.

may i make a couple comments, though. It's interesting that you call it Without a Map, as it seems to me that the allocation of income map is exceedingly detailed.

i for one would not break the allocations down so rigidly. Instead i would group my investments by the nature of their taxation. The idea would be to reduce income tax whenever possible.

so the TFSA would get stuffed to the max, which right now is 20,000 plus any contributions earned in tfsa over the years. I wouldn't fuss over whether funds going into tfsa are earmarked for retirement or land/house or emergency. I'd just push maximum funds into that marvellous tax-free shelter PDQ & ASAP. ETFs, GICs, common stocks, whatever, everything goes into the tfsa.

after that, if i needed to bring my taxable income down, i'd open up & contribute to an rrsp. The one thing i wouldn't put in rrsp are the hi-dividend payors. These have significant tax credits, so they should go either into tfsa (no taxes ever) or else be held in outright ownership so the owner can claim & benefit from the credits.

re your born-again mutual funds: with $8,000, i'd buy only 2 etfs at the most. Perhaps xiu & cdz. Although some would say this idea is a bit silly, because there will be a lot of overlapping stocks. So a bolder plan would be 50% etf & 50% a common stock that you know really well, or perhaps a 60/40 split (you're obviously good on telcos; how about banks or - maybe even better - farm machinery or potash/agrium.)

no matter what, it's a great orientation & a great startup plan. Wishing you prosperity & good fortune & pretty sure these will come your way ...


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## Barwelle (Feb 23, 2011)

Thanks for the input, everyone.

Mode, I'll still have to join the mortgage culture if I do invest in farmland. I'd like to stay flexible, as you suggest, but that means missing opportunities that don't come around often. If my brother and I want to expand beyond the land that is already in the family, we'll have to chase after any sale we find - there is plenty of competition around here from other farmers. 

This of course pushes prices up, along with upward pressure thanks to the "Alberta Advantage." The sad part is that, at current prices, land isn't cash-flow positive except in very exceptional years. We'll have to subsidize the business unless land prices miraculously drop, or grain prices soar. Like you, I believe that Canada's in a housing bubble at the moment, but I'm not sure if a decline in housing prices would also mean a decline in farmland prices - and of course that may not happen until after we've bought some land!

I feel like I'm talking myself out of it... I have mixed feelings about it. What it comes down to is, it is a good investment for the very long term, but would require sacrifices for the medium term to make it work. It's the same old farmer's story... you're poor for most of your life, until you retire... then you're rich.

Moving on... I was thinking of putting the old education fund into TFSA so that gains I make are tax-free. I ran the numbers, and if I stick to the plan, my TFSA will be maxed out sometime in 2013 if I keep all my investments but no cash in there. It doesn't make much sense to me to put cash in a TFSA when interest rates are so low, when I could have equities in there with more potential for gains. Although I could fill in whatever room I won't use this year with cash, and pull it out right before New Year 2013.

Humble, interesting that you say not to worry about earmarking the funds. Most would disagree and say that it's important to set aside money for specific goals/major purchases!

Re: dividends in a non-reg account... I keep hearing about this dividend tax credit. Never looked into it much until now. If I owned a few shares in a high-dividend payer (disregarding capital gains, or assuming that the stock isn't expected to grow much), it would be more beneficial for me to hold this outside of the TFSA, even if I have the room, because it would reduce my taxes payable. I'm basing this on MDJ's example. Am I seeing this right?

If this is true, then I will for sure have to rearrange my strategy.


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## Barwelle (Feb 23, 2011)

PS Humble, glad you picked up on the irony of Without a Map... irony is my favorite kind of humour. This is the title of a song by one of my favorite musicians (and a good old Canadian boy), Sam Roberts.


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## Barwelle (Feb 23, 2011)

In case anyone is interested, I did some more digging on the dividend tax credit. Turns out the advantage of holding these in a non-reg account has disappeared, because the government has been reducing the "gross-up" that you apply to your dividend income before subtracting tax from it.

This is where I found the information.

So I'll be scrapping the idea of holding high dividend payers outside TFSA, since I have the room.


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## humble_pie (Jun 7, 2009)

barwelle re allocating income into specific savings goals - of course it's great to do this. I didn't mean you or anyone else should give this up.

what i did mean is an elaboration of what mode pointed out to you, that your greatest wealth increase in your 20s, ie before kids & mortgages, is going to come from savings, not from growth in investments, for the simple reason that investments are still relatively modest. So i'm taking for granted that a young person will always want to enhance his savings by reducing taxes on his investment income.

of the various tax relief measures available, Numero Uno is the tfsa, especially for those whose earned incomes may not yet be substantial enough to trigger the need for rrsp.

what i was suggesting was push the maximum into the tfsa ASAP. In any & all investment forms. Funds, stocks, etfs, GICs, whatever. These assets can still be earmarked for different specific ultimate usages. It's just that imho they don't have to be kept in segregated accounts according to ultimate usage of the money.

one beauty of a tfsa among others is that its assets can be partially unbundled & withdrawn at any time. Need $$ for a wedding ? out come the relevant investments. Buy land ? same story.

you are probably right about not worth it to transfer cash into tfsa. Unless you can find an institution offering a high HISA type interest rate in tfsa that will definitely stick to this rate year round. Many institutions offer high rates to entice clients, then cut their rates in may. This might mean you'd need 2 tfsas, one for the investments & one for the HISA, which is a bother i would not take, myself.

re the dividend tax credit, many believe that the best place for hi-dividend payors is the tfsa. It's true the dividend tax credits will not be used, therefore they will be lost. However, the 100% tax-free nature of a tfsa outweighs any tax credit benefit that could be obtained from holding the dividend payors in outright ownership.

i looked at MDJ's article on dividend income taxation which you referenced & it's a bit out of date. Dividend grossups & resulting dividend tax credits have gradually declined, by federal edict, in recent years.

it's not quite true to say that div tax creds have disappeared. It's just that eligible canadian dividends *used* to be the most tax-favoured form of investment income. Now they've slipped behind. The most favourably taxed investment income at present is capital gains.

which means tfsa is king. Nothing is better than zero tax.


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## myk0 (Jan 14, 2012)

You have a very well thought-out plan Barwelle. I am also 22 and just recently started a new job, and our plans are very, very similar. Best of luck with everything, and I look forward to your updates.


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## m3s (Apr 3, 2010)

Barwelle said:


> In case anyone is interested, I did some more digging on the dividend tax credit. Turns out the advantage of holding these in a non-reg account has disappeared, because the government has been reducing the "gross-up" that you apply to your dividend income before subtracting tax from it.


Good find there. A saying we have at work is to always "trust but verify" which is what you've done here. I was not aware of these recent changes as I have been more leaning towards options on margin in non-reg lately. In my post though, I was not encouraging non-reg over TFSA but simply that you should plan to put the least taxed investment non-reg assuming your TFSA would be maxed. (My point was more that Cdn dividends are taxed more favourably non-reg than say US - however if cap gains are taxed less now I believe they are taxed favourably regardless of country) I agree about keeping HISA non-reg (that's what I do) Like you said you can always top up the TFSA and withdraw before 2013 (I've set up an auto withdrawal on ING in previous years, saved maybe $25-$50 in taxes for a few mins of clicking)



Barwelle said:


> Mode, I'll still have to join the mortgage culture if I do invest in farmland. I'd like to stay flexible, as you suggest, but that means missing opportunities that don't come around often. If my brother and I want to expand beyond the land that is already in the family, we'll have to chase after any sale we find - there is plenty of competition around here from other farmers.
> 
> This of course pushes prices up, along with upward pressure thanks to the "Alberta Advantage." The sad part is that, at current prices, land isn't cash-flow positive except in very exceptional years. We'll have to subsidize the business unless land prices miraculously drop, or grain prices soar. Like you, I believe that Canada's in a housing bubble at the moment, but I'm not sure if a decline in housing prices would also mean a decline in farmland prices - and of course that may not happen until after we've bought some land!
> 
> I feel like I'm talking myself out of it... I have mixed feelings about it. What it comes down to is, it is a good investment for the very long term, but would require sacrifices for the medium term to make it work. It's the same old farmer's story... you're poor for most of your life, until you retire... then you're rich.


My family has also expanded their farmland since the initial plot was granted to them by the Queen (and the err Micmacs) Farmland imo is one of the most stable investments long-long term. The population of any organism increases exponentially (barring any lack of resource or intervention) therefore the demand for food can increase exponentially in theory. I don't think it's directly tied to the RE market as it has it's own global and political factors etc. Farming is a lot like buying RE though imo it is a lifestyle choice in the end rather than a pure rational investment like stocks. I like owning physical farmland because you can always grow your own food if the sh!t hits the fan. When/if Canada realizes the this, our farmers will be in much better shape as well. I agree with you long term gain medium term pain. You just have to weight the pros and cons with your own lifestyle, and see what opportunities come along.


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## Causalien (Apr 4, 2009)

Wow, did not see this dividend adjustment coming. 

It seems like our tax policies are following all those that are being proposed in US congress at the moment except, Canadian's don't make a big fuss opposing the propositions. I am not impressed. 

This probably hints at the fact that these same measures will eventually be passed in the US.

Still, they are better than no discount?


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## Causalien (Apr 4, 2009)

Just found this table: http://www.taxtips.ca/dtc/enhanceddtc/enhanceddtcrates.htm

Which suggests that the actual tax rate are dropping while gross up is also dropping? Someone else confirm.


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## m3s (Apr 3, 2010)

Yea I had to wrap my head around this as I'm doing my taxes now (and only missing the T5 with the income in question..)

According to what I gather, it really depends what province you're in and what your total income is. The grossed up dividends can count against your benefits or put you in a higher bracket if your income is on the edge, but for many people I think Cdn dividends are still tax favourable



> *In Alberta in 2011*, the marginal rate of eligible dividends is *17.72% versus 27.71%* for ineligible dividends.





> Just be happy the corporations put all the numbers in the T3 and T5 boxes, since it is complicated.
> I have my flight booked to move to Alberta, since *you are far better off living and paying taxes in Alberta than Ontario.*
> *Most importantly*, you will prefer to receive eligible dividends rather than ineligible dividends.


http://www.boomerandecho.com/dividend-gross-up-and-tax-credit-mechanism/


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## Barwelle (Feb 23, 2011)

@Humble, Mode:

Oh yes, I see what you mean now. Keep things simple. Eventually I'll have a few different plans for the money I have in Questrade, but I'll only have the one TFSA account, well up until the point where I'll have an RRSP in there too. On the other hand, for my HISA which is in ING, I did open a couple different accounts anyway, each with their own automatic savings plan, just cause they make it so darn easy!

To put cash in a TFSA this year to use up contribution room, I'd get an extra 0.5%. Which would amount to $20. So a total of $80 interest, tax free... if they hold the 2% rate they have. Stellar, huh? But, like you say, Mode, it only takes a couple clicks to do. I do keep track of my TFSA contributions in an Excel spreadsheet though, that makes it a lot easier to know where I'm at. 

MDJ actually did an update on the dividend tax credit a couple days ago. So as Causalien says, it appears to be because corporate tax rates have been dropping. Yes, I'll be putting my dividend payers (and all investments) into TFSA. 

@myk0:

Thanks for the comments, I see you started your own diary too. I'll be sure to keep up with yours as well.

@Mode:

Farming certainly is a lifestyle choice. And I've thought of that idea too... if anarchy ensues some day, at least I can live in the farmhouse, heat the place with wood, and grow my own potatoes! City folk wouldn't be so lucky. Of course, that is only possible if all our food hasn't been modified with terminator genes. THAT really, really bothers me.

Any idea what farmland is worth back home? Around here, for good land, it's going for $3,000 an acre. You'd be really hard-pressed to find anything for less than $1,900/acre, within reasonable distance. My area is more tied to the RE market because we are within commuting distance of Edmonton, so a lot of acreages have been developed in the last 10-15 years. Acreages go for $15,000-$25,000/acre for bare land depending on services and location, so you can imagine how that would increase the cost of farmland. Some guys will buy a quarter-section then subdivide and sell an acreage just to recoup some of the cost, but then the fact that you can expect to be able to do that puts upward pressure on prices in the first place.

Some states in the US have it worse. I read an article a few weeks ago in a farm newspaper that some land in Iowa was going for... $10,000/acre? I think? And this recession did very little to slow down the rise in prices. Unreal. On the flip side, an adventurous person could hark back to the frontier days of Western Canada by going to Brazil, where land is $100/acre. Though you'd be contributing to the destruction of the lungs of our dear planet. *shudder*


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## Barwelle (Feb 23, 2011)

Well, it's about time I update this.

In April, after three months of working at this company, I got a raise. This inspired me to change my savings plan a tad, to avoid "lifestyle inflation." I'm going to live as if I'm making $40,000 on my original plan, and all extra income on top of that (after taxes, and travel and retirement savings) will go towards house/land. So at my current income, I'm saving about 24% pre-tax towards house/land. Man, that number looks good.

And instead of sending 5% play money each paycheque, I just put $10,000 into Questrade TFSA (most of which used to be mutual funds) and called that my limit for individual stocks/etfs not tied to retirement. If I see money piling up in my daily savings (which I expect to), I'll add even more towards house/land.

Also, last week I re-balanced my e-Series funds. Markets were almost at their lowest in the past several months so I took advantage by adding $375 (about 12% of the market value of the portfolio).


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## m3s (Apr 3, 2010)

As far as I know farmland is still relatively cheap our east, as is the RE. The problem is if you actually want to farm the land you need to buy dairy quota which costs a lot more. I never looked into it very seriously, but I know friends starting out have crunched the numbers and are left very frustrated. Most of my older cousins moved to Ontario long ago, and nearly all my other brothers/cousins have moved to Alberta now. Some with various engineering/college degrees relearning to wield etc. The oil tycoons desperately want to buy up the military owned land in Alberta, and the military has a serious issue now with soldiers priced out of the market. I'm buying up beaten down farming stocks in Brazil, but I look at it as a pure gamble because I don't know much about their situation. Congrats on the raise and being able to save it, I think starting with that mindset can make a huge difference some day!


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## humble_pie (Jun 7, 2009)

i'm thinking about posting a new serial story.

this one will be set in the year 2062.

mode, well past the age of 70, sets out on his motorcycle from his giant ranch in brazil to visit his old friend barwelle in northern alberta. He & the bike will travel by ship from caracas to texas.

as for barwelle, at 72 he is the lord of 46,000 acres, some of which include oil wells.

it's an on-the-road story.


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## Barwelle (Feb 23, 2011)

This new concept sounds intriguing, humble. I've enjoyed your Alice stories, though it seems you've cut back lately. And I must admit, some flew over my head. Oh, to have 46,000 acres, and a friend who could still travel immense distances by motorcycle in his 70's!

It's interesting to see/read others' takes on Future Earth. Apocalyptic? Utopian? This is probably beyond what you were thinking, but one of my favorite types of books is the kind of science fiction that deals with alternate realities, or dystopian future versions of our world. Stuff like Margaret Atwood's Year of the Flood, and Oryx and Crake, Terry Brooks' Armageddon's Children, and even the Hunger Games trilogy. Looking forward to reading this book, which I just ordered online.

Well, that was sufficiently off topic. I once scolded someone for getting off topic in a money diary... oh well.

I don't entirely understand the dairy quota system. It doesn't make sense to have to pay to produce a product. I mean, of course there are expenses in any business (labour, materials, location/buildings, taxes, etc), but I don't go to Canadian Tire demanding that they pay me for the privilege of having me as a customer. 

You bring up a good point, the oil/gas leases around here also push up the price of land. When you say that soldiers are being priced out of the market, you mean soldiers who are moved to / stationed in AB who are looking to buy housing? Doesn't the military provide housing on base?


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