Liquid Independence

Liquid is the main editor of the Freedom 35 Blog.

Aug 202014
 

I came across a story recently about a couple who moved from Colorado to California. Their incomes doubled and within two years they became debt free :) The article starts off as follows.

This couple dropped $185K+ of debt in 20 months – Here’s how!
What do too many student loans, a mortgage, and a few bad money decisions equal? A debt upwards of $185K. This couple destroyed that debt in twenty months through budgeting, scrimping, and a handy book about personal finance…

Wow, good for them :) Can you imagine paying down on average $9,250 of your debt every month? That’s amazing! This couple must have sacrificed a lot and lived like paupers to reach debt freedom so quickly.

However what the article introduction doesn’t reveal is that most of their $185,000 debt was in the form of a mortgage, and they sold their house and paid back that mortgage within the 20 month period :P I tweeted my findings and received some funny replies from the Twitterverse :D

14-08-selling-assets-pay-debt debt freedom

Sarcasm aside, this is why it’s important to look at changes to overall net worth and not just the debt or assets as individual parts. So here are a few lessons we can learn from this story.

  • Don’t judge an article by its title. If something seems too good to be true it probably is. According to last year’s poll, virtually every visitor to Freedom 35 Blog has a positive net worth. This means anyone reading this who currently has debt can literally pay it all off and be completely debt free if they wish. All they have to do is sell your assets.
  • Debt is not a major financial worry if you have a positive net worth. If debt was really stressing you out, you would have sold your assets and paid back all your loans a long time ago. The fact that most people, including myself, have outstanding debts despite having a positive net worth, is evidence that we care more about having our material stuffs than living a debt free lifestyle :D
  • The amount of debt someone has is irrelevant in and of itself. For example, having $40,000 of student loan debt and no financial assets is worse than having $400,000 of debt, but also having an equal amount of assets.

Whenever I hear stories about someone paying off a large amount of debt within a short period of time I always take it with a grain of salt ;)

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Random Useless Fact:
How to recycle used underwear. #frugal to the extreme. #swag

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Aug 172014
 

Some experts say the North American real estate market is starting to become overvalued again. In today’s post we’ll compare property prices to rents and explore whether or not overheated markets like Vancouver are headed for a hard landing :)

Let’s take two fictitious singles, Alice and Barry, who are both from Vancouver and work for B.C. Hydro, a utility company. They each have $20,000 in savings and they both want to move closer to work. Alice plans to rent while Barry plans to buy.

Alice manages to find a suitable apartment that’s located very close to her job. It only takes her 5 minute to walk to work :D She decides to invest her $20,000 of savings into the stock market.

  • Alice’s Apartment:
  • Location: 7418 Byrnepark Walk, Burnaby B.C.
  • Size: 800 sq ft
  • 2 beds, 2 baths
  • Rent: $1,600 a month

Here is the actual listing on Craigslist I found. The move-in date is not until Sept 1st, 2014. So this is a real life housing situation that could happen to someone in Vancouver right now. Click on image to biggify.

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Meanwhile, Barry also finds a place to buy, coincidentally in the exact same building as Alice, and also has the same number of bedrooms and bathrooms.

  • Barry’s Apartment:
  • Listed Price: $369,000
  • Location: 7418 Byrnepark Walk, Burnaby B.C.
  • Size: 792 sq ft
  • 2 beds, 2 baths

Here is the direct link to the actual listing on realtor.ca.I’ve taken a screenshot as well in case the listing is removed in the future.

 

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Barry decides to spend his savings on the down payment and get a mortgage for the remaining $350,000 balance. I’m currently paying 2.6% on my mortgage so let’s keep it simple and give Barry the same rate. Using a mortgage calculator we find that Barry’s mortgage payment amortized over 25 years is $1,585 per month, which is almost the same as what Alice is paying for rent :)

This is why a typical condo in Greater Vancouver costs $369,000. It HAS to cost this much in order to stay competitive with rental rates. Condo prices aren’t falling because lower prices would lead to lower mortgage payments, and it’s simply not rational for people to rent a place when it costs a lot less to easily own another (almost identical) unit in the same building.

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Aug 142014
 

The level of financial risk we can tolerate depends on our savings: The less money we have the more risk we can afford to take on. If you have worked with a financial advisor before then you’ve probably seen a risk tolerance chart like the following.

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Each portfolio from A to D represents a different risk tolerance of maximum expected returns and losses. Choosing a model portfolio can help one’s financial advisor determine the best funds for the client based on his risk assessment. Conservative portfolios tend to hold more bonds, GICs, and T-Bills. Aggressive portfolios may hold more technology and energy stocks, which are more risky but also more potentially profitable.

If we are currently in our working years and only have $100,000 of savings, then we should have an aggressive investment plan that mimics the expected rate of return as Portfolio D in the image above. High risk, high reward. Like Ms. Frizzle always says, “take chances, make mistakes, get messy!” This is because losing $20,000 in the worst case scenario is no big deal since we are still actively working. $20,000 is only 6 months worth of salary for many people, so the loss can be quickly recouped :D But if things go well then hot diggity dog! we’ll make a $50,000 profit. The key to compound interest is to start as early as possible so if we can make our portfolio value 50% higher at a younger age it will give us a huge advantage over the long run.

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But if we have recently retired and have $1,000,000 in savings then our investment goals would be different. We can’t be in Portfolio D because a potential $200,000 loss is a lot of money, and could prevent us from having a comfortable retirement. At the same time the potential return of $500,000 doesn’t sound that appealing when we’re already millionaires. At a certain level of wealth any extra money we save will face diminishing marginal utility which means the lifestyle of a senior who is worth $1.5 million isn’t going to be drastically different from another senior with only $1 million. So in this situation it would be better to choose the more defensive Portfolio A.

When we’re young our spending often depends on the product of our human capital and time, both of which we have an abundance of. But when we’re retired our human capital becomes diminished, so lifestyle needs to depend on our savings instead. This is when capital preservation takes priority over investment returns and we have to decrease our exposure to risk in order to make our portfolio last as long as possible ;)

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Random Useless Fact:
Humans don’t have natural enemies. So we fight with each other.

 

Aug 112014
 

I have been battling a financial addiction since 2008. It has unfortunately gotten worse every year :| I just kept going back for more, and couldn’t help myself. The potential harm of this long term abuse came up in a discussion recently when a friend in Toronto asked me what would happen if I lost my job :? So I decided it was time to do something about it and take control of my situation.

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The first step is to admit that I have a problem. So yes, I was powerless over my habit and my life had become unnecessarily complicated. But I can change. So today I have made the difficult decision to stop taking on new debt cold turkey, for the rest of the year :shock: This means I will only make new investments when I actually have cash on hand. Stephanie would be proud ;) From now until January 1st, 2015 I will not write any more of those obnoxious posts along the lines of “OMG! Best opportunity evar! Borrowed $10,000 to buy new investment. LMAO. Gonna be rich! #Sweg!” As for my existing debts which sits at only $535,000, which includes a mortgage, lines of credit, consumer debts, and long term loans, I will continue to service those debts and make the minimum payments. I only pay about $1,500 a month on interest so it’s no big deal given I make about twice as much from my job ;)

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