George and Angie Noble are a happy, successful couple. George is an executive at a large real estate firm, and Angie is a psychologist. They are in their late 40s, have 3 kids, and are enjoying the riches of life. They own a nice home in Rosedale (the mortgage is finally paid off), take several trips with the kids each year, and have a penchant for foreign cars. Combined, they earn over $400,000 per year ‘ a nice income!
The Nobles have worked hard over the years to get to where they are. Spending most of their 30’s just getting by, raising their kids and aggressively trying to pay down a large mortgage, they are now at a point where they want to enjoy their success. George loves cars, and Angie loves travelling. But, the more money that they make, the more they spend. This is not unique to the Nobles; this is common and we see it with many clients.
They have one main problem that naturally, they won’t be able to resolve. When you get used to a larger lifestyle, this becomes your new norm. There’s nothing wrong with this, but often the result is that there’s no balance between an increase in spending and an increase in savings. If you’re spending more now, you’ll likely want to keep up that lifestyle when you retire. And selling the house to help fund retirement (the proverbial ‘Retirement Nest Egg’) isn’t so common place anymore.
George and Angie are saving some money, but not a lot. It’s usually done ad hoc, when a bonus comes in, or when there’s some extra money sitting in the bank. They save about $20,000/year into RRSPs combined. Their total RRSPs today total about $200,000, and they have no other savings or pensions. At a 6% growth rate, this will amount to about $1 million by age 60. Doesn’t sound bad, but when you consider that they’re spending about $180,000 per year in today’s dollars’ well, let’s just say we hope that Walmart will be hiring. And that all of the monetary stimulus that’s been cycled into the economy won’t drive inflation up too much…
How did George and Angie have the discipline to pay down the mortgage so aggressively, yet lack the structure to make any regular savings that will go to help preserve their lifestyle at retirement? Easy.
People hate debt. People pay bills
You’ve probably heard the expression, Pay Yourself First. Well, doesn’t that sound like fun! Making regular savings can almost sound discretionary, at best. There’s always somewhere else that money could go – and often, it’s a lot more fun. But what if you ‘Bill’ yourself first?
Here’s how to do it. At the beginning of each year, take out a loan and invest that money (where you invest it, we can chat about!). Every month, you’re going to want to pay down that loan, because you hate paying the interest on it. So, structured like a mortgage payment, you pay down a portion of that loan every month. It’s one of your regular bills. By the end of the year, the loan is paid off completely. And then you do it again next year! In the meantime, that investment has been growing all year, and you’ve been earning compound growth on that money from January on.
Believe me; it’s a lot easier than you think. You’ll start to look at that loan with the same feeling of loathing as you do any other debt. And paying it down will become a priority! Suddenly, you’ve made looking after your future important again.
So for the Nobles and any other couple who struggles to save ‘enough’ ‘ consider this strategy. You may not be a natural born saver, but anyone who’s had a mortgage, student loan, line of credit, or credit card knows how to pay down debt.
Bill yourself first.
Representative case study
When borrowing to invest you will need to ensure that you have adequate financial resources to meet your loan obligations. Investments (such as mutual funds) in your RRSP and/or TFSA are not guaranteed, their values change frequently and past performance may not be repeated. Regardless of the performance or the value of your investments held in your RRSP and/or TFSA, you will be required to meet your loan obligation in full.