Sustainable Personal Finance celebrated it’s 6 month anniversary over the Canadian “May 2-4” (Victoria Day) long weekend just a few days ago. Over the past 6 months we have explored a lot of sustainability topics while mixing in financial analysis in articles about dog food, giving to charity, home renovations and how to save gas by leaving the car at home.
Now that our feet are “wet” so to speak we will begin to explore more traditional personal finance topics in addition to our sustainability / green / eco articles. To kick it all off I am going to present Our Sustainable Personal Financial Plan – the approach Mrs. SPF and I have determined to be the best plan of action that we believe will secure our financial present and future. This article will be split into two parts: The Base and The Future. Our Base will look at the core of our personal financial plan and Our Future will outline the steps we are taking to (hopefully) prosper in the future.
Our goal is not to retire by age 45 (although Mrs. SPF is 9 years younger than I so she may be able to!) and we do not strive to deprive ourselves of all things enjoyable to ensure early retirement. We want to enjoy what life can provide at all life stages and as such we like to think our plan is sustainable: for us.
Last summer when Mrs. SPF and I were buying a home together for the first time we discussed why we valued owning property of our own. There are a lot of arguments for and against home ownership and we are well versed on both sides. Ultimately we view our house as not only a stable investment that will appreciate over time it also provides us a place to raise a family and call home for the next 2-3 decades. As such, we include home ownership as part of our personal financial plan. Home ownership won’t be the right fit for everyone but it works well for us.
We knew we’d pay off the mortgage aggressively (currently we pay 40% more every 2 weeks than we are required to), in fact, while we were getting financed for a 25 year amortization we would have the mortgage paid off in less than 10 years (closer to 8). This means that once the property was paid for we would have greatly reduced housing expenses. Compare this with the idea of renting for the next 50-60 years – the savings were obvious. In addition, aggressive payment of our mortgage enables us to invest more rapidly and allow the wonders of compounding to work for us. More on this Tuesday of next week when I discuss our investment choices.
Our house allows us to save gas as we can walk to work. It will serve as a steady homestead for our children to grow up in and attach fond memories to. People in this 100 year old neighbourhood tend to live here for decades so our kids will likely have long time child hood friends and classmates. These sorts of features are difficult to assign financial value to but the value is there in different ways.
Recreational Property Contribution
Our family has been looking at succession planning of recreational property, a cottage north of Kingston, Ontario. I recently wrote a guest post on the topic: Children and Capital Gain in Cottage Country which explores the options cottage owners and their kids have regarding dealing with capital gains tax.
In our situation we need to determine if and when to “buy in” on the property with my Dad and Sister. Our net worth would increase if we bought in but we’d also incur annual expenses. The travel to get to our cottage (one of 3 on an island) is a bit arduous – 3 hours and an additional hour or so come October it will take an extra hour to canoe back to main land for a 2nd load of baby gear. We also need to find time to get to the cottage – I think we’ll only get there once this summer, maybe twice.
We are adults now and likely should contribute more to the family property. We will continue this cost / benefit analysis throughout the year and make a decision on this item in our personal financial plan.
Aside from our mortgage our other debt lies in my university student loans. We really dislike owing money and like our mortgage we are looking at aggressively paying off these loans. We believe that paying off debt with our after tax dollars is key to our sustainable personal financial plan as we are guaranteed a rate of return
Once we get these debts paid off we will free up that monthly payment to put toward our investing efforts and/or our mortgage elimination. We are torn between paying off the higher rate, larger debt in our Canadian student loan versus (quickly) paying off the smaller debt with the lower interest rate in the Ontario portion of the loan.
Perhaps we can knock both loans off this year … (now paid off!)
Defined Benefits Pensions
Mrs. SPF and I both work for the same employer, a government agency in Peterborough Ontario. Our employer offers a defined benefits pension which we both pay into every 2 weeks. Our employer matches our mandatory contribution so when we retire we will be afforded a pension that will be the basis of our retirement funds.
Our pension is commonly referred to as a “gold plated pension”. We are extremely fortunate to have government defined pension plans which will pay us 60%-70% of our 5 highest years of salary once we have worked a number of years of public service. The plan forces us to save money and this investment is partially tax deductible and greatly enhances our portfolio returns.
Less than one in three Canadians has a Defined Benefits Pension and many of those individuals are already retired. Since these plans are very expensive many companies no longer fund them. The Defined Benefits Pension plan is a stalwart in our personal financial plan but we are not relying on it entirely as many things can change over the next 2 to 3 decades.
Both Mrs. SPF and I are covered by both disability and life insurance by our employer. Insurance is very important to us especially as we have lil’ SPF on the way. If anything were to happen to one or both of us we want to make sure our income remains, albeit at a smaller number, if we were to become disabled. Additionally, we get the equivalent of 1 year salary in life insurance from our employer. This is not nearly enough to cover our debts already discussed so we have supplementary life insurance via a 3rd party that will fully cover our mortgage, student debt and funeral expenses. We likely purchased a bit too much insurance given the work life insurance we have, but if we were to lose 1/2 our income our investing and long term goals would be harder to meet as we’d lose a large chunk of income. So this money could be used to continue the previous goals. Thanks to Mike @ Money Smarts Blog for pointing out i’d forgotten insurance in “The Core” part of our personal financial plan.
In the next article regarding the future of our personal financial plan we will discuss things like our investing strategy and things like looking at a RESP for our kids, giving to charity , emergency funds and more.