Net Worth Update May 2016 – Smiling Saver – Student Loan Edition (+100%)
Welcome to the Million Dollar Journey May 2016 Net Worth Update – Team MDJ edition. A select group of readers were selected to be part of Team MDJ which was conceived after the million dollar net worth milestone was achieved in June 2014. SmilingSaver was selected as a team member and will post net worth updates on a regular basis. Here is more about him.
- Name: SmilingSaver
- Age: 30 (+0.00%)
- Net Worth: $107.8
- Day Job:Engineer
- Family Income: My main salary: $78,000, Wife salary: $ 16177 (Part time)
- Goals:
Start 2016 Debt free. Be debt free by 31!!! - Notes: Married in May 2015. Wife graduated from school with second degree in May 2015. Immigrated to Canada 13 years ago (full story here). Debt free May 2016.
Hey Everyone.
I’m very happy to announce that the debt-free goal is now achieved. Being frustrated over my financial progress, I took action and worked all the overtime I could get my hands on. In addition, my wife is now getting paid for her previously volunteer work. As you can imagine, oil and gas engineering job opportunities is not plentiful, so she is struggling to find anything in her field. But she has not given up hope and is still looking.
Having just $107 to our name may sound terrible, but it actually feels amazing. But without the blinders (every extra dollar went to the student loan), I realize how much other stuff was neglected. Health and wardrobe specifically.
During the last couple of updates, FT asked me to clarify my next goal. To tell you the truth I actually have no clue. Family net worth of 500k by 35 sounds unattainable, but 500k by 40 sounds too low of a mark. I am open to your ideas! Maybe I should be targeting something I have not even thought about.
After a weekend of celebrating being debt free, my wife and I sat down and went over our budget. When we were in “student loan payoff mode”, the budget took the back seat. We were closing off our loan first and living on what was left, so you can’t spend money you don’t have.
However now the allure of having extra available money is scaring me because it is so tempting to indulge. That is why we put more details into our budget. Apart from the necessities like rent and food in and out, the following extra lines were added to the list: Home, Clothing, Car Fixes and Gas, Trips and Savings.
Now I am struggling between the RRSP and TFSA. Still having a healthy deduction available from university for next tax year, TFSA seems more plausible in our scenario. I think RRSP will wait till we both working in a full time position. So my next baby step is to put our savings into Tangerine TFSA and purchase balanced growth funds. I will revisit this step when we have savings over 50k.
On to the net worth numbers:
Assets: $107 (-94.9%)
- Cash: $107 (-94.9%)
- Registered/Retirement Investment Accounts (RRSP): $0,000 (+0.00%)
- Tax Free Savings Accounts (TFSA) : $0 (+0.00%)
Liabilities: $0.0 (-100.0%)
- Student Loan (Wife) : $0.0 (-100.00%)
Total Net Worth: $107 (vs. -$13,727)
Some quick notes and explanations to common questions:
The Cash
We have $107, just 107 dollars. No more no less. My first priority will be to build back up to 2k emergency fund sitting in Tangerine checking account.
Savings
$0 in TFSA and RRSP.
Student Loan
Student loan. What student loan? It is done!
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While a house may not be in your immediate plans, the following is something to consider when contemplating TFSA vs RRSP, for a person with your details.
TLDR; The Home Buyers’ Plan is basically a tool that allows your to put tax savings towards a house purchase with no negative impact to your net worth (the “cost” of this is a promise to move $25k of your equity back to your registered account over 15 years; which all takes place on the assets side of your BS).
The Home Buyers’ Plan allows you to pull $25k from your RRSP to use in the down payment of your “first house”, without triggering taxation or penalties. The funds need to be payed back into your RRSP (still on the asset side of the balance sheet) over a very generous time period (ie. The repayment period commences 2 years after the withdraw, and needs to be repaid within 15 years; this works out to $1.7k a year or $140/month).
End of the day, you are paying ~$18k in taxes a year. Contributing $25k over X amount of years will save you roughly $7.5k in taxes (assuming marginal tax rate of ~30%) which can be put toward your house down payment (which is an asset). Plus, the repayment is very flexible in terms of the amount, which means it shouldn’t hog cash flow going forward ($140/month), leaving room to push extra cash into TFSA until you and your wife move into higher tax brackets.
The point of all this is, it makes sense for most people to take advantage of this incentive offered by our government. It also makes sense to build these contributions up to match a a reasonable “time frame” estimate of your first home purchase (meaning, plan to have $25k before or during the year of your house purchase; money needs to be in RRSP for 90 days before it qualifies to be withdrawn on these terms). You wouldn’t want to be scrambling to put together $25k in the year of your purchase.
Initial assumptions (solely your income for simplistic purposes):
MTR of 30% (average tax rate of 23%); translates into you paying $18k in tax
Contribute $10k for 3 yrs (only $5k in third year) for a total of $25k (which is the home buyer’s limit for one person). Saves you $25k @ your MTR for tax savings of ~$7.5k.
Devils advocate:
1. When a person is just starting out their net worth building, does it make sense to be placing a large portion of their net worth into illiquid account (illiquid in the sense that withdrawals before retirement are subject to taxes and/or penalties)?
Answer 1. Yes. While the illiquid point is true regarding the account, the entire $25k won’t be locked into the account until ~17 years from the date that you purchase the house. It’s unlikely that $25k will be a significant part of net worth in 17 years.
2. Why not save money in a TFSA and transfer it to a RRSP once the $25k amount is reached? (making the assumption that a house purchase isn’t decided on in 90 days)
Answer 2. This is a valid point, though to me it is more optics. Sure, economically, if you can estimate that the time value adjusted future tax savings on a $25k RRSP lump sum deposit (argument assumes your tax bracket goes up over the time it takes to save, thus increasing your tax savings) is larger than the time value adjusted annual tax savings invested at the risk free rate, then you have a point. I’d agree that this method makes more sense for, say, medical students transitioning to practice (where they will be jumping multiple tax brackets from one year to the next). It may also make sense for SS’s wife.
I digress… How did I get here?
Congrats on getting rid of the student loan. The emergency fund is key. People who do not have one turn to loan sharks or other high interest credit cards to make ends meet.
Hey Guys.
Thanks a lot for your comments.
Regarding the questions:
1) The plan is no kids for next year, than kids shortly after.
2) Since our future living location (district, city, county) will depend on where my wife can find a job, i think the idea of a house will have to wait.
3) Junior engineering salary is about 52k minimum in Alberta. So i think it is good expectation for her to start around there or higher.
Separate thanks to Steve Blaismith for an article, it was a really good read. Keep them coming, it is time for me to learn :)
Congrats on being debt free.
Next goal should be to set up a savings system.
‘Once money comes in, it goes here first, then here, then there. Keep these accounts topped up. Any extra goes there.’
You can change allocations/stock picks whatever later, but the savings system is the foundation it all stands on.
Make 500k by 35 the goal .. so what if you don’t reach it.
Congratulations! Debt-free is a nice feeling!
I agree with Steve Blaismith’s comments about setting goals. There are huge differences in planning, if a house or children are part of the picture.
Good luck!
Congratulation.
You are a young family, do you plan to have kids?
As we planned to have kids I have started contributed to ‘spousal RRSP’, coming tax time you get the RRSP tax deduction. Money have to stay in the ‘spousal RRSP’ for three (3) years before the spouse can draw the money and have it tax as additional income at her tax braket.
In our case in the first year I have contributed 10k, in the second year another 10k, then it just happen that the kid did not come for 3 year, in the year that my wife stayed home she draw the full 20k from spousal RRSP.
Great news but why are you using Tangerine when EQ, Hubert and Oaken offer MUCH higher interest on savings and GIC??
Congratulations! Great job kicking the debt. You’re onto the fun part of personal finance – owning stuff. Fortunately for you, you’ve already developed the skills you need by being disciplined enough to pay off the debt.
It would be helpful to know about your plans before setting any goals. Some questions:
– What are your wife’s plans in terms of working? What would realistic salary expectations for her be?
– Do you plan to have children in the near future?
– Do you plan to buy a house near term?
Without this info it’s difficult to comment. For example, if your wife will be working and making a similar salary as you, the two of you could reasonably gross $150-200k per year over the next 5 years. At that point, $500k net worth by 35 might not be as far off as you think. Kids would delay this but not by a lot.
What I would suggest for now is to maintain maximum flexibility. Put together an emergency fund in a high yield savings account. If you plan to purchase a home, put enough for a down payment in this. Once you’ve met all of your conceivable short term funding requirements, I’d allocate all of the rest to equities given your age. If this makes you uncomfortable, you can have some fixed income as well.
In terms of where to hold the assets, I’d prioritize TFSA first, then non-registered. Make RRSP contributions only if you’re getting an employer match. The reason for this is I’m assuming that within 5-10 years your income will increase to 1.5-2x current and the RRSP contribution room you accumulate will be worth much more. At that time you can catch up on contributions. It also strengthens your liquidity by not registering the funds.
This all probably seems boring. Getting rich slowly isn’t exciting – but it sure helps you sleep at night.
Here’s an article that might help you think about what you want out of life:
http://www.joshuakennon.com/mail-bag-financial-thoughts-for-a-young-person-starting-out-in-life/
The blog is winding down (or at least changing) but there is a ton of info on there. It’s not mine so I can’t take credit for it.
Awesome job. While $107.80 may not seem like a huge net worth, you’re doing amazing compared to all the people who are still living in debt. You are on your way to a lifestyle of success!
As for next goal, maybe $100,000 by 33? $200,000? I’m not sure how much you have to save every month, so it’s hard to know for sure.
But keep up the good work!
Anything beats a negative net worth!!! Great job SmilingSaver, keep it up.
Great job SmilingSaver. That was a very aggressive loan payoff in a very short period of time. If it were me, I would stay aggressive with your goals to start building your nest egg and wealth. As you mentioned, you want to start an emergency fund. Keep saving until you hit that milestone, and next would be to start your TFSA. I like the idea of putting off your RRSP until you are in a higher tax bracket while focusing on TFSA. Good call on the Tangerine funds as well – no fuss, and reasonable MER for a good overall indexed product.