Reader Mail: Buried in Debt, Help!

I may well be missing something here, but isn’t the above disagreement caused by mixing references to short-term versus long-term strategies?

We used to ask the question: Do we keep investing our savings, or do we buy a home? It didn’t occur to us until reading about readvanceable mortgages that we could do both. By being careful about what we bought, and the mortgage terms used to buy it, we didn’t need to take on additional jobs. I think that might qualify as an example of “scale”, if I understand the use of the word here.

We don’t have to move/sell to realize a gain in property value; we simply reappraise, then reinvest. The gain is translated into additional power to generate wealth. It’s a long-term plan, so the gains are realized indirectly, deferred so that they can compound. Using the purchase of increasingly valuable real estate to also further our investments elsewhere seems to me a valid example of getting the best value for our investing dollars.

Look David, even on an “equivalent size basis”, there is simply no comparison between renting costs and owning costs nearly anywhere in the country. I’ve run the numbers several ways and it all bears down to lifestyle decisions, which is summed up real well here: However, I also have an opportunity to pursue hobbies that would not be possible in an apartment.

But statements like this one: there is no possibility that any investment I would have considered would have doubled in three years are just misleading b/c you can’t actually realize your gain without moving. So it’s like your favorite job of all-time offering you double your stock options to leave.

The car is also a lifestyle decision (often tied to the house lifestyle decision). But the car does not appreciate in value, instead, owning “a car” is the single most expensive way to get around.

If you look around, this site is all about working smarter NOT harder. Take a look at today’s post: Dividend Analysis. We’re talking about getting the best value for your investing dollars here, not about taking on a second job so that you can have more dollars to invest. We all know about the second job method, but it simply doesn’t scale, b/c I can’t just take on a third and fourth. But when we talk about dividends we talk about stuff that does scale, if I triple my investment, I can reasonably triple my return.

Telly said;”If I added up the costs of owning our home over the last 3 years, it definitely would not have amounted to savings vs. had we rented and invested the difference.”

Ah, but therein lies the rub — you need the wisdom, and to adopt the responsibility to invest the difference! There are also other issues that arise, including do you rent an equivalent dwelling to the one you would buy; are suitable rentals available; and if you are moving, do you build enough equity to afford to enter the market at a later time. In the situation that I see in my community, the rapid increase in housing prices has made home acquisition nearly impossible for the average working joe. Rentals are effectively unavailable. Fortunately we were able to buy into the market during a relative low, and are able to use that equity should we move to another location. Had I rented, and invested the difference (an opportunity I have used in the past), there is no possibility that any investment I would have considered would have doubled in three years.

Yes, there are some additional costs associated with owning, mostly related to maintenance, but utilities, etc would be the same if I own or rent a house. However, I also have an opportunity to pursue hobbies that would not be possible in an apartment.

DAvid

Though I don’t agree entirely with Gates VP, I do think he makes a valid point. I too, am of the opinion that a home (even a modest one) costs a lot more than people think. The idea of “forced savings” instead of “wasting money on rent” doesn’t bode well with me (the owner of a modest home :))- but it’s exactly what realtors and bankers love to tell young couples. If I added up the costs of owning our home over the last 3 years, it definitely would not have amounted to savings vs. had we rented and invested the difference.

Curtis, you mention that you have $30k in equity in your home and the value keeps rising. Is the $30k built up through downpayments (not including the HBP amount you have owing) and prepayments or is much of that a result of increased value since you bought? If it’s through prepayments, I would obviously suggest reducing those.

I guess my adivce to Curtis would be: don’t worry about savings yet. Take care of the loans (it sounds like you’ve been doing a good job so far), make sure you have either an emergency fund or line of credit, contribute to your RRSPs enough to get the match and pay back the HBP and keep plugging away, increasing your loan payments with any salary increases and tax refunds you may get. Soon enough you’ll be done with the loans and all that money can start going to savings.

Curtis,
So, as you offer more information, it becomes easier to assess your situation, and offer advice.

In my town in rural BC, a ‘modest’ house now costs $300,000, double what it did 3 to 4 years ago. I believe this to be within the range of much Real Estate in Canada currently.

A ‘modest’ car is in the ballpark of $30,000 these days.

An average Canadian family income is a bit over $75,000 per annum.

You now indicate that you have (by most Canadian standards) a very inexpensive home, a compact car, a modest income, and have paid over 10% of your net income against your student loans over each of the past 5 years. This is a very different story than contained in the original quote. Based on this information, you are doing quite well financially.

Based on the original information, which suggested that you were recent graduates, owned a recently purchased home, a car that was purchased new, and student loans with no information about repayment, I stick by my original comments. For new grads, etc., your description is of a costly lifestyle. As suggested in other posts to this blog, given the information you provided, there are other avenues to financial security, that could be chosen.

GatesVP,
The benefits of the ‘expensive lifestyle’ refers to the forced savings that purchasing a home early rather than later usually causes, building home equity that may be used in a number of ways, and the acquisition of a vehicle that should be able to be kept for a decade or more. It also frequently causes that home owner to make expenditures that increase the value of that holding, rather than spending it in other directions. the ‘dividends’ accrue from the investment in home equity, rather than an expenditure in rent.

Yes, my solution, if you want to reduce debt in a hurry is to work harder. MOST of the wealthy folk I am aware of worked hard for their wealth — running small businesses with untold hours of labour to generate their wealth. While their lifestyles are not ostentatious, they do not live what I would call a frugal lifestyle. The folk I am speaking of are the working wealthy — the independent plumber or electrical contractor, the corner druggist, the realtor; the ‘millionaire next door’. Each of these folks can generate a fair bit of wealth, but it comes at the cost of additional work; being there when your customer needs your services, so they recommend your services to others. Doing the books after hours, to ensure you get paid; meeting customers at their time schedule, etc. While I agree that one will not become wealthy if they spend their income, few will become wealthy simply by reducing spending on an already small income.

DAvid