categorySaving

2020 Review

I’m not gonna lie. I’m not at all mad 2020 is over! A year that felt like ten, but also sort of flew by, in retrospect. A year that made history, for sure.

I like to think that this year will also have made my history. It was truly the year that allowed me to take the reins of my financial life. And now that this unique year is behind us, it’s time to do a full review! I’ll be true to myself and I’ll present a lot of numbers. 🙂

My FIRE number

As you already know, I am aiming to reach financial independence by building a nest egg of $375,000 that would generate $15,000 in passive income, according to the 4% rule.

So where do I stand exactly with regards to my goal?

I had $125,500 in personal investments at the end of the year. To this, I add the estimated commuted value of my DB pension of $26,000. I can therefore say that my nest egg reached $151,500. Therefore, I’m at about 40% of my goal.

Another way to put things into perspective is to apply 4% to what I already have. Right now, my nest egg would provide me with an annual passive income of $6,060. I am $8,940 of passive income away from my goal.

If we take a closer look, we can also conclude that at $6,060 per year, it would currently pay my rent. In fact, that would give me $505 per month in passive income and my rent costs me $497.50 per month. 🙂

In comparison, I had $73,000 in personal investments and $14,000 in my DB pension plan, for a total of $87,000 as of December 31, 2019. That’s an increase of $64,500 (or 74%) in twelve months! I am extremely pleased with those results!

Now, I have to be realistic and adjust my target with inflation. So I’ll add 2% to my goal. That means $15,300 in annual expenses or a FIRE number of $382,500 in 2021 dollars. 🙂

Net Worth

You’re already quite familiar with this part, thanks to My Net Worth page, in addition to my December 2020 monthly review.

All the same, I am proud and happy to repeat that in 2020, I reached a net worth of $117,805.

By comparison, my net worth as of December 31, 2019, was $55,444. This is an increase of 112%.

What a year!

Returns

The year 2020 will certainly have been full of twists and turns in the stock markets. Let’s just take a look at the S&P 500 or the S&P/TSX 60 over the last twelve months. Since I only invest in index ETFs, this has had a direct (and positive) impact on my returns.

Indeed, Passiv allows me to see the (relatively minimal) impact that the stock market jolts have had on my portfolio over the last twelve months:

The top line represents the value of my portfolio while the bottom line represents my total contributions.

This clearly shows the importance of staying the course. Just keep saving and investing on a regular basis, regardless of the ups and downs.

For all of my personal investments, I have earned the following returns according to Questrade :

If only it could always be like this. 🙂

Switching Strategies

I have to say that I have had some strokes of luck during the year. At the time of the March 2020 drop, I had a sort of hybrid portfolio that combined the old Canadian Couch Potato portfolio model and Ray Dalio’s All Weather Portfolio. While I most certainly felt the drop, it wasn’t as bad as if I had been 100 % stocks.

On top of that, I had a lot of money coming in at the time, including a large tax refund, a bonus and refunds for a cancelled trip. I invested all of it at the right time and clearly benefited from that afterwards.

Also, I later decided to make some changes to my portfolio after hearing about the all-in-one ETFs. I changed most of my portfolio for XEQT. By doing so, I took advantage of another happy coincidence. Indeed, I sold a considerable amount of MNT (gold) while it was at its peak during the summer.

In the end, my portfolio will have increased by $20,544 in return alone. I still find it a little hard to believe that this amount accumulated on its own! I’m starting to see the benefits of making my money work for me, rather than working for it.

Dividends

Although my investment style is not focused on dividends, some of the ETFs I held, or still hold, do pay dividends. It’s no big deal, but I received $1,200 in dividends in 2020. By comparison, I received $1,056 in 2019. The difference is rather small, considering the difference in value of my portfolio over the last twelve months. This is mostly due to the changes in ETFs I’ve made in the past year.

One thing is certain: I’m not going to say no to money that’s deposited in my account. Also, all of it has been reinvested.

Expenses

Although every personal finance book in the world explains how important it is to track your expenses, I only started doing so this past August. So I don’t have the information for the whole year, but here is the detail from August to December regarding my expenses :

This amounts to a monthly average of $2,138, or an annualized total of $25,654.

Also, I would like to do the same exercise, but without accounting for my car loan repayments. Since this loan will not follow me into retirement, I wanted to get an idea of my current spending level without this cumbersome (and unrepresentative) expense.

  • August: $1,090
  • September: $1,761
  • October: $1,042
  • November: $1,599
  • December: $1,396

That’s much better, isn’t it? This means an average monthly amount of $1,377, or an annualized total of $16,529.

Considering that I estimated $15,000 in annual retirement expenses (in 2020 dollars) and that my current expenses are not yet completely optimized (notably through geographic arbitrage), I find that I’m not that far off the mark. 🙂

Income

My final pay stub confirms I earned a gross amount of $78,050 in employment income. In comparison, I earned $63,288 in 2019. That’s a 24% increase! I did have 27 pays in 2020 instead of 26 and a nice raise. That helps. 🙂

Worth mentioning, although nothing major : I got $340 in Amazon gift cards through Swagbucks and $260 by doing jobs through Field Agent (mostly before the pandemic and during the summer). By the way, thanks to everyone who signed up for Swagbucks using my referral link!

Savings

I am more than happy with my savings rate in 2020, which is 50%!

As I explained here, I prefer to use a very simple formula:

(Amount saved / net income) * 100

Indeed, I saved a whopping $27,055 on a net employment income of $49,371, to which I also add my $5,000 tax refund, for a total of $54,371. I want to make it clear that this is my personal savings only. It does not include contributions to my DB pension plan, or any other form of forced savings.

I wasn’t tracking every cent at the time, but I estimate my savings rate in 2019 to have been around 27%, based on the same formula. At that time I was not yet aiming for FI, so I wasn’t saving as aggressively as I am now. It was still a good savings rate compared to the average person. With 50% in 2020, now we’re talking! 😉

Travel Hacking

I started looking into Travel Hacking this year after reading Quit Like a Millionaire, which praised its benefits in lowering travel expenses.

I started simply with the TD Aeroplan Visa Infinite back in March (for 30,000 Aeroplan bonus points). I later took the CIBC Visa Infinite Aeroplan in July (for 20,000 Aeroplan bonus points).

I studied more about travel hacking (thanks to Milesopedia), and in November, I applied for three more: American Express AIR MILES Platinum (for 3,000 bonus Air Miles), American Express Prestige Aeroplan (for 20,000 Aeroplan bonus points + a Buddy Pass) and BMO AIR MILES Mastercard (for 950 bonus Air Miles).

On top of all the sign-up bonuses, points are also earned based on expenses.

So, in just about 10 months, I managed to pile up the following points and miles for future trips :

  • Aeroplan: 72,212
  • Air Miles: 1,182

What I Can Buy With My Points

I still don’t have enough Air Miles to buy much of anything. Since I started collecting them pretty recently, I haven’t unlocked any sign-up bonuses yet.

On the other hand, I am starting to have an interesting number of Aeroplan points. You can take a look at this page for an idea of a flight’s cost in points. For example, I could currently pay for five short round-trip flights in North America (ex: Toronto, New York, Washington, DC) or three longer round-trip flights (ex: Mexico or California) with my points. I would only have to pay the taxes.

More specifically, my first travel destination post-COVID will be Hawaii (which I had to cancel this past April). Currently, a round trip (ex: YQB-KOA) with randomly picked dates would cost me 34,100 Aeroplan points and $189.66 in taxes. Once I get my Buddy Pass, I’ll even be able to bring someone with me (my sister, in this case) for the same number of points. Only the taxes would then be payable in double.

If I do the same search on Google Flights for the same random dates, I find that the cheapest tickets are $635.00 per person. By using my points, we’d be saving $445.34 per person!

Long story short, not taking advantage of Travel Hacking is leaving money on the table. 🙂

Blog

Finally, I wanted to mention that in only 3 months of blogging, I wrote (and translated) 14 articles. I must have something interesting to tell because I have had 3,741 visitors in 2020. My Facebook page is also now over 600 likes! Wow!

To be honest, I wasn’t expecting any real success. I just wanted to have a place where I could put my ideas in place and have some structure. Based on the positive feedback I get, I think people relate to me and I’m really thankful for that. It’s been a very rewarding experience to talk to some of you. I also love the complicity that comes naturally between FIRE bloggers.

All in all, it has been a very positive experience and I will do my best to continue bringing quality content. 🙂

Managing Your Personal Finances Like a Business

I know I may seem a little intense by doing such a detailed review, but I think you’re getting to know me a little bit. What can I say? I like numbers. It’s my Vulcan brain’s fault. By the way, I see that you like numbers too, judging by the traffic trend on the blog. 😉

Also, the fact that I put hard numbers on all this allows me to see my progression. That’s very encouraging.

I can’t help but think about Jean-Sébastien Pilotte’s (Jeune Retraité) book La retraite à 40 ans. The first chapter is called Devenir le PDG de sa vie (Becoming the CEO of Your Life). Here’s my rough translation of my favourite part:

The first step towards financial independence is the most decisive one to succeed. It is about having the will to take control of one’s finances. It’s time to go from being a janitor to becoming CEO. Take off your blue rubber gloves and put on your best tie. You are promoted! No one else applied for the job.

To begin your new position, you will need to understand and analyze your current financial situation. Where is your money going? What are your main expenses? What are your assets? So many questions that are essential to your financial health and, ultimately, to your quality of life. Like a CEO, you will have to peel the onion, layer by layer. And most of all, don’t cry! You will certainly have to get out of your comfort zone and make some unpleasant observations, but it’s time to get to the bottom of this.

I particularly liked this part. It’s really in synch with the way I see things. How can we hope to improve and move forward if we have no idea where we stand exactly?

Gratitude and Thanks

To say the least, 2020 has been a very special year. No matter how unpleasant the year has been, there is always a way to find something positive. I think this review shows that.

Financial review aside, I am also filled with gratitude for this blog and all that it brings me. In addition to discovering a certain talent for writing, my articles allow me to reach out to people and interact with them. I am so grateful for the opportunity to discuss with equally passionate people.

Thank you for reading my blog. Thank you for commenting (it’s sort of my pay!). I like to know what resonates with you in my writing. I love it when you share your own calculations or suggestions. Sincerely, don’t hesitate to contact me. I love discussing personal finances and FIRE.

I am ready to face whatever 2021 has in store for me. As you already know, I have already set goals for this year. Undoubtedly, I have a lot of work to do!

Perhaps the fact that it’s not easy is what makes it worthwhile.

– Odo (Star Trek Deep Space Nine)

Let’s stay the course. The best is yet to come.

 

Save the Balance

Finally, we’re getting down to business.

It’s good to have lowered our expenses and increased our income, but what do we do with the balance at the end of the month?

While it is almost shameful to save money in Quebec, it is essential to talk about it (and do it) if we’re hoping to reach financial independence someday. No more saving shaming, to use Pierre-Yves McSween’s dramatic expression.

You Gotta Treat Yourself!

If you’re like most people around me, then you’re having a hard time leaving a single dollar in your wallet without spending it. These people constantly justify these expenses on behalf of a “treat” or a “small gift” they make for themselves (a latte, anyone?).

I don’t know about you, but unnecessary expenses that come back every week (or even every day) are no longer treats, but rather a (bad) habit.

We have to break this pattern. It’s that kind of mindset that renders people dependent of a job until age 65 (and beyond), with QPP/CPP and OAS as sole retirement income.

You have to understand that only a few percentages of savings can represent years of hard work!

Do you know Mr. Money Mustache? I can’t really talk about financial independence and early retirement without mentioning him. He managed to retire at 30, and became one of the first prominent bloggers on the subject.

If there is one of his articles worth mentioning here, it’s The Shockingly Simple Math Behind Early Retirement.

In this article, he presents a (shockingly) simple table that predicts the time left before financial independence based on different savings rates.

The table is based on:

  • An after-inflation return of 5% during the accumulative phase;
  • A 4 % withdrawal rate.

You can also play around with this online calculator, which Mr. Money Mustache based his chart on.

Go ahead, see how much time you need to work before reaching FI.

The Calculation Method

Perhaps you are wondering how to calculate your savings rate?

Let’s keep it simple. First, consider how much you manage to set aside from each paycheck.

If the amount is zero, then the savings rate is obviously 0 %. Unless you have a pension plan offered by your employer, it means you’ll have to work forever, or settle for the QPP/CPP and OAS as sole retirement income.

Then we’ll use your net pay (after tax). Take the amount deposited into your account every week or two weeks by your employer. Of course, for the self-employed, it can be more complicated. In this case, the best would be to estimate.

Then you apply the simple mathematical rule:

(Amount saved / net income) * 100

Some people like to think of debt repayment as (forced) savings and include it in the calculation. As a result, the savings rate is inflated (and it possibly helps people sleep at night). However, it is not relevant in our calculation. While it does increase your net worth, it will not give you passive income in retirement.

So, if we keep it simple with the previously mentioned formula, someone who receives $1,500 and sets $300 aside has a 20% savings rate. There is $1,200 left to cover expenses until the next pay.

According to the calculator mentioned above (or Mr. Money Mustache’s table), someone with zero net worth who starts saving 20% of their net income will have to work for 37 years before they reach financial independence. For example, if that person is 18, they can expect to retire at age 55. That’s already considered early retirement!

On the other hand, if that same person managed to save 30%, or $150 more per pay, they would only have to work for 28 years, or 9 years less!

9 years!

This person would be financially free at 46.

It might just be worth changing mobile phone plan after all.

The Power of Saving

While striving for financial independence, your best ally will be your savings rate.

Before you read this post, you might have thought that what mattered was investment returns. Although not insignificant, we unfortunately do not feel the effects straight off the bat. It is later in the process that return has an essential role.

Keep in mind that return doesn’t matter when you’re only just starting to save. Making 10% return on $0 is still $0. So we have to focus elsewhere. That elsewhere being our savings rate.

For example, my sister only started to save and invest seriously this year (I like to think I have some influence!). Although she’s getting close to $30,000 in savings already, she sees very little return. Indeed, even if she were to make a 10% return, it would still only amount to $3,000 in gain. While it’s nice to realize you made $3,000 without even working, it’s not what really makes your portfolio grow fast.

In her case, what really makes the difference is the 60% she saves on each pay. By the end of the year, her investments will have increased by $20,000-30,000 only from saving.

On the other hand, when my sister reaches $200,000 in investment and her 10% return gives her $20,000 in gain, then we’ll talk about the power of investments returns. 🙂

Savings in Québec

In November 2019, we were told that Quebecers’ savings rate was at its highest level in 23 years. We were proud to see that Quebecers had never put so much money aside. (French source)

Wow! Quebecers are getting their personal finances on track! And what would this incredible savings rate be?

6,2 %.

Someone starting from scratch, saving this little, can expect to work more than 60 years before reaching financial independence.

Ow.

On the other hand, 2020 has given us many twists and turns. Against all odds, the savings rate recorded by L’institut de la statistique du Québec from April to June 2020 was at its highest levels for the past 40 years. Indeed, Quebecers managed to save nearly 35% of their net income in the midst of the crisis.

Now we’re talking! A 35% savings rate equals 25 years of work. Imagine if that became common? Early retirement would then be the new norm. 😉

However, this record savings rate is mainly due to mortgage and other debt deferrals. Thus, when normal debt repayment resumes, the savings rate will fall back to the pre-pandemic rates.

Let’s just hope that Quebecers have taken a liking to saving.

My Savings Rate

I have not always been a very conscientious saver. Prior to 2017, my voluntary savings rate (i.e. excluding employer pension/RRSP contributions) was 0%. I didn’t have an individual RRSP. The TFSA I had, I was making withdrawals as I went along.

After that, I started saving little by little. I didn’t record everything from the get-go, so the best I can do is estimate. I can estimate my 2019 savings rate to be around 27%. In 2020, I estimate I’ll reach 51%. Now I record everything (and I mean everything), so I should be able to give you accurate numbers in my future annual reviews. 🙂

For someone starting from a zero net worth, a 51% savings rate amounts to about 17 years of work. For someone saving that much at a young age, early retirement is inevitable. 😉

In my case, with more than $100,000 invested already, we’re talking about 10 years of work before reaching my goal. Leaving the corporate world at 39 wouldn’t be so bad!

However, my savings rate calculation does not include my (non-negligible) Defined Benefit Pension Plan (DBPP). Currently, my DBPP contributions are about 8-9% of my gross salary, without counting my employer’s contribution.

After quitting, I plan to take the commuted value and invest it in a Locked-in retirement account (LIRA). My pension’s minimum commuted value is 175% of the employee’s salary contributions plus interest. These “forced” savings substantially brings me even closer to my goal.

Finally, I estimate that I’ll be able to save at least 60% of my income in the coming years, once my car is fully reimbursed. Plus my salary should continue to increase every year!

So, considering the investments I already have, my DBPP and a future savings rate of 60%, I actually estimate 6 years before financial independence. We are talking about an early retirement at the ripe old age of 35! 😉

Financial Independence Is on the Horizon

Do you understand the power of saving now? Financial independence awaits you! With each additional percentage of savings, you reduce the time you have left in the workplace! The phrase “Time is money” makes perfect sense now, doesn’t it? When $150 every two weeks means nine years of work, it’s worth making changes.

The best way to painlessly increase your savings rate is to automate. On payday, set up pre-authorized transfers for the savings rate you’re aiming for. Then you only spend what’s left. This is called paying yourself first.

So, did you do some calculation? Are you closer to your goal than you thought? Financial independence is possible. Don’t doubt it.

Things are only impossible until they’re not.

– Captain Jean-Luc Picard

What’s Next?

My next post will be about investing. You can save all the money you want, but if you just hide it under the mattress (almost the equivalent of putting it in a GIC, really), then early retirement will not be possible. Without a decent return, your savings would be wiped out long before you die, and we don’t want that. Once we stop working, our money has to work for us for as long as we live.

I know that investing in the stock market can be terrifying. Therefore, I will try to make the subject as accessible as possible. Anyone who neglects to invest their savings leaves (huge!) money on the table.

And I don’t like leaving money on the table.