Tag Archives: Personal Finance

Should You Stick with a Job You Hate in the Pursuit of Financial Independence?

I recently hit a net worth milestone: $200,000. That’s more than I paid for my house. It’s a fair amount of money and I’m proud that I’ve made it this far. But it is nowhere near enough for me to stop working.

The pursuit of financial independence is my passion. It gives me hope for the future and is the reason I haven’t quit my current job despite the fact that I hate it. But sometimes I have to stop and ask myself if sticking this out is the right call, when I could be living a different life and doing something else to earn a living.

It’s Official: I Hate My Job

I am at the point in my still-early career where I go to work solely for the paycheque. I don’t go because I care about the work I do. I don’t go because I enjoy it on any level. I go because I need to earn money to fund my needs and wants.

I went to university for almost a decade because I wanted to work. I wanted to be good at something, and to love it enough to want to do it even when things got hard or boring. What do you do when you’re halfway through your program of study and realize, “Uh oh. This is not what I want to do, especially for the next several decades”? Well, someone with more guts and imagination than myself might have cut their losses and tried something else.

Not me. I’m a coward but not a quitter. I quickly gave up on finding the “meaning” in my work that millennials supposedly value above all else. If I could just be sort of OK at my job, and not hate every part of my work day, that would be good enough.

I sort-of half-got what I wanted. I’m marginally competent to the point where I can get through the day. My hope to not hate all of it never did pan out though. I find my job stressful and unpleasant to the point where thoughts of the past day and worries about the next day bleed into all the time I’m not at work.

I Really Should Quit

Forty hours a week is a lot of your life, no matter what anyone says. One time an acquaintance said to me in justification of his multitude of hobbies, “I just have so much time outside of the 9-to-5, even with volunteer work and a family!” (True story. I kind of wanted to punch him but didn’t.) I figure this must be a function of having a tolerable sort of job, one that doesn’t leave you exhausted and empty when you get home.

You can always make more money. It’s time that is valuable beyond all else. Every hour you spend at work is an hour you will never get back, and if you hate it, that’s an hour of your precious life that you can never spend doing something that makes you happy.

I’m barely 30 years old. There’s time. I could try and wiggle my way into a related career. Selling my house would be easy enough and living in a city isn’t the end of the world. I could find my way back into academia. I could get started in a new line of work, or maybe even learn a trade, which would allow me to continue to live where I do. I’m sure I could even earn the same amount of money I make now doing something else – perhaps I’d start my own business – if only I was a little more driven, a little less risk-adverse.

I could make a change. Most of us could, I think. Is the job you are doing right now really the absolute only thing you could do to make the amount of money that you actually need?

So Why do I Stay?

I said that I don’t quit my job because I need the money. That’s not the whole truth though. I am very fortunate in that I don’t need near what I earn in order to pay my expenses. So in reality, the reason I stay is that this job feels like my best shot at achieving financial independence as quickly as possible with as little risk as possible. That, and I love where I live.

There’s switching costs to consider as well – when you’re occupying a niche position in a very small town, chances are good that a job or career change will also require relocation. And depending what you want to do, you may need a whole lot more training and education.

At the end of the day, there’s a biggest fear of all: after all those costs have been swallowed, you wake up in a new job and realize you’re just as miserable as you were before.

I’ve done the math. Unless I have a really clear idea of what I would like to do instead – and a very high degree of certainty that it would work out – this is where I should stay. This is about as high a salary as I can hope for in my field, and combined with the low cost of living in the area, I feel like I would be crazy to not stick this job out for as long as it lasts.

The Economics of Settling

So maybe I’m settling. I could do something different; I could live a very different life. But right now, FIRE makes more sense to me than anything else. I may not do it forever, but right now it is the blueprint for my life. Building my financial house allows me to keep the panic at bay. Decreasing my dependency on the system – grocery store, utilities, regular paycheques – helps keep me sane.

When financial independence is your goal, then looking at your work situation through a strictly economic lens makes sense. And that means picking the job and the location that gives you the biggest differential between salary and living expenses. That last point is key – you will get further ahead making $10,000 a year less if the smaller paycheque is earned in a place where your net housing/transportation/etc costs are $15,000 less.

Hating almost everything about my job is what drives me to pursue financial independence. I’m not sure if I would do this if I liked my job. That being said, I’m actually pretty happy with my standard of living. I like my house, my car, the food I eat, and the things I do. I honestly don’t think that living in a bigger house, driving a nicer vehicle, or eating more meals in restaurants would make me significantly happier.

Due to circumstance (a big part of this is my simply being willing to live in the middle of nowhere), I am unlikely to make a higher salary than I am making right now without making some serious changes. And when I say “willing to live here,” I should stress that if I was financially independent and could set up camp anywhere, the little pocket of Canada I call home would be pretty high on my list.

Sometimes my life here feels like a holding pattern. Like I’m waiting for some grand opportunity or inspiration to fall from the heavens and hit me in the head. When that happens, I can quit my job, abandon my life here, and head off into the world to do something new. The rational, pessimistic side of my brain knows this is unlikely. We reap what we sow, and this is the life I have designed for myself. Which is fine, because when I am gathering and splitting firewood, or harvesting vegetables from the garden, or foraging out in the woods, I often think, YES! This is exactly what I’m supposed to be doing. This is good. And I just have to leave this idyllic life for a big chunk of most days for a while longer, and one day I’ll be free.

FIRE Rocks

What I love about early retirement extreme is that even working toward it for a short period of time is beneficial. You can build up an emergency fund or jump-start your retirement savings in a few months when you’re saving 50-75% of your paycheque.

Living below your means is good insurance. In effect, I’m building my own pension – the longer I keep doing what I’m doing, the higher my net worth and the greater my passive income. Like a pension, I only get what I put in. In this case, there is no guarantee I’ll have enough to live off of if and when my current employment comes to an end. But the more I have, the less desperate I’ll be to take the first new job that comes around, and the more flexibility I’ll have to go back to school or consider positions that pay less but that I might enjoy more.

I couldn’t justify sticking it out for salary if everything I earned went out the door to pay expenses and buy shit that I really don’t need. (I’m very pointedly not counting things that contribute to self-sufficiency as “shit I don’t need.” For example, my honey bees). Money has to buy me an awful lot of happiness to make up for the unpleasantness that goes into making it.

Money is important no matter what anyone says. But I don’t think of money is something to be used to buy stuff. I think of it as a tool we use to buy safety, security, and eventually freedom. And that, for me, is the essence of FIRE.

Summary: At Peace with Inertia

Maybe as millennials, we are just a bit spoiled. I know I am. And I also know that spending 35-40 hours a week at a job where I make a good deal more than the average worker is hardly the worst thing that has ever happened to a person.

Besides, the majority of people hate their jobs. This is a normal thing, right? After all, if work was fun, no one would need to pay us to do it.

So how much do you have to hate it to want to build your life on the foundations of early retirement extreme? Is it worth it?

I don’t know, to be honest. I didn’t really expect to come to any great conclusions with this post alone. It’s just my explanation for what and why I’m doing what I’m doing at this point in time. I hope it’s of interest to someone out there, and I always love to hear others’ stories if anyone’s up for posting in the comments.

Today I went to work and it sucked. Then I came home and went outside to work in the garden before coming in to do some cooking and baking. And all of that was good. Tomorrow I’ll head out in the backcountry to do some foraging. And after that, only time will tell. But for now, this FIRE stays lit.



Pay Down the Mortgage or Invest? Looking through the Lens of Asset Allocation

Introduction

As you might have seen in my first post, my paper assets (cash, stocks, and bonds) now exceed my remaining mortgage debt. Pretty neat to think that I could be debt-free and own my house outright today if I so desired. Instead, I’ve been making prepayments and continuing to invest at the same time, and basing the amount of money directed at each activity on my asset allocation plan. Am I on the right track? If home ownership is part of your FIRE strategy, how fast should you pay off the mortgage?

My Current Situation

  • House purchased for $172,500 in Autumn 2017 with 20% down.
  • Took out a 25-year mortgage of $138,000 at 2.98% 5-year fixed.
  • Mortgage payment: $325, twice a month.
  • Allowed to make prepayments totaling up to 20% of starting principle annually, at any time during the mortgage year.
  • I’ve been making prepayments of between $1000-$1500 each month.
  • As of February 15, 2019, there is $112,708 remaining on the mortgage.

Why I Still Want a Mortgage

Aside from the fact that I’d have to pay a penalty to terminate my mortgage prematurely, there are three big reasons why I want to hold on to it: liquidity, diversification. and growth. Let’s dig into those a little further.

Liquidity

In most cases, buying and selling real estate is costly and time-consuming. There was a span of a couple of months between when I first saw my property and the day I moved in, and mine was a very simple transaction! There’s never a guarantee that I’d be able to sell my house that quickly at an acceptable price in the future. There’s also no way to liquidate a fraction of my house. On the other hand, any proportion of my paper assets can be turned into cash at the click of a mouse.

As an additional bonus, part of the growth from my portfolio comes in the form of dividends, interest, and distributions. Right now I re-invest everything my portfolio kicks off, but if needed the portfolio can improve my cash flow without my actually selling assets. (Although this doesn’t apply to me, you could get some cash flow from your house in the form of roommates or a home business).

I should mention that you can get money back out of your home using a reverse mortgage. I considered the Smith Maneuver: selling investments to pay off the mortgage, than borrowing against the house to buy back the investments. The rationale for this is that borrowing money to invest is a tax deduction in Canada, while interest paid on a mortgage on your primary residence is not. In my case, the difference between my mortgage interest rate and the rate I’d have to pay to borrow the money was larger than the tax break I’d get.

Diversification

If I paid off my house today, my portfolio might look something like this:

  • Personal residence: $175,000
  • Cash: $2000
  • Stocks: $3000
  • Bonds: $1000
  • Having almost 97% of your entire net worth in one asset is risky – doesn’t matter whether we’re talking about one property, one business, one stock, or even a group of stocks from a single country or sector. Whether it comes down to a collapse of the local economy in my one-industry town, or a broader real estate decline in Canada, having the vast majority of my net worth in one single property in one single place is more risk than I’m comfortable with.

Growth

Growth is the big one. This is the major determinant for how long it will take someone to attain financial independence. Putting nothing on my mortgage but the regular payments, and piling every last available dollar into investments is arguably the fastest path to the highest net worth.

Consider asset appreciation. In the long run, the stock market as a whole outperforms the broad real estate market. In the last 30 years, average annual growth in Canadian real estate prices was around 4.7% while the TSX offered annual returns of 8.3%. Might seem hard to believe given the crazy appreciation of Vancouver and Toronto home prices, but I’ll place my faith in historical averages over bubbles any day.

Bonus: a mortgage offers potential additional growth through leverage. Let’s say the $200,000 property you bought last year has increased 5% in value, and you’ve only put $10,000 on it so far. Congratulations, you just made $10,000 (if you sell the property and pay off the loan), giving you a 100% return on investment. Someone with $100,000 in equity can only claim a 10% ROI, and that drops to 5% for the owner with no mortgage. Debt can be a powerful tool for building wealth, and a mortgage is pretty much the best interest rate you’ll ever get. Caution – leverage in any form is a double-edged sword and losses are magnified to the same extent as profits.

Ultimately, keeping the mortgage provides the best protection from inflation. First, there’s all that extra growth being generated from the stock portfolio that you’re building instead of making extra mortgage payments. Secondly, there’s the fact that the principle component of your mortgage is fixed in today’s dollars, while we expect the property to appreciate at at least the rate of inflation. (Then again, it might not. Real estate and stock markets crash. But again, we’re talking averages over long time-frames here.) Think of this as a gift to your future self – ten years from now when a dollar will buy you less food, fuel, toys, etc. than it does today, that dollar will still buy you the same amount of equity in your home as the day you moved in. And should the inflation rate exceed your mortgage’s interest rate, you’d actually be making money just by having a loan.

Why I Make Prepayments

If having a mortgage is so great, why do I make prepayments at all? Well, there’s the obvious argument that prepayments reduce the total interest that I’ll pay over the life of my mortgage. The amount of interest I am paying each month is getting smaller a lot faster than it would be with regular payments alone. My books therefore look better – more money going toward assets and less toward expenses every month. But those of us doing early retirement extreme shouldn’t care about freeing up cash or making our statements look better. In the building stage, the work is just that – maximizing net worth to create passive income for the future.

I will warn you that this side of the argument is coming more from a place of emotion than reason. Paying off the mortgage and eliminating debt feels good. I like knowing that I’m getting closer to owning something as big and tangible as my house outright. Maybe I have been a bit indoctrinated by the stereotypical Canadian dream, but I like having my own property and owing as little on it as possible. I feel very fortunate to have found a place close to work that I love living in now, and would be happy to stay in once the 9-to-5 is ancient history. If I’m going to spend money on anything, my little homestead that offers shelter, security, and an ever-growing portion of my food supply is going to be it.

And you know what else? It’s an easy way to build wealth. Paying down the mortgage requires almost no effort at all compared to the trepidation and decision-making that comes with picking stocks. Hell, I still find purchasing a low-cost ETF in line with my asset allocation to be more stressful than throwing cash at my mortgage. The interest savings on my mortgage are a guaranteed rate of return, and that 2.98% is better than I can get from a high interest savings account. (There are now some 3-year GICs with better rates, so I will likely start plunking cash earmarked for prepayments in there – arguably a similar loss of liquidity as paying down the mortgage but with a smidgen more growth).

Houses and stocks are both susceptible to market downturns and subsequent decreases in value. That market value really only matters when you go to sell. Here’s the difference. If the resale value of my house plummets by 20% overnight, of course I’m not going to be thrilled regardless of my debt-to-equity on it. However, unlike any of my paper investments, my house still provides me with something of very high personal value regardless of its market value: a safe and comfortable place to live.

The Compromise: Asset Allocation

Taking the above into account, I settled on a compromise and simply added home equity into my asset allocation model. Just as I have target proportions of Canadian, US, and international equities in my stock portfolio, I set my home equity at a maximum of 33% of my total net worth. Is this a somewhat arbitrary number? Definitely. But that’s OK – the beauty of asset allocation is that as long as the proportions are fixed, more cash will flow into equities that are undervalued. Once my house is paid off, that magic number of 33% will decline as I continue to build net worth outside of my residence, which is why I call it a maximum instead of a target.

Before I wrote this post, I googled “asset allocation invest vs. mortgage” to see if anyone else had hit upon a similar strategy. Instead, I found discussion centered around what a mortgage actually is in the context of a personal portfolio. Most notable is the idea that holding a mortgage negates the need to hold any bonds or fixed income at all. This is best detailed in a recent article in the Globe and Mail by Benjamin Felix. In short, he explains that taking out and holding a mortgage is the equivalent of issuing, or selling, a debt instrument. Following this train of thought, holding a mortgage is the opposite of, and therefore cancels out, buying debt instruments such as bonds. In terms of cash flow, the interest earned from your bond holdings cancels out the interest you pay on the equivalent portion of your mortgage.

Huh. Makes sense. I keep 15% of my stock portfolio in bonds. Would it be logical to exit my bond position entirely, and apply these funds to my mortgage? If buying bonds in my portfolio is really equivalent to holding a mortgage (selling a debt instrument) then the answer would have to be yes. But when I thought about it, my conclusion is that they’re really not.

The logic holds when you look at an isolated transaction – sell your bonds and use the cash to make a mortgage prepayment. But I wanted to work out how my whole financial picture would change over time as my portfolio increases and my mortgage decreases. I tried to plug in some hypothetical numbers that would allow me to keep my asset allocation constant while plunking money into stocks and onto my mortgage, and ignoring bonds completely. The results were non-nonsensical. Adding $10,000 to my net worth and distributing it between 85% stocks and 15% mortgage prepayments increased my stock holdings, and therefore the weighting of stocks…but nothing else. Suddenly the reason was clear. The big problem with equivocating bonds and mortgages is that the mortgage lives on the opposite side of the balance sheet. Bonds are assets, but the mortgage is a liability.

This realization changed my thinking. Eliminating my mortgage won’t actually change the asset side of my personal balance sheet one bit – the entire value of my home is still sitting there – but it would decrease my liabilities, and eliminate leverage for better or worse. The bonds have their own job. They exist to cushion the asset side of the balance sheet against heavy losses during the next bear market. My home may or may not contribute to that end as well, but the presence or absence of a mortgage is inconsequential.

If a mortgage doesn’t change my asset allocation, then I also need to change the question. I started by asking “How much home equity should I have?” but the question should be “How can I best distribute my pool of resources among my assets to strike a balance between returns and safety?”

My perspective has changed, but my process really hasn’t. I’m still making prepayments – and limiting them to keep my home equity at a maximum of 33% of my total resources. My asset allocation model tells me where my incoming cash goes. It is a guideline to ensure that I continue to invest and build a diverse portfolio instead of over-doing the easy and feel-good mortgage prepayments.

In the end, my answer to the whole pay-off-the-mortgage or invest debate is a resounding “both.” How about you? What is your strategy – hold that mortgage for as long as possible or pay it down? Would you consider paying down your mortgage in lieu of having bonds in your portfolio?