July 20th, 2010 
Category: 
Last Saturday I was invited to Paul’s (coworker) house for his daughter’s birthday. Our daughters enjoy playing together since they are of the same age. I finally got to see the new in-ground pool he installed a month ago costing about 30k all in all.
I have discussed money and retirement several times in the past with him and we always come out in agreement of how important it is to maximize savings in order to get out of the race as many years earlier as possible. However, I found his decision to dump 30k on an in-ground pool excessive since he took a loan to pay that amount which will be added to his ever growing mortgage. This is not the first time Paul goes big on a high ticket item. His new car last year cost him about 40k.
Paul’s plan for early retirement is simple: dump as much money as possible in his RRSP mutual funds. 2 years ago our company got bought by a bigger one and our new contracts specified a retention bonus equivalent to our yearly salary to be paid in 2 payments over the course of 2 years. I have the impression Paul spends on big ticket items knowing a small windfall is on the way.
Even though we are both in our early 30′s, Paul’s gross household income is probably double that of mine because he is more senior and his wife is a full time employee compared to my wife working part time. Yet while sharing the same goal with different household incomes, I will come out ahead in terms of the mortgage. If I stick to my plan of maxing out payments on my mortgage for the next 3-4 years, my mortgage will be finished and I will be able to divert more cash flow into investments.
I must admit that I love his pool and prefer it way more to the above ground pool I got in the backyard. I also like his new car but for now, I prefer to stick to my 2005 Toyota. I thought it over with my wife, we can afford to redesign the whole backyard and dig a new pool, we can afford to lease a BMW on top of that but the end result is more debt, a bigger mortgage. This is blasphemy in my dictionary since the dream of financial independence would slip through my fingers and this dream starts with closing the mortgage first.
Paul who has been investing since 2000 complained repeatedly that his return over the last decade has been nil, he is not getting closer to his objective. With the decisions he took, I don’t know if he simply knows how to enjoy life better or if he has grossly miscalculated his future revenue. After all, we are both white collar employees and he should be aware that our positions can be exported to faraway places in a heartbeat. In fact, we are going through some tough time right now and uncertainty is looming.
Do you think of today’s happiness or of tomorrow’s financial burden when you decide to spend? I would love to hear your input.
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Nice post Mich.
I know a few people named “Paul” as well. My friend just bought a new car and I wondered how on earth he could do it, given he was out of steady work for most of last year. I don’t get it. Makes me shake my head.
I think my wife when to Paul’s house to visit his wife and her girlfriends this past weekend. Our friends just bought and moved into a new, fancy home just outside Ottawa. I don’t think they have a retirement plan other than their defined contribution pensions. (I’ve never asked how their pensions are doing). DC pensions would at best be tracking the equity index – which remains far below its all-time high and likely will for a few years to come.
Those friends are a little older than us, in their 40′s, but their salaries are comparable to ours. If we stick to our plan, we should have a few thousand in passive income this year and growing every year thereafter. Additionally, if we decide not to move, our house will be paid off in 5 years.
I can’t imagine they could pay their house off in 20 years.
They’ll be about 65 by then.
I would have to say I/we live for today’s happiness but within my/our means. My wife and I never want to wake up to tomorrow’s financial burden. I’ve never equated more spending to more happiness. Never will
I completely agree with Financial Cents above, but I go even further and say that I don’t equate more debt with happiness. Sure I could spend tons of money, but I won’t feel good knowing that I just emptied out the piggy bank. I’d rather get passive income and have that pay for me, and I don’t mind living within my means now, and in the future, in order to make that happen.
To me, having passive income without debt is like not having a master. No boss, no bank manager, nobody pulling your strings, except on YOUR terms. That is the dream for me, that along with the ability to do work I truly love and the time to travel and enjoy life. I think that’s worth giving up a new car and pool for.
@Financial Cents, We live within our means as well and by no means are we extremely frugal, we take one trip a year for example. We will be sticking to our plan as well and should achieve comparable results to yours within 5 years.
@Kevin, Passive income is the key to financial freedom and i share with you the same dream. The dream is within reach in a relatively short period of time, once the mortgage is closed the momentum will increase significantly when all the cash flow will be heading towards dividend paying stocks. The mortgage is the first milestone.
It all comes down to what you want out of life. If people want to spend all their money on all the latest toys and work till 65, then that’s their choice. I myself would rather live within my means and be able to retire earlier with no debt and no headaches.
Getting paid dividends every month is exciting. Am I the only one that feels this way?
Hey! This sounds oddly familiar to my post on “lifestyle inflation”. Sounds like your friend is suffering from that =)
I know a few Pauls too! Pauls and Paulettes =)
They just bought a 500K condo, are paying a lot every month for their mortgage, and just bought an espresso machine because “we’re in so much debt already it doesn’t matter”.
Hey A2D,
You are right about life style choices, in the end it’s his money not mine. I tried pointing out that maxing out the RRSP is no guarantee he will retire before 64 since he already went through a decade of 0 ROI.
The only problem i have with dividends is not holding many of em! Just DAY and PMT for now and looking to add more once new “worries” hit the markets.
Hi Y&T,
Not only is he suffering from life style inflation, i would add a new term: “Early Retirement Illusion!”. Hey, that’s like an idea for a new post idea =)
I don’t know how can people stomach such high mortgages, I can’t wait to get rid of my 150k remaining!
Hi-In general, I keep an asset allocation in line with my risk tolerance funded primarily with broad index funds representing International stocks, USA stocks, TIPs, bonds, REITS, & some cash. & I don’t vary the allocation too much. The older I get the more I transition away from equities and into fixed classes! I never ever take out debt for depreciating assets or items that won’t increase their value. No pool or BMW for me! I AM TOTALLY IN LINE WITH YOUR PHILOSOPHY. More expensive stuff doesn’t = more happiness! Good article, Barb
Hi Barb,
You seem to be in total control of your finances. Discipline is one central ingredient when it comes to sticking to a plan and you are doing it superbly. Kudos to you and welcome aboard!
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