I was told on Twitter that living on less than $24k per year is very frugal. Maybe it is, but I would like to explain how I live on less than $24K and I feel that I live like a king.
(Editor’s Note: The Twitter discussion below followed Monday’s Hub post on by Myownadvisor blogger Mark Seed: Is Fat Fire realistic?)
First of all, my net worth right now is about $500,000. If we use the 4% rule, I should be able to withdraw $20,000K/year ($1,667/month) in perpetuity.
How I live
Map of Alain’s neighbourhood in Montreal
I live in one of the best neighborhoods in Montreal. It’s called “Le Plateau Mont Royal.” I have a beautiful park 10 minutes walking distance to the east, and another more beautiful park 10 minutes walking distance to the west, and I have the Old Port, 20 minutes walking distance to the south.
Alain on Duluth Street
The street where I live is pedestrian only; it’s a cobblestone street.
Because I have been living in the same apartment for the past 12 years, my rent is low. $815/month.
One of my small pleasures is to go downstairs, to a little park on the corner and drink a beer with my neighbors. (beer from the convenience store $2)
My apartment is what’s called a 3 ½. One bedroom, one living room, a kitchen, and a bathroom. I live on the second floor of a two floor building.
The local supermarket
I do my groceries at a small family-owned supermarket where I have been shopping for 12 years and where I know the cashiers and the owners by first name basis. Because I follow a plant based diet, I eat 99% of the time fresh fruit and vegetables. My grocery bill hardly exceeds $10 per day ($300/month). I buy my fruits and vegetables daily.
For generations, undergraduates have been fed a steady diet of what might otherwise be called “traditional” economics – economic theory that is predicated on the plausible but largely unsubstantiated premise that people make rational decisions in their own economic self-interest.
That notion of economic self-interest, first championed by Adam Smith, is now nearly a quarter millennium old and there are a number of variants that come from it. For instance, there are the ongoing debates between monetarists and Keynesians; debates between the so-called ‘salt water schools’ and ‘freshwater schools’ and debates between traditionalists and behaviouralists. Economics, the ‘dismal science’ isn’t really much of a science at all, given that economic theories implicitly recognize the influence of systems theory – where one decision will affect another and so on. The idea of simple, measurable cause and effect testing is quaint in theory, but almost always impossible to replicate in practice.
A recent ideological variant is something called Modern Monetary Theory (MMT). It’s an updated wrinkle on the traditional monetarist approach. Historically, monetarists have posited that the role of central banks is twofold: to ensure both price stability and strong economic growth, as defined by something approaching full employment. We all saw a proactive form of MMT in action in the U.S. late in 2019 when, despite decades-low unemployment numbers and inflation that was well within the 2% target range (give or take 1%), there were three consecutive rate cuts implemented by Governor Powell. This was a clear attempt to avert a possible recession since the U.S. yield curve had inverted earlier last spring.
Central banks hinting we ain’t seen nothing yet
Lately, central banks have been hinting at the notion that we ain’t seen nothin’ yet. Apparently, they are now prepared to keep rates low for a very long time (decades at least, but possibly generations) in order to keep more people working. In essence, the twin monetarist objectives mentioned earlier have now been given a hierarchy. Continue Reading…
Occasionally, a friend or family member asks for help with their investments. Whether or not I can help depends on many factors, and this article is my attempt to gather my thoughts for the common case where the person asking is dissatisfied with their bank or other seller of expensive mutual funds or segregated funds. I’ve written this as though I’m speaking directly to someone who wants help, and I’ve added some details to an otherwise general discussion for concreteness.
Assessing the situation
I’ve taken a look at your portfolio. You’ve got $600,000 invested, 60% in stocks, and 40% in bonds. You pay $12,000 per year ($1000/month) in fees that were technically disclosed to you in some deliberately confusing documents, but you didn’t know that before I told you. These fees are roughly half for the poor financial advice you’re getting, and half for running the poor mutual funds you own.
It’s pretty easy for a financial advisor to put your savings into some mutual funds, so the $500 per month you’re paying for financial advice should include some advice on life goals, taxes, insurance, and other financial areas, all specific to your particular circumstances. Instead, when you talk to your advisor, he or she focuses on trying to get you to invest more money or tries to talk you out of withdrawing from your investments.
The mutual funds you own are called closet index funds. An index is a list of all stocks or bonds in a given market. An index fund is a fund that owns all the stocks or bonds in that index. The advantage of index funds is that they don’t require any expensive professional management to choose stocks or bonds, so they can charge low fees. Vanguard Canada has index funds that would cost you only $120 per month. Your mutual funds are just pretending to be different from an index fund, but they charge you $500 per month to manage them on top of the other $500 per month for the poor financial advice you’re getting.
Other approaches
Before looking at whether I can help you with your investments, it’s worth looking at other options. There are organizations that take their duty to their clients more seriously than the mutual fund sales team you have now. Continue Reading…
Before my answer to that question, for those outside the personal finance, devout FIRE (Financial Independence, Retire Early) bubble, a primer based on what I know …
What is FIRE?
I would like to provide a universal definition from the personal finance community today but there isn’t one. There are, however, some general thoughts/themes when it comes to FIRE and those who follow the philosophy around it:
Financial Independence, Retire Early (FIRE) is a movement related to extreme/aggressive savings rates and investment tactics that allow individuals to retire sooner than potentially any traditional budgeting or retirement planning approach might permit.
When it comes to savings rates: in some circles, by saving up to 70% of your annual income, some FIRE enthusiasts aim to retire early (and live off small portfolio withdrawals from their accumulated assets).
When it comes to portfolio withdrawals: in some circles, by withdrawing a small % of the accumulated assets (e.g., 4% of the portfolio), said FIRE enthusiasts may expect their portfolio to last a lifetime without fear of running out of money.
The FIRE movement takes direct aim at some traditional retirement ages, such as age 60, 65 or even later on but there is no consensus on what is / is not a retirement age, of course.
The theory and movement goes: by dedicating the majority of your after-tax income to savings and specifically saving for retirement, well, you could “retire” sooner than most. Probably true.
From this perspective, FIRE is not a new concept even though the moniker is somewhat newish.
I’ve written multiple times about the FIRE movement and my thoughts on FIRE.
I’m hardly anti-FIRE; this movement/approach/philosophy has always resonated how I live for the most part:
To live within your means or slightly below what you make as income.
To save early and often.
To avoid long-term debt that is not used for wealth generation.
To optimize your investing (i.e., keep your costs low and diversified, and avoid money managers).
Several FIRE retirement variations have emerged over the years to frame a particular lifestyle expectation that could come with FIRE. I’ll rank them in order of cashflow significance although these terms also vary based on the FIRE enthusiast you’re talking to:
1. Lean FIRE
As the first word suggests, lean is a strict adherence to a minimalist lifestyle. Many Lean FIRE adherents live on $25,000 per year, or less per year. Here are a few examples:
Not that you have to become a barista, rather, the term is used to highlight a combination of work-life balance that can be juggled – a form of semi-retirement if you will.
Barista FIRE is a type of semi-retirement whereby you can consider part-time work or work on your own terms, and still enjoy the benefits of some income and workplace benefits. (The term was coined as such since Starbucks offers benefits to part-time workers … something to consider for your semi-retirement plans!?) Continue Reading…
Inflation is coming down in Canada and the U.S. And one can argue that the rate hikes have had little effect. After all, Canadians and Americans are spending money, and employment is strong. The economy has been very resilient. Perhaps inflation was transitory after all, caused by the pandemic and the invasion of Ukraine. This is not the traditional inflation fight script. The economic soft landing argument is getting more support. Was inflation transitory?
Total inflation in Canada is back ‘on target’ in the 2% to 3% range.
According to Statistics Canada, the June slowdown was driven primarily by a year-over-year drop of 21.6% in gasoline prices. Meanwhile, the largest contributors to the rise in consumer prices are food costs — which rose 9.1% in June — and mortgage interest costs (up 30.1%).
It’s likely a very good guess that rates are staying higher for longer. The bond market is certainly suggesting that as well.
The 5-year remains elevated.
Fixed-rate mortgage holders will likely be resetting at higher borrowing costs over the next 2 to 3 years – adding several hundred dollars a month to the typical mortgage payment. Of course, that takes money out of the economy and money that would have been spent on goods and services.
Next year may be sunnier than forecast
In the Globe & Mail, Ian McGugen offered a very interesting post. Ian looks to one of the most optimistic economists, and that is a growing group.
Jan Hatzius, chief economist at investment banker Goldman Sachs, has set himself apart from the crowd in recent months by declaring that the United States will not sink into a recession. Continue Reading…
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