I still remember the frosty winter of 2014 when my fiancé and I were searching for our first home. I’ll never forget that year because the burning frostbite left a mark on one of my toes. Though recovered, my affected toe will remain sensitive to the cold and heat for the rest of my life. I guess that’s what you get for rockin’ Hunters in the snow when it feels like -30°C (-22°F). As sad as this may sound, it’s now the memory of our first property. How romantic, right? ❤️
Anyway, after going through 20 properties and fierce bidding wars, we finally got the house! I don’t know if that’s a good or bad thing since we offered $70,000 over asking price. But I can still reminisce the moment when we were jumping up and down like little kids at the candy store. The only numbing pain I felt was that annoying frostbite. Needless to say, I was happy enough to ignore it. Sort of.
Canada Lowers Rates in 2015
Unexpectedly, when we bought our first home in January 2015, Stephen Poloz announced a rate cut in response to the oil and energy crisis. As a result, Bank of Canada slashed rates by 25 basis points (BP). And about half a year in, they slashed another 25 BP — a total of 50 BP in 2015. In that event, we were able to secure a rate of 1.80% on the house for about two years.
Being the odd person I am, who screams for joy about cheap money, my reaction to the broker was: “OH. EM. GEE. Like, really?? 1.80%?? No effing way!”
As you remember, Canada technically fell into a minor recession in the first half of 2015. We had two consecutive quarters of decline in GDP due to the steep drop in oil and energy prices. Luckily, Toronto did not feel much of an impact compared to the cities in Alberta.
Despite surviving our jobs at the bank, we were a bit concerned with how those rate cuts could eventually impact the financial sector. Rates were already low to begin with. But lowering them further would tighten profit margins even more for banks and insurance companies. Hence, the potential for job cuts at the bank. Though this was a possibility, we still took the risk to invest our money in the markets instead of paying off the mortgage.
We were already doing this with our student loans, at a higher rate, so it wouldn’t make any sense paying down the house. On top of that, we decided to rent out our separate unit to a family. Our tenants were covering most of our mortgage payments, and that gave us room to invest more of our money in the markets.
Fast forward three years, we’re still seeing the bulls run since the crash of 2008. Will it still continue? I don’t know. No one knows.
But we need to be more prudent here because our position is pretty leveraged. Aside from our mortgage debt, we have investment property debt, HELOC, as well as student loans!
Rate Hike Once… Rate Hike Twice… When’s The Next Surprise?
Poloz raised interest rates in Canada by a total of 50 BP this year – once in July, and another in September that shocked most people. As of today, they announced that they will keep the benchmark rate steady at 1% but it’s still a smart idea to prepare for more future hikes.
As a result of this year’s hikes, our mortgage rate increased from 1.80% to 2.30%. Our loan on the investment property increased from 2.15% to 2.65%. And the interest on our student loans increased from 5% to 5.50%. We’re going to knock off the student loan before 2017 ends. Merry Christmas to us!
Here is an article by Ian Bickis. He writes how the rise in rates is a warning that low rates aren’t permanent.
From the article, he writes:
“The rate increase means about $50 more a month for an average $480,000 home in Canada on a variable-rate mortgage, said Janine White, vice-president of RateSupermarket.ca, while Toronto’s higher average housing price of $670,000 means the increase would be about $80 a month.”
So, with the anticipation of further rate hikes, 2018 doesn’t bode well for borrowers who chose float (i.e. us). With that said, our plan for 2018 is to prioritize paying off some debt instead of investing in the markets. It’s not to say that we’re going to fully stop investing. We will still continue investing our bare minimum, but our main focus is to deleverage because our debt to asset ratio is about 50% — not optimal.
Debt to Asset Ratio
For those who don’t know, the debt to asset ratio is a financial ratio used to calculate your leverage. It is your total assets divided by total liabilities multipled by 100. Although we’re using debt to invest, we still believe in lowering our ratio to about 30% to 40%. According to this article, ratios lower than 40% are considered better debt ratios from a risk perspective.
With that said, our rationale is to shed off some debt from our balance sheet to reduce some risks.
For starters, we mentioned that our plan is to knock off $20,000 of student loans before we kick start our 2018 journey.
Despite our current net worth (which can easily be wiped out any time), we’re going to make 2018 our journey to reduce some debt. And here’s how we plan to achieve our goal.
If your goal is to knock off some debt like us, I encourage you to join our party. 😉
Continue to go out on Friday/Saturday, but cut back on the Sunday Splurges to pay off debt
On Mondays to Fridays, my fiance and I would make our breakfast, pack our lunch, and eat dinner at home (except on most Fridays). As you can see, we’re pretty frugal here.
However, without thinking about debt the same way most people do, we would usually go out and somewhat loosely spend on the weekends. Two out of the three days, including Friday nights, we would go out for breakfast, lunch, and dinner. When we go out with friends, we would usually spend a bit more. On top of that, we would also order a Venti frap or latte from Starbucks on Saturdays and Sundays. On Friday nights, we would sometimes go out for some ice cream or bubble (boba) tea as well.
We will continue our weekend tradition, but we’re also going to make an effort to reduce our spending.
So, it’s time to embrace frugality on Sundays! And here’s what that means:
1) Sip on one less Starbucks on Sundays
I have to admit we’re already really frugal here.
He would usually order a Venti (equivalent to a large) frap or latte and ask for an extra cup on the side. Instead of ordering two Talls (equivalent to a small), we would both share their largest size. IMO, that’s more than enough for the two of us.
Yummm… I love their peppermint hot chocolate mocha!
He would usually order this about two to three times a week, but I believe we can skip this on Sundays. Or, instead of fraps and lattes, we can opt for their coffee. After all, we all know how expensive their specialty drinks can get, right?
2) Make breakfast on Sundays instead of going out
Sometimes we would eat in at a restaurant or grab some McDonald’s breakfast due to laziness. Yes, I said it – we are lazy.
Every day before heading out to work, we would eat a banana and make some smashed avocado with toast. So, when the weekend is here, we would feel entitled to eat out two days in a row. How bratty of us, right?
But we came to realize there’s no need to splurge two days in a row. In fact, we’re better off making breakfast at home. Not only is this good for our wallets, it will also force us to wake up earlier.
3) Prepare a salad or pasta on Sundays instead of buying lunch
Again, we felt like entitled lazy brats. But we will start preparing for meals on most Sundays to save money. We’re sure hoping all the money we save can help with the extra mortgage payments! 🙈
4) Join our parents for dinner on Sundays instead of dining out
As Asian parents, they love inviting us over because they cook a lot. If anything, they would ask us why don’t we join them every day!
Based on the below, you can see how much we roughly spend on a typical Sunday.
|Unit Cost||Annual Cost|
|Starbucks||$ 6.00||$ 312.00|
|Breakfast||$ 20.00||$ 1,040.00|
|Lunch||$ 30.00||$ 1,560.00|
|Dinner||$ 65.00||$ 3,380.00|
|How Much We Spend On Sundays (for two)||$ 121.00||$ 6,292.00|
Although we made some decent progress this year with our overall net worth, we still thought: “Really?? Roughly $6,000 just for that bull$hit??”
Now, we’re not going to entirely cut back on Sundays because we believe in enjoying life. And things don’t happen over night. But if we can manage to cut this in half, we would have the option to pay almost two extra mortgage payments for the year!
At the end, we figured that splurging one extra day every week wasn’t adding much more utility. In fact, we’re looking forward to more frugal-fun things to do in 2018!
Let’s see how creative we get on Sundays next year!
5) Sell refurbished furniture to pay off debt
I have to be honest. I scaled back a lot here because I’ve been trying to focus my efforts on blogging. But if I could even squeeze in $250 to $300 per month, that still equates to $3,000 to $3,600 for the year. Again, that’s almost making two extra mortgage payments for 2018.
Coupled with eliminating the Sunday Splurges, that’s a total of almost four mortgage payments! It sure doesn’t sound like much, but it’s the baby steps that matter.
Read here to learn how I flip furniture to make money! I’m not a handy gal. But if I can do it, then so can you! Seriously!!
6) Use our year-end bonus to pay off debt
If neither of us gets laid off or fired from work, and if the company continues to do well, we would expect a combined bonus of about $30,000. Generally, we shelter the max 85% of this money and invest in our companies’ funds where total management fees are no more than 0.02% (for the funds we choose). We will continue doing this, but we will put 15% of the unsheltered money towards the mortgage payment. 15% of that still works out to be roughly $2,700 after tax.
If your company pays you a bonus, we would recommend taking this approach to pay off any debt. Or if you don’t have debt, consider putting the remaining that you cannot shelter into a tax-free investment account (i.e. a TFSA).
I know most people who opt for a 100% cash bonus payout and spend it on a nice vacation or other lavish things. Not only do they get taxed, they are also losing compounding returns on their before-tax money. Their rationale is “I like to see the cash in my account and I have the flexibility to access it.”
Shrugs, what do I know about YOLO? 🤷♀️
our my addiction to investing in the markets to pay off debt
I admit that I’m usually the crazy one who wants to put everything into the markets, whereas he’s the lunatic who wants to hoard cash and time the markets. He sees me writing this! I can understand that he views holding cash as a “call option” with no expiration date (he got the idea from Warren Buffett). I don’t mind hoarding some cash, but selling everything and holding ~100% cash does not exist in my books!
Anyway, I will reduce my temptation to throw everything into the markets for 2018.
As mentioned, our focus is to reduce our leverage ratio to less than 40%.
With that said, we’ll still continue our monthly automatic investment plans such as the:
– employee ownership program (this is free money)
– company pension contribution
– RRSP and TFSA contribution
Any leftover in cash after this monthly automation plan would generally go towards spending, an emergency fund, or investing in more stocks/ETFs.
But for 2018, the game plan is going to be different. Instead, we’re going to make efforts to reduce our debt. Of course, this is assuming we’ll still have some emergency (likely reduced to $10,000).
To give you a precise number, our aim is to pay off $70,000 of our mortgage in 2018.
will kill our $20,000 student loans before the new year hits.
Once that’s done, the real game begins!
Update: We just paid off $20,000 of our student loans on December 17th, 2018 (after writing this post)! Yay!
Read here for our story and some valuable life/money lessons we learned. This can help you avoid some mistakes.
With the tenants’ help, and our attempt cut back on Sunday Splurges, and a portion of our unsheltered bonus, we should be able to make extra debt payments in 2018.
I also know that blogging will be an uphill battle for me, but I’m also really hoping I can squeeze in some time for my furniture gig. That would also help with at least one or two mortgage payments.
Aside from those challenges, the biggest hurdle for me is getting over my addiction to stocks. This will have the most impact on our debt repayment, so can I do this?
I’m ready for the challenge, so bring it on! If I can do this, then so can you!
Over to you
Do you also have plans to reduce debt in 2018? Is it credit card debt, student loans, or mortgage debt? What are your plans and goals to ensure success for next year?
You have about one month to plan ahead, so don’t wait until Christmas is over. Start now!