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Reader Mail: Babe in the Woods

Mrs. J, a subscriber of MDJ, has emailed me with a load of questions on how to get started with her finances.  I sometimes forget that a lot of my readers are just starting out where a lot of my writing is geared towards intermediate/advanced topics.  Not today though, back to the basics for the personal finance babe in the woods.

Here is some information about Mrs. J (and her husband):

  • We are both 38
  • Family income is $72k
  • We live in NT
  • We have 3 children

Here are some of her questions

  • Should we continue renting or buy a house?
  • Why would I need an RRSP AND a savings account?
  • What books would you recommend that I read?  Is Rich Dad Poor Dad Recommended?

If you haven't done so already, I would suggest that you start an "emergency fund" because you never know what can come up.  How much?  Some suggest to have around 3-12 months worth of expenses.  Personally, I keep enough in my savings account to cover the worst case scenario accounting for insurance/EI benefits etc.  Alternatively, you could get a line of credit as your emergency fund.

Once you have a "cushion" to work with, you and your husband should consider getting aggressive with your retirement savings.  As your husband is in a higher tax bracket (for NT), he should start his RRSP.  For every dollar that he puts into his RRSP, he'll get around 34% of it back when tax refunds come around.  On top of that, with a large discrepancy between your incomes, you should consider Spousal RRSP's which will allow you to income split when you both retire.  When you do get to contributing to your RRSP's, look into investing in low MER INDEX funds/ETF's. 

As to the question regarding renting vs owning, that is a question with many opinions.  It really depends on your situation and where you live.  Are the prices of houses in your area ridiculously high?  Would the mortgage payments be significantly higher than the rent that you're paying now?  If so, it makes sense to rent.  For example, in Vancouver, the difference between mortgage and rent payments is substantial thus the reason why even people with high incomes rent there.  If house prices are crazy high in your area, I'm a believer in the rent low and invest the rest.

In terms of which books to get started, my favorite beginner book is "The Wealthy Barber".  Rich Dad Poor Dad is also good book to read to get you started.  It's not a "how to" book, but a book to help you get in the frame of mind of how a wealthy person thinks.  Another great Canadian read is: Spend Smarter, Save Bigger.

When it comes down to it, it really depends on what your financial goals are for the future.  Does your husband want to retire when he's 65 or earlier?  At what income?  It all boils down to one mantra, and that is to live below your means

So, as per the regular routine, I'm going to pass the buck to you, the reader.  What advice would you give Mrs. J to get started? 

Note that i'm not a financial advisor so please consult a financial professional before using any of the info given in this article.

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 20 comments… add one }
  • Nabloid December 10, 2007, 6:21 am

    Great advice. I’d add that its nice to make a plan for retirement with some rough estimates. Example> Say I think I could retire on $40,000 a year. If I’m able to get 12% dividend rates on some Income Trust than I would be able to earn $40,000 with a portfolio size of $333,333. If I’m able to get just 4% with some bond, then I’d need $1 million. There is a huge difference depending on the yield you are able to obtain and you’ll need to take inflation into account.

    Go check up on the power of compound interest… use a compound interest calculator and play around with the interest rate, the amount saved per year and the number of years to determine approximately how much money you should invest each month. If you break it down into monthly goals, it will be much easier to accomplish… when you first start out with $0 it can be daunting to think you need $500k or $1 million or whatever amount you think you’ll need. Break it down and start as soon as possible. Compound interest is the most powerful thing in finance.

    PS> The Wealthy Barber is a good starting point. I’d add a book on Warren Buffett too. Go through Amazon and find the top selling investing books and read through summaries to find one that interests you.

  • Mun-Economics December 10, 2007, 10:21 am

    Along with what is said above I think you need to take into account what you plan of support will be with your kids when they are finished high school.

    If you are going to pay for their schooling or contribute to it then you should not forget about this as a financial liability in the money that you will need for retirement. I know from my families experience they didn’t really think about this and we are big financial drain :P

    If you want to help them out with school then I think you should look into RESP contributions as soon as possible. Doing this early will maximize the government grant you can get and componding.

    Check around the financial blogs to find information on RESPs.

  • The Financial Blogger December 10, 2007, 12:22 pm

    If Jennifer has some room in her budget, I would go with a RRSP loan in order to contribute as much as possible. If you invest 20K into an RRSP loan, your husband will receive a nice cheque of $6,800 with a 34% marginal tax rate. With RRSP contributions, you can build a tax sheltered investment account that could help you out buying a property in the future (please search for Home Buyer Plan on the web for further information). I believe that MDJ did a nice post on this topic as well.

    In order to find what is your exact tax rate according to your province and income, you can visit this site:
    http://www.ey.com/GLOBAL/content.nsf/Canada/Tax_-_Calculators_-_2007_Personal_Tax

    That is the Ernst and Young tax calculator (I believe it would be a good resource).

    I am not a big fan of emergency fund (check out my blog to find out why!). I think that a line of credit of $20K will do just great. The key point is to not to use it unless it is an emergency ;-)

    An RESP would definitely be a good idea as well since you have 3 children. Four Pillars (four-pillars.ca) wrote a nice series about them.

    I hope this helps!

    FB.

  • Q Cash December 10, 2007, 12:57 pm

    Isnt there a northern resident deduction that kicks in for those living in the NWT?

    Does that make a greater difference in the retirement planning/costing?

    I know things are much more expensive in the north too, so what would the average household budget look like up in Yellowknife?

    Q

  • FinanceAndFat December 10, 2007, 12:59 pm

    So far for me, Your Money or Your Life is the best financial book I have read. It really helped me to understand the problems with consumerism, the value of frugality, and why these things are important. If you are working on getting out of debt, I also really like The Total Money Makeover by Dave Ramsey.

    On a personal note, starting an emergency fund has made a big difference for my finances. Without that I couldn’t have ditched the credit cards.

  • nobleea December 10, 2007, 2:46 pm

    Do not bother with Rich Dad Poor Dad. It’s a poorly written book with nothing but age-old financial platitudes, often conflicting from page to page. One could argue that the huge glut of ‘investor’-owned homes in the US is due to crappy get-rich-quick-with-real-estate books. There’s a complete rebuttal of all the ‘points’ Kiyosaki makes here:
    http://www.johntreed.com/Kiyosaki.html

  • Mr. Cheap December 10, 2007, 6:56 pm

    I’m with nobleea, Rich Dad is garbage. I’d read Stanley’s “The Millionaire Mind” if you want to know how the rich think, and I’d second MDJ’s recommendation of “The Wealthy Barber” (and would suggest buying ETFs instead of mutual funds).

    Mike’s excellent RESP series starts with http://www.four-pillars.ca/2007/10/05/the-big-resp-series/.

  • The Financial Blogger December 10, 2007, 7:01 pm

    I might be the only one, but I liked Rich Dad :-P

    However, this is not an How to guide to be rich. This book will show you how to think differently. Most books are just showing you the importance of putting money aside regularly… nothing to write your mother about ;-)

  • ThickenMyWallet December 10, 2007, 7:53 pm

    I have always been partial to The Millionaire Next Door since it gives you a good snap shot of how middle class families attain financial independence and addresses money and children without recommending a product- its a good think-piece on the mind-set of the financially intelligent.

  • Clayton December 10, 2007, 10:13 pm

    I agree with FrugalTrader, Rich Dad Poor Dad, even though not the best book in the world, will start the path of thinking like a rich person. The best piece of advice from that book is stop buying “doodads” and start buying assets. That is step #1 for anybody on the path to financial freedom. Good luck and have fun on your journey!

  • Gates VP December 10, 2007, 10:57 pm

    Book suggestion: “Personal Finance for Dummies (for Canadians)” It’s really enough information for anyone to get started without being bogged down in details.

    The rest of these well-known books have real issues: Rich Dad.. is just poorly written, Wealthy Barber is a parable with the message of “Save 30%+ of your income and you will be rich” (no kidding).

    There are also tons of other books and information guides, but after you’ve read the dummies book, just start surfing the Canadian PF blogs. More information (and opinions) than you can shake a stick at.

    The deep truth though, is that Babe in the woods had a bunch of questions regarding financial tools (rent vs. buy, RRSPs vs. savings). But she didn’t give us any financial goals, so any advice (outside of the book suggestions) is just kind of moot.

    I’d love to help her out, but we’d need a whole bunch more information to be able to offer any specific advice. Otherwise, Babe will just have to keep reading books and figure out how to apply the tools on her own.

    You got a lot of smart people on these boards Babe, give us a little more to chew on (i.e.: your dreams for the future and your cash flow situation) and we’ll give you a host of options.

  • Mr. Cheap December 11, 2007, 5:42 am

    I actually meant to recommend “The Millionaire Next Door”, not “Millionaire Mind” (both by Stanley), so I’ll change my book recommendation to match TMW’s.

    I’m still firmly anti-“rich dad” though.

  • nobleea December 11, 2007, 1:54 pm

    “The best piece of advice from that book is stop buying “doodads” and start buying assets. That is step #1 for anybody on the path to financial freedom.”
    I agree with this, but the book is contradictory on this, as Kiyosaki boasts that he has porsches, mercedes, rolexes, expensive golf clubs.
    The authors of The Millionaire Next Door found conspicuous consumption was typically a sign of a non-millionaire who was trying to impersonate a millionaire.

    The book has been proven as a piece of fiction. What it is selling is the same as those late night get rich infomercials.

    The Millionaire next door is a good book with tomes of data (some if it maybe a little old now), but still accurate in terms of lifestyle and consumption habits. Some of Gordon Pape’s older personal finance books are quite good (all Canadian content).

  • Babe in the Woods December 12, 2007, 5:12 am

    wow.. thanks for all the feedback. I’d have been here sooner, but busy with the baby (who is waiting for me now, so I’ll try to be brief.)

    I’d like to help my little ones get started so they wouldn’t be left owing the estimated `100,000 for tuition when they are 24. It was hard enough for our generation, and is part of our late start. We are just rebuilding our credit, and dusting off the last of the fall out from the dot com crash. When the company my husband worked for went under he may have been a little too loyal and trusting.

    We are saving on our rent in a very family friendly area, and according to the new york times calculator renting is a better option. I guess this means we have to be much more disciplined about putting money aside. I am thinking about the possibility of getting a mortgage on a building to rent for investment purposes, but not sure where would be the best market. Should we think about getting someone to manage property for us in another part of the country? This may be jumping ahead, but at our age we need to do some serious planning.

    We’d also like to retire in France (possibly), for my husband to write. I’m an artist so self employed. It’s possible I could keep working till 90 or be earning much more in years to come, but it is nothing I’d like to count on. Having said that if I have a goal in mind, I’m prepared to work towards it.

    Baby calling me again. Have to go. Hope this makes sense. Once he sleeps through the night I’m hoping to start working again.

    Thank you for all the help, and all the feedback. I really appreciate your time and opinions. I had mixed feelings after I heard the author of Rich Dad talk, so I had to ask…

    p.s. Does anyone have any suggestions about life insurance, and various companies?

  • Babe in the Woods December 12, 2007, 6:14 am

    I just realized a few more details might help. The rent where we are staying hasn’t been raised in 20 years, and we are quite fortunate, in that we are saving a lot compared other places we might be able to rent in the city. My husband income currently covers our living expenses with a few hundred free each month. He’s was told there would be pay raises, and there is a couple of thousand bonus each year. (This went to basic furniture this year as we haven’t been here very long.)I’m not sure if I’m exact here, but I believe the average income for a family is 140 (a lot of people like to collect expensive toys here.) I don’t really understand the tax situation here, but I know there are some benefits, and also with regards to education for the children. My husband offered for us to get child care for 800 a week, so I could spend more time working in my studio, but I am hoping to be here for them and fit my work around it. They are pretty well behaved… and I think it could work. I know I could earn much more here doing another line of work, but my career is pretty established, and it is very much a calling for me that I don’t want to give up unless my family’s welfare was threatened. I’d like to learn more about investing so I can take the little I make and make it grow.

    What other “assets” are there to consider besides real estate? I was joking with my husband we should start a chapters and starbucks, but we don’t quite have a few million kicking around just yet to embark on that venture. Also the time I can afford to put into something is a issue.

    I had wondered about joining an investing club to learn the ropes… but have to do a little more research. I could only find a seniors one, and I’m not sure they’d take me just yet. (^; I did once get an advance on a painting to buy stocks in 2000 (my husband was paying attention to some tech stocks), and would have made 40 thousand in a day, but I was laughed out of the door. They were only selling to people who wanted to buy hundred thousand or more…

    So here I am starting over (albeit sleep deprived), and wondering the best place to start to take care of my family.

    all the best j.

  • DAvid December 14, 2007, 1:23 am

    Babe said (in jest): “What other “assets” are there to consider besides real estate? I was joking with my husband we should start a chapters and starbucks, but we don’t quite have a few million kicking around just yet to embark on that venture.”

    Maybe you don’t have the few million, but had you bought $10,000 of shares in Tim Horton’s this past July, today (not yet six months later) you could pocket about $2000 in gains. Without you having to wash a single coffee cup!

    Read the books mentioned above, and others that you can borrow from your local library, follow this and other financial blogs, and learn all you can.

    DAvid

  • just learnin' December 14, 2007, 2:10 am

    Can anybody tell me if there is some catch to these free books I came across? Is this useful for someone starting out.

    http://www.truehelpfinancial.com/index.php?campaign=AG5

    btw. Frugal you are so popular maybe you should consider a drupal community blog. It could generate a lot more advertising revenue. Just a thought, and not just because it would be easier for people to discuss things. :-)

  • paulette June 15, 2008, 2:27 am

    In my opinion one should have their own house even by means of mortgaging. You are just wasting money in renting while in mortaging you are sure that one day that house could be yours.

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