Rule #25 Live like a student as long as you can.

"The essentials of life are cheap. Only the luxuries are expensive." - Ron Muhlenkamp

Remember when you were a student at college or university? Remember how much fun it was and yet how broke you were? You didn't have a luxurious place to live in, or a car, and you walked to everything, or maybe skateboarded everywhere?  The TV you had was the TV the previous tenants left behind because it was too bloody heavy to move... you know.. the Radiation King with the wooden case, and you certainly couldn't afford cable TV.  You stayed in and hung out with friends, choosing potlucks instead of going to fancy restaurants.  You made coffee at home, and brought sandwiches for lunch instead of buying it.  Cheap Poutine and Pitcher of Beer night at the local pub was the best night of the week because you and your friends could nurse your drink and wax poetic all night long at discount prices.  Life was simple.  You had few financial liabilities and it was fun living this way.

But then something happened.  There was this temptation that with a new career must also come a car, new furniture, fancy clothes, an expensive watch or phone, a big flat-screen TV,  and instead of frequenting the local watering hole, you feel compelled to hang out in the more expensive places with the foreign or micro-brews on tap instead of the cheap domestics.   Your big adult paycheque deserved a big adult lifestyle.   That big TV meant a cable-TV plan, and high-speed internet and a phone with a big data-plan.  Whoa! This is starting to sound expensive.

I always tell young people I meet to resist this temptation as much as possible, for as long as possible.  It is extremely difficult to save, pay down debt, and generally get ahead if you jump into a higher standard of living without the financial base to make it happen first, and that is just what many recent grads do.  Once people get used to a high-status high-consumption lifestyle, it is often very difficult for people to reign in that spending if needed, so the longer you can prolong your student lifestyle, the better.  I can not emphasize enough how much financial sacrifice plays in to financial well-being and resisting many of these adult lifestyle trappings can be a boon to your bottom line and mental well-being.  In my opinion, spending money on luxuries in life such as cars, expensive clothes, and expensive monthly liabilities such as Cable-TV should only be done once the basics are covered such as eliminating bad debt and having some savings.  Another thing I've noticed is that people with high standards of lifestyle without a financial base often worry a lot about maintaining that lifestyle...  and I generally like to sleep at night, so a simple carefree lifestyle suits me just fine.

When I was in grad school, we lived just like in the first paragraph.  My wife and I lived in a very modest apartment, we didn't own a car, and we didn't have have a TV let alone cable TV.   When I got my first employment position as a technical professional, there was a temptation to buy all the fancy things people come to expect with such a position.  But we resisted.  We did however buy a house after  I had been working for 3 months only because we were going to be evicted from our apartment due to a coming renovation.  While we did own a house, it would be another 4 years before we would buy a car.  It wasn't that we couldn't arrange for a car-loan to get one, it was that cars are money pits, and we weren't interested in digging new financial holes while we were trying to pay off our student loans.

With two adult salaries, but without many of the liabilities many adults take on, we were able to slay both our student loans ($58 thousand worth) in just over 3 years, save up enough to pay for a used car four years after I started working, begin to max out our RRSPs, and give to worthwhile charities.  We were essentially saving 50% of our take home pay.... By comparison to many in our field and experience level, our standard of living was modest, but we were very happy because we maintained that interactive social face-to-face lifestyle by continuing pot-luck get-togethers and Cheap Beer and Poutine nights.  We still lived with "student" quality furniture because it still met our needs.  It was still functional, though certainly not fashionable.  We only bought stuff out of necessity, not because of some feeling or self-imposed obligation around keeping up with others.    We never focused on what status items we were missing out on, but rather focused on relationships and building a solid financial base to give us more flexibility and freedom as we got older.  Once the essentials of living have been taken care of, then we focus on adding the luxuries.

At our current stage in life, which is late-thirties with young kids, we have adopted many of the liabilities that come with adulthood: A nice car, high-speed internet, club memberships etc, but we only added these lifestyle choices when we could afford them.  To this day we still walk or bike everywhere we can, we do not have Cable-TV, dont frequent fancy restaurants more than once a year, and Cheap Beer and Poutine are still our favourite nights out.

Rule #8 Your Home is not an Asset.

This is one of the topics where people tend to get a little bent out of shape with respect to our perspective on what makes something an asset or a liability.

If you buy something that pays YOU to own it, it is an asset. If you buy something that YOU PAY (net) to maintain or own, its a liability. Those are two definitions that WE use to describe almost everything we own or think about buying.  By these definitions a bought home is not an asset, it is a liability.  A lot of people have bought in to what they've been told by Realtors, Banks, Big Box Home Centres and HGTV - that their home is the biggest asset they own...  It certainly is one of the biggest purchases that people make, but is in an asset?  A home, whether it be a condo or a stand-alone house, does have intrinsic value, but the bricks, wood, fencing, and countertops if neglected or without maintenance, are most likely depreciating in value over time.  The only thing that is truly increasing in value is the land value.... because God's not making any more land.  It is a scarce and limited resource.

Then there are the monthly costs.  Lets have a look at a $300000 house that someone might purchase... What kind of expenses does a house of that size have? That home owner would now have to pay the following things... these things are pretty much non-negotiable... they must be paid: Mortgage, Property Taxes, Insurance on the home, Utilities, and General Upkeep.  If you buy a house or condo with monthly fees, you can add those in as well, but lets assume there are no monthly condo fees. We'll also ignore Land Transfer fees and all the other costs that it takes to make a Real Estate Transaction.

If you add all those costs up, the house costs about $2150 per month to keep it in your name. Of that $2150, only about $400 of the monthly mortgage payment will go on the principle in the first few years or so.  Lets also not forget the 25% downpayment or $75000 that needs to be put down in order to keep the CMHC fees low... I hate extra fees.  After the $400 is deducted from the $2150, that adds up to about $1750 of monthly costs.  So for the initial $75000 that you put up, you now will pay $1750 a month in costs that will fill other peoples pockets.  Its actually quite an expensive liability that you've purchased.  This is not to say that you shouldn't buy a house, because we all have to pay to live somewhere, but if you think of it as a liability and a lifestyle choice as opposed to an asset, you begin to view it quite differently.

Another path you could take with that $75000 would be to invest it in something that has a higher growth rate than a house, and pays you either a rental cheque, distribution or a dividend as a shareholder.  It should be reasonable to rent a house for the same amount... lets say $1750 all in and then save the $400 per month that would have gone on the house principle and invest it somewhere instead.  It certainly adds more flexibility if you wish to move within a few years and don't want a significant amount of your equity tied up in a house.

What about appreciation of my home/property?  Well, the average appreciation of real estate has been about 3.5-4.5% per year in Canada for the last few decades.  This is in contrast to the 2-3% typical inflation we have in Canada.  What this says is that either housing has been very undervalued in Canada and the market values are steadily catching up, or housing prices are, or will be, overpriced and due for a correction.... I tend to believe in the latter case.  Much of this market appreciation has occurred due to historically low interest and bond rates, which control mortgage rates, and the sustainability of low rates is always in question.  There are hotspots like Toronto, Vancouver, and Calgary that may be due for a correction, and local markets will vary, but lets not fall into the trap that real estate values always go up... because as we've seen with our neighbours to the South, house appreciation is not a given.  If you are banking on the house appreciation game, then you are also playing the timing game, and timing can be a difficult game to play....

There are lots of reasons people might want to own a house: pride of ownership, control over where they live and for how long, the ability to modify a home to make it their own.  These are all good reasons to buy a home for your own living... But by my definition, it is not an asset.

from tinyhouseblog.com

Rule #3 Defining Assets and Liabilities

We aim to accumulate Cash-Producing Assets that increase their cash-flow over time at or above the rate of inflation.  This is one of our big overarching rules for our Financial Independence strategies.  At a later time, I will talk more about this strategy, but for now I want to tackle some definitions.    This strategy revolves around how we define things we own in our lives, and it is one of the rules where we tend to deviate from other financially-minded people.  We view almost everything we own as either an Fiscal Asset or a Liability.

Here are OUR definitions:

Asset: An asset is a thing that you own that produces positive cash-flow
Liability: A liability has negative cash-flow.... it pays you nothing or costs you money to own.

This sounds fairly straightforward until you start putting things you own in each of the buckets.  So lets list off some.

Some Assets would be:

• Rental Property 
• Stocks that Pay a Dividend 
• REITs 
• A Profitable Business you own or have shares in
• Bonds 
• Farm Land that is being rented for farming 
• Royalties from something you created, designed, or have the rights to 

Some Liabilities would be

• A Car
• A Home 
• Bare Land 
• Gold
• An iPhone
• Stocks that Don't Pay a Dividend
• A Television
• A Computer
• A Swimming Pool
• An Unprofitable Business
• General "Stuff"
• A Pet

While taxes and debt are also a liabilities, I will talk about those at another time as we treat them differently.  People often take exception of us putting a car, home, and swimming pool in the liability bucket.  Especially their home.  All of this things have intrinsic value so on a typical net worth statement, they would go in the Assets column, however the way we look at it, all of those things cost you money to maintain them once you own them.  So by buying them, you are also adding on a monthly-burden of other costs such as fuel for your car, taxes and upkeep for your home, a mortgage payment on bare land, a monthly plan for your iphone, cable for your TV, Internet for your computer, and chemicals for your pool.  You also need to store your "stuff" which may require that you rent or buy a bigger place to live in.   Its not to say that we don't own some of these things because we do, or have done so in the past, but we are very conscious of how much these things will add to our monthly operating expenses as a family.  These are not one-time buy-and-then-you're-done items.  They can add a lifetime of monthly costs to you.  Ultimately our goal is to minimize things in our life that create monthly-burden payments.

Gold and Stocks that don't pay a dividend are a bit special because many would consider them assets as they have a reputation for going up in value. Well, if you bought Gold at $1000 and it went up to $2000, how much have you made?  The Answer is $0 unless you sell it.  We don't count paper gains (or use mark-to-market valuations) as true gains like the banks do.  The very next day, your gold could go down to $900, and if you didn't sell it on the way down from $2000, now your gold is in a losing position.  Gold pays you nothing to hold it, the price can fluctuate up and down, and it never sends you a dividend cheque for all of your trouble and not to mention the risk you put up just to hold it.  I'm not saying you shouldn't buy some because it may make sense to you to do so.  Gold has appreciated in value quite a bit a these last few years, but there is nothing to say it won't go back down again.  This holds true for non-dividend paying stocks as well (Think Research in Motion - You only made money on it if you got in and out at the right time)  This is why we do not consider Gold, and Stocks with no dividends, assets.