Thursday, 3 October 2019

Financing Your FIRE Lifestyle

We'll assume these are happy FI/RE flames.

Forgive me for preaching to the choir here but of course what good FIRE blog doesn't at least once mention the rampant abuse of a consumer culture that revolves around borrowing for your wants in less than an hour.

I could go to town on how horrible a financial decision it is to walk into a "Easyhome" or how morally bankrupt the "Chip Home Income Plan" actually is but I digress it's all been said before by smarter people than me with actual research and relevant quotes from important people in society.

So instead, I'll talk about how FIREwalkers such as myself take advantage of cheap and easily affordable credit: Financing, the Responsible Way!


The House:
Let's begin with the house. Pretty much the Canadian pastime is buying and rebuying a bigger and bigger home, and then downsizing to a smaller and smaller home until you die. The amount of money Canadians blow on real-estate is quite amazing - even I have bought a home using credit! The difference is I haven't sold mine to achieve higher square footage and/or keep up with the Joneses. Some FIREwalkers don't even want to buy a home and who can blame them? I wouldn't finance a home larger than $400k because I actually want to live my life, not live to work to pay down a mortgage. I got to that $400k number by multiplying my household income by 4. It's an anecdotal rule of thumb but it sits well with me.

Speaking of houses, if you find yourself entering the neverending online debate of whether or not to pay off your home in a low-interest rate environment, just do literally whichever side you want. They're both sound plans and nobody can predict the future. Paying off your home is a great financial decision. Investing in the stock market for the long term is a great financial decision. Which do you choose? Go with your gut (and your gut can tell you to go 50/50).

If you want to pull equity from your home and buy more houses to rent or invest in the stock market (This is called the Smith Maneuver), you are one of the more daring FIREwalkers to tread down this path. While the rest of us walk on cobblestone, you breed are the type take off your shoes and walk across burning coal. It can be done - but you gotta know what you're doing.

If you're interested in hearing more about the Smith Maneuver, check out Episode 4 of Explore FI Canada Podcast or read about it on Million Dollar Journey Blog.

Cars:
First off, it should be car. A singular, not a plural. My wife and I both have full-time jobs and one kid so far and we have made 1 car work. It is why my path to FIRE is much shorter than most because my transportation only costs $214.75 a month. I know people who spend that much on gas or insurance separately! Sorry, that was a sidebar...

So should we finance cars? Well I would if it made financial sense. For example, why would I use $5-10k upfront in cash and suffer the opportunity cost when I could just pay $88/month for the same duration of driving. Let's say the next two used cars you buy will last you 10 years each and the new car you buy will last you 20 years. Why risk it and go used?

Because financing new is not free, regardless of the 0% interest rates you might find. There are additional taxes and levies you have to pay. You will be required to pay for full coverage insurance so the lender is protected. Because a used car from 2014 is worth about 50% of its original value 5 years ago. Let's face it, buying new is not a financial decision, it's a peace of mind and ease of purchasing decision.

Every money blogger and their dog will find exceptions to everything I've said, but let's stick to one of the core principles of FIRE: Simplicity. For simplicity's sake, FIREwalkers should avoid financing cars.

The Cell Phone and it's Plan:
Under no circumstances should you finance your phone. You might be tricked into thinking your phone is "free" with a 2-year commitment. I can assure you - it is not. Like cars, phones lose their value very, very quickly. Whether or not you pay for a tab on your phone plan, you are paying an extremely high price for what is likely a half-decent phone plan. This is because you are subsidizing the phone you thought was free. I've curated a list of why you should buy your own phone and switch to Public Mobile like I did months back. Two phone plans that used to cost me $100/month now cost me $20/month (taxes and referrals included). That's a $80 difference a month for nearly the same service. Still think your phones are free?

Credit Card Churning:
This is truly one of the best goldmines surrounding the FIRE philosophy where Canadians well on their way to FIRE should immediately begin. Readers still working their way out of debt or trying to land their first job and build some credit are shit-out-of-luck on this one.

I'll admit, we just use our credit to get sign up bonuses so we can offset any annual fee or time associated with researching and setting these cards up. So far I've earned a few thousand bucks in gift cards and travel thus far. I've paid $0 since my spending didn't change and the cards I chose waived the first year annual fee. I may have paid a bit of interest @ 22.9% actually because it's not that big a deal and... just kidding. Of course I didn't. Shame on you if you thought that sentence had any truth to it. I'll make another post about my history of churning credit cards and resources for you to follow along.

Summary:
Do we responsibly finance a house? YES but under pretax household income x4
Do we responsibly finance a car? NO, TOO EXPENSIVE
Do we responsibly finance a phone? NO, TOO EXPENSIVE
Do we responsibly churn credit cards? YOU BETCHA!

Check in tomorrow, where you'll see just how lucky we all are.

So what else can we finance responsibly from a position of FIRE? Let me know in the comments below, I'd like to hear from some of you.

Ryan Myricks
Email me here: canadianfire1@gmail.com
Listen to me here: Explore FI Canada

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