When people find out that shortly after turning 29 we were mortgage and debt free, interesting assumptions seem to arise such as us eating canned tuna every day, or never taking vacations or going out.
In reality we do take several vacations per year, go out at least once a week, and as much as I enjoy eating tuna (usually in sushi form) we do still go out to eat regularly. Yet, doing all this while not earning massive salaries we were still able to have our mortgage paid off and be debt free shortly after turning 29.
In today’s culture there seems to be an acceptance that debt is normal, and to live a “normal” life you must be in debt. We hear about the average Canadian having $25,597 in consumer debt and think, “Hey, being in debt must be normal.” Or we hear about people in a massive debt crisis and at the point of financial collapse and think, “Wow, at least we’re not in that bad of shape. We must be doing okay.”
The reality is that by focusing on three critical elements, anybody can massively reduce their debt and enjoy the stress reduction and the drastic increase in wealth that comes with it, while still living and enjoying life.
How it All Started:
After graduating, my wife and I purchased a home and quickly felt the pain of the giant pile of money leaving our account every two weeks. I started dreaming of all the things we could do with that money once we owned the house free-and-clear. By renting, we could never live rent-free, but in a house, this was actually possible once the mortgage was paid-off.
After spending some time fantasizing of early retirement, more frequent vacations, and all the things we could do with the increased disposable income once the mortgage was paid off, it was time to get to work.
Step 1: Where am I bleeding…financially?
The first step was finding out where our expenses were coming from, and determining which of those expenses could be trimmed on an ongoing basis, while still allowing us to enjoy life (i.e. sushi and vacations).
Like everyone else, the last thing I wanted to do after work was spend hours entering receipts and writing up budgets. So, the ultimate goal was to find an automated system where receipts/expenses didn’t have to be inputted by me (i.e. having a software automatically download and categorize all my transactions) so that by spending just a few minutes every week I could quickly find out where my money was going and where the financial bleeding was taking place.
The 2nd objective was to have the system automatically warn me when I’m overspending in certain areas like going out to eat, or shopping.
I experimented with every tool that I could find, from creating my own spreadsheets, to using off-the-shelf accounting programs, to using different personal finance software and online tools.
These days, I use Mint.com to manage and automate all of the above (it’s also free). This lets me spend just minutes managing my finances every week, while knowing exactly where all the money is going, and warning me of any discrepancies, suspicious activity, and any areas that I’m in danger of overspending in.
Money has a way of being spent whether you’re consciously aware of where it’s going or not. By having an automated system like this in place, I was able to save hours every month by not having to draw up budgets or enter receipts, and ensure that as much money as possible was being put towards paying down the mortgage/debt quicker.
Step 2: Getting Aggressive
After obtaining financial awareness in step one, it was time to set an aggressive goal of how much of the mortgage/debt was to be paid off each month.
By knowing how much we actually needed to live on every month from step 1 (including some “fun” money), I determined that a good aggressive goal was to use 50% of our after tax household income on paying down the mortgage quicker (this is in addition to our existing monthly mortgage payments). Now before you stop reading because 50% sounds ridiculous, please hear me out as it’s really just about being honest with yourself when determining what items are a “want”, versus what is an actual “need” when thinking of buying something. If you followed step 1, you will quickly notice all the things you’re spending money on that can be cut to reach that 50% without sacrificing your standard of living and still enjoying life.
Now that we had the goal of 50%, here’s what we did:
1. At every paycheque, my wife contributed a set amount of money to a joint chequing account. This amount was determined in step 1 when we did our expense analysis, and is a figure that we both agreed upon.
This joint account was then used for all our spending such as groceries, fuel, restaurants, regular mortgage payments, etc. The amount that she didn’t transfer to the joint account was her own personal money that she could use however she wanted. This prevented a LOT of couple’s conflict as it gave her guilt free money that she could spend on whatever she wants whether it’s on a new pair of shoes, clothes, etc. We never got into fights about money because she had “her money” and all the expenses and debt payments were already taken care of first.
2. With every paycheque that I got from work, almost the entire amount (over 95%) went to a separate savings account which was used exclusively to pay down the mortgage/debt as quickly as possible. The remaining 5% was used for my own personal “fun” money.
Since we still wanted to have some fun with international travel, and had the occasional emergency such as the car breaking down, such expenses were covered by the joint account as much as possible. I would use some of my extra mortgage payment money to cover any difference.
By doing this, we were able to pay off the entire mortgage in under 6 years on a typical salary of someone in their 20’s.
Could we have been more aggressive? Definitely. But, this just goes to show that you don’t have to live without any vacations, and other fun experiences just because you’re being financially responsible. It is simply a matter of moderation, sticking to your goals, and not falling for the consumer trap.
What if you’re single?
Having dual incomes definitely helps, but you can still take advantage of many of the things married people have by living with roommates. You can purchase a house and rent some of the rooms to live almost rent-free right away. You can also split the cost of food by taking turns doing groceries and cooking. With your roommates paying for most, if not all of your mortgage, you can easily put 50% of your income towards paying down the mortgage debt, or investing.
Step 3: Avoid the Consumer Trap!
While step 1 and 2 are about gaining awareness and determining the goals, step 3 was quite possibly the most critical of all: avoiding the consumer trap. This is what made the saving rate of 50% possible.
This is easier said than done as companies spend billions every year trying to persuade us that what we “want” is actually something we “need”. When this happens, we as humans let our guard down, then we justify the purchase in our heads (I “deserve” that new car, phone, etc.) and that’s when the marketers and sales people go in for the kill.
There are many ways to avoid the consumer trap, and save money on the things we do actually need. While I cover these in greater detail on the BuildWealthCanada.ca blog, here are some key lessons that have allowed us to be mortgage and debt free in our 20s:
1. Read the top personal finance books. For example, I highly recommend David Chilton’s books: The Wealthy Barber and the Wealthy Barber Returns. The Wealthy Barber is a classic that got me started in thinking intelligently about money at a young age and built a great foundation of personal finance knowledge. His subsequent book (The Wealthy Barber Returns) is also a must read as it updates what was taught in the first book and provides some great additional financial wisdom that can be applied right away.
I also recommend The Millionaire Next Door by Thomas Stanley and William Danko as the book discloses the habits of the wealthy that you can try to emulate in your own life. You can use this book as a checklist to make sure you’re developing the correct wealth building habits.
2. Another critical component was focusing time and energy on areas that have the biggest impact on our financial wellbeing. For example, avoiding consumer debt like the plague, picking the right mortgage, and ruthlessly cutting car costs (as opposed to clipping 50 cent coupons, or trying to find a “deal” on consumer items that in reality shouldn’t be purchased in the first place).
These subjects can be a book of their own, so I will be covering them in greater detail on the BuildWealthCanada.ca blog and podcast. Be sure to sign up (it’s free) to get the latest video tips, podcasts to listen to on your commute to work, and articles that can help save you money, and become debt and mortgage free.