August 30th, 2007, 9:15 pm PST by Greg
A while ago, I came across this rent-or-buy calculator. After playing around with it for a while, I learned two things: (1) I didn’t really understand what it was trying to display, and (2) the buying/renting distinction was more subtle than I thought. So, let me work through this…
Option 1: Buy
Let’s buy a $400,000 home. Let’s say we get together a $50,000 down payment and mortgage $350,000.
At the moment, the banks’ best lending rates are 6.25% on variable rate mortgages. Let’s assume (foolishly) that that will not increase over a 20 year mortgage. A mortgage calculator says that the monthly payment will be $2,542.
So, after 20 years, we own our home. Apparently, home prices don’t really increase that much, on average in the long-term. (I suspect the problem here is that after 20 years, your house is 20 years older, thus less desirable to potential buyers. It’s not relevant to compare new-home prices.) Let’s say the home appreciates at 2% after inflation. At the end of the mortgage, a compound interest calculator says that our home will be worth $594,379.
Option 2: Rent
Let’s use the mortgage payment of $2,542 per month. We rent a place for $1,500 (which should be comparable to what we could buy for $400k at the moment), and invest the other $1042. Start the investment account off with the $50,000 down-payment.
Like in my last money-related post, I’ll use 6% after inflation as the rate of return and an investment calculator gives us $649,364 after 20 years. A net worth of $55k more than if we had bought.
- Option 1 ignores property taxes, fees, and maintenance. Strata fees in particular are going to really add up if you’re buying a condo.
- In option 1, you might do really well if housing prices go up dramatically. Or you might get screwed. Basically, the problem is that you have a horribly diversified portfolio. You have one thing, your house, and are very susceptible to market fluctuations.
- Option 1 doesn’t take into account any improvements made that would increase the value of the house. It doesn’t count the cost of those improvements either.
- A home is about the least-liquid asset you can have. It may be worth $600k, but you have to sell it (and thus start renting) to get at that capital.
- After the 20 years, you’re definitely still paying rent in option 2.
- Option 2 assumes the discipline to invest without the threat of the bank breaking your kneecaps.
- There are probably some tax implications of buying that I don’t know about.
- There are any number of possibly-invalid assumptions there, but I’ve tried to hit a reasonable balance (except that thing about interest rates never going up: that’s nuts). The calculations are particularly sensitive to changes in the interest/return rates.
I don’t know, really. I just needed to work an example through. I guess the message is that buying a home isn’t the be-all and end-all of investing.
We can rent, invest, and relax.
August 26th, 2007, 11:21 pm PST by Greg
So, I rode up to SFU this afternoon. This is something I try to do once a week, but realistically get around to less than that. I tried riding to work for a while, but I’m not really very useful for an hour or so after the ride, so that didn’t really work.
I had ridden up two weeks ago after a long hiatus. If anybody had been there to hear me after I got past the SFU sign, they would have heard something like this:
pant… pant… gasp… “gonna die”
pant… pant… gasp… “gonna die”
This week went better. I said “gonna die” way less often than every three breaths.
Anyway, as I was grinding up the hill, I started to wonder how many calories I was burning. Even ignoring the forward motion, I was gaining a lot of height. Gaining height means gaining gravitational potential energy. Energy is conserved, and there was no other energy source around, so I had to be putting out the energy in return.
According to Google Earth, the Security booth at SFU is about 200 m above Curtis and Duthie. I weigh about 80 kg (which is part of the problem). So, my gain of gravitational potential energy was
E = mgh = 80 kg × 9.8 m/s2 × 200 m
= 156800 kg m2/s2 = 156800 J = 37451 cal.
So, that doesn’t sound right. I don’t think I need to eat 65 Big Macs to recover from the ride.
I seem to remember that there’s some confusion between calories and kilocalories when people talk about food. So maybe it’s 37 “calories”? If all I earned from the ride was half a nigiri, then I’m not exercising any more.
So, what the hell am I doing wrong there? I know I’m ignoring the forward motion but, as anybody that rides up the hill will tell you, forward isn’t the hard part.
August 25th, 2007, 10:41 am PST by Greg
So, after work last night, there was a birthday dinner for Kat’s uncle Sev. As always for birthdays, I hopped in the car and drove down to Ama’s house in Surrey
When I got there, I rang the doorbell. There’s usually a certain level of commotion in the house that can be heard from the front door that was strangely absent. I knocked again.
A couple of facts quickly started to come together: (1) I had arrived on-time for dinner at 6:30. (2) Dinner wasn’t at the place had arrived to. (3) I had no damn clue where dinner actually was.
No answer on Pam’s cell phone, so I sent Kat a text, which I believe was “Where the fuck is dinner? Not Ama’s?” Kat was good enough to leave the movie she was in and text back “Sun Sui Wah in Richmond!”
Then, some more facts joined the earlier three: (4) Kat had told me dinner was at Sun Sui Wah; I had totally forgotten and gone to Ama’s out of habit. (5) I knew how to get to Sun Sui Wah from the direction of our place, but was a little fuzzy on how to even get from Surrey to Richmond efficiently, let alone find the restaurant from a totally different direction. (6) Not owning a teleporter, I was going to be seriously late.
Luckily, Pam phoned at just that moment to ask if I was getting there soon. “No.” Her father gave me instructions for the drive. Luckily, my good auditory learning kicked in, and I got them about as fast as he could talk. I’m pretty sure he gave me the cross-street in Richmond incorrectly though. I had to phone Paul and have him check for me.
So, I got there about 45 minutes late, but only missed one course (either squab or quail, the family was undecided). Since it was a full 10-course banquet, that was pretty good. I took a bunch of pictures and all was well.
I’m sure there will be much mocking the next time I see the fam. Sigh.
August 12th, 2007, 6:18 pm PST by Greg
A lot of people seem to be talking to me about money recently. Like, a lot. I don’t know what’s up with that but, like questions from my class, I assume that if 3 people have asked, 30 have the question. So, here is everything you need to know to be financially secure. Seriously.
Start an investment account. My advice here is to go to one of the investment things in a bank: CIBC/Wood Gundy, BMO/Nesbitt Burns, or whatever. These have the advantage that if you move across the country, you can just move your account to a different branch. If you’re just starting out, they’ll probably put you with some schmuck that handles you and a thousand other accounts, but don’t worry about it.
The investment advisor will do a little general financial planning: financial goals, risk tolerance, etc. To my mind, it’s worth it to have them do this kind of stuff.
Invest 10% of your income. Have the investment guy/gal set up a monthly or bi-weekly withdrawal of 10% of your income from your bank account to your investment account. You’ll never notice it’s gone. Really.
If after six months, you think “boy I really feel poor without that 10% of my income,” I’ll buy your poor ass lunch.
Invest in mutual funds. Pick two mutual funds with as few adjectives as possible. That is, you want the “Growth Fund”, not the “Pacific Rim Manufacturing Fund”. All you’re doing by buying a more limited fund is limiting what your fund manager can do with your money. The fund manager knows what he/she is doing. You’re buying their expertise as much as anything else. Let them do their thing.
The only other thing you need to worry about is risk tolerance: high growth and high risk generally go together. Your financial advisor should point you to funds that match your risk tolerance. (Basically, go high risk over the long term and lower risk for short term investments.) Edit 11/2007: Watch the fees on mutual funds too. A fund that gets 1% better return, but charges a 2% fee is a loss.
Paying off debt is the best investment. Since lending rates are typically higher than investment earnings, it makes sense to pay off any debts (say, by doing the 10% thing) before you invest elsewhere.
If that’s going to take you a little time, first convert any credit card debt into something with a less-stupid interest rate.
Increase the 10% to cover your RRSP contribution. Have a look at what you’re allowed to contribute to your RRSP (it’s on a slip that comes back after you’ve filed your taxes). Get that amount into a registered investment and the taxman gives you 30–40% of it back. (Yay free money.)
If you’re reading this, you probably want the retirement money in a high-risk/high-yield fund since you won’t be touching it for several decades.
Don’t shuffle investments. The whole point of the mutual fund is that somebody smarter than you is doing the buying and selling for you. Do you know what Russian textile companies are going to be up to over the next decade? Do you care? No? Then piss off and let the mutual fund manager to his/her job. Don’t let your investment guy/gal talk you into selling one investment for another unless they have a damned good reason.
The only good reason I can think of: going from high-risk investments to lower-risk because you’re going to need the money in the medium-term.
The scary future. Get home/renters insurance for your shit. If you’re child-free and debt-free, you probably don’t need life insurance. You likely need long-term disability insurance, though. Your job may get you some of this for free.
Come to think of it, get yourself a will too.
Do whatever the hell you want with the rest of your money. Liquor, hookers, fast cars, whatever. Fuck budgeting, we’re all too stupid for that. Make sure there’s enough for rent and food and don’t go into debt.
Read The Wealthy Barber. What I just wrote there is basically a distilled version of The Wealthy Barber. It’s a fast read and has better explanations and more details than I have here. I’ll lend you a copy if you want.
Okay, that might seem like a longish list of stuff, but until you have kids or edge up on retirement, that’s just about all you need. The time needed to maintain this is like 2 hours/year.
In fact, if you only get steps 1–3 down, you’ll probably be fine.
The only other things I can think of: Buying a house shifts some of your investments from mutual funds to real estate. If you get married and have dissimilar incomes, you need life insurance and can shuffle some things between you to save on taxes.
The magic here is, of course, compound interest. Try the calculator on that link: starting at $0, contributing 10% of your income per year, enter the number of years until you expect to retire, and a 6% return. Six percent is pretty reasonable over the long term, taking inflation into account.
Remember: that 10% is in addition to your basic retirement plan. That’s “I’m retired and want to live it up” money. That calculation also assumes you’ll never in your life get a raise beyond the cost of living.
They say money can’t make you happy? Bullshit. I look at the investment summary they send me every month and giggle to myself.
August 6th, 2007, 4:02 pm PST by Greg
I recently (either through Digg of StumbleUpon) found an article 10 virtually instant ways to improve your life. Now, I don’t usually go in for self-help douchebaggery, but this one made some sense to me. For the impatient, the ten things are:
- Stop jumping to conclusions.
- Don’t dramatize.
- Don’t invent rules.
- Avoid stereotyping or labeling people or situations.
- Quit being a perfectionist.
- Don’t over-generalize.
- Don’t take things so personally.
- Don’t assume your emotions are trustworthy.
- Don’t let life get you down. Keep practicing being optimistic.
- Don’t hang on to the past… let go and move on.
It’s amazing how many people come to mind when reading this: colleagues, questionable supervisors, ….
Of course, the elephant in the room is actually noticing that you’re doing these things when you are. That seems to be the tricky thing.
Hmmm… Maybe I should just concentrate on one at a time and make real sure I’m not doing that one. Fuck… that’s being a perfectionist! 🙂
August 4th, 2007, 12:22 am PST by Greg
So, I haven’t blogged for a while. I guess I have been too busy.
The busy time started with Lisa, a friend of ours from North Carolina coming to Vancouver for a conference. Since she had some downtime, and it’s a damn nice city to be in, her partner Brian decided to come with her and make it a light-work vacation. Since they were coming, Kat decided to come to town herself to hang out with all of us.
So, it was a full house for a little while: Kat stayed for 4 days, and Lisa and Brian for 3 more. It was nice to take a mini in-town vacation.
Last Friday, I took Lisa and Brian to the airport, and hopped on a red-eye myself to go and see my parents in Ontario for a quick five day visit before having to return. I haven’t been back to see my parents at home for about two years. The four days I actually spent at their place was long enough to spend some time with them, and they got high speed Internet since I was last there, so the border would be under control.
The day before I left, their Internet connection went down at around noon: some problem at the ISP’s end.
You know when you’re walking around the house at night and the power suddenly goes off and all you can think is “fuck, now I’m in the dark.” Well, that’s pretty much how I felt. “Fuck, now I’m in Toledo and have to face that with no Internet to distract me.”
I’m not really sure how I got through my teenage years without going nuts or developing a chemical dependency. I suspect that Jeb and I managed to enter a balance of stupidity: stupid enough to entertain ourselves, not stupid enough to hurt ourselves.
Although, the time we made water burn came close.
Anyway, I’m back. Ready to face the end of the semester.