Wakeup Call...

For those who are considering using debt to make your next big ticket purchase, think again! Just found a video from the Financial Post, showing you just how much the cost of debt really is. The problem is, financial institutions/retailers will implement all these tricks like introductory rates, smaller minimum payments, and even tell you that you don't have to pay for the first X number of months just to make a sale. What they don't make obvious, is the fact that the interest on the principal you owe is being compounded and you're paying a lot more interest than you have to because of the smaller minimum payments! Those plans sound more attractive than they really are.

APR% rates are frequently advertised but most will not show you the effective annual rate nor the sample interest calculations. To demonstrate how costly these payment plans can be, here's a video with numbers:

http://www.youtube.com/watch?feature=player_embedded&v=FGCAKyuXR6A

We all use debt every now and then, in varying amounts...hopefully neither of us will ever have to use those ridiculous minimum payment plans! The only way I would say use it, is if you actually have the money to make the purchase immediately but you are choosing to borrow because you are fairly certain that you can make more with your investments than the interest you are paying.


-TT

Fuel & Tires - Round And Round We Go!

Fuel economy seems to be the biggest rave lately. We have seen crazy ideas in the past few years, everything from low rolling resistance tires to a hybrid Porsche! (Porsche 918 Spyder for those curious individuals out there) There's even been studies conducted that shows you would save more gas using the A/C instead of opening the windows once you exceed 80 km/h (about 50 MPH) due to wind resistance.

Going back to low rolling resistance tires though, are they really worth the extra dollars? If you look at my chart below, the Michelin Energy Saver All-seasons cost a whopping $230 more than the regular OEM-equivalent replacement all-season tires - Bridgestone Insignia SE200's. For the purposes of comparison in this article, we will be looking at the prices from Canadian Costco only. The MPG figures are based on a 2009 Toyota Prius, fuel economy data were grabbed from a report on Tirerack.com (a reputable online retailer of tires and car parts/products based in the USA, link below). I have made my best guess for the missing numbers based on the Tire Rack numbers, these estimated figures are denoted with a "?" after the number.

The short answer is, yes the low rolling resistance tires do offer you enough of a benefit to offset the extra costs in purchasing the tires. Performance of these low resistance tires is also not a problem because the difference won't be noticeable if your driving is not too "spirited". It's been said that the earlier generations of low resistance tires encountered poor wet surface performance, based on the reviews and articles on Tire Rack it seems to have been fixed in later editions of low resistance tires.

Here's the chart from my calculations based on the prices ($CDN) from Costco and the test data from Tire Rack:

  * Ignore the grey...it's just the extra information not used

  

Please be aware that the last two rows are regular all-season tires, the first three rows are the low rolling resistance tires. The Bridgestone Ecopia EP100 is a summer low resistance tire, and the EP422 is the all-season version. The Bridgestone Insignia SE200 is the tire I used for base comparison, since it is a regular all-season tire just like the Goodyear Integrity I have assumed the MPG figures for those two will be the same if not very similar. I had to use the Insignia tires for my calculations because unfortunately Costco in Canada doesn't carry the Goodyear's. Ideally I would've used the Goodyear for my calculations because that's the tire used in the Tire Rack tests.

Focusing on the last two columns in my chart – highlighted in green, you will see that the fuel savings over five years far exceeds the extra costs for the tires. The time frame of five years was chosen because either one of two things will happen: 1) the treads are worn, or 2) the rubber is near the end of its useful life and large cracks are presents.

Wait! These fuel consumption numbers are from a Prius, will it apply to other cars?

You can use the same calculations but make sure you keep the ratios the same. So in here we see that the Michelin's fuel consumption is 0.892 times of the regular Bridgestone Insignia all-seasons, use that same factor for your car's current fuel economy data (e.g. 7.5 L/100KM) and recalculate the litres per year and dollar amounts. The conclusion should be the same and actually, the less fuel efficient your car is compared to a Prius, the bigger the net savings you should realize because the price of the low resistance tires are fixed but the fuel savings will grow with fuel consumption. Don't believe me? See the chart below. The fuel consumption numbers highlighted in yellow are the extrapolated numbers. Now the ratio method of extrapolating data isn't as accurate as real test data done with your car but you likely won't find data specific to your car online, this is the most logical method given the constraints of information.

 * Ignore the grey...it's just the extra information not used

Well there you have it folks, get low rolling resistance tires the next time you replace your tires!

Tire Rack test figures: http://www.tirerack.com/tires/tests/testDisplay.jsp?ttid=121

Have a wonderful weekend everyone, sorry I haven't been able to update this blog as frequently...things have been quite busy lately.

-TT

Is Early Retirement Possible?

Early retirement, who wouldn't want that! Here's an article I just read from the Financial Post:

http://business.financialpost.com/2013/06/01/extreme-saving-setting-a-retirement-goal-of-age-35/

This family of five wants to retire by age 35, quite an aggressive goal. It's highly improbable given the sacrifices they have to make on their quality of life, but I guess if you're disciplined enough it could be possible. Moral of the story is, cut back on unnecessary expenses and save every penny! Oh and of course, start early...as early as you can and let the power of compounding work for you. Now I am not suggesting you forgo your beers folks, woah woah woah let's not go overboard here but instead of kicking back a few pints at a pub, why not drink at home instead? Bottled beer may not taste as good as tap but it sure isn't watered down like in most pubs nowadays, and it's cheaper than going out for drinks. 

For fun, I have quickly put together a rough estimate of what you can expect to save up between you and your partner living under the same roof for 21 years. Yes yes...I know, it's the year 2013 and relationships might not last that long...but I assume you will find another partner at some point. Note that because these are rough figures, I didn't take into account the fact that you may need to buy replacement vehicles within the 21 years. Instead of breaking out the major maintenance items for the cars, I just lumped those costs into the row called "discretionary/misc". Also, be advised that I have made an assumption that both you and your partner would've saved enough to afford the down payment on the mortgage by age 24. Based on what I have saved up so far and it's just me alone, it is definitely possible!

Looking at this chart, it certainly seems possible you can retire between age 40 to age 50. It would probably be closer to age 50 if you factor in the cost of having children, and the cost of replacement vehicles during those years. The mortgage would've been mostly paid off at that point and with half a $million per person, combined with post-retirement investments on that $500k, your CPP, and company pension plans (if applicable) it is definitely doable. If you choose to have children and they turn out to be somewhat successful in their lives, you might not even need to put away that much for retirement! 

Bottom line is, for an early retirement to be possible it is necessary to be disciplined when it comes to saving. Keep track of your expenses and make a plan to save, don't just save whatever is leftover, make saving a priority as oppose to a "catch-all category". Tell yourself you need to save $ X each month and use calculations to forecast your retirement savings. It's never too early to start retirement saving!

-TT

That Time Of The Year Again!

Now that it's moving season, I figure this should be an appropriate time for this article! Just finished post-secondary and accepted a job offer? Dying to move out and become independent? Being able to live in a "nag-free" environment and having personal space is probably the dream of most new graduates, but is it wise and is it doable? – That's where a lot of them fail to consider thoroughly. I have actually encountered at least one person who had to move back home after her one year lease because she realized she could not afford it. She even took on a second job to help pay for everything.

Here are some "hidden" costs that may seem obvious to some but sometimes not considered:

• Cost of having your own car instead of using your parents' car, paying for your own gas, monthly parking space charges at the condo you are renting, and expenses related to maintenance. Surprisingly a lot of rental units do not come with parking, the landlord rents it out to other residents that require an additional space. You might end up renting the condo unit from one landlord and renting a parking space from another owner. 
• Additional food costs, due to A) not having your parents cook for you or fill the fridge with groceries, and B) you will be working a lot and so you can expect to order takeout more frequently.
• Shared utilities cost: you will now be paying for your own internet and cable most likely, hydro bill on the other hand will probably be covered by your landlord depending on who you rent from. Cable bill may not be that big of an issue since a lot of us stream or watch TV online.

So the above list should help in identifying whether it's doable, you will have to run some numbers for the condo you plan on renting. Now is it wise to move out right away? To be on the safe side, it may be safer to accumulate a sum of cash before moving out. You would then invest this cash while using it as a safety net in case anything unexpected happens, eg. your car might need repairs. There's a general rule of thumb, you should have enough cash to cover 6-months of expenses as a safety net. Depending on how risk averse you are, you could add to that time period of course. In fact, I believe you should have enough cash to cover all your expenses for as long as you will need to take to find another job in case this one fails. This means that it could be longer than 6 months depending on your career field.

Side note: Did you move at least 40km closer to your new employment location? You may be eligible to deduct moving expenses against your income for Canadian tax purposes. More information on what expenses are eligible can be found here:

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/219/

Happy Canada Day folks! 

-TT