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Financial Coaching the Average Canadian Household (Part 2 of 6)

This is the second post in a series of six that walks through a theoretical exercise of coaching the “Average Canadian Household” to improve their financial situation.  In the first post, we did a deep dive in to the Average Canadian Household’s finances – looking at their income, expenses, and net worth.

In my coaching program, once we obtain some data from tracking the client’s income and expenses (essential and discretionary), we work together to figure out where we can focus improvements in their financial situation, generally prioritizing changes that are likely to to have the greatest impact.  In this post, let’s deep dive into the Average Canadian Household’s essential (vs. discretionary) expenses.  Why start with essential expenses?  Looking at the two donut charts below, “Essential Expenses” is 55.5% of the Average Canadian Household’s Gross Income (“gross” means before deductions such as Tax, Canada Pension Plan (“CPP”), and Employment Insurance (“EI”) contributions).  At the Net Income level (only the amount that is left over after paying mandatory deductions), Essential Expenses is a whopping 71.5% of overall net income.  This is why we will start here.  When we think about “essential” expenses such as food, home, and vehicle, it is not surprising to overlook them as high potential saving areas since they are deemed necessities.  However, how much you spend on housing, and what kind of car you drive will have a huge impact on how much you actually spend on essentials, which flows through to your savings rate and impacts the amount of time that you need to work to reach financial independence.  The other thing I want to note and say again on this blog is that I’ve listed a bunch of ideas on how somebody may go about decreasing their expenses.  That said, the whole list is not meant for everyone!  Each individual and family has to decide what are important to them and then spend on those accordingly (aligning spending to values) – guilt free, as long as they consider the “time for money” and “money for stuff” tradeoffs that we make each day (often times, unconsciously).

What are Essential Expenses?

Now, let’s dive a bit deeper to see what really makes up “essential expenses” for the Average Canadian Household.  Here is the breakdown for 2017:

Not surprisingly, the three largest essential expenses are Housing, Transportation, and Food.  Generally, it is a good idea to start optimizing the largest expenses first since even marginal changes in these big categories can make a huge difference to the household bottom line (savings).

Housing

As mentioned in my last post, using data on the Average Canadian household isn’t perfect.  In the housing category, it clearly shows that some Canadians own their own homes and some choose to rent.  Obviously with an individual household it would only be one or the other, however, I will discuss both here.

Whether you decide to rent or buy, the key to minimizing costs in the housing category is to not buy or rent more than you need / can afford.  There is a good quote that illustrates the benefit of this:

“If you will live like no one else, later you can live like no one else.”-Dave Ramsey

My personal situation is a good reflection of what this means.  I very intentionally chose to live below my means throughout my 20’s.  For housing, I chose to:

  • Live with my parents during University rather than live on campus (I was fortunate to study in my hometown of Edmonton, AB)
  • Live with my parents for a few years after graduating
  • When I eventually moved out, I rented a place that was well below my means

Because I did the above, I was in the position in my early 30’s to buy a car with cash and a buy a house without a mortgage.  I chose an unconventional approach initially and “lived like nobody else” so that I could “later live like no one else”.  Certainly not saying that nobody else owns their car and house outright, however, it is rare for those in their early 30’s.

When choosing where to live, consider what you value more:

  • Pay more to be closer to work and save time / money on your daily commute
  • Pay less by living further away from work and spending a bit more time / money on your daily commute

When comparing buying vs. renting from a financial standpoint, it is absolutely critical to consider sunk costs of ownership beyond just your mortgage payment (e.g. property tax, maintenance, insurance).

When buying a property, consider the following:

  • What percentage does your house make up in your investment portfolio?  This was the key reason why I chose not to purchase a home in my 20’s – I didn’t want a single, illiquid asset to make up >100% of my networth.  Now that I have accumulated more wealth, the purchase doesn’t look so big relative to my overall portfolio
  • Make sure you do your due diligence so you are less likely to have surprises down the road.  For example:
    • If you are buying a home, I have detailed my due diligence process in this post
    • If you are buying a condo, research the condo’s reserve fund and read the engineering studies that detail expected capital expenditures going forward – I have heard many horror stories about people who bought condos and later received “special assessments” for unexpected repairs to the buildings – sometimes to the tune of $20,000-$30,000 per unit
  • It costs more than just the mortgage payment (my point above on sunk costs of ownership)
    • As you can see below, when you own a home or condo, your mortgage payment is only part of the donut (54.8% on average).  You must not forget about property taxes, other expenditures, homeowners’ insurance, repairs and maintenance and condo fees – they really add up!

When renting a property, consider the following:

  • To evaluate whether you are getting a good deal, think of the rental from the landlord’s perspective by calculating the rate of return they are earning on their investment.  To do this:
    • Take your gross monthly rent and multiply by 12 to arrive at your annual gross rent
    • Figure out the property value – generally this can be easily found using city property value assessment maps online or by looking at comparable properties on a real estate search website like realtor.ca
    • Take your annual gross rent and divide it by the property value to get a percentage.  This percentage is the gross rate of return that the landlord is getting (before expenses).  To get a net return, you can decrease the numerator by property taxes (can usually be found online), maintenance expenses or condo fees (can be estimated or found online), and insurance.
  • If the return is sufficiently high and you plan to stay in that location for a significant period of time (5-10 years or more), then you may want to consider buying

Live alone or live with others

  • One way to decrease your housing expense is to live with others.  This isn’t for everyone and some people value their independence more than the cost and/or income associated with having a roommate or tenant.  There are a few ways to do this:
    • Live with a roommate and share the costs for a place – for example, it is generally cheaper for 2 people to share the costs for a 2 bedroom property vs. 1 person having a 1 bedroom property
    • Rent out part of your principal residence (e.g. bedroom, basement, etc.) – some people call this “house hacking”
      • I’ve heard of some people being able to rent out their basement and the rental income from their tenant cover their entire mortgage
      • Others take this to the next level and buy a multi-bedroom house or a multi-unit residential complex and rent out rooms or units – in some cases, the owner was able to completely offset their own living expenses and bring in additional income (effectively negative housing costs!)
Utilities

According to Statistics Canada data, the Average Canadian Household spends ~$2,484 on utilities each year.  From a house perspective this seems a bit on low, however, don’t forget that the “average” in the data includes not only houses but also rented or owned apartments and condos.  Some utilities in this case would likely be included within the monthly rent and condo fees.  My view on utilities is that if you can decrease your use of electricity, natural gas, and water without negatively impacting your life, why wouldn’t you!  There is a double benefit to your bank account and the environment from doing so.  Here’s the breakdown of the average utility spend per year:

I started putting down various ideas to reduce utility usage / increase efficiency and plan to write a whole separate post about that.  For now, check out the EPCOR website for some great efficiency tips that can save you money and the environment:  https://www.epcor.com/learn/efficiency-conservation/Pages/default.aspx

Transportation

The average Canadian household spends $12,707 on transportation each year – that is over $1,000 a month just to get around!

Here’s the breakdown:

Vehicle Operations

  • Similar to house ownership costing more than just the mortgage payment (e.g. property taxes, maintenance, insurance, etc.) the cost to keep a car on the road for the Average Canadian Household actually exceeds the average cost of the car itself!  Let’s break it down further:

A few ideas to optimize vehicle operation expenses:

  •  Gas
    • Drive a more fuel efficient vehicle
    • Use an app like Gas Buddy to optimize fuel costs – be careful about spending too much time on this since it usually isn’t worth your time (or gas) to drive across town to save a few cents per litre on a 50 litre tank.  I fill up at Costco only when I’m there – I never make a special trip
    • Drive less
      • Try to plan where you need to go to minimize driving
      • Try cycling or walking to destinations that are close to home – good for your health too!
  • Insurance
    • Get quotes from multiple companies
    • Bundle your car insurance with your home or tenant insurance to get a discount
  • Maintenance and repairs
    • Perform scheduled preventative maintenance on your vehicle so that you lessen the chance of larger things coming up (e.g. regular oil changes, etc.)
    • When you do need major work done, shop around – I like to do this in an efficient manner by sending the same e-mail to several shops requesting a quote for the work that I need done
  • Registration fees
    • No getting around these unfortunately
  • Tires, batteries, and other supplies
    • Shop around for deals
    • I ended up getting tires at Costco since they were high quality and good value – Costco also ended up being WAY cheaper than other shops for the semi-annual switchover (in Canada, we have winter tires for the ice/snow and summer tires)
  • Parking
    • Try to park further away – save a couple bucks and get some exercise
  • Licensing
    •  No getting around this unfortunately

Vehicles themselves

  • Looks like most people in Canada purchase their vehicles, however, some do lease

  • Purchased vehicles – here is the breakdown of average annual expense by vehicle type.  My advice here is to try to buy what you need.  Maybe you don’t need a Ford F-350 if you are just picking up groceries once a week from the store (I know, not really an Albertan thing to say).  Also, if it is possible for a family to get away with only having one car, it can lead to very significant savings (obviously this is a tradeoff though, and if it really decreases your quality of life having only one vehicle in the household, it may not be worth it) 
    • Trucks & SUV’s
      • I’m from Alberta and with the number of trucks I see on the road, it doesn’t surprise me to see that this category is #1 (exceeding cars and vans on a combined basis)
      • In my experience, I find that trucks and SUV’s are generally more expensive than cars – not only during the initial purchase but from an operational cost perspective (since they aren’t as fuel efficient)
    • Cars
      • My family of four grew up having 4-door sedans for the most part so I ended up buying a 4-door sedan.  People say that you “need” a van or an SUV for a small family, however, so far it has been working out great for us.  Let’s see what happens when we have two kids – maybe I’ll change my mind?
  • Leased vehicles
    • I’ve heard some people make the case for leased vehicles.  I guess if having a very new vehicle is something you value and you don’t drive a lot (able to stay within the km restrictions and not have to pay too much in overage charges), maybe this does make sense for you.
  • Rent
    • Don’t forget – you can always rent a vehicle if you don’t need it very frequently.  Maybe don’t buy a Yukon XL if you only need the extra space once a year for a trip to the mountains – just buy something less expensive and more fuel efficient for everyday use and rent that SUV for your annual mountain trip

Public Transportation

  • Public transit
    • The fact that the Average Canadian Household spends only $276 per year on public transit suggests that public transit is underutilized
  • Taxi / Other local passenger
    • Consider ride share services like Uber / Lyft to save cash on local passenger travel
  • Household moving
    • I’ve always moved without hiring help.  That said, I’ve only moved 3 times in my life.  My wife has declared that we will be hiring professional movers for our move to the house – she has moved 14 times so I guess that is fair.

Please see my related posts on ideas to reduce transportation expenses and buying a used car.

Food – Groceries & Household Items

We will talk about “Restaurants” in the next post on Discretionary Expenses but just so you know, here is the break down between Groceries and Eating out

Groceries

Some ideas to optimize:

  • Meal plan – plan your meals in advance to minimize wasted ingredients and the need to run back to the grocery store to pick up a missing ingredient
  • Take advantage of quantity discounts for non-perishables – a Costco membership has a pretty short payback period for a regular household
  • I’m all for spending on groceries since I get a lot of value and enjoyment out of high quality, home cooked, nutritious and delicious meals
Other Essential Spending
  • Rather than going into too much detail on the other essential categories (household, clothing, healthcare, education, life insurance), I’ll give some general tips here and write separate posts in the future going into more detail on how you can potentially save money in these categories:
    • Household / Clothing
      • Buy quality products that will last longer rather than cheap products that will have to be replaced regularly – this is also more sustainable for the environment
        • My go-to example here is hiking boots.  I paid $350 for a good pair of hiking boots because I know that they will last me 10+ years – I will get a lot of use out of them, and I value the comfort (waterproof and blister free) over price
      • Take care of the things you buy (preventative maintenance)
      • Think carefully about what you add to your household – we all have a lot of things we don’t even use that just take up space and will eventually take energy to donate / sell / dispose
        • I was watching a show on minimalism the other day and really liked the minimalist approach to building a wardrobe.  The minimalist featured said that every piece of clothing that he owned was his favourite.  So rather than having 100 shirts, he might have 5 but they are all his favourites
      • Buy in larger quantities to get quantity discounts (e.g. Costco)
      • Buy on sale (e.g. past season apparels)
    • Healthcare
      • Compared to our friends south of the border, healthcare is less of a financial consideration for us Canadians due to our public healthcare system (although we certainly still pay for it through taxes!)
      • For anything that is not covered (e.g. prescription medication, dentistry, etc.), if you have a work plan, get familiar with it
      • If you don’t have a work plan, weigh the costs/benefits of signing up for a healthcare and/or dental insurance plan 
    • Education
      • Save for your children’s education using a Registered Education Savings Plan (RESP)
      • Encourage your kids to get good grades in high school and college and maximize extra curricular activities – this sets them up well to apply for scholarships and looks great on resume!
      • I may be biased, but I am a big believer of staying local for your college / university education if you can.  You can save a significant amount of money on living expenses by living at home, and not to mention out-of-state tuition for some countries
        • If you want to go to an Ivy League school, consider doing your undergraduate studies locally and then going to a more prestigious school for your Master’s degree (if you choose to do one)
    • Life insurance
      • I am a fan of term insurance instead of whole life as I figure that my need for life insurance will decrease as my networth increases.  I plan on writing a dedicated post on insurance to detail my thoughts and analysis on the subject soon
    • Childcare
      • This category was minor for the Average Canadian Household (it wasn’t even big enough to justify a label on the donut chart on Essential Expenses at the beginning of the post).  This is likely due to the fact that childcare is only applicable to the subset of Canadian households that have kids.  Furthermore, it is only applicable to those who choose to put their kids in childcare and whose kids are of the age that they need childcare.  That said, it is a major expense for the small subset of Canadians who have young kids and require childcare!  Another thing that this expense category ignores is those parents who decide to decrease their work down to part time or take time off completely to raise their children.  The opportunity cost of those parents not working is definitely not reflected in the numbers and could very well be the largest “expense” of all
      • Ideas to decrease childcare expense:
        • Look at less expensive options like dayhomes
        • Share a nanny with a friend
        • Baby sitter swap – if you choose to work part time or not at all, take turns with a friend to care for your child and your friend’s at the same time

I hope this gave you some helpful takeaways on how to decrease your essential expenses.  We will shift gears and talk about Discretionary Expenses (if essential expenses are “the needs”, then discretionary expenses are “the wants”) in the next post.

If you are interested in my Financial Coaching Program, get more information on the program here and sign up for your free consultation.

Financial Coaching the Average Canadian Household (Part 1 of 6)

Fun fact: I took this picture at the top of Sulphur Mountain in Banff the day I proposed to my wife.  She passed the challenge of climbing to the top (no gondola allowed), so she was rewarded with a ring. Now she has to put up with me for the rest of her life!

I thought I would take the chance to run through what coaching the average Canadian Household would look like.  Through this process, I hope to give my audience a preview of what part of my financial coaching program looks like and some ideas of how they can make positive changes to their own personal finances.

As discussed on my homepage, Canadian’s aren’t saving enough!  Here is the proof:

I know, the chart is small and hard to read.  Let me give you a few highlights:

  • The average savings rate has been trending down for decades (see blue trend line)
  • The 2018 savings rate was the lowest on record since 1961

For a chart you can actually read, let’s just look at the last 10 years.

Key observations:

  • Savings has dropped substantially in the last 10 years
  • Savings rates recently are nowhere near where they need to be for Canadians to reach financial independence!  This means that the average Canadian will likely have to work longer and rely on Canada Pension and Old Age Security in their older years to get by.

It is my sincere hope for the average Canadian Household to increase their savings rate since you know from a previous post that savings rate is the most important financial metric that will determine if and when you reach financial independence.

Please note that this analysis is based on data from Statistics Canada.  This analysis is not perfect because there are certain limitations to using average data.  For example, it assumes the average household has 1.23 kids, rents 44% of their home and owns the other 56%, drives 1.5 cars, etc.  Obviously this doesn’t make sense, however, let’s look past these limitations for now and just focus on the big picture – the fact that Canadians aren’t saving enough.

Part 1: Tracking the Average Canadian Household Finances like a Business

Generally after the free consultation / meet and greet session, the first thing I like to do with my coaching clients is to start tracking their finances like a business.  I’ve detailed some of what I like track in this post.  For most people, it takes a couple months to get used to tracking expenses and start to get some meaningful data.  In this case, for the average Canadian Household, data is plentiful so I was able to get 8 years of data.  Here is what I came up with:

Income & Expenses Table

I was able to leverage my personal finance geek / spreadsheet skillset to come up with the table below that succinctly details the average Canadian Household’s income and expenses.  As you can see, income is positive, expenses are (negative) and the “grand total” at the bottom represents savings -unfortunately not so “grand” in the case of the average Canadian Household.

Networth Chart

Another important metric I encourage my clients to track is networth (that is, total assets minus total liabilities).  This is a good measure of total wealth that can be very motivating to track over time.  Here is where the average Canadian Household came up on networth (grouping in to different age groups and the overall average):

Financial Independence Chart

The following is what I like to call the “Financial Independence Chart”.  It visualizes the subtotals from the four categories in the Income & Expenses Table above and overlays a green line that shows how much of the client’s expenses would be covered if their networth was invested at a 4% annual rate of return.  As you can see, if the average Canadian’s networth was invested at 4% return, the investment income wouldn’t even cover their essential expenses, let alone their total expenses (what is required to reach financial independence).

Summarizing the data table and charts above – the average Canadian Household, in 2017 had:

  • Gross income of $87,341
    • Paid $19,541 in taxes, CPP, and EI (22.4% of gross income)
    • Spent $48,463 on essential expenses (55.5% of gross income, or 71.5% of net income)
    • Spent $17,981 on discretionary expenses (20.6% of gross income, or 26.5% of net income), and
    • Saved a measly $1,356 (1.6% of gross income, or 2.0% of net income )
  • Networth breakdown:

Networth = Assets $861,802 – Liabilities $142,302 = $719,500

After reviewing the data and charts above, I come to a few preliminary conclusions:

  1. Based on the average net savings rate of 2%, ignoring CPP and OAS, the average Canadian household would have to work 77 years to reach financial independence
  2. Real estate represented 42.3% of total assets and 50.7% of networth
    • It’s important to note that from a portfolio perspective, you should think about your real estate exposure as the total value of the real estate assets (not just the equity amount after deducting your mortgage) divided by your total networth (not total assets).  In my opinion, having 50%+ of your networth in a single, illiquid real estate asset in a single market is risky and limits your ability to invest in other investments that are likely to outpace real estate.  This is part of why I decided to rent vs. buy in my early 20’s and held off on buying a house until my early 30’s
    • Most of the data used above is based on the “Average Canadian Household”, however, I also have the ability to cut the data by age group and income quintile.  I couldn’t resist looking at the break down by age group here:
      • What I found was that households in the “less than 35 years” age bracket on average had real estate assets that exceeded their networth! 104% to be exact (using 2017 numbers)
      • This means that the average young household in Canada is extremely exposed to real estate.  That’s all fine and dandy when real estate is booming, however, a retraction in real estate could really deal a blow to these young households (don’t forget if real estate depreciates, the “asset” on your personal balance sheet goes down, but your mortgage doesn’t!).  Not to mention that these young households are probably pouring most of their capital into servicing mortgage debt and other expenses that come along with home ownership.  In some cases, this forces young households to take on additional consumer debt to cover other expenses (higher interest credit card debt, etc.)
  3. I am a bit concerned about the $50,000+ of “other liabilities” as this is likely high interest consumer debt (student loans, credit cards, unsecured lines of credit, payday loans, etc.)
    • Digging further into the data here, and not surprising, younger households and lower income households have a higher percentage of “other liabilities” relative to their overall networth
  4. Based on the amount of tax the average Canadian pays (combined with the low savings rate), it is likely that they aren’t taking advantage of various tax-advantaged accounts that could save them a significant amount of tax expense (specifically, Registered Retirement Savings Plans and Tax-Free Savings Accounts)
  5. Both the fixed and discretionary expense categories seem high relative to total income – this suggests the need to earn more and/or spend less.

There is a lot of room for improvement in the average Canadian Household’s finances.  In my next post, I’ll go through some action steps that could be taken to reduce essential expenses.

Here’s what I have planned for the 6-part series:

Part 1: Tracking the Average Canadian Household Finances like a Business (what you just read)

Part 2: Aligning Essential Expenses with Values

Part 3: Aligning Discretionary Expenses with Values

Part 4: Aligning Earning with Values

Part 5: Constructing a Savings and/or Debt Paydown Strategy

Part 6: The After Picture – How the Average Canadian Household’s Finances Might Look like After JBFI Financial Coaching

If you are interested in my Financial Coaching Program, get more information on the program here and sign up for your free consultation.

Sources:

We bought a house!

Well, we did it!  We pulled the trigger on our largest single expense yet – a house!  I’m not going so far as to calling it an “investment” just yet given it is our principal residence.

Why I chose not to buy a house in my 20’s: (in order of importance to me)
  • Concentration risk: I didn’t want a house (single, illiquid investment with high maintenance and transaction costs) to make up a significant amount of my overall networth / portfolio – in my early 20’s, the value of a house would have likely exceeded my networth!
  • I valued the lower cash costs associated with renting vs. buying
    • In hindsight this ended up to be HUGE since I diligently invested the cash savings from renting vs. buying.  However, if one didn’t save the cash cost differential from renting, he/she would have been better off buying earlier as it would have created “forced” savings
  • I valued the convenience of being close to work / downtown
  • In my singlehood, I valued not having to cut the lawn, shovel the walks, and do everything else that is involved with having a house
So why did we decide to buy a house now? (in order of importance to us)
  • The key reason is that our values have changed.  Now that we are married and have a son, our values have shifted away from the convenience / low maintenance of a downtown condo toward wanting more space and a nice neighborhood
  • It felt right – buying a house is a very emotional decision! A big part of why we bought is because we really liked the house we saw, and just wanted to have a home of our own
  • We’re not as concerned with “concentration risk” noted above given that the house now makes up a much smaller proportion of our networth compared to if we bought in our 20’s
    • One important thing to note here is that we did not overextend ourselves financially.  We ended up buying a house that was well within our means (around 25-30% of what we would have qualified for at the bank)
  • We wanted to feel motivated to make improvements to the place that would benefit us over the long term (if we rented, we probably wouldn’t feel as settled in as if we were to own).  We also found that a lot of houses on the rental market were not well taken care and not necessarily in places that we wanted to live
  • Tax-exempt capital gains!  Since we are using this property as our principal residence, we will not be subject to capital gain tax when we sell it.  Per the Canada Revenue agency website:
  • We have a long term time horizon and plan to live in this house for at least 10+ years.  This makes the economics of the purchase more favourable since various one-time and transactional costs are amortized over a greater number of years (for example, realtor cost, legal costs, and inspection cost)
  • COVID has made our apartment feel smaller!  With three adults and a newborn in a 2-bedroom condo, you can imagine that working / studying / caring for baby can be challenging at times
Our due diligence process:
  • The search
    • My wife and I sat down together to figure out a list of “needs” and “nice to haves”, including preferred vs “blacklist” (less safe) neighborhoods
    • In finding the right neighborhood, I did geek out a bit to try to use “big data” to isolate neighborhoods that met our criteria
      • The City of Edmonton website has data files available for download that show every single property tax assessment in the city (we are talking >100,000 homes!)
      • I filtered out the type of home that we were looking for (e.g. single family detached home)
      • I filtered out homes that were on large lots since a large yard was important to us (> 600 m2)
      • I sorted the list by average distance to downtown (each individual assessment data point gave GPS coordinates so I was able to use math to approximate the average distance to my workplace).  It is important that I am decently close to downtown since I plan on riding my bike to and from work for most of the year
      • Obviously, the neighborhoods closest to downtown (shady “blacklist” neighborhoods aside) sold at a premium to comparable neighborhoods further out
        • After filtering out the shady neighborhoods and then searching for neighborhoods with an average assessment value that was within our target price range, I started to get a really good idea of which neighborhoods we should be targeting
    • We set up a search on realtor.ca that identified homes in our price range in our preferred neighborhoods
    • After looking through hundreds of properties online, we set up viewings and worked with a realtor to view 6 properties
    • The house we ended up making an offer on stood so far above the others we viewed that we put an offer on it right away
      • I don’t know if it was just a coincidence, but we ended up buying in the neighborhood that was at the top of the list once we applied the various filters described above
  • Rent vs. buy analysis
    • Although we had a strong preference for owning a home going forward, we still looked at the rental market to assess value and if there was a deal to be had.  Through our analysis, we found that rental properties in our price range had gross annual rents (before expenses) of between 2.3% and 8.4% of the assessed property value – this equates to net rent (after considering estimated property taxes and maintenance costs) of between 0.3% and 6.4%.  For our place specifically, the estimated gross rent equates to approximately 5.0% and 6.0% (between 3.0% to 5.0% after considering property tax and maintenance).  Therefore, it made sense to capture that return by owning instead of renting.  If we really saw a stellar rental deal and a place we loved, we definitely would have considered renting for a bit longer before buying.  Also, it was nice to have such flexibility.  My wife and I agreed that unless we found something that we were 100% comfortable with and excited about buying, we would continue renting until then
      • We did find one property on the rental market that looked like a stellar deal but it was indeed too good to be true.  It was a $1.3 million house in a fantastic neighborhood that was renting for $2,250 per month (that is around 2.0% of property value, and only about 1.0% after considering the ~$1,000 of property taxes that the owner had to pay).  After maintenance, the owner would probably lose money!  We later found out that the owner was only renting it out for a short term (3 months) before demolishing it to build a new house in the summer.
      • On other homes that had lower “rental returns”, after further inspection we found that in a lot of cases, the places were just expensive due to their location (and not necessarily a house that we would enjoy living in)
      • The other interesting observation from this analysis was that generally, the lower the house value, the higher the rental return in percentage terms.  This is interesting:
        • Out of the houses that met our # of bedrooms and bathrooms criteria, the range in
          • rents was $1,395 to $2,500 (the most expensive was ~1.8x the least)
          • assessed values was $215,000 to $940,000 (the most expensive was ~4.4x the least)
          • It seems that there is a fairly clear “floor” and “cap” on rent prices, however, the relative “floor” and “cap” on values is much different
          • Based on this analysis, if I were to look at purchasing a rental property, I would likely look in the lower price range in order to realize a higher rate of return.  That said, I’m sure there is more to the story here – for example, if you buy a low priced home in a less than desirable neighborhood I’m sure you are more likely to run into issues (e.g. tenant turnover, vandalism, etc.) that increase the risk profile of the property – I guess it is true what they say: the higher the risk, the higher the return
          • If I were looking to buy a rental property, I would also try to broaden my search to include other cities and even countries.  I’ve heard of many people in the financial independence community being able to buy rental properties and realize as much as 12.0% in gross rent (or 1.0% per month)
  • The home inspection
    • I can’t believe that some people choose to skip this important step!
    • Our inspection report cost $575
      • On a percentage basis, this represented less than 0.12% of the overall purchase price of our home
      • I’m MORE than happy to pay 0.12% to make sure that there is not a significant issue with the house that could cost several percentage points to fix later on!
    • Luckily our inspection report came back very clean based on my discussion with the home inspectors.  Just a few minor maintenance items and non-urgent repairs were recommended but nothing large enough for us to request a price adjustment from the sellers
  • The mortgage
    • Although I decided to pay cash for the house (more on this below), I still engaged a mortgage specialist to set up a home equity line of credit “HELOC”
  • The current owners
    • Although our realtor mentioned that it was not usual practice, I requested to speak with the owners to directly ask some questions that we had about the house.  Not only did this give us a feel for the current owners of our house to be, it gave us perspective on the house that we wouldn’t have had otherwise.  Here are some of the questions that we asked (and responses):
      • Have you or the previous owners ever had any water problems or electrical issues?
        • Luckily the answer was no
        • Also, we found out that the house was owned by the same group of family since it was built in 1983
      • Please provide a list of maintenance and improvements done over the years, and the names of companies that completed the work
        • The owners were meticulous in this respect – we found out that they had invested over $90,000 in the house in the last few years and had very good record keeping (cost, who did the work, etc.) 
        • I also asked if they had extra paint and hardware since they recently repainted and installed hardwood – they did and agreed to leave these behind for us 
      •  How much are the utilities every month?
        • Again, the owners were meticulous in this respect and were able to provide several years of utility bills (this was good so we could get a sense of heating and cooling costs).  The meticulous record keeping reminded me of my own expense tracking spreadsheet
      • If you still have the manuals for the appliances, can you please leave them behind?
      • Do you have a trusted neighborhood tradesmen that you would recommend?
      • Any lights that require non-standard bulbs?
      • Any issues with crime in the neighborhood?
      • Any trouble with rodents or insects?
      • Anything that should be fixed before we move in?
      • What do you like / dislike about the neighborhood (any favourite places?)
      • How many kids come by at Halloween? (an unconventional way of figuring out the demographics in the neighborhood)
        • They said 50-90 kids!  I was very surprised by this since I know some other neighborhoods in Edmonton get less than 10 kids
      • In addition, we asked a handful of house-specific questions that I won’t list here
        • They also graciously agreed to give us a walkaround to show us various things about the house – e.g. working the irrigation system, showing us where the shutoff valves are, etc.
  • The lawyer
    • We received a few recommendations from our realtor and mortgage specialist, reviewed google reviews, sent a few e-mails for quotes, and then landed on a firm that we were happy with that agreed to a fixed price engagement.  They also gave us a discount since it was a referral from our mortgage specialist.  What does the lawyer do?
      • Review draft documents and work with the sellers’ lawyer to prepare final documents to complete the sale
      • Handle the transfer of funds via their trust account
      • Land title office search, transfer registration and mortgage registration
      • Tax search
      • Review Real Property Report and advise on whether Title Insurance is required / advised
Paying cash?  Are you mad?
  • I chose to pay cash for my half of the house
  • I am 100% certain that I will be criticized by those in the Financial Independence community and will likely hear things like:
    • “Why would you pay cash when interest rates are so ridiculously low?”
    • “If you can invest for a rate of return that exceeds your mortgage interest rate, why don’t you just do that?”
  • So why did I pay cash?
    • I felt like it wasn’t a bad time to take some cash off the table in the equity markets (time will tell!)
    • I set up a HELOC so I am able to borrow back the money (up to 80% of property value) to opportunistically invest (in public or private markets) whenever it made sense – when I do so, my borrowing to invest will be tax deductible, effectively converting my mortgage to be tax deductible (in Canada, we call this the “Smith Maneuver” – more on this below)
  • I do feel a bit silly right now with my equity allocation sitting around 30%, however, will look to aggressively deploy cash over the next several years – this should be easy to do without a mortgage payment or rent
The Smith Maneuver  
  • Since mortgage interest on your primary residence is not tax deductible in Canada like it is in the US, I decided to perform what has been keyed the “Smith Maneuver” when buying my house
  • Effectively what this involves is:
    • Buy the house with cash and then open up a home-equity line of credit (“HELOC”) that can be used (secured by the home) to buy investments
  • Luckily, per my last quarterly update post, I had quite a bit of cash on the sidelines in anticipation of buying a house soon.  I also ended up selling some of my non-registered portfolio to make the purchase – was able to do so in a way that avoided triggering significant capital gains
  • Disclaimer – borrowing to invest is an advanced personal finance strategy that is not for everyone.  Before considering this for yourself, think carefully about your risk tolerance, time horizon, and consult investment and tax professionals to make sure you do it right! 
  • Initially, I plan to just own the house outright.  To be honest, I’m in no rush to deploy the available credit on my HELOC based on where equity markets are right now.  That said, I will look to opportunistically do so when I feel the time is right (either back in the equity markets or in private investments)
    • As noted above, I calculated that I am effectively getting a 3-5% after tax / low-risk return on my equity by choosing to own instead of rent at this point (based on what a comparable house would rent for).  That said, I won’t be in too much of a hurry to redeploy the funds into an alternative investment unless I feel that I could exceed this return on a risk-adjusted basis
  • Even when I do decide to enter the equity markets with a portion of my HELOC, I don’t plan to push the limit.  Technically I can borrow up to 80% of the home value to invest, however, I think I personally would only be comfortable going to 30-50%
  • More on the Smith Maneuver here: https://smithmanoeuvre.com/what-is-the-smith-manoeuvre/

What has COVID-19 done to personal finances in Canada?

Over the last week or two, I have been preparing a series of upcoming posts where I will walk you through a deep dive into the average Canadian household’s personal finances.

During my research, I stumbled upon an interesting tidbit that I figured warrant a short post.  The Canadian household savings rate in the second quarter of 2020 was the highest it has been in the history of available data from Statistics Canada (since 1961)!  28.2%!  During a pandemic!?  See the chart below:

What happened here?  From what I have read and can tell, although employee compensation dropped in 2020, generous government support programs such as Canada Emergency Response Benefit (CERB) likely exceeded income decrease.  At the same time, Canadians were forced to pare back their expenses as various restrictions (work from home, travel restrictions, businesses not being open) prevented people from spending what they normally would on transportation, travel, fast food, fine dining, etc.  Economic uncertainty also generally result in an increase in savings as people become more cautious and want to build some cushion to weather the uncertainty.  The opposite is true when the economy is booming – people are more comfortable with saving less and spending more.

Government transfer payments aside, I think this massive spike in savings during a global pandemic is a good illustration that Canadians do have the capacity to increase their savings above pre-pandemic levels – the average savings rate for the 5 years preceding the pandemic was a meager 3%.

More reading:

https://www.fraserinstitute.org/blogs/spike-in-household-savings-rate-only-temporary

https://www.fraserinstitute.org/blogs/spike-in-household-savings-rate-only-temporary

https://www.bnnbloomberg.ca/canadians-focused-on-savings-and-debt-not-spending-poll-1.1547281

Canada’s Household Savings Rate Plummets Lower After Government Supports Slow

Why Systems and Habits are More Important than Goals

2020 is over

Reflecting over the last year and trying to focus on the positives, I am very grateful that I was able to work from home for most of the year (not in the office or out on business travel) so I could be there for my wife during her pregnancy and spend time with my newborn son who arrived in November.  My heart goes out to those of you who have been negatively impacted by COVID-19 over the last year.  I’m looking forward to when this virus is behind us and we can continue with the new normal. 

A new year brings new resolutions

It’s the time of the year where people set audacious goals to lose weight, save money, etc.  Unfortunately, a lot of people who set goals are unsuccessful in their pursuits.  A likely cause of this is that most people are too focused on the end-goal itself and aren’t giving enough thought to the habits and actions that it will take to get there!  

When thinking about your New Year Resolution, I encourage you to think beyond the goal itself – focus on the system that you can put in place that will allow you to achieve the goal.  To quote James Clear, “You do not rise to the level of your goals.  You fall to the level of your habits”.  Simply put, the goal itself is not enough to get you there, you need a system whereby you create habits that allow you to take action towards your goals.  Habits that involve taking action towards your goals are crucial to make progress towards those goals. Similarly, bad habits that prevent you from taking action towards your goals will definitely hamper progress.   Habits and individual actions can seem small on a day-to-day basis, however, they can compound over time to produce great results (or the opposite if we are talking about bad habits).   

“Success is nothing more than a few simple disciplines, practiced every day; while failure is simply a few errors in judgment, repeated every day. It is the cumulative weight of our disciplines and our judgments that leads us to either fortune or failure.” ― Jim Rohn

The concept of smaller actions compounding into great results is called “the aggregation of marginal gains” and was popularized by Sir Dave Brailsford who turned around the British Cycling team.  The team went from having a single gold medal in its 76-year history to winning 7 out of 10 gold medals in track cycling in the 2008 Beijing and 2012 London Olympics.  He also led Britain’s first professional cycling team to win several Tour de France events (The more complete story here if you are interested: https://hbr.org/2015/10/how-1-performance-improvements-led-to-olympic-gold)

So what is my advice when thinking about your 2021 resolutions?
  1. Identity: Start with the kind of person you want to be (your identity) – not necessarily just in one year but several years down the line
    • It helps to visualize your future self and think in present tense like you are already there.  For example:
      • I am financially independent 
      • I spend plenty of time with my family and friends
      • I contribute to causes that are aligned with my values
      • I am healthy  
  2. Set SMART goals (explained below) that will serve as “stepping stones” to get to your final identity.  Some people say to scrap goals altogether, however, I am of the opinion that it makes sense to have some milestones / goalposts as you move towards your ultimate identity above.  Goals allow you the opportunity to celebrate small wins along the way.   
  3. Create daily habits and actions (i.e. a system) that align with your goals and your identity – this is the most important step.  Without daily habits and actions, you will never achieve your goals or identity.  Examples:
    • Side business: commit to working a minimum of 1 hour a day on my side business 
    • Health: run a calorie deficit every day (calories in < calories out) 
  4. Don’t spread yourself too thin: When setting goals, it is important that you keep the number of goals to a reasonable level.  Given each of your goals will be competing for your most valuable resource, your time, it is important that you focus on only the most important things you would like to accomplish. 
  5. Don’t just focus on your finances and your diet: In my post “Enjoy the Journey through a Balanced Approach“, I tried to emphasize that Health, Wealth, Love, and Happiness are all required for a fulfilled life.  People tend to overemphasize the “Health” and “Wealth” goals and forget about the “Love” and “Happiness” goals.
  6. Play the long game: Bill Gates once said “Most people overestimate what they can do in one year, and underestimate what they can do in ten years.”  Don’t be discouraged if you don’t accomplish as much as you expect in a single year.  Similar to compound interest, it takes a while to realize the full benefit of the aggregation of marginal gains.
What are SMART goals?
  • Specific
    • Bad – I want to reduce my debt
    • Good – I want to reduce the total balance on my credit cards by 50% by the end of 2021
  • Measurable
    • Bad – I want to save money
    • Good – I want to save 50% of my after-tax income in calendar year 2021
  • Achievable
    • Bad – Be the richest person on earth by the end of Q2 2021  
    • Good – Reach financial independence by 2030
  • Relevant
    • Bad – Goals that are not aligned with your identity 
    • Good – Goals that are aligned with your identity 
  • Time bound
    • Bad – I want to save 50% of my after-tax income 
    • Good – I want to save 50% of my after-tax income in calendar year 2021

I’ve designed my coaching program as a system that can be used to reach financial goals.  The system focuses on:

For more information, reach out to me at jonathan@jbfi.ca.

 

How to Buy a Used Car

I didn’t buy my first car until my early 30’s, 32 to be exact.  This doesn’t mean that I didn’t drive.  Read my post here on how I optimized my transportation expenses through my 20’s.  Shortly after we found out that my wife was pregnant with our first child, we decided that we would value the convenience of having a car.  I did a bit of research and less than a month later, we had a car.  Here are the steps I took to buy the car:

  1. Figured out what kind of car we wanted.  We wanted a larger four door sedan that was safe, comfortable, and reliable.  My wife and I landed on the Toyota Camry. That said, we decided we certainly didn’t need a new car so we looked for used. Having a single make and model in mind makes the search WAY easier since it really allows you to compare apples-to-apples (maybe not Royal Gala to Royal Gala since there are different trims and years, but close enough and not Apples to Oranges – e.g. a Hummer and a Prius).
  2. While watching a movie one night (I like to do things like this while watching movies), I tried to find every single used Toyota Camry in the province of Alberta.  My main sources of information were Kijiji, Facebook Marketplace, Autotrader, and a template e-mail that I sent to every single Toyota dealership in Alberta.  I found 162 cars.  I started a spreadsheet (as any good financial geek would) and inputted the following data on each car:
    1. Year
    2. Model trim (e.g. in this case LE, SE, XLE, Hybrid, etc.)
    3. # of kilometers
    4. Asking price
    5. Website link
  3. Knowing very well that cars depreciate in value but not necessarily in a linear fashion (generally depreciate the most in the first year or two of ownership), I thought I would plot data points to see if I could model the depreciation curve of the Toyota Camry.

A few observations from this exercise:

  • As you can see, there is a clear inverse correlation between number of km and price (generally as the number of km increases the price decreases – that makes sense and is aligned with what everyone knows about depreciation)
  • You can see a bit of a trend line of downward movement between 0 and 100,000km and then it seems to flatten a bit around that $15,000 mark (I noticed that there were some cars going for $15,000 that had 100,000kms and others in the same price range with 200,000km)
  • So how did I find value
    • To me, good value meant low price per km
    • Cars below the trend line you could say were undervalued (their price being lower than the average car with comparable mileage)
    • I found the market wasn’t pricing in the premium trims – when you buy a brand new Toyota Camry, you can pay twice as much for the premium models (e.g. XLE, XSE) than for the base models (LE and SE).  Based on my analysis, the used car market was not pricing in the premium trims (in some cases, I was able to find premium models that were selling for less than basic models in similar mileage range)
    • Looked for inefficiency in the market
      • Generally from what I saw, the dealerships were always around or above the trend line (i.e. higher pricing).  The dealerships also didn’t deviate too far from the trendline (they know the market)
      • The private sellers were all over the place and these made up a lot of the outliers that were way off the trend (either asking way above or below the market value implied by the trend line)
    • Ultimately, the car I ended up buying was a 2012 Camry XLE (the large gold bubble on the chart above)
      • This car was for sale by a private seller (trying to exploit the inefficiency!)
      • The car plotted below the trendline even though it was the “premium trim”
      • The car was listed for $15,000 and had 70,000 km on it (we negotiated down to $14,000 fairly easily)
      • There were comparable cars (same make/model/year) in the same price range that had DOUBLE the number of km on them.  Given this car was at the point on the graph where the depreciation curve flattened, it suggests that I may be able to drive this car for a few years and sell it for a similar value!  I’ll take it!

Once I negotiated with the seller, I quickly did the rest of my due diligence to make sure everything looked good and there were no red flags:

  1. Ran a quick Carfax report with the VIN# https://www.carfax.ca/
  2. Had an inspection done at a local Toyota Dealership
  3. Got a bank draft from the bank
  4. Took it for a test drive
  5. Bought it
  6. Registered it
  7. Drove it home

The only thing I will try to do differently next time is to get a car that is slightly more fuel efficient for city driving.  I find that the Camry gets very good fuel efficiency on the highway (especially for a V6) at about 7.0L/100km, however, the city gas mileage is not great (~10L/100km).  Though overall, we are really enjoying the car – no regrets on the purchase! 

Ideas to Reduce Transportation Expenses

After taxes and housing, transportation is generally up there on the list of significant household expenses.  Similar to some other parts of my life, I took an unconventional approach to optimize my transportation expenses.  I’ve detailed this below, not for people to use as a guide, but more to share my experience and how this approach has and will continue to save me a lot of money.  A lot of people don’t realize how much a car actually costs when you add it all up: 

  • Depreciation
  • Insurance 
  • Maintenance
  • Interest (if financed)
  • Opportunity cost on equity tied up in the car 
  • Roadside assistance 
  • Parking
  • Gas 
  • Registration 
  • Opportunity cost on renting out the parking stall 

For some people, not having a car is a non-starter – they need a car (e.g. due to their work or where they live) or they just really value having a car.  That’s perfectly fine, to each their own.  

I chose not to buy a car until I was 32 years old.  I thought that if I could eliminate a major expense category (even if it was just for a few years) I would be able to kick start my savings and accelerate my journey to financial independence.  It was never my plan to be car-less forever.  Looking back I am quite surprised I was able to go as long as I did without a car (16 years since getting my drivers license).  

How did I get around without a car? 

  • I lived close enough to work to walk
    • When I originally moved out of my parents house, I was very intentional choosing where to live.  I found a place that was within walking distance from work – with a grocery store on the way home.  This eliminated a need for a car for most of the week!
    • If you live in a city and relatively close to work/family/friends, this can save you a boatload of money.  Not only did I not need a car (hundreds of dollars per month savings), I didn’t even need a bus pass (~$100 / month in Edmonton)
    • When choosing to live downtown, I paid a premium over the rent I may have paid being further out (or could have paid the same and got a nicer place further out), however, I decided that I valued my time more and being closer to work and not having to commute were important to me
    • An added benefit of walking was the exercise.  My daily walk to and from work allowed me to get a baseline of 30-45 minutes of exercise each day and was a good time to think on the way to work and unwind on the way home
  • I rode my bike
    • I love cycling and chose to ride my bike all year round in Edmonton (yes, I’m one of those crazy ones).  A picture from 2017 to prove it: 
    • I once cycled to work when it was -46°C/-50.8°F with the wind chill.  At that temperature, I wore my snowboard goggles so my eyes didn’t freeze!
    • After University, while I was still living at my parents house, I would ride my bike ~10 km each way to and from work, all year round.  Similar to walking, I thoroughly enjoyed the added benefit of the exercise and the fresh air – the best way to start and end my day!  I found that, even on the snowiest and coldest of days, I could still cycle to work in less time than it would take for me to take public transit (bus alone or bus/light rail transit combo)
    • Nowadays, even though I have a car, I still ride my bike for leisure and to visit family and friends within the city
  • I used public transportation
    • All throughout University and the early years of my career (before I figured out I could cycle to work or just live closer!), I took public transit, specifically the bus and the light rail transit system in Edmonton, or “ETS”
    • In my view, the worst part of taking the bus was the waiting time – I found that the bus was very often not on schedule (not necessarily the fault of the drivers, but rather often weather / traffic related).  Technology has improved this significantly through time as the buses are now equipped with GPS trackers so you can check the status of the bus before you leave home
    • Some people are above taking the bus and even embarrassed to take public transit.  If you are one of those people, I think you care a bit too much about “what other people think”
    • I found the bus ride itself was quite enjoyable. I would often enjoy a cup of coffee while I read the news or a good book or catch up on e-mails 
  • I used rideshare services / taxis
    • I mostly stuck to public transit unless I was in a rush, in which case I would take a taxi or an Uber
  • I borrowed my parents’ cars – given my parents lived close by in the city, I would sometimes borrow their cars when needed.  Unlike when I borrowed their cars in high school, I filled them up with gas and occasionally washed them.  Thanks Mom and Dad! 
  • Lastly, I rented cars
    • Just because I didn’t own a car, it certainly didn’t mean that I didn’t want to drive around.  I love driving and going places on weekends   
    • I rented cars very often – since I lived downtown, there were several car rental companies within walking distance from my apartment
    • Similar to my housing “rent vs. buy” analysis, I ran the numbers on car ownership.  I concluded that it was cheaper to rent a car every single weekend vs. owning a car and parking it downtown.  When you rent a car, you have:
      • A nominal per-day rate – I generally only rented on weekends where the per day rates were much lower (~$15-$30/day)
        • In my case, depending on the month, my costs were mostly or completely offset by the fact that I rented out the parking stall that was included with my apartment for $175 / month (heated / underground parking close to a nearby university and downtown)
      • No car payment 
      • No insurance cost (I used a travel rewards credit card that included free rental car insurance)
      • No money tied up in a depreciating asset  
      • No maintenance costs 
      • No annual registration fee
    • Other benefits of renting cars:
      • Always get a newish car that is full of gas when you pick it up
      • Never have to wash the car or maintain it (no twice a year tire rotations, oil changes, etc.)
      • Can tailor what type of car you rent based on your needs (e.g. I got a big SUV when I had multiple people to transport, got a nice Mercedes to drive down the coast of California, got a van for moving, got a hybrid if I wanted good gas mileage, etc.)
      • A great chance to test drive various cars before buying one

Here is a collage of various cars that I rented over the last several years:

If renting was so great, why did I buy a car?

  • Convenience eventually took over – I always knew that once I was married and had kids, I would value the convenience of having a car.  I made a guilt-free decision to buy a car in April of this year, a month after we found out my wife was pregnant with our son.  Definitely no regrets so far, it has been great
  • I’ll detail my used car buying experience in my next post 
  • I’ll still consider renting cars in the future if I need a specific vehicle (e.g. a van or a truck) or if I will be putting on a significant number of kilometers – since the depreciation of the vehicle for a long mileage trip may exceed the cost to rent:
    • I once rented a brand new Volkswagen Golf and put on 8,132km over 23 days (drove it down to Arizona and back up the West coast of the US)
      • Cost for the rental = $538.36 = $23.41 / day = $0.06620 / km
    • Another time, I rented a Toyota Yaris in Australia and drove 6,270km from Sydney to Cairns and down the East coast of Australia – another great road trip!
      • Cost for the rental = $498.41 or $0.07949 / km

As a car owner, there are still yet a few things one can do to minimize transportation expenses – for example: 

  • We chose to be a 1 car family instead of a 2 car family (so far!) – obviously this is a significant saving
  • We bought a used car rather than a new car to avoid the initial steep depreciation in the first couple of years 
  • We paid cash for the car rather than financing it and incurring financing charges and interest 
  • Maintenance
    • We bought a reliable car that is less expensive to maintain (Toyota Camry) 
    • We take it easy on the car – for the most part, we avoid putting the pedal to the floor and slamming on the breaks
    • We conduct regular preventive maintenance 
  • Fuel economy
    • We fill up with gas at Costco – generally we find that the cost of gas at Costco is 10 cents / litre less than elsewhere.  That said, we only fill up at Costco when we are there anyway
    • We are smart about driving – when we have to go multiple places we will route out to try to minimize backtracking.  Also we don’t drive across town to save $2!
  • Insurance
    • We bundle our tenant and automobile insurance policies to save money
    • We don’t drive to work – I still walk to work and my wife works from home.  This saves gas, parking, and insurance costs (generally your insurance premiums are less if you do not commute daily and if your mileage is lower)
  • Parking
    • We have parking included in our apartment rental and don’t drive to work

Other ways that you can save money on transportation are:

  • Carpool – if you choose not to live close to work, carpooling with a co-worker or a spouse can save a significant amount of money and is better for the environment

I hope this article gave you some ideas of how you can potentially save money on transportation expense!  

Enjoy the Journey through a Balanced Approach

I once read a great post on the site “Wait but Why” that illustrates how finite our lives really are by displaying our lives in years/months/weeks.  Here is the post for your reference: https://waitbutwhy.com/2014/05/life-weeks.html.

This helped shape my view on how to go about approaching financial independence.

First let’s talk about the two extremes:

  • Work very hard and save aggressively to hit financial independence as soon as possible
    • I’ve read about some people in the financial independence community that were so focused on hitting a specific networth / financial independence number quickly, they worked and saved to the point where they deprived themselves of any day-to-day enjoyment – which led to depression in some cases.
  • Spend aggressively since You Only Live Once, “YOLO”
    • It may be fun in the moment but this could mean a lifetime of working to fund the spending.

I decided that a balanced approach fit my life and values best and that I wanted to spend my time on things that were most important to me.  For this, I think about my life in four main categories – Health, Wealth, Love, and Happiness.  This is what the breakdown looks like:

If my life were a table, these would be the four legs.  If one leg breaks, the table falls over.  To make sure that my table / life doesn’t fall over, I set goals based on these categories and track my progress to ensure that I am maintaining balance in my life.  If I were just to focus on the accumulation of wealth at the detriment of my health, love, and happiness, what would be the point?  Life needs to be more than working for the weekends.  You need to consciously set aside time for the big things in your life that are important to you.  I hear so many people say that they are “too busy” for this or that.  The truth is, if something is important, you can make time for it.  Let’s run some quick numbers on this:

  • Let’s say you work 40 hours a week
  • It takes 1 hour a day to commute to and from work
  • It takes 1 hour a day to get ready for work
  • You sleep 8 hours a night

Sounds pretty jammed right?  Probably not much time for yourself?

WRONG – There are 168 hours in a week (24 hours x 7 days)
(-) 56 hours sleeping
(-) 40 hours working
(-) 5 hours commuting
(-) 5 hours getting ready
= 62 hours (that’s enough time to work 1.5 more full time jobs! It works out to be 9 hours a day on average)

Of course there are other things that have to be done throughout the week (e.g. grocery shopping, cooking, cleaning, etc.), but still there is a lot of time left over at the end.  I would encourage everyone to think about what is most important to them and prioritize the most important activities.  Put them in your calendar if it helps.  If you’re like me, this includes things like spending time with friends and family, cycling, walking, playing the piano, and working on a passion project.

One time saving tip is to look for synergies.  A “synergy” is an interaction or cooperation giving rise to a whole that is greater than the sum of its parts.  What this means in practice is finding ways to increase your time efficiency by combining activities.  For me, an example of this would be going for a bike ride with a friend.  This covers health (exercise), love (time with friends), and happiness (doing something I love, cycling).  If we talk about work/investing/entrepreneurship along the way we can even cover off my fourth category (wealth)!

So for those of you who are pursuing financial independence, try your best to balance working and saving aggressively with spending time and money on things that are important to you – this will allow you to enjoy the journey much more.  I personally prefer to have a slightly longer journey to FI if it involves a much more enjoyable ride.

Housing Expense: Rent vs. Buy?

As I wrote my last post on My take on rental properties, it got me thinking about another related topic – the question of whether to rent or buy a house.

For the average household, housing is the second largest expense (after tax of course).  That said, it is important that we all spend some time thinking about our decision to buy a house or rent.

Most people assume that it is always better to buy if they have the means since they’ve probably been told one of the following:

  • If you rent, you are just throwing money away / paying your landlord’s mortgage
  • You better buy, so you can build equity!
  • Home prices only go in one direction – that is UP!  So don’t miss the boat

There is a great book I read a few years ago that goes through this decision in quite a bit of detail – it is called “The Wealthy Renter”.  It goes through the decision in a lot more detail than I plan to go through here.

The common “myths” above imply that owning is always the optimal decision, however, it is important that we run the numbers to ensure this is true.  Home selection (especially when deciding on a primary residence) also goes beyond the financials – there are other emotionally driven factors that we should consider.

First, let’s weigh some of the pros and cons of owning and renting:

  • Pros of owning:
    • You have a home that is truly yours that you can do whatever you want with it
    • You can’t get evicted from your own home (as long as you can make the mortgage payments!)
    • Forced savings – for those who are not disciplined in saving money, owning a home and making mortgage payments “forces” you to save and build equity (through the initial down payment and the ongoing principal portion of the monthly payments)
    • Potential for appreciation of home value
  • Cons of owning:
    • Significant upfront and ongoing financial commitment
    • Significant real estate market exposure (often people, especially young people, will buy a house that has a value that is greater than their total net worth).  This seems okay because everyone is doing it, however it is pretty risky from a portfolio diversification perspective
    • Significant transaction costs – you have to pay a lawyer every time you buy or sell a property, and potentially a realtor when you sell a property
    • Ongoing maintenance costs – roof, windows, plumbing, furnace, etc. 
    • Annual property tax – for example, 0.9% of the property value every year in Edmonton
    • Illiquid asset – can sometimes take a while to sell a property
    • Potential for depreciation of home value
  • Renting pros:
    • Lower financial commitment
    • Can invest the money that would otherwise be tied up in home equity
    • Flexibility to move/ travel for an extended period of time without having to worry about selling a house
    • Option to try out different neighborhoods
    • Switch from place to place without incurring significant transaction costs
  • Renting cons:
    • Don’t get that warm / fuzzy feeling from owning your home on your own land
    • You can be forced to move at a time that’s suboptimal for you if your landlord chooses to vacate you
    • Less flexibility to “make it your own” – your landlord might not be as excited about orange walls as you are

Now on to the financial analysis:

As I stated in my previous post on “My take on rental properties“, my wife and I are currently renting a 2 bedroom, 2 bathroom apartment.  Since we recently had our first child, we too have been talking a lot about moving into a house, and whether we want to rent or buy.  As part of this analysis, I built a comparison tool using Google Sheets.

  • To do this analysis, I picked a house for rent in Edmonton and compared the “renting” scenario to the “buying” scenario
    • Renting assumptions
      • Cost to rent (per month) = $2,100
      • Tenant insurance (per month) = $50 (tenant insurance is generally less than homeowner insurance since you are only insuring the contents rather than “contents + structure”)
    •  Buying assumptions
      • Property value: $643,000
      • Annual property tax: $5,996 (0.9% of the property value per year, $500 / month)
      • Time horizon: Let’s assume we plan to hold this property for the long term (say 20 years).  Generally a longer time horizon makes the economics of owning more favourable since one-time costs will be amortized over a greater number of years
      • Mortgage: for now let’s assume that we use leverage since this is the norm for most people buying a home.  Assumptions:
        • Down payment: 10%
        • Mortgage term: 20 years (let’s assume the mortgage is completely paid off by the end of the time horizon to make the math easier)
        • Mortgage rate: 3.50%
          • I know interest rates are low right now, however, we need to consider what our borrowing costs may be over a longer term.  As far as I know, unlike the US, it is quite rare to get a 25-year fixed rate mortgage in Canada
      • Appreciation: per my last post on rental properties, the appreciation over and above inflation over a 40 year time horizon in Edmonton was 0.5%
        • I would be careful about including significant inflation over and above the rate of inflation.  The price of housing in real terms (adjusted for inflation over time) will fluctuate based on the supply and demand for housing in each region / community.  Let’s also not forget that past performance is not indicative of future performance.  Just because one neighborhood or city may have had significant appreciation over and above inflation historically, it doesn’t mean that this will continue forever
      • Maintenance costs: $4,500 / year (works out to ~0.7% of the purchase price per year)
      • Taxes: Given there is a principal residence capital gain tax exemption in Canada, there is no tax payable on capital gains on your principal residence.  Unlike the US, mortgage interest is not tax deductible in Canada
      • Realtor cost to sell: 3.0%
        • I’ve read that the typical range is 3-7% in Canada
      • Legal costs to buy and sell: $1,000
      • Homeowners insurance: $150 / month
    • Common assumptions (applicable to both the buy and rent scenarios)
      • Utilities: $350 / month (for power, water, gas, and garbage pickup)
      • Inflation: I have excluded inflation in this example so everything is based on real terms   

Results of the analysis:


When comparing the cost of renting to the cost of owning, it is clear that renting is significantly cheaper in this example:

  • Total cost to rent over the 20 year time horizon = $600,000
  • Total cost to own over the 20 year time horizon = $1,214,471
  • At first glance it appears that renting is cheaper than owning by $614,471 over a 20 year period

Now this isn’t exactly fair, why? Because there is a big difference between what the renter has at the end of the 20 years and what the owner has:

  • The renter has $0 (when he moves out, he gets his security deposit back from the landlord and moves on)
  • The owner has a house at the end of the investment period!
    • Recall that the owner paid $643,000 for the house
    • At the end of the 20 years, the house is worth $710,448 (recall that we said the house appreciates at a rate of 0.5% over and above the rate of inflation)
    • We said that the owner would pay 3% to a realtor to sell (3% x $710,448 = $21,313)
    • We said that the owner would pay $1,000 in legal costs when selling the property
    • The net proceeds from a sale would be $710,448 (-) 21,313 (-) = $688,134  

Recall we initially said that renting was cheaper than owning by $614,471.  Now if the owner were to sell the house at the end of the 20-year period, he would receive $688,134 based on the assumptions above – effectively making them better off owning (see calculations below).

  • Adjusted cost of ownership =
    • Total cost to own from table above = ($1,214,471)
    • (+) sale proceeds of house = $688,134
    • Total net cost to own the house = ($526,337)
    • Comparing to the total cost to rent over the 20 year period ($600,000), it now looks like owning is ahead by $73,663

Now this is more in line with traditional beliefs that owning is less expensive than renting in the long term.  That said, we are still ignoring one very significant consideration – the fact that when you own a house, a significant amount of capital is tied up in the equity of your home.  If you are a renter, rather than this equity being tied up in your home, you can invest the excess cash.   

The cash required to own a home is significantly higher than renting:

  • Initially – when you first buy a home, you are required to fund a down payment (generally 5-20% of the market value of the home).  This amount is significantly more than the up front cash required to rent, generally just a one-month security deposit.
  • Ongoing – Your monthly cash requirements are also much greater when you own a home.  This is due to the fact that there are significant sunk costs (that you will not get back) when you own a home (e.g. mortgage interest, property tax, maintenance, insurance).
    • As you can see, the monthly cash cost of buying a home ($4,750) is almost double what it costs to rent ($2,500)

For a true apples-to-apples comparison, let’s say that the renter invests the excess cash.  Assume that the renter can invest the excess cash at an after-tax return of 3% over and above the rate of inflation (a conservative assumption given that it is below historical returns for a balanced portfolio).  

  • Initially, the renter invests the same amount as the buyer’s down payment
  • On a monthly basis, the renter invests an incremental ~$2,250 (the amount of cash it costs to own over and above what it costs to rent)

Now let’s look at the numbers again at the end of the 20 year time horizon:

  • Red line: Recall the owner had net proceeds of $688,134 from selling the house
  • Blue line: The renter, given that he invests the excess cash in other investment instruments yielding a 3% return, would have $852,194 in his investment account

Now let’s look at the total net cost of renting vs. owning: 

This implies that renting is $164,060 cheaper over the 20-year time horizon ($684 / month).

Going back to the reason for writing this post, ultimately what we want to find out is whether it is financially more sensible to rent or to buy.  When you buy a house, in addition to the sunk cost of home ownership, you also invest equity in the house (initial down payment and principal payments on the mortgage).  It is important to consider that if you chose to rent instead of buy and you invested the cash differential, you could be significantly better off (assuming a 3% return on your investment portfolio vs. 0.5% home value appreciation – disregarding inflation).  These assumptions reflect the fact that a balanced portfolio of stocks and bonds has generally outperformed average residential real estate appreciation historically.  

Quickly, a comment on each of the myths stated at the beginning of the post: 

  • If you rent, you are just throwing money away / paying your landlord’s mortgage
    • Not necessarily true – as you can see now, the sunk costs of home ownership can be close (or higher in some cases) than renting
    • In this example, the sunk costs of owning the home (which are not recoverable) average $2,381 / month (close to the $2,500 all-in cost to rent)   
  • You better buy, so you can build equity!
    • You can build significant equity by renting – IF you are disciplined in saving to invest the excess cash that you would have otherwise paid to own.  Furthermore, you can choose to invest in a more diversified portfolio (e.g. stocks / bonds / ETFs) that potentially has less risk than a single real estate investment in a single market.  A portfolio of public investment securities would also have superior liquidity, given the lower transaction costs and higher ease of converting the portfolio into cash when needed 
  • Home prices only go in one direction – that is UP!  So don’t miss the boat
    • We all know this was disproven during the 2008 global financial crisis where homes in certain locations decreased in value by 50%+

I’m not saying that renting is always better than buying.  The single biggest takeaway from this post is that when you are comparing renting vs. buying, you need to compare apples-to-apples and take in to account ALL factors, including investment income that a renter could earn by investing the cash that he doesn’t have to fork out for a down payment and more expensive monthly expenses along the way.

Like everything else in personal finance, the decision to rent or buy is very personal and there is no right answer.  A financial optimizer may look to do whatever the numbers say, however, somebody who prioritizes other qualitative factors in their decision may have another view.

My wife and I chose to rent an apartment for now (mainly because we valued the close proximity to work and didn’t value a yard or a bigger living space before having kids).  We will look to purchase a house eventually, not only because the numbers are likely to look favourable with a longer time horizon, but emotionally, we do want to own a house – a place where our family can truly make our own.

Either way, I think you should at least look at how the numbers stack up before making your decision between buying and renting.  For many of us, this is usually the largest financial decision of our lives.  As usual, if you would like help running the numbers, or just to chat/debate on this topic, feel free to reach out to me at jonathan@jbfi.ca.

    My Take on Rental Properties

    This is one of those posts that might stir the pot in the financial independence community.  I want to be clear that I am certainly not opposed to real estate investing, I just think that people need to be careful and fully aware of the various risks associated with real estate investing before they dive in head first and buy six properties.  I personally have not made any real estate investments (other than Real Estate Investment Trusts and the purchase of my principal residence) to date, however, I may look to do so in the future if I find a rental property that has a risk adjusted return that I think is high enough to justify the market exposure and illiquidity.  I’ve seen a lot of people in the personal finance community succeed with real estate investing, in addition to those who invest in traditional asset classes and run their own businesses.    

    I’ve spent most of my career working in institutional private investments where a large portion of my time is spent performing due diligence on potential investment opportunities.  Applying my institutional investment knowledge to smaller retail investments (such as rental properties) gives me an interesting perspective.  

    Why does everybody think real estate is such a good investment?

    • Short answer – real estate always goes up (until it doesn’t – remember the 2008  financial crisis?)
    • Leverage – real estate is the only asset class I know of where you can lever up 20 to 1 (maybe only 10 to 1 these days given tightening mortgage requirements).  To properly compare real estate to other asset classes, it is necessary to compare apples-to-apples and adjust for leverage, and other associated costs 
    • Forced savings plan – a lot of people who don’t have the discipline to save money are able to still do so through the purchase of a home (since the principal portion of their monthly mortgage payment is effectively savings)

    A lot of people buy rental properties after doing some quick back-of-the-envelope math that may not take into account all of the considerations.  I’ve tried to think through a reasonably complete list of things that you will want to think about when buying a rental property:

    • I decided to use our apartment as an example to see what type of return my landlord is receiving by renting to us:
      • Rental income: $1,650 / month
        • What we are currently paying for a 2 bedroom + 2 bathroom condo in Edmonton, AB, Canada
      • Property value: $350,000
        • This is the average of three condo’s like mine in the building (based on current list price) 
        • To find the value of a house, I usually check out the City of Edmonton’s property tax appraisal website (https://maps.edmonton.ca/map.aspx?lookingFor=Assessments\By%20Address).  The property tax appraisal value is not always equal to the market value of the property, however, is generally a good proxy  
      • Annual property tax: $3,264, which works out to 0.9% of the property value per year (or $272.00 / month)
      • Time horizon: Let’s assume we plan to hold this property for the long term (say 20 years).  Generally a longer time horizon makes the economics more favourable since one-time costs will be amortized over a greater number of years
      • Mortgage: for now let’s assume that we are using leverage since this is the norm for most real estate investors.  Assumptions:
        • Down payment: 20%
        • Mortgage term: 25 years
        • Mortgage rate: 3.50%
          • I know interest rates are low right now, however, we need to consider what our borrowing costs may be over a longer term.  As far as I know, unlike the US, it is quite rare to get a 25-year fixed rate mortgage in Canada
      • Appreciation: let’s assume 2.0% per year (the long term Bank of Canada inflation target)
        • In Edmonton, most people of my age have parents who bought a house in the 80’s for around $100,000 that is now worth around $400,000.  Seeing this, you probably think to yourself – wow, 4x my money, where do I sign!  But let’s dive deeper into this.  If you bought a house in 1980 for $100,000 and it is worth $400,000 today, what is the actual compounded rate of increase over that 40-year period?
          • The answer?
            • 3.52649% BIG WHOOP
          • Really?
            • Yes 
          • How?
            • Well the math based on a simple future value calculation is (1+0.0352649)^40 x $100,000 = $400,000
          • The other thing to consider is that this is a nominal increase (i.e. includes the impact of inflation over time).  The actual real (inflation-adjusted) increase in the value of the home is much less (especially considering that inflation was very high in the 80’s).  When I ran the numbers, even I was surprised. The following numbers are from https://inflationcalculator.ca/alberta/ , however, there is also a good inflation calculator on the Bank of Canada website: https://www.bankofcanada.ca/rates/related/inflation-calculator/

          • This basically shows that a $100,000 house in 1980 is equivalent to a $328,118 house today.  This means that out of the 3.5% property appreciation I mentioned above, 3.0% of that was inflationary impact, leaving a real return of only 0.5%!  
      • Property management: 10% of gross rent
      • Maintenance costs: $497.75 / month (condo fees per the real estate posting – works out to ~1.7% per year)
        • I’ve read that maintenance costs average 1-4% of the home’s value per year  
      • Taxes: 30% of net income, 15% capital gains tax (see disclaimer below – I am not an accountant)
        • Unless held within a corporation, I believe (don’t quote me) that net income from renting out real estate (after expenses) is added to an individual’s income at their marginal tax rate 
        • In Canada, you will also have to pay tax on the capital gain of a real estate investment if it appreciates over time.  Here I have assumed that the tax rate on capital gains is 50% of what it is on income.  The actual calculation is a bit more complex but this is a good proxy
      • Vacancy: 2.8%
        • I’ve assumed that the house will be vacant for 1 month every 3 years
        • Some people forget to consider the fact that the place may not be rented 100% of the time.  Chances are once you purchase a place it will take some time to get the first tenant in and there may be some downtime between tenants   
      • Realtor cost to sell: 3.0%
        • I’ve read that the typical range is 3-7% in Canada 
      • Legal costs to buy and sell: $1,000 

    Based on the assumptions above, here is the math I worked out using a Google sheets template that I built:

    Scenario 1: Internal rate of return with 80% leverage
    Scenario 2: Internal rate of return without leverage (assumes 100% cash purchase)

    A few observations:

    • The “unlevered gross” return has two key components
      • Income return from gross rents (e.g. $1,650 x 12 = $19,800 / year)
        • $19,800 ÷ $350,000 = 5.65%
        • I have assumed that this percentage of the property value sticks (so the rent will increase in dollar terms over time to keep up with inflation) 
      • Appreciation return: assumed to be 2% (inflation, to be conservative)
    • Leverage has a huge impact
      • As you can see, leverage is accretive to your overall returns as long as your borrowing rate is less than your expected investment return
      • In the scenario with leverage, each of the costs have a bigger negative impact on overall return (since the initial investment amount funded in cash is smaller) 
    • Maintenance cost is the largest negative contributor to returns, however, it is often overlooked in back-of-the-envelope calculations (this is generally more front of mind with a condo investment since the condo fee is a significant monthly expense; but not as transparent with houses since they are usually more lumpy costs – e.g. roof, windows etc.)
    • Taxes – in this example the tax drag is just under 1% – again, often overlooked
    • Overall the nominal (includes inflation) “net” return is between 3.3% (unlevered) and 4.1% (levered)
      • At a 2% inflation rate, this implies a real return of only ~1.3-2.1%  

    The bottom line is, if you are buying a house, I think you should run a detailed analysis of the numbers.  Where I think you need to be careful:

    • Leverage
      • If used correctly, it can be a very powerful wealth building tool.  When your expected investment return exceeds your borrowing costs, leverage can really increase your returns given you are able to capture that spread on the money that is borrowed.  Additionally, interest paid on debt used to lever an investment is often tax deductible, which effectively lowers your borrowing cost on an after-tax basis (widening the spread further)
      • Where I think people need to be extra careful, it to really think about their exposure in terms of total exposure (not just the cash that they need to fork out as down payment, but the total value of the property).  For example, if you are buying a $400,000 home and putting 10% down, that is a $40,000 investment for you.  But when you think about market exposure, all $400,000 is exposed to market fluctuations.  That said, if there is a 10% market correction after you bought the $400,000 home with a 10% down payment, that entire original equity investment  is gone.  I question whether some real estate investors are thinking about their exposures this way (especially those who have several rental properties).  A longer time horizon does generally help as it increases the likelihood that the market will recover after a downturn
    • Liquidity –  Some properties provide cash flow that is barely positive, or worse yet, negative cash flow.  If your original assumptions change (income decreases, expense increases, or worse, both), then you could be in trouble and forced to sell at a bad time if your overall liquidity position is poor
    • Income projections – Current rent does not necessarily equal future rent.  When market conditions change in an area (supply and demand), the rents too will change
    • Expense projections – Current expenses do not necessarily equal future expenses.  If you can pass through increases in expenses to the renter then you are generally okay, however, if you can’t then your return takes a hit.  For example:
      • Maintenance costs could be higher than what you had originally budgeted (assuming you budgeted for maintenance in the first place)
        • In the case of a condo investments, the condo fees could go up or you could get hit with a special assessment to cover a deficit in the condo’s reserve fund – this can happen when major work needs to be done to a building and the reserve fund is insufficient to cover the costs 
        • In the case of a house, there will be big expenses that come up every now and then.  Examples would be replacing the roof, replacing the windows, replacing the furnace, updating electrical / plumbing, etc. Best to get an inspection prior to purchasing a property and estimate future capital expenditure / improvements required.
    • Interest rate variability – As discussed above, interest rates can increase  
    • Appreciation projections
      • I would recommend that people be conservative in their appreciation projections 
      • It’s good to remember that past appreciation is not an indication of future appreciation.  Future appreciation will be driven by forward economic fundamentals – supply and demand of properties
      • I prefer to view appreciation over and above inflation as upside rather than bake it in to the base case when buying a property
    •  Think about exposure in terms of your broader investment portfolio
      • Obviously diversification is one of the best ways to mitigate risk in an investment portfolio.  When you buy a rental property, you have to consider your market exposure as the full value of the property (not just your down payment) relative to your overall investment portfolio
      • For a lot of people starting out, this number can be close to or greater than 100%.  This scares me a bit and is one of the major reasons I didn’t purchase real estate in my 20’s (principal residence or rental property).  I didn’t want a single rental property (a chunky illiquid investment that has significant transaction costs) to make up a large portion of my portfolio. As you get older and your net worth increases, this becomes less of a concern since real estate investments will make up a smaller percentage of your overall portfolio 

    What to consider when comparing real estate to traditional asset classes like stocks and bonds:

      • Traditional asset classes (equities, fixed income) may be more volatile than real estate  
      • Liquidity – A market investment is more liquid and can be bought and sold instantly for a very low cost, whereas when you purchase physical real estate, it takes time and money to buy and sell 
      • Leverage – Don’t forget to adjust for leverage to make a proper comparison.  Leverage has the ability to add to your returns but can also greatly increase the volatility of your cash flows
      • Passive or active – The purchase and management of real estate is not a passive activity, it takes significantly more time and effort relative to purchasing traditional investments

    In my opinion, the real estate example above does not compare too favourably to other traditional, more liquid investment alternatives.  That said, the gross rent on that example was low to begin with (only 5-6% of property value).  There are still markets where great real estate returns are achievable.  I’ve heard of several investors being able to achieve the 1% rule (whereby the gross monthly property rent is equal to 1% of the property value, or 12% per year).  I’m not saying that you shouldn’t invest in real estate.  Just make sure you do your homework – run the numbers, and compare the net return to other investment options / asset classes available to you on an apples-to-apples basis. 

    I realize that this is one of my more technical posts – if you have any questions/thoughts or want me run the numbers for you on a potential real estate investment, feel free to reach out to me (jonathan@jbfi.ca). 

    Disclaimer: Please note that I am NOT a registered investment advisor and all of the above are only my opinions, NOT investment advice.  When making your investment decisions, if you don’t have the expertise, make sure to consult the relevant professionals (accountants, lawyers, realtors, financial advisors, etc.).