If you missed it, here is the link to Part 1: My Million Dollar Journey
The road to recovery
The financial market continued to crash until march 09, 2009. After that, the slow and painful recovery began and stock markets around the world started to recover from their massive losses. Governments around the world did anything and everything they can to try to stop their economy from free-fall and stimulate their economy’s growth. The Canadian government was no different and created many new incentives to stimulate the Canadian economy. Three things that I did to take full advantage of the Canadian government’s initiatives were: the new saving vehicle – Tax Free Savings Account (TFSA), Home renovation tax credit and dirt cheap historical interest rates. Starting from 2009, all Canadians can open a TFSA account and contribute a maximum of $5,000/year into that account and all the income earned will be tax-free when you withdraw. With a sweet offer like this, how can I resist? So I maximize my TFSA contribution every year (that’s $46,500 saved if you maximized your TFSA contributions from 2009 to 2016). With the home renovation tax credit, I decided to take the opportunity to upgrade my driveway from a single lane to a double lane driveway. This added more value and curve appeal to my house – literally. Even though the tax credit was up to a maximum of $10,000, I did not have the budget to take full advantage of it. As for the low-interest rates, it did wonders for my personal finance. I was able to refinance my mortgage from 4.5% to 2.99%, save thousands of dollars in interest payments and took out some very advantageous personal loans. By then end of 2010, I had more than recovered all the losses from the financial crisis, paid back the $20,000 loan to my mom and the $5,000 to my father-in-law. My young family’s net worth slowly grew to a modest $357,541.85.
The art of a deal
During the Financial Crisis, I not only took opportunities to save money, but I became greedy when people were fearful. When my mom’s mortgage was up for renewal, I worked out a deal with her to take out a $75,000 loan from her mortgage when she renewed it at 2.99%/year fixed for five years. Every month, I would pay her the interest-only portion of the $75,000 loan, which had minimal impact on her finance and my monthly cash flow. This was a win-win-win deal for me. The interest payment was low and stable, it was an affordable forced saving for me, I got to write off the interest as an expense on my tax return because I was using it to earn an income and I got all the benefits from the potential future capital gains. The second deal that I made was with my mother-in-law for another $75,000 personal loan. She was earning peanuts from her savings and was very risk adverse. So I offered her safe investment opportunity. I would pay her an annual interest of 3.25% per year if she loans me the money for my investments. This way, her money would be relatively safe, she would get a decent return on her investment (considering the return on a five-year government of Canada bond was nowhere near the interest that I offered her at the time) and I got a reasonable rate and stable loan for my investments. Once again, all the benefits of this loan were the same as the first loan. There you go, the meaning of making money with (other people’s) money on full display.
The year of change
2011 was the crazy year of drastic changes for my family. I became a father for the first time and of course, my wife had to take a maternity leave for a year to recover from giving birth and raising our daughter. Though she did not work, she was able to apply and receive employment insurance for a year. So her total income was reduced to about 65% of her full-time salary – not a huge impact on our finances. We spent thousands of dollars on essential items (crib, stroller, clothes, baby monitor, toys, books, diapers, etc.) for our daughter (having a kid was expensive and the cost could balloon quite quickly). To offset my wife’s lowered income and the cost of a baby, I upgraded my job and became a Project Leader at my third major financial institution in Canada. I got a 17% pay raise from my last job and an annual bonus of about 10% to 12% of my annual salary. To further increase my future income potential and have another income stream, I started my quest to become a licensed Realtor. Further, I did a lot of little things to minimize the impact of my wife’s short-term decrease in income on our day to day finance and net worth. However, I could not stop the Canadian financial market from crashing a second time in three years (the stock market dropped about 10%). My net worth took a huge plunge to $220,799.71. Once again, I did not panic as these losses were only paper losses and soldier on with what I got in my portfolio.
The 5-year plan
Before we bought our first home, I insisted that we buy a small house and live within our means as it was just the two of us. My logic was: between the two of us, we were already living in a three bedroom house, why do we need anything bigger than that? So my pitch to her was, “Let’s start our lives together modestly and responsibly. For now, this house should be sufficient for us for the next five years. If there are drastic changes, we’ll go back to the drawing board and revisit our plans.” My wife thought that we should also plan for the future with kids and we should buy a bigger house to accommodate for the growth of our family. At the end, my stubbornness and living within our mean mindset led us to buy a smaller house (through hindsight, you were right honey, we should have bought the bigger house at the beginning). Fast forward five years, and what do you know? We did need a larger home to accommodate our growing family. In the spring of 2012, we sold our first home, made about $100,000 in capital gain, but did not pay any taxes (as it was our primary residence, so we don’t pay any income taxes on the gain) and put it towards the purchase of our new four bedroom house (we also got a $50,000 in interest free loan from my father-in-law to purchase the second house). The awesome part was that I obtained my real estate license and was able to save thousands of dollars by selling and buying my own houses. By the end of 2012, my net worth increased dramatically to $464,726.40. It was a great year and my shiny gold bar was taking shape.
Disaster strikes the next year. Will it stop my journey? Tune into Part 3: My Million Dollar Journey.