Basic Moose House Purchase Rules

It is possible to bring housing into the mix when accumulating wealth "Moose-style".

However, there are rules to ensure sanity!

Moose Rules for Housing

  1. You first must be comfortably saving enough for retirement in real investment accounts (TFSA, RRSP, and Cash/Margin accounts). Follow Moose Math to estimate your number. If you are under 30, you should be saving a minimum of $562 per month. This money should not be touched until you retire!
  2. Always have a 20% downpayment, plus closing costs, plus an emergency account on hand before buying a house. This significantly reduces your leverage ratios, saves you money on insurance costs, and decreases your chances of getting into a financial pinch. Your emergency account should be equal to 3 months expenses. The emergency account will protect you from unexpected expenses associated with owning a house: furnace breakdown, hot water tank replacement, flood in the basement, roofing disaster, etc. New house or older house, one episode of Holmes on Homes highlights the importance of this!
  3. Make sure all other consumer debt is paid off. No outstanding credit cards, lines of credit, student loans, etc. Do not ever borrow your downpayment—even from family! If you have outstanding debts, you are essentially borrowing your downpayment. Purchasing a house with outstanding consumer debt is likely to put you into a stressful and never-ending debt spiral.
  4. Stability... or stay-ability. Never buy a house if you are going to school, in an unstable job, in a career you can't see yourself in long-term, or planning to move somewhere else in the foreseeable future. Trading costs on housing are ridiculously expensive. Sales commissions, lawyer fees, mortgage fees, staging costs, survey costs, transfer taxes, etc. can easily run $20,000+ on a typical house in Canada. Much more in high priced markets. If you buy a house, be sure to stay in that exact house for a long time. Buying, selling, flipping, upgrading, and downsizing is for chumps. Every time you change real estate you lose 4-5% of the house value off the top. Your real estate guy and mortgage gal will rub their hands together gleefully at your expense I guarantee you! I'm all for spreading wealth, but make sure you are actually wealthy before you give away thousands!

These four rules are critical to home buying success and your general long-term prosperity. Without these prerequisites, you are gambling your long-term financial health on the continued appreciation in house values. You will survive when house prices go up, but you put your family at serious risk when prices are stagnant or fall.

Finally, before leaping blindly into homeownership based on popular opinion, do a thorough financial evaluation to check if you might be better off renting. This is the most complicated step and it's NOT simply comparing a mortgage payment to a rental fee.

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Designing a Retirement Savings Plan

After talking about the ridiculous housing situation in Canada for a few weeks, one thing I've been hammering home is the dangerously low savings rates in Canada. About half of Canadians have less than $10,000 saved, only 60% of us are saving something for retirement at all, and a full one-third of us admit we have no idea how much we need to save for retirement.

To top this off, nearly 40% of savers are pillaging retirement accounts to pay for credit card bills and houses. Embarrassingly, although 60% of us save for retirement, the average saver over 55 years old has merely $125,000 in their investment accounts! Using our 20x Rule, that translates to a retirement income of just $6,250 per year... ouch!

You'll notice I have not talked about paying off a mortgage instead of real investing: the current paradigm in Canadian finances. This is because a paid off house gives you next to nothing. A house is a non-productive, no-income generating, costly to maintain arrangement of chipboard, sticks, vinyl, and asphalt. The only thing a paid-off house does is displace about $15,000 of annual expenses... maybe. At 20x, your source of shelter is worth $300,000 tops in my investment account.

Planning Ahead

If you're reading this blog, chances are you at least have some knowledge of the power of self-managing your investments with Questrade, keeping your costs low with index ETFs, and what it means to invest in a disciplined style that generates long-term success. This is important!

To figure out your retirement needs, it's important to adjust all your numbers for inflation. The average Canadian couple will spend $40,000 to $60,000 a year with a paid off house and no external debts. If you're renting add about $15,000 to that. This income level will pay for a lifestyle that includes vacations, some eating out, and fun activities—comfortable, but not lavish, spending.

The next step is to plan your desired retirement age because this helps you estimate your safe portfolio withdrawal rate. I'm going to base my numbers on the 20x Rule to allow for a standard retirement in your mid-60s.

The third—and easily most important—factor is when you start saving. Compound interest is a powerful force. In a Growth Portfolio, you can double your money approximately every 12 years with no new contributions using historical data. Saving young gives a powerful advantage that's very difficult to make up later.

The Only Equation That Matters

[(Your Estimated Spending - CPP) x Your "Rule")] = Your Required Portfolio (in today's dollars)

Once you have your required portfolio number, all it takes is a simple compound interest calculation to get your minimum regular monthly contributions.

Your Required Portfolio / [(1.005^(12 x Years of Saving) - 1) / 0.005] = Minimum Monthly Contribution (in today's dollars)

For example, let's say I'm 30 and want to retire at 65. I spend $50,000 a year with a paid-off house. I currently will have 35 years (or 420 months) to save for retirement. I'll estimate $10,000 for CPP. (CPP is funded in a defined-benefit pension format and is highly likely to provide benefits for a long time in its current form.) I don't include OAS as it's drawn from annual government revenues as a form of wealth transfer. OAS benefits could quickly be reduced if the government needs to cut their spending levels.

What's my Required Portfolio? $800,000 = [($50,000 - $10,000) x 20]

How much do I have to save per month? $562 = $800,000/[(1.005^(420)-1)/0.005]

I would say every young Canadian should be saving at least $562 a month for a decent retirement. This is in addition to paying your mortgage! $562 a month translates to about 8.5% of gross household income in Canada. More than double our current savings rates.

What you do have to keep in mind is your monthly savings must be adjusted up for inflation each year. This can be done by increasing your savings every time you get a raise. Otherwise 35 years from now I'll have my $800k, but prices will probably have more than doubled by then so it would be worth less than $400,000 in today's spending power.

What is your monthly savings number given your desired spending and number of years to retirement?

Comments & Questions

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Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.