Ditching home ownership and becoming a millionaire instead

Ditching home ownership and becoming a millionaire instead

You might already know from the recent posts on my site, I’m more interested in FIRE – which stands for Financial Independence Retire Early in the personal financial community.

Here is a recent article on this subject:

Is FIRE right for you?

In the latter article, Aussie investor Martin achieved his financial independence through real estate investing initiated from home equity leverage.  Those decisions are not for the faint of heart.  However, by all accounts he worked hard, had some luck and realized his dream.

Today’s post is the antithesis of what Martin did, and this couple was equally successful all the same.  Meet FIRECracker from Millennial Revolution.  She and her husband outright rejected home ownership, and invested their money instead, diligently.  In doing so they amassed a seven figure portfolio throughout their 20s to formally retire from their 9-to-5 jobs at the age of….get this…31.

FIRECracker is now one of Canada’s youngest retirees.  I reached out to her to learn about how they invest now, how they are going to sustain their wealth, and what advice they have for Canadians in general.

FIRECracker, welcome to the blog. Thanks for the time.

Oh my God, I’m actually being interviewed by My Own Advisor!  Seriously, I read your site a lot and I actually learned a lot about how to invest from you, so thank YOU for being you. 🙂

Kind words – thanks!  So let me get this straight.  You built a seven figure portfolio with your husband to retire at age 31?  This sounds like science-fiction.

Yeah, it still seems a bit weird when I say it out loud, but that’s what happened. A million bucks seems like SO much money that most people will never get there, but for us it just happened naturally as we just lived our lives. We never sat around eating beans, we went on fancy vacations, we went out to restaurants and bars. The biggest thing we did was refuse to buy an overpriced house. Everybody thought we were crazy not to get in because “houses always go up,” but now here we are travelling the world while they’re still stuck paying their mortgage.

Who’s crazy now huh? *laughs maniacally*

That seems very smart in hindsight, so let’s back-up.  How did you get started with investing to amass so much wealth?  You must have had an incredibly high savings rate.

Yeah, about 60-70%.  Both of us are computer engineers from Waterloo, so we made pretty good money, but not INSANE doctor or lawyer money. We broke down our year-by-year spending/savings in the article series “How We Got Here”.  A lot of our readers went over the numbers and said “Hey, that doesn’t seem so crazy! I make just as much, why aren’t I a millionaire?”

And the answer to that lies not in the little stuff:  like cutting coffees or never going out.  The answer comes from making the really BIG financial decisions in your life correctly.

We lived in the second floor of a townhouse renting for $800 a month instead of plunging headfirst into massive debt like all of our friends, and we took the subway everywhere instead of buying a car. Those two decisions were probably the biggest factors in getting to where we are today.

OK, so when did you have the epiphany that investing (well) could provide financial independence – you could live off the income generated by your capital? 

How are you investing now, what products do you use?

I first heard about financial independence from Mr. Money Mustache (www.mrmoneymustache.com), and then the ideas became fleshed out as I read more from other FI (Financial Independence) bloggers like Jim Collins (www.jlcollinsnh.com), Jeremy from www.gocurrycracker.com, Justin from www.rootofgood.com, and Brandon from www.madfientist.com.

The idea of retiring from our job and living off passive income seemed so weird and foreign to us, so at first we dismissed it as an idea that only tech entrepreneurs or trust fund babies could pull off.  Then we woke up and realized our savings had hit half a million bucks, and we were like “Hey, why not us?”

So we learned how to invest using passive, low-cost Index Exchange Traded Funds (ETFs) and the rest is history.

What makes a great Exchange Traded Fund?

Other than never buying a home (in Toronto), what are your philosophies or guidelines when it comes to living, saving, and/or investing?

Besides the obvious (debt is toxic, track your spending, etc.), I think the biggest philosophy I have when it comes to this stuff is that investing isn’t that complicated. So many people buy overpriced houses simply because they don’t understand the stock market, but they understand a house. And that’s never a good reason to do anything (i.e., “because I don’t understand the alternative”).

Investing isn’t difficult.  But it can be overwhelming.

We’ve been teaching people how to invest for a while now, and the biggest barrier I find is when they get blasted with too much information at once. They get confused and shut down or run back to something simple like a house. But the truth is buying and owning a house is way more complicated (and expensive!) than people realize.  Investing outside real estate is actually a lot simpler (and profitable!) than most people realize. That’s what we try to do on our blog. Make investing simple.

That’s not to say if you own a home, you can’t reach FIRE. For those who own responsibly (like Justin from RootofGood, whose home is only 6-10% of his portfolio), it’s perfectly fine. When you are well diversified and only a small portion of your net worth is in your house, owning a home won’t screw up your finances.  Just make sure you do the math (or as we like to say on Millennial-Revolution “math that shit up!”).

There are never ending debates in the personal finance community about the TFSA vs. RRSP vs. paying down debt.  What’s your take on investing within the TFSA vs. RRSP?  What’s your take on debt?

If you have to make that choice, you’re in trouble. As a Canadian especially…

While our American friends have huge debt issues when it comes to the cost of university and health care, we here in the Frozen North don’t typically graduate with that much debt. Houses are the only reason people up here get into that much debt, and if you have to ask that question “Should I fund my TFSA/RRSP or pay down debt?” for more than a couple years in a row, you have FAR TOO MUCH debt.

Every Canadian should be maxing out their RRSP and TFSA every year. The fact that MOST can’t, should ring an alarm bell.

How are you going to sustain your wealth?  You’re only in your early 30s.  Do you have plans to spend the capital?  If so, when?  What might be your drawdown plans?

In retirement, you remain invested and take a certain percentage of your portfolio every year to fund your living expenses. 4% of your initial portfolio, adjusted annually for inflation, is a general rule. This gives you a 95% chance of success, meaning you won’t run out of money for the duration of your retirement, 95% of the time.

In addition to the 4% rule, we added a twist, which mitigates our risk even further. By building a portfolio that generates 3-3.5% in dividend income and fixed income, if markets were to tank (and they will from time to time), we could completely live off the dividend/fixed income without touching the capital. That way we never have to sell at a loss.

Consider The Crossover Point for investors

Why living off your dividends or distributions works

One of the most surprising things we discovered in retirement is that the cost of living in countries outside of North America is much lower. After spending one whole year travelling around the world, bouncing around the UK and Europe, the Netherlands, Denmark, Germany, Belgium, Greece, Japan, South Korea and South East Asia, our total cost of living was only around $40k for the entire year for the two of us!  This is actually LOWER than living in Toronto. So then we asked, why the Hell would we stop travelling?

So now we travel and live nomadically. And now that we’re experienced travellers and know the best countries to go to, our costs have fallen BELOW $40k (or 4% of our $1M portfolio), which has caused our net worth to go UP.  So shockingly, not only did we not run out of money (like our haters predicted) we actually MADE money in retirement.

What advice do you have for anyone seeking to achieve FIRE?  What money advice do you have for young Canadians in general?

Learn about your money. Money absolutely CAN buy happiness, but you have to understand how it works first.

And secondly, saving and investing unlike some people would have you believe is NOT that complicated. But unfortunately, there’s a whole industry out there whose jobs depend on making investing seem complicated while making housing and real estate seem simple. The opposite is true. If you want a house, fine. Go for it. But if you don’t and would rather be free from your job instead, check out our blog.  We’ll show you how.

Thanks FIRECracker.

No doubt there are haters and fans of your journey but the biggest takeaway for me is, you had a plan and stuck to it – to realize what you and your husband wanted.  Good on you.  I want to thank FIRECracker for sharing her investing journey to date and avoiding the f-bomb on my site for my PG-friendly audience.  You can check out more of Millennial Revolution here.

Got comments or questions for FIRECracker and her story?  What do you make of some 30- and 40-somethings being “retired”?

You can find more retirement essays from folks that have successfully “been there, done that” on this Retirement page here.