Crushing Debt. Why Canadians Should Drop Everything and Pay Off Debt

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Posted in Debt Help
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

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Should You Save Or Should You Pay Down Debt?

Today’s guest is David Trahair, Chartered Professional Accountant and author of several books about personal finance including the book we talked about today: Crushing Debt: Why Canadians Should Drop Everything and Pay Off Debt. David makes an excellent case for why consumers should pay off their debts rather than save money.

David explains that most of us have bought into the dream that we can have anything we want because debt allows us to do that. This is particularly true in today’s tempting low interest rate environment. But as David points out, things can change, and not for the better. A prime example of this is what happened in the US housing market melt-down of 2008 – 2009.  And it looks like it’s happening again in Fort McMurray.  So many Canadians earning a good income, taking on huge debt only to find that, suddenly, their economic circumstances took a sudden u-turn.

David is of the opinon that your primary financial goal should be to retire debt free.

retiring totally debt free, including the mortgage, is the best way to go into retirement. Because if you can do that, it means that your expenses after you retire are going to be significantly less

The idea of ‘drop everything’ means your should be paying down debt rather than saving money. If you have revolving credit you are likely fooling yourself into thinking you are getting ahead if you are putting money in a TFSA while paying 19% on your credit card.

So his advice is to stop everything, stop saving in a TFSA, don’t make RRSP contributions, and pay down debt because its about:

beginning with the end … retiring totally debt free is I would argue, the best position to be in.”

As David says, if your objective is to be debt free, using any form of debt on a regular basis is going in the wrong direction.

Techniques To Live Debt Free

While the steps are not new, David has a way of expressing the techniques to getting your finances under control in a fairly straight forward and simple manner.  It all starts with paying yourself first. And doing that means:

  1. Track where your money goes.
  2. Find out if you’re spending more than you make.
  3. Identify the big cash drains in your discretionary spending.
  4. Spend some time planning alternatives and how you are going to change your habits.
  5. Next focus on paying of the existing debt. Shop around for cheaper rates and transfer your balances there and begin the process of paying them down.
  6. In the meantime, don’t run up your old balances again.

Before the widespread use of credit cards this was easy. You only spent what was in your bank. Now credit cards are masking what you can afford with what you can spend. It’s critically important to focus in on your spending.  As David says:

“the absence of a cash outflow is as good as a cash inflow, and even better if that inflow is taxed.”

Debt is never a problem until it is. So drop everything, and start paying off your debt today.

Resources Mentioned in the Show

  • David Trahair’s website (where you can purchase his book)

Read below for a full transcript of today’s podcast.

FULL TRANSCRIPT show #25 with Dave Trahair

crushing-debt-podcast

Rebroadcast as Best of Show episode 102.

Doug Hoyes: Welcome to “Debt Free in 30” the show where every week we take 30 minutes and talk to industry experts about debt, money, and personal finance. I’m Doug Hoyes. Today my guest happens to be an expert in all of those areas so I think we’re going to have a good show, get lots of practical advice, and lots of insight. So let’s get started.

Who are you? What do you do and what makes you an expert in debt, money, and personal finance?

Dave Trahair: My name is Dave Trahair. I’m a chartered professional accountant. I run my own sole proprietorship accounting practise in North York. I’ve been doing this for a couple of decades now or longer. So my day job really is chartered professional accountant dealing with small businesses. But I’ve also written five books related to personal finance including the one that we’re talking about today, “Crushing Debt”. And really, I’ve gotten into the subject of personal finance and debt out of personal interest.

I wrote my first book in 2003 really out of personal interest because I was fascinated by this subject of, “How much will you need to retire? What’s the – is it better to pay off debt or make an RRSP contribution?”, and that kind of stuff. But basically the day job is public accounting. I’m not an investment advisor. I’m not a trustee in bankruptcy or anything. Just a logical accountant trying to make sense of the world.

Doug Hoyes: A logical accountant, there you go. So that’s good because it means you really don’t have an axe to grind here. You’re not trying to sell us a specific product. Your advice is hopefully as unbiased as it can be. So you mentioned your book so let’s talk about that and you’ve written five of them. We’re going to pick on one of them today and the title of the book is, “Crushing Debt. Why Canadians Should Drop Everything and Pay Off Debt”. And I’m holding it up to the microphone which is really bad radio but there it is.

Now I’ve read the book. I understand where you’re coming from but I think from the title it’s pretty obvious where you’re coming from. You’re saying that debt is crushing and that Canadians should drop everything and pay off debt. So I guess if I was a really good interviewer I’d start off with some softball questions to get you loosened up and then, “Pow”, I’d come in with the real hard-hitting questions. But since this isn’t 60 Minutes let me just hit you with the hard-hitting question right off the bat. And that is, “Is that really true? I mean is debt really a problem?” And obviously I have a show called “Debt Free in 30” and so obviously I’m encouraging people to get out of debt as well. But let’s think about this here.

If I bought a house five years ago or ten years ago and if I mortgaged it to the hilt, bought way more house than I could reasonably afford, I had a variable rate mortgage, I’d be sitting here today in February of 2015 laughing my head off. Because my house price has probably gone up and my mortgage rate is certainly lower today than it was three years ago, five years ago, ten years ago, so it’s all great. Debt for me in that scenario has been fantastic.

Dave Trahair: Right.

Doug Hoyes: So why are you advocating the exact opposite? Why are you saying that debt should be lower, not higher?

Dave Trahair: Good question. Well first of all, the title’s supposed to be read either way. Either debt can be crushing you or you can crush your debt. So it’s meant to be sort of a double-edge sort of title. The other issue is when you talk about real-estate doing well and not people not being too worried about mortgage levels. Well we’re in Canada and the housing market has been great here but if you were in the United States and you were heavily leveraged like many Americans were before the melt-down of 2008, 2009, you would be of a different opinion. A lot of Americans, I think the statistic currently is about 25 percent of American’s single family dwellings with a mortgage, are under water. Their houses are still worth less than the mortgage on them.

Now very different market, Canadians seem to be more prudent financially generally than Americans. I mean you can make a good argument that the American dream is debt-financed right?

Doug Hoyes: Mm-hmm.

Dave Trahair: You can have anything you want because debt allows you to do that. And people bought into that dream fuelled also by the fact that to within certain levels interest on your mortgage is tax deductible in the States. So why would you ever pay it off? It’s the best tax break around. So again, debt is not a bad thing. Definitely within reason, debt allows us to live a wonderful life but if you go overboard it can be a total disaster as it has in the United States. I’m not saying that’s going to happen in Canada but we have to be wary of the fact for example, that the housing market doesn’t always go up.

I mean even the Bank of Canada recently said that it believes housing prices in Canada are overstated by as much as 30 percent. I’m not sure I believe that but the warning is you know, don’t assume that the good times are always going to last. Because if you live on a daily basis assuming that everything good that’s happening now is going to continue forever and therefore you keep increasing your debt, you may be setting yourself up for you know, major problems later on.

Doug Hoyes: So what you’re talking about is what the psychologists would call “normalcy bias”. I assume that, “Well, you know that interest rates have been going down for 20 years. I guess they’ll just keep going down for another 20 years.” House prices have gone up for the last probably again, 20 years –

Dave Trahair: – yeah –

Doug Hoyes: – and therefore it will continue. But you give the example of the United States where obviously that hasn’t been the case. And if your stats are right and you’re probably in the ball park, that a quarter of the people down there, own a house that has a mortgage more than what the house is worth, that’s certainly a warning sign. I guess the Canadian example would be what’s happening out west right now, Fort McMurray for example.

Dave Trahair: Exactly.

Doug Hoyes: So you’ve got people who bought. The house prices just kept going up and up and up as the oil price went up and in 2014 oil prices are $100 a barrel, it’s all great.

Dave Trahair: Exactly.

Doug Hoyes: And here we sit early in 2015 and well obviously, we’re under 50 bucks. So that’s really what you’re worried about then. It’s not that it’s been a problem right yet today. It’s the future. That’s really the worry.

Dave Trahair: Exactly. And if you get down to a more personal level, I’ve always been of the opinion that retiring totally debt free including the mortgage is the best way to go into retirement. Because if you can do that, it means that your expenses after you retire are going to be significantly less. Like take out your mortgage payment that you’ve currently got. That means you need to have much less money coming in to stay in your house. Now the trick is, that retiring totally debt free takes work. It basically forces you to be fiscally responsible because to pay off debt, you have to spend less than you make which is difficult to do.

So a lot of people today are using the ultra-low interest rates as an excuse to not worry about their debt level. So they’ll have a mortgage that they’re paying down but they’ll go out and take out a home equity line of credit and continue to spend more than they make running up the balance of that line of credit by saying, “Well interest rates are low. This is easy to afford.” Not really thinking that well, if your objective is to get debt free, you’re going in the wrong direction. How do you turn things around?

Doug Hoyes: Well, and you just wrote an article that was published in “CPA Magazine” I believe it’s called, in January, that – you addressed the whole line of credit issue as part of that article.

Dave Trahair: Right.

Doug Hoyes: Do you see that as a big issue then?

Dave Trahair: Well I think so. I mean the big problem I think, and Trans Union used to have great media releases on this, is that people tend to start with credit card debt. It’s easy to spend more than you make when you run up credit card debt. Then they don’t like the fact that it’s charging them 18 percent interest so they go out and take out a home equity line of credit at prime, you know three percent. The banks last month just dropped to 2.75 and they shift high interest rate debt to a low interest rate which is fine. But if they continue their ways and spend more than they make and run up the credit card debt again, they’re left with twice as much debt. Half at a low rate and half at the high rate. So that can backfire, this debt consolidation idea.

Doug Hoyes: Yeah, no and I agree with you. Lines of credit sound good but they only make sense if your total debt level’s going down.

Dave Trahair: Right.

Doug Hoyes: If you are – if I pay off my credit cards with my line of credit and then I rack up my credit cards again, I’m actually worse off as a result of that which I think is the point you were making. And what I’ll do is I’ll put in the show notes, links to the stuff we’re talking about today including links to your books and links to that article so people can read it. So the title of the book, “Crushing Debt. Why Canadians Should Drop Everything and Pay Off Debt”, so tell me what you mean by “drop everything”? What does that mean?

Dave Trahair: What I mean by that is that obviously it’s a question between, “Should I save?”, or, “Should I pay off debt?” So extreme example. If we have somebody who has a revolving credit card debt, and a revolver is somebody who can’t afford to pay off their credit card balance and therefore pays a lot of interest on that balance. You know we have a revolver that has credit card debt charging interest at 18 percent and they’ve started a tax-free savings account making three percent. That makes no logical sense whatsoever. They think they’re saving but they’re actually getting in worse shape because the alternative would be to pay down that credit card debt at a high interest rate.

So “the drop everything” means look, think about stopping to quote, “save in a TFSA”, possibly stop making RRSP contributions, and instead focus on paying off your debt. Because beginning with the end in mind as I said earlier, retiring totally debt free is I would argue, the best position to be in. If you live in your house mortgage free, you’ve got no ugly consumer debt. That means the cash out-flow requirements are much lower than somebody who’s going into retirement with debt. I mean some people are just on track for total disaster. You know, people who have a big mortgage, line of credit, they also have consumer debt. Once they retire and their income goes down significantly, how do you maintain that lifestyle? I just don’t see that.

Doug Hoyes: It’s pretty much impossible. Well, and you make a good point that it’s better to have low expenses than high income and high expenses. You can certainly weather the storm a lot better. Well that’s very good advice. We’re going to take a quick break here and we’ll be right back to talk more with David Trahair. You’re listening to “Debt Free in 30”.

Announcer: You’re listening to “Debt Free in 30”. Here’s your host, Doug Hoyes.

Doug Hoyes:  Welcome back to “Debt Free in 30”. I’m Doug Hoyes and my guest today is David Trahair, a chartered accountant and a CPA. He’s also the author of five books and today we’re talking about one of those books which is, “Crushing Debt. Why Canadians Should Drop Everything and Pay Off Debt”. So David, let’s talk about that. Let’s talk about the ways to get out of debt. You go through this in detail in your book in chapter seven. You explain a bunch of techniques so I’m going to gonna start by throwing them at you and perhaps you can give me your thoughts on them. Your first one, and I think I agree with you, it’s definitely the place to start, is pay it off yourself.

Dave Trahair: Right.

Doug Hoyes: So walk us through that process. Obviously it’s not as simple as me just writing a cheque and paying it off or else I wouldn’t be in this situation. How do I get started?

Dave Trahair: I’d say that the first thing people should do, and I know many people won’t do this because it’s boring and it’s tedious, but it should start with tracking where your money has gone in the past. I mean I do it using Microsoft Excel and it’s very easy now with the advent of internet banking. You can go on to your main bank and download your credit information for the last year and your main bank account information for the last year. And then if you’re proficient with spreadsheets, it’s very easy to sort that information.

For people who aren’t technically inclined, I encourage them to maybe just do it for one month. Just take one month’s of expenses from your main personal bank account and your credit card, and just see where the money has gone in the past.

Doug Hoyes: So let’s start with the spreadsheet thing cause you and I both happen to be CAs, CPAs, we’re numbers guys. And I do it exactly the same way I must confess.

Dave Trahair: Okay.

Doug Hoyes: I go onto my online banking, I hit the download or the export button, and it dumps me all the transactions either in a CSB or an Excel file and you’re right, you suck it into a spreadsheet and then you can make columns for each of the different categories.

Dave Trahair: Exactly.

Doug Hoyes: Food, rent, you know, hydro, gas, whatever and you’re right, it’s not that hard. There aren’t that many transactions in a month. “Oh, Union Gas. I guess that goes in the gas category.”

Dave Trahair: Exactly, yeah.

Doug Hoyes: And then you can see where it’s going. If people don’t want to do that, obviously there’s other software out there that can do that for you as well, but you’re saying, “Okay, let’s start small here. Do it for one month –

Dave Trahair: – right, right –

Doug Hoyes: – and even if you have to use a piece of paper and a pencil I guess, that’s better than nothing.

Dave Trahair: Exactly.

Doug Hoyes: What should I do at the end of the month then? So I’ve got all this list of everywhere I spent my money on, then what’s next?

Dave Trahair: Well the first thing that you need to determine is whether you’re spending more than you make. And a lot of people, you know they think of how much they earn from their job before taxes. They don’t factor in tax like CPP and E.I. You know, your take-home pay is what’s important because that’s the money you’ve got to pay your expenses. And a lot of people are off-side. A lot of people that will do that procedure for a month will see, “Oh, I’m spending “x” hundreds of dollars more that I’m bringing in”, and obviously they’re off-side and that’s going to lead to problems.

Doug Hoyes: And they’re off-side because they’re using credit cards to do that.

Dave Trahair: That’s the problem. These days credit cards are so easy to get now. If you have a half decent credit rating, very easy to apply for a credit card on-line. Previous generations didn’t have that access right? So personal finances used to be a lot easier. You had a bank account. The only debt you could get was a reasonable mortgage on a house. Your paycheque got deposited into your bank account and that’s the amount of money you had to spend. If you ran out, that was it. You couldn’t spend any more. Now with credit card limits being quite high, it’s very easy for people to spend hundreds, thousands of dollars more than they make every month. And obviously that’s you know, a downward slope disaster.

Doug Hoyes: And you don’t even know it because “my credit card balances are going up every month”.

Dave Trahair: Exactly, that’s the result. But the cause is they’re spending more than they make. And the problem is most people are not going to do what we just recommended because nobody’s forcing them to do that. The government doesn’t say you have to track your personal spending. You’ve got to track your business spending for tax purposes but not your personal so most people don’t do it.

Doug Hoyes: So your recommendation is to start with, crunch the numbers, figure out where your money’s going, then what?

Dave Trahair: Yeah, then if you had this listing, then you could identify where the big cash drains are. You know, people might have an idea of where the money is going but to see it on paper and to see, “Oh, last month on restaurants we spent $1500. I thought we were spending less than $800 on that”. Then you can target areas where you can cut your expenses. And I think the good news is that a lot of people will find a lot of their spending is discretionary. If they don’t have to spend that, it is possible to cut it back. It won’t be easy. It’s painful to cut back things like going out to restaurants. But without that information it’s very difficult to make good strides.

Doug Hoyes: So in your experience, most people are able to cover their rent no problem. It’s not the mortgage payment that’s the big issue, it’s everything else. What you call discretionary spending. Meaning, “I have discretion. I could either spend it or not”, and examples of that – you gave us one example which would be going out to restaurants. I don’t have to do that every day. What are some other examples of discretionary items that perhaps would be areas where I could cut back in?

Dave Trahair: Good question. One of the areas I find for a lot of people is vacations. Going on vacation especially if you’ve got a number of kids, if it involves flights, very expensive, worthwhile and you know, something that makes life worth living is going on vacation with your family. But within reason right? Clothing is another area that people often go overboard. I think that the key thing is the relationship and family. I mean if we have a couple that are both cheap tight-wad accountants like us, they’re probably not going to have too many problems with debt. Biggest problem they’re going to have is you know, they’re going to die with millions of dollars in the bank. That’s not a big problem to have. So if you have one prudently fiscal person with somebody who’s a spender, that’s going to be – there’s going to be a lot of tension there. If you have two spenders, this is I would guess a lot of the people that you see, is because they’ve got people that they can’t control their spending.

Doug Hoyes: And so it starts with knowing where the money goes and when you see it in black and white in front of you, then you can actually start taking some steps to address it.

Dave Trahair: Exactly.

Doug Hoyes: And that’s the first step then. I’ve got to get my monthly spending down below what my income is or else I’m just going deeper and deeper into debt.

Dave Trahair: Right.

Doug Hoyes: So let’s say I do that then. It takes some hard work. I’ve got to you know, spend more time planning meals so I can cook at home rather than going out for dinner. We’re still going to take vacations but they’re going to be driving vacations you know, a little bit closer to home rather than flying to the other side of the world. We’re going to make some changes. We’re now in a position where there’s more money coming in than going out but I’ve still got all this debt sitting there from the past. So what’s my thought process next? What do I do?

Dave Trahair: Okay, good question. I think – I think strategy number one for people with high interest rate credit card debt, is to shop around for a balance transfer offer. I mean they can just Google credit card balance transfer and find another financial institution willing to take that credit card debt over. And it depends on the environment and how interested the new company is in getting new business. So sometimes you might get credit card balance transfer offer three percent for six months. Other times I’ve seen offers at zero percent for a year.

So the key is, if you’ve got your spending under control and you’re destined or focused on paying it down, that is a great strategy. You go from 18 percent down to zero or three percent without having to tap into home equity line of credit. But the key is you’ve changed your behaviour and you’re not going to run up the balance again. And I think that’s why these credit card balance transfers are offered is because the new credit card granting company that’s going to give you the break, knows that most people are unlikely to change their habits.

Doug Hoyes: And that’s really the key then. You’ve got to actually change your habits and that’s how you start grinding down the expenses and that’s how you can then start taking steps to get out of debt.

Dave Trahair: That’s it.

Doug Hoyes: Great. I appreciate that David. Thank you very much for joining me. We’re going to come right back to wrap it up right here on “Debt Free in 30”.

Announcer: You’re listening to “Debt Free and 30” with Doug Hoyes. We’ll be right back.

You’re listening to “Debt Free and 30”. Here’s your host, Doug Hoyes.

Doug Hoyes: Welcome back. It’s time for the 30 second recap of what we discussed today. My guest today was David Trahair. A chartered professional accountant and the author of five books including “Crushing Debt. Why Canadians Should Drop Everything and Pay Off Debt”, who made the point that debt may not appear to be a problem here in Canada because we didn’t have the same credit implosion that Americans did. But just because we haven’t had a severe debt crisis yet, does not mean that one won’t happen in the future. The housing market does not always go up so being over-mortgaged is a risk. David’s advice is to pay off debt now because the best way to go into retirement is debt free. That’s the 30 second recap of what we discussed today.

So what’s my take on David’s message? I agree with David’s point that retiring debt free is a very important goal. If you retire with debt, whether it’s a mortgage, car loan, or credit card debt, a portion of your income must go to debt servicing costs and that leaves less money to live on. You don’t want to be in a position where you’re forced to work in retirement to earn enough money to service your debt. That only makes sense. If I have a $1000 mortgage payment when I retire, my pensions and other retirement income need to be $1000 higher to achieve the same standard of living as I could achieve if I was debt free.

Of course as David said, retiring debt free takes work and it probably means you have live a more frugal life today so you have less debt tomorrow. It’s up to each of us to balance out our desire to spend money today and with our need to save for the future. David’s point is that debt isn’t a problem until it is. As David said on the show, he’s heard statistics that say as many as 25 percent of Americans are under water on their mortgages. That’s a staggering statistic and it proves that point that too much debt is very dangerous and you don’t want to use debt to finance a lifestyle you can’t afford.

That’s our show for today. This show is on the radio every week and also available on our website and on iTunes. So please go to Hoyes.com for a full list of participating radio stations and details on how you can download the show to listen on your iPod or Smartphone. Full show notes are available on our website and you can contact the show by email at dfi30@hoyes.com That’s dfi30@hoyes.com or you can leave your comments right on our website at hoyes.com

Thanks for listening. Until next week, I’m Doug Hoyes. That was “Debt Free in 30”.

Doug Hoyes: It’s time for the “Let’s Get Started” segment here on “Debt Free in 30” and my guest today is David Trahair, a chartered accountant who’s been – who has written a book called “Crushing Debt”, and in that book he walks through the steps for dealing with it on your own which includes tracking your expenses so you know where they’re going, and then starting to reduce your expenses each month so you free up some cash which you can then start applying towards paying off debt. Well now, David how do I do that? I’ve now freed up some cash, I’m living more frugally, how do I now start attacking my debt?

Dave Trahair: Well there’s two main options. Mathematically it makes sense to attack the highest rate of interest that you have first but I’m kind of inclined to the alternative to that which is to focus on the smallest debt balance that you have because of the psychological effect. You know if you focus on the smaller balance you have first, you’re going to get rid of that first and a lot of people get a lot of jump from – you know they get psyched from paying off that lower balance one. So I tend to recommend that people try and focus on the smallest loan that they have and try and get rid of that one first.

Doug Hoyes: So if I’ve got a $10,000 balance owing on my credit card and I’ve got a cell phone bill for a couple of hundred bucks and I’ve already cancelled the phone, your advice would be, “You know what? That $200 cell phone bill is a real nuisance, it’s weighing on you, get rid of that. Then you go after the big one.”

Dave Trahair: Exactly, yeah. Because as I say, the psychological feeling of actually making some progress.

Doug Hoyes: I feel like I’ve done something.

Dave Trahair: Yeah.

Doug Hoyes: And I guess it makes it simpler each month because rather than allocating payments to a lot of different places, then I’ve reduced the easy ones. I go after the big ones.

Dave Trahair: Exactly, yeah.

Doug Hoyes: And obviously we’re giving options here. We’re not telling you this is what you should do. It depends on what is the nature of your debt? What kind of interest rates are you paying? Is some of your debt callable and some of it not callable? There’s a whole bunch of other factors. But what you are saying is, “Yeah, if you’ve got some small debts, clean them up and go after the biggest win.”

Dave Trahair: That’s right.

Doug Hoyes: Now the biggest debt most people ever have in their lives is a mortgage.

Dave Trahair: Right.

Doug Hoyes: So what are your thoughts, and in your book “Crushing Debt” you do talk about mortgages, how big a mortgage should you get? Should I borrow as much as I possibly can because interest rates are low and that’s how I make the money? Or is that not a prudent approach?

Dave Trahair: Well I think overbuying is a big problem today. In the previous generations you know, typically people would get a mortgage two, maybe three times their annual household income. And these days I’ve heard stories of people who are up around seven, eight, even ten times their household income. They’re never going to pay that off. My key thinking is that again, getting back to this concept of retiring totally debt free, if you’ve bought a house you can afford, that means you will have been able to afford to pay off that mortgage. If you go way overboard, you’re going into retirement with a big mortgage.

Doug Hoyes: So that’s a very key point you made there. So one way I can tell if I’ve got too big a mortgage is looking at it, how big is my house in terms of my income? I make $100,000 a year. If I’ve got a million dollar house that’s ten times my income, that’s crazy. But the other way to look at it is, will this house be paid off well in advance of when I retire?

Dave Trahair: Exactly.

Doug Hoyes: And if the answer is “no”, you’re saying, “You’ve got too big a house.”

Dave Trahair: Exactly.

Doug Hoyes: Or more specifically I guess, “You’ve got too big a mortgage”, is really the question.

Dave Trahair: That’s true, yeah. It’s the mortgage balance really that we should be focused on.

Doug Hoyes: And by having the house paid off before I retire, the advantage when I retire is what?

Dave Trahair: The advantage is that your cash out-flows, the requirements of you to continue paying those mortgages won’t be there. I like to say that the absence of a cash outflow is as good as a cash inflow, and even better if that inflow is taxed. For example, you’ve got a mortgage payment of $2000 a month when you retire and you’re bringing in the money to pay that from your RRSP, you’re going to need, depending on your tax bracket, a lot more than $2000 a month just to maintain that mortgage. If you are mortgage-free then your RRSP doesn’t need to be nearly as high as it needed to be if you went in with the mortgage.

Doug Hoyes: That’s a very key point too. So in order for me to make a payment on my mortgage of $2000 a month, my paycheque before taxes has to be, I don’t know, $3000 a month.

Dave Trahair: $3000, $3500 …

Doug Hoyes: $3500 a month.

Dave Trahair: Exactly.

Doug Hoyes: And so by eliminating my mortgage, I can reduce my gross pay by let’s say by $3500 a month and I’m in exactly the same spot.

Dave Trahair: Exactly, which is huge when you look at the net worth balance required at retirement for people that have debt. The RRSP balance needs to be significantly higher which is hard to do right?

Doug Hoyes: Yeah.

Dave Trahair: It’s hard to get to that point.

Doug Hoyes: Yeah unless you’ve got an RRSP where you’re earning ten percent a year, every year for fifty years.

Dave Trahair: Good luck.

Doug Hoyes: Yeah, good luck with that cause that’s not the current reality here as we record this in 2015. So the big key then is keep your mortgage balance as low as possible when it comes time to retire.

Dave Trahair: Right.

Doug Hoyes: So can you say that sentence again then? Cause that was really key. The absence …

Dave Trahair: The lack of a cash outflow is as good as a cash inflow and better if the cash inflow is taxed.

Doug Hoyes: So your focus really then as you head into your retirement years is not, “I want to have as much income coming in as possible. I want to be working until I’m 90.” Your focus should be on the other end, keep my expenses as low as possible, have the house paid off, and then retirement becomes simple.

Dave Trahair: Exactly because if your expenses are high that means your income needs to be high and then you’re working against taxes because of the increase in tax rates, the more you report on your taxes.

Doug Hoyes: Perfect. Thanks very much for joining me David.

Dave Trahair: Thanks for having me Doug.

Doug Hoyes: Thank you.