I grew up in a lower-middle class household. I'm the oldest of 3 siblings. My mother was a schoolteacher, and my father was a blue-collar worker in the boiler room of a tire factory. My mother quit her teaching job when I was born, so she could raise the kids. My dad worked shiftwork in the boiler room for 30 years, retiring 5 years ago at age 51.
We were a family of 5, living on a single, blue-collar income. We didn't have a lot of luxuries. Going out to McDonald's was a big deal to us when we were kids. Nevertheless, we did have a full and fun childhood. We went to Disneyworld twice, we spent a lot of summers camping, or at my grandparents' cottage. I had G.I. Joes and Transformers. One year, I even got an Atari 2600 for Christmas (Best. Christmas. Ever.).
I grew up with a bit of my own money. We got an allowance ($5/week), and I had a paper route. As I got older, I did some odd jobs during the summer, mowing lawns and that sort of thing. While my dad didn't earn a lot of money, and he had a lot of us to support, he knew what was important when it came to money. He wasn't well-learned in the workings of the markets, or the various kinds of investments, but he knew it was crucial to live below one's means, not acquire debt, and save for the future. He meticulously balanced his checkbook by hand and paid all his bills on time. He didn't splurge on anything. He's the kind of guy who would never buy new things for himself. He'd wear the same slippers until they were practically falling apart. If you bought him new ones for Christmas, he'd still keep wearing the old ones, claiming "they still keep my feet warm just fine." He is very frugal. He did a great job resisting our childhood pleading for name-brand clothing and expensive toys.
I went to university and studied computer science. Student loans covered about half the cost, dad contributed about a third with money he'd saved up for our education (I told you he was smart), and I paid the rest myself, working during the summers. I graduated in 1999 with about $12,000 in student loan debt, and a Bachelor of Computer Science with Honours. No other debt.
I got an apartment and started working in high-tech, making decent money. I immediately started investing, and had my employer take my RRSP (Canadian 401(k)) contributions off my paycheck. This elicited a generous company match of $1-per-$1 up to 6% of my salary. I maxed that out, and then some. I was investing $800 per biweekly paycheck. Unfortunately, it was almost entirely in my own company stock (a telecom company). In 1999/2000. See where this is going?
I got married in 2000, and we bought a house in 2001, as the bubble was bursting. We borrowed the down payment from my RRSP, which had been substantially depleted by falling tech stock values. In hindsight, we didn't do too badly. After we'd cashed out the borrowed money for the house, the stock continued to plummet, and is still waaaay below what it was when we sold the stock.
We bought a house for $360,000. We made a $36,000 down payment and financed the remaining $324,000 for 20 years. We opted for a bi-weekly payment schedule, which made the mortgage effectively 17 years instead of 20. With property taxes, our monthly payments were around $2,700.
We were paying $2,700/month for our mortgage, $650/month for a car payment, $200/month in my student loan payments, $150/month for an investment loan we'd taken out years earlier, investing around $400/month, and of course groceries and other expenses. We found ourselves resorting to using our line of credit to make ends meet sometimes. Before we knew it, we'd run our line of credit up to $12,000.
Since interest rates had dropped after the tech bubble burst, we refinanced our mortgage to take advantage of the lower rates. We also rolled in our line of credit debt ($12,000), and the remainder of my student loan. We decided to cut back on investing, and instead focus on paying off the mortgage as soon as possible. We took a 10-year mortgage with monthly payments of around $4,000. Paying bi-weekly, it would actually be paid off in a little over 8 years.
Unfortunately, this proved to be more than we could handle. While the numbers said we could afford it, it didn't leave us any wiggle room. We had no emergency fund, and we'd underestimated our miscellaneous expenses. Our car got rear-ended and totaled, and the car we replaced it with turned out to be an expensive lemon. That, plus a couple far-off weddings, and before we knew it, our line of credit was approaching its $15,000 limit again.
Around this time, we were contacted by an organization called "HEIR" - Home Equity Investment Rewards. They professed to be able to tell us how to pay our mortgage off faster without spending more money. We met with them to hear the pitch.
At the time, we had our mortgage paid down to around $260,000, and our home was worth $400,000. The plan they proposed went like this:
- Refinance our mortgage to the longest-possible term (30 years) and take out $100,000 in equity.
- Invest $80,000 ($20,000 went to fees, penalties, and paying off that darn line of credit again) in a land banking company called Syndication and Development.
- Since we'd refinanced from a 10 year mortgage to a 30 year mortgage, our payments were substantially lower. However, instead of spending the difference, we'd save it in a high-interest savings account. Once a year, we'd take the accumulated money and use it to make a lump-sum payment on the mortgage principal.
- The land-banking investment would return 15% per year and allow us to pay off the mortgage in 10 years, with over $200,000 left over.
Naively, my wife and I signed up. I feel foolish for it now, but there's still a chance we'll make a significant profit on the land banking deal. Instead of using the saved money to make lump sum payments on our mortgage, we're instead investing that money. I'm sure HEIR made a tidy profit in commissions and kickbacks from brokering our new mortgage and bringing new investors to the land banking company, but I wasn't cynical enough to see that when we signed up years ago. I now know better.
So we've made some mistakes, but we're still on the track to wealth. Our present mortgage stands at around $350,000, and the house is worth $400,000, so we've got $50,000 in remaining home equity. In addition, we've built our retirement savings back up to $60,000. We continue to invest a little over $2,000/month into retirement savings. If we merely break even on the land banking program and get our money back, then that's still another $80,000. If they deliver the returns they're claiming, then we'll actually do quite well and could potentially expect the investment to grow to $160,000.
We currently have no other debt besides the mortgage. We've been able to keep our line of credit at $0. We use our credit cards for as many expenses as possible in order to get the points, but we pay them off every month. We only use them for things we were going to buy anyway, rather than as an excuse to splurge on an HDTV or something.
So, in the worst case scenario that the land banking venture turns out to be a scam and we lose the whole $80,000, our net worth would still be $110,000. If it turns out to be successful, then our net worth would be $270,000. We're presently aged 32, so I'm confident we're well on our way to early retirement.