Thursday, April 05, 2007

How we paid off our house in three years

Perry Goertzen as told to Duncan Hood - from Yahoo Personal Finance

Have you ever wondered what you could accomplish if you saved 80% of your pay? Well I can tell you, because I did it.

Most people have trouble saving just 5% or 10% of what they make, but my wife Tiffany and I decided that it was worth living like paupers for a few years if it could give us a huge jump start on life. Saving as much as we did was challenging, but what we accomplished was amazing - I still can't believe it myself sometimes. When we started, we had a rusty old Toyota Tercel, no house, few possessions and a crushing debt of $37,000. A few years later, we had two almost-new cars and a beautiful new four-bedroom house on a 46-ft lot in Milton, Ont. Everything was completely paid off - we had zero debt. During this time, neither of us made much more than $60,000 a year at any one job, but by working several jobs and saving almost all of our income, our net worth increased from negative $37,000 to positive $420,000 in less than five years.
I was born in rural Manitoba in my grandparents' car on Mother's Day, and my family still jokes that I came into this world fast and I haven't slowed down since. But though I was always very energetic, it was channeled in the wrong direction during my teenage years: I was basically a juvenile delinquent. I quit high school at age 15, worked odd jobs, drank and partied. By my early 20s I hit rock bottom. I realized that I was going nowhere and that I had to make some serious changes to get back on track. So I gave up my old friends and my old lifestyle, and decided to move to Abbotsford, B.C., to start over.

It was there that I met my future wife, Tiffany. After a couple of years we got engaged and then we got married in 1995, when I was 27. During this time I changed dramatically. I started volunteering for an organization that worked with troubled teens, and I loved the work. Tiffany and my family kept challenging me to go back to school, and shortly before we got married, I applied to a private Christian university in Langley, B.C., called Trinity Western, and I was accepted as an adult student. Four years later, in 1998, I graduated with a B.A. in psychology.

I was proud of my degree, but a B.A. didn't open as many doors as I originally thought it would, so we decided that I should get a Master of Social Work degree. Wilfrid Laurier University, in Waterloo, Ont., offers one of the better programs in Canada, so we packed up our belongings and drove across the country. It was an absolutely crazy trip - we did it in only 49 hours with one four-hour stop at a little motel - and when we arrived we settled into a small apartment in Milton, midway between the university and a new teaching job we found for my wife. During the next two years of schooling, money was tight, and I had to borrow heavily for tuition and books. When I finally finished my master's degree in 2000, we had a total debt of $52,000 from my student loans.

This is when we made the decision that changed everything. With my new degree, I quickly found a job that paid well, but we decided that rather than rewarding ourselves for all those years of hard work, we would continue living like impoverished students for a few more years. In exchange, we figured we'd get a head start on the rest of our lives.

I got my first job as a crisis intervention worker before I even finished my degree. When I graduated, they gave me more hours, then offered me a second position doing the same thing at another location. I was just loving the work, and I took on a third job doing the same thing at the Credit Valley Hospital in Mississauga. As crazy as it sounds, I then took on a fourth position, and I saw clients now and then through my own counseling business as well.

The next few years are a bit of a blur. I worked an average of 90 to 100 hours a week, or about 14 hours a day, seven days a week. It wasn't unusual to work 22 hours straight, go home, sleep for two or three hours, get up, shower, and work another 12-hour shift. I once worked 99 days in a row, took two days off, and then worked another 60 days. Meanwhile, Tiffany began supplementing her salary as a teacher by tutoring and giving piano lessons.

In some ways it wasn't much of a life. My wife thought I was pushing it too much, and our friends and family thought we had lost perspective. But my father had taught me a strong work ethic and I felt like I had wasted a lot of years in my youth. This was my chance to catch up. With six or seven jobs between the two of us, within a few months of graduating, our combined income was well in excess of six figures. But even with our sizable new income, we continued living in our $900-a-month apartment in Milton. Most of our furniture came out of the garbage, and we rarely bought new clothes. We didn't have cable and we didn't go out much. Eventually, we splurged and bought a set of rabbit ears for our old TV.

We were able to save over 80% of our after-tax income, which amounted to over $80,000 a year. In a lot of ways, saving 80% of your income is absurd, but you would be amazed at how quickly you can pay off huge loans if you do. I obtained some loan remission from the government, which knocked my $52,000 student debt down to $37,000, and we managed to pay that off in just four short months. Paying off such a staggering loan so quickly was an incredible feeling. We realized that we had become accustomed to saving most of our income, so we decided to accomplish a few more goals before we broke the habit. We began by saving up for a down payment on a house, and it took us less than a year to save up $82,000.

In June of 2002, we purchased our first home in a new subdivision in Milton for $302,000, and took on a five-year, 5.2% fixed-rate mortgage for $220,000. At first, we intended to pay it off in 10 or 15 years. But then I began to look at what would happen if I doubled up the payments and paid an extra 10% a year. It was incredibly motivating to see how much interest you could save. So we decided to double up every bi-weekly payment, from $670 to $1,340. We also made the annual 10% prepayment, which was about $22,000 a year.

At the end of the first year, we realized that we were saving much more than we needed, even with the doubled payments and annual prepayment, so I approached the bank and asked them if we could make an annual prepayment of 20% instead. It took a little bit of coaxing and a few Tim Hortons coffees, but banks can be more flexible than you might think: don't assume the terms of your mortgage can't be changed.

At that rate of payment, it sounds absolutely incredible, but we managed to pay off the whole thing in exactly 952 days. By paying off the mortgage in less than three years instead of 25, we saved a total of $153,000 in interest charges, which amounts to more than half the original cost of the house. Meanwhile, the house had already increased in value to about $420,000.
Now we own our house, our cars, and we have absolutely no debt. We feel like a huge weight has been lifted off of us. The best part of it is that we feel like we've been set free to do many things in life that we otherwise wouldn't have been able to do. Tiffany is pregnant now, and we're expecting our first baby in July. Because we have no debt and our expenses have been reduced by 80%, one of us can stay at home as long as we want after our baby is born. I'm only working about 55 hours a week now - which after my previous schedule, feels like part-time - and we're already saving aggressively for retirement. My dream would be to retire when my father did, at age 52, so that we'll still be young and healthy enough to travel the world.

Let me make it clear that I wouldn't recommend the number of hours that I worked for most people. But was it worth it for me? Absolutely. It's been challenging and tiring, but exciting and rewarding too. Right now, I wouldn't change anything for the world. We're only in our 30s, but in a lot of ways, we're set for life.

17 comments:

Jesse said...

I can attest that what Perry has claimed to do is possible. Figure out what you need to survive; it is not much more than food, shelter, and transportation. Food for thought when you are asking how anyone can afford sky-high real estate prices in Vancouver.

Pondering said...

Exactly,

Everyone should be working 100 hours weeks and cutting back to just buying food in order to buy a condo in Vancouver.

blueskies said...

I'm exhausted just reading this.
I think I'll go lie down for awhile.

Warren said...

What ever happened to "I could get hit by a bus tomorrow" Can we say B-A-L-A-N-C-E.

tulip-Mania2 said...

Seems to me this couple may, or may not, need a financial advisor, but they could sure use some mental health help.

We had neighbours like this couple. The man died of a heart attack at 54.

She ended up marrying a "reformed" alcoholic/drug addict etc etc, from her church group.

The guy had never had a full time job in his life, but ended up with a nice house, slightly used car, and I suspect, he was banging some of her friends as well.

Freako said...

I have lots of opinions on this, as I studied in detail in school.

I knew it as the Robinson Crusoe dilemma (or something like that). We know it as the propensity to save.

You can consume today. But if you forego consumption today, you can consume even more tomorrow (real returns). So what is the right answer? That depends on the individual. BUT: The two extremes are generally undesirable.

Saving nothing (or worse, going into debt) allows you to live well today, but at the expense of tomorrow. Second, since most of us are genetically programmed to worry about the future, we may actually be miserable in the present AND the future.

The other extreme, is to live like a pauper until death. Some obviously derive pleasure and security from such hard earned wealth, but if for most people it is a winning propostion.

A couple of other things to note:

For a given amount of consumption, you generally get the most pleasure out of spreading it out For example, eating a chocolate bar a day will give you more satisfaction than eating 7 once a week. For the same reason, it is preferably to spread consumption over your lifetime, but somewhat biased towards later in life. Firstly because of real returns (you may prefer two chocolate bars next week instead of one this week). Second, past consumption may lead to regret, but anticipation of future consumption leads to excitement (the msot enjoyable part of Christmas is looking forward to receiving and opening the gift, not possession of the gifts themselves).

For this reason it is advisable to spread out consumption over our lives. But since our incomes are not evenly distributed , we can use borrowing and savings to smooth out consumption. For example, a med school student has a high probability of high future earnings, so going into debt to lead a decent existence while in school is not a bad thing. Similarly, most of us expect our incomes to decline in our later years, so we save during our peak earning years.

Finally, we all differ in the ways we deal with unknowns or stresses. Some live fulfilling lives despite having been given a only a few years to live due to cancer. Others have everything but can't shake the smallest cloud on the horizon. If you fall into the latter category, the best action for you may have been to act such as the narrator in this post did. Namely bite the bullet, and make some material sacrifices to put his financial house in order and mind at ease.

What does this all have to do with housing? The traditioanal "work, save and controlled consumption" model has been blown out of the water by the housing boom. I don't think there has been such reckless abandon and sense of false entitlement since the roaring 20's. And we know what followed. In fact, the lessons learned in the Great Depression served us for a long time. Even the famed tech bubble was not as pervasive as popularly believed. Most people had their savings tucked into GIC's, savings bonds, homes, and well diversified equities. Not so this time. Another amazing fact out of the States is that a good portion of defaults are due to HELOC's. Some of the owner's in trouble bought 15 years or more ago. They just got greedy with the home equity cash machine.

Clarke said...

I guess Calvinism never really died out.

The majority of people I know that have done this sort of thing have either died too early to enjoy their savings, or did live long enough to do so, but were so acclimatized to the ascetic lifestyle that they could never slow down and enjoy it, and kept going til they died in the saddle.

I do not know of anyone lying on their deathbed, saying "you know, I should have worked more...."

Jason said...

I think Rob Chipman wrote this article. Affordability issues? There are no affordability issues, you're just not working hard enough.

betamax said...

They could have saved even more money by sleeping in a cardboard box and eating garbage from dumpsters behind fast-food restaurants.

I knew a guy who worked all the time; he was an inspiration to me, and I also took on extra work and made a lot of extra money.

Meanwhile, he retired rich and owned 3 houses outright. Then, 2 years after retirement, he died of cancer. He never really got to enjoy much of it. His widow, maybe.

I quit working extra hours after that. As warren suggests above, you have to have some balance in your life.

rentah said...

Recent anecdotal (& thus methodologically limited) research asked people to survey their lives thus far.
The core result was that people reported regrets of omission rather than commission.
They wish they'd taken more risks, and done more things. They didn't say "I should have eaten KD for ten years and paid off that loan instead of backpacking around Europe".
(That said, some may have had regrets that thay'd had to work for 'the man' to pay of xyz, rather than (whatever activity may have been more valuable to them). So this is not an endorsement of wanton spending. I like the way that freako summed it up above).

On your deathbed, it's unlikely that you'll be saying "I should have sat on more committees". (I heard that somewhere, can't quote source).

Jesse said...

There are two things that Perry did: top line growth and bottom line growth. Top line comes from increasing income. He did this by working twice as hard. Personally I would not do this (I would have to give up the pleasure I get spending time reading blogs).

Perry's bottom line growth came from not spending on stuff he didn't need. That is, live simply. Doing so will not give him cancer.

Do not confuse the two strategies Perry used. You can have a life balance while living simply and save a lot. Maybe you cannot pay off your house in 5 years. Instead it might take 10 (in some areas in Vancouver I think it might take 25-30 ;) ).

Also note Perry's top line growth, using his chosen income generation method of working double shifts, is taxed higher. Bottom line growth is after-tax income and is likely your biggest bang for the buck.

Freako said...

"There are two things that Perry did: top line growth and bottom line growth."

Don't forget that it is not just "what" but "when" that matters. As mentioned, all investments earn a real return. The higher the risk, the higher the return.

If a person at age 19 had a chance to earn serious money, say working construction in Saudi Arabia and spend as little as possible. Might not be an enjoyable experiance, BUT:

1. Hard work and lack of comforts/pleasures does give perspective and promotes maturity.
2. If invested at such a young age, high risk is acceptable, so it will earn a very high return.

The equities market has earned about 7% long run real return.

$120,000 invested at age 19 would be cross the $1 million mark in the 50th year of age. You know what, if I had access to a time machine ...

Also, if took all the money I spent on booze between the ages of 17 and 22 and had instead invested it in 100% equities ...

I don't smoke and never did, but the math would work along the same lines.

Jesse said...

"Don't forget that it is not just 'what' but 'when' that matters."

This is true but what seems important for this guy is stability and not large amounts of cash. That can be achieved whether or not he is 35 or 55, though it is probably a bit easier to double-shift earlier in life.

Rad said...

Why are some of you so pissed off? I think that the point of the story is that one has to make some sacrifices to get what he wants.
As opposed to the free luch - gimme now mentality pandemics.

Sure, they are stretching it a bit too far... still a good contrast to the debt junkies.

Freako said...

"Why are some of you so pissed off?"

Who is pissed off?

vintage said...

For some reason this story reminds me of an old joke I've heard as a kid while still in Europe:
This old rich man comes back to the old country after years of immigration and he brings in coffers of money.
Everybody wonders how did he become so stinking rich in America, so he explains:
-Well, I was unemployed, broke and starving and one day while wandering the streets I found a potato.
So I wrapped in tinfoil, cooked it and sold it for a dollar.
With the dollar I earned I bought few more potatoes which I prepared and sold the same day. Made a few bucks this way, bought more potatoes - you got the picture...
I continued that for a week and then I won the State Lottery.

dingus said...

"I don't think there has been such reckless abandon and sense of false entitlement since the roaring 20's."

Hear hear.

"Also, if took all the money I spent on booze between the ages of 17 and 22 and had instead invested it in 100% equities ..."

...I'd be much the poorer for it.


And I don't think anybody's 'pissed off', just a little doubtful that Perry's model is the path to enlightenment and financial salvation for everyone. A tad on the unbalanced side.