Brad finds investing nauseating, but if he had done it five years ago, he’d own his own house by now
By Victor Ferreira
The last time that this 28-year-old federal government worker we’ll call Brad invested money, he didn’t last more than a month.
Brad was 19 in 2012 when his bank convinced him to invest $15,000 he had in his tax-free savings account in a mix of mutual funds.
The decision to invest never sat right with him. The idea of losing any money he earned was nauseating. Although the mutual funds weren’t exactly volatile, he was checking his balance at least twice a day as if they were. He worked as a roofer then and even when he was several stories up with toxic tar fumes filling his nostrils, his mind was elsewhere. There were more bad days than good. At the end of the month, he had lost $200 — or 1.3 per cent — and that was enough to convince him to pull out.
“I don’t have the ability to invest and trust that, over time, I’ll earn a sizeable amount,” Brad said. “The risk of losing two per cent isn’t worth the possibility of getting 10 to 15 per cent.”
Brad now earns a $94,608 salary and has $108,447 divided between his TFSA, high-interest savings and chequing accounts. In a recent month, he was earning 2.3 per cent in interest on his TFSA and 2.5 per cent on his high-interest savings account. Still uneasy with the idea of investing it, his money is sitting entirely in cash. Worse, it appears to be delaying his goal of buying property in Ottawa in the next five years.
Brad was initially able to save up his nest egg by being frugal with his spending when he first arrived in Ottawa after graduating from university. He was making about $50,000 then and was able to set aside $1,200 per month by living in a compact bachelor apartment. His bed wasn’t just where he slept, it doubled as a couch and an office table. An app kept track of his expenses and he diligently refused to go over them. He would buy appetizers instead of entrees when he’d eat out with friends and bring TV dinners to work for lunch.
“I was killing it, but it was pathetic,” Brad said. “I was being so stingy.”
But as he became more successful and was promoted, Brad loosened his grip on his wallet. He now has a car and in the month that I analyzed his expenses, he moved into a new one-bedroom apartment.
The next logical step for Brad is buying property in downtown Ottawa. He’s unsure of whether he’ll end up buying a condo or a house. It depends on how long it takes for him to get married. If he’s still single in five years, he’ll go with the condo instead.
As for the money, he’d want to keep about 20 per cent of his savings after making a downpayment. I asked Mark Therriault, a financial advisor at Nicola Wealth Management if any of this was actually possible and well if Brad started investing five years ago, he probably would’ve already had a house. Ah, the power of compounded returns.
Looking over his expenses, the one thing that sticks out to Therriault is that lack of a detailed plan. While his TFSA is maxed out, Brad should still be looking to budget to save somewhere between $900 and $1,500 per month, he said.
Brad actually outspent his $4,736.12 in after-tax pay as his expenses added up to $5,653. Most of that discrepancy came down to one-time purchases, Brad said, pointing to the $536.75 he spent to get his car’s windshield repaired after cracking it and the $1,091.52 he spent on furnishing his new apartment. His move meant he didn’t need to pay rent, which now sits at $1,379.
Ideally, Therriault said, Brad could free up money from his transport budget, which included $316.28 in car payments and $262.61 in gas or in the $766 he spent on food.
The math is simple. If Brad had saved $900 per month and earned 2.3 per cent in interest — an impossibility now that no single Canadian digital bank is offering two per cent anymore — for the next five years, Brad would have more than $169,000.
In comparison, Therriault looked at what Brad could have saved should he invest that money. For someone of his conservative nature, Therriault recommended an asset allocation fund such as the Nicola Core Portfolio, which holds stocks, bonds, hard asset real estate, commercial mortgages and private equity. By making smaller investments of $1,000 per month, Brad can ease his way into the market while also educating himself on how it functions, Therriault said.
Assuming that the fund generates 6.23 per cent in annualized returns over the next five years as it did between 2014 and 2019, Brad would have more than $199,000 saved in 2025. If he could manage to save $1,500 per month, that number would rise to more than $242,000.
Therriault doesn’t want to push Brad toward investing if he’s not comfortable with the idea. He’s seen similar cases before. He remembers a client who sold assets as markets crashed in 2008 and as a result took nine years to return to investing. As the markets rebounded, he missed out on hundreds of thousands of dollars.
“He has to be okay with not making $30,000 of savings in the next five years because of the fact that I don’t want to see any fluctuation in my portfolio,” Therriault said. “The reality is that’s not in his best interest.”
Average house prices in Ottawa increased by 10 per cent to $500,306 in 2019, according to the Ottawa Real Estate Board. Brad could technically afford to put down a 20 per cent downpayment of $100,000 currently, but it would wipe out his life savings and likely lead to about $2,400 in monthly payments over 25 years.
Over the past five years, prices increased by an average of 7.2 per cent in Ottawa. Should they continue at that pace, the average house will be worth $709,000 in 2025. Even so, if Brad had $199,000 saved, he could spend $159,000 on a downpayment, keep 20 per cent of his savings intact and buy a house. The only caveat is that his mortgage payments would rise to $2,938 over 25 years.
He could not afford a house in five years on his current path.
In the short-term, Brad is confident he can save $900 per month and willing to stick to that plan. Hearing that he might not be able to buy a house won’t convince him to begin investing, he said. If anything, that possibility is making him think about moving up his timeline.
And Therriault’s suggestions did appear to spark his interest, at least initially. One month later, he’d already soured on the idea. The March market crash certainly didn’t help. He’ll buy a house, eventually. He just won’t take the easy way to get there.