Million Dollar Decision: Spend or Save?

Balancing Act! Spending vs Saving

Recently, I ran across a fantastic company. I loved their business model.

The team their helps Canadians take control over their finances and build passive income. Most of their clients achieve the following objectives:

1. Pay off their bad debt within about 30 days
2. Create about a $1,000,000 investment portfolio within 8-10 years
3. And all this, without sacrificing their current lifestyle. 

I am starting to work closer with this firm, to learn more about the specific software program and approach they use to achieve such tremendous success. I can see how this process will benefit many of my readers.

Wouldn’t you want to have a million dollar portfolio!?

This afternoon, I worked through my own numbers and a couple of scenarios to see how I can use my primary home plus leverage to build up my passive income.

I'd like to share my notes with you. It’s amazing how the decision to hang on to current lifestyle affects the long-term outcome!

The Formula

Step 1) Re-finance your primary residence to extract as much equity as possible. Pay-off all high interest rate bad debt and invest the rest.

Step 2) Repeat step #1 above three times: today, then in 3 to 5 years, and then again in about 10 years.

Assumptions

Below are the key assumptions I made when working through my own numbers. These assumptions are reasonable in my particular case.

Your situation might be different, so please adjust and feel free to post questions below the post:

• Property appreciates steadily at 5% a year
• At first refinance, my mortgage interest rate will increase from 3.15 to 4.5%
• Mortgage interest rate will remain at 4.5% for all future years
• I will be able to re-finance up to 75% loan to value every five years
• My portfolio will be invested with an average 11% annual return.

Scenario 1: Keeping My Lifestyle

After each re-finance, I’ll spend all of the passive income.

It is important for me to use the extra disposable income right away.

Outcome

• Fifteen years later, my net worth will be $770,000.
  
• My investment portfolio will be $383,000, producing $42,000 of passive income a year. This income will not be enough to cover my annual mortgage principal and interest payment of $55,000.

Scenario 2: Extreme Frugality

After each re-finance, I’ll find a way to reduce my day-to-day spending, so that all of the passive income goes right back into my portfolio. 

As a result, my disposable income will get smaller with each refinance, yet my portfolio will grow very fast thanks to the compounding interest.

Outcome

• Fifteen years later, my net worth will be $1,307,000.
  
• My investment portfolio will be $1,001,700, producing $110,000 of passive income a year – more than enough to cover my mortgage payments of 55K. 

Know Your Options - Make Conscious Decisions 

These two scenarios show you the full spectrum of possibilities.

The first scenario best fits those who appreciate today and live in the moment. It shows that with some effort put into making your equity work for you, you can build some wealth while enjoying some extra passive income.

The second scenario emphasizes the importance of being conscious about the impact of compounding interest over a long time. If you can be frugal – be frugal! This will pay off over time and you could be on the road to creating a multi-million-dollar portfolio and hundreds of thousands in passive income!

Whichever point on the spectrum of options you choose, it's extremely important to know yourself well, evaluate the possibilities, and go for whatever plan you believe fits your needs and desires best.