The cheapest way I’m aware of (and the way I do it) is to get a “self-directed investing account” at TD Canada Trust, with Web Broker enabled. This can be a bitch to set up in person at a branch, but once it’s done it’s done and you can enjoy a lifetime of investing without paying some banker thousands of dollars to click a mouse for you. Because that’s what’s happening if you don’t do this yourself. A banker will charge 1-2% annually whether you make money or not. Bankers get away with this because it doesn’t sound like much and what they’re doing seems mystical.
It’s not magic. And it’s not difficult.
And when your balance is only earning 2% in interest annually, that means you’re losing all of your interest in fees if you have someone manage your account. FUCK that. YOU manage your account and keep those thousands so they can compound.
Once you have the Web Broker enabled TFSA account open, you add your TFSA as a bill payment from whatever other bank you normally bank with, and that’s how you get cash into the account.
Once cash is in there, you can buy whatever you want but I’d argue violently for choosing indexed mutual funds with the lowest Management Expense Ratio (MER) possible. As linked to above, my trio of death include TDB900, TDB905, and TDB902. This covers the entire Canadian, US, and International markets. It’s as diversified as you can get (aka lowest risk), with the lowest management fees, and gets you that juicy 7% average annual return over the long term.
There is no transaction fee when buying or selling mutual funds (as there are with stocks, which is about $10 each time you buy or sell). MER is what you pay the person who manages the entire mutual fund (this is not your local branch banker, this is some superstar way high up the TD foodchain).
As far as I can tell, this MER fee is unavoidable, so the best we can do is to minimize its damage as much as possible. AND THE DAMAGE CAN BE SIGNIFICANT. If you currently own mutual funds, find out what the MER is on the funds. It should be easy to look up online. Lia and I are paying between 0.33% and 0.51% MER rates on the TDB900, TDB905, and TDB902 mutual funds we own.
So if you’re paying 2% or 3% MER, that’s between 5 and 10 times more than you could be paying with TD’s E-Series funds. From what I’ve been able to find online, these are the least expensive indexed mutual funds available.
This year’s investing efforts got off to a depressing start. I had set a goal of investing $30,000 this year, which breaks down to $2,500 per month. To keep myself (painfully) aware of my (lack of) progress, I had a running tally on the whiteboard in my office.
After the first 3 months of 2018, Lia and I had only managed to invest $600 and so we were $6,900 below where we’d hoped to be at that point in the year (as seen in the image below, photographed in April):
You will also notice that I delayed publishing the last Retirement progress report because I was embarrassed at how little we’d invested. I also started reporting market value to avoid having to talk about the actual dollar amount contributed this year. I was working flat out, and I just couldn’t make enough to invest after monthly living expenses took their toll.
Lake also arrived in March, so there’s that.
Then, a few months ago, I stopped tracking the deficit and simply kept track of the positive number. I was just tired of feeling shitty about myself, and obviously looking at that red number grow negatively wasn’t having the desired effect on my behaviour. I erased the red and just tracked the green. I buckled down and worked a bit harder too.
Since then, things have improved.
I’m not entirely sure what happened, but keep in mind there’s a significant chunk of HST in that figure which we will have to make up for in the beginning of 2019. So that’s probably why our investing pattern is so end-of-year heavy: I spend the beginning of the year trying to build up money again to pay taxes owed for the prior year – because we’d already invested that HST / income tax (instead of setting it aside and having it earn nothing all year).
My TFSA has dropped 14% in the last quarter and now sits at $55,542.05. It’s down $6,094.70 in 3 months. This is actually a good thing because this is the lowest I’ve seen these indexed mutual funds in like 3 years, and we just bought a heap of them at this lower rate.
Lia’s TFSA is on the radar now, clocking in at $28.645.18 market value (it’s dropped 2.5% since we bought our first chunk of mutual funds like 2 weeks ago, indexes are plummeting).
It does not feel good at seeing our TFSAs drop like this. But on a conceptual level I understand that this is a great time to buy mutual funds. So in the long run we should do better because we bought during this slump, and have sold nothing. But still – nobody likes looking at their accounts when they’re low.
Our mortgage is sitting at $158,666.20 (down $1,301.95 since my last report).
Up to this point, my math has been a bit wonky in predicting future values for these retirement reports. I was calculating the total value of our investments compounding at 7% annually but really they compound at about 2.17% and are supposed to appreciate at 7% on average over the long term. I think the two are different but I struggle to know why.
I also don’t quite know how to create projections of future value based on these conditions of separate appreciation and compounding percentages. But I’ll try walking through it slowly and try to get close.
Say we contribute $30,000 per year, we can look at it like this:
We have an $84,187 balance going into year 3, 2019.
We hope to add another $30,000 in year 3, which will bring the balance to $114,187. The value of these mutual funds should grow by 7% annually, so by the end of year 3 we can expect it to have appreciated in value to $122,180.
Our mutual funds pay annual distributions (basically, this is an interest payment) at some point in mid-December. The distribution yield percentage for each fund is a little different, and I’m not sure if it’s fixed or if it changes year to year. At present, distribution yield is 3.04% for the International Index (TDB905), 2.3% for the Canadian Index (TDB900), and 1.16% for the US Index (TDB902). So at the moment, these distribution yields average to 2.17%.
I’ve selected the “re-invest dividends” option, so that dividend/annual distribution buys more shares of the same mutual funds already sitting in the TFSAs. As far as I can tell, this is what is meant by “compound interest”.
In the chart below of my TFSA’s performance, I’ve restricted the time period to the past 3 months, and you can see that things are tanking hard except the “Interests and Dividends” which have increased by $1,284.96. That’s the annual distribution which was just paid out on Dec 17th.
Wow that rabbit hole got deep. I totally forgot what I was doing there for a good hour while I looked all of that up. So we’ll take our future value $122,180 amount in December of 2019 and collect 2.17% in distributions, which comes to $2,651. Add that to the pile and we’re going into year 4 with $124,831.
Keeping with this pattern, here is my best shot at illustrating future years:
If someone who knows math or money or both wants to vet this that would be awesome. At this point it’s feeling a lot like a shot in the dark.
Based on the most recent MMM article, Lia and I will likely be aiming for between $1 and $1.4 million to consider ourselves financially independent / retired. This is way higher than my first guess that we’d be able to retire on $800,000. So at this rate it looks more like we’ll become financially independent at some time in our early 50s.
But the good news is that once we reach the latter years of our investing career, we’ll be covering ground exponentially faster than we had been in the beginning.
Investing seems to be like a train; it takes forever to even begin to get rolling, but once it does the sheer momentum becomes a force unto itself.
If you’d like to get your own war chest going, I’ve written a much shorter post called Simple Investing 101 so check that out.
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