Save. Spend. Splurge.

How can they afford that and all about a desirable net worth

The other day I was chatting with a friend who was mentioning that she lives in a building where the cleaning woman for the place owns a luxury SUV, and at the end she says to me:

But just how can she afford that?

Keep in mind, she’s the cleaning woman, and it doesn’t exactly pay $$$$$…. It is still a good job in a nice building but not surgeon-at-a-hospital-good.

Well it is one of two things, I told her.

(A) They’re either millionaires next door.

(B) Or they’re in debt.

Take your pick.

It surprises me how easy it is for people to get their hands on debt these days and they gorge on it like there is no tomorrow.

Not only that, even if you make a good income and aren’t really in debt, you can still be re-classified as an actual rich person or a HENRY.

Actually rich people, are people who don’t think about what they’re buying because they’ve got so much of it, they can spend it like water.

HENRY’s are High Earners Not Rich Yet, and these people (unfortunately) are mostly doctors, dentists and high earners who spend like they’re rich with a lavish $200,000-a-year lifestyle, but don’t save as much of it compared to their income.

How can you tell which one you are, regardless of income?

Well, here are two quick ways.

1. What’s your PF score?

Formula: Your net worth divided by your annual expenses

Read about the PF Score here.

My current PF score* is = 20.6

*New expenses would be $24,000 a year based on my Semi-Emergency Budget, but I really aim for $1700 a month.

  • Anything in the negatives: You need to get out of debt now.
  • Score of 1: You have enough for one year’s worth of expenses.
  • Score of 5: You are picking up steam.
  • Score of 10: Getting better.
  • Score of 25: You are financially independent!!
  • Score of 30: Your investments are making more than you spend.
  • Anything above 30: Sit back and relax, you’re golden!

2. What is your Millionaire Next Door score?

Formula: 10% x Age x Income = Ideal Net Worth

Based on that formula above, my personal net worth should be at least: $264,000 which is a “desirable net worth”, or in other words “Good but not Great“.

If you want to be a true accumulator of wealth, it is that number multiplied by two.

2 x $264,000 = $528,000 should be my net worth if I am truly rich and good at saving my money.

Oooo! I am so close. 🙂

I guess it’d help if I worked more. Alas.


Comparing yourself to the average Canadian

The average Canadian debt load is $22,081 not including mortgages (shout out to Quebec for having the lowest!).

For an overall debt load, Canadians are 167.3% in debt if you take into account DISPOSABLE income (not their actual).

This means if you look at how much you make in a year ($50,000 let’s say), a portion of that goes to taxes, and then the rest goes to your rent/mortgage, utilities, groceries etc and whatever you have left over, is called “Disposable Income” which is whatever you have leftover for clothes, shopping, eating out, etc.

That 167.3% figure means that it would take a year and a half for the average Canadian to not spend a SINGLE FREE PENNY on anything, to clear that debt (not including of course the fact that interest keeps racking up on that principal).

Out of the G7 countries, we owe the most. We beat the U.S. O_o

The Two Canadian Extremes: No debt or lots of it

There are two extremes in Canada: 25% of us are not in any personal debt at all (again, not counting mortgages) and the rest of us are gorging on it.

Even so, as part of that debt-free cohort, I wonder how many of us Canadians are completely 100% debt-free the way my partner and I are, I mean there are people who are shouldering the portion of our average debt load, and their own as well.

That is SCARY.

It still kind of shocks me when people sometimes mention their $400K mortgage so casually like it isn’t a big deal. I sort of fall over. It’s almost as much as I have as a net worth.

I’d have sleepless nights owing that much money to someone, no matter how cheap it costs to borrow it (for now!).

See, in Canada, you also can only get a rate for 5-10 years, max.

After 10 years, your mortgage gets re-negotiated to whatever the new market rate is. So you could lock in let’s say 4.5% now but only for the next 10 years and it might rocket to 11% then as the lowest rate.

What if you get caught in that upswing in rates? You may not be able to pay it.

To add the nail to the coffin, you can’t even write off that mortgage interest on your taxes. Boo-urns.

Paying down our mortgages illogically

I also think that people paying down mortgages do so aggressively at the end of the loan rather than at the start, which is counter-intuitive to logic.

You should pay down your mortgage aggressively at the start when you get the biggest bang for your buck to reduce the amount of interest. Most of your payments at the start of your mortgage go towards the interest in the loan, not on the actual loan itself (the principal).

Then take it easy near the end if you wish to do so because most of your payment by then is going towards the principal (what you owe as a base amount) and not the interest paid on the loan.

People do the opposite because they see: only $50K left!! .. and are excited to just finish it off.

That $50K would have been better paid off at the start to lower your interest overall (taking into account of course, penalty charges for paying it off too aggressively).

Baby means … “New / Upgrade your home”

I’ve also observed casually two things that happen that trigger the purchase of a home:

People buy homes and/or upgrade before the birth of their first child.

We are the only couple we know to not have done this. Every single person I knew who was expecting, bought a place. More often than not, a home, and a monstrosity at that, the biggest they could afford.

Also, people gorge on more consumer debt if they take on mortgage.

I know at least 5 couples who bought new cars along with their new home because what is an extra $30,000 in the grand scheme of a $400,000 mortgage?

It is like when I go out for the day, have to spend over $300 on passports and say: what’s another $5 for a piece of cake?

(Seeeeeeee.. you KNEW I’d bring it back to food eventually.)

The spending floodgates have opened and I’m primed to spend now and think later.

We are also the only couple we know to not have done this.

We are keeping our cars until they hit the junkyard and taking minimal care of them until they do, that is to say we are not upgrading the rims, adding fancy stereo systems or tricking it out in any way. As-is, regular oil & brake pad changes, putting in the lowest grade of gas and minor repairs as required (shocks), are fine.

Why gas is cheaper at retailers

By the way, if you buy fuel at a Native American Reserve, Canadian Tire, Costco or any other retailer that sells it and you wonder why it is SO MUCH cheaper, it is because it is not the same quality.

As I learned, oil refiners like Esso, etc, refine the oil differently for each market.

They sell and add byproducts like ethanol in the oil for their own chains (Esso, Shell, Petro Canada, etc) and sell that. They also provide and sell oil to retailers like Costco, but they do less refining and cut back on the expensive additives that help the fuel burn better and more efficiently in your engine.

As a result with an old car you may notice that it makes noises when you run it on retail chain gas and seems to chug along a little tougher versus proper gas station fuel.

The difference is in the price. Personally, I avoid retail gas stations and stick with the regular gas stations no matter how much they charge.

Anyway, back to debt.

The vicious cycle of spending

We have easy access to it, and use it freely, with the mindset that we will always be in debt no matter what we do, and this resignation to our fate is what makes us so unhappy, which restarts the vicious cycle of buying stuff to pile on and cover up our unhappiness.

It isn’t until you break that mental cycle and sit down, budget your money, track your expenses and plan to be realistically debt-free by taking the reins on your finances that you start to see that you’ve been living in a hell masquerading as heaven.

Stuff, does make you feel better

I know I feel great when I get a new package in the mail…

But it isn’t worth it unless it is something you truly wanted and wasn’t some impulse buy because you were bored/sad/mad/upset about something.

So.. purchase with intent instead

I’m not saying to go live like a monk and never spend a penny again, but just consider what you’re buying before you do it.

Take a few minutes, run through the 4 R’s (Reduce, Reuse, Recycle, Rent) and hold whatever it is in your hand to mindfully choose it.

Sounds like a load of hokey but it works.

You don’t even need to do it out loud, do it in secret in your head and watch how you stop buying without thinking.

I did this with a necklace at COS the other day that was a tempting 70% off and totally my style, citing that I already had something similar that I liked better than this one at home, so I didn’t need it. (Reduce)

In case you were wondering, it was this one:

..which looks similar in style to this necklace of mine:

Shop the look here ]

So how do people afford that (and it isn’t patently clear)?

My answer is:

Debt. Lots of it.


  • restful

    Parents buying a house with backyard is also intended for land appreciation in pace with post secondary tuition especially in the US. No other asset class historically has grown as much than land in Coastal cities in the last 20 years. Not to say past performance is future indicator . But not all parents are as astute to invest in a portfolio for baby since day 1. So buying detached house is essentially land acquisition and long term investment for baby. Ideally as a mom I’d like to have a manageable house size on a low maintenance larger plot of land in the future. My condo in the long run will not grow as fast as land appreciation in coastal cities at least.

  • restful

    A common strategy for house purchase when baby arrives aside from more space is actually a financial strategy for the land which historically tho not indicative of the future the only asset class that has kept up with the rising speed of tuition ESP for people who are not disciplined enough to ride out the stock market index volatility. Land acquisition is a good alternative and a family needs to live on somewhere anyway.

    I plan to buy a larger lot and smaller house when baby comes for the same reason.

    Looking historically in general people who grew up on a single family detached dwelling with the land appreciation are financially better off than the ones living in condo or townbhosue that obviously has not appreciated as much.

    Most mommies aren’t prudent enough to start investing in the stock market for their baby on day 1. Kudoos to u

  • SarahN

    I would suggest the pregnant women want to move before having a new born – as moving house is harder then. Do they need a huge place or a mortgage – no, not necessarily. But the timing, that makes sense to me. Plus – I’ve been reading your weeks, and (if you didn’t care about debt of course) you could have enough space for Baby Bun to play alone potentially!? if he can play independently? Ok, maybe it’s a delusion…

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