September, 2018 - Millionaire on the Prairie

Finding the Balance – Saving Money for Today and Tomorrow

When I was a very young girl, I’d heard about a marital method of allocating money to both present and future goals that made a lot of sense to me at the time. Essentially, in a situation where both spouses worked, the household’s present needs would be paid for from one paycheque while the other paycheque was devoted to saving for the future. To my naive mind, this division would be split evenly since obviously both parties would earn the same amount and there would be no reason to fight about money… Ah, the innocence of youth!

Now that I’m an adult, I realize that many, many, many factors go into the process used by couples to decide how their money is allocated. Many of my friends are married. As far as I know, not a single one of them uses the “ideal allocation” that I’d envisioned as a child. They’ve worked out money rules that work for their relationships and they all seem very happy with their decisions. Still though, I remain convinced that spending one income while saving the other is a great idea.

If you’ve read enough personal finance blogs, you’ll have noted that the common minimum savings target in the online world of personal finance is 50% of your income. There’s often the admonition to save as much as you can, as soon as you can but 50% should be considered the baseline if you want to reach financial independence sooner than 65!

The challenge for singletons is obvious! We don’t always have that second income coming into our households, which means it’s not always as easy for us to live on 50% today while saving 50% for tomorrow. Economies of scale are missing since there’s only one paycheque to pay for the entire cost of housing, all of the food, all of our entertainment/travel/debt payments, etc… There are ways around some of these costs. For example, those singletons living with roommates have found a way to decrease their housing costs but not everyone wants to live with roommates. Also, it’s highly unlikely that roommates are willing to fund one another’s retirement accounts from the disposable income that results from lower housing costs! A couple’s desire to share their financial goals and to pursue them over a lifetime together is something that is very definitely missing from the roommate relationship.

If you’re a singleton with a side hustle, then maybe you’re one of the fortunate ones whose side hustle income is equivalent to what you earn from your regular job and saving that income already amounts to saving 50% of your income. Or maybe you’re a singleton with a nice, fat paycheque that allows you to live well below your means. If so, then hooray for you! You’re well on your way to funding the very desirable status of being a financially independent person where working for a living is an option rather than a requirement.

Singletons without lucrative side hustles or incredible incomes have to find ways to increase the savings target so that they can also reach financial independence and have the option of whether to continue working. Even singletons who love, love, love their current jobs should be saving big chunks of cash from their paycheques. The things that we love about our jobs can change over time. When they do, it’s best to be in a position to leave when those changes become intolerable and it’s even better to be able to leave without financial fears for the future.

What’s a singleton to do? As one singleton to another, I would urge you to save money towards your future. Personally, I automatically transfer money from my paycheque to my investment and retirement accounts every single time I get paid. The convenience of automatic transfers cannot be overemphasized because automation is beautiful!

If you need a daily reminder to commit to your future, consider the savings method employed by Grant Sabatier of www.millennialmoney.com where he decided to save a fixed amount every single day in order to reach his goal of financial independence and early retirement. Not everyone is able to save as much as Grant does. If you can, great! If not, then pick an amount that you can save and go from there. The point is to start saving money for your future as soon as you can. Once you’re in the habit of saving money, you’ll more likely than not increase the amount that you’re saving so that you can reach your financial goals sooner rather than later.

And the reality is that saving something is far better than saving nothing, even if your financial situation doesn’t allow you to hit the target of saving 50% of your income every year.

In a perfect world, I would be living on 50% of my income. I would pretend that my Illusory Partner was bringing in the other 50% of the household income and that his income would be going into the bank towards our goals of financial independence and early retirement while continuing to enjoy a standard of living that’s as good as the one I have now. Unfortunately for me, saving 50% of my income would mean that I wouldn’t enjoy my day-to-day life as much as I already do because I’d be living on a very tight budget that wouldn’t allow for the little luxuries that make life sweet. That’s just a fancy way of saying that I’m not yet prepared to cut out any of today’s expenditures in order to save even more for the future.

Am I still working towards the goal of saving 50% of my income? Of course I am! Yet, I will freely admit that my choices about how I want to live my life from one day to the next have prevented me from reaching this goal.

This particular singleton has made the decision to live below her means and to save as much as possible while still incorporating travel, entertainment, and spontaneous fun into her life. It’s a constant battle, but I’ve managed to create a budget where I save 40% of my net income and I set it aside for my aforementioned goals of financial independence and early retirement. I’m not terribly hard on myself for not being able to save the full 50%. As far as I’m concerned, 40% is still a respectable chunk of money so I think I’m doing okay.

The extra 10% that stays in my chequing account is for the small extravagances and short-term goals that are most important to me. It has paid for my recent international trips to Italy (2016) and to Spain (2017). It paid for a last-minute invite to a production of Comedy of Errors at Shakespeare in the Park. It has paid for my annual theatre subscription. It has paid for the costs associated with flying all over North America to attend family reunions. That extra 10% allows me to enjoy life now without having to wait to do all of my enjoyment later. I’ve been able to find a balance that works very well for me.

Could I have lived without those little extras in order to save the money? Of course I could have! And had I made that choice, there is no doubt in my mind that I would be closer to my financial goals. However, the other reality of choosing to save more money would be that I wouldn’t have seen as much of the world as I already have. I wouldn’t be as close to my extended family as I am now because I would have missed time with them nurturing the familial bonds. Similarly, I wouldn’t have had as much time with my friends building great memories around time spent doing things that we’ve enjoyed.

It’s very important to me to be free of the obligation to work as soon as possible – that’s why I save 40% of my net income and invest it for my future. Hopefully, I will continue to earn raises and receive larger dividend cheques from my army of Little Money Soldiers. One day, I will be in a position to meet my target of saving 50% of my net income.

Until then, it’s vitally important to me to live my best life each and every day on the other 60% of my paycheque. I don’t want to reach early retirement and realize that I haven’t nurtured important relationships or that I don’t have enough good memories of my life-before-retirement.

It’s taken me the better part of nearly 5 decades to figure out the best balance between my today money and my tomorrow money. Life is so short and the time flies so fast! There is a balance and I’ve been lucky enough to find it.

Not all healthcare expenses are free

We Canadians pride ourselves on our free healthcare system. However, I’m the first to admit that the Canadian healthcare system is not perfect and that there are challenges which will get worse as more and more of us age and try to access the resources and services simultaneously. However, it’s still better than the experience of our neighbours to the south – we are far less likely to go bankrupt for want of a bandaid…

Today, I’m positing that even Canadians need some emergency money set aside for medical expenses. Sometimes, we delude ourselves into thinking that we don’t need to pay for expenses related to healthcare. Hogwash! There are some expenses which arise from healthcare and they have to be funded just like everything else. And since these kinds of expenses are unanticipated, a healthy emergency fund should be in place so that the money is already there when you need it. I’m not talking about regular prescription co-pays, which should be accommodated in your monthly budget. I’m not talking about any health insurance premiums that you may have to pay, since these should also already be a line item in your budget. You know in advance that you have to pay these expenses so you can plan for them ahead of time.

Nope! Today, I’m talking about the sneaky and indirect health-related costs that can spring up at any time and without warning yet must still be paid.

Back in 2014, I took a trip to Vegas and had a very good time until I arrived at the McCarran airport to fly home. My right Achilles tendon started to cause me significant pain with every step. I tried to minimize my walking through the airport, but the pain was still there when I landed and had to get off the plane. I had a few days off before returning to work so I kept my leg elevated and applied an ice-pack. I’m not a doctor – I don’t even dress up as one at Halloween! Needless to say, my home remedies did not work and I eventually had to visit my primary care doctor. Her time, attention and expertise were all free – thank you Canadian healthcare system!

My doctor ran some tests and told me that I’d likely sprained my tendon. She advised me to avoid any weight-bearing on my foot for a few days then I could start walking on it a little bit after 5-7 days. After that initial period, I could gently increase the amount of walking that I did each day. No weight-bearing meant using crutches to get around – not fun, but not impossible either.

Now, I normally commute to work by bus. I’m not a fan of rush hour traffic and the bus is convenient. Riding the bus allows me to have a little catnap after work before I arrive home. It’s also a lot cheaper than monthly parking. (The money I save on parking funds my travel, i.e. travel such as the trip to Vegas where I somehow hurt myself!) The only problem with commuting while on crutches was that my closest bus stop is roughly a 5-minute healthy-tendon-walk from my office. As I wasn’t terribly fast on my crutches, I knew that my injured-tendon-walking time would be a lot longer than 5 minutes so I chose to drive to work and to park in my office building, a whopping $13/day at the time.

My injury did not heal nearly as fast as my doctor had predicted. When day 7 rolled around, I still couldn’t walk the distance between my parked vehicle to the bus! I still needed my crutches so I made the decision to pay for parking until such time as I could walk comfortably.

It took me 5-6 weeks before I was confident that my tendon was strong enough to let me get through the day without being hobbled by mid-afternoon. This meant that I had to shell out several hundred dollars for parking fees! While parking is not technically a health expense, it is an example of how health issues can result in unexpected expenses. If I hadn’t had an emergency fund, I would have been funding those parking expenses with my credit card.

Another example of unexpected expenses related to healthcare is visiting people in the hospital. When my mom has gone in for surgery and has been required to stay in the hospital for a few days, I’ve paid close to $100 in parking fees for 3-4 days’ worth of visits. I’m convinced that the streets surrounding the hospitals in my city are worn down faster than every other city street because visitors spend many hours driving around in search of a free parking spot. Each of my hospital visits started with the mandatory loop around the hospital in search of an elusive free spot. More often than not, my search was futile and I found myself standing at various parking meters trying to figure out how much time to buy. Thankfully, I live in the same municipality as my mother so I didn’t have the added financial burden of travelling out of town, possibly staying in a hotel, and missing a few days of work in order to be with her.

What about injuries that don’t require a trip to the doctor or hospital? In 2016, I hurt my thumb so badly that I couldn’t concentrate. (Again, I have no idea what I did to myself!) It was impossible to pick up items and any movement caused pain in that digit. I was afraid to drive my 5-speed because I wasn’t confident that I would be able to work the stick-shift in case I need to complete an emergency maneuver. I went to a medical supply store and bought myself a hand brace. Relief was immediate and I happily handed over my money.

Thankfully, I had the money in my emergency account to fund all these unexpected purchases. I wasn’t forced to borrow money in order to get to my office, to visit my mother, to find a non-prescribed solution to my injury. I’d had the foresight to put money aside for an emergency. When those emergencies showed up, I was ready financially and I was easily able to weather the added strain on my finances without going into debt. My focus was properly on healing the injury without the distraction of wondering how I would pay off credit card debt.

Medical emergencies will happen. They will never be at a convenient time, nor will they give you much, if any, warning. However, I can promise you that they will result in some sort of impact to your finances. If you’re lucky, the financial impact will be minimal. If you’re not so lucky, then you’ll need to have a larger cash cushion to get you through the situation. (And if you don’t already have short-term or long-term disability insurance, then get a policy in place sooner rather than later!) I strongly urge you to start funding your medical emergencies now by putting money aside in your emergency account.

Trust me when I say that you won’t regret having the money in the bank when you need it!

Coasting to Financial Independence

How many of you have heard of coasting to financial independence once you’ve hit a pre-determined target for your investment portfolio?

It’s a concept known as Coast FI. I first learned about it in a post from Military Dollar. Essentially, Coast FI means that you can stop contributing money toward your goal of financial independence once you’ve accumulated a certain amount of money in your investment portfolio, i.e. your Coast FI amount. Your Coast FI amount will increase via compounding returns until it’s the amount of money needed to sustain your life’s expenses without you having to earn an income. Once you’ve obtained the prescribed amount of money, then you need not ever add another penny to your investment portfolio because compounding will do the work of growing it to the right amount of money to cover for your future spending needs. Keep in mind that if your spending needs increase, then your required Coast FI amount will also increase proportionally.

I was most intruiged! Coast FI is a great idea and I admire those who have faith that they will get the annual returns that they need to make this work. Obviously, higher annual returns mean that you’ll need a lower amount in your investment portfolio. The opposite is also true – if the anticipated annual returns are going to be lower, then you’ll need a higher initial amount in your investment portfolio before you can start coasting. The real trick, of course, is reliably predicting what your future returns will be in order to accurately determine your personalized Coast FI number.

Based on the Rule of 72, you can figure out when your money will double by dividing 72 by the your investment return. For example, if you earn a 9% annualized return, then your money will double every 8 years. If you earn a 10% return, then your money will double every 7.2 years. If you earn a 3% return, then your money will double every 24 years.

The other neat thing I like about this concept is that once you’ve saved your Coast FI number in your investment account, then you can stop contributing to your investments because compounding will take over and you’ll reach your financial independence number without adding another nickel!!! This is where faith comes in. There are people out there who will stop contributing to their investment portfolio once they’ve hit their Coast FI number. They will trust in the long-term returns of the stock market to deliver unto them the money that they will need in order to retire when they want.

For the record, I’m not a person who would stop making contributions without a signed guarantee from God that I’d have enough money in place to stop working. Others may feel differently. I have a feeling that I’ll keep adding to my investment portfolio forever. My reasons are as follows:

One – I actually feel better when I set aside a little bit of money. Psychologically, I know that I’m saving for a rainy day. I get great comfort knowing that there’s a little pot of money set aside in case I need it. Saving money also makes me feel responsible and in control of my destiny. It’s my way of telling myself that I’m doing the right thing with my money. I’ve been a saver since I was a little girl and I’ve lived by the spend some, save some philosophy for my entire life so I doubt that this aspect of my personality is going to change just because I’ve reached the point of Coast FI.

Two – Saving a portion of my paycheque helps me with budgeting. For the past 18 years, I’ve been using percentages to divvy up my money. Right now, 40% of my net income goes to investing. There may come a time when I drop that allocation down to 25% but that’s pretty far away. If I were to start adding more fixed expenses to my budget now, then I’d have to figure out where to cut them later just in case I wasn’t getting the annualized returns that I would need for the Coast FI method to work for me. So instead of having 15% more expenses, I simply invest that money and live on whatever’s leftover. So far, this method has worked beautifully for me.

Three – Even if I do get the returns that I need to coast to financial independence, adding extra money to my investment account would mean that I could retire from work even sooner! Pretend for a moment that relying on Coast FI means I can retire at 56. If I keep adding to my investment account in addition to relying on Coast FI then I’m creating the option to possibly retire even sooner at 52 or 53. Nothing wrong with that!

Finally, when it comes to money, I’ve always believed that it’s better to have it and not need it than to need it and not have it. In the unlikely event that I wind up with “too much money” – a concept I find as foreign as the idea of “leftover wine” – I will have done myself a huge favour by creating a financial cushion that weathered the storms of my life. Whatever money remains after I’ve departed this mortal coil will be used to better the lives of my beneficiaries. Make no mistake – I am not depriving myself during my lifetime and I’m going to continue doing the things that I want to do. The reality is that my wants are few: time with family and friends, travel to new places, money for dining out, theatre and concert tickets, renovations to my home. My income is sufficient to satisfy these desires and I see no reason to find new ways to spend my money simply because I have it. I’ve found that delicate financial balance between living for today and saving for tomorrow. Coast FI is simply another layer of icing on my already super-delicious cake!

Procrastination is a Money Mistake!

I’ve made my share of mistakes when it comes to money.

One of my biggest mistakes was waiting 5 YEARS before I started investing in my non-registered portfolio of dividend-paying exchange traded funds (ETFs). I paid off my house when I was 34 but I waited half a decade before I started investing in dividend-producing assets outside of my TFSA and my RRSP. That was such a dumb move that I almost want to slap myself! I was investing my former mortgage payment money in somewhat expensive mutual funds. Fortunately, I’d had the brains to not spend my newly-freed-up mortgage payment on stuff! However, I was getting raises at work during this time so I’d had the good fortune of having additional disposable income on top of my former mortgage payments. Unfortunately, I wasn’t smart enough to re-direct these extra funds towards my non-registered investment portfolio. In other words, money from my raises did not work as hard for me as it should have.

And if you were to ask me what I did with my “extra” money during that time-frame, I’d be hard pressed to tell you. I know that I took a trip to Hawaii with my mother. I know that I bought my SUV, although I paid it off within 6 months of purchase through gazelle intensity. I know that I did some renovations to my house. However, the rest of it must have just disappeared via thoughtless spending. I have no idea where it went and that drives me crazy!

You want to know the kicker? I’d spent the three years prior to actually investing thinking that I should be putting my money into an asset that would pay me dividends. I yearned for a dividend-paying portfolio so badly that I could taste it. I craved a dividend-paying portfolio because I understood that those dividends would compound over decades to create a solid cash flow to supplement my other retirement income. I spent hours reading blogs and personal finance books, pouring over newspaper articles about value investing versus growth investing, deciphering the various blah-blah-blah from multiple sources. Yet, I was no closer to actually buying the dividend-producing assets that I wanted.

Despite all my time thinking about what I wanted, I didn’t take any action to make it happen – instead, I waited and waited and waited to start! And when the financial crisis hit, I froze. I listened to the faceless voices on the radio who were predicting the end of the stock market as we knew it. Years of procrastinating will cost me dearly because I could have been investing steadily during the financial crisis and scooping up investments at low, low prices. Instead, I waited and pondered and thought and wondered and dreamt and delayed and considered and waited a little bit more!!! My inaction means that my Little Money Soldiers have five fewer years to go out and reproduce themselves.

I’d always wanted to retire at 50, but I don’t think I can hit that target without winning the lottery. In case you were wondering, picking the right numbers is a lot harder than it looks!

Part of me will always wonder if I could’ve hit my goal if I’d started investing all of my disposable income into my non-registered portfolio as soon as I’d paid off my mortgage. It’s a horrible game of “What if?” and there’s no good answer. The truth is that I can’t go back and re-write history. What’s done is done. And I have to remember that I still love the renovations that I’ve done to my house, and that I loved the travelling that I’ve done since becoming mortgage-free. During those 5 years of procrastination, I was smart enough at the very least to pay cash for everything so I never got myself into debt.

So what caused me to finally make the investment that I’d wanted for 5 years? Mainly, it was a smart little voice inside my head that spoke firmly and said the following: “Enough! Just start or it will never get done.”

I wish that voice had been more melodramatic or that the words had been more inspiring but the little voice was short and sweet. I listened to the little voice and went to my brokerage account’s website to get started. It only took a few minutes to set up my automatic transfers, to enter the initial buy order for my dividend-producing assets, to set up the dividend re-investment plan (DRIP), and to take the first step towards getting the kind of portfolio that I wanted.

The other thing that kicked me into gear was all the reading I was doing on personal finance blogs about something called the “side hustle.” Back in my day, a side hustle was called a part-time job. Times change and I must change with them. In any event, a side hustle is a way to make money beyond going to your main job. I knew that an investment portfolio which paid me dividends every month would count as a side hustle…and it offered the added benefit of not requiring me to really do anything in order to get the money. Yes, I had to earn the money to buy the units in my ETF but I already had a firmly established habit of investing my former mortgage payment so there was no trouble on that front. I simply had to move the contribution from my old investment to my new one. Easy-peasy!

The other benefit of my chosen investment plan was that my deeply-held preference for laziness would be satisfied, yet I could still tell myself that I had a side hustle. I too had joined the ranks of the personal finance bloggers whom I admired and who had found ways to benefit from a side hustle in addition to their regular, full-time employment. The cherry on top of my plan was that my dividend income would receive preferential tax-treatment, which is just a fancy way of saying that my dividend money would be taxed at a lower rate than my employment income.

There are many, many ways in which I could have made significant financial mistakes with my money. Procrastination is the one that will hobble my dream of early retirement at age 50. However, it could have been worse. I could’ve gone into debt, or I could’ve co-signed a loan with someone who skipped out on the debt. I could’ve spent my mortgage money after my mortgage was gone. I could still be waiting to start!!! When I’m flagellating myself a wee bit too much about this financial mistake, I remind myself that I’ll still retire sooner than most and that I could’ve done a whole lot worse than living in my own head instead of taking action as soon as I’d figured out what I wanted to do with my money.

Debt is Corrosive to the Creation of Intergenerational Wealth

Debt is a cancer to building intergenerational wealth. The phrase intergenerational wealth conjures up images of the very, very rich who are able to bestow entire empires upon their progeny. Truthfully, the concept doesn’t require anything quite that elaborate. My definition of intergenerational wealth is the ability to provide financial assistance to your offspring in order to help them get ahead as adults. It’s above and beyond that level of sustenance that is legally required of parents. Intergenerational wealth is what you use to assist your child in achieving a better life – financial or otherwise – than the one you’ve had. This type of wealth is created when you’ve acquired assets that can be utilized to fund the major purchases of your child’s life when the time comes.

A few weeks back, I read an article about how black women graduate with the highest amount of student loan debt. It got me thinking. How could these women build wealth for their families if they were saddled with big student loans which required years to repay? And what if they also had mortgages, car loans and credit card debt while carrying student loan burdens? How much money would they have to earn to both pay off all debt and save enough to invest in the family’s future? What kind of impact does debt – student loan or otherwise – have on a parent’s ability to build intergenerational wealth?

My ultimate conclusion was that all debt is an inhibitor to the creation and growth of intergenerational wealth, regardless of the demographic group to which the debtor belongs. Debt of any kind impedes the accumulation of wealth because you’re so preoccupied with paying someone else that you rarely get the opportunity to pay yourself first. Obviously, larger amounts of debt have a greater negative impact on the creation of wealth because it takes so much longer to pay it back. At the end of the day, debt is corrosive to the accumulation of wealth.

If you’re making payments on your student loan, your car loan, your credit cards, and your mortgage, then your money is not being put towards your family’s future. Whatever the size of the debt obligations, whether $500 per month or $5000 per month, the fact remains that you’ve committed to giving that amount of money to someone else in order to pay down your outstanding debt. You’ve agreed to give away the money that could have been used to build a foundation of wealth for yourself and your family.

Recently, I read an interview with a millionaire where a cycle of intergenerational wealth was put into place. The millionaire being interviewed was the daughter of parents who had worked very hard at regular jobs, while also running their own side hustles. Her parents had worked very hard to create wealth for their family. They taught their children the same principles, and the millionaire in turn taught those principles to her own two sons, the grandchildren. Over time, this family had created sufficient wealth that offspring who needed a mortgage did not have to go to the bank. Instead, mortgages were issued within the family from one generation to another. When the millionaires’s sons graduated from post-secondary schooling, each of them already had $200,000 in their investment portfolios. Their money had grown from cash gifts bestowed upon them by the grandparents. (Check out ESI Money if you want to read more millionaire interviews.)

Many parents want to pay for their children’s educations. This is a worthy goal and I have no quarrel with it. In today’s world, an education opens doors and provides opportunities that would otherwise not be available. An education is not a guarantee of success, but it is certainly an asset in the pursuit of success. Parents who save for their children’s educations are providing their children with a gift, i.e. starting their adult lives without student loans. They are gifting their children the opportunity to start with a clean slate. Once employed, their children will not be required to send a portion of their paycheques to the student loan people. Instead, if the children are wise, they will start using that portion of their money to invest for the future and to buy cash-flow positive assets…assuming, of course, that the children appreciate the opportunity provided by their parents’ gift of a debt-free post-secondary education.

The children who wisely take advantage of this opportunity are then in a position to do the same for the grandchildren, when they make their appearance. The children will have continued the tradition of ensuring that the next generation begins adulthood without debt. If the children were also fortunate enough to have invested in assets the grew over the years between their graduation and the start of the grandchildren’s post-secondary education, then those invested assets may still be available for the benefit of the grandchildren and the eventual great-grandchildren.

The cycle of passing down intergenerational wealth cannot flourish if the parents or the children are required to send part of their income to creditors, year in and year out. Creating intergenerational wealth begins with the basic principle of paying yourself first. The accumulation of wealth comes from the act of setting money aside from your paycheque and investing it for a positive return. If your money from today’s paycheque is being used to pay for yesterday’s purchases, then you’re impeding your ability to invest money for your future and for your family’s future. In other words, today’s paycheque cannot be used to pay for tomorrow’s needs and opportunities. Once you’ve given your money away to pay off debt, then your money is gone forever and you must find a way to earn more. Money spent on repaying debt can never be used to change your family’s future.

I am not an expert in parenting, but I have observed families in my life who have established a positive cycle of investing in businesses and assets while also saving money for their offspring’s future. These families are ensuring that the financial lessons are passed down so that each successive generation has the money to live a comfortable life and to both grow and preserve their wealth. One of the other things I’ve observed about these families is that they do not have debt.

I’ve watched as the parents gifted down payments for homes to the children. I’ve seen the parents assist the children to buy businesses. I’ve observed the children purchase income-producing rental property where their parents did not have intergenerational wealth to pass down. Where the parents didn’t have money, they had worked in real estate and had advice to give to their children about how to assess investment properties. The children’s rental properties will become part of the intergenerational transfer of wealth to the grandchildren. Personally, my brother and I benefitted from such intergenerational transfers of wealth by having nearly all of our post-secondary education funded by our parents.

Please don’t get me wrong. Receiving a down payment didn’t eliminate the children’s obligation to pay the mortgage. However, the gift of a down payment meant that the children were able to start building equity in their homes sooner than their contemporaries who had to save up a down payment.

Even where the parents assisted a child to buy a business, there was still the need for a commercial business loan from the bank which had to be repaid. The parents’ transfer of wealth assisted the child to take advantage of the opportunity to buy a business that he understood intimately at a time in the child’s life when he did not have the money to buy the business himself. In that situation, the child received another form of intergenerational wealth – his parents worked at his business for free for the first couple of years until he got himself established enough to hire his own staff.

The children whose parents did not provide them with intergenerational transfers of wealth still took it upon themselves to start creating a strong financial foundation for their own future children. They purchased property, lived in it, and then rented it when they moved to the next home. Did they have to use mortgage debt? Yes, of course. Are they using the underlying asset to create positive cashflows in their lives? Yes, they are. The tenants pay the mortgage debt, and the cash flow from the properties is directed towards improving the families’ financial future.

I have also observed other families who seemed destined to live paycheque to paycheque. From what I can see, they make decisions with their money which will always require them to remain in debt servitude. From the outside, it looks like they actually love being in debt to someone. When a car breaks down, a brand-new car with a $700 per month payment is immediately purchased. There is no consideration given to the option of buying an adequate used car that fulfills the same purpose of safely going from point A to point B. Student loan debts are not aggressively paid down as soon as possible due to other priorities. Such loans last for ten or more years after the former student has graduated when sustained monetary effort could have eradicated the debt in three years or less. Mortgages are taken out when there is insufficient household income to handle the monthly payment, the utilities, the taxes and the other associated costs of running a home. Unfortunately, the mortgage-holders do not earn high incomes so they’ve essentially made themselves house-poor. They will be forced to live paycheque-to-paycheque until the mortgage debt is gone or until the bank forecloses on them for non-payment.

These families have purposely created situations for themselves where they are unable to create any wealth to pass on to the next generation. In fact, they cannot even create wealth for their own retirements. They purposely seek debt-burdens rather than debt-freedom, and I haven’t been able to figure out why. At the same time, these families want to live a life that they could actually afford if they didn’t have debt payments. They want the toys and the travel and the comforts that come with debt-free living yet they are not willing to do what needs to be done to rid themselves of debt.

Perhaps the distinction between the two families comes from the debt-free choosing a long-term view while the indebted choose a short-term view? I will continue to think about why some people get it and some people don’t, how some families are able to create a comfortable legacy while others are not. In the end, I guess the reason for the distinction doesn’t matter too, too much. The bottom line is that debt always inhibits the creation and the accumulation of intergenerational wealth. Debt prevents people from saving for their families’ future since it requires people to pay for their past purchases.

Just imagine what you could do for your family if you didn’t have to repay debt. How different would your life be? Is there something that you would be able to give to your children and your grandchildren that you can’t give them right now? How much could you change your family’s future if debt were not a part of your life?