Month: June 2019

Are the Lessons Still Working?

The older I get, the more I think about the ideas that have guided my life’s decisions up to this point. I ruminate on whether some of the ideas that I’ve held dear for a long time are still good enough to follow, or whether they’ve led me to a place that I’d rather not be. In short, I ask myself if those ideas are helping me or hindering me when it comes to achieving my dreams. One of those lessons that I ponder has to do with investing.

When I was younger, I read Dave Ramsey’s book – The Total Money Makeover. I immediately implemented its principles into my life. This book for put me on a very stable financial path. I was young and inexperienced, so this book helped me immeasurably when I was first getting started. And since I’m older than the Internet, I didn’t have access to the myriad of great blogs and websites that now exist to teach people about money.

Fans of Dave Ramsey will know all about the Baby Steps, which are designed to get you living a life that fulfills your dreams once you’re debt-free. If you’re not familiar with Dave Ramsey, get yourself to a library and borrow his book. You may not agree with him, or you may become a disciple. If you’re uncertain about where to start with your finances, his book is a good place to figure out what your next steps should be.

There is a lot to appreciate about the Baby Steps. I’m firmly in favour of getting out of debt. It’s a fantastic goal for just about everyone. I’ve yet to come across a situation involving revolving credit card debt and then think to myself “Wow! What a brilliant idea to pay 29% interest month after month, year after year! I wish I was doing that with my money!”

Nope! I have never once had that thought. When it comes to getting out of debt, I think Dave’s advice is pretty sound… for the most part.

Never refuse free retirement money

However… I’m not as dedicated to everything that Dave preaches as I used to be. Our beliefs about best practices for your money diverge when it comes to saving for retirement and building wealth. If you read his book, then you’ll know that Dave wants you to stop investing for your retirement until all of your debt except for the mortgage on your home is completely gone.

In my opinion, ceasing retirement contributions is a bad choice for a number of reasons. Firstly, people already have a serious problem with saving for retirement and building wealth. That problem generally takes the form of them not doing it! Secondly, the longer money is invested then the more time the money has to compound and grow in the market. It’s so vitally important to simply start investing so that your money starts to grow as soon as possible!

Thirdly, the debt burden to be paid off could be quite large and it might take several years to eliminate it. That’s several years of missed investing! If you’re an older person who’s suddenly decided that it’s time to clean up your personal finances, then you don’t have the luxury of waiting to invest for your retirement. Finally, if you’re getting any kind of retirement match from your employer, then you’re giving up free money when you stop making contributions to your retirement accounts at work. You should not say “NO!” to free money from your employer!

Why pay more for the same thing?

The second area where I disagree with Dave is in respect of where to invest your money. He is a firm believer in buying mutual funds, preferably ones that invest broadly in the stock market. He urges his followers to invest in mutual funds with long-term track records and which provide 12% return on investment. Since he’s from the USA, he encourages people to invest in the S&P 500. I have no quarrel with investing in the stock market. I just can’t figure out why he wants people to invest in mutual funds instead of exchange-traded funds.

For the most part, there’s an ETF out there that is equivalent if not identical to whatever mutual fund has caught your eye. Buying an ETF instead of mutual fund is less expensive than buying a mutual fund. This is because ETFs have lower management expense ratios than mutual funds do. If you want to contribute to a mutual fund that invests in the stock market, then find an ETF that invests in the stock market. Compare the two and then buy the one that’s cheaper. You’ll be investing in the same thing, for a much lower price. The difference between the MERs for the two investment products is money that will stay in your pocket.

Imagine your investment as a 2L carton of milk. You can pay $2.49 for the milk, if it has the mutual fund sticker on it. Your other option is to pay $0.75 for the milk, if it has the ETF sticker on it. One carton is vastly cheaper but you’re still buying the same milk. Why would you pay more for the same thing?

Until I hear a persuasive argument from Dave on why he prefers mutual funds over ETFs, I can’t ever see myself agreeing with him on where people should invest their money once they’re out of debt.

Investing 15% isn’t enough when time is short

The third area where I disagree with Dave is with the amount of money that he wants people to invest. Once you’ve reached Baby Step 7, Dave wants you to invest 15% of your income for wealth-building. Presumably, you can spend the rest of it in any way that you choose.

Woah… 15% of your paycheque isn’t a lot of money if you have no other debts. Personally, I think this number should be way higher. I’d like to see debt-free people investing atleast one-third of their take-home pay, and ideally half of it! My reasoning goes back to the fact that money needs lots of time to grow to significant sums.

If you don’t become completely debt-free until you hit your mid-50s, then you won’t have enough time to build a super-sized cash cushion. Maybe you’ve got a pension so you don’t have as much interest in building your own pot of gold. If you don’t have a pension, then you’re going to need to fatten both your RRSP and your TFSA as fast as you possibly can so that they can get you through your second childhood.

I think saving 15% is a good enough amount if you start in your 20s. This is because young people who aim to retire at 65 have 40 or more years to invest 15% of their income and watch it grow. However, if you’re starting in your 40s or 50s, then you need to save a lot more because you don’t have 40 years of growth ahead of you. There’s no guarantee that you won’t be a victim of downsizing or ageism once you hit your 50s. Dave likes to throw around a rate of return of 12% on mutual fund investments. The longer your time horizon, the better your odds of getting such a lofty return on your portfolio. If you’ve got a short time horizon, then the growth of your portfolio is going to have to come from your return AND your savings so make sure that you save more than 15%!!!

There’s no harm in saving more. Please do not misunderstand – I don’t want you to lead a life of deprivation while you build wealth. I’m not advocating that you deny yourself some of life’s luxuries in order to build mounds of wealth. Sacrificing all the things that bring you happiness and joy alone your journey simply to save for retirement isn’t a good way to live the only life you’ve got.

I just want you to consider saving more than 15% of your income.

If you have no debt and no mortgage, do you really need to spend 85% of your paycheque? Could you not stumble along on two-thirds of it and still do/acquire/experience most of the things on your want-list?

Track your expenses!

You’ll always know where your money goes if you track your expenses.

As trite and obvious as that sounds, I’m always amazed by the number of people who don’t do this simple task.

Have you ever experienced getting a paycheque then wondering where all of your money has gone? If your answer is yes, then you might want to consider engaging in an old-fashioned activity called keeping track of your money.

There are so many ways to track your expenses. Pen & paper is very, very old-school but still highly effective. You can use an app, since nearly everyone has a smart phone. You can download a spreadsheet from any number of websites. If you’re the creative sort, you can even customize a spreadsheet tailored to your needs. This is my preference since I’ve yet to find an app that has all of the categories I need and want. I also like to play with the color scheme to highlight various pieces of information at a quick glance.

For the past three years, I’ve tracked every nickel of my money on a spreadsheet. I know how much I’ve spent on donations at work, cab fare, groceries, eating out, and a myriad of other spending categories. At the end of the year, I add it all up and figure out whether I’ve spent too much, too little, or just the right amount for the life I want to live.

As you know, I’m a huge fan of automatic savings plans. I have a number of automatic transfers in place to fund my long-term goals like retirement, as well as short-term goals like annual vacations. It’s also how I find the money to do renovations around my house. I think ASPs are the cat’s pyjamas! I encourage everyone I know to use them to fund their own goals and dreams. If you haven’t created one for yourself, I promise you that it’s as easy as falling down. Go ahead – give it a try – create atleast one today!

The Others will take your money

Want to know a secret? The same people who won’t set up an ASP to fund their dreams are the very same people who allow others to automatically transfer money out of their bank accounts every month. Withdrawals such as these aren’t as much fun since they represent money leaving the warmth of your bosom…to go and warm someone else’s!

Some of these withdrawals are necessary. If you have a mortgage, then the bank’s going want to get its money or the bank will eventually take your home away from you. And if you decide to get a car loan instead of buying in cash, then I can assure you that vehicle finance company will want access to your bank account so that they can grab their loan payment on the appointed day.

Gym membership? Subscriptions? Insurance dues? Bank fees? Cable? Internet? Membership in the beer-of-the-month-club? Each of these purveyors will happily withdraw money from your bank account each month with an automatic transfer that benefits them, not you. If it comes out of your bank account, then it’s s direct hit to your bottom line. Most often, these good people want to take their skim from your wallet indirectly, which means that they will charge your credit card. Should you not pay your credit card balance in full, then you’re paying interest to facilitate someone else’s automatic transfer of money out of your bank account. Ask me if this is a very good thing and I will tell you: NOPE!

When you allow someone else to withdraw money from your bank account every month, you’re less aware of where your money is going and when. And I’m convinced most people have no idea when monthly bills are charged to their credit card. By drib and by drab, someone other than you regularly drains your account because of decisions that you made years ago about products and services that you may no longer even use. This is an utterly ridiculous way to manage your money.

Track your expenses & avoid interest charges

Like I said before, some of you might be putting these same monthly expenditures on your credit card. Notice that I said “card” – there’s little if any need to have multiple monthly charges on more than one card. One card means one bill, which is to be paid in full each month as it comes due. You do pay your credit card off in full every month – right?

Some people carry credit card balances from month to month, year after year. They pay exorbitant interest rates for the privilege of doing so! If you’re in this group, then I strongly urge you to cut back on your automatic monthly payments. You’ll have to live a lean life to get out from under your credit card debt. That means you stop using credit and you start using cash. When you run out of cash, then you stop spending money until you get more. It’s a very, very old-fashioned way of living but it is guaranteed to prevent you from going into debt.

Prioritize what’s most important to you

When you track your expenses and you simultaneously commit to living on cash, prioritizing your money is mandatory. In other words, you have no choice but to rank what’s most important and apportion your funds accordingly. Is paying the mortgage more important than your Netflix subscription? Does a gym membership trump the cable bill? Can you keep your wine-of-the-week and still meet the car payment?

From what I’ve observed, there are only two ways to satisfy all of your spending desires. The first and definitely more destructive way is by accumulating debt via credit cards. The second way is to limit your desires such that they can all be met by the money that you bring home. This is called living within your means.

I would urge you to pick the second method since it causes far less stress. You retain the power to decide how best to spend your money on the items that matter most to you. Start tracking your expenses and only spend your money on the experiences and things that bring you joy.

Beer vs. Champagne

Beer tastes on a champagne budget… This is the secret to riches! It’s a fancy way of saying that you should do what you can to live below your means.

This post is going to be short and sweet, Dear Readers. In a nutshell, if you can maintain your beer tastes once you’ve attained your champagne budget, then you will never go into debt, you’ll be living below your means, and you will always have money for investing.

You simply have to stick fairly close to your baseline. Oh, sure – you can increase your baseline by 10% each time you get a raise, or even more if you choose. So long as atleast 60% of all your increases go towards building your cash cushion, you’ll be just fine.

So what’s my Baseline?

Your baseline is where you are right now. Or your baseline could even be whatever income you had when you became interested in the topic of personal finance – this is your beer budget. You lived on this budget and you – metaphorically speaking – drank your beer. For whatever reason, you decided to learn more about personal finance. Perhaps you discovered the Financial Independence, Retire Early movement. Maybe someone close to you died and you realized that there’s more to life than working at an unfulfilling job. Or your reason could be as simple as you realized that you needed a way to fund your life when you stop working because you don’t have a pension waiting for you. There’s also the possibility that you realized that living paycheque-to-paycheque really, really sucks.

So you spend your time devouring any and all money-related topics and you get your act together. You’ve cut out the spending that doesn’t propel you closer to your life’s goals. You’re maxing out your registered plans – your Registered Retirement Savings Plan & your Tax Free Saving Account. You’ve funded a 6-month emergency fund. You’re cooking more meals so that you have money to invest in your non-registered investment account. You may have cut the cord in order as per the Physician on Fire to get to your goals sooner. You might even be acquiring your own army of money soldiers.

Getting to a champagne budget may take some time, but you’re committed to freeing yourself from the financial shackles that are preventing you from doing what you want with your life. A few years down the line, you realize that you’ve made significant strides. Your investment portfolio is kicking off a healthy 5-figure amount of dividends and capital gains every year. You’re a Smart Cat – you have those gains automatically re-invested and you continue to live on your beer budget.

You Will Be Tempted

At this point, the AdMan and his trusty fried, the Creditor, might start knocking on your door. It’s not hard to imagine them reminding you, ever-so-persistently, that you no longer have a beer budget. You’ve got some money now – you’re moving on up like George & Wheezy! You’re a person who can afford deserves champagne. And gosh-darn-it, you’ve got the money for it so what are you waiting for? You only live once, right?

The eternal question now looms before you: beer vs. champagne.

Do you increase your spending to match your new spending power? After all, you no longer just have your paycheque to spend. Now, you’ve got capital gains & dividends that can be spent too.

Hmmmmm….decisions, decisions!

Dear Readers, you’re grown! And I know that no matter what I say, you’re the one who’s going to make the final choice about how you spend your money. This is as it should be.

Does it really make sense to waste money just because you have it?

Like I said at the beginning of this post – the reason you’re in the position to make this choice is because you were living on a beer budget. Your baseline kept you going. You were never deprived. You spent your money on the experiences that brought you the most joy and happiness. The beer budget worked like a dream and it allowed you to save money until you’d created a champagne budget for yourself.

My simple suggestion is that you think long and hard before you choose to upgrade your baseline to the limit of a champagne-budget. Ask yourself what need will be served by giving up the beer budget just because you can afford champagne? What is it that you really, really want your money to do for you?

The Power of Intergenerational Wealth

For the past year or so, I’ve been fascinated by all the examples I see of intergenerational wealth. I like to think that it’s because my assessment of the FIRE movement and personal finance has become more nuanced. I’m always curious about and very intrigued by how people get the money for their first investment. When I listen to podcasts devoted to personal finance and FIRE, I’m constantly thinking about the power of intergenerational wealth. I want to know how many people honestly and truly do it all by themselves.

Lately, I’ve been listening to podcasts from www.biggerpockets.com, which is a US-based website. I have learned a lot about real estate deals from listening to these podcasts! If you’re in any way interested in doing real estate investing, I would suggest that you spend some time listening to this podcast. It’s a great starting point, and you’ll learn what regular people with regular jobs have done to improve their finances through real estate investing. Some of their methods might work for you, or they might not. The salient factor is for you to learn about these methods so that you can figure out whether to pursue them. Once you do, then you decide how to customize your next steps to best suit your own particular circumstances. Knowledge is power, right?

**** To be explicitly clear, I am not endorsing any of the methods suggested on that website. I am not an expert in real estate investing. I am not qualified to tell anyone how to do it. ****

This post is about intergenerational wealth, not real estate investing. So why am I talking about Bigger Pockets?

Intergenerational Loans are a Huge Help

Earlier this week, I listened to an interview with a man who was earning $10,000 per month by age 35 from his real estate investing. Needless to say, I was very interested in what he had to say. I too would like to earn $10,000 per month, even though I am no longer 35!

Without divulging too much, I would like to focus on one particular element of the story. The interviewee had benefitted from intergenerational wealth on atleast two separate occasions as he built his real estate portfolio. He and his wife were able to gather a down payment on their first home, a duplex. However, they needed to borrow $4K from their parents to pay the closing costs. This was the first time that they benefitted from intergenerational wealth since their parents had the $4k to lend them. As a result, the interviewee and his wife were able to significantly lower their living costs and they decided to start buying more properties.

As the podcast episode continued, the interviewee disclosed that he borrowed money from both his father and his father-in-law. They each took out lines of credit on their residential homes and gave him the down payment to buy property. This was the second occasion on which the interviewee benefitted from intergenerational wealth.

Again, it was an “A-ha!” moment for me. This man had access to family members who had assets. His family had been able to lay hands on money, and they willingly helped him to invest in real estate. This is the heart of intergenerational wealth – those in the older generation are able to use their own accumulated money to assist the people in the younger generation to build wealth.

Please don’t misinterpret this post. I don’t begrudge this man for seeking his family’s help, nor do I think it’s unfair that his parents and his in-laws were willing to assist him and his wife. It’s completely natural for parents to want to see their offspring succeed.

Getting A Leg Up

What I find fascinating is the effect that intergenerational wealth has on so many aspects of our lives. Those who don’t have access to this form of wealth face more barriers in acquiring wealth. One of the barriers that I see for those without access to intergenerational wealth is the passage of time. It simply takes longer to build wealth if you don’t have wealthy parents or grandparents because you, as an investor, first have to save the seed money to buy that first investment. No one is around to gift you, or lend you, the money to start investing.

The sooner money is invested, the sooner a person can start building wealth. In other words, those who have access to intergenerational wealth have a leg up on those who don’t. Those with access can invest their money sooner. This means they have more time for their assets to grow and to compound.

If the interviewee’s family had not lent him $4K for the closing costs on his first home, then he wouldn’t have been able to buy it. I’m not saying that he never would have bought a home. I’m just saying that it would have taken him longer to buy one; he would have had to save up the money for closing costs to complete the purchase of another house. The same goes for his first real estate investment. Without money from his father and father-in-law, the man would’ve had to wait until he had sufficient seed money – whether equity in his first home or savings in the bank – to buy his investment property.

The Confidence of a Cushion

The second barrier to acquiring wealth is the natural hesitation that can arise when assessing risks without a cash cushion. When you know that your family has the ability to financially assist you if the need arises, you have the confidence to take more and/or bigger risks with your investing dollars. The confidence rests on knowing that you won’t lose everything, that you won’t have to start from scratch all over again. If your family can help you to recover, you’re more inclined to try in the first place.

For those without a financially-flush family, the consequences of making a poor investment decision include the very real and very significant risk of losing everything. There’s no one to bail you out so you might not make the same kinds of investments, or you may hesitate a bit longer before making a decision. The price of a failed investment is costlier when you don’t have the option of accessing intergenerational wealth should things not go as planned.

Do not misunderstand me. No investment is without risk, regardless of your access to intergenerational wealth. I’m simply stating that the downsides of the risks are more acute, and possibly more detrimental, when you do not have access to family money should your investments fail.

A Lack of Intergenerational Wealth is a Hindrance, not Brick Wall

I want to be very, very clear on this point. A person can still acquire assets and build wealth for herself without the benefit of intergenerational wealth. It will probably take a bit longer, or it might involve thinking outside the box.

To its credit, the Bigger Pockets podcast also features people who haven’t been able to turn to family for financial help. I particularly like the episode about the 23-year old single mother who has created a steady cash flow from her real estate portfolio. Though very young when she started, this woman learned how to buy, renovate, and refinance her properties. She has created a financially secure life that for herself and her children. In turn, she is pursuing a path that will allow her to provide intergenerational wealth to her children when they need it.

The longer I think on this topic, the more I appreciate the power of intergenerational wealth. Money creates the opportunity to build wealth. If it is not squandered, then wealth can be transferred from one generation to the next. The wealth, if not lost, can create a self-perpetuating cycle that ensures the financial security of successive generations. Each generation can reap the rewards which come from financial stability and good investment opportunities.

There are few among us Singletons who don’t have a connection to the next generation in some form or another. Even if you don’t have your own children, perhaps there’s a young person in your family who you would like to help at some point. If so, build your own wealth and you’ll be able to offer intergenerational wealth when the time comes. Perhaps you have a niece who wants to go to med school, or a nephew who wants to start a business. Maybe you just want to start some sort of scholarship for students you’ve not yet met.

Whatever your goals are, I encourage you to build your wealth now. One day, you’ll be the one who has the power to transfer it to the ones coming up behind you. You have the power to create intergenerational wealth for the next generation.

Dollar Cost Averaging is a Great Tool

As the warm days of spring roll in and push harsh memories of winter to the recesses of your memories, you may find yourself enjoying the sunshine and asking yourself: What is exactly is dollar-cost averaging?

I’m here to tell you that DCA can be a powerful tool for investors.

In a nutshell, dollar-cost averaging is a method for systematically investing your money. Investors who use DCS invest the same amount of money into an investment on a regular schedule. That schedule can be whatever the investor choose – weekly, monthly, quarterly, annually, or any other increment. The purchase of the underlying asset occurs regardless of the asset’s price.

There are a few of good reasons to use this investment methodology.

Dollar Cost Averaging or Lump-Sum Investing?

Firstly, the DCA strategy facilitates quicker investment in the stock market. Investors can align their investments with their paycheques. Since one my guiding financial mantras is spend-some-save-some, I make sure that a part of my paycheque is promptly & automatically re-directed to my investment portfolio.

There’s a school of thought which says that lump-sum investing is better than DCA because the entire value of the lump-sum amount is put to work in the stock market all at once. If your plan is to invest a large amount in the market, the proponents of lump-sum investing recommend that you invest the entire amount at once. Check out this article from the wise fellow at www.fourpillarfreedom.com for a good discussion of the benefits and drawbacks of the two investment methods.

Theoretically, I have no quarrel with the lump-sum investment style. However, the practical reality of my life is that I don’t have large lump-sums of money lying around. I invest when I get paid because that’s when I have the money available. The money is deposited into my chequing account, then it’s shunted to my investment account, where it sits until it’s invested. For most people without large chunks of money at their disposal, DCA is a better option – in my opinion – because they can invest when they’re paid.

No Need to Time the Market

Secondly, DCA eliminates that temptation to try and “time the market.” Investors who time the market are trying to buy an investment at its very lowest price. Perhaps you’ve heard recent chatter in the system from economists about the impending recession?

What you will never hear from any of those experts is the exact date on which the recession will start. And absolutely none of them will tell you date on which the stock market will be at its very lowest point. People lucky enough to buy at the lowest point will have the best investment returns when the market recovers. Market-timers are always trying to pick the very best time to invest.

Like all investors, market-timers are trying to maximize the profits from their stock market investments. Unlike market-timers, investors following the DCA-method simply invest their money on a consistent basis. They do not bother themselves with trying to buy at the very lowest price. They’re not concerned with the very best returns. They understand that time in the market is more important that timing the market.

Automation Pairs Beautifully with Dollar Cost Averaging Investing Method

Thirdly, the power of automation complements the DCA investment strategy very nicely. If you intend to invest in the stock market, then automatically transferring money from your chequing account to your brokerage account is an excellent strategy.

Let’s say you decided to invest on the 15th of each month. Your automatic transfer will ensure that a chunk of money is in your brokerage account for the purchase. On the 15th of the month, you’ll buy as much of the asset as your funds will allow regardless of the asset’s price. Then you won’t think about investing again until the 15th of the following month. Maybe you want to invest quarterly? That’s fine too. Put the power of automation to work! Gather money in your investment account until it’s time to buy some assets. Never forget the DCA can’t work for you unless you’ve set aside some savings.

This is how I invest. Every month, I invest money into my dividend-paying investments. I don’t follow the price of my exchange-traded funds from one day to the next. Instead, I buy as many units as I can when it’s time to buy. Then I don’t think about my investments again until the dividends roll in.

Easy-peasy, lemon-squeezy – rinse & repeat!

I’ve been using the DCA method to invest my money since 2011. I wasn’t interested in learning to be a wizard at picking stocks. The DCA method was easy to implement and even easier to understand. Much like every other investment method, it’s not perfect and it’s not suitable to for everyone. However, it works for me. I’m confident in this method and I’ll continue to use it until something better comes along.