Month: September 2020

Commit to a Per Diem

Per Diem… it’s a phrase that means “an amount of money paid per day.” In the world of personal finance, it’s a phrase that is not used nearly enough. I want you to commit to a per diem.

That’s right. I want you to pay yourself some amount of money every single day.

I’ve written about per diems before, but this article is about creating a per diem that’s specifically designed to take care of Future You.

The Four Steps of the Per Diem Plan

  1. Pick a daily amount to save.
  2. Set short-term goals for your money.
  3. Invest that money.
  4. Don’t spend the money until you retire.

Step 1 – The Amount

If all you can afford is $1, that’s fine. When you have more, you can give yourself a raise. The important thing is to get into the habit. Start the habit today.

Think about it. How would you like to have more than $3500 by this time next year? All it takes is $10 per day. That’s not a whole lot of money in today’s world. If you have it to spare, then I’d like to see you put it to good use. And what better use is there for your money than ensuring that you’re comfortable, warm & fed in your dotage?

Maybe you’re fortunate enough to be able to put away $20 per day. Great! Do it! I’m not a stickler on the amount that you save each day. However, I am adamant that you save something. Start with whatever you can then increase your per diem as you’re able.

Step 2 – Set Short-Term Goals

Like I said above, this per diem is for Future You. When I talk about short-term goals in this context, I don’t mean saving for a vacation or new sports equipment, although you should never go into debt for those items either. You should definitely save first then pay cash at point of purchase.

No. In this case, your short-term goals are monetary targets. Let’s say you commit to a per diem of $10. Set a target amount of $500 or $1000. Then create an automatic transfer from your main day-to-day bank account to a separate savings account. When you hit $1000 in your savings account, then you invest that amount into an equity-based exchange traded fund or index fund.

You do not want to keep your money in a savings account. Why? I’ll tell you why – the rate of interest paid on savings accounts is less than inflation. You are losing money by keeping your money in savings accounts for long periods of time. Inflation is a fancy way of saying that the value of your money is decreasing over time. When $100 buys 5 bags of groceries in 2019, but only 4.5 bags of groceries in 2020, then you are seeing inflation at work. Inflation means your money purchases less today than it did yesterday.

Savings accounts are great to accumulate money that will be spent in the next few weeks or months. (They’re also a good spot for emergency funds, in my opinion. Others disagree with me.) Commit to a per diem going into your savings account. When it hits the target number, you invest the money then start working towards the target again.

Step 3 – Invest that Money

You’re free to pick whatever monetary target you want. I like $1,000. It’s a nice round number and it will take roughly 3 months, at $10/day, to achieve. If you can save $20/day, then you’ll be investing money every 8 weeks. Also, it feels good to tell yourself that you’ve just invested $1,000.

Again, you don’t want to let your per diem languish in a savings account. That money has to work as hard for you as you do for it. That means you simply must invest your per diem money in the an equity-based product.

I have no idea how young you are at the time you read this post. The bottom line is that the longer your money is invested in the stock market, the better your odds of watching it grow to a nice, big mountain of financial security. That mountain won’t be built until you commit to a per diem.

Step 4 – Mitts off until retirement

The money you save today is for Future You. Even though no one is promised tomorrow, it’s best to plan as though you’re going to be here for a long time. It’s very, very possible to find the balance between enjoying the present while saving for the future.

Wouldn’t it be awful to live to 92 yet you ran out of money at age 74? The social safety net isn’t designed to keep you comfortable. It’s designed to keep you at a level of not quite starving to death. That would be a terrible way to live during your retirement years.

Allow me to be clear. Your per diem money is not to be touched.

You’re still responsible for creating an emergency fund, and for replenishing it if you need to use it. Sadly, the rest of life’s expenses don’t disappear just because you’re saving for your future. You’ll be saving for tomorrow while paying for today. Commit to a per diem, then live the rest of your life on whatever’s left over.

And if you find that you have too much money waiting for you when you’ve finally retired, feel free to leave me a message. I’ll happily take whatever amount of money you don’t want.

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Weekly Tip: Never grocery shop when you’re hungry. You’ll likely make more impulse purchases and that can throw off your budget. Whenever possible, eat before you go to the grocery store. Make it easy for yourself to stick to your list!

The Holidays.

As hard as it may be to believe, the holidays are only a few weeks away. Thanksgiving will be here in another couple of weeks. (Or in November if you’re in the USA.) Then it’s another few short weeks until we celebrate Christmas, or Hannukkah, or Kwaanza, or Festivus.

While the holidays will be different this year, the fact remains that people will do what they can to keep tradition alive. That might mean mailing more presents, or swapping recipes instead of baking in the same kitchen. It might mean less travel but more time doing video chat. Or it might mean more road trips and fewer flights.

No matter how you and your loved ones plan to celebrate the holidays COVID-style, there’s a good chance that your wallet is going to take a gut punch before the celebrations are over. The time to start saving for the holidays is now. There are roughly 13 weeks left in 2020. Start setting some money aside each week so that you can pay for the upcoming expenses without putting them on credit.

Homemade for the holidays?

I’m going to take a wild guess and say that you’re one of the many people who are staying closer to home. If that’s so, then maybe you have some extra time on your hands. This might be the year that you take up baking Christmas cookies or other holiday treats. If you start a few weeks before the big day, you can probably bake some presents for the people you’ll be seeing.

After the year we’ve had, and the social distancing we’ve done, I suspect that a great many of us don’t want more stuff. However, we’d appreciate sharing a bite of something delicious with those we’ve missed. Stuff is easily forgotten. Happy time spent together? Not so much. People want the connection… and most of us connect over food in one way or another.

If you’re doing to be online anyway, try watching some videos of people baking (or cooking) something you’d like to share with your loved ones. I recently discovered the Preppy Kitchen on YouTube. I’ve spent hours watching the host bake delicious desserts. My eyeballs have consumed more calories than I could ever possibly burn off in one lifetime! That said, I’m still considering which of his delicious recipes I will be baking for Christmas dessert.

It doesn’t have to be a baked gift. You could make or create so many other things to be shared. Here’s one list of ideas that might appeal to you. The internet is a vast place so keep looking if none of these suggestions are the ones for you.

Spend cash, not credit!

Maybe you’re not the creative or crafty type. No worries! I’m not either. I bake year-round, but only make Christmas cookies at the end of the year. I’m more of a mall-shopper when it comes to presents for the holidays.

That said, please follow my lead. Only spend cash on the presents for others. No one wishes for their loved ones to go into debt to get them stuff. Well, maybe kids do but that’s because they don’t understand credit and debt just yet. The adults who love you don’t want you to be financially harmed over doodads and knickknacks. If you must buy people presents, then stay out of debt to do so.

Figure out a budget of how much you want to spend on others, then stick to it. Thanks to the pandemic, there’s a chance that your discretionary spending on other stuff has been curtailed this year. There’s a chance that the money not spent on commuting, the gym, sports activities, and eating in restaurants has resulted in a little bit more jingle in your pocket. I’m not encouraging you to spend more than you otherwise would! Savings should not be squandered simply for the sake of doing so.

What I am saying is that, hopefully, it’s easier for you to keep the credit cards tucked away this holiday season. If you’re fortunate, then you can spend cash only to fulfill your desire to give.

We are two thirds of the way finished with 2020. The holidays are coming up quickly. It would behoove you to start planning for how you’re going to pay for them. I want you striding into 2021 with a smile on your face and without debt on your mind!

Weekly Tip

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Make extra payments over the life of your mortgage to minimize the interest you pay over the life of your mortgage loan. This can be done by increasing your minimum payment each year. Or it can be done by putting a lump-sum down against your mortgage. The more extra payments you make, the less interest you will pay to the bank.

MER – Cheaper is Better

The management expense ratio (MER) is the percentage of your portfolio that you pay to the company that sells you the index fund, exchange traded fund (ETF) or mutual fund that you hold in your portfolio. The fees for these products must be disclosed to potential buyers. Thanks to the wonder that is the internet, you can easily do an online search of any mutual fund, index fund or ETF and find its MER.

Generally speaking, mutual funds are more expensive than both index funds and ETFs. I’m not entirely sure why other than to say that mutual funds are actively managed. This means that there are a whole lot of people who are researching and analyzing data before doing a whole bunch of buying and selling of various stocks for inclusion in the mutual fund. All of those people need to be paid. There’s a lot of overhead that must be covered by fees from clients in order to ensure that all of that activity is performed.

In sharp contrast, index funds and ETFs are passive investments. They simply buy into the top companies that meet their investment objective and then it’s done.

You’ll have to do your own research before you in invest. You can also speak to a fee-only certified financial planner. However, my general advice to most people is the following. If you have the choice of buying a mutual fund or an index fund/ETF, go for the lower cost product so long as you can still achieve your investment goals. It will be cheaper for you in the long run and you’ll wind up with more money in your kitty.

Take a look at the following MER calculator. It allows you to do a side-by-side comparison of the impact of paying a higher MER on your portfolio. You can control so many variables: your investment horizon, the MER, your starting balance, the assumed rate of return, and your contribution amount.

See for yourself…

Start with an investment of $1000 in both Fund A and Fund B. Assume that they are both identical and both of them will help you achieve your long-term financial goals. Commit to contributing $50 per week into your portfolio, which is $2600 per year.

Enter an annual average return of 7% for both funds. And assume that you’re going to be investing this money for 30 years. The average life expectancy is roughly 80 years for humans. Believe me when I tell you that 30 years is not an unreasonably long investment horizon.

Here’s where the steak starts to sizzle. Fund A is a mutual fund charging a measly 1.5% per year. In other words, Fund A skims off 1.5% of the value of whatever’s in your portfolio. Fund B is an index fund, or an ETF, which is charging a minuscule 0.05%. Go ahead – plug those numbers into the formula.

Now, hit the calculate button. What do you see?

Fund A – with the higher MER – is going to cost you $37,330.78 in fees. On the other hand, Fund B – with the much lower MER – is going to cost you $1,244.36.

That’s a difference of $36,086.42 in fees. This is money that is not staying in your investment portfolio since it’s being paid to someone else. Why would you want to pay this amount if you didn’t have to?

Play with this calculator – change the variables – see the impact of higher MERs over a longer period of time. I think you’ll agree with me that when it comes to paying for investment products, the MER matters – cheaper is better.

Hold up, hold up, hold up!

Blue Lobster, are there really investment products that pay 0.05% in MER?

Yes, Gentle Reader, there are. At the time of this post, the website for VanguardCanada is showing two equity products – VCN and VCE – with MERs of 0.05%.

*** To be clear, I am not being paid by Vanguard Canada for mentioning these investment products. I do own units in VCN.

All else being equal, cheaper is better. For simple comparison, the Big Six banks in Canada sell mutual funds that are equivalent to VCN and VCE. At the time of this post, the MERs on their products are much higher than 0.05%.

I have to amend my earlier statement. At the time of this post, the links for CIBC and HSBC do not disclose the MERs for their equity products. To find the MERs for their products, you will have to do a bit more hunting-and-clicking but you’ll get there. The other 4 banks disclose this information on their website with one-click. This tells me that atleast 4 of the 6 big banks are willing to ensure that their customers can easily find the right information to make an informed choice.

Now you know better.

Paying a higher MER means less money in your pocket at the end of the day.

As a general rule, cheaper is better when it comes to assessing the MER of equivalent investment products. I want to be clear that you shouldn’t base your entire investment decision on the MER. It is a significant factor, but it’s not the only one.

You still have to determine your investment horizon. Is this money for a short-term goal or a long-term goal? If long-term, MER should be given more weight in your decision-making.

Are you comparing equivalent products? An index fund that invests in short-term bonds should not be compared to a mutual fund that specializes in gold and diamonds. The risk profiles of the two products are vastly different. It is reasonable that they would have different MERs so this factor should be given less weight at decision-time.

It is a serious money mistake to pay a higher MER. If you want to really blow your mind, go back and change your starting balance to $10,000 and your annual contribution to $5,200. The disparity in MER cost grows to $83,130.29! And if you extend your investment horizon out to 50 years, then you’re saving yourself $442,979.28! Wouldn’t you rather have that extra money in your portfolio in 30 years? I know I would!

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Weekly Tip: Track all your expenses so you know where you spend every dollar. Despite my constant admonitions to save-and-invest, I know that most people enjoy spending money. However, I want you to be 100% confident that you’re spending your money on things that make your life better. Tracking your expenses is one way to do this. If you see that you’re spending money on things that don’t bring your joy or that make your life worse, stop buying those things. Easy peasy – lemon squeezy!

Silver Linings

The silver linings are there if you look for them, even in a pandemic. We all know that COVID-19 has changed things in a fundamental way at a societal level. However, as with most things in life, its impact on individual lives is different depending on one’s access to money and resources.

Over the past few months, I’ve been reading articles about how some people are seeing an improvement in their finances in the midst of COVID19. Working from home means that people are saving money on professional wardrobes, commuting costs, grooming products, cosmetics. Some people are even moving from their expensive locales to cheaper areas since they no longer need to be physically close their offices. In other words, people haven’t had to spend their money in certain categories because COVID19 allows them to work in their pyjamas in the comfort of their own homes.

There is no arguing with the fact that the pandemic has severely impacted life as we knew it a mere 7 months ago. Yet, there are some pretty serious financial benefits for some people. The people I’m referring to still have steady and substantial paycheques, yet they can work from home. For this fortunate group, their income is the same yet their outgo has dropped.

If you’re one of the fortunate ones who still has a reliable income, assess your own situation. Determine if you’re saving money by working from home. If so, calculate whether those savings are getting you closer to your financial goals.

There’s some chatter in the system about a vaccine for COVID19. No one knows when it will be found, nor how quickly it will take for all of us to get it. All we know for sure is that the pandemic won’t last forever.

We can also very be certain of the following. Regardless of whether we move back into our old offices, spending will go up. Think of the concerts, retreats, tournaments, and conferences that have all been put on hold due to the pandemic. Those will return with a vengeance. People who’ve chosen not to risk traveling will be on the way to the airports within days of getting vaccinated. After all, time is precious and the world is a big place. Those struck by wanderlust will be making up for lost time.

What I’m saying is this. Take this opportunity to save. Nothing obligates you to spend the money you’re saving by working from home. I’m not even suggesting that you hoard every penny. I’m urging you to take note of the financial silver linings that available to you during this pandemic.

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Weekly Tip: Listen to podcasts about money. You’ll learn a little something about a great many things. Try out a few different ones. Take what you like. Leave what doesn’t work for you. Be open-minded, but don’t let your brains fall out. As I’ve said before, you need not make every mistake yourself. You can learn from the mistakes of others.