Month: July 2021

Yesterday, Today, and Tomorrow

Today, I listened to a really good interview on YouTube with the fellow from Debt Ascent. He and his wife had over $500,000 in student loan debt. They paid it off in 5 years, while buying a house and also fully funding their registered retirement accounts. This was a great interview for two reasons.

Not everyone has fat to cut.

What I loved about this interview was that Mr. Ascent acknowledged that not everyone has the same ability to pay off debt as quickly and as easily as he and his wife. While both of them earned good six-figure incomes, they chose to live on one income while pursuing their financial goals. One of the things I loved best about this interview is that Mr. Ascent articulated that it is easier to meet your financial goals when you have a larger income.

Don’t misunderstand me. If you’re earning $300,000 per year and spending every penny, then you are in the exact same financial boat as the person who earns $35,000 per year and spends every penny. Both of you are living paycheque-to-paycheque. However, if both of you realize that you need to make financial changes, only one of you has the ability to make significant changes in a relatively short period of time.

Mr. Ascent acknowledges that there is a baseline of spending. In order to pay for the basics, everyone has to spend a certain amount of money. While it might fluctuate based on location, let’s say that the baseline is $35,000.

When you’re earning $300,000, you can choose to cut expenses. Doing so frees up a good chunk of money for you to fund your financial goals. Maybe you decide to pay off the auto loan in 18 months instead of 5 years. Perhaps you switch to cash instead of credit so that you can pay off your credit cards faster. Once your debts are gone, you have the ability to re-direct debt payments to funding your retirement accounts and paying off the mortgage.

At the other end of the spectrum, an income of $35,000 doesn’t allow you to make such big financial changes. At that salary, you’re going to need the vast majority of it just to pay for your life.

Unlike the vast majority of personal finance bloggers out there, Mr. Ascent expressly acknowledged that it’s easier to meet your financial goals when there is a lot of fat to cut from your budget.

Paying for yesterday, today, and tomorrow.

The other fantastic part of this interview was hearing Mr. Ascent talk about how he and his wife prioritized their money. In his words, they made choices to maximize every dollar. They were able to get a mortgage rate of 3%, and had a rate of 2.95% on their student loans. He disclosed that in order to get such a low rate on their student loans, they had to agree to pay $4,000/mth for 7 years. Further, they knew that they were responsible for funding their retirement so that was priority number one. And, of course, they had to pay the mortgage or else they’d lose their house. Every “extra dollar” was sent to their student loan debt rather than being funnelled into an investment account.

Why? Isn’t the common wisdom to invest while paying down debt? Don’t all the calculators show that doing both works out best over the long-term?

Perhaps… Yet, personal finance is personal for a reason. What works for one won’t necessarily work for all.

The Ascents took a different view. In Mr. Ascent’s words, they wanted to prioritize their money in order to maximize their cashflow. They realized that the sooner they rid themselves of that $4,000/mth minimum payment, the sooner they could earn and keep that money for themselves. In other words, eliminating that payment would mean an immediate increase in their household’s disposable income. The Ascents realized that they would be able to cut back to working 4 days a week if they chose. The former student loan payment could be re-directed towards their mortgage, resulting in even more disposable income sooner.

So that’s what they did. According to Mr. Ascent, registered retirement accounts were funded first as they were the highest priority. The next highest priority was paying the mortgage. Finally, the minimum student loan payment was made. And when there was extra money, it went to the student loans.

If I understood him correctly, they were completely debt-free within 7 years of finishing their respective graduate degrees. They paid off half a million dollars in student loans as well as a $200,000 mortgage. On top of that, their retirement accounts have hit the half million dollar mark. Their starting salaries after graduation were a combined $200,000 and they managed to double that in less than 10 years.

Again, Mr. Ascent was humble enough to recognize that he and his wife were in a very fortunate position to be able to do what they did. At not point did he ever try to make the argument that everyone could mimic their choices, no matter their income.

Well, anyone could do that…

… if they were earning that much money. That’s the common response upon learning that the Ascents earn big bucks as a dual-income professional couple.

I think that response is short-sighted. There are many people who earn high salaries, and are living paycheque-to-paycheque. Having a high income provides you with the opportunity to pay off debts fast, to fully fund your retirement, and to rid yourself of your mortgage. A high income is not a guarantee that any of those things will happen. The choice to spend money belongs to you. The Ascents are an example of a high income couple who chose to live below their considerable means in order to achieve the goals that they set for their money. Again, they chose to live on one salary while the other salary went to paying off debts and funding their retirement accounts. The choices they made after graduation paved the way for them to have full control over their entire paycheque.

There is absolutely no doubt that having a very high income was beneficial. That fact should in no way diminish the choice that they made to live on one income. They made the choice not to upgrade their lifestyle once they finished graduate school. Together, they decided to eschew the path of consumerism and to focus their energies on removing the shackles of debt from their lives.

Again, anyone could do that!

You’re right. Anyone who earns more than the baseline income needed to survive can make the same choice as the Ascents. To be clear, I absolutely understand that some incomes are just not large enough for more that subsistence living. This post is directed at those who do have the fat-to-cut in their budgets, yet choose not to align their spending with the dreams they have for their lives.

Just like the Ascents, you have the choice to prioritize your financial goals. Nothing is stopping you from living below your means in order to fund those goals. It might take you longer than 7 years, but so what? Would you rather spend every penny and not ever achieve your dreams? Or would rather work a little bit longer to see your long-term goals become a reality?

As soon as you decide what you want, you’ll be in a position to start figuring out ways to make it happen.

Intergenerational Wealth – Down Payments

Even though I’m not a parent, I find the topic of intergenerational wealth fascinating. It makes perfect sense to me that parents want to help their children succeed. Parents with wealth are able to give their offspring a boost with so many of the costs of starting adulthood. This week though, I was surprised to hear about parents who are starting down payment funds for their newborns.

My first reaction wasn’t that the parents are nuts, nor that they are helicopter parents. I didn’t even think that the parents were trying to deprive their children of the opportunity to achieve something on their own. Instead, my first thought was that it made sense to start saving at birth. Not even 50 years ago, eyebrows went up when learning that non-wealthy parents paid for a child’s post-secondary education. Kids who wanted to study after high school had been expected to pay their own way through school by working summer and part-time jobs. Today, I can’t think of a single parent in my circle who isn’t financing their children’s post-secondary education through RESPs, co-signing loans, or cash-flowing the tuition bills. My parent-friends all realize that their kids cannot earn enough money from summer jobs & part-time employment to pay for undergrad and graduate degrees.

Over time, more and more parents realized just how expensive a post-secondary education would be. They determined that one of the best ways to help their children become successful in life was to pay for their studies beyond high school. No parent has ever paid their child’s tuition because they believed that doing so would somehow hinder or limit their child’s opportunities for a quality life.

So when I hear of parents who want to save for their newborn’s eventually down payment, I’m not at all surprised by the idea. To my mind, it’s the next logical step in helping one’s child become economically established. Houses are incredibly expensive! Back in the day, a person aimed for a mortgage that was no more than 3 times their annual salary. Those days are long past. When house prices are such that a first mortgage can be 8-10X one’s salary, it’s very realistic to think that it may take 25 years to build a down payment.

Parents who can save for their children’s down payments will do so. They realize that if they don’t do this now, then their children might be priced out of the future real estate market later. Of course, if they’re wrong and their children can acquire a home on their own, then so much the better. The money is still available for something else…maybe the foundation of the anticipated grandchildren’s education fund?

The other aspect of parents saving for their offspring’s down payment is that such actions contribute to the very wealth inequality from which the parents are trying to protect their children. Parental financial contributions reinforce the divide between those who have financial resources and those who don’t. In 20-25 years, the children with down payments funded by their own contributions and those of their parents are going to be better positioned to buy a property compared to children who don’t have the benefit of parental money.

Bridget Casey talks about this phenomenon in her article about the Funnel of Privilege. Essentially, the privilege allows young adults to start investing for their future without the burden of debt. By starting down payment funds in their child’s infancy, wealthy parents are positioning their children on the property ladder sooner. Being handed a down payment means that someone need not spend years saving money from their paycheque to simply by the first property. Instead, that same money would be spent building equity sooner rather than later.

Parents help their children. This has been true since the dawn of time, and I expect it will be the governing order of things until the end of days.

I’ve mentioned before that my parents saved all baby bonus cheques and a portion of money from their paycheques so that they could pay for my brother and I to attend university. I have 8 years of post-secondary, while my brother has 9 years under his belt. I will never complain that my parents’ gift has ever diminished my life and I know that I’m far better off than I would have been without my education. My parents did the best they could, but they were nowhere near able to also save for our first down payments. My brother and I had to save for those on our own.

Did my parents help contribute to the increase in wealth inequality by directing their wealth towards ensuring their children graduated university without debt? Or were they simply taking the natural steps to make sure that their children had the best shot possible at having a successful life?

Wealth begets wealth. It is natural for parents to want what is best for their children. Helping a child to achieve a home is simply the next step for parents who have the money to make such a contribution. These are the seeds of intergenerational wealth.

You’ve Got This!

It’s natural to doubt yourself when you first start something new. However, the great part is that those doubts diminish over time as you get better at doing the new thing. Gaining some experience goes a very long way towards quelling the nagging voice in your head that tells you that you’re out of your depth. If you do anything over and over and over again for a long enough period of time, eventually you’ll approach it by telling yourself that you’ve got this!

Personal finance is no different. No one starts off doing it perfectly from the very first time they do a budget, or save money, or pick an investment. If it were easy, then everyone would do it. We would all be rich – none of us would have consumer debt – we’d all be retired by 35 and spending our time doing what we love best.

That’s not the reality though, is it?

In the real world, it takes a bit of time to gain confidence with our money. And that’s perfectly fine! I started at age 16 with $50 from my part-time job at the grocery store. Every two weeks, I would manually transfer $50 from my chequing account to my savings account. At one point, I had $8,000 in my savings account. (There was a condo up the road from my house that was for sale for $40,000. I had the 20% down payment, but I was still in school and I knew my parents would never co-sign a mortgage for me… Sometimes, things don’t line up for you and investment opportunities are missed. That condo is now worth over $200,000!)

Back then, I was young and un-knowledgeable about personal finance. All I knew how to do was save a little bit of my paycheque while spending the rest of frou-frou stuff that has long been forgotten. I shouldn’t be too, too critical of Young Blue Lobster – atleast I had the brains to pay myself first. Saving $50 bi-weekly was a good start, but I hadn’t realized just how much was yet to be learned. A savings account is not the place to invest money. By the time I’d finished my undergrad, I’d learned about mutual funds… so I started investing my money with in a bank’s lineup of mutual funds.

Better than a savings account, but still not great. Bank products generally had very high management expense ratios. I eventually learned about MERs, and how higher MERs lower my overall return. Once I had that knowledge, I I learned about investment companies and how they have lower MERs. I moved my money. Anyone remember Altamira?

Though hardly glamorous, each time I learned more about some aspect personal finance, I adjusted course. When I paid off my student loans, I turned my focus to paying off my vehicle loan. Debt was bad so I had to get rid of it. Renting was bad – or so I thought at the time – so I bought my first residence, a condo in the university district that became my first rental property. When I started thinking about retirement, I funnelled money into my RRSP and then, when they were introduced in 2009, into my TFSA. In my 30s, I switched from mutual funds to exchange-traded funds. The more I learned, the more I refined my money management skills.

Am I an expert today? Gosh, no! There’s still so very much more for me to learn. However, I can tell you that I’m more confident today than I was decades ago. I’m not frozen by indecision anymore. My trial and error, and my past mistakes, have taught me to ask better questions. I don’t invest in products that I don’t understand. Today, I’m far more prepared to do my own research before investing my hard-earned money.

Create your own plan of action.

Figure out what you want. These are your priorities, aka: the things you want to do/be/have in order to live the life that you want. Money that’s not spent on your survival should be channeled towards funding your priorities. Don’t spend your money on things that don’t get you closer to your priorities. Studying abroad? Six weeks in the Riviera? Starting your own business? Taking a sabbatical from work? Creating a scholarship fund? You can have what you want if you can figure out a way to get it. This blog is about the financial aspect of your priorities. Figure out what you want, then spend your money in a way that helps you to get it.

Determine your savings per diem. This is the daily amount of money that you will set aside to turn your dreams into reality. I don’t care how much you start with. My $50 bi-weekly amount worked out to $3.57 per day. Maybe you can afford more, maybe you can afford less. It doesn’t really matter. If you save $0 per day, then you will have $0 to create the life you want. You must save something. When it comes to money, some is definitely better than none!

Find the balance between enjoying the present and planning for the future. It’s taken me a very long time to learn how to spend a little bit in the here-and-now. Some would say that I still invest too much of my money. And they’re entitled to their opinions. For my part, I know that I’ve found a balance that works for me. In the Before Times, I’d started travelling to Europe each year. It was important to me to see another part of the world while I was still young and energetic enough to do so. I bought coffee a little more often than most FIRE gurus would suggest. My last two vehicles were purchased brand-new rather than used. Oh, I’ve spent money in countless ways on today’s whims – there’s no doubt about that! However, those whims were only and always funded after I’d paid myself first.

Finally, don’t be too hard on yourself. Personal finance is personal because there’s no one exact right way for you to handle your money. Your priorities are different than mine, as are your responsibilities and risk tolerance. You may hate the stock market so you’re investing in real estate. Or maybe you’re into cryptocurrencies and are getting in sooner rather than later. Maybe you’re running your own business, or you have a side hustle on top of your regular job. However you choose to earn your money, you owe it to your self to save then invest your funds in a way that gets your closer to living your dreams.

Never, ever stop learning. Remember the wise words of Dr. Maya Angelou – when you know better, you do better.

It’s all good, because you’ve got this!

Know Thyself

One of the keys to getting what you want from your money is knowing who you are. The very first step to getting what you want is identifying it. There is no way around it – you must know thyself.

Are you a person who buys something because everyone else buys it? Or are you saving up for something that may only be magical to you? Do you care about others’ opinions on how you spend your money? Are you a person who can live with the consequences of your choices?

Be very honest with yourself about how you want to use your money. Some people want to use it to impress others. Then there are those who use it to control or manipulate the people around them. A good number of people use their money to alleviate suffering in the world. And there are some who want to hoard money in an effort to build security for themselves.

What do you want from your money?

As the years roll by, my perspective on money is changing. I’ve always been a saver, a very good saver. And when I first learned about the FIRE movement, my goal was to one day save 50% of my income – maybe even 70%! However, as I approached this arbitrary yet magical allocation, I started to seriously consider the impact saving that much money would have on my desired lifestyle.

Thanks to several money mistakes, saving 50% wouldn’t allow me to retire in my 40s…which would have been awesome, since I’m long past the ability to retire in my 30s. I suppose if I were willing to commit to very reduced standard of living, I could retire in my 40s… But I know myself. I don’t want to retire and hope that nothing goes so wrong that I have to return to work. I want to be done with working once I retire. Saving 50% wouldn’t get me there. Even saving 70% wouldn’t give me the kind of retirement cash flow that I want.

So I stopped chasing that arbitrary goal and crunched my numbers. Saving a solid chunk of my paycheque would allow me to retire in my early 50s. And I’d have a little extra jingle in my pockets to enjoy the journey. Speaking of the journey, travel has always been one of my favourite things. The “extra money” that wasn’t squirrelled away allowed me to travel overseas. Before the pandemic hit, I was fortunate enough to visit Italy, Spain, and Ireland. Had I been saving 50% of my paycheque, those trips wouldn’t have been possible… and they also wouldn’t have been possible after retirement because my retirement cash flow would not be enough to pay for them.

See… I know myself. And I know that I don’t want to be a penny-pincher during my retirement. I won’t be keeping tigers on a gold leash, nor skipping across the globe to spend equal time in my 4 homes. However, I will have the flexibility to do more international trips, to make renovations to my home, to replace the appliances as needed.

What I also know is that if I had been smarter sooner, I would have made different choices. There’s no sense regretting my choices because I don’t have a time machine to go back and change them.

Knowing myself means that I’ve made peace with the following truth: I don’t use a budget. My money-management system does not involve very many categories. The only ones I have are: retirement, short-term goals, charity, and Everything Else. I’m a huge fan of using automation to ensure that my first three categories are funded. My paycheque hits my account – my automatic transfers are triggered – I spend whatever’s leftover in my chequing account. The leftover money has to last me until the next payday. I can spend it however I want, on whatever I want, secure in the knowledge that the priorities most important to me are being funded.

Your choices need not please everyone else.

Thankfully, I’ve reached the stage in life where I don’t require a popular vote to feel good about my financial decisions. When I was younger, it bothered me that my friends’ financial priorities didn’t align with mine. I intensely disliked being told that I was “saving too much money.” When others blithely told me “you can afford it”, I would bite my tongue so very hard in order to not lash out in anger. How dare someone else tell me how to spend my money?

I’ve since learned to let those comments roll off my back. Their priorities are not mine. And their hearts were probably in the right place. They honestly believed that their spending habits, which obviously made them happy, would make me happy too. And I’m sure I drove them nuts talking about retirement and investing and saving. Those were the things that made me happy. Over time, I learned to only talk about money with friends who are also interested in investing and retirement planning. Again, knowing myself has led me to find like-minded people who encourage and support me when it comes to pursuing my financial goals.

Know thyself. What is it that you want your money to do for you? Once you’ve answered that question, the next question is whether your money is actually being put towards achieving those goals. Finally, what changes do you need to make to align your spending with your financial goals?

Choices have consequences

This week, I had a conversation with a dear friend of mine about spending money. She made the observation that if she spends money today, then there’s that much money less to pay for her retirement. I couldn’t argue with her. In fact, I was happy that someone else in my circle of loved ones was thinking about their senior years. Sometimes, I feel like an outcast when I talk about money. It’s one of the reasons I like to chat about it online. It does me good to know that people in my real world are considering how to accumulate the gold for their golden years.

We live in a capitalist culture where we’re exhorted to spend every penny that we earn. Should our earnings not be enough, we’re strongly encourage to borrow money to spend beyond our means. Look around! Outside of the personal finance corner of the internet, there’s almost no discussion about saving money for emergencies, building up a retirement fund, and creating cashflow to replace your income. Instead the overwhelming message is to work hard, spend money, wake up, repeat.

I think this is a terrible way for people to live.

We were not given life just to work and spend money. Our lives should be about time spent with those we love best. We should be striving to spend as much time as possible engaged in the activities that bring us joy. I’m not convinced that we need to live on a never-ending work-spend-sleep treadmill to be happy. The beauty of financial freedom is that it’s a situation where work becomes optional. Being FI means spending your time as you see fit.

One of the universal truths is that choices have consequences.

I want you to think about what you want from your life. Now, ask yourself if your spending choices are getting you closer to or further from that life. If your choices aren’t getting you closer to the life you want to live, then explain to yourself why that is.

Vicki Robin and Joe Dominguez of Your Money Or Your Life have taught us that money is the manifestation of your life’s energy. In short, you trade your life energy for money. It seems only logical that you spend your energy in ways that create the life that you want to live.

From what I’ve observed, people base their spending decisions on short-term thinking. They’re concerned with today, and possibly next week. They don’t really start to consider the long-term until they hit their late 40s, 50s, and sometimes 60s.

I get it. When I was a teenager, I brought home roughly $108 every two weeks from my part-time cashier job. My money went to dinners at Red Robins with my friends, followed by a movie. It was a simple life, and I never thought beyond my next paycheque. Long-time readers know that I had an automatic transfer in place so that $50 was squirrelled away to my savings account. If I could go back in time, I’d tell Young Blue Lobster to just put that money into a broad-based equity index fund (or exchange-traded fund), and then never look at it. The past 30 years have flown by! Had I started investing at 16 instead of 21, I’d probably be retired by now. I would certainly be financially independent.

However, that didn’t happen and I have to live with the consequences of my teen-aged choices. I’ve spend the last few decades teaching myself about investing. When necessary, I’ve tweaked my investment strategy. I’m forcing myself to ask harder questions, to analyze information more critically. I’ve finessed my money-management strategy to the point where it’s on auto-pilot and needs very little attention from me on payday. My choices from yesterday have resulted in both good and bad consequences for me. Had I made different choices, I would be living with different consequences.

Take some time to assess your money choices. Are the consequences of yesterday’s choices bringing you joy or misery? Maybe neither? Are you committed to making more informed choices in the future? What will you do today to get the consequences you want tomorrow?

The choice is yours.