Month: October 2021

Lock it down!

Quick! Do you have a variable rate mortgage? Has your lender given you the opportunity to lock in your next mortgage rate today since it’s up for renewal in the next 90-120 days?

If the answer to either question is yes, then I’m going to suggest that you seriously consider locking down a fixed-rate mortgage as soon as possible. Mortgage rates are going up. The higher the rate, the more interest you’ll pay to the bank. Why pay more if you don’t have to? If you have the opportunity to renew your mortgage at a low interest rate, then lock it down as soon as possible!

It’s fairly complex. I am certainly no expert but my understanding is this. The 5-year mortgage rates are going up because central banks are expected to raise the bond rates. They’re raising those rates in order to fight inflation. The bond market controls long-term interest rates. That’s the entirety of my understanding of how the whole thing works. You’re encouraged to learn more about this if you’re interested.

The long and the short of it is that the very low 5-year mortgage rates that we see today will soon be gone. Some people are predicting that mortgage rates will double in the next 18 months. You should play around with an amortization calculator. Doing so will give you a good idea of what your mortgage payment when mortgage rates are twice what they are now.

This is not a good time for procrastination. Lock it down! Call your lender and figure out how to secure a fixed interest rate while fixed rates are still very, very low.

Once you’ve locked into a fixed rate, consider making extra payments towards your mortgage. When your mortgage renews in 5 years, the rate is going to be higher. As we all know, higher mortgage rates mean higher mortgage payments. Throwing extra payments at your mortgage while paying a lower rate over the next five years will lessen the impact of renewing at a higher rate. If your budget won’t allow for extra payments, then start a sinking fund. Every time you have some extra cash, squirrel it away. When renewal time rolls around, you’ll have a chunk of cash to throw at the principal. Making lump sum payments is another way to minimize the increase in mortgage payments when you go to renew your mortgage in the future.

Of course, if your mortgage is scheduled to be paid off in the next 5 years, then you need not worry too, too much. You won’t be on the of ones renewing into a higher interest rate environment.

If you have a line of credit, pay it off! Your monthly payment on your LOC is made up of interest and principle. As the interest rates go up, the portion of your payment devoted to interest will also go up. The result is that it takes you longer to pay off the principle. In other words, you’re paying more interest on your line of credit as interest rates go up.

For the record, I’m a huge fan of 5 year rates, so my suggestion in this article applies to the 5-year fixed rate. I only ever had 5 year amortizations when I had a mortgage. To me, it was easy enough to plan life in 5 year increments. Some people like the idea of having a 10 year fixed rate. Others want to lock in a rate for 3 years. You’ll have to pick the timeframe that best suits your life and your goals.

Intergenerational Wealth – Start Them Young

Very recently, I learned that dear friends of mine had opened an investment account for their child who had recently turned 18 years old. My reaction was one of happiness because my friends are nurturing the seeds of intergenerational wealth for their family. The intent is to help the offspring build the habit of investing for the future, to have money in place for a down payment in 5-10 years, and to start retirement planning early. Helping their child today improves the odds that their grandchildren will also have a measure of wealth at some point.

Since the child is only 18 years old, a little will go a long way. As a matter of fact, steady contributions of as little as $50 per month can generate a big cash cushion 5 decades from now. Thats assuming the money is left to compound for the long-term goal of retirement. If the money is spent on a down payment, or other life expenses, then obviously the final amount will be smaller. The more withdrawals that are made, the smaller the final amount.

Earlier is better when it comes to investing.

I’ve never accepted the premise that it’s unwise to start saving small amounts in your teens & 20s. While those are supposed to be years of “carefree youth”, my view is that those years should not equate to carelessness with money. The two need not go hand-in-hand. Starting to invest early is rarely a bad idea.

To my way of thinking, the most important thing is to build the habit of saving and investing. I agree that $50 isn’t a life-changing amount of money. However, the contribution amount likely will not stay at $50 forever. At some point, the amount will increase to $75, then $100, then $200, and possibly more. Once it’s invested, the money will be working non-stop in order to maximize compound growth. How is that a bad thing?

Practicing good money habits is a key factor to succeeding with money as an adult. It’s never too early to build good habits in this area of your life.

It’s true that the 20s and 30s are expensive years for many people. Pursuing an education, buying vehicles, starting families, maybe even buying a home – these are all costly endeavours. I’m not here to argue otherwise. That said, the 20s and 30s are also the very best years for starting to invest. Most people have time on their side when they’re this young. Compound interest works best over longer periods of time.

Not the First Step

Allow me to be clear. My friends’ choice to set up their 18-year old with an investment account isn’t the first step in building intergenerational wealth for their family. I would say it’s the second-last step, or maybe the last step in their plan.

The first step was to set a good example of how to live below your means. My friends had certain priorities for their family and those got funded first. Debt did not become a permanent fixture in their lives. Every month, they paid the full balance on their credit card bills. They used the word “No” so that they could stick to their financial plan. Yet they still travelled as a family. My friends’ children all participated in extracurricular activities. The family built many great memories together and with friends, all while attaining their dreams and goals.

My friends’ next step was to start a registered education savings plan when their child was born. The RESP was fully funded every year. They knew that they only had 18 years before the money would be needed to pay for post secondary education costs. As soon as they could, they started saving for those expenses.

The third step was to pay off their mortgage when their child was in junior high. They did it by making extra lump sum payments where they could, maintaining a budget, and employing a little bit of delayed gratification. They worked hard to eliminate their four-figure monthly debt, aka: mortgage payment.

Between what’s in the RESP and their former mortgage payment, my friends’ child will not have to take on student loans to pursue post-secondary education.

Starting adulthood without student loans is a wonderful leg up on the journey to wealth. No student loans and a decent-sized investment account upon graduation from post-secondary education? Now, that’s an even better advantage! One could even call it a super-power… if one were so inclined.

If you’re lucky enough to be able to spare $50 or $100 per month before the major costs of young adulthood land on your shoulders, then take advantage! Start investing small amounts while you save for other goals. I’m not suggesting that you never have fun. Life is meant to be enjoyed at every stage, so enjoy it! However, I’m urging you to also realize that you also need to pay heed to Future You.

My friends’ offspring is being given a golden opportunity! How many of us wish we could’ve started investing sooner? Or had been encouraged to learn about personal finance in high school?

Even if your parents didn’t do this for you, find a way to do it for yourself.

Inflation is the Non-Stop Money-Eater

Today, I read a Twitter thread about inflation and its impact on money. So many people feel that their paycheques are not going as far as they did before. Their net income is going to shelter, groceries, and utilities. Yet, they feel that it’s harder and harder to survive from one paycheque to the next. Costs are going up while their pay remains the same. They are caught in the grip of inflation, which I like to call the Non-Stop Money-Eater.

I’ve noticed it too. The bulk package of chicken breast at my local grocery store was $27 this time last year. When I went to buy the same package 6 weeks ago, I paid $42. That’s a price jump of $15 in 12 months, or an increase of 55%. That’s inflation at work. My $27 won’t buy me as much chicken today as it did last year. And I’m a Single Person. Every time I leave the grocery store, I wonder how people with families afford their grocery bills. (As a matter of fact, I asked a friend of mine how much their 6-person family spends on groceries in a month. The answer was $2,000. Even accounting for cleaning supplies and personal care products, that’s a huge grocery bill!)

Inflation is a serious problem, for everyone. The lower your income, the more severe its impacts on your household finances. If you’re fortunate enough to have extra money in your budget, then you can better absorb the increased prices. However, your paycheque or investment returns have to continuously outpace inflation. If they don’t, you will eventually reach a point where your income is not enough to cover the higher costs resulting from inflation’s impact on everything.

Inflation Erodes Purchasing Power

Simply put – the Non-Stop Money-Eater will decimate your finances, if given enough time. You can only tighten your belt so much. Even if you got a second or third job, there are only so many hours in a day. You were not put on this Earth to simply work and pay bills. There should be more to life than scrimping from one payday to the next.

At the time of this post, inflation in Canada was at 4.2%. This is the macro number used by the government. Your personal inflation rate might be higher, or lower, depending on your personal expenses. Whether a large number or a small one, the result is the same. Your income is not buying you as much today as it did yesterday. It will take more money to buy the same amount. That means you have less money for everything else. So unless you want to live off your credit cards, or lines of credit, and pay interest to do so, you will have to eliminate something from your budget. Fewer streaming services? A cheaper place to live? Giving up your car?

Again, your life should be more than the daily grind of working, getting paid, paying bills, then working some more. You should be able to breathe without financial anxieties. We can’t all own private jets, third houses, and a stable of Arabian horses. However, you should be able to find your happy medium between barely scraping by and a life of unfathomable extravagance.

For those of you whose incomes are still growing, congrats! You may not have to alter your lifestyle since your purchasing power is keeping up with inflation.

A Few Suggestions

What is the answer to fighting inflation on a personal level? I honestly don’t have a perfect answer that will work well for everyone. I’m not an expert about such things. What I will do is share my opinion on how to dull inflation’s impact if you’re fortunate enough to have some extra money in your budget after you’ve paid for the necessities.

My first suggestion is make good use of your kitchen. I’ve written before about how financially prudent it is to cook the majority of your food at home. A hamburger with fries at restaurants around me will run you atleast $17, and the bottomless soft drink is another $3.50. After tax and tip, the bill is atleast $26. The same money spent at the grocery store combined with 30 minutes in your kitchen will result in far more than 1 hamburger with a side of fries.

Don’t let lack of cooking skills stop you. Thanks to YouTube, you can learn to cook just about anything by watching a few videos and paying attention. Start small then work your way up to the more complicated meals. Maybe you start making your own muffins and cookies so that you don’t have to buy them each day. Then you move on to making simple breakfasts and tasty lunches. Afterwards, you tackle dinner and turn your attention to batch cooking. Your freezer and pantry become your happy places, since they are key to making your tummy and wallet happy too. Much like piano playing and walking, cooking skills get much better with repeated practice. You’ll figure out what you like to eat, and then you’ll master those dishes. Cooking for yourself should be your default choice when you start to feel hungry.

And it’s not too early to start planning for next year. One of my favorite personal finance bloggers has a vegetable garden. Each year, he plants vegetables and harvests them as they ripen. You better believe that his veggie garden saves him a good chunk of money each year. We’re well into autumn and winter’s just around the corner so now’s the time to start thinking about planting next spring. Do you have the room for your own garden? Is there a community garden nearby? Do you have a balcony that can hold a few planters? If you’ve never planted a garden before and you want to, use your downtime in winter to watch and to learn from some gardening videos on YouTube.

My second suggestion is to use your freezer and to stock up on things when they’re on sale. Low-sodium bacon was on sale last week. My mother, my aunts, and I all made sure to get some for our respective freezers. In my corner of the world, bacon is now $1/slice! That was unheard of last year but I doubt the price will fall back to its former level any time soon. My mother and her sisters are all ladies in their 70s & 80s, so they use an old-fashioned app called “a telephone” to share the great prices that they find at the grocery store.

I’m willing to be that you, Dear Reader, have a cell phone. I’ll go out on a limb and assume that you’ll probably want to use apps on your phone to find good prices when you are grocery shopping. Never forget that coupons are your friend. I have an app on my phone that sends me weekly offers on things that I buy most often. When I buy those things, I get points and those points translate to dollars off my grocery total. It’s fantastic to have a bill of $110.77 and only have to pay $0.77 because my points-into-dollars covered the rest.

It should go with out saying that price-matching is an essential tool in your arsenal. Some grocery stores will match a competitor’s price on the same item. This is another way to save money without going to several grocery stores in order to buy the same product at the lowest price. You need to eat, but you don’t have to pay more than necessary to do so.

My third suggestion is to continue investing for the long-term. The capitalist system is not designed to make employees rich. Read that sentence a few more times, and let it sink in until you’ve memorized it better than the alphabet.

Employees’ salaries are a cost of doing business. Every business has a profit-motive. This means that every business benefits by lowering its costs. Lower costs translate into higher profits. Your employer has little, if any, incentive to pay you more money to do your job.

In sharp contrast, there is a built-in incentive to align the interests of investors with the interests of business owners. The corporations need shareholders’ money, or else they wouldn’t sell stock in their company. By investing in low-cost equity exchange-traded funds, you will increase your chances of creating a cash flow that can sustain you. By all means, keep your job if you need it to survive. What I’m telling you is to wear two hats. Be an employee and an investor. If all goes according to plan, then you’ll be doubling your sources of income. Should inflation erode the income from your job, you’ll have your investment income available if you absolutely need it to survive.

No Easy Answers For Everyone

In my humble and inexpert opinion, inflation is not going away any time soon. The cost of necessities will continue to rise, which is not going to be fun. You will need to sit down and figure out how you are going to deal with Non-Stop Money-Eater. What will it take for you to limit its impact on your finances?

Another Little Criticism

Learning about personal finance and investing has been a hobby of mine for the better part of 30 years… wow – that’s a long time! No wonder I make those odd noises when I get up from the couch…

Anyway, one of the first books that set me on my successful path was The Total Money Makeover by Dave Ramsey. I loved this book! I was in undergrad when I read it, and I promised myself that I would follow its tenets once I had graduated and was earning real money.

I’m not sad to say that this is one promise to myself that I’m glad I broke. See, while I still think that the debt snowball is a brilliant strategy for getting out of debt, I’m not so sure about the other steps.

In particular, I take strong issue with the step about only investing 15% of your income after you’ve gotten yourself out of debt.

What’s wrong with 15%?

On the fact of it, saving 15% is a great goal to strive for. My question for other personal financial afficianados is why stop at 15%? If you can comfortably save 20% or 30%, or even 50%, then why not do so?

See, somewhere along the line, I discovered FIRE. It’s an acronym for Financial Independence, Retire Early. Thanks to the vastness that is the Internet, I went deep down the rabbit hole of FIRE. I learned about people who saved 70% of what they earned, who’d lived on $7,000 for an entire year, who’d retired in their 30s! Eventually, I discovered Mr. Money Mustache – a fellow Canadian, whose face-punch imagery caught my attention from the word go.

The FIRE community is varied, like any other community. However, the one thing that they do seem to share is the belief that you need to save more than 15% to become financially independent anytime soon. There’s even this handy-dandy retirement calculator floating out in the world. (Plug in your own numbers – see if you like the answer!)

FIRE and Dave Ramsey seemed to have a lot in common. Both financial perspectives eschewed debt. They both emphasized having an emergency fund and saving for retirement. There are even many in the FIRE community who think Dave Ramsey is great, and happily pay homage to him.

Yet Dave Ramsey… is remarkably quiet on his thoughts about the FIRE movement.

Why is that?

Look. I can’t speak for Dave Ramsey or his organization. Maybe he’s a huge fan of FIRE, but it’s not part of his company’s mission statement. Or maybe he hasn’t heard of FIRE yet. There are a million reasons why he sticks to advising people to only save 15% of their after-tax income.

My theory is that FIRE is an anathema to employers, and Dave Ramsey is a businessperson who needs employees to work for him. As an employer, it makes no sense to encourage the pool of talent from which one draws to become financially independent. Employers have the advantage when employees are dependent on a paycheque. I think that this was most beautifully illustrated in the blog post of other fellow Canadians over at Millennial Revolution.

Allow me to be clear. I’m not for one minute suggesting that Dave Ramsey speaks for all employers. Of course, he doesn’t!

What I am saying is that it would not be in Dave’ Ramsey’s best interest as an employer to encourage the pool of potential employees to strive for financial independence. Think about it. Being FI gives jobs candidates more negotiating power since they don’t need the job to survive. The beauty of the FIRE philosophy is that it gives people choices, including the choice to work for personal satisfaction without consideration of the paycheque. After all, just because one is FI does not meant that one has to RE. If your job brings you joy and you’re also FI, then your are truly and wonderfully blessed. No need to retire early if you don’t want to.

Think about how terrifying that must be for an employer. If money is the primary tool to control the workforce, then what weapon is left when money is not effective? A financially independent pool of employees means the employers have to find another tactic to persuade people to work for them.

In my very humble opinion, 15% isn’t enough.

If you’ve paid off your debts and your budget has breathing room again, I don’t see why you should be implicitly encouraged to spend 85% of your money. Spending at that rate keeps you tethered to your paycheque longer than you may like.

Until recently, I didn’t really consider why Dave Ramsey doesn’t encourage people to pursue financial independence. Yes – some people won’t be able to save more than 15% of their income, even if they’re out of debt. I get that. If you don’t have it, then you can’t save it. However, those aren’t the only people who listen to him.

My question is more about why those who can save more are not being encouraged to do so.

Again, the only theory that makes sense to me is that he doesn’t want to use his platform to encourage financial independence. I find it odd. Firstly, I don’t believe that everyone who calls his show for help loves their job so much that they want to stay for as long as possible. Secondly, one of the very best things that money buys is freedom from doing what you don’t want to do. Thirdly, financial independence doesn’t mean that people become lazy and idle. Instead, it gives them the time to work on what truly makes them happy.

Currently, I believe the following. Pursuing FIRE status will always be an employee-driven social movement. Given its nature, it has to be. After all, as a group, employers cannot maintain their vice-like grasp on power where there is a financial balance in the employment relationship. When employees have the ability to walk away without negative financial consequences, employers run the real risk of losing employees’ labour. A vision remains a vision unless there are minds and bodies that can bring it to life.

The concept of financially independent employees is adverse to the employer’s interests. It’s hardly surprising that employers are not advocating that their employees put some of their focus on saving and investing.

Getting back to Dave Ramsey. His book was written long before the FIRE movement hit the mainstream. I do not believe that he suggested a 15% savings rate in an attempt to maintain the imbalance of power between employers and employees. That’s a pretty broad stroke, and it’s not one I’m intending to make.

What I am willing to say is that the practical effect of his advice to only save & invest 15% works to give employers the upper hand. I’ve had many good jobs in my lifetime, yet none of my employers has encouraged me to save and invest for my future. There’s never been any kind of nudge towards financial independence.

Think long and hard.

The sooner you invest your money, the sooner you can hit the target of being financially independent. There may come a day when you no longer love your job, for whatever reason. When that day comes, you’re going to need to have money in place to pay for those pesky expenses of living like food, shelter, clothing, etc…

I’m not telling you to not follow the Baby Steps. What I am telling you is to think about their practical effect on your personal finances. Take what works… leave the rest.