January, 2022 - Millionaire on the Prairie

How Debt-Proof Living Made My Financial Life Easier & Better

Take what you need. Leave the rest.
Author Unknown

Roughly 20 years ago, I was fortunate enough to come across the book Debt-Proof Living by Mary Hunt. I can honestly say that this book changed my financial life. How so? This book taught me a simple way to organize my money, to get out of debt, and how to always have funds on hand for life’s little “surprises.” Ever since reading this book, I have always had a Freedom Account. The best thing about this account for me is that I’m always able to tell myself “I’ve got this!” whenever a truly unanticipated expense lands in my lap.

The Freedom Account

Despite its heading, this account isn’t for retirement. This account is for those small-but-kind-of-large expenses that don’t warrant a visit to your emergency fund. Since I didn’t know how to do it myself, I went to my mechanic to have my SUV’s battery replaced. That was an unexpected $350 hit! After many, many moons, my garage’s motion sensor light went out. Again, I hired someone to replace it for me. That was another few hundred dollars. I also recall that I’ve had to replace my SUV’s tires over the years… let’s call that an even $1,000 every 6-7 years.

Each of these expenses was easily handled by my Freedom Account. A pre-determined amount of money sits in my Freedom Account, until it’s deployed to pay for small-to-medium-sized expenses. The point of this account is to lessen the financial sting of unanticipated-yet-required purchases that occasionally need to be made. Sure, I could have lived without a new motion sensor light. However, mine was burning electricity 24/7 since it never shut off. Paying to replace it was a better economic choice instead of having an extra $20 added to my electrical bill each month for who knows how long. As for the battery, that was a no-brainer. Without a battery, my SUV had become a very large, un-moveable paper-weight taking up room in my garage.

Personally, I would never go to my emergency fund to pay for these kinds of expenses. My emergency fund is there to replace my paycheque, should my employer and I part ways on unpalatable terms. In the event I lose my job, I’ll still need to buy food and pay for my shelter. My emergency fund is there to cover my survival expenses. Its purpose is not to cover expenses associated with car ownership and occasional housing repairs.

Rapid Debt Repayment Plan

At the time that I found Debt-Proof Living, I had a lot of debt: student loans, car payments, mortgage. Thankfully, I didn’t have any credit card debt! Still, I hated making loan payment to creditors. I wanted to be debt-free as soon as possible. This book helped me to achieve this goal. The author set out her 4 rules for the rapid debt repayment plan. I followed her rules, and achieved my goal of eliminating debt from my life sooner rather than later.

What I liked about this part of the book is that the four rules teach you how to best deploy your funds to eliminate your debt. Instead of working in vain, Ms. Hunt’s plan instructs you to create an order of repayment and to focus your money. The debt with the highest priority gets the bulk of your repayment money. Every other debt receives its minimum monthly payment. When debt #1 is paid off, its former loan payment is re-directed to debt #2 on your list. In short, debt-payment #1 is added to the minimum monthly payment of debt #2. The new combined payment is applied to debt #2 until debt #2 is eliminated. Once gone, the money going to debt #2 is added to the minimum monthly payment of debt #3. The process is repeated until all debts have been paid.

Whether to order debts by size of amount owed or by the highest interest rate is a personal choice. Do not let analysis-paralysis over this issue stop you from creating your own debt repayment plan! Every day that you’re not working to eliminate your debt means that more interest is being paid to your creditors. Personally, I like the idea of paying off the smallest debts first so that they’re eliminated and their minimum monthly payments can be re-directed to the larger debts.

My copy of the book includes charts. I expect that these would be fairly easy to reproduce in Numbers or Excel. When I was repaying my debts, having visuals of my progress was encouraging.

Go Back to the Quote at the Top

You see where I said to take what you need and to leave the rest? I added this in because, while I loved the majority of the content of Debt-Proof Living, there were other elements that may not be everyone’s cup of tea.

The author is a devout, religious person and this comes through in her writing. Some people care about this, some don’t. If you like your personal finance and debt advice to be divorced from religious convictions, then this book may not be one you can stomach. Personally speaking, I found that the substance of the money-management principles were incredibly useful. I could easily apply them to my own situation without supplanting my own religious convictions for those of the author.

For my part, I’ve relied on the Freedom Account since the turn of the millennium. I’ve used its principle to create a Me Account, which is a pot of money for pampering myself. Back in the Before Times, this money was used to pay for spa treatments, concerts, subscription services, little things… I indulged myself guiltlessly because the money had already been set aside for that very purpose.

Thanks to Ms. Hunt’s wisdom, I’ve managed to stay out of debt. Big purchases are planned. I’ve been fortunate enough to travel to Europe three times in the space of 5 years. I’m proud to report that all of those trips were fully paid before I stepped into the airport. Renovations to my house were similarly funded well before any contractor started the job. My next big purchase will be a replacement vehicle. My SUV is 14 years old and I know it won’t last forever, even though I wish it would. Now is the time to start saving up for its replacement.

Ms. Hunt’s expression of her faith in this book did not impede the usefulness of her lessons. I simply focused on what was most important to my goals. Should you deign to read Debt-Proof Living, I suggest that you do the same. Take what you need and leave the rest.

The Basics Never Change

No matter how you slice it, the basics don’t really change. This blog is about money, so I’ll stick to the financial basics.

Live below your means so you have some money to save and invest.
Invest your money so that it grows over time.
Go back to step one and repeat.

Everything else is about the details.

Where should the money be invested?
How low should the management expense ratio be?
Are mutual funds better than index funds?
Should one invest in index funds or exchange traded funds?
Is real estate better than the stock market for investment returns?

Start where you are, and go from there. One of the best tools I’ve found for managing my own money is a spreadsheet. Thanks to Numbers, I’ve been tracking my expenditures for the past few years. I could’ve used an app on my phone, but I prefer to personalize the spreadsheet to my own requirements. An app has a built-in structure that may not be suitable for me.

By tracking my expenses, I’ve been able to see where I splurge and where I don’t. The past two years haven’t produced as sharp a drop in expenses as one would have thought. I spent just as much in 2020 & 2021 as I did in 2019 & 2018. Yet, in the past two years, I haven’t been to a concert, a movie theatre, overseas, or inside of restaurants. I’ve been at home, partaking in Netflix, homemade food, and lots of computer games. Despite my at-home-hiding-from-coronavirus existence for the past two years, my annual expenditures have been the same or slightly more than they were in the Before Times.

I’m paying the same amount of money to purchase fewer things. That’s called inflation.

Despite the arrival of this particular money-eater, the basics haven’t changed. I still have to live below my means and invest for growth. My spending power will hold its ground against inflation so long as my returns are higher than the inflation rate.

You owe it to yourself to spend a little bit of the present thinking about the Care and Feeding of Future You Fund. It need not be a lot of time. After all, life is meant to be enjoyed and not wished away. The right amount of time is however long it takes you to set up an automatic transfer from your chequing account to your investment account. When you get paid, a chunk of money should automatically be sent to your investments. Then you forget about that money and go back to your daily life, doing what makes you happy.

Three weeks of 2022 are already in the past. Time flies so very fast! It’s important that you don’t let procrastination stop you from sticking to the basics. You need not know everything before you start. Instead, you start today and you learn as you go.

Get some books from the library. Do a Google search. Spend some time at YouTube University. Check out the education section of Investopedia. Maybe start following some personal finance bloggers. You don’t have to understand everything before you set up an automatic transfer. Have the money accumulating so it’s in place when you’re ready to make your first investment.

In the interest of transparency, I want to tell you a bit more of my story. I started with guaranteed investment certificates. I didn’t understand that GICs don’t beat inflation and that my money wasn’t growing the way I needed it to. At the time, I was concerned with safety. I didn’t want to lose my money. Perfectly understandable! You don’t want to lose your money either, right?

However, I borrowed books from the library and I learned about these things called mutual funds. They were offered by banks and they would give me better returns that GICs. So I switched my money to mutual funds. After a time, I learned about index funds and exchange-traded funds. They were better than mutual funds because they charged lower fees. Today, I’m still investing in ETFs while learning about crypto currency and NFTs. I’ve done some real estate investing but certainly not enough to consider myself an expert.

If anyone were to ask, I’d tell them that I have made many mistakes in my investments. I didn’t have all of the answers when I made my choices. I didn’t always understand the implications of my choices. If I could go back and make different decisions, then I most certainly would. That’s not possible so I continue to follow the first three rules articulated above. Save – invest – learn – repeat.

Wherever you are on your personal finance journey, you should be putting the basics to work for your money. You work hard for it. The least you can do is make sure that your money is working just as hard for you. There’s no time like the present. Take the first step today. Congratulate yourself. Then work on figuring out the next step. Take that step too. Before you know it, you’ll be saving and investing for Future You while still enjoying the gift that is today.

My Money Mistake – Investing vs. Paying Off a Mortgage

One of the eternal questions that’s raised in the personal finance world is whether one should be investing or paying of a mortgage. I made my choice 15 years ago. In hindsight, my choice could qualify as a mistake but, if so, it’s not the worst one I’ve ever made. As I’ve said before, personal finance is personal and it should be about what makes you the most comfortable when it comes to investing your hard-earned money.

I was raised to not carry debt. It’s a good lesson, and I can’t disagree with it too, too much. That said, there are nuances to debt that I did not learn nor understand until after I’d paid off my mortgage at age 34. I’m going to share my perspective of those nuances with you so that you have the information to make the best decision for your own life and goals.

Different Choices, Different Risks

Jordan and Leslie are both 30 years old when they finally buy their first house. They both have 25-year amortizations, and they both have an extra $1500 per month that can be used for investing or paying down the mortgage.

Jordan decides to pay off his home early. His extra $18,000 per year goes into making extra mortgage payments. He’s in line to pay off his home in 15 years when tragedy strikes. At year 14 of the amortization, Jordan loses his source of income and cannot make his mortgage payments. Within six months, he loses his house to the bank in foreclosure. After years of making mortgage payments, Jordan is left without a house and without an investment portfolio. He has to start over from scratch – find another job, build another down payment, start making mortgage payments all over again, figure out how he’s going to pay for his retirement.

Leslie makes a different choice because she knows that time lost can never be regained. Investments need to be made early so that they have the maximize time to grown. Leslie decides to pay minimum monthly requirement on her mortgage, which commits her to the full 25 year amortization. Leslie invests her extra $1500 per month by fully funding her TFSA and RRSP every single year. Once those two registered plans are maximized, she invests the remaining money in a non-registered investment plan through a brokerage. In short, Leslie chooses to invest $18,000 per year. As with Jordan, Leslie loses her employment income at year 14 of her mortgage.

Leslie’s not worried about losing her house. Why not? Her investments have grown quite nicely over 14 years. She has money in the bank. Her dividends and capital gains are enough to provide her with cash flow to pay the mortgage. They’re not yet enough to replace her entire former income, but they’re enough to keep her afloat until such time as she finds another job.

Even if Jordan and Leslie hadn’t lost their jobs, Leslie would still have been wealthier than Jordan at the 25-year mark. Why?

Leslie’s investments would have had 25 years to grow while Jordan would have only had 10 years of growth. Even if he starts investing his entire former mortgage payments the day after his mortgage is paid off, Jordan’s investments will not grow as large as Leslie’s. Her investments have had an extra 15 years to grow, assuming the same rate of return for both portfolios. Both Jordan and Leslie would have a paid-off homes at the 25 years mark, but Leslie would also have a much bigger cash cushion than Jordan.

Hindsight is 20/20.

Now, don’t get me wrong. The logic of this example was lost on me when I took out a mortgage on my home. As a matter of fact, I don’t even think I saw the options presented this way until after I’d paid off my home. If I’d seen it sooner, I would have atleast thought about it while paying off my biggest debt.

With the benefit of hindsight, I now realize that I should have followed Leslie’s lead. It’s been nearly 25 years since I took out my first mortgage. Had I kept that mortgage and invested my money instead, I’d be that much closer to financial independence. Instead, I chose to become debt-free in my early 30s and have been diligently investing in the stock market for the past 15+ years.

My parents taught me to stay out of debt, and I heeded their advice. Was I wrong to do so? Not really… Yet, if I had learned about more about investing and the compounding of time, I would have made a better-informed decision. I might have better appreciated what it meant to lose those early years of compound growth as I worked very hard to pay off my home in 5 years.

Since you’re best-placed to know your own life goals & dreams, you will make your own choice. Investing vs. paying off a mortgage is a major financial decision. The consequences of the choice won’t be known until long after you make it.

My hope is that you make an informed decision. While you can’t know the future, you can influence it by making wise choices and planning accordingly.

There’s nothing wrong with changing course, if necessary.

If you’re currently making extra payments but you’re doubting that choice, then know this. It is perfectly okay to change your mind. When you know better, you do better. Maybe you stop the extra payments for a few months while you stuff your RRSP and your TFSA. Perhaps you decide to alternate – one month the extra money goes to your mortgage and the next month it goes to your investments. You have to do what makes you most comfortable. And if you decide to keep paying off your mortgage, then do so with the full knowledge of what that might mean for your future.

We no longer live in a world where the majority of people have pensions. For the majority, saving for retirement is up to each individual person. Lifetime employment with the same employer is no longer the standard. Committing to decades of mortgage payments without the security of gainful employment is risky. In Canada, houses are ridiculously expensive so mortgages are often several hundred thousand dollars. I understand why getting rid of such a large debt is a huge priority for people. At the same time, getting out of debt shouldn’t diminish the responsibility you have to funding the Care & Feeding of Senior You Account.

When I think about my own choice through the lens of maximizing my wealth, I feel that I made a mistake and that I should have kept my mortgage for as long as possible in order to invest. Yet when I consider the fact that employment is not guaranteed and funding retirement is on the shoulders of the employees, I think I was wise to eliminate my mortgage as fast as possible.

Will I have the absolute maximum amount for my retirement? No, but I’ll still have enough and that’s what matters most.

Is Your Spending Making You Happy?

There are lots of ways to find happiness. Playing with puppies. Mastering a difficult musical piece. Finally accomplishing a goal that means a lot to you personally. However, I like to talk about money in this space so I’m asking you to consider whether your spending is making you happy.

For the record, I want it said that I don’t believe that spending is the path to happiness. No, no, no… not at all! That way leads to madness. As Dr. Seuss has taught us every Christmas, happiness is not bought at the store.

What I’m suggesting is that since you work so hard for your money, you should only spend it on things that will generate happiness for you. That could be buying an experience that means something special to you. It could be donating money to a cause that you believe in very deeply. Maybe you want to gift something special to someone else, or create a celebration in honor of someone you love very much. True, these things all need to be purchased but they’re not the same quality of purchase as a consumer good that will likely just take up space. Will buying another pair of jeans bring you the same amount of happiness as paying the vet-bill to get your fur-baby the care that she or he needs to be healthy again?

Every penny should be driving your happiness quotient up. If your purchases aren’t doing that for you, then I have to ask you to consider why you’re making that purchase.

Novelty is part of the Happiness Quotient

Every fall, various coffee companies release their version of a pumpkin chai latte. I know that this is a seasonal drink. I also know that a great many people look forward to this time of year. (I’m not one of them, but to each their own.) I can only assume that lovers of the pumpkin chai latte are very happy to have the first one of the season. If they weren’t, they wouldn’t readily spend money on them as soon as the drink became available. However, I’m not as easily persuaded that they are as happy with subsequent pumpkin chai latte’s as they are with the first one.

Once the novelty wears off, is the burst of happiness at their seasonal arrival remain as intense on the last day as it was on the first day?

Personally, I think the novelty factor is one of the reasons why experiences bring more happiness than stuff. Attending a concert with friends – traveling – enjoying a great meal! Think about your most cherished memories where you had to open your wallet for whatever reason. Would you gladly pay the money again?

Of course, great experiences can also be had for free. However, I’m talking about the experiences that might have cost you a little bit of money. Unlike stuff that can disappear into the back of a closet, a storage locker, or the garage, we remember our experiences. They’re special because they are unique to us. They have a personal novelty that is unlikely to be purchased from a retail outlet. The ones we cherish most have that 7-star rating, which will last with us for a very long time. They’re not that seventh pair of jeans that we bought from our favorite store.

Maximize your Happiness Quotient

Since people have to trade their energy and time to acquire money, it seems to me that maximizing happiness from every purchase just makes sense. I’d like to suggest that one of your goals for 2022 is to only spend money if it will make you happy. You should aim to only make 5-star, or higher, purchases at every opportunity. If you don’t feel that the 17th pumpkin chai latte is going to make you happy, then don’t buy it. The beauty of the PCL-season is that it is coming back next year.

To be clear, I’m not talking about spending on survival expenses. Food, shelter, transportation all need to be acquired. Maybe you feel happiness that you have the money to pay for your survival expenses. If so, great! Generally speaking, I’m talking about the joy generated by your disposable income, the money that’s leftover after you’ve taken care of the absolute necessities. Do you feel happiness when you spend that money?

Start by tracking your expenditures, then rate how much happiness they generated for you. One-star for “Not happy at all”. Seven-stars for “Happier than I could’ve ever dreamed!” In my humble opinion, you should only spend money if the purchase will hit atleast 5-stars on this rating scale. Anything less is a waste of your money.

Now, I ask you. If your purchases aren’t making you happy, then why are you making them? Is it just habit? Do you spend to make someone else happy? Have you subconsciously bought into the marketers’ false promise that spending money is the same thing as acquiring happiness?

Sit with yourself for a bit. Figure out if your spending choices are worthy of 5-stars or more. If the answer is “No”, then I want you to think about why that is. Each day, you’re presented with so many opportunities to spend your money. Try this experiment. Before you open your wallet, ask yourself if the purchase is going to make you happy. Articulate what it is that you think the purchase will accomplish – create a forever-memory with a loved one? Fulfill some long-held heart’s desire? Put a smile on someone’s face?

Aim to have the rating last a long time.

This past summer, the gaggle of teenagers who lived next door moved away. I miss them. They were all good kids – friendly, responsible, polite. Also, they would shovel my driveway & sidewalk for money. They were the perfect young neighbours! Mid-November of last year, I went to one of my favourite stores and bought a snow-blower. Believe me when I tell that the purchase of a snow blower rated 6-stars on my happiness scale!

On a good day, my driveway will only take 45 minutes to shovel. Then add on another 10 minutes to do the sidewalk at the front of my house. My snow-blower has cut the total time down to 25 minutes… When I finally get the 100’ extension cord I need, I expect that it will take even less time to do this chore since I won’t have to do the sidewalk with the shovel. My driveway is longer than 50’ so I’m still using a shovel for the last 10’ and the sidewalks.

My snow blower makes me happy because it saves me time on a chore that I really dislike. When it’s -30C outside, yet I still need to clear my driveway, that machine moves snow way faster than I can with a shovel. I also don’t have to worry that I’m re-injuring my wrist or my shoulder. And I’m also making the walking surfaces around my house safer for everyone. The snow-blower has continued to maintain its 6-star rating!

You’re going to be spending money in 2022. You might as well be increasing your happiness quotient while you do so. Make this year the one where you strive to only spend your money in ways that only bring more happiness into your life.

Could you afford your life without credit?

I love reading about personal finance. It’s been a hobby of mine for the past 20+ years. I’ll even go so far as to admit that I’m also an avid snoop – I love hearing about how other people spend their money.

Are they investors?
Do they like to be spontaneous with their cash?
Maybe their parents or grandparents are helping them out?
Perchance they started a wildly successful business?
Are they just regular folk trying to survive and have a few creature comforts for themselves?

Want to know what I’ve learned after all my many years of reading about how other people spend their money? Here it is.

There’s a persistently growing group of people who need credit to survive. These are working folks whose paycheques don’t get them from one to the next. No matter how they crunch the numbers, economize, downsize, and sacrifice, they simply don’t take home enough income to pay their expenses.

Take a good look at your finances. There’s no need to share your answer with the class. Just be honest with yourself as you answer this question:

If you had to survive on cash, would your cash run out before you got to your next paycheque?

For Some, Credit is Optional

There’s a segment of the personal finance community that loves to talk about credit card hacking. I’m not an expert so forgive my less-than-accurate description of this financial method. In short, credit card hacking appears to be a process by which cardholders maximize their points for extremely discounted or free travel, hotels, car rentals, etc… These cardholders are diligent about how they use their credit cards each month to maximize these benefits. Most importantly, THEY NEVER, EVER CARRY A BALANCE ON THEIR CREDIT CARDS.

And while travel cards are not my preference, I can certainly see the advantages. I have two friends, each of whom has 4 children. Every so often, my friends like to travel by air for family vacations. Believe you me, they make extremely good use of their travel rewards credit cards. Flight expenses for a family of 6 are very expensive. It only makes sense to use a credit card that will result in one or two of those airline tickets being free or otherwise extremely discounted.

In the interests of transparency, I freely admit that I use a credit card that saves me money on groceries. I use the card – I earn points towards food – I pay off my credit card charges long before the due date. If I had to pay for a gaggle of airline flights, I’d probably use a different credit card.

For Another Group, Credit is a Requirement

There’s another group of people who use credit cards for reasons that aren’t driven by economizing on life’s little luxuries. These are people who need credit because their paycheques are insufficient. They don’t make enough money to pay for rent, food, utilities, and transportation. To be blunt, their paycheques do not cover the basics. It’s not a situation where people have to cut back on cable for a 3-4 months to pay off a debt. I’m talking about those who have already cut their expenses to the bone… and are now digging into the marrow. These are folks who are at the financial bottom, even though they’re employed.

For these people, access to credit gives them a way to survive from one paycheque to the next.

Do not misunderstand me. I am not for one second saying that this a good way to make ends meet. It is not. The rates of interest charged on credit cards should be criminal. However, using credit is the next best way to buy your necessities of living if you’re not able to further slash your expenses and your efforts to earn more money have failed.

I’m going to suggest that those who could live on cash have some empathy for those who can’t. Put yourself in the other’s shoes. Again, no need to share the answers with the class. Just be honest with yourself.

Let’s say you’re paid bi-weekly, i.e. every 14 days. Yet your paycheque only allows you to buy 12-days worth of food. What would you do? Would you willingly be hungry for 2 days or would you use credit to bridge the gap?

You need your car for work, and it breaks down. There’s no reliable public transportation near you, and your co-workers don’t live nearby. Do you look for another job near home? Or do you use credit to fix your vehicle so you can maintain your livelihood?

These aren’t terribly far-fetched scenarios. People find themselves in these situations every day. When they don’t have the cash to pay for the repair, or to feed themselves, they turn to credit.

Life Can Be Expensive When You Don’t Have Enough Money

Even if you had an emergency fund, there’s no universal rule that life won’t throw you another emergency before you’ve had a chance to rebuild your fund.

Credit provides a lifeline, an immediate solution to a financial problem. The real issue is that the cure is as bad as the disease. For those at the bottom of the economic ladder, relying on credit is just as bad as not having sufficient money to pay for their costs of living.

It’s not a situation of using credit and paying it off in full, while earning a low income. People in that situation could live on cash, but use credit for other reasons. Maybe they’re earning points. Or perhaps they’re building their credit score. At the end of the day, they set aside their cash to pay off their credit card balances in full. Their income may be low, but it’s enough to get them from one paycheque to another. They simply use credit in place of cash, but they never fall into the trap of carrying a credit card balance.

My concern is for those who need to use credit because their cash isn’t enough. Life isn’t getting any cheaper. A few weeks ago, we found out that inflation in Canada had hit 4%. That’s not great, especially when your income doesn’t grow in step with inflation. For those who have disposable income, now they have just a little bit less of it. The people who were just making it from one payday to the next… well, they may not be able to do it anymore. When gas, groceries, rent and utilities all increase, while income stays stagnant, doesn’t it make sense to rely on credit if you can? Even if it’s going to cause problems later on?

Again, I ask you…

…Could you afford your life without credit? Do you earn enough to live on cash?

There are no easy answers when the belt has been tightened as tight as it can go but there’s still not enough money. If I were wise enough to have the answers, I would share them with the world. Like most of the chinwag that emanates from personal financial bloggers, my suggestions and insights are for those who already have money. Solving the problem of people not having enough money to begin with is beyond me.

In a perfect world, incomes wouldn’t have to be supplemented with credit. Paycheques would be enough to cover the survival expenses, to invest, to save for emergencies, and to buy a few little extras. That isn’t the reality for everyone. So as we start 2022, I urge you to have some compassion and kindness towards those who aren’t fortunate enough to have to have extra. Please don’t judge them for the choices that they make. They’re doing the best they can.