October, 2023 - Millionaire on the Prairie

Going Out Always Costs Me Money

It’s expensive out there. Staying at home with a cup of homemade coffee, snuggled under my favourite throw, and reading a long-anticipated book is a cheaper use of my time. And it’s just as satisfying to me as anything I pay for outside my home.

I don’t know about you but it’s expensive to leave my house. Yesterday, it was gassing up my vehicle. Today, it was groceries. Tomorrow, it’s Halloween so there might be last minute run to the grocery store for candy. Later on this week, it’s dinner with a dear friend. Next weekend… sigh… I think you catch my drift.

In terms of problems, this one really doesn’t count. Over the years, I’ve built up some very good habits for my money. I use automatic transfers to fund my emergency accounts and to invest for retirement. Several years ago, I established sinking funds for annual, un-sexy expenses like insurance premiums and property taxes. And lest you think that I don’t have any fun, there’s even a sinking account for travel, gardening, birthday presents, and theatre subscriptions.

So when I say that leaving my house is synonymous with money leaving my wallet, please know that I’m taking care of my priorities before spending on the day-to-day stuff that crops up.

You see, I think it’s the same for everyone. Leaving the house usually means spending money. The world is literally designed for us to spend money everywhere. Vending machines. Coffee shops. Grocery stores. Restaurants. Drive-through windows. Retailers of every stripe. Parking lots & parking meters. It’s hard to get through the day outside of the home without spending a little something somewhere.

Priorities First

Based on my own observation, the trick is to do your saving and investing first. It’s the timeless principle to pay yourself first. You may have heard of it as living below your means. When you get paid, transfer some of your net income – ideally 20% or more – into your saving/emergency/investing account. Once that money is tucked away, you can spend the remaining amount however you want so long as you don’t go into debt.

At the tender age of 16, I got my first part-time job as a cashier in a grocery store. Every two weeks, I took home just over $130. I picked $50 as my “savings amount” and transferred it into a separate account. By the time I bought my first car 5 years later, I had socked away $8,000. (Living with parents who paid for everything helped tremendously.)

If I knew then what I know now, I would’ve embraced public transit sooner and that money would’ve gone into equity investments in the stock market. Oh, well… too late smart.

Bottom line is that I started my first habit – saving a chunk of my paycheque every time I was paid – at a tender age. When I bought my first condo, I really had to figure out where my money was going. It was the first time I realized how badly I needed an emergency fund. If I had to pay for a condo assessment, then I needed to have money set aside or else I would have to go into further debt to cover my portion of the assessment. And when I moved from a condo to a house, I learned that furnaces and hot water tanks and roofs are exactly cheap. Again, my emergency fund got some loving attention.

Tune Up Your Finances

Speaking of your emergency fund, how’s it doing? Do you have atleast 3 months of expenses in there yet? If not, get to work. If yes, then consider beefing it up. Inflation is still something of a concern. I don’t know what’s happening in your corner of the world, but things aren’t getting any less expensive as far as I can tell.

Once your emergency fund is nice and fat, focus on filing your TFSA and your RRSP. Ideally, you’ll max out your contributions every single year. Realistically, that’s not likely to happen. Do what you can to put in as much as you can. Invest your money for long-term growth. When you’re too old to send your body out to work, your TFSA and RRSP will provide the cash you need to live.

And if you’re fortunate enough to be able to max out those two accounts, then open a non-registered account and invest your money. Unlike the TFSA and the RRSP, there is no limit to how much you can invest in your non-registered account. Take advantage of that to earn dividends and capital gains, two forms of income that are taxed less lightly than your paycheque.

I speak from personal experience. It took me years to fine-tune my system, but it’s now running like a well-oiled machine. Between my automatic transfers and my sinking funds, I’m able to fill my TFSA and my RRSP every year. I’m able to send money to my non-registered account from each paycheque. And my emergency fund is nearly fully funded because it takes a very long time to save up a year’s worth of expenses. (Yes – in my view, a fully funded emergency fund is one that will keep me going for a year. You may feel otherwise.)

You Can Do This

So long as you’re investing 20% of your income, or whatever you can realistically afford, then it doesn’t really matter that you spend money every time you leave your home. Just don’t go into debt! If you’re going into debt, then you need to stop. Debt is corrosive to your ability to secure your future. Money that’s going to your creditors is money that it not going towards your financial future.

And I know that 20% is a big chunk of money. You may not be able to save that much right away. Guess what? I don’t care. You start where you are and you work your way up. Ruthlessly cut out whatever you don’t need so that you can save and invest for Future You. No one else is responsible for ensuring that you have the kind of retirement you want for yourself.

So, yes – going out is going to be a hit to your wallet, more often than not. However, if you take care of yourself by investing off the top and by keeping your emergency fund healthy, then those hits won’t matter. The money that’s working for Future You will keep doing its job, regardless of the day to day expenditures.

There Are No Easy Answers

Today, I read a very sad story about a 76-year old man who sold his home when his mortgage payment went up. Presumably, the story was about the impact of rising mortgage rates and the lack of affordable housing in Calgary. In reality, what I took from the article was an appreciation of just how risky it is to have a mortgage when you’re on a fixed income.

Now, it should be noted that the article failed to explain why this 76-year old man still had a mortgage!!! To my mind, the journalist who wrote the story – or the editor who removed the relevant details – failed the reading public by leaving the financial questions unanswered. All we know from the article is that the man’s mortgage went from $1,000/mth to $2,600/mth and that he received $2,200/mth in social benefit payments.

Without any confirmation, I’ve tried to be generous and have assumed that he went through a grey divorce and he had to re-mortgage his home so that he could pay half of the home’s value to his ex-spouse. I could be completely wrong, but the bottom line is that his senior citizen has to move out of his home because he can’t afford to repay his mortgage.

When I was born, the mantra to all mortgage holders was to pay off the mortgage as fast as possible. Times have since changed. In the past 20 years, the message has gone out that it’s better to pay the minimum mortgage payment and to invest the difference in the stock market.

Sometimes, I think this is great advice. If you’ve got a 25-year runway ahead of you, then it’s less risky to invest your money for the long-term. You can have your mortgage paid by the time you’re in your 50s and you might still have a decade or more to invest if you retire at age 65. The dollars invested in your 20s might have 40+ years to compound if things go exactly according to plan. You’ll have a paid off home and a comfortable retirement waiting for you. Even if you make a few mistakes with your investing choices, the odds are still pretty good that you’ll retire comfortably.

The calculus changes considerably if you’re starting your mortgage in your 40s or 50s. Going into retirement on a fixed income while carrying a mortgage is like dancing on razerblades! You’re asking for trouble.

Mortgage rates started to skyrocket in 2022 from their historically un-characteristic lows of the previous decade. Rates haven’t stopped going up in 2023. When I worked as a cashier last millennium, any rate under 8% was cause for celebration. My first mortgage rate was 6.50%, and it steadily dropped over the next 20 years. The last mortgage I had in my name was for 2.79%… and I felt ripped off because one of my friends had a rate of 2.49%! I doubt I’ll ever see mortgage rates that low again in my lifetime.

These increased rates are the normal ones. It will take a long time for people to accept that but they are here to stay. The main problem with these rates is that people’s incomes haven’t kept pace with the impact the rates are having on their budgets. People who’ve had to renew their mortgages at rates 3%-4%-5% higher than what they were paying before are having to come up with several hundred dollars more each month to pay back their mortgages. And these are people who are working!

Imagine being a senior on a fixed income. The 76-year old doesn’t have as many options for increasing his income. In this case, he chose to sell his home and is looking for some place to rent. He’s having no luck. Again, the journalist/editor failed to tell us how much he received from the sale of his home and how much of that went to paying off his home equity line of credit. We have no way of knowing whether he’s in a position to buy himself something smaller than his former home. Presumably not since he’s decided to look for a roommate…

Anyway, my point is this. Stories like these should be a cautionary tale. Whatever your current circumstances, strive to stay employed until your debt is paid. Do not retire with debt!

Want to know one of the very worst elements of this story? All of the money that this man put into his house is gone! We don’t know how much of it was siphoned away via his HELOC. What we do know is that all of his payments went to the bank until he couldn’t afford them anymore and now he walks away without enough to buy himself another home. To add insult to injury, he doesn’t even have enough to easily rent another place. He could very well be homeless in a few weeks.

Do yourself a favor and learn from this man’s story. If you have debt, get out from under it. And if you’re out of debt, stay out. It’s so very easy to get into debt but it’s really, really, really hard to get it out of your life. You deserve to have the experience of being debt-free. Live below your means for life!

There are no easy answers. I don’t have any secrets that will make your debt magically go away. All I can tell you is this. If you’re fortunate enough to have some extra money in your budget, then use your good fortune to aggressively pay off your debt. When it’s gone, don’t spend the money on stupidities. Instead, invest it. Save up to pay cash for your next bright-and-shiny-whatever-it-is that you want. Just stay out of debt and don’t become the senior citizen who has to start job-hunting in his mid-seventies. Strive for a debt-free life.

Your Net Income is the Amount That Counts

People like to talk about their salary when asked about how much they earn. This is hardly surprising, since annual salary is nearly always a larger amount than what you take home. Net income is what you received after taxes and deductions have been subtracted from your gross salary. Whether you get direct deposit and receive a physical cheque, your net income is the number that you should have in mind.

What sounds better? Earning $100,000 per year (annual salary) or earning $68,572 (net income after taxes)?

It always sounds better to be earning the higher salary. This is because our society subtly and not-so-subtly teaches us that it’s always better to earn more. After all, that means you’re worth more… doesn’t it? So to admit to earning a lower amount is akin to telling the world that we are worth less. But I digress!

When it comes time to doing your budget, always work with your net income. Determine how much you take home from your job each month and subtract your expenses until you get to $0. Once you’ve spent all your money, stop spending until your next paycheque.

Don’t ever divide your annual salary by 12 and then subtract your expenses from that amount. Doing your budget this way is a recipe for disaster, an invitation to overspend. It’s the pathway towards a debt-spiral. You need not make your financial life any harder than it already is!

Pay Yourself First… doesn’t work for everyone, sadly.

If you were asking for my advice, then I would tell you to order your expenditures by priority. Personally, I think pay-yourself-first is a fantastic way to live… unless doing so means that shelter and food won’t get funded.

The unfortunate reality is that there are a good many people who barely have enough to pay for shelter and food before the money is gone. I don’t have any easy answers for those folks. They are the working poor. They live hand-to-mouth, not because they want to but because they don’t have enough money to live. They’re paid the lowest amounts permitted under the law. As prices go up and their wages stay the same, they don’t have enough money from one paycheque to the next. I’m going to give them a pass for not paying themselves first since I can understand why eating today might be viewed as more important than retirement tomorrow.

For everyone else, my suggestions are as follows.

Pay Yourself First

Take the first 15% of your net income and put it away for Future You. The money should go into your TFSA. Once you’ve maxed your TFSA, then put your money into your RRSP. Fill these accounts and choose equity investments. Don’t fiddle with this money. It is meant to take care of you in retirement. In other words, when you’re no longer able to go out to work, then you will be relying on this money to generate sufficient cashflow to pay for your expenses until you die.

Necessities Come Next

Next, pay for your necessities. You need shelter, so pay for your mortgage or rent. If you’re a homeowner, pay for the utilities that you need to keep your house running – power, water, heat. You should also pay your property taxes so that your municipality doesn’t take your home away from you. If you’re smart, you’re also setting aside atleast $100 from every paycheque for annual maintenance and unexpected “surprises” that come along with owning a home. Eavestroughs need to be cleared of leaves. Furnaces and hot water tanks need to be inspected, maintained, and replaced. Windows and roofs don’t last forever.

Have an emergency fund for your home and add to it on a regular basis.

Stick Some Money in Your Emergency Fund

There’s an emergency in your future. They are the very definition of spontaneity. You don’t know when one will arrive, but you can be guaranteed that it won’t show up at a convenient time. When it does land in your lap, you’d be best served to have some money in the bank to deal with it.

Whatever your emergency is, you will likely need money to deal with some aspect of it. A flight? A deposit? A hotel stay? New clothes? Repairs to something-or-other?

Just stick money into your emergency fund from every paycheque. Don’t spend this money! When you need it, you’ll be thanking yourself for having the foresight to set it aside in the first place.

Fill Your Belly

Do yourself a favor. Start preparing most of your meals at home. You’ll have more control over what goes into your body. It’s still cheaper to cook and bake for yourself than it is to have someone do it for you. The upside is that food that you prepare for yourself tastes better than whatever you can get at the drive-through window. And when you do go out for a meal, it become a special treat because it’s not something that you do everyday.

Fill Your Vehicle’s Belly

If you need to drive to work, then go and fill your tank. Throw $100 into a dedicated vehicle fund. At some point, your vehicle will need an oil change, new tires, or a tune-up. Whatever your vehicle will need, odds are good it won’t be cheap.

There will also come a day when you’ll need to replace your vehicle. If you can manage it, pay for your next vehicle with cash and bypass financing all-together.

Pay Off Your Debts

Maybe you didn’t find my blog until today so you weren’t aware of the debt trap until you were firmly caught in it. What’s done is done. Your task now is to get yourself out of debt.

Pay off your debts. Personally, I like the Baby Steps and the idea of getting rid of small debts in order to have a few quick wins. It feels good to pay off debts. Use a good chunk of whatever’s left over at this point to pay off your creditors. This might take you a few weeks, a few months, or a few years. No matter how long it takes, just do it.

Once you’re out of debt, don’t go back into it.

Spend What’s Left

Okay… do you have money left after savings, shelter, emergency fund, debt, food, and gas?

If the answer is no, then stop spending. Do not go into debt for non-necessities. That’s a stupid move and you’re not a stupid person. It sucks to not be able to spend your money the way you want to. Focus on what’s come next after your debt is gone. That money stays in your pocket; you don’t have to send it to your creditors anymore!!!

If the answer’s yes, then let’s keep going. My next suggestion to you is to build up your non-registered investment account. Your TFSA and RRSP are registered accounts, so the government limits how much you can contribute to them each year. There are no such limits on non-registered investment accounts. You can contribute as much as you want. I like the idea of contributing $100 per day to your investment account, but you can pick whatever amount you want.

Now, you can spend the remainder of your net income however you want on the luxuries. These are the non-necessities that you don’t strictly need for survival, yet they do make life a little easier. Very often, they can be categorized as entertainment, self-care, sports, gardening, travel, or whatever-it-is-that-makes-you-smile. Spend your money on these things however you see fit.

I’m a little bit cuckoo about plants. In the spring, I hit 3-5 greenhouses and buy too many annuals for the planters around my home. I’m constantly on the hunt for perennials that thrive on neglect, in poor soil, and in the hot sun on the southern wall of my house. Oh, and it has to have pretty flowers. I haven’t found it yet but I spend a good chunk of money looking for it.

Your whatever-it-is is likely not the same as mine yet we both derive pleasure from spending our money on it. There is nothing wrong with this. One of the purposes of money is bring joy to people.

Read a Couple of Books to Optimize Your Spending

If after your non-survival spending is done and you still have money leftover, then you should read Die With Zero and figure out what really, really, really matters to you. Then you should spend your money on that. After all, you only get one life. Whatever money you earn should be spent creating the life you want for yourself. For some people, you might still choose to spend your money in the same way that you would have if you hadn’t read the book. However, atleast you’ll be aware of another perspective before you do.

Actually, now that I think on it a little bit more… maybe you should read Die With Zero after you’ve paid for your survival expenses and before you start spending on the whatever-it-is-that-makes-you-smile. You might also want to consider the words of Ramit Sethi and learn how to build your rich life.

So there you have it. These are the ways that I think you should be spending your money. Whether you follow my suggestions or not is entirely up to you. After all, you know your money situation better than I do. And I fully admit that your priorities won’t be the same as mine. Take what you need and leave the rest.

Tools vs. Anvils – How to Use Your Credit Card

Credit cards are an exceptionally useful tool if used correctly. However, they can also cause great financial harm when the basic rules of use are ignored.

There are two terms that you should know: deadbeat and revolver. Deadbeats do not carry credit card balances from one month to the next and they reap the benefits of rewards programs. Revolvers are the people who do not pay their credit card bills in full and they have to pay interest and fees.

For the purposes of this post, deadbeats use credit cards as a tool. Revolvers are the people who are carrying the anvils, which are in the shape of credit card debt.

Just in case it needs to be said, banks love revolvers and they really hate deadbeats.

The Tool

Your credit card is a tool if you pay it in full every single month before the balance is due. You can use it throughout the month, happily collecting points (or not) as you spend. When the bill is due, it’s paid in full. This is the only correct way to use credit cards, in my humble opinion. So long as you never pay interest, then I think it’s perfectly fine to use a credit card for all of your purchases.

For my part, I know how much I can spend on my credit card before I pull it out of my wallet. I’ve been tracking my expenses for years. As such, I have a good sense of how much I spend in a given month. It’s around $2,500. As such, I never spend more than this amount on my credit card.

Spending more on my credit card than I earn in one month is a recipe for disaster! Expenses go on my card simply so I can earn points towards free groceries. (If I were coupled, I would use the credit card that earns points towards companion fares. If I could find a free cash-back reward card, then that’s the one I would use on a regular basis.)

There are a myriad of reward cards out there. I don’t really care which one you pick. My advice if the same whether you accumulate travel points, grocery points, free movies, or any-other-benefit-that-works-best-for-your-goals. Pay off the entire amount of your credit card bill every single month.

If you’re never carrying a balance, then I think credit cards are a wonderful tool that should be used with abandon.

My opinion changes drastically if you don’t pay off your credit card every single month.

The Anvil

If you carry a balance from one month to the next, then your credit card is an anvil. It is holding you back from spending your money the way you want to. No one wants to send interest to the bank.

If you are paying interest on your credit card balance, then look at your statement. It will tell you how much extra money you have to pay to cover the interest. So on top of the $100 you spent on your initial purchase, you’ll be spending an extra $9 – $29.99 to pay for your whatever-it-is depending on your credit card’s interest rate. Keep in mind that the interest will continue to compound until you pay the credit card balance in full.

This is how credit cards become an anvil. It’s very, very hard to repay a debt when the interest is over 5%. At double-digit rates, your best bet is to cut up the cards, go cash-only for a year or two, and get a part-time job to pay off the debt.

Get Rid of the Anvil

Cash-only means stopping all subscriptions until the credit card debt is gone. We now live in the world of streaming services, wine-club memberships, gym memberships, online subscriptions of every sort, Patreon & Only Fans account, etc, etc, etc… You don’t have to give these up forever. Far from it! Maybe you have to give yourself a hard “No!” for 6 months. All of those “small” subscriptions add up to a decent amount.

Take the amount of those subscriptions/memberships/fees and add them to your minimum monthly credit card payment. Continue to do make these payments until the debt is paid off. While you are paying it off, do not use your credit card to pay for anything! When you make a new purchase, that purchase will only increase your outstanding debt and it will also be subject to interest. You’ll be working backwards if you continue to make purchases on your credit card while trying to pay it off.

Once you’ve paid off your credit card(s), you can re-start your memberships/subscriptions/fees that you were paying before but only up to the amount that you can pay for in full every single month. If your monthly financial commitments are more than you can pay for in full, then you need to cut some of them out permanently until you’re earning enough money to cover their cost.

Once you’re out of debt, you can continue to use your credit card. You need only follow my 3-step plan for staying out of credit card debt for the rest of your life.

Make a purchase on Day 1.
Wait for it to post to your credit card account on Day 3 so that you can earn your credit card points / rewards. (You can check your credit card account online. I check mine every few days.)
Once the purchase has been posted, make a payment in the amount of the purchase on Day 5.

By the time you receive your credit card statement, you will have paid off nearly every charge from the prior 30 days.

Real Life Experience

I think the interest rate on my credit card is 23.99% per year, or maybe even 29.99% per year. I don’t really know because I never pay interest. In my case, I follow the 3-step process outlined above so that I never pay interest on the balance.

Believe you me, the only time I ever want to see a rate a high as 29.99% is when I’m looking at the rate of return of my investment portfolio.*** When I’m the one earning this kind of return, it’s a great thing because compound interest is working in my favour.

Paying 23% or more on a credit card means that compound interest is working against me and hurtling me down into a deep, dark pit of debt. I don’t ever want to pay this amount of interest to a bank!

I’ve had a credit card ever since turning 18. Thankfully, I knew enough to pay it in full ever since the first day. I’m not the bank’s favourite customer because I’ve been a deadbeat since the beginning.

So take this information and do with it what you will. While I have strong suggestions, you are best-positioned to know the circumstances of your life. You will make the choices that you think are appropriate with the knowledge that I’ve shared. The choice to be a deadbeat or a revolver lies with you. Choose wisely.

*** Interestingly enough, I don’t earn anywhere close to these returns even though my portfolio has a significant weighting in the financial sector.

When You Retire Depends on Money in the Bank

Many people think of retirement as a function of age. They think that it arrives at the age of 65 or 70, and that retiring sooner means an “early retirement”. To my mind, this is wrong. Your retirement date is a function of your money. If you don’t have enough money in the bank to retire at the age of 65 or 70, then you’re pretty much forced to keep working until you die. And if you’re fortunate enough to have buckets and buckets of money sitting in your cash-hoard right now, then you have the ability to retire this instant.

When you retire depends on money in the bank. When you have it, you can retire. When you don’t, you can’t. It’s really that simple.

Starting earlier is better.

If you’re in your 20s and 30s at the time of reading this post, don’t fall for the historical dogma that you’ll be working until you’re 70. There is no way for you to know every single detail of your future. Why not strive for optimism? Start saving as much of your paycheque as you can and investing it into well-diversified, broad-based ETFs. Ideally, start with 20% of your take-home pay and live on 80%. As you earn more, you save more.

Track your expenses. Live below your means so that you always have money to invest. Pay yourself first before you pay everyone else.

Set up an automatic transfer to your investment account. Ensure that your earned interest, dividends, and capital gains are all automatically re-invested. Do not spend what your portfolio earns! This money has to be re-invested until you retire because it will be the cashflow that you live on once you’re no longer receiving a paycheque. The sooner your gains are reinvested, the faster they will benefit from compound growth.

Even if you love your current job, or you stand to inheiret money from your family, do this for yourself. Inheiretances can disappear for a variety of reasons. And there’s always a slim chance that you might sour on your job at some point. In either eventuality, it’s best that you bake your own cake when it comes to funding your future.

Finally, it will take a few years to build up a nice little stash. Don’t undermine your efforts by taking money from your future. Prioritize your goals and spend your money accordingly. If it’s not important, then don’t spend money on it.

When you’re younger, time is on your side when it comes to building your retirement nest egg. Don’t waste it!

Middle aged already?

Should you happen to be in your 40s and 50s when you read this post, then continue saving and investing. I would suggest that you continue to invest in equities since you’ll need the money to continue working hard for you even after you’re retired. If you live another 20+ years beyond retirement, that’s still a long time horizon so there’s little need – in my mind – to have more than 35% of your investment portfolio in bonds. Start looking at dividend-paying investments to boost your cash flow once you part ways with your paycheque. Get out of debt and stay out of debt.

If you haven’t started yet, then what are you waiting for?

Don’t spend another second castigating yourself for not starting sooner. Start today. As you pay off your debts, do not incur new ones. Instead, put that former debt payment towards your retirement savings. Car payment gone? Great! Take 80% of it and put into your retirement savings. Mortgage payment gone? Excellent! Take 80% of it and pad your retirement account. Stuff your TFSA first – that money grows tax-free, which is the best-kind of growth to have. Next, fill up your RRSP. This money will grow tax-deferred, which means you’ll pay taxes when you take the money out of the RRSP. Finally, open a non-registered investment account and start filling that once your TFSA and RRSP room has been maxed out.

Earn – save – invest. This is the formula for funding Future You’s expenses. Don’t depend on anyone else to take care of this for you. The government will not provide for you nearly as well as you can provide for yourself. Waiting for an inheritance is a very iffy proposition. Winning the lottery isn’t a solid financial plan.

Your retirement is in your hands. Retirement is a function of money, not your age.