December, 2023 - Millionaire on the Prairie

A Gift For You – A Step-By-Step Plan for Your Money in 2024!

There’s only 1 week left until we say “Welcome!” to 2024. My gift to you this holiday season is a step-by-step plan for your money. As always, take what you want and leave the rest.

First off, I want you to open atleast 3 bank accounts. Each of these will have a very specific purpose. You can add more if you want, but you need atleast three.

First Account – Your Chequing Account

This is the account that will be the center of your financial life. You will deposit your paycheque money into this account. You will deposit your tax refunds into this account. If you get birthday money, it will go into this account. In case I’m not being clear, all of your money will flow into this account.

Next, all of your automatic transfers will flow out of it. These are the transfers for plumping up your emergency account and for sending money to your investment accounts, aka: the Care and Feeding of Future You accounts.

Once the automatic transfers have been completed, you can spend the remaining money in your chequing account however you see fit. As you know, I’m not a fan of budgets.

If you see a need to budget whatever’s left over after your transfers have gone through, then more power to you.

Second Account – Your Savings Account

This account will hold your emergency fund. These are the funds that you will rely on in a true emergency, which I’ve defined as the loss of your income. If your paycheque goes away, then you will use the money in your emergency fund to pay for your life until such time as you get another paycheque.

How much should you have in your emergency fund? Well, I’m quite traditional on this subject. I think you should have between 6-12 months of take-home pay in your emergency fund. If you can replace your paycheque quickly, then it’s okay to have closer to 6 months of take-home pay. However, if it would take you longer to replace your income, then aim for the higher amount.

Don’t expect that building an emergency fund is going to be easy or quick. It’s simple to create one. After all, the only thing you need to do is set aside money from every paycheque and then not spend it. However, as we can all agree, it’s not always easy to keep our mitts off a growing pile of money.

Easy or not, you still need to do it. Set up an automatic transfer from your chequing account to your savings account. Make it for $100 (or whatever amount you can reliably handle) and send that money to your savings account every time you get paid. The higher the amount, the faster you fill your emergency fund.

Trust me when I tell you that absolutely no one in the history of the world has ever complained about having too much money during an emergency.

Third Account – Your Investment Account

This is the account where you’re going to invest money for Future You. As I’d mentioned above, Future You is still going to want food everyday and warm place to sleep once you’ve stopped working. You owe it to your future self to start investing for tomorrow.

By now, you know the drill. Set up an automatic transfer from your chequing account to your investment account. I would advise that the transfer amount be atleast 20% of your net, take-home pay. If you’re under 25, then it can be 15%. And if you’re older than 25, aim for 30%. Again, if you can’t hit these targets right now, then set the automatic transfer amount for whatever you can afford. Then, work up to the target percentages as your income grows and as your debts are paid off.

You can hold your investment account with your current financial institution, with an online brokerage, or with an investment company. In the interests of transparency, I hold my accounts with an online brokerage where I do a single trade, once a month, to buy more units in my exchange-traded fund of choice.

Once your transfer goes through, do not leave the money sitting around. Invest it! The only way to make your money grow is to invest it. I recommend exchange-traded funds for the following reasons:

they’re less expensive than mutual funds and offer the same level of diversification;
they’re way less risky that picking individual stocks;
they allow you to invest in hundreds of companies at once and in different countries; and
they permit you to benefit from dividend re-investment plans immediately.

When you go to buy exchange-traded funds or mutual funds, pay attention to the management expense ratio. You should never be paying more than an MER of 0.40% without a damn good reason. MERs paid to someone else are money that is leaving your pocket. The higher the MER, the less money that you have invested. The MER shouldn’t be the only reason that you pick an ETF or a mutual fund, but it should be a factor that’s given a lot of weight when you decide where to invest your money.

Next, your ETF or mutual fund should have a DRIP feature. The dividend re-investment plan is one of the tools that’s going to help you stay invested. You see, at first your annual dividends are going to be very small. Think dollars… or cents. But within 2-3 years, you’re going to be receiving hundreds and then thousands of dollars on an annual basis. With a DRIP, those dividends are automatically re-invested while you, Dear Reader, are spared the temptation of spending them. The dividends don’t land in your investment account. Instead, they promptly re-invested before you ever get a chance to consider withdrawing them and spending them.

Finally, keep investing no matter what. The pandemic taught many of us that the stock market can plunge deeply within the span of a few weeks. And 2022 was no picnic either for investors. Even today, the Talking Heads of the Media are expending a lot of chinwag on “the recession”.

Listen.

No one knows when the recession will get here, how long it will last, nor how bad it will be. The only thing that they can all agree on is that it won’t last forever. When the recession is over, the stock market will start going up again. It’s what the stock market does, and what it has always done. If you’re not invested, then you won’t benefit from the stock market recovery.

So invest. And stay invested. Do not stop contributing to your investment account. Transfer your money to this account and continue to invest your money so that it can grow. Future You will thank you for doing so.

Additional Accounts – Your Sinking Funds

These accounts are where you will accumulate funds for both un-sexy stuff (car insurance, annual property taxes) and irregular payments that make your life better (travel, theatre subscriptions, concerts, fine dining, etc…)

In short, you will prioritize your short-term goals and set aside money to pay for them. I can’t tell you how much easier it is to pay may insurance premiums when I know that there’s money sitting in a bank account just for that purpose. The same goes for my annual subscription to Broadway Across Canada, my vacations, my property taxes, etc, etc, etc… You get the drift. If a certain item or service has made it onto my priority list, then I have an account set up to pay for it.

You should do the same. Sinking funds force you to allocate money to the things that are most important to you getting closer to your dream life. And one of the keys to a dream life is not having to worry about how to pay for the things that you want.

That’s the Plan.

Those are the steps. Everything else is a detail. I admit that it’s not glamorous, nor particularly snazzy, but I can assure you that this plan works. I’ve been following it for most of my adult life, and I’m pretty satisfied with the outcome. I’ve made mistakes along the way… many mistakes… but sticking to this plan for my money has tempered their impact on my financial life.

Scared of Making Investing Mistakes? Do It Anyway.

You learn a lot from failure. It’s a more instructive teacher than success.

Everyone makes mistakes with their investments. Warren Buffett started investing when he was 10. Do not let anyone convince you that every investment he’s made in his entire life was a winner. If I had to guess, I’m sure that he’s made a really bad investment or two in his time. No one picks a winner every single time, not even Warren Buffett.

The reason he became super-rich is due in part to the fact that he never gave up investing after making his mistakes. You shouldn’t either.

The fact that Mr. Buffett has been investing for the past 83 years also hasn’t hurt him. Take a page from his book. Once you’ve started down the investing road, don’t stray from the path. Invest – err – learn – repeat. That’s the key to getting good at anything.

You need to start investing today. My inexpert & amateur recommendation is that you start investing into your TFSA. Don’t be misled by the name – Tax Free Savings Account. This account is best used for investing your money, not saving your money.

If you invest $0 this year, then you’ll only be harming yourself. Procrastination is your enemy when it comes to investing your money for long-term growth. Think of how far ahead you’d be with your investing knowledge if you’d started 10 or 15 years ago. Let that be your impetus to stop dawdling and to start doing.

Start with $1/day. That’s $365 going into your TFSA. If you can swing $2/day, then that’s $730 working for you on a tax-free basis. And if you think anything less than $1,000/year isn’t worth attempting, then all you need to set aside is $3/day to have $1,095 working hard for you.

Invest your money…and learn from your failures. No one is expecting you to be perfect the first time out. As a matter of fact, it would be downright weird if you never made mistakes with your money. I’m not suggesting that you make money mistakes on purpose. I just don’t want you to be so paralyzed with fear of making mistakes that you never invest.

If you could remember when you learned to walk, then you’d remember how many times you tried and fell down. Each time, you got back up and you tried again. Your first forgotten lesson was that you couldn’t move both feet at the same time. You next lesson was probably that holding onto something made walking a lot easier. Couches, tables, a bigger person’s fingers – whatever was steady and handy was good enough. Next, you figured out that you could do it on your own but leaning too far back or too far forward resulted in toppling over. It took a bit of time, but eventually you got very, very good at walking. Now, you do it with barely a second thought.

Bottom line is that you mastered walking. The same can be said for investing. Try – fail – learn – repeat. You’ll make errors. So what? Make them quickly, learn from them, then never make the same one twice. Learn from others’ mistakes too. That’s a perfectly valid way to learn a lesson. Re-invest your dividends. Increase your automatic transfer amount as you’re able to do so. Max out your TFSA. Then max out your RRSP. Then open a brokerage account and invest money there too. It doesn’t have to, and very likely won’t, happen quickly but it will happen. So long as you start today.

If you’re 18 or over, open your TFSA. It’s easy. Every financial institution has made it a seamless process to open your TFSA online. Do you have one already? Great! Set up an automatic savings transfer. Every time you get paid, money goes into your TFSA. I would suggest $24/paycheque since we’re going into 2024. You can pick your own number, whatever your budget can bear. In 2024, the maximum TFSA contribution is $7,000. Don’t beat yourself up if you can’t put in the maximum contribution. Anything more than $0 is fantastic!

And if you’re under 18, you can’t legally open a TFSA. That shouldn’t stop you from opening a savings account at an online bank. (Most youth accounts at brick-and-mortar banks are free too, but don’t use a bank where you have to pay fees.) Put your money into your savings account. When you turn 18, open a TFSA then transfer the money over.

Everyone starts somewhere. Your journey won’t be the same as everyone else’s but you do need to start. And once you do, don’t stop. Keep that investment train chugging along by investing a portion of every paycheque for long-term growth.

Automatic Savings Plans Perform Better Than Promises.

Another year is quickly barreling towards its expiration date, and that means it’s time for me to assess what I’ve learned about money and my own behaviour towards it. And this year, the big thing that I’ve learned is that automatic savings plans perform better than promises.

For the most part, I have the same financial goals every year:

Max out my TFSA & RRSP contributions.
Have a sinking fund for my annual property taxes and insurance premiums.
Take a trip, whether domestic or overseas.
Renew my Broadway Across Canada subscription.
Contribute money towards the education funds of younger family members.
Pay off my credit cards in full every month.
Invest a big chunk of every paycheque for my retirement years.
Buy birthday and holiday presents for family and friends.

These are my priorities each year. Some are long-term goals for my money, while others are very definitely short-term goals. I generally have sinking funds for each of them. These little pots of money make it super-easy for me to pay for big expenditures every year without worry.

That said… yet there is one goal that I set for myself that is just as un-finished as it was at the start of 2023. That goal relates to my emergency fund. You see, I had promised myself that I would add atleast $2,000 to my emergency fund this year. It didn’t happen.

And why didn’t it happen?

Dear Reader, the answer to that question is very simple. Promises about money don’t work as well as automatic savings transfers. Had I spend 2 minutes in January setting up a transfer of $100 every payday from my chequing account to my emergency fund, I would’ve easily hit my goal. Instead, I promised myself that I would send any “leftover” money to cover my future emergencies.

Do you want to take a guess of how many times I actually transferred that leftover money?

Zero. That’s right. Over the past 346 days, I haven’t made a single deposit to my emergency fund.

Ask me what I’ll be doing on the morning of January 1, 2024. You guessed it! I’ll be setting up an automatic savings transfer of $100. Knowing myself as I do, I cannot count on myself to abide by financial promises. Instead, my most effective route to achieve my goal is to use the power of automation and allow inertia to do the work for me. Once I’ve put an automatic savings transfer in place, I’m loathe to interfere with it. Increasing the transfer amount is permissible, but cancelling the transfer is unfathomable to me. This is how I know that creating another transfer to increase my emergency fund will be extremely effective in getting me to my goal.

The part that really chaps my cheeks is that I use automatic savings plans for nearly all of my other financial goals. My cherished sinking funds aren’t funded by well-wishes and good thoughts. Nope! I have automatic savings transfers in place. My chequing account is fat and juicy for roughly 25 minutes on payday before steadily being eroded by my various transfers.

Relying on automation has been one of the most effective methods I’ve used to build my investment portfolio. I don’t have to choose to invest when I get paid because the computers are doing the heavy lifting for me.

So why am I so backwards with my emergency fund? That’s a very good question, but I don’t have any good answers. Here’s the key though… I don’t need to have a good answer before I rectify the problem. I can ponder that problem for as long as my heart desires after I’ve set up the automatic savings transfer to my emergency fund. The questions about why I didn’t do what I should have done can linger for as long as my brain wishes to dwell on them. I don’t really care about the answers. What I have to do is set up a system to save myself from my own bad choices and habits.

In this case, it’s another automatic savings transfer for the win!

What are Your Money Goals for 2024?

At the time of his point, there are 26 days left in 2023. Hard to believe that this year will be done in little over 3 weeks, but that’s the reality we’re living in. Maybe you should take a few minutes to think about 2024 and your money goals for the upcoming year.

If you don’t have any, that’s okay. I’ll lend you one of mine. It’s simple and straighforward:

My money goal for 2024 is to live below my means and invest a nice chunk of my take-home pay.

Now, this isn’t my only money goal. And this one needs a bit of polish because it’s a bit vague. After all, what does “a nice chuck mean”?

For me, it means investing $1 out of every $3 that I bring home. You can choose a different percentage if you want. Maybe you’re hardcore and you want to invest atleast 50%. That’s fine. Or perhaps you’re just starting out and you want to go small, with something like 5% or 10%. It’s not ideal, but it’s definitely a way better than investing 0% of your take-home pay.

The next area that needs fleshing out is the part about investing. After all, money sitting in a bank account is not invested. It’s an emergency account, or maybe even a sinking fund. However, it is most definitely not invested for growth. And I want my money grown big and strong!

For me, investing my money means filling my TFSA and my RRSP with equity-based exchange traded funds. Equity-based ETFs allow me to buy small pieces of a great many companies that are listed on the stock-exchange. As these companies grow, so do my investments in them. At some point, those companies will pay out dividends and capital gains. In a nutshell, this is passive income that is taxed much more lightly than my paycheque. For the record, I love earning dividends and capital gains!

Living below my means is a simple shorthand phrase that means I won’t spend every penny I make. Oh, I’ll definitely spend some of my take-home pay. I just won’t spend all of it. After all, if I spend it all then I’ll have nothing left to invest. Without anything to invest, I’ll have no way of ensuring that my dividends and capital gains grow large enough to replace my paycheque. And that would be a shame.

What about you?

Think about your life. Determine whether you want something different. Either way, carefully consider if the money you have is being used to make your life just the way you want it to be.

And be ruthlessly honest with yourself. Are you spending to impress others? Do you have things just because other people have them?

For myself, I cancelled one of my streaming services today. It wasn’t that I couldn’t afford it. Rather, my motivation for cancelling was that I simply didn’t want to pay for it anymore because it wasn’t making my life better. It doesn’t matter that others have that service. That’s their choice and, hopefully, it brings them great joy. For me, this expense won’t be missed. The money can go towards something else.

Do you have expenses like that in your life? Are you still paying for something even though it no longer brings you happiness? If yes, then what’s stopping you from cancelling that service?

Never forget that you should always be the one in control of your money. You’re a Single Person, which means that you don’t have to consult anyone else about how to spend your money. This is one of the superpowers of being single. Every penny you earn is yours to do with as you please.

Don’t give away your superpower!

Next Steps on the Path

Perhaps you’ve already set up your sinking funds, your DRIPs, and your automatic savings plans. You’ve already done everything to make sure that your money is working hard and churning out those sweet, sweet dividends and capital gain. Congratulations!

What is the next step? Well, I would have to say that your next step is figuring out how to best spend your the rest of your money.

While I’m a huge proponent of savings and investing, I also know that we have to live in the present too. There’s no sense getting to dotage and not having anything to reflect back on. Also, no one is promised tomorrow. That’s why it’s so vitally important to live in the present once you’ve set up systems to have your money automatically invested.

Is there a class you want to take in 2024? If yes, then put it on your list. Are you interested in travelling beyond your city, province, country? If so, then jot that down too. What about moving? Replacing a vehicle? Taking another job? Joining an amateur sports league? Starting a garden?

Whatever it is, write it down. That’s the first step. And then, you prioritize which goals absolutely have to be done in 2024 and which ones can roll over a little bit longer. For example, let’s say you want a new car but your current vehicle works just fine. That’s okay. You can still want another vehicle. All you need to do is take advantage of the fact that your current one is running just fine. Start a sinking fund and throw a “car payment” in there very month. Assuming all goes well, your current vehicle will run until you have enough money to buy the next one.

See how that works? You wrote down a money goal and you came up with a plan to get what you want. By creating a sinking fund and using an automatic transfer plan, you won’t have to go into debt. Maybe it will take a few years to save up for this big of a purchase but so what? If something bad happens to your current vehicle, the money will be there as a down payment on the next one and your car payments – shudder!!! – will go to your financing company instead of your sinking fund.

Let’s go back to the example of you taking a course. Maybe you’ve always wanted to take a culinary tour in Italy. Food and travel combined – what could be better? Write it down. Is this very, very important to you? If yes, then start a sinking fund today for this trip so that you need not rely on debt to achieve this goal. Once your automatic savings plan is in place, the next step is to visit Google and get a list of websites for companies that offer these kinds of tours. While you’re building the stash you need to move this money goal from your Want-To-Do list to your One-of-the-Best-Things-I’ve-Ever-Done list, you’ll be learning about what it takes to get the most out of this kind of trip.

Living the Life You Want Is Achievable

So long as you control how your money is spent, you can achieve all of your money goals. The first step is defining what your money goals. The second step is sticking to your plan. The final step is living the dream life that you’ve created for yourself.

Don’t delay anymore. Decide what you want then go and get it!