Month: March 2024

Mistakes I Made on the Way to the Double-Comma Club.

This week, I heard a statistic on YouTube that 49 is the average age for people to become a millionaire in the United States. I can only assume that it’s approximately the same for Canadians. Speaking from personal experience, that statistic is bang on. And I managed to do it while making some very big mistakes.

Mistake #1 – Buying mutual funds instead of exchange traded funds

When I first started investing, I bought mutual funds instead of exchange traded funds, i.e. ETFs. One of the reasons for this was that ETFs were not widely known in Canada at the time. I can’t be faulted for working with the information I had at the time.

Where I can be faulted is for continuing to invest in mutual funds after I learned about ETFs.

See, the only beef I have with mutual funds is their price. The management expense ratios, aka: MERs, of mutual funds is always higher than the MER of the comparable ETF. Investors have to pay MERs to the financial institutions that offer mutual funds and ETFs. Fine – people need to get paid. I understand that.

However, there’s no evidence that paying higher MERs results in better outcomes for investors. If anything, it’s the opposite. Paying higher MERs means smaller portfolio values for investors.

Over a long-enough timeframe, the difference in MERs can mean seeing hundreds of thousands of dollars less in my portfolio. That’s a very bad thing. It means that investors paid more for management expenses and wound up with less money. Check out this calculator and play with the numbers for yourself if you don’t believe me. Adjust the expense ratio and you’ll appreciate difference there is between an MER of 2% and an MER of 0.5%. The money that doesn’t go to the final institutions is money that stays in your portfolio.

Eventually, I realized that keeping my investments in mutual funds was only hurting me. So I sat down, completed the necessary forms (which took about 10 minutes), and sent the proper instructions to have my money moved into ETFs. I have never regretted my decision to make the switch.

Mistake #2 – Investing for dividends instead of for growth

This mistake happened because I’m an inherently lazy investor. The idea of passive income via dividends appealed to me! I wouldn’t have to work and money would still come to me?!?!! Once I’d understood what dividends were and how to get them, I couldn’t invest in dividend-producing assets fast enough.

So, instead of investing in equity-based mutual funds and ETFs, I invested in the dividend equivalents. Every month, I earned a few dollars. Eventually, I was earning hundreds of dollars each month. That sum crossed the 4-figure amount. Today, my dividends are enough to cover all of my basic annual expenses for food, shelter, transportation, and clothing. There’s even enough to cover some of my wants, stuff like short trips, concerts, and theatre tickets.

I try not to think about the fact that I would’ve been able to retire 5 years ago if I’d invested that same money into equity-based products. By investing solely in dividends, I missed watching my portfolio benefit from the 11-year bull run in the markets that happened between 2009-2020. If I’d invested in growth ETFS, my money situation would be so much better. I can only imagine that my portfolio would be worth double – maybe even triple! – what it is now.

I corrected my mistake in October of 2020. As the stock market was recovering from the pandemic, I tweaked my investment plan. (I should’ve made this move in April of 2020, but… coulda-shoulda-woulda, right?) Instead of investing in dividend-generating ETFs, my contributions are directed towards equity-based ETFs. The difference its made to my portfolio is remarkable. Even during the downturn we all saw in 2023, my portfolio was happily chugging along. I’ve more than recovered what I lost during the steep market declines of 2020.

Mistake #3 – Not understanding the 4%-rule

Admittedly, it can take me a very long time to understand certain things. For example, I still don’t understand the importance of the P/E ratio when assessing stocks. However, I’m not a stock-picker so I don’t worry about this blank spot in my understanding of investing. If I ever do decide to become a stock-picker, I’ll study the topic of P/E ratios and go from there.

One of the investment concepts that had me stumped was the proper application of the 4% rule to my portfolio. I didn’t understand how to use the percentage to fund my retirement. Sure, I could appreciate that 4% of $1,000,000 is $40,000. What I didn’t understand was whether that $40,000 came from the $1M-principal amount or did it have to come from the earnings generated by that principal? And what was I supposed to do if my portfolio had an annual return of less than 4%?

In other words, I always wondered what the 4% represented. Was I supposed to be taking 4% out of my portfolio’s principal every year in retirement? Or was I supposed to aim for an annual return of 4% and then only withdraw those earnings?

Roughly 5 years ago, I started to fully understand that the 4% rule traditionally means taking out 4% of the principal value of one’s portfolio and living on that amount. The 4% rule is meant to effectively decrease the value of one’s portfolio so that a person can pay for food, shelter, and living expenses in retirement.

So if I started with $1,000,000, then I’d take out $40,000 and leave the remaining $960,000 invested. Hopefully, the remaining $960,000 would still be earning 6% or more. Then, those earnings would be added to the $960,000. The following year, I would withdraw 4% of $960,000+earnings (whatever that amount wound up being)… The remainder after year 2’s withdrawal would remain invested to earn more money, and then I’d repeat the cycle in year 3.

This is not a bad strategy. It does mean that the portfolio is canabilized a little bit each year. Also, if the annual return is less than 4% in any given year, then the value of the portfolio decreases faster than the investor may want it to.

That said, my personal goal has always been to live on the dividend income earned from my portfolio. By living on the earnings, my portfolio remains intact. In other words, I don’t have to sell my portfolio in 4% chunks every year. The assets within my portfolio will continue to benefit from compound growth and my earnings should increase accordingly.

Mistake #4 – Ceasing my contributions during the 2008 recession

This one is a doozy. It’s one of the worst investing mistakes I could have made, aside from the two mentioned at the end. I try not to castigate myself too badly because I was young, and far less informed than I am now. The internet didn’t offer the same kind of information that it does now, and I had few real life examples to emulate. I made the decision that I thought was best at the time. I just happened to be very wrong.

When the stock market crashed in 2008, I saw the value of my portfolio go down. I stopped investing. I’d had an automatic transfer in place. Every two weeks, a certain amount of my paycheque went into my investment account where it would be invested into pre-selected mutual funds.

When the stock market dropped in 2008, I halted my automatic transfers. The mists of time have impacted my memory. I can’t exactly remember how long I stopped investing. Let’s say it was 3-6 months. I could kick myself for making that choice! During those 3-6 months, when the market was low, I should have been buying more units in my mutual funds when they were super-cheap. The stock market was on sale and I chose to wait until the prices went up before I resumed buying into it.

Who goes to the grocery store and says “Wait! This food is too cheap! I need the price to increase significantly before I buy some more”? No one says this, ever!

So when the pandemic delivered a gut-punch to the market in March of 2020, I knew not to make the same mistake. I continued to invest my money. I even scrounged up a few extra dollars and made an additional contribution outside of my regular investing schedule! Today, 4 years later, I’m so very pleased with Yesterday Me for sticking to my plan. Yesterday Me had learned from the past and ignored the Talking Heads of Doom who were out in full force as the coronavirus spread across the planet.

Conclusion

Making mistakes won’t prevent you from reaching your financial goals. I’m proof of that! I made 4 very big mistakes during my investment journey yet I’ve still earned my way into the Double-Comma Club.

Let’s be realistic. There are 2 big impediments that are definitely going to stop you from becoming wealthy. The first one is living above your means, which is to say that your expenses are more than your income. If this is the case, then you’re in debt because you owe money to creditors. If you don’t have money to invest, then you’re hooped.

The other big impediment to becoming wealthy is failing to invest. If you never invest your money in the stock market, then it will never grow for you. Do not let fear stop you from investing. Accept that you will make mistakes. At the same, realize that you will learn from them. We learn a lot more from failure than we do success.

Every baby stumbles after their first few steps. But you know what that baby does? S/he gets back up and tries again. And again and again and again until s/he figures it out. You can do the same thing with your investment portfolio. Make your mistakes. Learn from them sooner. Keep investing and you too will eventually become a member of the Double-Comma Club.

So start today.

5 Simple Rules to Become a Millionaire

This week, someone asked me if I would consider writing a post about not drinking a daily coffee in order to become wealthy. I responded that I though the “daily coffee” is a red herring. By following a few simple rules up front, anyone will become a millionaire with enough time.

Rule #1 – Invest

Take 30% of net pay and invest it in well-diversified exchange traded fund. Do this every single time you get paid. If you get a raise, maintain that 30% proportion.

If you can’t start with 30% right away, then start where you can and increase the percentage by 1% every chance you get. I didn’t start at 30% right away either. However, after 30 years of investing, I’ve managed to hit a 40% savings rate. It didn’t happen overnight but it did eventually happen.

The more you can save, the faster you will hit the goal of becoming a millionaire or being financially independent. It’s important to start today.

I promise you that if you don’t invest any money today, then you will have very little of it when you need it the most later.

Rule #2 – Build an Emergency Fund

Some people recommend having 3-6 months’ worth of expenses set aside in your emergency fund. I’m a little more conservative than that. Personally, I would recommend 12 months’ worth of expenses. My personal mantra when it comes to emergency funds is as follows.

It’s better to have it and not need it, than to need it and not have it.

You know your own comfort level far better than I do. Ask yourself if you would rather have more or less money in an emergency fund?

Saving up this much money will take time, probably years. If it makes you feel any better, I’m still working on building up my emergency fund, and I’ve been tackling this project for a long time.

Rule #3 – Pay off your debt

Much like building an emergency fund, it may take some years to pay off all your debt. And I do mean “all” of it: vehicle loans, personal loans, student loans, credit cards, mortgage, etc… If you owe money, pay it off.

A mortgage may take decades to pay off. This is why I think it’s best to invest while paying down a mortgage and building your emergency fund. Should you get an inheritance, a lottery win, an insurance payout, or a huge raise/bonus at work, then maybe you can consider paying off the whole mortgage. There are a many factors to consider before this decision is made so consider it carefully and don’t make any hasty moves.

It might make more sense to invest the inheritance/lottery win/insurance payout/ raise-or-bonus in the stock market for long-term growth, then use the dividends generated to pay off your mortgage. That way, when the mortgage is gone you will still have a cash machine churning out an income for you. Check out this video for more details of this plan in action.

If you spend the inheritance/lottery win/insurance payout/ raise-or-bonus right away, then it’s gone for good.

Rule #4 – Use sinking funds

When there’s something you want to buy, save up for it first before you buy it.

Sinking funds force you to prioritize where you want your money to be spent. I believe that when you work hard for your money, it should be spend on the priorities that will make you happiest. Wasting money on the things that don’t bring you joy seems to be a poor choice. You will never get back the time and energy spent at work. Instead, you get a paycheque. It should be directed to building the life you really want because it represents your precious, precious time and energy.

I realize that our capitalist society does not encourage this way of life. The Ad Man and his trusty sidekick, the Creditor, are relentlessly exhorting everyone to buy everything they want immediately. My rule is about delayed gratification, not a popular choice for most folks.

However, if you want to become a millionaire, then it’s better to not send interest payments to creditors. It’s better that you invest that money so that you can reach millionaires status as soon as possible, if that’s what you really want.

Rule #5 – Spend your money

That’s right. After you’ve eliminated debt and you’ve funded your emergency fund, then it’s time for you to spend your money however you choose without going into debt.

Your investments are happily compounding in the background. Dividends are compounding each year on a DRIP, aka: dividend re-investment plan. You’re continuing to contribute 30% of your net pay even after paying off your debt and fully funding your emergency account. You’re saving up for everything before you buy it.

Keep investing. Stay out of debt. Maintain a fully-funded emergency fund. Rely on your sinking funds to meet your life’s goals.

If you’re doing these things, then you’re following the first 4 rules. Your day-to-day purchases will have no impact on your path to becoming a millionaire.

So spend the rest of your money however you want. Coffee? Travel? Brunch? Spa days? Pets? Hobbies? Wine club? Sporting events? Clothes? Shoes? Vehicles?

It doesn’t matter how you spend your money once the first 4 rules are being followed. Again, spend the rest of your money however you want so long as you stay out of debt.

A Woman Always Needs Her Own Money.

Single or not, a woman needs her own money.

Full stop. I’ll never be convinced otherwise so don’t even try. I’ve lived for a long time and I see the importance of having money in the bank. The only thing that money buys is options. The more money you have, the more choices you get to make about how to live your life. When you don’t have your own money, you’re living at the risk that someone else might take away access to shelter, food, transportation, and everything else that you need to have the life you want.

International Women’s Day was celebrated on March 8, 2024. Think about yourself and the women in your life. What are you doing to take care of your money so that it’s always in place to take care of you?

A good portion of self-care is having money. It’s never explicitly stated but money gives you the ability to walk away from situations that you don’t want in your life. Job sucks but you have money in your FU-fund? Then you can walk away and find another one without worrying about how to pay your bills. You want to move because your new neighbours blast their music until 3am every night? You’ve got the money for the damage deposit already sitting in the bank, waiting to be deployed. You want to take a sabbatical because you’ve been grinding for years and you’re simply burned out? Money in the bank means that your bills will be paid while you replenish your soul.

Always have your own money, Ladies! There should be atleast two bank accounts that only have your name on them. One account should be a chequing account, for day to day expense and monthly bills. The other account should be your investing account. You should be funneling money into your investment account from your chequing account every time you get paid. The money invested in the second account will be there to pay for your life once you’re no long employed. Money invested today funds the retirement of Future You, who will tire of going to work at some point.

You need an emergency fund to cover your life’s expenses if you and your income part ways. The emergency fund keeps financial vulnerability away. Trust me! It is far more precarious to depend on the kindness of strangers than it is to have 6-12 months of income in the bank.

A little bit of today’s money should be spent on those luxuries that bring you joy. You shouldn’t be at the mercy of someone else’s mood every time you want to splurge on something. Do you want to book a trip to Paris? Tokyo? Ghana? Maybe you want a weekend away in a ski chalet? Or maybe you’ve decided it’s time to buy that vintage car you’ve been eyeing. Whatever you little luxury is, you deserve to buy it for yourself without having to worry what anyone else has to say. If you’re dependent someone else for your money, then you’re in the financial position of a child and you need to wait for someone to give you spending money.

This week I heard someone say that money can’t buy happiness. What is equally true is that poverty can’t buy anything. If satisfying your hunger makes you happy, then you’ll need money to purchase food. Grocery stores and restaurants aren’t giving it away for free. Maybe you need medication for a chronic condition, or even a one-off medical concern? If so, then you need money to buy the medicine you need. Camping and homelessness both involve living outside yet one costs money while the other one doesn’t. Tell me honestly – wouldn’t you prefer to say “I went camping” rather than “I am homeless”?

In honour of International Women’s day, I encourage all women to do what they must to get their own money. It is the one tool that can be used however you want. You need money to create the life you want and to pursue the opportunities that come you way. Money amplifies your ability to make choices without needing someone else’s financial permission. Every woman should have that.

Have You Decided How to Spend Extra Money?

Most of us dream of winning the lottery, but there are times when smaller lump-sums come into our lives. What should be done with that extra money?

In my humble opinion, you should split that extra money in the following way:

  • 50% to your investments
  • 30% to your debts (if you have any)
  • 10% to your emergency fund
  • 10% to whatever you want

Investments need to be funded.

My advice is to invest money when you have money. Your Tax Free Savings Account and your Registered Retirement Savings Plan will not fund themselves. It’s up to you to put the money into both of these accounts. Once you’ve made the contributions to your TFSA and RRSP, you have to invest that money so that it can grow over a long period of time.

If you’ve already maxed out your TFSA and RRSP contribution room, then put the money into your non-registered brokerage account. The government taxes capital gains and dividends earned in your brokerage account less than it taxes income received from your employer. This is a very good thing.

So when that “extra money” lands in your bank account, invest half of it.

Pay down your debts.

In an ideal world, you don’t have any debts.

Most of us don’t live in an ideal world. Debt is a part of many people’s lives via student loans, credit card debt, medical debt, mortgages, car loans, etc… I view debt as a financial cancer. Debt prevents you from building your own financial cushion. It prevent you from accumulating wealth. When you send money to your creditors, then you’re unable to invest those same dollars for Future You. Debt limits your ability to make life a little bit easier for Today You.

So when extra money comes your way, send atleast 30% of that amount to your debts. If you want my opinion, pay off any debts that can be paid in full. I subscribe to the Debt Snowball method of repayment because it feels good to get rid of debt. Positive psychological boosts are generally good motivators, so I’m a fan.

Top up your emergency fund.

It takes a very long time to build up an emergency fund. While some people are comfortable with a smaller one, my goal is to work my way up to 12-months worth of expenses. I’ve yet to meet this goal and I’m still working towards it. Thanks to my automatic transfers, I’ll get there eventually.

In the interests of transparency, I’ll tell you that I recently had to pull money from my emergency fund. Accordingly, refilling my emergency fund has moved up my priority list for my money. I need my cushion to be replenished as soon as possible because there’s no way to know when the next emergency will arrive.

When extra money comes your way, it’s an extremely good idea to put atleast 10% of that money into your emergency fund. You don’t know when that emergency is going to land. There is a high likelihood that there will be a financial component to your emergency. Right now, there’s no way for you to know how big that financial hit will be. Trust me when I say that you will be very happy to have some money salted away the day that you have to deal with your emergency.

Spend the rest however you want.

That’s right. I want you to spend the last 10% of your extra money however you want.

While I firmly believe that it’s important to save for the future and to get out of debt, I realize that one of the main benefits of money is buying those things that will make you happy today. Is it a nice dinner out? Maybe a day on the links? Or you need to refill your wine-rack? Perhaps you want to upgrade your phone or your computer? Is there a getaway that you’ve been wanting to do?

Whatever it is, make it happen with the remaining money without going into debt.

Let your priorities guide you.

It’s your money. You’re the one deciding how to spend your extra money. My suggestion allocation of how to use that money is for those who might need help in figuring out what to do with their extra money.

Now, the allocation suggested above is just my preference. Other people might have different priorities for their extra money. Some people might want to put all that money towards paying off their debts. There are others who will put the whole amount into their investments. Of course, there are also those who will see this as “found money” and will choose to spend the entire amount on whatever they want at the moment.

Do what makes sense for your life. Having a plan for your extra money ensures that your priorities are met, and that you’re not left wondering where all that money went.