Author: Blue Lobster

Know Your Ex-Dividend Date & Maximize Cash Flow from Dividends

This post is about creating cash flow by understanding ex-dividend dates. Buying a share in companies that pay regular dividends is way to creating passive income for yourself. Once invested, your money will be put to work. The dividends will come to you for as long as you own the shares. It’s a great way to create a steady cash flow for your later years, when you’re no longer will or able to send your body out to work. If you’ve sent your money out to work instead, then you have some assurance that it will generate an income for you at some point.

I am not promising you that this method of generating a retirement income will be quick. I’ve been investing for decades. While I’ve learned a lot along the way, I’m still not at the point yet where my dividends can support my current lifestyle. My first dividend payments amounted to tens of dollars per year, then hundreds of dollars per year. I’ve finally reached the point where I’m earning a five-figure amount of dividends on an annual basis. It’s comforting to have that passive income, even if I still have to rise-and-shine for my employer most days of the month.

You should definitely consider whether a dividend portfolio would be a good fit for your finances. If you need to hear an inspiring story about someone who did phenomenally well at divided investing, then please check out this 2-part interview at the Tawcan blog.

Dividends & Date of Record

Companies pay dividends to shareholders who buy their shares before the ex-dividend date. There is a date of record that entitles shareholders to a portion of the profits that are distributed as dividends. It’s a very important date to know if you’re planning to receive dividends. If you aren’t listed as an owner of the underlying security on the date of record, then you won’t be paid any dividends even though you bought shares or units in that security.

Every stock, mutual fund, index fund or exchange-traded funds that pay dividends will list their ex-dividend date on their website. Personally, I have a good chunk of my portfolio invested with Vanguard Canada in the VDY ETF. This ETF pays dividends on a monthly basis. I receive dividends based on a distribution price per unit. For the most part, I know in advance just how much money I’ll receive from this security before it’s paid to me. I simply multiply the number of ETF units I already own by the distribution price to be paid. So long as I’ve bought my units before the ex-dividend date, I can get an accurate amount of the dividends that I will receive on the payment date.

Click on the link and scroll down to the bottom of the page. There, you will find the distribution frequency for VDY. Pay attention to the ex-dividend date. If I wanted to be paid on any new purchases of ETF units, then I would have to buy those new ETF units before March 31, 2022 in order to get paid dividends on those units on April 8, 2022. This is because I have to be listed as the owner of those new units on the record date, which is April 1, 2022. If I’m not listed as an owner on April 1, 2022, then I won’t be paid for those units in the month of April. Instead, I’ll start receive payment for those new units in the following month.

As I said earlier, companies pay dividends to those who are listed as an owner of the underlying security on the date of record.

Creating a Cash Flow of Passive Income Takes Time

Knowing the ex-dividend dates of the securities that you’re buying will help you to forecast your cash flow. Once armed with this information, you have the ability to know exactly when you’ll be receiving your passive income.

In the interests of transparency, I can advise that I spent years and years investing in dividend-paying ETFs. (In October of 2020, I tweaked my investment strategy and have been investing new contributions into VXC.) My two dividend ETFs of choice are VXC and XDV. As with VXC, the link for XDV will disclose its distribution dates and amounts. Both of these ETFs pay me dividends every month.

I track my purchases on a spreadsheet. Each month, I update my spreadsheets with the distribution price. This way, I’m able to calculate how much passive income I’ll be earning. It’s awesome! Unlike the money from my 9-5, these dividend payments are effort-free money. Contributions to my portfolio that were made 10 or more years ago are still churning out passive money for me.

When I was a child, my parents purchased bank stocks for my brother and I. I still own them today. Those stocks have paid me dividends for decades. I just wish my parents had been wealthy enough to buy me more! Now that I’m at my current stage of life, perhaps I should do that for myself.

Procrastination is your enemy

When it comes to investing, procrastination is a cancer. It slowly and irrevocably eats away at the potential growth of your portfolio. Your money must be invested in order to work its hardest for you. Creating a steady, reliable cash flow based on dividends won’t happen through wishing and hoping and good thought. You need to actually invest the money then leave it alone to do its thing.

If you let procrastination win, then you’re not investing before the ex-dividend date. That means you don’t receive your dividends until the following month. At the start of your investment journey, you might be missing out on a few cents or maybe just a dollar. Big deal, right? It is a very big deal. The sooner you receive your dividends, the sooner you can re-invest them through a dividend re-investment plan aka: DRIP.

While you’re building your dividend portfolio, you want to earn dividends as soon as possible. They can be re-invested with your regular contributions so that the following month’s dividend payment is even bigger. Compound growth is a key to increasing your dividend payments every month. If you invest after the ex-dividend date, you’re not doing yourself any favors.

Now, I know that you can only invest when you have the money in hand. This is why I suggest that you set up an automatic transfer so that a chunk of your paycheque is diverted to your investment account. Doing so means that you have money to invest. Sometimes, the transfer will take place after the ex-dividend date. While this is unfortunate, it’s also out of your control. You cannot invest what you don’t have.

By the same token, procrastination is entirely within your control. I don’t want you to set up an automatic transfer and just let the money accumulate. If it’s not invested, then your money isn’t being given the opportunity to grow. When you’re interested in pursing cash flow through passive income, then you need to be investing your money in dividend-paying securities as soon as you can. I do my investments every month, but you may want to do your investing quarterly or every other month or once a year. Whatever you choose, ensure that it’s result of your choice and not the result of procrastination.

As with everything you learn in life, you have the option of how to put the lesson to use. If you want passive cash flow, then start today. Get your money invested. Buy your securities before the ex-divided date. Then go about your daily life while your dividends do their thing in the background.

Is now a good time to invest in the stock market?

Yes.

Short though the answer may be, it is accurate. Today is the best time to invest in the stock market.

Since the start of 2022, my portfolio has seen a lot of volatility. My personal definition of volatility is that its value has moved between $7,000 and $15,000 in one day. Some days the swings are negative, and my portfolio value has dropped. Other days, the swings are positive and my portfolio has increased. Either way, I count it as volatility. During the Big Market Drop of 2020, my portfolio lost $247,000! It might have lost more, but I simply stopped checking it at that point.

Do I enjoy volatility? Not particularly, but it doesn’t bother me very much. I’m the same as most everyone who invests – I don’t want to lose money. No one wants to lose their investment! After all, we’ve worked incredibly hard to earn the money to invest in the first place and a loss means that all that hard work was in vain.

One of the secrets I’ve learned over my many years of investing is to never lock in your losses when the market is volatile. If you buy at $10/unit, and the price drops to $5/unit, then that’s a 50% loss. If you sell when the price is down, then you’ve locked in your loss – and that’s not a good thing. The key is to keep your money invested because the stock market’s trend over the long term is to go up.

Check out this image from personalfinanceclub.com which visually explains why stock market investors should ignore short-term volatility. It’s a picture of a person walking up the stairs while working a yo-yo. The yo-yo’s up and down movement represents the daily gyrations of the stock market. The stairs represent the long-term upward trend of the stock market.

If you stay invested for the long term, you will be financially rewarded. Your portfolio will be bigger than your initial investment. Yay for you!!!

Now, I have to caveat that last statement. This works for equity-based exchange traded funds and for equity-based mutual funds. If you decide to invest in a single stock, then you’d better have far more insight and wisdom than I do. You’ll do what you want, but I would suggest that you stay away from individual stock picking until you’re a sophisticated investor. It is between extremely hard and impossible to determine which stocks are the ones that will make you rich over the long-term. For my this very reason, I don’t invest in single stocks.

All of my money is invested in exchange-traded funds. ETFs are very diversified because they hold a basket of stocks that have done well over time. When one of those stocks starts doing poorly, it is removed from the basket and replaced with something else. When I invest in my ETFs, I don’t need to do the stock analysis to determine which stocks are good and which ones aren’t. That analysis is done for me. I can spend my precious time doing other things I enjoy. For example, last night I tried this absolutely delicious recipe for Thai Yellow Chicken Curry instead of poring over a prospectus. My portfolio continued to work in the background while I tried my hand at something new and tasty.

Money needs time to compound. The sooner compounding starts, the bigger your money will grow. Now is a great time to invest in the stock market! War breaking out? Check! Social unrest somewhere? Check! Inflation spiraling? Check! Devastating natural disaster? Check! There will always be some world event that makes the stock market volatile. That’s just how life goes with 8 billion people on the planet. Don’t let those extremely disturbing events stop you from investing in the stock market. Money that is not invested today never benefits from compound growth. You can’t go back 20 years and start your investment portfolio. You have today so start today. Once lost, time can never be recovered.

Do Future You a favor and start investing in the stock market via equity-based exchange traded funds. Start today. Set up an automatic transfer to your investment account so you’re investing on a regular basis. Personally, I invest every month. I know others who invest every 90 days. There are those who invest once a year. The key is that the investment gets made. Once you’ve started your investment journey, continue to learn about personal finance and investing. Start where you are and build from there because when you know better, you do better.

Money – A New Normal

As we gradually move into a vaccinated post-COVID world, I wonder how many of us have discovered a new normal for our money. The lockdowns forced many of us to curtail our spending in many areas of our lives. Those lockdowns have all but disappeared in my corner of the world. However, there were some changes to my spending habits in the interim. How about you? Did you change the way you spent your money?

For my part, my social life took a beating! ZOOM calls simply don’t replace face-to-face meals in a nice restaurant. Virtual hugs aren’t the same as real ones! Where I used to share meals with friends 2-3 times a week, that was all but eliminated during the pandemic as I cooked most of my meals at home. There were those few brief months when I diligently participated in Take-Out Tuesday. It was my way of ensuring that local mom-and-pop restaurants stayed afloat. I didn’t want my post-pandemic restaurant options to consist solely of chain restaurants. The pandemic induced a second, major change in my annual spending. l stopped travelling. No more trips for work or leisure. All told, I haven’t left my home province in three years!

Believe me when I say that has never happened before. I’ve been travelling somewhere atleast once a year since the time I was 6 weeks old and my parents took me to the mountains. Travel used to be as familiar to me as brushing my teeth. I was the person who planned her next trip on the flight home from her last trip! Being grounded for the past few years hasn’t been fun. At the same time, I know it’s been a very small price to pay while living through a global pandemic. First world problem, right?

The World Health Organization declared the pandemic on March 11, 2020. Take a look at your expenses for the past two years. Where were you forced to cut back? What did you do with the money? Was it funnelled into savings? Did you pay off some debts? Perhaps you chose to simply spend more online?

The pandemic did not impact everyone in the same way. Some people lost their jobs and subsequently fell into debt & unemployment. Others transitioned to working from home, or otherwise continued to work in their essential jobs. The fortunate ones who continued to work had the opportunity to invest and pay down debt. They could do so because they were essentially stuck at home! Thousands of dollars were no longer going to sports activities, concerts, travel, eating out, gasoline, commuting, dry-cleaning, salon visits, etc… That money was now available to be spent paying down debts such as credit cards, auto loans, student loans, and other consumer debt. Alternatively, for the Debt-Free, those funds could be diverted to RRSPs, TFSAs, and non-registered investment accounts. The money could have also been used to bolster previously-anemic emergency funds!

Ask yourself if you’ve got a new normal for your money. You need not share your answer with the class. Instead, consider your spending choices during the height of the pandemic lockdowns. What were you forced to stop purchasing? And will you go back to making those same purchases now?

For my part, I look forward to socializing more with my friends and family outside of the house. Will I go back to the same frequency as before? That’s doubtful! These past two years have inspired me to try new dishes and to expand my culinary repertoire. The frequency of socializing will definitely go up, but I have a feeling that I will be doing more entertaining in my home.

As for my travel-habit, I suspect that my comfort level will not return to pre-pandemic levels for another few years yet. My annual international travels are still on hold for another year or two. Truthfully, it was an expensive habit. I wish I could say that all my travel funds have been piling up in my savings account. In reality, a lot of that money has been re-directed into my house. In 2021, I had to replace the sewer pipe that connects my house’s water to county’s water line. That particular project cost me as much as my 2016 trip to Italy!

Do you have a new normal for your money? Maybe take some time and think about whether you want to resume your pre-pandemic spending habits. If the lockdowns and restrictions forced you to curtail your spending, then maybe that’s a good thing. It’s your money and you’re the only one who can determine if you’ve found a new normal for how you manage it.

Commission Free Investing is Fantastic!

Allow me to be very transparent, right from the start. I’ve had a non-registered investment account with BMO Investorline for decades. They’ve recently introduced a list of exchange-traded funds that can be purchased for free. Let me tell you say it again. Commission-free investing is fantastic!

I suspect that this move to providing commission-free purchases is in response to newcomers such as Questrade and WealthSimple. I don’t have an account with Questrade or WealthSimple, but it’s my understanding that their platforms both allow investors to buy ETFs for free.

This is wonderful. Commissions on investments through brokerages can run from $4.95 to $9.95. If you don’t have to pay them, then you can invest your former commission fee. Remember! The sooner you invest your money, the sooner it can start compounding for you. One of your goals during your accumulation phase is to invest your money as soon as you can. Investing without commissions allows you to do that.

For my part, I buy units in my preferred ETFs every month. Luckily, my paycheque is bi-weekly. That means, money shows up in my account every 2 weeks. I siphon off a chunk for investing. Every other paycheque, or every 4 weeks, I take my investment-money and buy more units in my preferred ETF. At the same time, my ETFs pay me dividends every month. While all of my ETFs are on the dividend re-investment plan (DRIP), there’s usually a little bit of dividend money left over after I’ve received my new DRIP-units.

For example, my ETF might pay me $100 in dividends. If my ETF is trading at $15/unit, then I only receive 6 DRIP-units valued at $90 (=$15 x 6). That leave $10 in dividends sitting in my account. Four weeks later, the same thing happens. I receive another $100 in dividends and my ETF is still trading at $15/unit. Again, my DRIP feature kicks into action and buys me 6 more units, leaving another $10 worth of dividends in my account. (For the ease of calculation, assume that my ETF’s trading price stays the same. In real life, the price of my ETFs fluctuates from month to month.)

Wait a minute – hold the phone! Now, I have $20 in “leftover” dividends. Yet the cost of each unit is still only $15. Since there’s no commission to buy, I simply do a trade for 1 unit at $15. There’s still $5 leftover in my account, since $20-$15=$5, but who cares? I’ve done all that I can to get as much of my money working for me as soon as possible.

This is why commission-free investing is fantastic! More of my money can be invested sooner. The more units I have, the more dividends I earn the following month. This is self-reinforcing cycle that increases my passive cashflow, via DRIP-units and commission-free units. As I’ve said before, passive cashflow is awesome. You work once – you invest money earned from your blood, sweat and tears – that investment pays you dividends. So long as you don’t spend them, those dividends earn you more dividends as they compound over time. What’s not to love about this process? Now that you know about it, you can create the same system for yourself.

Earn it once, invest it until retirement. Dividend ETfs have been the bedrock of my investment portfolio for the past 10+ years. Happily, I can report that my dividends hit the 5-figure mark years ago. At this point, I expect that they will be a very nice supplement to my other retirement income when my employer and I part ways. Up until a few years ago, commission fees constrained how often I reinvested my “leftover” dividends. Today, those fees no longer a concern. Whenever I have enough money in my account to buy a unit in one of my ETFs, I’m investing it immediately. The sooner my money’s invested, the sooner it can start to compound and to increase my passive cashflow.

Ever since commission-free investing has been available, I have done my best to take advantage of it. You should take advantage of it too!

Pension or Not, Feather Your Own Nest!

It’s up to you to feather your own nest, regardless of whether you have a pension. The first step is to take responsibility for Future You by investing some of today’s money for tomorrow. It is both risky and foolish to rely on your employer for your retirement income needs. You shouldn’t assume that your employer’s contributions to your retirement plan are going to be sufficient when you can no longer work for a living.

Simply put, a pension is a promise from your employer that there will be money for Future You when you quit working for that employer. While you’re employed, your boss sets aside money for your retirement. That money goes into the pension. It is then distributed to the former employees each month.

Under a defined-benefit pension, the employer contributes money to the plan and promises to pay you a fixed monthly amount when you retire. This is your pension payment, and it is calculated by a formula. The payment is derived from your years of service and your salary. In other words, you can figure out how much you’ll receive in advance of retirement. The longer you work, the higher your salary, the bigger your pension will be. Your employer takes responsibility for ensuring that there will be enough money to pay you a pension until the day you die. Your benefit is defined.

The defined-contribution pension works differently. Your employer promises to contribute to your pension plan. There are no promises about how much you’ll receive when you retire. Under this plan, it is the employer’s monetary contribution that is defined. Your employer takes no responsibility for ensuring what your pension payment will be when you retire. Determining the size of your pension payment is a responsibility that lies on your shoulders. You’re the one who has to ensure that the money is properly invested for the long-term. Your choices will determine if your pension payment will be big enough to pay your bills once you’ve stopped working. Under this pension, two employees working the same length of time for the same salary can receive vastly different pension payments when they retire. The difference is attributable to how each employee chose to invest their pension contributions.

Hedge your bets when it comes to funding your retirement.

No matter what kind of pension you have, you need to feather your own nest. Why? Simple – a pension is a promise, not a guarantee. If your employer goes out of business, your pension will be impacted. It may take years for you to receive the pension payments that you were promised. Just talk to some former retirees from Nortel or Sears Canada. They all saw their pension payments cut when their employers went bankrupt. What would you do if 30% of your paycheque disappeared today? Now imagine losing 30% of your pension payment when you’re too old to return to the workforce. What options would you have for replacing that chunk of your promised pension?

Having your own investment portfolio is like having insurance for your pension. Investing for the long term increases your chances of being able to live off the income from your portfolio. If things go in your favour, dividends and capital gains might eventually exceed your annual pension income. Every dollar earned by your investments is one that can replace a dollar from your pension just in case the worst happens to your pension. Think about it. The Nortel and Sears Canada employees with personal investment portfolios weren’t as badly impacted when their pension payments were cut. The income from their investments was available to replace the money cut from their pension cheques. Had they planned on spending the cashflow from their investments? Maybe, maybe not. The reality is that having that investment cashflow dulled the impact of the reduced pension.

Do Better for Future You

I know how seductive the pension promise is. It would be lovely to cast aside all responsibility for Future You’s financial health, to let “someone else” worry about that. It’s the path of least resistance, but it might be disastrous. You wouldn’t even know how disastrous until it was too late. Imagine working for decades then realizing that you won’t have enough money. You’ll be out of time to earn more money. At 70 years old, do you really believe that you’ll eagerly anticipate working another 10, 15, 20 years just to make ends meet?

And I recognize how persuasive the AdMan is! In a world where you’re constantly exhorted to live your best life, it’s hard to save for a future that is decades away. After all, living your best life is generally code for open-your-wallet-and-give-me-your-money. The AdMan won’t be there to pay your bills in your dotage. Trust me on that!

Again, a pension is only a promise. This is why you have to feather your own nest! Err on the side of caution and invest some of your own money for Future You. No one is suggesting that you become a miser. I don’t want you to give up all the things that you love in order to save for tomorrow. I recognize that no one is promised tomorrow. However, I do want you to admit that there’s little to no harm in investing a portion of today’s money for tomorrow’s needs. Having a pension and cashflow from your personal investment portfolio would be the best of both worlds. Why deprive yourself of that?

Start Today

The reality is that you have to worry about Future You. Living below your means isn’t a punishment. It’s an admirable way of governing your financial life. Doing so will maximize your comfort when you no longer can, or want, to work. Money invested for the long-term will generate annual income for you, regardless of the pension plan you’re in.

Shave a little something off of each paycheque and invest it for tomorrow. I would advise saving 25% of your net income, but you know your finances better than I do. If you can only start with $10, then start with $10. Every penny counts, but you have to start somewhere. As your income grows, as your debts are eliminated, increase the amount that you’re investing. Once you’ve saved a portion of your paycheque for the Care and Feeding of Future You, then spend whatever’s left however you see fit.

Feather your own nest. The worst thing that can happen is that your pension shows up every month. In addition, your investment portfolio would be churning out dividend and capital gain payments every year. You’ll have two sources of income in retirement. How could Future You have any complaints about that?

No Easy Answers

Forgive me in advance, as this post is going to touch on several things. I don’t have all the answers, but I have lots of questions.

Today, I watched a couple of YouTube videos about poverty in Europe. They could’ve just as easily been about North America, but The Algorithms suggested videos about Europe. It hardly matters what country I was viewing. The story is nearly universal. Once a person falls into debt and/or poverty, there are precious few ways out of it.

The first video involved young people who’ve graduated from university and cannot find a job. It’s not for lack of trying. The jobs simply aren’t there to be had. So young people who can do so are leaving their home countries to build lives everywhere. Why wouldn’t they leave? How do you create jobs that will motivate people to stay, to put down roots, to start families? What kind of a future does a country have when its young people have to move away in order to fulfill their dreams and ambitions? What has to happen to entice the young people to return? Will the country be around 100-200 years from now if their best, brightest and most talented leave to build satisfying lives elsewhere?

That same video also discussed how increasing interest rates skewered the incomes of those formerly in the “middle class”. Countries borrowed money and the terms of the loans required a decrease in labour costs. This is economist-speak for employers reducing salary costs. The good folk that believed they were solidly in the “middle class” saw the value of their paycheques plummet while their debt obligations remained the same. More than a few lost their homes and businesses. When incomes are slashed and debt stays in place, how are people supposed to recover from that particular double-whammy? What do you do when you realize that your economic status was tenuous at best? More myth than reality?

There are no easy answers to my questions. You can have the 12-month emergency fund to “tide you over”, but there has to be a job waiting for you at the end of those 12 months. If there’s no job, then you’ve simply exhausted your emergency fund. Without another job to go to, you’ve only delayed the inevitable results of being unemployed: homelessness, couch-surfing, losing friends, deteriorating networks, separation from family, etc… It’s grim.

Getting out and staying out of debt offers some protection from rising interest rates. Payments that used to go to creditors can stay in your bank account. You can use those funds to pay for the rising costs of food, housing, utilities, and any other price hikes associated with inflation’s impact on the economy. Yet if your paycheque doesn’t go far enough, what choice do you have other than credit to pay the minimum monthly bills? When your rent eats 75% of your paycheque, can you really be faulted for using credit to pay for the necessities that the remaining 25% doesn’t cover?

For most of us, the reality is that getting out of debt generally means having a steady income from which payments can be made. When it takes 25 years, or even 15 years, to pay off a mortgage, a borrower is making a huge bet that they will have income over that long period. In today’s world of contract workers and gig-workers, there’s a whole swath of people who might be better off not taking that bet. After all, a bank can just as easily foreclose for failure to pay at the 20 year mark as it can at the 2 year mark. Can you imagine how awful it would be to make 20 years of mortgage payments then lose your home if something permanently reduced your income?

Yet, at the same time, owning a home is still one of the few ways for a not-rich person to build wealth. Talk to the people who bought houses in Vancouver and Toronto as recently as 5 or 10 years ago. The values of their home have skyrocketed. Some lucky folk have houses that have earned more in equity growth than their owners have earned through a paycheque. Buying a home in a city with a strong economy and paying it off is still one of the ways to build wealth for your dotage.

And speaking of your retirement, what recourse is there if your retirement is adversely impacted by market forces beyond your control? If going back to work is not an option for you due to your health, age, or lack of job openings, what do you do?

These are the questions that keep me up at night. We always hear about the success stories, the people who’ve made it. They should be celebrated – they’ve overcome the odds and they can serve as a hopeful example of what’s possible. Yet there are countless others who did not achieve that same success. They worked hard. They saved. They followed the rules, yet they didn’t get their happily-ever-after on the financial front. What are the answers available to them?

Like I said at the start of this post, there are no easy answers. If there were, these problems would’ve been solved by now. All I know is that there are serious structural problems that are encouraging and reinforcing income inequality on a global scale.

Will you be prepared when it’s time to renew your mortgage?

According to the various talking heads in financial media, mortgage rates are set to rise over the next two years. They’re predicting that almost everyone is going to see their mortgage payments rise on renewal. If you’re on your last mortgage term, then you have my heartfelt congratulations. You don’t have to worry about your mortgage payment going up because it will be going away. You will get to keep your current mortgage payment instead of sending it to your lender. Hooray for you! Take a chunk of it – no more than a third – and use it for day-to-day spending. The rest of it should be invested for long-term growth. Enjoy your money and the comforting feeling that comes from knowing that your disposable income has gone up, way up!

If you’re one of these lucky ducks, you need not finish this article. The increase in mortgage rates will have little to no direct impact on you.

For the rest of you, keep reading. If you’ll be renewing your mortgage at some point in the future, you’d be wise to ask yourself how your budget will accommodate an increased payment. The only pertinent question that you need to consider is the following one. Will you be ready when they do?

Fortunately for you, there are many online amortization calculators. These little beauties will tell you how much your new mortgage payment will be if your mortgage rate changes. I urge you to find one immediately! Then I want you to add 2% to whatever rate you’re currently paying, figure out how much your remaining mortgage debt will be on renewal, and determine what your new payment will be at the higher rate. The sooner you have this information, the better.

Should you be fortunate enough to have access to Excel or Numbers, then you have the ability to create your own amortization table. This spreadsheet will break down your payments into the principal and interest portions. You can then play around with the interest rates and mortgage debt to see the impact on your future payment.

Armed with this new information, you can turn your attention to your budget and figure out where the money will come from to fund the higher payment. Remember! If you don’t pay your mortgage, then your lender can take your house. No one wants this to happen to you.

If your budget can accommodate the new, higher payment without trouble, then hooray! You’ll be fine and you need not worry about the increase’s impact on your life. Your house won’t be at risk of foreclosure, and you won’t need to worry about declaring bankruptcy. You can stop reading here if you choose.

Should you be in the position that your budget will balk at the increased payment, consider the following option to prepare yourself for the inevitable.

One way to keep the same mortgage payment, even if rates go up, is to make a lump sum payment at renewal time. After all, your payment is based on both the prevailing interest rates and the remaining mortgage debt. The smaller the debt, the smaller the payment. If you can accumulate a few thousand dollars between now and renewal, then do so! You’ll have the option of making a lump sum payment at renewal time. Doing so will keep your payments from inflating more than your budget can bear.

You could even start sending extra payments to your mortgage in advance of your renewal date. Doing so chips away at the mortgage’s principal balance even sooner. Every dollar of principal that is repaid is a dollar on which your lender can no longer charge you interest. Prepayments are a fantastic method of ensuring that your increased mortgage payment isn’t as high as it could be. Revisit the terms of your mortgage contract and see what options are available to you for making prepayments.

Be prepared for the day when your mortgage lender asks you for more money. Mortgage terms in Canada are rarely set for 25 years. You’d be wise to assume that mortgage rates will continue to increase. If they don’t, then you’ll have done yourself absolutely no harm by being prepared.

A Primer on How Banks Make Themselves Rich

The first thing you should know is that I am not a banking expert. I worked in that industry on a part-time basis while going to university. That was 20+ years ago. Currently, I am what you would call “just” a customer. I don’t have access to private banking, nor is my business significant enough for the executives at the banks to care about me. This primer on how banks makes themselves rich is based entirely on my personal experiences as a customer and my part-time job at ATB before moving into my current career.

Savings Accounts

Customer A: “I should start saving some money.”

Banker: “Great idea! We can put you into our Never-Fail, Best-Option savings account. It pays you interest. The more you have in there, the more you earn.”

Customer A: “I like earning interests on my money. I’d like to open one of those accounts please.”

Banker: “Easy-peasy-lemon-squeezy.”

The account is opened. The customer goes away. The banker has the customer’s money and is wondering how to make it grow. After all, Customer A was promised that interest would be earned on her funds. The banker certainly wasn’t going to pay the customer with money from the bank’s own pockets! A lightbulb goes on as the banker realizes that money can be made from lending. An idea begins to germinate. If the Banker only had to pay out a fraction of the interest charged to lend, then the bank would make buckets of cash!

But how to make that happen?

Mortgages

Customer B: “I need to borrow some money to buy a property.”

Banker: “I can help you with that. The interest rate on our mortgages is very fair.”

Customer B: “That sounds good. Where do I sign?”

The banker is gleeful. Two customers! One brings in the money to be lent to the second. The bank only has to pay Customer A an interest rate that is a tiny portion of what’s being charged to Customer B. The difference between the two rates will be spent on administrative costs & other expenses, but any leftover is profit. How many other ways could the Banker come up with to make money?

Lines of Credit

Customer C: “I’d like to borrow money, but I’m not sure when or how much I’ll need.”

Banker: “Not a problem. We’ll set aside some money just for you. If you don’t use it, then there’s no charge. If you do use it, then the interest rate will be the prime rate + 3%. We’ll start charging you interest from the minute that you use your line of credit, but you only have to make the minimum monthly payment. You can pay it off whenever you want to.”

Customer C: “Awesome! Thank you!”

Auto Loans

Customer D: “I want to borrow money to buy a new vehicle.”

Banker: “I can help you with that. We’ll secure the loan with the vehicle. If you don’t pay the monthly note, we’ll repossess it.”

Customer D: “Sounds fair. Thanks!”

Credit Cards

Customer E: “I’d like a credit card please.”

Banker: “Done. Now, it charges a double-digit interest rate.”

Customer E: “Double-digits? That’s kind of expensive!”

Banker: “You know what? You’re right. So I’m going to do this for you. We won’t charge you any interest at all so long as you pay off the full balance when the statement is due. Think of it as a grace period. If you don’t pay it off in full, then I’ll charge you interest… and other assorted fees for late payment.”

Customer E: “Okay. Can I have my credit now please?”

Service Charges

The Banker wants to make even more money. The spread between interest paid on savings accounts and the interest earned on mortgages and other debt products is pretty good… However, the Banker is convinced that there is a way to increase its profits. Customers had always paid for drafts and certified cheques, but those instruments were often rare and not guaranteed income to the Banker. In a world of electronic transfers, fewer and fewer people need such services. Yet, everyone still needed to pay their bills, send electronic transfers to each other, make loan payments, and clear cheques.

Banker: “I could charge them just for having an account! Or I could offer them a so-called free account, but charge them by the transaction. People are inherently lazy about switching banks. I might lose a few customers but most of them will stay with me…and will pay me every single month to use their own money!”

The Banker add service fees to its bank accounts. Presumably, these are to cover the costs of providing services like utility payments. The Banker tell people they can pay per transaction, or they can pay a flat monthly fee for unlimited transactions. Better yet, customers can leave several thousand dollar in their account at all times in order to have the monthly fee waived completely.

Customers: “This sucks!”

Banker: “What are you going to do?”

If you’ve ever wondered…

…how banks make themselves rich, I hope this post gave you some insights. Banks make money because they have a vested interest in getting customers into debt. They profit when people borrow money. That’s the heart of their business. Everything else is a detail.

The vast majority of us will need to borrow money at some point. Assuming you’re interested in paying as little as possible to do so, here are some things to consider:

And should you be in a position where you cannot avoid owing money to the bank, then do yourself a small favour. Start buying shares in the banks! In Canada, banks pay out dividends every single quarter. Their profits are going up and their shareholders are benefiting. If you become a shareholder, then atleast some of the interest and fees that you pay is coming back to you every year. After sufficient period of time, all of the money that you’re paying to the bank will be returned to you in the form of annual dividends.

Now you know.

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.

  1. Live below your means so you have some money to save and invest.
  2. Invest your money so that it grows over time.
  3. 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.