Author: Blue Lobster

F.I.R.E. – A Refreshing New Perspective

For those who don’t know, F.I.R.E. is the acronym for Financial Independence, Retire Early. It’s a financial point of view that has gained traction in the past 10-15 years. People live significantly below their means in order to grow their money as fast as possible until they no longer need to work. Once they hit that point, they are considered financially independent. If they wish, they can choose to retire early at that point. There are a multitude of websites and blogs devoted to the F.I.R.E. way of life. I will admit that my personal finance coming-of-age was heavily influenced by the initial hardcore tenets of FIRE.

For a long time, I easily adopted the face-punching viewpoint of Pete who runs Mr. Money Mustache even though I was not going to give up some of things that he clearly eschewed. For a little while, I was also enamored with the draconian thriftiness espoused by Jacob’s on his website, Early Retirement Extreme, even though I would never choose to live that way. I was constantly searching for stories of people who lived well-below their means because I wanted to see how far I was willing to go to have money for my investments. When I found a poster on YouTube who only ate once a day in order to save money for investing, I realized that I had limits. Starving when you don’t have enough money is one thing. Purposely starving yourself in order to invest money is offensive to me. I decided to stop seeking the extremes.

Lately, a refreshingly new perspective has emerged. In my view, it is healthier and more welcoming than what I learned. The concept is an homage to living your best life while investing your money. Your money should be used to make your life as good as possible. This doesn’t mean going into debt. It doesn’t mean working forever. It does mean being laser-focused on that which is most important to you. Debts eventually get paid. Salaries increase, one way or another. Consistent contributions to investments will churn out capital gains and dividends. At some point, the gap between the cost of your monthly necessities and the cash flow coming to you will widen to an appreciable amount. This is called your disposable income. The new perspective is about figuring out how to spend that disposable income in a way to brings the most joy and happiness into your life.

I find the new perspective more persuasive than I would have even 5 years ago. One of my biggest challenges is finding balance between living today to the fullest while saving and investing just enough for tomorrow. Two authors come to mind. They’ve articulated ideas about living each day to the fullest, without ignoring the onus to take care of Future You. Specifically, I’m thinking about Ramit Sethi of I Will Teach You To Be Rich and his exhortation to live your rich life now. The other author is Bill Perkins, who has encapsulated the essence of the new perspective in his book book, Die With Zero.

What I like most about the new perspective is that it offers a sense of balance. It gives people permission to enjoy the present, and to enjoy spending a little bit of money today. The new perspective recognizes that time is fungible – once gone, it can never be reclaimed. Accordingly, everyone should figure out what is most important to them and spend their money accordingly in order to maximize the utility of their money while securing their financial future.

Ramit Sethi encourages people to pursue their rich life today. As I understand his message, he doesn’t want you to wait 10-15-20 years to start living well. He wants you to determine what you want and to figure out if you can incorporate it into your life today. Mr. Sethi advises people to ruthlessly cut out the stuff that doesn’t matter so that they can focus their money on the things that do.

I love this idea! For my part, cable TV is unimportant. I cut it out of my life 8 years ago, and I don’t really miss it too much. I can’t host Grey Cup or Super Bowl parties, but that’s the extent of the drawbacks to not have cable in my home. What I do love is traveling to new countries. Before the pandemic, I was able to fund 3 trips to Europe in the space of 4 years. For me, that was a huge accomplishment. My rich life definitely includes travel!

In Die With Zero, the author’s position is that dying with too much money means that you have deprived yourself of experiences that could have enriched your life. This book really challenged my views about spending, saving, and investing my money. Truth be told, my mind was blown! First of all, how could a person die with too much money? Was that even a thing? I really had to slow down and contemplate what the author was saying.

Speaking only for myself, this book forced me to consider whether I was spending money in ways that made me happiest. I’ve been saving consistently since age 21. I’d finally visited a fee-only financial planner to get an objective opinion on whether I could hit my financial goals. (The answer was a resounding “Yes!”) By the time I read Die With Zero, I was comfortably past the Coast F.I.R.E. point in my money journey. I was ready to contemplate the idea that I might not have been using my money in the best way possible. After reading this book, dying with un-spent millions no longer seemed like the wisest choice.

It’s truly not my intention to be the richest person in the graveyard. There are experiences that I’d like to have which will require me to open my wallet. Though I’m not entirely convinced that I should die just as my net worth hits $5.47, I appreciate the ridiculousness of dying with millions of dollars to my name. That money will only benefit my heirs. The opportunity for me to benefit from the money dies the moment that I do. While I intend to leave something to my heirs, I want to help and not hinder. There is an intrinsic value in attaining your own personal goals. I won’t deprive them of the chance to experience the pride of accomplishment.

Right now, I’m still searching for the sweet spot. In my humble opinion, the new perspective is going to gain traction. There are those who hate their jobs and want to leave as soon as humanly possible. To those unfortunate masses, I encourage you to change jobs or find a new career. Life is too short to be miserable at work. If changing jobs isn’t an option, then know that I completely understand why you’re willing to sacrifice time today and gamble that you’ll have the time tomorrow to enjoy your money when you eventually do quit.

There will always be hardcore adherents to the “sacrifice everything in the short-term to retire ASAP” view of F.I.R.E. However, that path to financial independence and early retirement is not palatable to everyone. As with most lessons to be learned in life, it is up to each of us to take what we need and to leave the rest. We alone are the ones who know best what we truly desire from our precious time here on Earth. We owe it to ourselves to learn new ideas, try them out, see if they work, keep them if they do, discard them if they don’t, and to do it all over again.

My 5 Most Successful Steps to Retiring As I Wish

Ever since I started working, I’ve been thinking about the day that I can stop – for good. Thankfully, I’ve had very good jobs and worked with amazing people. My work has been challenging and my tasks have been interesting. All that said, work is not my passion in life. I’m not one of those people who bounds out of bed every morning because I’m excited to get to the office. Nope. I’m willing to admit that I’m happier with life when I’m not at work. Whether it’s two weeks away on my annual vacation, two days away on a weekend, or a day off during the week for whatever reason. I’m always happier with my life when I’m not at work.

Thankfully, I learned this truth about myself when I was quite young. As a result, I started my retirement planning when I was 21 years old. Here are the most successful steps that I’ve taken over the years to maximize the odds that I can retire as I wish.

Contributing the Maximum to my RRSP

In hindsight, maybe it wasn’t the best decision to start investing in my Registered Retirement Savings Plan at age 21. I still remember my parents’ accountant telling me that taking the tax deduction while I was a student wasn’t the best idea. He didn’t have any qualms with me contributing to my RRSP but he thought I should wait to claim the deduction in the future when I’d graduated and was working in my chosen profession.

Looking back, I can see that his advice was very good. Admittedly, I didn’t really understand it. My lifelong love of learning about all things personal finance was nascent so I didn’t appreciate the wisdom of his words. At 21, I happily claimed the deduction and spent it on some item whose memory thereof has been lost to the mists of time.

Stupid decision or not, the RRSP-habit was formed. I have contributed the maximum allowable amount to my RRSP every single year since age 21. The money first went into GICs, then into mutual funds, and finally it is now all invested in exchange traded funds. As I learned better, I did better. Over the years, my MERs have dropped and my returns have skyrocketed.

Contributing the Maximum to my TFSA

In 2009, the federal government introduced the Tax Free Savings Account. I can still recall sitting at my computer desk and hearing the words come out of the Minister of Finance’s mouth as I listened to the recap of the federal budget. My head whipped around and I immediately started paying attention. What had he just said? There was going to be a new way for me to save money without paying taxes? Tell me more!

My wise younger sibling then said the following to me:

“Blue Lobster, for you, the TFSA is just another retirement savings vehicle.”

Lightbulb on!

Ever since it’s been available, I have been making the maximum contributions to my TFSA. These contributions have never been sullied by interest rates incapable of matching inflation, as are offered by GICs, nor have they been brutalized by the higher-than-necessary MERs of mutual funds. Nope. I immediately put my TFSA money to work in dividend-paying ETFs.

After another discussion with my accountant, I decided that my TFSA could be used to create a tax-free stream of income in retirement. If I invested in dividend-paying ETFs, then I could withdraw the monthly dividends from my TFSA in retirement. It would be tax-free cash flow. Cha-ching! There was also the tiny little benefit that money from my TFSA wouldn’t impinge my ability to get OAS payments.

Was this the smartest use of my investment? Probably not. I now listen to the wisdom of Bridget Casey of Money After Graduation, and she’s convinced me that I should’ve gone for growth by investing in different equity ETFs. She’s probably right. There was a bull run in the stock market from 2009 to 2020. My TFSA would be bigger had I made different investment choices.

Contributing a Good-Sized Chunk of my Paycheque to my Brokerage Account

This is where the rubber really hits the road. Once I’d paid off my mortgage, I had a good bit of money remaining in my bank account every two weeks. (For the record, I’m a big believer in accelerated bi-weekly mortgage payments.)

Instead of spending that money on this-and-that, I put it to work in my non-registered investment account at my brokerage. My former mortgage payments went straight into ETFs. As with my RRSP & TFSA investments, I put everything on the dividend re-investment plan. When I got raises, I diverted some of the newly-earned money to my investment portfolio and some of it went to increasing my standard of living. As time passed, I was able to get to the point where I’m investing 1/3 of my net pay into my brokerage account and living on the rest.

Staying Away from Debt

In today’s world, it is very hard to avoid all debt. I understand that. I don’t like it, but I understand it.

For my part, I’ve had student loans, vehicle loans and a mortgage. Thankfully, I’ve never had revolving credit card debt. In the interests of transparency, I’ll admit that I do use my credit card but I pay the balance in full every single month.

However, I don’t have debt. The last time I bought a vehicle was in 2008. I used my line of credit and I did everything possible to pay off that LOC-debt within 6 months. It sucked but I didn’t care. I knew that having a car loan for 5 years would’ve sucked too. In my mind, 6 months of short-term sacrifice was well-worth the extra 4.5 years of car-loan freedom. And, yes – my former car loan payments were re-directed to my investments once that debt was gone.

My house has been paid off for 15+ years. While the property taxes, utilities and insurance aren’t cheap, my housing costs are far less than they’d be if I still had a mortgage to pay on top of everything else.

Life without debt is generally better. Instead of money going to your creditors, it can be re-directed to paying for your life’s dreams. It’s best avoided altogether. And if you can’t avoid debt, then minimize it to the greatest extent possible. While it’s in your life, do whatever you can to get rid of it as soon as possible.

Playing the Lottery

Bet you weren’t expecting that one, were you?

It’s true. I play the lottery every week – to the tune of about $20/wk. Even though it hasn’t yet paid off, I consider this one of my most successful steps.

I’ve heard that the lottery is a tax on the stupid, and that those who can’t do math are the ones who play the lottery. I don’t care. The fact of the matter is that I can’t win if I don’t play. Someone has to win and it might as well be me.

Let’s face facts. I’m contributing the max to my RRSP and my TFSA. One third of my paycheque is going into my investment portfolio. I don’t have any debt. Spending $1040 per year on lottery tickets is not going to make or break me. My retirement plans are still on track. If I win the lottery, they’ll just get a fantastically, awesome boost and I can retirement today instead of tomorrow.

Playing the lottery is my indulgence and I’m not giving it up. Other people will spend their disposable income as they wish. I will too. No judgment.

Final Thoughts on Why I Save So Much

I’ve been working in my current position for a long time now. Believe me when I say that my feelings towards working haven’t changed. I’m still happier when I’m not at the office. And I say this despite the fact that I have mentally challenging work. I’m rarely ever bored by my work. My colleagues are truly wonderful people who carry their weight and are always there for me when I need guidance, advice, or mentorship. My bosses are all fairly good people. And while I would never turn my nose up at a raise, the truth is that my compensation allows me to live the life I want. Even my benefits are not too shabby. All in all, I have a working situation that many others can only dream of yet I’m still far happier when I’m at home or with family or on vacation.

I have no illusions that my feelings are unique or that others prefer working to spending time doing what they love with those whom they love. The difference between me and them is that I’ve created a financial foundation for myself where work is becoming optional. This blog post is about the most successful steps I’ve relied on during my working life. Thanks to them, I’ve put myself in a position where I don’t have to allow my paycheque to be the overriding factor in decisions about my life. If my paycheque were to disappear, I wouldn’t have to find another one immediately… or at all. I have the comfort of knowing that my investments – and hopefully a newspaper-worthy lottery win! – will replace my paycheque when I’m ready to part ways with my employer.

Meal Planning is Your Secret Weapon Against Food Inflation

If you’ve been paying attention at all, then there’s no way that you’ve missed the impact of inflation at the grocery store. Food has gotten more expensive! One of the few ways to combat the increase in prices is to make each grocery dollar stretch a little bit further. Enter meal-planning.

One of my friends has a large family. She’s been meal-planning for as long as I’ve known her. Each week, she scours the flyers and plans her meals around whatever’s on sale. I’ve always admired her commitment to keeping her grocery expenditures as low as possible while still feeding herself (and her family) very well.

Yesterday, I failed to heed my mother’s wisdom and spent $36.31 on takeout. I let myself get too hungry and the result was that I made a bad choice with my food dollars. Had I been a little more thoughtful earlier in the week, I would have taken that same $36.31 to the grocery store and bought the fixings for a good meal that would have generated some leftovers.

My mother has been a widow for nearly 20 years. Her “trick” to keeping her food costs down is to always have food cooked in her house. Yes – that’s it. That’s the trick. My mother cooks every few days and she makes enough to last. After raising her family, she no longer wants to cook every single day. At the same time, my Wise Mother knows that she’ll make better food choices if her fridge is well-stocked with tasty leftovers. She lives and breathes the benefits of meal planning.

Why am I not as smart as my own mother? Very good question. I know better!

Two things are true.

One, you know best what you like to eat. Two, you will be hungry later. These are irrefutable facts. You have the power to use these two bits of knowledge in ways that will maximize the utility of your money.

The internet is rife with recipes! If there’s a recipe that you like, rest assured that someone somewhere has written about it online or has created a video for you to watch on your desktop, your tablet, or your phone. Here are a few of my favourite spots to find new recipes, or to be inspired by someone else’s culinary wizardry at filling their freezers.

When you plan your meals in advance, you aren’t forever asking yourself what you want to eat. If you’re anything like me, you are tired of wondering what’s for dinner every night! It would be nice to have a couple of nights in a row where I didn’t have to ask myself that question.

I used to believe that cooking for one was harder than cooking for a family. If you believe that too, then please stop. It’s time to start thinking differently. There are always ways to scale a recipe down for one or two people.

  • You need not cook the whole turkey if that’s what you’re craving. You can buy turkey parts at the grocery store. One turkey thigh can last 2-3 days, depending on how your use it.
  • Maybe you’re craving a lasagna? Cut the ingredient list in half and make it in a smaller dish. Or make the full-sized recipe and freeze the leftovers. The beauty of most pasta recipes is that they freeze and thaw beautifully, which means that much less work the next time you want to eat that particular meal.
  • Perhaps you’re craving homemade bread? I love it too, but it’s a lot to eat in 2 days. Homemade bread goes stale fast. You know what takes as much time but doesn’t go stale as fast? Homemade buns! Make a pan – eat what you want – freeze the rest. When you want another bun, just take it from the freezer.

Impediments are in your mind.

Meal planning is a skill that will take time to master. My mother has it down to a science. She’s retired so she has more flexibility with her time and can grocery shop as needed. For those of us who still work, a teensy bit more effort is required. We have to find the time to grocery shop. Not a problem. If you can’t get to the grocery store, then go online, order your food, and pick it up at a time you’ve scheduled. You can even have it delivered to you at your convenience. The time it takes to grocery shop is not an impediment if you truly want to maximize your money.

In the same vein, there has to be time to prepare your food before it gets cooked. Again, this is not an insurmountable problem. Read the recipe before you start cooking. Then read it again. Personally, I enjoy prep work – the slicing, the dicing, creating little piles of food that have to be combined in a particular order. I find it both relaxing and satisfying to get ingredients ready before I start my recipe.

If you don’t find prep work satisfying, that’s not a problem. You can buy pre-shredded cheese, minced garlic, pre-cut onions, pre-sliced carrots, etc… You can even use a meal prep service if that’s your fancy! The bottom line is that someone, somewhere has already done the prep-work for you, but you still need to get the ingredients into your kitchen so you can cook them.

Step #3 is the follow-thru. In other words, you actually have to cook the food that’s in your kitchen. I know, I know – this might be a radical idea to some of you. My advice is to buck up and get it done. Remember what I said about the internet? It’s everywhere! You can be commuting to work while watching cooking videos on YouTube, Instagram, TikTok, and websites. There is nothing holding you back from meal planning and cooking your own food.

Meal planning is not hard. It takes practice and patience, and a willingness to try something new. It’s a skill that gets better over time. The more meals that you prepare and/or eat at home, the more money you will save for the other parts of your life.

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.