Camille Audain, Author at Millionaire on the Prairie

My Criticisms of the Baby Steps

Based on my understanding of them, the Baby Steps have two main problems. One, the Baby Steps encourage people to work longer than they might otherwise wish. Two, people will pay higher than necessary management expense ratios (MERs).

One of the more controversial figures in the personal finance section of the Internet is Dave Ramsey. Among other things, he is famous for encouraging people to follow his Baby Steps.

When I was first starting down my own money journey, I happily devoured The Total Money Makeover. Even today, I still think that the Baby Steps are a great path for newbies who are looking for a way to get out of debt and to start building wealth. When I had student loans and car debt, I followed the Baby Steps and paid those off. Once debt-free, it was very nice to have some breathing room in my budget.

However, when I got to the step about investing 15%, I had to pause a little bit.

Criticism #1 – Working Longer than Necessary

My first concern with the Baby Steps is that they implicitly encourage people to spend 85% of their income once all non-mortgage debt has been repaid.

Allow me to exceptionally clear. THERE IS NOTHING WRONG WITH SAVING 15% OF YOUR INCOME! When there is a choice between saving nothing and saving something, always choose to save something. Then invest that money for long-term growth and go about the business of living.

However, I was fortunate enough to have learned about early retirement. I wanted to retire as soon as possible. Investing the recommended amount of 15% of my paycheque wasn’t going to do it for me. In short, investing only 15% of my income while spending the rest wouldn’t allow me to fulfill my goal of early retirement. I was not interested in working 30+ years if there was a viable option for me to still have a financially solid retirement while working for less than 3 decades!

As a result of my independent self-study, I had learned from other sources that a higher savings-and-investing rate meant a quicker path to financial independence. I’m certain that the Baby Steps will help most people get to a comfortable retirement at a traditional retirement age. And if the Baby Steps help someone to start their 15% investment plan in their 20s, I’m sure that they’ll have millions of dollars after 30+ years of work.

My life’s dreams didn’t involve working for 30+ years. My career has a lot of perks, but jumping out of bed each morning in gleeful anticipation of another day at the office is not one of them.

Fortunately for me, I had the ability to save more than 15% of my income once all my non-mortgage debt was eliminated. At this point, I seriously deviated from Dave Ramsey’s plan. Firstly, I paid off my mortgage in my mid-thirties. Then I took my former bi-weekly mortgage payment and started investing it. To be clear, that former mortgage payment was more than 15% of my take-home pay. I first maxed out my RRSP, then I maxed out my TFSA contribution room. Once that was done, I started contributing to my non-registered investment accounts. Over the years, I’ve benefitted from raises. Generally speaking, two-thirds of each raise went to my investments and the remaining third went to improving my present-day life by spending on those little luxuries that make me happy.

I am not encouraging anyone to deviate from the Baby Steps if they want to work for as long as possible. There are people in this world who love their jobs! Saving and investing only 15% of income works beautifully for these people. They get to spend their money today, while enjoying their jobs, and will still retire at traditional retirement age with a nice, fat cash cushion. If this is you, then I congratulate you on having found a way to make money doing something you love.

It just seems to me that the Baby Steps should say “invest 15% or more of your household income in retirement.” Adding those two little words would plant the seed that retirement can come sooner if you so wish. I’ve met more than a few people who’ve expressed the desire to quit working, but cannot yet do so because they need the paycheque. For these folks, saving the recommended 15% doesn’t get them closer to their goal of retiring sooner rather than later.

Criticism #2 – Paying Higher-than-Necessary MERs

My second issue with the Baby Steps is related to Dave Ramsey’s love of mutual funds. I’ve listened to him on YouTube where he consistently exhorts his listeners to invest in mutual funds.

In the interests of transparency, I admit that there was a time when I invested in mutual funds. I was younger and less knowledgeable about the costs of equity products. It’s been years since I divested myself of those products and moved into exchange traded funds with VanguardCanada and iShares. There was one main reason that I exited from mutual funds and went into exchange traded funds.

Mutual funds are consistently more expensive than exchange traded funds and index funds. This is because mutual funds charge higher MERs than their ETF/index fund equivalent. Think of the MER as the cost of the product. The returns on my mutual funds were not twice as good as the returns on my ETFs, even though the MER might be twice as high (or many multiples higher!) on a mutual fund than on an ETF. If the mutual funds’ performance had justified the higher price, then I would have continued paying a higher price. When I realized I could get the same performance for a lower price, I hastily moved out of mutual funds and put my money to work in ETFs. I’ve never regretted my choice.

So when I listen to Dave Ramsey talk about how wonderful mutual funds are, I have to ask myself why wouldn’t he tell his listeners to invest in equivalent yet cheaper ETFs? The same performance for a lower price seems to be a good thing for the people following his advice.

I have never heard a persuasive explanation for why people should pay higher MERs when an equivalent and cheaper product readily available.

Take a look at this MER calculator. It demonstrates that higher MERs result in smaller portfolios over any given period of time, all else being equal. The longer you’re investing your money, the bigger the MER-bite. Whenever possible, invest in an ETF or an index fund instead of a mutual fund. You should not be paying an MER higher than 0.3%.

So that’s it in a nutshell. Though they are a great starting point, I hope that I have articulated my two biggest problems with the Baby Steps. I sincerely hope that this blog post has given you more information about how to influence how much longer you’ll have to work. The secret is to invest more today so you don’t have to work as long tomorrow. Whenever you do invest, pick exchange traded funds instead of mutual funds to keep costs down and to maximize the amount of money working on your behalf. Lower MERs ensure that a higher percentage of every invested dollar works for you as you pursue your investment goals.

At the end of the day, the choice of how much and where to invest is yours. If you want to work for as long possible, while paying more in investment costs, then follow Dave Ramsey’s plan to the letter. If you’d like to have the option of attaining financial independence as soon as you can,then invest more than 15% of your next income and choose ETFs over mutual funds.

Mistakes with Money – Hindsight is 20/20

As I’ve said before, you need not make every mistake yourself. You can learn from the mistakes of others and make better choices for yourself. Luckily for you, my hindsight is 20/20. If you’re facing the choice between paying off your debt or investing your money for growth, perhaps my experience can offer you some insight into the best choice of your circumstances.

Roughly 14.5 years ago, I had a choice between paying off my primary mortgage or investing a six-figure lump sum of money into the stock market. At the time, I owned two rental properties and my tenants both told me they would be moving. Faced with the prospect of having empty rental units, I immediately chose to sell. It literally never occurred to me that I could get new tenants. I was a young landlord who hadn’t heard of people like Brandon Turner of Bigger Pockets or Coach Carson. No one in my family owned rental properties so I didn’t know where to find the mentorship or guidance that would have opened my eyes to my many options.

Unfortunately, I reacted poorly and made a decision out of fear. Instead of doing a basic Google search on what to do when tenants move out, I sold off my rentals within weeks of each other. The housing market in my corner of the world was on fire!!! I’m sure it was the easiest money my realtor had ever made.

I took the proceeds from my rental properties and paid off my primary residence. Within a few weeks, I was completely debt-free! Woohoo!

What would’ve happened if I’d invested that money and kept my mortgage?

Firstly, I would not have had to pay a penalty. The mists of time have obscured the exact numbers, but I do seem to recall paying a penalty for breaking the mortgage on my primary home. Where I live, you can break a mortgage without penalty if you’re selling your home. However, if you’re simply paying off the mortgage, then the bank wants you to pay the interest that would’ve been paid as per the mortgage contract.

I was younger, financially un-sophisticated, and completely committed to being debt-free. So what did I do? I paid a 5-figure penalty to break my mortgage. That was definitely a money mistake! I had the cash from my two rental properties. I could’ve simply carved out a chunk of it to cover the remaining years’ payments under my mortgage agreement, and thereby avoided the penalty, while investing the rest. When the mortgage was up for renewal in a few years after the sale of my rentals, I could have just paid off the mortgage debt in full. Alternatively, I could have invested the whole lump sum and simply kept up with my regular mortgage payments until the mortgage was discharged.

By paying off the mortgage on my primary home, I didn’t invest as much as I could have in the stock market as soon as I possibly could. If I’d invested those proceeds in the market, then I’d be a hell of a lot closer to my original goal of retiring at 50.

We know that, up until the onset of the pandemic, the stock market has rewarded investors with a very long bull-run. Full equity portfolios have done amazingly well between 2009 and 2020. Brace yourself! My rental proceeds were over $100,000. Had I been as wise then as I am now, I would’ve invested that lump-sum of cash and continued with my life-long habit of investing a chunk of my paycheque every time I got paid. My investment portfolio would’ve definitely landed me in the Double-Comma Club by now…. and my mortgage would still have been paid off in good order.

Instead, I focused on becoming debt-free. I chose to pay off my debt instead of investing for my future. My actions were not aligned with my goals.

Why weren’t they aligned?

That’s a good question. Thinking back, my own ignorance about investing is the root cause of the mis-alignment. I didn’t know as much then as I do now. Also, I’d been watching the global monetary chaos created by the financial crisis in 2007-2008 and I wanted no part of it. Being debt-free felt safe. I didn’t have the luxury of relying on someone else’s paycheque to support my household. I very much craved the security of owing not a single nickel to anyone! In other words, I let my ignorance and my fear of being in debt guide my actions.

That global financial crisis caused the stock market to drop. Today, I know that such declines are to be relished because they are excellent buying opportunities. Steep drops mean that the stock market has gone on sale, and that it’s time to load up on quality investments in good companies. Back then, I naively determined that the “smart” course of action was to wait until things settled down before investing any money in the market. As I’ve written before, I waited far too long to start investing. Sigh… this is why hindsight is 20/20. Coulda-woulda-shoulda! I delayed the implementation of my investment strategy for years. It was the wrong move!

Now that I’m older, and wiser, I realize that I should have invested my lump sum. The market started its recovery in 2009. Sure, I would have invested in 2006 and then I would have gone through the rough years until the recovery started. It wouldn’t have been terribly fun, but it would have been quite profitable. Like I said earlier, that course of action would have gotten me much closer to my financial goals.

Don’t feel too, too sorry for me. Like I said, I used that lump sum to pay off my house. I haven’t had a mortgage on my principle residence in over 14 years! Trust me when I say it’s a good feeling. Not having a mortgage means a smaller overhead for my life. My emergency fund need not include 6-9 months of mortgage payments. I don’t have to worry that the bank is going to take away my home. Instead of forking over mortgage payments, I can make contributions to my investment portfolio. I sleep better knowing that my largest debt is in my rearview mirror.

Like they say – if I knew then what I know now, I would’ve made different choices. Hindsight is 20/20…c’est la vie!

Find Serenity in What You Can Control

Sometimes, I think that people procrastinate about starting their investment portfolios because they don’t understand every element of how various investment products work. They’re afraid to invest and to lose their money. I can understand that fear completely. Believe me when I say that I share that fear too!

However, it’s a fear that can be tamed if you can find serenity in what you can control.

Here’s the thing. No one can control the stock market. Contrary to what you see from the Talking Heads of Financial Media, there really isn’t any way to control what happens in the future. People can predict – they can approximate – they can calculate likelihoods. These are fancy way of saying that the chinwag is simply a guess. It might even be an educated one, but it’s a guess all the same. Allow me to assure you that there is not a single one among us who always knows which stock will soar like Facebook or tank like Enron, ascend like Tesla or plunge like Bre-X.

You can’t control the vagaries of the stock market nor their impact on your investment portfolio. Only God knows what’s going to happen with any particular stock in the future.

That said… there are three areas where you do have control. Your choices in these areas will have a significant impact on the growth of your investment portfolio. Think of these areas as levers that can be manipulated to increase the odds of you amassing great big buckets of cash. If you manipulate all three levers, then you can vastly improve your portfolio’s return.

Amount and Frequency

You control the size of the contributions to your investment portfolio. How much you save is the single most important factor influencing the amount of money you ultimately accumulate. The more you save and invest, the faster your money will compound and grow. The best returns in the world will not get you to your goal if you don’t actually contribute money to your investment account.

Play around with this compound interest calculator if you don’t believe me. At a steady rate of return, a higher contribution grows faster than a lower contribution. In other words, a $500 contribution will compound faster than a $100 contribution.

The second most important factor, in my humble opinion, is the frequency of the contributions. I’m paid every two weeks, so I contribute to my investments every two weeks. Personally, I think it’s best to contribute when you have the money to do so. You should always pay yourself first when you get paid. That means taking some portion of your income and investing it for growth. If you haven’t read it yet, get your hands on a copy of The Automatic Millionaire by David Bach. It’s great!

If you’re paid bi-weekly, then contribute bi-weekly. Paid monthly? Invest monthly. Go back to the calculator and compare the difference in future value between investing monthly and investing annually. The difference is attributable to the effect of compounding.

My advice to you is to invest as much as you can as early as you can. Start harnessing the power of compounding interest immediately.

Control Your Fees

A second very powerful lever within your control is the management expense ratio (MER) of your investment product. The MER is the fee that you pay to the purveyor of the investment you buy. In short, it’s a skim from every dollar you invest and that money is spent to pay salaries & overhead to make the investment available to you.

You control the impact of these fees on your portfolio by choosing investment products that have lower MER fees while delivering equivalent results. You are the person who is choosing the products where your money will be invested. (Or maybe you’ll go with an investment advisor. I don’t have an investment advisor.)

Mutual funds are more expensive than exchange-traded funds and index funds. However, they both allow you to invest in equity products and bond products. My opinion is that it does not make sense to pay more for an investment when an equally good one is available at a lower price. However, if you want to pay a 2% MER (or higher!) on your investments, instead of a 0.25% MER for the same investments, then you are free to do so. You are an adult and, after all, it’s your money. You earned it and you get to decide what to do with it.

However, please make an informed decision. Take a look at this investment fee calculator to see the impact that fees have on your portfolio’s overall performance. If you’d rather have less money at the end of your investment horizon, then go with the higher MER. However, if you’re interested in maximizing your cash cushion, then choose investments with low MERs.

In the interests of transparency, I can state that none of the MERs I pay are higher than 0.25%. That means for every $1000 that I invest, I pay my investment company $2.50. If I had to pay an MER of 2%, then I would be paying $20.

Imagine having a nice 6-figure nest egg of $750,000. Would you rather pay $1,875 per year in MERs of 0.25%? or $15,000 per year in MERs at 2%?

Duration of Systematic Contributions

This is just a fancy way of saying that you are in charge of how long you make contributions to your investment portfolio. How long are you willing to commit to investing for your future?

I’ve always been a nerd about money, and I’ve been contributing to my investment portfolio for 2.5 decades. Let’s just say that I’m old enough to remember the Freedom 55 commercials and they struck a chord with me. I’ve been gunning for early retirement ever since!

I won’t lie to you. Without a lottery win, inheritance, or sizeable payout from somewhere, it’s going to take a good amount of time to build an investment portfolio that’s capable of replacing your income. If you’re living on 50% of your take-home pay, you can get it done in less than 17 years. Don’t believe me? Check out this handy-dandy little calculator if you want to play around with your own numbers.

For most of us, it’s going to take many years of steady investing to build a nest egg. You are in charge of whether you start now or tomorrow. In other words, you’re the person who controls whether to procrastinate on such a long-term endeavour. Once you do get started, you’re also the person who’s in charge of whether to continue investing.

Investment Portfolios Don’t Fund Themselves

Now that you know what you can control, put that knowledge to good use. Set aside a chunk of every paycheque and use an automatic transfer to make sure it’s re-directed to your investment account. Pick investments that are diversified and geared toward long-term growth. Make sure your investments have MERs under 0.5%. Keep investing and ignore the Talking Heads. Over the long-term, the stock market goes up. Day to day gyrations should not guide your investment choices. You’re in this for the long-term.

Never stop learning! Read books and blogs. Ask questions. Remind yourself that when you know better, you do better. It’s best to make mistakes with small amounts money than with large amounts of money. So when you make a mistake, forgive yourself and learn from it then move on. Find serenity in what you can control.

The time will pass anyway. Why not start today?

Banks are not evil – they’re simply a tool.

Truth be told, it took me a very long time to realize that banks are a tool that will help me achieve my personal finance goals. Every three months, the Big Banks release their earnings. More often than not, those earnings are in the billions, if not the hundreds of millions. And people start frothing with anger at the size of those quarterly earnings. Ink is spilled all over the Internet about how banks are evil and their earnings are obscene.

Two days later, the angry mob has moved on to some other topic upon which to unleash their rage. The banks go back to the business of earning more money so they can hit their next quarterly target.

And I wonder to myself if any one person in the mob realized that banks are a tool?

How banks make money

First off, I want to be very clear that I’m not an expert on the banking industry. I’m just an online citizen who has watched banks operate for the past 35+ years. I even used to work as a bank teller, which was an incredibly educational experience. However, being a bank teller and being a banking expert are two wildly different things.

I’ll share with you what I know.

Banks take money from depositors then lend it to borrowers to earn money. This is the heart of banking. Everything else is a detail.

Depositors have bank accounts and they expect to earn interest on their deposits. As we all know, most bank accounts pay less than 1% interest. Every so often, an online account has a higher rate but it’s usually not anything to get overly excited about.

Banks lend money to people at rates that are higher than what they pay to their depositors. See, from the bank’s perspective, the 1% interest rate is a liability because the bank owes money to someone. Money that’s lent out to borrowers is an asset because it’s going to earn money for the bank.

If the bank owes Depositor 1% per year on a $10,000 bank account, then the bank has a $100 liability since it has to find a way to pay $100 to Depositor in a year’s time. How does the bank do that?

Easy. The bank takes the Depositor’s money – $10,000 – and loans it to Borrower at a rate of 5%. Borrower has promised to repay the bank $500 in a year’s time, because 5% of $10,000 is $500. The Borrower’s $500 debt is the bank’s asset.

The bank collects $500 from Borrower, and pays $100 to Depositor. The bank keeps the $400 spread for itself. Now, I’m sure there are expenses that go along with running a bank, procuring loans, administration of bank accounts, and staffing costs. Whatever is left after paying those expenses is the bank’s profit.

Banks are good at making profits.

Understanding the spread between what is owed to depositors and what is earned from borrowers is what keeps banks profitable.

So how do you turn this to your advantage?

It’s very simple, Gentle Reader. Banks are a tool for you as soon as you buy your first bank share.

Remember how I said that bank earnings are reported quarterly? One of the best features of banks is that they pay dividends to their shareholders. The more bank shares you own, the more dividends you’ll receive.

I used to get irate over bank fees. How dare the bank charge me for using my money? The little vein in my temple would visibly throb if ever I saw so much as a $1 taken from my account to cover an ATM withdrawal, or for anything else.

Eventually, this financial annoyance was removed from my life through 2 actions that I took. First, I opened bank accounts with institutions that did not charge bank fees for daily banking. I was no longer paying bank fees every month. Secondly, I started earning money from everyone else who chose to continue paying bank fees. I bought shares in banks and cashed the dividend cheques every quarter.

I can confidently say that the idea of bank fees no longer enrages me. Even if I do mess up and bounce a cheque, I might have to pay the $35 NSF fee. However, I know that I’ll be getting my money back in a few weeks’ time via my next dividend payment. That fee is a nuisance, but hardly a reason for me to get upset.

Banks are necessary.

I firmly believe that everyone needs atleast two bank accounts – a chequing account and a savings account. The chequing account is for your day to day money. It’s for receiving your paycheque, buying your groceries, paying utilities bills, and the expenses of day-to-day life. Your savings account is for your emergency fund. It’s meant to be a liquid pool of funds that can cover 6-12 months of your monthly expenses. Some people argue that an emergency fund can be 3 months of expenses. I’m a big believer in the idea that more money is better when an emergency strikes so it can’t hurt to have more than the minimum.

Banks are not evil, in and of themselves. Used properly, they facilitate the transfer of money into your investment account. You know that I’m a huge fan of automatic transfers. I’m a proponent of paying yourself first. A portion of every paycheque should be sent to your investment account, so that it can start working to ensure the Future You has a financially comfortable lifestyle.

For my part, I have several bank accounts. And all of them are designated for a specific purpose. Some accounts hold money for my annual travel. (Even during the pandemic, I’ve socked away a few coins for the eventual day when I feel comfortable enough sharing a plane with others.) Other accounts hold money for my annual insurance premiums and property taxes. I have an account for little luxuries like my theatre subscription to Broadway Across Canada. There’s also an account for maintenance and repairs to my home.

Again, banks are a tool – they’re not evil. Learn to use them properly and you’ll find that they offer many great methods for handling your money. Better yet, become a shareholder and receive a slice of their profits every three months. I’ve no doubt you’ll enjoy the feeling of the banks paying you instead of the other way around!

Housing Prices & Interest Rates

When I was a kid, one of the things I learned from my mother was that interest rates are inversely correlated to housing prices. If interest rates are going down, then housing prices are going up.

Over the last 12 months, I’ve seen this lesson play out in real life. By the time this blog post goes live, we will have passed the one-year anniversary of the COVID-19 pandemic. Yet, there are cities in this country where the housing market is red-hot. People are tripping over themselves to buy homes and they’re “winning” bidding wars to do so.

Five-year mortgage rates in my corner of the world had been on offer for as low as 1.84% up until just recently. At the time of writing this article, they’re slowly creeping up but a few can still be found at just around 2%. The Talking Heads in the media are predicting that 5-year rates will increase steadily over the next year. They say that this will be due to the economy fully re-opening as everyone gets their vaccine.

Who am I to argue with the Talking Heads?

The corollary to my mother’s great insight is that house prices drop as interest rates rise. This is due to the fact that fewer people can afford house payments when the cost of borrowing increases. Fewer people buying is a fancy way of saying lower demand. Less demand for something forces sellers to drop prices in order to sell their goods. In the housing market, rising interest rates are very strongly linked to decreasing housing prices.

For the past 10 years or so, the interest rates for mortgages have been less than 4%. I can tell you that my very first mortgage – taken out nearly 20 years ago – was for 6.5%. That seems astronomically high by today’s standards! When I was teenager and working part time as a grocery store cashier, I worked with folks who were thrilled to get a mortgage at 8%. The super-low mortgage rates of the past decade have been normalized, and I worry that people forget that rates can also move in the other direction.

Two Minds

I’m of two minds when it comes to housing. Buying a house was a very smart move for me. I was fortunate enough to buy what I needed at a price that was less than 3 times my gross income. The mortgage payments were less than 30% of my take-home pay. I could afford the repairs and maintenance that come with a house. Taxes and insurance weren’t an onerous burden on top of these other costs. The monthly nut associated with my shelter did not inhibit my ability to invest for retirement, travel, and have a bit of fun with my family and friends.

In short, buying a house was a good move for me… 20 years ago.

Today, twenty years later, I’m not so sure that buying a house would be a good financial move for me. For starters, I would have to choose between servicing the monthly nut of homeownership and every other financial goal. My mortgage, property taxes, insurance, repairs & maintenance would render me house-poor for a very long time. There wouldn’t be room in my budget for things like retirement savings, travel, entertainment, vehicle replacement, or those little luxuries that make like easier. My financial life would revolve entirely around paying for my housing, and there would be no room for my other money priorities.

I used to think that renting was a bad idea. However, my perspective has become more nuanced. If renting allows one to have a balanced life, then I think it might be a good idea. Of course, that balance has to include maxing out all retirement savings and building an investing portfolio. Those investments need to be big enough to pay for rental accommodations when the paycheques stop arriving. Whether you own a house or rent your space, you need to pay for shelter one way or another.

Cheap rates aren’t here to stay.

Today’s very low 5-year mortgage rates will go up. Securing a mortgage at 1.84% is wonderful, but that rate is likely only going to be locked in for 5 years. (And only for those who were lucky enough to grab it!) At renewal, the rate might be 3.5% or higher. Can your crystal ball predict the future perfectly? Will your budget be able to survive the mortgage payment increase that will come with a higher mortgage rate? Are you positive that you’ll still have the same income that you have now?

Even if your job’s salary stays the same, will your other expenses do the same? I’ve noticed that the cost of my streaming service goes up every 18 months or so. The price of food hasn’t gone down, ever. Taxes seem to only ever move in one direction. The list goes on. Life gets more expensive every year, yet salaries and wages don’t always go up in tandem with the increased expenses of every day life.

So even if you were only of the lucky ones to grab a super-cheap mortgage rate for a five-year portion of your mortgage, I strongly urge you to calculate how much your mortgage payment will increase when you renew. It’s not too, too crazy to believe that the bond market will push the five year rate up by 50 basis points each year for the next five years. Add 2.5% to your current rate and see what your new payment will be. Can you handle it?

Alternatives

Your first option is to pick rich parents. It’s been my observation that some parents with an excess of money are willing to help their offspring purchase a home. Financially speaking, it’s wonderful to have that kind of help to get onto the property ladder.

Not all of us can pick our parents, so that means being a little more creative.

If I were starting out today, I’d be looking at becoming a landlord. Either I’d try to buy a house with a rental suite or I would have roommates. There would have to be someone else around to contribute to the mortgage payments. If my salary paid for the minimum monthly mortgage payment, then the tenant’s rent would be what I would use for the extra payments to principle.

Would it be ideal? No. Would it have to last forever? Also, no.

A third alternative would be waiting to buy. Like I said earlier, house prices will come down as mortgage rates go up. Figure out how much of a mortgage you can afford. This number will be different than what the bank says you can afford. After all, you’re the one who’ll be responsible for the payments so look at your budget and be realistic.

Once you know how much mortgage you can comfortably carry, open an account at EQ Bank and start salting that mortgage payment away. This benefits you two ways. First, you’ll get used to having a mortgage payment since you’ll have to make that payment once you’ve signed the mortgage documents. Second, this money will help you make as large a down payment as possible.

I’m not trying to dissuade you from buying a house. Truly, I’m not. I just want you to think long and hard about the financial commitment that owning your own home will entail.

In a world without pensions, I am not persuaded that it’s a good idea for a person to spend 25-30 years paying off a mortgage without the ability to save for retirement. A mortgage debt that leads to an extended hand-to-mouth lifestyle is rarely a good thing. It limits options and inhibits one’s ability to pursue their true dreams, goals, and desires.

Weave Your Own Safety Net

The deadline to contribute to your Registered Retirement Savings Plan for the 2020 tax year is March 1, 2021. I would strongly suggest that you contribute a little something to your RRSP because the money will grow on a tax-deferred basis. Tax-deferred just means that the money will not be taxed by the Canada Revenue Agency until such time as it’s withdrawn from your RRSP.

As you weave your own safety net, it would behoove you to take advantages of all legal option for avoiding the taxation of your money. In Canada, two of the best ways to legally avoid taxes are to put your money inside of your RRSP and your Tax Free Savings Account.

The care & feeding of Future You is your responsibility. Since this is a blog about personal finance, I’m going to focus on the two main reasons why you simply must weave your own safety net.

Escaping Bad Working Conditions

I’ve talked about the unfortunate reality of horrible bosses and I’ve also talked about some great advice that I received way back when. When you weave your own safety net, you are buying yourself options in the event that your working conditions become unbearable or that you’re suddenly turfed from your job.

I promise you that having a safety net brings you peace of mind. I hope that you haven’t had to experience the panic and anxiety that comes when you don’t know how you’ll pay for the expenses of your life. I’m not talking about having to missing a vacation. They’re wonderful and I do love to travel, but vacations are a luxury. I’m talking about worries stemming from how you’ll get your next meal, whether you’ll be evicted or foreclosed on due to non-payment, whether you have to suffer harassment or bullying at work because you need the paycheque. These are the kinds of financial problems that can magically disappear when you weave your own safety net.

I won’t promise that it will happen quickly, but rest assured that accumulating a several hundred thousand dollars in your piggy bank will give you the option to walk away from a toxic work environment. It will provide you with the breathing room you need to find a better job, to start your own business, or to find another way to fund your life.

However, your safety net won’t weave itself. You have to take the steps to create it. And it starts with $1. You will weave your own safety net by being diligent, by relying on tools to transfer a portion of every paycheque into your investment portfolio. The sooner you invest your money, the faster it will grow.

Should you be one of the Fortunate Few who loves their job and has never had serious problems at work, then I still want you to weave your own safety net. Why?

DB-Pensions are few & far between.

The answer is that you’re more than likely going to be responsible for footing the cost of your own retirement. Defined-benefit pensions are a rarity. These are the pensions where you know exactly how much you will be paid every month when you retire.

Defined-contribution pensions are completely different. With DC-pension, you know how much you contribute every month. However, the amount that you are paid from this pension is dependent on the strength of your investment choices. If you’ve chosen well and earned good returns over the years, then your pension will pay you a very nice sum. Conversely, if you’ve not chosen well and your returns aren’t good, then your DC-pension will not give you a comfortable retirement…and you may simply have to continue working when you’d rather not.

Investing throughout your working life gives you the option to quit earlier, if you so choose. In a perfect world, you’ll contribute to your pension regardless of whether it’s a DB or a DC variety and you will contribute atleast 20% of your paycheque to your own investment portfolio!!! After a couple of decades of uninterrupted contributions & growth, your investment portfolio will be sufficient to give you the option of retiring early if you so choose. It should be kicking off dividends and capital gains that are sufficient to fund your life.

Weaving your own safety net means buying yourself options about how you want to live your life. You’re not yoked to employment forever. Those of us who aren’t born into money know that we have to earn it by working. At some point, most of us will want to stop working for money without seeing a precipitous drop in our standard of living. The only way to quit while keeping the same way of life is to have a financial safety net that exists to replace our paycheque.

Your primary goal for your safety net is to be there when your paycheque disappears. Your safety net will then take over the job of putting money in your pocket for things like food, shelter, clothing, transportation, and entertainment.

So start today, right where you are:

As you pay off debts, re-direct 75% of each former debt payment to your investment portfolio.
Never stop learning about investments – read books, blogs, magazines, online articles.
Don’t invest in what you don’t understand.
Keep your management expense ratios low, which means under 0.5%.
Invest atleast 65% of your portfolio in equities, including half of that in international equities.
Ignore the media! The day to day gyrations of the stock market aren’t important unless you’re on the eve of retirement.
Invest for the long term, which means 10 years or more.
Build up an emergency fund so you need not dip into your investment portfolio when the inevitable emergency comes your way.

Some Final Words of Advice

Don’t become a mere conduit for your paycheque.

What are you talking about, Blue Lobster?

I’m suggesting that you are not simply a convenient link between your paycheque and someone else’s bank account. If you work hard, get paid and spend every penny that crosses your palm, then what have you done other than make someone else rich?

Instead of your employer paying sending your paycheque directly to your credit card/streaming service/subscriptions/memberships/etc, you’re the one dispersing all of your money to others… And at the end of that dissemination process, you have nothing leftover in your bank account. You were simply a conduit.

Tell me again. Why do you work so hard to give away all of your money? Don’t you want to keep some for yourself?

An indebted employee is a person with few options other than to keep going to work. Granted, one of those options includes losing everything but no one really wants to go through that experience. And you need not do so. Staying out of debt, or paying it off as fast as humanly possible, gives you the option of keeping more of your money for future you.

It’s in your best interest to do what you can to resist the pervasive societal training to become a dutiful, prolific spender. And I’m not preaching that you go to the other extreme. I don’t want you to become a miser. I truly do want you to enjoy your money and to use it in a way that maximizes your happiness. Contrary to every marketing message that bombards you daily, there is no good reason for you to obey the AdMan’s relentless message to spend-spend-spend-then-borrow-to-spend-some-more!

Determine what your life’s goals are, what dreams are most important to you, what makes your heart sing with unadulterated joy! Then only spend your money in ways that move you towards fulfilling those dreams, accomplishing those goals, and experiencing that glorious joy.

Debt is not Wine!

Time is good for wine, but it’s very bad for debt.
Blue Lobster

Though it should be obvious to everyone, I’m going to say it again. Debt is not wine.

Hear me now! Time makes debt get worse. This is not a secret. Nor should it come as a surprise. The longer you keep it, the worse it gets. And there is no limit to how big a debt can get.

You know how they say that fine wine gets better with time? Debt is the complete opposite. Debt get WORSE over time. Due to the impact of compounding interest, all of your debts will get bigger the longer you keep them around.

Gangrene gets worse with time too, but only so much. Eventually, flesh that is infected with gangrene is removed. Gangrene has an end life. Debt is worse than gangrene because it can go on indefinitely. For those in the cheap seats who insist on pedantic accuracy, it is true that both gangrene and debt end when the host/debtor dies. However, I’d like to see you get rid of debt (and gangrene) before you shuffle off this mortal coil.

Debt gets worse over time.

Time is the ally of the creditor and the enemy of the debtor. When you borrow money, you’re a debtor and you’re obligated to repay both the amount your borrow and the interest on that debt. Think of the interest rate as the price you pay to borrow money. You might need $1,000 to fix your vehicle. If you borrow money, the creditor is going to charge you interest. For simplicity’s sake, let’s assume you borrow $1,000 for 1 year at a rate of 5% per year. At the end of the year, you have to repay $1,050 to your creditor.

And if you can’t repay your creditor, the interest rate of 5% continues to compound that debt. At the end of the second year, you’ll owe your creditor $1,102.50 (=$1,050 x 5%). At the end of the third year, you’ll owe your creditor $1,157.63 (=$1,102.50 x 5%). And the amount of money owed just keeps going up until the debt is paid.

Take a look at your credit card statement. How much interest is being charged on your credit card balance when you don’t pay the full balance every month?

So there’s two factors impacting the growth of your debt: time and interest rate. You know how when you invest your month, you want a really high rate of return so that your investments grow really big, really fast? Your creditor feels the same way about the debt you owe them. I can assure you that your creditor does a happy dance when you take out an 8% car loan, or a 19.99% credit card loan. The higher the interest rate you pay, the better rate of return your creditor is getting.

Do yourself a favor. Take a pen and a piece of paper and physically write out how much interest is charged annually on your current credit card balance if you let your monthly balance roll over each month. Now add on another year’s worth of interest. For good measure, keep doing this calculation for 10-15 years. The resultant number should make you slight nauseous.

Take a look at this list of facts about credit cards in Canada. Two years ago, the average credit card debt was $4,240. And since this is an average, there are some people with much higher balances! Plug the average number into the compounding calculator of your choice and watch the numbers jump, year over year… I feel sorry for the person who doesn’t have the high income to wipe out this kind of debt in a month or two. High interest debt can balloon very, very quickly.

Wine ages well. Debt…not so much.

Again, debt is not wine. Here’s another simple way to tell the difference between the two. Seeing the end of one makes you sad, but ridding yourself of the other will bring you financial contentment.

When my wine is all gone empty, I’m sad – even if it wasn’t a great bottle of wine. Yet when my debts are all paid off, I do a little happy dance and smile brightly for the rest of the day.

Do what you need to do to get rid of debt. Maybe you give up cable and other streaming services for 12 months? Trust me when I tell you that they will always re-start your subscription. Cook at home a little more often than you normally do. You can continue to get take-out or delivery, but just get them one or two days less each week.

The time will pass anyway. Pay off your debts and start investing your money so that you can pursue your heart’s truest desire. Once your money is going towards your investments instead of towards paying off debts, then time will be working for you instead of against you. And wouldn’t that be a really, really good thing?

Retirement is coming, one way or another.

What the eyes don’t see, the heart won’t grieve…
Anonymous Online Poster

No matter how you look at it, retirement is coming.

And if you’re fortunate, you’ll get to pick when you retire. Should Life have other plans for you, then retirement may arrive unexpectedly. Either way, retirement is in your future. One of the best things you can do for Future You is to start saving today.

This year, the contribution deadline for the Registered Retirement Savings Plan is March 1, 2021. In other words, if you put money into your RRSP on or before March 1, 2021, then you will get a tax deduction that can be used against any taxes that you owe for the 2020 tax year.

Here’s a handy-dandy little chart to show you the maximum amount of money that you can put into your RRSP this year.

What’s that? You say that you don’t have $27,830 lying around to make this year’s contribution?

Do you have $1?

Fear not, Gentle Reader. The numbers listed on the chart are the maximum contribution limits. In an ideal world, you would have no trouble at all socking away this much money.

If you’re not one of the Very Fortunate Ones who can easily plunk $27,830 into your RRSP without batting an eye, then fret not. You will do what you can until you can do better. It’s really not more complicated than that.

If you can afford $1 per day, that’s $365 per year. It’s not a lot but it’s a whole lot more than nothing. If you don’t start saving this tiny daily amount, then I can assure you that you’ll regret your decision. Retiring solely on social benefits will not be comfortable.

At $5 per day, you’re looking at $1,825 per year. That’s not too shabby, but it’s also not the cat’s pyjamas. It means one less snack per day, or one less fancy coffee. (Hat tip to David Bach, who is the author of The Automatic Millionaire. This is one the first books that put yours truly on my current financial path.) Save a few calories – use your kitchen to save some money – throw that money into your RRSP and let it grow over the years.

Kick it up to $10 per day and wow! Now, you’re contributing several thousand dollars in a year. In a lot of places, $10 each day is less than you’d spend on parking your car at work. It’s less than getting a burger, fries and a drink at a fast food place. It’s not a whole lot of money, but it can certainly get you to the retirement you want if you consistently put it to good use. If you don’t believe me, check out what Mr. Money Mustache has to say about the $10 bill.

Pick your per diem.

I trust you see a pattern. By implementing a per diem for your RRSP, and setting up an automatic money transfer, you’ll be improving the chances that you’ll have a financially comfortable retirement.

Whatever amount works for your budget, that’s the amount that you should be sending to your RRSP. Before you even ask, $0 per day is not at all an appropriate amount to be saving.

Once siphoned from your daily chequing account and into your RRSP, your money will grow tax-free until withdrawn. How large will it grow? That’s up to you and/or your financial advisor.

In the interests of transparency, I will tell you that my portfolio is invested in exchange-traded funds with Vanguard Canada and iShares. I’ve gone to a fee only advisor for advice, but I do my own research and make my own investment decisions. I’m currently putting my money into equity products, after having spent 9.5 years investing solely in dividend ETFs. I’m a staunch buy-and-hold investor. That means I don’t sell after I buy. I buy what I believe to be good investments and then I just leave them alone for years and years and years. I still have the bank stocks that my parents bought for me when I was a baby…and I haven’t been a baby for a very long time!

You owe it to yourself to spend some time learning about investing your money. Save your money via automatic money transfers. Invest your money in equity products. Learn, learn, learn – as much as you can! There are books, blogs, YouTube, and people who all have information to share. Then repeat the process. Save – invest – learn – repeat!

Do not procrastinate.

Every day that you don’t open your RRSP and invest your money is a missed opportunity to grow your money in a tax-free environment. This is important because money grows faster when it is not taxed. To be very clear, money grows on a tax-deferred basis in an RRSP and you will pay taxes on the money when your withdraw it. However, if all goes well, retirement is a long way away and your money will grow into a giant pile. While you won’t be happy to pay taxes, regard that tax debt as evidence that you’re not going to be poor in your retirement. Poor people don’t pay taxes. You don’t want to be poor in your retirement.

I digress. Retirement is coming, one way or another. If you’re procrastinating about opening and/or funding your RRSP, then stop! Today’s technology means you can open and fund your RRSP from your hand-computer. You no longer need to go to a branch or talk to a human to complete these functions.

Time waits for no one. Take the steps you need to take so that you can put as much as you possibly can into your RRSP. This is a fundament step that you need to take to better your chances of having a financially comfortable dotage and being able to handle whatever financial challenges come your way when you and your income part ways.

Shorting a Stock – the Simple Basics

A major stock market event occurred during the week of January 25, 2021. The current lore is that a group of humble retail investors put a serious hurt on the hedge fund experts who had shorted GameStop stock. As a result of the online amateurs banding together to drive up the stock price, the hedge funds lost billions of dollars.

I’m discussing it in today’s post because I found it both riveting and exceptionally educational. January 24, 2021 was the week that hedge funds bled billions of dollars because of a little thing called a short squeeze.

(In my humble opinion, the stock market events of January 2021 were far more enlightening than the predictable plunging of stock market values in February/March of 2020 due to the COVID-19 pandemic.)

At its most basic, this is how you short a stock:

Let’s say you ask to borrow your sister’s skirt. She says yes, but she needs it back in 4 weeks. You take the skirt and sell it to someone else for $100. Now, you have money in your hand but you owe your sister a skirt. You find a skirt identical to the one you borrowed, and it’s priced at $45 so you buy it. In 4 weeks, you’ve returned the skirt to your sister and you’re $55 richer.

Now, go back to the last paragraph and change the word “skirt” to “stock” and the word “sister/she” to “brokerage house”.

You now understand the rudimentary principles behind making money by shorting stocks.

Got it? Good. Let’s move on.

Why would anyone do this?

Why? You’re kidding me with that question, right?

They would short a stock for the same reason that they do anything in the stock market – to make money. To short a stock is to gamble that its price is going to decline between the time you borrow the stock to sell and the time you buy it back to return to the lender.

In the case of GameStop, the hedge funds borrowed the stock and sold it when it was around $10/share. They wanted the price to go down so that they could buy it back at a lower price. Once they’d bought it back at the lower price, they would have returned the stock to the lender and kept the monies earned. They would’ve had derived their profit from the difference between the sell price and the lower purchase price.

That was the plan anyway…

What is a short squeeze?

The short squeeze happens when the price of the stock (skirt) doesn’t go down. Instead it goes up. And since there is no limit to the stock’s price, the person holding the short can get squeezed pretty severely if the price doesn’t stop rising.

Remember, the stock (skirt) must be returned to the brokerage house (sister) in 4 weeks. So you might need to pay more than the original $100 to buy the same stock (skirt) from someone else.

During the week of January 25, 2021, very sophisticated hedge funds got caught in a short squeeze instigated by amateur investors who belonged to a sub-account on Reddit called WallStreetBets. The retail investors started buying stock in GameStop, thereby driving up demand for the stock. In-demand stocks have rising prices, which is exactly the outcome that the hedge funds did not want. Remember – in order for the hedge funds to make money on their short-bet, the price of GameStop stock had to keep going down.

After selling the borrowed stock for $10/share, the last thing the hedge funds wanted to do was to buy back the stock at $11 per share, $50 per share, or $400 per share. For every penny that the stock rose, they were losing buckets and buckets of money.

Don’t Try This At Home

Shorting stocks is not for amateurs. Yes, some of the retail investors in GameStop have made money. The ones who got in early, way back in 2019 when this started. The early investors would have bought at prices that were far lower than they are today. Those early birds would have profited handsomely this week if they sold at the GameStop stock price rose above $300/share.

Even the Ontario Teachers Pension Plan wisely took advantage of the opportunity to divest itself of its shares in the company which owned the malls where GameStop were located and earned $638 million dollars for its members.

Hedge fund managers who had invested in shorts when the stock price was less than $10 had essentially wagered that the stock price would go down further. The plan would have been to buy more stock at the new, lower price and keep the difference after returning the stock to the brokerage house.

This is not what happened.

By buying the stock, the amateurs drove the stock price up and way past $10. As more investors bought more stock, the price increased tremendously.*** The hedge funds still had to “cover their short”, which means they had to meet the deadline for the return of the stock they had borrowed and sold at the price of $10. In order to meet those deadlines, they had to buy stock at the much-higher price thereby losing billions in the process.

Absolutely fascinating to watch…

Shorting a stock is a risky stock market move. The risk lies in the fact that there is no limit to how high the price of the shorted stock can go. In other words, there is no way to accurately predict just how much money can be lost if the stock price doesn’t go down.

And as the events of late January demonstrated, even the experts can get financially walloped if things don’t go according to plan.

*** At the time of writing this post, the stock in question had hit a high of $469.42USD!

The Secret Sauce Isn’t Being Bright

Being bright isn’t a requirement to being successful with personal finance and investing. I speak from personal experience as I don’t consider myself to be overly bright. There are many people in my circle who are much smarter than me and who learn things much faster than I do. Their net worths are not necessarily larger than mine. It’s taken me a long time to accept the fact that being bright has very little to do with whether someone will succeed in the realm of money.

Those who’ve read this blog for a little while know that I’ve erred during my investment journey. I’m the first to admit that I’m not the smartest investor in the room. I’ve made so many mistakes!

When I first started investing years ago, I put my money into mutual funds instead of index funds and exchange-traded funds.
Investing in mutual funds instead of index funds & ETFs means I paid higher management expense ratios than I needed to pay.
I invested in dividend-based ETFs instead of buying equity-based ETFs.
I didn’t earn as much as I could have during the 10-year stock market bull run that ended in February of 2020. (D’oh! How I would love to be able to unwind that mistake.)
And I don’t increase the rent on my rental property every year. I’m sure there are some in the real estate investment community who see this as a very grave mistake.

Despite these mistakes (and I’ve made way more than 5), I’ve learned that you don’t have to be all that bright to do well in personal finance. You do need to have disposable income, since you can’t invest what you don’t have. I’ve crafted a list of traits that I believe are essential to successfully building wealth.

Being smart is not one of the traits!

You have to start from where you are. No investor has ever made money without starting to invest. Thinking about investing is great but people don’t earn 7% returns on investments they only dream about. They only earn returns on money that’s actually invested in real life, whether that’s in the stock market, in real estate, or in a business. Investing your first dollar isn’t a function of being bright. It’s a function of taking action.

Consistency isn’t dependent on how bright you are either. I’m a huge fan of automated transfers. Every time I get paid, some of my net income is siphoned away from my chequing account. That money is invested to pay for my future goals: retirement, travel, house renovations, whatever. If the money is for a planned purchase that’s not part of my day-to-day basic life, such as groceries, gasoline, and utilities, then the money is automatically whisked into various accounts and it stays in place until it’s time to make those future purchases. Automated transfers have ensured that I’ve always had money going towards my investments.

No one needs to be all that bright to be disciplined. You’ll need to be disciplined if you’re going to stick to your priorities. You’re the only expert when it comes to how best to spend your money because only you know what’s most important to you when it comes time to spend it. It also means that you’re the only one who’s responsible to say “No” to the things that don’t move you towards your dreams. Believe me when I say that there is alway someone who wants your money. Being bright is not a pre-condition of only spending your money in ways that align with your priorities.

Finally, never stop learning. Like I said earlier, I’m not particularly bright. And it takes a long time for me to learn new things and for concepts to sink it. THAT’S OKAY!!!! Learning at my own pace isn’t an obstacle to achieving my goals. If anything, it’s a benefit. Once I’ve been exposed to a new concept, I can learn it as thoroughly as I want to. And once I’ve done that, I can determine whether it will help me meet my financial priorities.

No one is grading your progress.

I’m not in school anymore. There’s no teacher under a time pressure to get through a pre-set curriculum. I’m my own teacher now. Taking as much time as I need to teach myself a particular concept is a good thing in real life. Unlike a school setting, there isn’t a fixed number of hours to be spent teaching one concept before the teacher moves on to the next one. I’ve been investing for over 25 years, and I still don’t understand how Price-to-Earnings ratios work. Is it better if they’re high or low? What exactly do they mean? Do they fluctuate every day? What are the factors that impact them?

Hear me now: I’ve been investing in the stock market for 25+ years, and I did not let my ignorance about P/E ratios stop me from building a solid portfolio that kicks off a nice amount of dividends each year. Admittedly, I’m not a stock-picker. In other words, I don’t buy individual stocks after analyzing their annual reports and doing research into both the company and the industry. If I were an investor who had gone the stock picking route, then I would have learned a lot more about P/E ratios and other nuanced stuff. The information is out there and I would have spent my time learning about it.

When it comes to being good with your money, habits will always beat brains in the long run. Being smart isn’t what helped me the most. Having the investing habit and putting automatic transfers in place has been my secret sauce. Together, these tools have been tremendously more beneficial for my portfolio and for meeting my short-term goals. Once I had prioritized how to spend my money, relying on habits and tools propelled me towards attaining my goals.

Being bright is not an indicator of whether you will be successful in handling your money. Again, speaking from personal experience, you can make stupid money mistakes and still set yourself up for future financial success.