Author: Blue Lobster

A Consideration of a New Investment

Every so often, I take a quick gander at the new investment products that come onto the market. For one thing, it’s important to never stop learning about investing. There’s no pressure to change my investment path just because I’m reading & learning about something new. The worst thing that can happen is that I’ll know more than I did before I started reading.

Over the Christmas holidays, I engaged in a consideration of new investment portfolios from Tangerine. Overall, I wasn’t horribly impressed. Let me tell you why.

But first – read the following two paragraphs very carefully and commit them to memory.

Disclaimer

I am not in any way qualified, certified, designated or otherwise authorized to give advice to anyone about how they should invest their money.

If you need or want professional investment advice, then you should hire a certified financial planner who is paid by you and not by investment companies. Do not base your investment choices on blogs that you read on the internet without careful consideration of all the factors impacting your personal situation.

Blue Lobster’s Personal Review***

*** Not to be confused with a professional recommendation that has been tailored for your life’s goal, income, ambitions, and risk tolerance.

a) Management Expense Ratios

In my view, the Core Portfolios are all too expensive. The MERs range from 1.05%-1.06%. For a similar product, you could buy an exchange traded fund at Vanguard Canada or iShares and pay considerably less in MERs. Personally, I don’t see any reason to pay MERs any higher than 0.35%-0.55% for investment products that are similar if not identical to the Core Portfolios.

Here’s a link to Vanguard Canada’s index funds/ETFs. You’ll see that their MERs are way cheaper than Tangerine’s.
https://www.vanguardcanada.ca/individual/indv/en/product.html#/productType=etf&managementStyle=index

The MERs for Tangerine’s Global ETF Portfolios are all 0.65%. I still think that this is too much to pay for these products. As per the prospectus and despite their names, these products are mutual funds . The last time I look at this statistic, the average MER charged for Canadian mutual funds is 1%-2%. 

b) Composition of the Portfolios

The Core Portfolios invest directly in various companies and in exchange traded funds. As I understand the prospectus, the Core Portfolios are mutual funds. I don’t invest in mutual funds anymore because I prefer to buy the ETF equivalent, which always has a lower MER. Why pay more for the same thing?

The Global ETF Portfolios are mutual funds created out of ETFs. Each portfolio is comprised of a subset of ETFs, held in varying proportions. 

Given their newness, none of these funds holds over $7Million in assets. Again, I’m no expert but this tells me that they are much smaller in size than comparable mutual funds and ETFs. 

c) Age of the Portfolios

The Core Portfolios haven’t been around that long. The oldest was started in 2008, and the newest was started in 2016. 

To be transparent, I transferred my holdings to Vanguard Canada when the parent company – Vanguard – came to Canada a few years ago. I invest in VDY, which is a dividend-focused ETF with an inception date of 2012. In other words, they haven’t been in Canada all that long. Vanguard has been big in the USA for a much longer period of time and I’ve been a fan of John C. Bogle for a long time. If I hadn’t been aware of Vanguard’s history in the USA, I likely would not have invested in them since they hadn’t been in Canada long enough to give me comfort.

The Global ETF portfolios were all started in November of 2020… less than 2 months ago. As such, they do not have any kind of track record that is worthy of note.

d) Overall Impression

In my opinion, investors in these funds are paying more money to own a mutual fund where the ETFs held inside the mutual fund cost less, on an individual basis, than the cost of the mutual fund itself. 

It would be far cheaper to buy an equity ETF and a bond ETF from Vanguard Canada, achieve the same performance results, and pay a lower overall MER. By purchasing equity and bond ETFs directly via an online brokerage, investors are coming out ahead because the brokerage fee, if any, for purchasing those units would be lower than the 0.65% MER that would have to be paid on the Global ETF Portfolios. 

My brokerage charges me $9.95 on my monthly purchases. $9.95 x 12 = $119.40 in annual fees. Once your portfolio is more than $18,369.23 (=$119.40 / 0.65%), then you’re paying less in fees if you buy units directly instead of buying units in Tangerine’s Global ETF Portfolios.

In the interests of transparency, I have the following products with Vanguard Canada and iShares. 

  • VDY – dividend ETF with an MER of 0.22% (VC)
  • VXC – equity ETF with an MER of 0.26% (VC)
  • VSB – bond ETF with an MER of 0.10% (VC)
  • XDV – dividend ETF with an MER of 0.55% (iShares)

Buying my ETFs through my brokerage account (BMO Investorline) saves me money on my MERs, and those savings are more than enough to cover my annual $119.40 purchasing costs.

e) Conclusion

I’d love to see you open a brokerage account and buy units in ETFs that best-match your investment goals. And that goal, in case you’re wondering, is to not outlive your money. Never forget that ETFs are cheaper than mutual funds.

Brokerage accounts are easy to open. You buy units in the cheaper ETFs of your choice, then you forget about them and let them do their thing over a long period of time.

However, if you’re uninterested in opening a brokerage account, then I suppose that Tangerine’s Core Portfolio options aren’t a horrible choice. If you can set up an automatic transfer from your account to one of the Core Portfolios, then I think this is probably a not-bad way for you to invest in your future dollars. My comments apply to the money going into your registered accounts – RRSP & TFSA – and your non-registered accounts. Your emergency funds will stay in cash, since you shouldn’t be forced to sell investments just to pay for an emergency.

A consideration of a new investment won’t harm you. There’s no requirement that you chase every investment rabbit that enters your field of vision. That said, it’s always a good idea to know and understand the options for your money. Get professional investment advice as needed, but always be learning about new stuff.

5 Traits to Become Wealthy

Ever since I started learning about personal finance, I’ve noted that those who are successful at it have 5 traits in common. These 5 traits appear regardless of the path taken. Some people invested in the stock market, either through stock picking, mutual funds, or exchange-traded funds. Others became real estate investors and built a portfolio of rental properties. Then there’s the group of people who only invested in their retirement accounts and grew those a nice 7-figure amount before retirement.

Regardless of the path chosen, the people who accumulated a comfortable cash cushion all appear to have relied on the same 5 traits to become wealthy.

The Word “No”

To my mind, saying “No” is fundamental to achieving your goals. There will always be someone or something who wants your money. If you’re unable to say “No” to the requests that stop you from meeting your priorities, then how will you ever be able to create the life that you want?

Gathering the funds to meet your financial objectives will require you to use the word “No”, a lot. Let’s pretend that you want to start investing in real estate. Unless you can use the strategies Richard Fain discusses in this video, you’ll need a down payment to get into the real estate market. Saving for a down payment may take you a year or two. If you don’t use the word “No” when faced with other opportunities to spend, then it’s going to take you considerably longer to achieve your goal.

Delayed Gratification

This trait is a kissing cousin of the first one. It’s the ability to say “No…not right now.” It’s the ability to delay saying “yes” to whatever it is that you might want.

Instead of going into debt to buy something today, you save up the cash and buy it tomorrow.

Delayed gratification keeps you out of debt. If you pay cash, then you’re not using credit. When you don’t use credit, then you don’t pay interest to a creditor. The beauty of not paying interest is that more of your money can be spent on the pursuit of your life’s dreams.

Be honest with yourself. Wouldn’t you prefer to spend your money on your dreams instead of spending your money to pay off debts for purchases that don’t align with your financial desires?

Sinking Funds

My long-time readers know that I love sinking funds! I use them all the time because they help me to organize and track my money so that I can get what I prioritize most. Between sinking funds and automatic transfers, I very rarely need to think about how I’m going to pay for things. My paycheque lands in my chequing account. My automatic transfers whisk pre-determined amounts of money to each of my sinking funds. Whatever’s left over once the transfers have done their task is mine to spend freely.

  • Retirement money? Check!
  • Emergency funds? Check!
  • Insurance premiums? Check!
  • TFSA contribution? Check!
  • House renovations? Check!
  • Travel money? Check!
  • Utilities? Check!
  • Charitable donations? Check!

Your priorities will determine your sinking funds. If you want to buy your first home, or your first rental property, then you’ll have a sinking fund for your down payment. This is where you’ll direct a certain portion of your income until you have the down payment that you need to make your purchase. This sinking fund might be in place for one year, two years, five years, or more. It hardly matters. What does matter is that you are saving money towards one of the goals that is most important to you.

Some sinking funds will last longer than other. For example, your retirement funds are just a long-term sinking fund. You save and invest money in a retirement account so that the funds can replace your paycheque when you stop working for a living. However, your sinking fund for utilities exists to hold money that will be spent within the next 30 days. The money goes in – the bills arrive – the money goes out to pay the bills.

Whether designed to pay for long-term goals like retirement or financial independence, or to pay for short-term goals like paying your utilities, sinking funds are integral part of your financial toolbox.

Living Below Your Means

If you earn $60,000 and spend every penny, then there’s no way to build wealth. Your net worth remains at $0 because nothing is set aside for investing.

However, earning $60,000 and spending $59,000 means that there’s $1,000 available for investing. That $1,000 is available because you made the choice to live below your means. The money can go towards the down payment on a real estate purchase. It can be invested for retirement. It can be the seed money for a business.

Leftover money doesn’t happen by accident. Trust me – there is no amount of money that cannot be spent. The more you earn, the more spending opportunities you will find. The duty to impose spending limits in your life rests solely on your shoulders .

Money

Surprised that I saved this one for last?

You shouldn’t be. Its priority in this list is irrelevant. Whether you earn a little or a lot, wealth will always elude you if you can’t implement the first 4 traits that I’ve already discussed.

Let’s say you earn $250,000 every month…but you don’t know how to say “No” when presented with the opportunity to rent a yacht for the week to party in Monaco. And you’ll need to rent a private jet to get there since you can’t rely on traditional airlines to get you there on time. Let’s face it – when you’re earning $3Million per year, do you really want to travel on Air Canada? Or even British Airways if you can afford to rent a private jet for you and a few of your closest friends?

Let’s say that you earn $35,000 in a year, and you manage to set aside $3,000. You are living beneath your means. Those dollars might be allocated between a variety of sinking funds. You employed the trait of delayed gratification. The reason you have that $3,000 in the first place is because you said “No” to the various requests for your money.

Unless you impose some kind of spending limit on yourself, the money will be gone. It doesn’t matter how much you earn. This is why the simple act of earning money is insufficient proof that a person is also building wealth. It takes all 5 traits to become wealthy.

Without the first 4 traits, no amount of money will make you wealthy because you will spend it all. You cannot be financially wealthy without money.

Create Money Pots and Organize Your Money

Welcome to 2021! A bright and shiny new year stretches out in front of us. Have you figured out what you want to do with it? Any resolutions in place yet? Or do you firmly believe every new dawn brings you the chance to change you life as you see fit?

Whichever philosophy you adopt, I’d like to suggest that you organize your money in a way that best suits your lifestyle.

You know how your recurring monthly bills arrive every other day? It could be a bill for a utility like electricity, heat, or water. On the other hand, it could be bill for some service that you makes your life a little bit easier, like a housekeeper, or lawn service. Maybe it’s a subscription for some kind of pampering service, like a wine-of-the-month club or food delivery. Whether by email or by snail-mail, there always seems to be some utility/service provider out there who wants to receive some portion your hard-earned money:

  • $13.99 for Netflix;
  • $400 to heat your house;
  • $14.95 for your Audible books;
  • $104.71 to keep your mobile phone turned on;
  • $57.85 to keep the weeds away;
  • $60-$140 for your wine subscription;
  • $115 for your gym membership;
  • $Y-amount for product/service-of-your-choice.

You get my drift. Between you, me and the fencepost, it’s more likely than not that you have way more monthly subscriptions than the few I’ve listed above. Who do you know who has only one streaming service? I know people who pay for cable on top of Netflix, Crave, and Disney+!!!

And even though you agreed to pay for each of these utilities and/or services, are you ever truly and deeply excited to actually get the bill? Does your heart leap with joy when it’s time to pay for what you’ve ordered? Or is it more often the case that you ask yourself where the money is going to come from in order to cover the cost?

It’s been my experience that the fun is in the having of the whatever-it-is, not in the paying for the whatever-it-is.

Here’s another couple of questions for you. And you need not share your answer with the class if you don’t want to. I just want you to be brutally honest with yourself… Are you ever caught off-guard by these payment demands? Are the words “I thought I just paid for this!” a part of your daily lexicon?

If so, then I have the perfect solution for you.

Introducing the money pot.

Sadly, it is not the one at the end of the rainbow. Nope, these nifty little caches of coins are ones that you will fill yourself. You create money pots to segregate your funds based on their intended purpose.

A money pot is the place where you set aside money from each paycheque to pay for various things. In this particular circumstance, you should create a money pot dedicated to your recurring bills. If you use your money pot correctly, I promise that you will never again have to scrounge around for money to pay your monthly bills.

Money pots are an integral part of your financial armamentarium. Think of them as stopover points for your money. The money arrives via your paycheque, stays in the money pots for a little bit, then leaves again to pay for its intended purpose. If you create a dedicated money pot for your recurring bills and use it as intended, its balance will fluctuate without ever growing significantly. Money will go in – bills will arrive – money will go back out to pay them.

Where does the money come from?

You’ll fund this money pot by adding up your monthly recurring bills then ensure that this amount of money finds its way into your utilities/services money pot every money. If you receive atleast 2 paycheques each month, then you can automatically transfer half of that amount to you money pot. If you’re paid monthly, then the full amount comes out of your paycheque and goes straight into your money pot.

Let’s say your monthly recurring bills are $1000 each month and you’re paid every two weeks. You’ll set up an automatic transfer of $500 every two weeks. That money will be sent to the money pot dedicated to your monthly bills. By having these funds set aside, you can pay your recurring bills as they arrive. You have the comfort of knowing that your money pot will be replenished every 14 days. No more scrounging around for the cash to pay your bills!

From this point forward, your automatic transfer should be automatically funding your money pot every time that you are paid. To be blunt, set things up so that your paycheque goes into your chequing account and then some of it is automatically transferred to your money pot. Recurring bills land in your inbox or mailbox and you pay them immediately from the money pot.

You know what else is great about this system? You’re in control of the size of your monthly bills. If you want to shell out less each month, then you can do so. And if you think your life needs a little something extra each month, then you’re in charge of that decision too. The amount of money going into your money pot is entirely up to you.

Divide and Conquer for the Win!

It’s been my experience that having one stash of cash from which to pay everything makes it rather easy to delude one’s self. The precise details of the delusion vary but, at its heart is the false belief that a large balance in one’s chequing account means that all the money therein is suitable for spending willy-nilly. Don’t feel bad if you’ve ever succumbed to this fantasy. You’re human and this illusion is particularly seductive.

Frankly speaking, the majority of mere mortals aren’t particularly good at ensuring today’s wants do not take priority over tomorrow’s needs. It’s okay to admit it – wants are generally more fun that needs! 

You’ve heard me talk about sinking funds before. Once you’ve identified your priorities, you direct your money to paying for them by relying on automatic transfers. The money pot for your recurring monthly bills is a sinking fund designed to handle the very short-term demands on your money. You’ll use the funds within the money pot to pay for the routine bills that come around every 30 days. It is to be kept separate from your emergency funds, your retirement funds, and your investment portfolio. This is not the money that you spend on groceries, clothing, or vacations. This money is for funding those bills that come around, month-in-and-month-out, until such time as you cancel them.

Since you’re the only one in charge of your money, it’s on you to ensure that your recurring utility bills are funded, before you start spending on your wants. Creating and funding a money pot for your recurring bills is an effective way to complete this monthly chore.

Trust me on this! Automatically funding a money pot for all of your recurring monthly bills guarantees that the money doesn’t “accidentally” get spent on something else. 

The Day After…

Hope you had a good Christmas, even if you may not have celebrated exactly as you would’ve pre-pandemic. And if you were able to celebrate in your normal fashion, then good on you. Another Christmas is in the history books.

It is now the day after the extra calories, the all-day pjs, the gifts, the video calls, the sports games, the board games, the laughter. The preparation and the anticipation can all be put away for another year. If you’ve taken time off this week, I would urge you to take a few minutes to ponder upon and flesh out next year’s financial goals.

What new things do you want to accomplish in 2021?

If you’re satisfied with your life as it is, what do you need to do to stay on your chosen path?

Either way, you should have a good grasp of how you want to spend your time and your money next year. Both are precious and neither should ever be wasted.

The day after is as good a day as any other to make the necessary plans to ensure that you’re moving towards the life you really want to live.

See you in 2021!

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Weekly Tip: Never stop learning about money.

Do You Have a Car Fund?

A car fund is a tool that will help you stay out of debt. Avoiding car payments is a great way to keep your financial stress to minimum. Your car fund is the place where you save money for your next vehicle. It’s a sinking fund dedicated to the purchase of your next motorized chariot.

Pay cash. I can’t be any clearer than that. Keep saving for as long as it takes you to have enough cash to pay for your next vehicle.

Once you’ve bought a vehicle, continue making that same payment to your car fund. Whatever you’re driving now will not last forever – all vehicles eventually need to be replaced.

How much should you be contributing to your car fund?

That’s an easy one to answer. Go to any car manufacturer’s website and use their loan calculator to determine the monthly payment for the vehicle that you want. That’s the amount that should be going into your car fund every month. If you were planning on making bi-weekly payments on a car loan, then arrange to have that bi-weekly payment sent to your bank account.

This method serves two purposes. First, it will assist you to build the savings needed to pay cash for your next vehicle. While it’s obvious, I’ll say it anyway so that there’s no room for misunderstandings. The more you save, the faster your pile of money will grow. Secondly, and less obviously, saving your car payments in advance of purchase allows you to experience the real-time effects of a car payment on your current budget. If the calculator says your car payment is going to be $600 per month, then that’s the amount you set aside every month.

If you had taken a loan, you’d be making that $600 payment to the creditor. Making payments to yourself tells you whether your budget would’ve been able to handle a payment of that size. By saving the money in advance, the impact on your budget is the same – you’re still giving up the use of that money. The fact that the money is going into your car fund doesn’t alter the fact that you’re not at liberty to spend that money on something else.

Can your budget handle a car payment?

You’ll quickly get the answer to this question by setting aside this chunk of money in advance of your purchase. Either you’ll be able to comfortably live on the whatever’s left over after the contribution to the car fund, or you won’t.

So if the answer to the last question is yes, great – keep saving until you have enough cash to buy the vehicle outright.

Should the answer to the question be no, then you’ve got some decisions to make about your money. Maybe you want to consider buying a less expensive car. Alternatively, you may decide to simply save your money over a longer period of time so you can get the vehicle that you really want. There’s also the option of getting a part-time job, or finding a side hustle, that will bolster your contributions to your car fund.

Avoid taking out a car loan if at all possible. Incurring that kind of financial stress won’t make your life better. Instead, pick a cheaper vehicle and save up your money until you can pay for it in cash.

Finally, if you absolutely must take out a vehicle loan, then follow the tips that I’ve talked about here. Debt beggars the borrower while enriching the lender. It’s in your best interest to minimize the amount of debt that you pay on a vehicle loan.

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Weekly Tip: Make a will. No one is promised tomorrow. The province will divided your earthly belongings according to a pre-determined list if you die without a will. For those of you have specific bequests in mind, get yourself to a competent lawyer to have your will drawn up and properly witnessed. This way, your wishes will be followed when you’re no longer around to tell people what your wishes are.

The Wisdom of my Folks

When I was growing up, my parents always encouraged to be a professional. I was told to aim for dentistry, medicine, and law. My parents wanted me to be a professional so that I could always create a job for myself. They knew, and wanted me to understand, that working for someone else meant that my financial security would be subject to my employer’s whim. They wanted me to have the security that comes from having the power to earn my own income.

This post is about reminding you that your wage is a burden your employer tolerates until such time as it can be eliminated. It’s not personal – it’s just business. The goal of a business is to maximize profits. This goal is met by lowering a business’ expenses. Your salary is an expense that your employer is always looking to trim and/or eliminate.

One of your goals should be to start, maintain, and grow a financial foundation. You shouldn’t be at the mercy of an employer forever. There should come a point in your life where you’re working because you want to, not because you have to.

Not everyone can be a professional, Blue Lobster!

I hear you, and I agree with that sentiment. Fortunately for you, there is one proven way for you to protect your financial health from the risk of losing your paycheque.

That method is called planting your money tree and making it grow. Not everyone can be a professional – this is true. But nearly everyone has the ability to set some money aside to create an investment portfolio.

Protect your financial health by having a stream of income that’s independent from your paycheque. Work on increasing that money stream until it’s big enough for you to survive on just in case your paycheque disappears at an inconvenient moment. Dividends, capital gains, interest on savings accounts – these are all forms of income that, if sufficient in quantity, can be used to replace your paycheque should the need arise.

You have an obligation to Future You to construct a solid financial foundation. Building your investment portfolio will create a waterfall of income that will eventually replace your paycheque. Investing your money for long-term growth today will allow you to substitute your paycheque with investment income tomorrow.

Nothing lasts forever.

Make no mistake – your paycheque will eventually disappear for one reason or another. You’ll get fired. Or maybe you’ll get too sick to work. Maybe your employer’s business will fail. Hopefully, you’ll retire on your own terms. Only the poorest among us are required to work until the day they die because of their finances. If you choose to work until your dying breath, make sure that you’re doing so because you want to and not because you have to.

The wisdom of my folks boils down to the following. A professional has more control over their income stream than an employee. If you’re a professional working for yourself, then there’s no conflict of interest because you’re both the boss and the employee. In both roles, your goal is to increase your profit because it is your income. When you work for someone else, they will increase their profit by reducing your income if they can. And if your salary can’t be reduced, then there’s always the option of simply not increasing it. This is a situation where the interests of the employer and the employee are at odds. As a professional, working for yourself puts the interests of the employer (you) and the employee (also you) in alignment.

I remember working in a grocery store when I was in high school and undergrad. I started at $6/hr. My salary went up every six months until I hit $9/hr. My boss told me that was the top range for a cashier. At the time, I just accepted it because what choice did I have? Well, I had a lot of choices but was not knowledgeable about them. I could’ve found another part-time job. I could’ve moved to the competitor, who was paying more. However, I didn’t know any better so I stayed. My point is that my employer imposed a limit on how much I could earn. I couldn’t do anything about that situation since I wasn’t my own boss. I wasn’t a professional.

It’s your choice.

Always remember that you have choices about where to put your disposable income. By my definition, disposable income is what is spent on the wants and not on the needs. If you’re already tucking a good chunk of your disposable income into your investment portfolio, then good on you. For the rest of you, what are you waiting for?

Having disposable income allows you to increase the odds that you will have a stream of income when your paycheque eventually goes away. Invest your money for long-term growth so that it’s working as hard as you do. Consistently invest from every paycheque you receive. People will tell you not to invest until all your other debt is gone. I no longer agree with that view. To my mind, time is too precious a resource. You need your investments to bake for as long as possible, even as you’re working hard to eliminate your debts.

Similarly, there’s a lot of debate about how much to save. Some argue for a bare minimum of 10%. Others push for 15%. My personal view is that you should save as much as you can, as soon as you can. Building an investment portfolio whose income stream will eventually replace your paycheque will take a long time for most of us. The sooner you start, the better.

We can’t all be professionals working for ourselves. Yet, it is still possible for the majority of us to reduce the fear of losing our paycheques. All that needs to be done is to start, build, and maintain an investment portfolio of our very own. It’s a very big goal and it might take decades to achieve. That doesn’t matter and you shouldn’t let it deter you. Future You needs to be fed, clothed, housed, and nurtured. Start taking care of Future You today.

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Weekly Tip: Cut back on how much TV you watch so you can get rid of cable. And you need not subscribe to every streaming service out there. Doing so means that eventually, your subscriptions will cost just as much as cable and you will be no further ahead.

Student Loans are an Anchor

When I was younger, I was convinced that student loans are an anchor. I believed that the best course of action was to eliminate them as soon as humanly possible. Full stop – no further discussion needed. Paying off student loans ASAP was a sign of being a mature adult. One did not carry debt if one could pay it off early. Being debt-free was the Holy Grail!

Suffice it to say that my views on student loans have become more nuanced as I’ve aged.

Full disclosure. When I graduated from post-secondary, I had student loans of just under $15K. My salary was paid bi-weekly, so I made extra student loan payments from every paycheque. These were on top of my regular monthly payment. I was fortunate enough to receive bonuses at work, so my first two years’ worth of bonuses went towards my student loans. Within 2 years, those loans were gone!

For the most part, I still believe that student loans are an anchor for many folks. If you’ve got a $200, $400, $700 student loan payment every month, that’s a big chunk of money that isn’t being used to build a better future for yourself. It’s not going towards a down payment. The money isn’t being set aside for your “thirsty underwear” years. (Hat tip to Garth Turner at Greater Fool for that descriptive phrase!) Those funds aren’t seed money being deployed in your own business. Depending on your circumstances, it could take you a very long time to pay off your student loan debts. Time that can never be recovered.

Truth be told, I still encourage people to focus on paying off their student loans. After all, it’s good to have less debt. Do what you can to make extra payments. Set up a per diem and have that money sent to your student loans every week. Do it via automatic transfer. If it’s $1/day, then send make an extra payment of $7/week. If you can afford $5/day, then that’s an extra $35/week. And if you can swing $10/day, then you’re looking at extra payments of $70/week… which is a very sweet $3,650 per year. The higher your per diem, the faster the debt goes away. Make this extra weekly payment on top of your regular minimum monthly payment. If you’re fortunate enough to get a raise or income from a side hustle, then use some of that money to pay off your student loans even faster.

When my student loans were gone, I felt very proud of myself. A debt obligation had been lifted from my shoulders! I was one step closer towards being debt-free. Yay, me!

Nuance…

It’s been over 15 years since I paid off my student loans. And I’ve learned a lot about investing in the stock market. Had I paid the minimum monthly payments on my student loans and invested in equities… <sigh> … Well, I’d be the Retired Blue Lobster by now, and my student loans would also be completely paid off. All else being equal, my loans would have been paid off in 9 years and I would have an even larger investment portfolio. My money would have had an extra two years to grow and all those extra payments would’ve been invested for growth.

Make no mistake! I still believe that student loans are an anchor. Yet, I’ve also come to believe that investing the stock market for the long-term is slightly more important than paying off student loan debt ASAP. This is because the weight of that debt burden, i.e. anchor, is reduced in two ways. Firstly, the debt gets smaller each time you make your minimum monthly payment. Secondly, the debt becomes a smaller portion of your net worth as your investments grow over time. Eventually, the debt will be gone and you’ll have a nice cushion of cash in the form of your investments.

If you go hard on your student loans to the exclusion of investing, you’ll be debt-free sooner but there’s no cash-cushion at the end. If you’re fortunate enough, you’ll be able to immediately re-direct your former student loan payments to investing. It seems trite to say this but I will anyways. Focusing solely on paying down debt robs you of the time that your money could have been working hard for you in your investments.

Investing early is a key to building wealth.

I’m not talking about investing money in a single stock and hoping that you’ve managed to get in on the ground floor of the Next Big Thing. From my perspective, that path is simply gambling. If you want to gamble, save your money and go to Vegas – it’s a lot more fun to gamble in Vegas!

The kind of investing that I’m referring to involves holding a broad-based equity exchange-traded fund (ETF) over a very long period time. Regular, consistent contributions to this kind of product gives investors access to the entire stock market and removes the temptation to jump from one promising stock to another.

An ETF offers you the chance to invest in a lot of companies at once. While they’re hardly exciting, ETFs offer regular people the opportunity to invest in some of the biggest companies in the world. You don’t have to be a genius, nor do you have to be lucky. The Next Big Thing will eventually become part of the ETF’s holdings, so you’ll still wind up own a sliver of it. And you’ll have avoided the risk of investing all of your money in one single company.

You should definitely read The Simple Path to Wealth by J.L. Collins. He does an excellent job of explaining why and how this works. Rest assured that I am not being paid for mentioning this book.

Real estate is another way to make long-term investments for the future. To be explicitly clear, this is not my preferred method. I am not an expert in real estate investing. If this interests you, then check out Bigger Pockets. I follow this account on social media and I’ve learned a lot. Again, I’m not being paid for mentioning them.

Some people can’t do both.

Fair enough.

I appreciate that not everyone has this option of to investing while paying down debt. Maybe you don’t have the money to do both. Reality being what it is, money only stretches so far. Or maybe the thought of debt causes you psychological distress. If that’s the case, then pay off your student loans as fast as you can. They are an anchor on your wallet. They prevent you from investing in your future because they force you to pay for your past.

You’ll make the best choices that you can with the information and money that you have available.

However, there are those in my audience who have enough to pay off the minimum student loan bill while also investing. If you’re fortunate enough to be in these circumstances, then I strongly urge you to do both. It may take you years to pay off your student loans. That is time that you can never get back. It makes the most sense to be investing in the stock market or in real estate while also paying down your debts. Your investments should be growing while your debts are decreasing.

Student loans are an anchor. There’s no doubt about it. However, how your handle those student loans will drastically impact your wealth-building goals. I don’t have all the answers because everyone’s situation is different. I just want you to think long and hard about what will work best for you.

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Weekly Tip: If you must finance a car, follow the 20-4-10 rule. Always put down 20% of the car’s purchase price. Make sure the loan is for a maximum of 4 years. Do not let the car loan be more than 10% of your annual salary. When your loan is paid off, keep making the payment to your Next Vehicle Fund so that you can pay cash the next time around.