Author: Blue Lobster

Tough Choices

Try as I might, I still haven’t figured out a way to get everything that I want. There are always tough choices to be made about money. I honestly believe that tough choices are the foundation of the non-financial side of personal finance.

While the Single Ones among us do not have to fight with anyone about money, it’s still incredibly important for us to identify our spending priorities. Being single does not eliminate the requirement to take responsibility for our money. Setting priorities helps us figure out what to do when tough choices have to be made about how to spend our dollars, and which goals to pursue.

Last weekend, I found a wonderful house. It’s a 1500sqft bungalow with main floor laundry, a double-car garage, and – wonder of wonders! – a large foyer that opens into a beautiful, bright living-space. Did I mention the large composite deck, the spacious & fully-furnished basement, and the fabulous ensuite off the master bedroom? It’s even in the neighbourhood that I’ve been watching for the past ten years!

So why didn’t I jump on the change to buy it?

Here’s why… Doing so jeopardizes my retirement plans.

The house is almost perfect for me. It’s main drawback is that it would require me to commit to working for at least another 5 years. Time is precious. I’m not one of the Very, Very Fortunate who loves their job and would do it for free. While my job has a great many benefits, I’ve long dreamed of the days when I can spend my time doing what I want and not what my employer pays me to do. I don’t want to sacrifice 5 years of my retirement for a house.

And it wouldn’t just be losing 5 years of retirement. Having a mortgage again would mean that I would lose the financial flexibility that I have right now. In pre-COVID times, it was so nice to be able to say yes to spontaneous invitations without worrying if my budget could handle the expense:

  • Dinner with friends to celebrate the warmer weather? Sure.
  • Can I afford the Rimrock to attend a good friend’s wedding? I’ll be there with bells on!
  • How about a last-minute theatre performance? Not a problem!
  • Why not pop over to the Emerald Isle in six weeks? I’m on my way!

Taking on a six-figure mortgage at this stage of my life would mean giving up the little extras that bring me joy. Those little extras are my reward for having been diligent and focused in my younger years, when I was paying off student loans, car loans, and the mortgage on my current house. Back then, I said “No” a lot more than I do today. Friends and family often chided me for the financial choices that I made, but I don’t regret following my plan. After all, I was the one who had to live with the consequences of my spending choices.

So as much as I wanted to buy the very awesome new house, I had to make a tough choice between two competing priorities. I could stay on track to retire, and continue to live in my current home which is perfectly suitable for me. Staying in place means that I don’t have to forego time in retirement. Alternatively, I could go back to having a mortgage and living on a tighter budget. In addition to all its lovely features, this new house’s property taxes are twice what I pay now. I’d have a higher heating bill each month, and I expect that the other costs of running a house would be higher too. Also, little renovations that I would want – a railing for the deck, new paint in the dining-room – would have to be put off. My budget wouldn’t handle renovations and mortgage payments at the same time.

At the end of the day, I chose to say “No” to the new house. The truth is that I’m not prepared to give up my goal of retiring when I want. I don’t hate my current house but I’m also not enamoured of the idea of never living anywhere else before my long dirt nap starts. Part of me is craving to be the Joneses, to buy another house, to set up a new little spot to call my own. It seems that everyone I know has bought a new house in the past 5 years – family, friends, colleagues, acquaintances. Why should I be the only one who doesn’t get to buy a new house?

The last question is a stupid one. I am not being deprived of a new house! I’m simply making a different choice. Those who have bought won’t have the option of retiring a wee bit sooner. They’re committed to repaying the bank or losing their home to foreclosure. The choice for them was to buy the house and to work longer than I’ll have to.

When it comes to money, tough choices have to be made sometimes. I’d already defined my priorities so it wasn’t too, too hard to walk away from the new house. I know what’s most important to me.

Ideally, you’ve also defined your priorities and you’ve figured out how to spend your money so that you can meet them. You’re the one who works hard for your money so make sure that you’re pursuing your priorities whenever you spend it. Whether you want a new vehicle, a new home, a new book, or new clothes, just make sure that your money is going towards the priorities you’ve set for your life.

The tough choices won’t go away completely. Knowing your priorities will better equip you to choose the alternative that gets you closer to the life you want to live.

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Weekly Tip: Update your net worth every month, or on a regular schedule that best suits you. Net worth is determined by adding up your assets and subtracting your debts. If you have a negative net worth, that means you’re in debt. If you have a positive net worth, then your assets exceed your debts. Your net worth is a snapshot of your finances at a given point in time. Knowing this number will help you to determine what your next steps need to be on your financial journey.

Mistakes with Money

Not a single one among us is born knowing how to use money perfectly. Our skill with money comes from making mistakes and learning from them.

For my part, I’ve made several notable mistakes with money over the years. I’ve written before about how I failed to take action with my investment plan for 5 full years. That one still hurts when I think about it. It took me 5 years before I finally rectified that situation by committing a good chunk of my paycheque towards my automatic savings plan. Now, I benefit from using dollar cost averaging to invest my money on a regular basis.

I hate to admit it but choosing to invest in dividend products instead of equity products is one of my biggest money mistakes! Had I started investing in equity ETFs instead of dividend ETFs way back when, then I’d be in a position to retire today…even with the recent volatility in the stock market.

Sadly, this money mistake cannot be un-done. I have been investing in a dividend portfolio since 2011, instead of a broad-based equity exchange-traded fund. The financial media has spent the last 3 months talking non-stop about the pandemic’s effect on the stock market, and how it has brought the 10-year bull run to an end. It’s true – the market took a deep fall in March. However, it has bounced back. It’s still quite volatile, and – in my completely amateur opinion – the stock market will continue to be volatile for the next 2-3 years.

I’ve been forced to realize that one of my biggest mistakes with money was to delay investing in equity ETFs. I’ve only just started investing in equity investments in 2019! It’s true that I managed to catch almost the very tail-end of the bull market, but the smarter play would’ve been to start investing in equity ETFs back in 2011… ideally, back in 2006.

Water Under the Bridge

‘Tis true. I can no more turn back the hands of time than I can lick the spot between my own shoulder blades. We make our choices then we take our consequences.

I shouldn’t be too, too hard on myself. Nine years of consistent investing has yielded a nice little cash flow for me. While my monthly dividends are in the 4-figure range, they’re not quite enough for me to retire just yet. I equate my little army of money soldiers to income from a part-time job that I don’t have to actually perform. Truth be told, it’s nearly a perfect side hustle since it’s money I earn without the sweat off my brow. How cool is that?

So why am I divulging one of my biggest money mistakes to you?

Two reasons. First, people in the personal finance world don’t talk about their mistakes with money nearly enough. The only regular mention I see of this reality is on the ESI Money website, where the millionaires who are interviewed are asked about some of their errors with money. I think it’s important that people realize that everyone who is good with money has made their own mistakes with it. Like I said at the beginning, no one is born as an expert with money.

Secondly, I don’t think that there’s any reason for you to make this mistake yourself. You can just as easily learn from someone else’s mistakes as you can your own. The more information you have, the more likely you’ll be to make a decision that best fits your particular circumstances. I firmly believe that people make the best decisions they can with the information that they have at the time. When you know better, then you do better.

Hard-Won Truths

Money mistakes are unavoidable. Mine isn’t the worst one in the history of the world, and it certainly won’t derail my financial future. And, let’s be honest – I ought not complain too much. I earn a small boatload of dividends month in and month out. How bad of a decision could I have really made 9 years ago?

My investing journey isn’t over. And I’m sure that I will make different mistakes in the future, but I just don’t know what they are yet. I still have choices and options for my money. I can choose to continue building up my army of money soldiers. The other option is to start investing in equity ETFs and take part in the stock market’s recovery. I’m quite confident that the stock market will continue to trend higher. It’s recovered before, and it will recover again. A third option is to simply coast on what I’ve already invested a la Military Dollar, so that I can spend today’s money on today’s things – home renovations, landscaping, a new vehicle, spa treatments, whatever…

I want you to accept that mistakes with money are an inevitable part of investing. That’s why it’s so very vital that you continually learn about it throughout your life, and that you put what you learn into practice. Invest as much as you can as early as you can. Invest for the long-term. Keep your mitts off your investments by simultaneously building an emergency fund for those emergencies that will crop up in life. Live below your means and stay out of debt. Save, invest, learn, repeat – this is a recipe that works.

By following these foundational principles with your money, the impact of your money mistakes will be minimal rather than nuclear.

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Weekly Tip: Set timelines for your goal so you know which ones are short-term, which ones are medium-term, and which ones are long-term. Generally, short-term goals are the one to be accomplished within the next 12 months. Things like vacations and concerts would fall into this category. Medium term goals are one that take between 1 and 5 years to accomplish. Think new vehicle and down payments on a home or a business. Long-term goals are those that will take longer than 5 years. Common examples are retirement and paying off a mortgage. Once you have a timeline, then you’ll be in a better position to prioritize where your money goes and to segregate your money so that each goal is funded.

Scratching my Head!

I’m fascinated by people who oppose the idea of becoming financially independent.

Personally, I think that this opposition is borne of the acronym FIRE. Most of us in the personal finance echo chamber know that this is an acronym for Financial Independence, Retire Early. It’s rather unfortunate that so many have twinned the two concepts together. They are not the same thing. A person can pursue one aspect of FIRE while completely eschewing the other.

A large cohort of people think that both elements must be pursued with equal vigour. I’d like to take a few minutes to tackle this misunderstanding into the ground.

Financial Independence =/= Retiring Early

Becoming financially independent can be a goal that is completely separate and apart from retiring early. Everyone should strive to become financially independent because it maximizes the options that one has for living the life that they truly want. Volunteering to build houses for six months after a hurricane? Travelling for 18 months just because you can? Taking a job that requires you to only work 3 days a week instead of five so that you have more time for doing what you love? When you’re financially independent, you can do all of these things without worrying about how to maintain your employment.

If you love your job, great! No one is saying that you have to quit the job you love simply because you have enough money to live without receiving a paycheque from paid employment. One of the side benefits of being financially independent is that you can continue to go to work if that is what makes your stomach do little flip-flops!

I’m always left scratching my head when people ask me why I would ever want to retire early. Sadly, I’m not one of those people – think professional athletes or celebrity entertainers – who is paid to do what they love. If anyone is looking to pay me cold hard cash to read books while enjoying a nice glass of wine, please speak up.

No one will stop you from working!

Allow me to be exceptionally clear on the following point. Being financially independent is not an obstacle to working. If anything, it gives you the power to work on what really matters most to you. When your stash of cash can pay for your bare necessities, then you’re free to take a paycut – if necessary – in order to do work that you find fulfilling. Rent – food – utilities can all be paid for by your Stash’O’Cash while your newly-reduced paycheque can be stretched to cover everything else. In the meantime, you have the pleasure of knowing that your life’s energy and your precious time are being applied to your true calling.

When you’re not financially independent, there’s a good chance that you are somehow being prevented from pursuing your dreams and living the life you want. It could be that you have debt that eats up a good chunk of your take-home pay. Maybe you’re caring for a parent or grandparent. Perhaps it’s just that you weren’t fortunate enough to have a job that pays more than ‘just enough’ to make it from one paycheque to the next. Whatever the reason, the lack of financial independence means that you cannot spend your time doing what you truly want with your time.

No one should be ashamed to pursue financial independence. It is not synonymous with greed or selfishness. Instead, it is a recognition that each of us has been granted one life. We only have so many tomorrows. Achieving financial independence allows us to spend our days doing what is most important to us. We are not shackled to someone else’s goals in exchange for a paycheque.

Save, invest, learn, repeat. Do this until you’ve become financially independent. At that point, take stock of how you spend your time. If you want to keep working, trust me when I say that no one will stop you. You can continue to collect a paycheque, content in the knowledge that you’re doing so because you truly want to and not because you have to.

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Weekly Tip: Keep your emergency funds separate from your other savings accounts. When the money is all co-mingled, it’s too easy to forget that the emergency money should NEVER be spent unless there is a true emergency that threatens your financial security. At the time of this post, millions of Canadians have lost their jobs due to the COVID19 pandemic. They’re facing a true financial crisis. Another scenario where an emergency fund is imminently reasonable is if your home burns down. An emergency fund comes in very handy if your town catches on fire and you have to relocate quickly. I’m looking at you Fort McMurray.

When Should I Start Saving?

In a perfect world, you would have started saving with the first dollar that you ever received, i.e. birthday money, paper route money, graduation money.

You would have gone to the bank – or your parent would have taken you – to the bank and you would have opened an account. Then you would have deposited that dollar before you’d had a chance to spend it. Everyone seems to know that the sooner you start saving, the better. However, there appears to be a disconnect between knowing and doing.

You’re the only person who can bridge the chasm between knowing what to do and then actually doing it. The truth is that it is quite simple to open a savings account in today’s world of online banking. It’s another very easy and straightforward matter to put an automatic transfer in place, thereby eliminating the need for you to manually transfer money into your savings account. The automatic transfer kicks in every time you’re paid – easy peasy lemon squeezy!

The very next best time to start saving money is immediately. I cannot stress this enough! Savings work best if you take steps to save money. Step one – save. Step two – don’t spend your savings. If you’re not yet accomplishing these two things, then you’re only dreaming about saving… which is all fine and good but it won’t help you very much since you can’t use dreams to acquire what you want. Dreaming about saving is not the same as actually starting to save.

I love dreams as much as the next lady, but dreams don’t put the cream in cupcake. You need to actually start saving – the sooner, the better. I speak from experience. One of the reasons that I’m able to seriously consider an early retirement is because I started saving a portion of my first paycheque when I was 15 years old. I’ve made many stupid decisions with my money over the years, but starting my savings plan in my teens is not one of them.

Now, let’s say there’s a good reason why you can’t start saving today. If this is your situation, then I want you to start saving money on any day that ends in the letter “y”. That leaves you with Monday, Tuesday, Wednesday, Thursday, Friday, Saturday, and Sunday. Each of these is a very fine day to start saving your money.

Whatever else you do, please don’t start saving tomorrow. First of all, tomorrow is promised to no one. Further, it is not a day ending in “y” so it’s not a suitable day on which to start saving. And while I hesitate to state the obvious, I feel that it’s best to articulate the fact that everyone eventually runs out of tomorrow’s. No one ever runs out of today’s – go back to my first point. Today is the very best time to start saving money.

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Weekly Tip: Practice delayed gratification. Wait a day or a week or a month before buying what you want. It gives you a chance to assess if you really want to make the purchase. It also gives the retailer a chance to put the item on sale. This is good because the whatever-it-is-that-you-want will be cheaper if you decide to make the purchase after a prescribed waiting period.

It Takes Some Time

Near as I can figure, it takes some time to become wealthy. There are those who manage to do it very quickly, and they generally fall into one of these three camps:

  • Being born into wealth.
  • Winning the lottery.
  • Inheriting money from someone else.

And I have to give an honourable mention to those who, every so often, invent something that’s so valuable someone pays lots of money for it. Yet, this isn’t always a “quick” way to make money. Usually, it takes a little while … but the possibility of doing it quickly still remains.

For the rest of us who don’t fall into these categories, building wealth is an activity that doesn’t occur overnight. Even for the adherents of Mr. Money Mustache and other FIRE followers, a commonly touted timeframe for building the kind of wealth that allows for early retirement is anywhere from 5-7 years depending on how much money a person has already accumulated.

If you’re not willing or able to live a very frugal life for 5-7 years, then you’re probably looking at 2-3 decades to acquire sufficient wealth that will allow you to live the way you want without having to earn an income. No matter how you slice it, 20-30 years isn’t a short period of time. Yet it’s definitely a sufficient amount in which to build wealth.

Okay, Blue Lobster… so what?

I’m going to suggest that you figure out what best makes you happy and find a way to do that for money. It seems obvious, but the truth is that most people don’t love what they’re employed to do. They do it for the paycheque. I’m not knocking that path. It’s a valid one if you’re a fan of eating, sleeping indoors, and having some measure of comfort in your life. Working for a living has been a time-tested method for ensuring that you can earn money.

Whether your employment brings you joy or not, I’m going to urge you to have your money do the heavy lifting for you. Every time you get paid, you save a portion of your paycheque and you invest it for the long-term. You’ll re-invest the dividends and the capital gains along the way. In the first 10 years or so, these contributions from your paycheque are going to do the heavy lifting of building your wealth. After that, the dividends & capital gains that your investments generate will exceed the contributions from your paycheque. So long as you don’t interfere with the Money Machine, you’ll be creating a very nice cash flow for your later years.

And just to be blunt – “interfering with the Money Machine” means siphoning off your dividends and capital gains instead of automatically re-investing them. The phrase also covers any interruption in your commitment to send a portion of every single paycheque to your investments. Finally, these words also encompass any strange desire you might have to temporarily halt your investment contributions during times of extreme market volatility. Further, the more you save at the beginning, the faster your wealth pile will grow.

The only catch is that it will take some time before you can stop depending on your paycheque.

Simple? Yes. Easy? No.

Not easy, not at all! It has never been easy to save money consistently over a long period of time. There is always a temptation to spend. Saving money is downright boring compared to vacations, concerts, vehicles, clothes, socializing, hot air balloon rides, jewelry, collectibles, camping, road trips, golfing, theme parks, shoes, massages, new furniture, artwork, streaming services, coffee, etc… Saving money reflects a pessimist’s viewpoint because it means that you don’t trust the universe to provide for you in the future. Saving money is viewed as selfish when someone important needs your income, i.e. someone has to make a rent/mortgage payment, a sibling lost their job, a parent needs a medical device.

Building wealth… it takes some time. In some cases, it takes generations. If you’re the first in your family to graduate and earn a higher than median income, are you going to say no to helping younger siblings on their way through school? Will you turn your back on your parents if they need your help?

It’s easy to encourage people to give up the luxuries, the nice-to-have’s, the fun-stuff in order to build wealth for the future. Lately, however, I’ve started thinking about the harder choices that people face when having to choose between spending now and spending later.

A very simple definition of poverty is that it is the state of lacking of wealth. From my observations, poverty affects entire families, sometimes over generations. Few of us would put saving for retirement or a home ahead of paying for a sibling’s groceries, if push came to shove. For the majority of us, the familial bonds are stronger than the need to save for our futures.

Where families have financial wealth, there is less need for financial interdependency. If each adult child can pay their own way, then they need not look to their parents or siblings for assistance. As a result, all of the adult children and the parents are free to save & invest some of their money for the future. The invested money, aka: wealth, can be left to grow because there are no other immediate demands on it. In addition, the adult children will more than likely inherit some portion of the parents’ money once the parents are gone. The wealth moves from one generation to the next, compounding over time.

The less money a family has, the greater the interdependency among its members. When parents can barely keep the lights on, they will turn to the adult children for assistance. This limits the adult child’s ability to build wealth because the money that goes to helping their parents is money that is not invested for the future. The same principle applies if one adult child makes good money but her siblings don’t. More than likely, she’ll feel obligated to assist her siblings and that means less money is available for investing. This family doesn’t get to benefit from intergenerational wealth because all of its wealth is spent in order to survive from one day to the next.

The money is needed now, which means that its owner doesn’t have the privilege of letting it compound to be used at some point in the distant future.

Realistically speaking, building wealth from a position of poverty creates untenable choices for many. When your family needs financial help to survive, are you obligated to sacrifice your financial health? Does your paycheque belong to you or to your family?

And the answer is…?

I wish I had the answer. I honestly and truly do. One of the saddest observations that I’m seeing as I get older is that wealth is funnelling from the many to the few. More and more people are barely making it from one paycheque to the next, even when they make the so-called right choices about how to spend their money. It’s happening at such a fast pace that I wonder if the trajectory can be changed.

Marketing machines are working non-stop to get people to spend money. Sure, we’re in a pandemic (at the time of this post). However, pandemics do not last forever. The advertising industry will go into overdrive once the pandemic is over in an attempt to get people to open their wallets.

And if the pre-pandemic situation is a good predictor of behaviour, people will spend. It might be slowly at first but then they will gradually “forget” to put money into their emergency funds, to only pay with cash, to decline offers for credit.

I don’t have all the answers. What I have is a theory and it is this.

Once the not-rich are barely making it from one paycheque to the next, they reach for a lifeline to maintain the illusion that they’re living comfortably. For a great many people, appearing poor is just as awful as actually being poor. The anchor-disguised-as-help that is offered to those in this particular situation is called credit. So the paycheque that barely covered the necessities is now most definitely incapable of covering the interest charges on the debt. Remember! Once you’ve used credit, you’ve simultaneously created a debt.

The not-rich person (or family) has taken the first step towards becoming trapped in a cycle of poverty. After all, if one cannot survive before taking on debt, then how is one to use the same insufficient paycheque to pay off that debt?

Then there’s the little pesky, incidental problems such as rents eating 50% or more of a household’s income in some cities. Trust me – the high income household aren’t the ones paying the majority of their income on rent. Another pesky problem is the fact that some mortgage are over 7x the household’s income. Again, households with higher incomes can manage to get mortgages which are less than 3x their income.

So going back to where we started, the steps for building wealth are the same all of us who aren’t born rich, who haven’t inherited money, and who haven’t won the lottery. Earn an income. Save a portion of that income and invest it for long-term growth. Re-invest the dividends and capital gains for many, many years. It will take some time, but these steps will build wealth.

The reality of the situation is that not everyone has the advantage of having financially-secure loved ones. The steps to building wealth are grounded in the assumption that investing for wealth is your highest priority. When there are competing and equally important uses for your money, then the choice to save and invest gets much harder.

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Weekly Tip: Keep your emergency fund separate from your other savings accounts. Segregating your money by its intended use solidifies the line between what can be spent today and what can be spent in a true emergency. Emergency funds nestled in their own dedicated account decreases the likelihood that you’ll somehow spend the money on something that isn’t an emergency.

Budget? No, thank you.

I don’t use a budget. I’ve been in charge of my own money since I got my first part-time job, in a grocery store, at the age of 15. Not once since that time have I ever written out a budget in order to allocate a certain amount towards food, towards clothing, towards entertainment, towards X.

If you’ve been reading my blog for the past couple of years, you’ll know that I’m a huge fan of automatic transfers and sinking funds.

Very simply, my paycheque hits my bank account. My automatic transfers kick into high gear. Various amounts of money are dispersed among my many, many bank accounts. (Each account has a very specific purpose!) Then I spend whatever is left in my account.

For the cheap seats in the bank, I say again that I don’t use a budget.

If budgets work for you, then stop reading.

For my part, I’m not against budgets if they work for you. Everyone needs a good money-management system and budgets are one of the options available for controlling spending.

A budget simply doesn’t work for me.

See, if I’m at the grocery store and I see something that I want but which isn’t on my list, then I’m still going to buy it. I don’t want to walk past it solely because it’s not in the budget. (I might walk by it because I don’t need more calories/sodium in my diet, but that’s a different blog topic.) The same principle applies to clothing, shoes, gasoline, whatever isn’t already covered by my sinking funds.

And lest you think that money runs through my fingers like water, I promise you that there is a method to my budget-free madness.

The backbone of my money-management system lies in taking care of the Big, Important Priorities first. Once my priorities have been funded, then it doesn’t matter if I buy a couple of extra things at the grocery store or drive more than I’d intended in a given week. The most important elements of my financial life get funded first so that daily decisions don’t matter too, too much so long as I don’t go into debt. Rule number one of my system is always avoid debt!

Although I’m still fine-tuning it after all these years, the system I’ve developed for myself ensures that my medium-term and long-term priorities each get the lion’s share of my paycheque before I start doing my day-to-day spending. The impulse purchase of a pair of jeans while window-shopping at lunchtime is not going to derail my retirement dreams.

Automatic Transfers & Sinking Funds

The most important quivers in my money-management arsenal are automatic transfers and sinking funds. One of the most burdensome realities of adulting as a Single One is that all the expenses of my household are my responsibility. That means, I pay all the utilities and taxes and insurances. It also means that if I want to travel to Vancouver to enjoy the cherry blossoms in the spring, then I’m the one who has to scrounge up the money to do so.

In the pre-COVID19 days, I had a far more active social life that included concerts, travel, and meals with friends. Those activities have been curtailed for now, but I’m sure that I’ll get to enjoy most of them again.

My point is that I rely on automatic transfers and sinking funds to pay for the expenses of my life. For example, I pay my insurance premiums on a yearly basis. I have a sinking fund for that particular bill. I take the amount I paid last year, increase it by 10%, then divide that number by my annual number of paycheques. The final amount is then automatically sent to my sinking fund every time I get paid. When the premium due date rolls around, I’m not left wondering where to come up with several thousand dollars.

While I realize that some people pay their insurance monthly, I abhor the idea of anyone other than me withdrawing money form my account. I’d prefer not to grant access to my bank accounts to anyone else.

I have sinking funds for all of the following:

  • insurance premiums;
  • property taxes;
  • annual vacations;
  • birthday and celebration gifts;
  • Registered Retirement Savings Plan contributions;
  • Tax Free Savings Plan contributions;
  • renovations;
  • MISC.

Yes, I set aside a segment of my paycheque for miscellaneous stuff. I might decide to do something fun and unexpected, so I need to have a bit of money tucked aside for this unanticipated spending. Sometimes the MISC-money has to be spent on not-fun stuff, like a new pair of glasses – they’re quite necessary but they won’t be cheap.

Leftover money gets spent…

Yes, that’s right. Think of my automatic system as a blackjack dealer in a casino. My sinking funds are the players. The deck is my paycheque. Once the system has dealt money to each of my sinking funds, I’m free to spend whatever’s leftover however I want.

Again, I don’t use a budget. The leftover money is spent on groceries, clothes, gasoline, liquor, dining out, whatever I want. What I love best about my money-management system is that I can spend however I want in the very short-term because my medium-term and long-term goals are also being met. It’s the best of both worlds for me.

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Weekly Tip: Consider following the 50-30-20 rule for your money, which I first learned about in the book All Your Worth written by Elizabeth Warren and Amelia Warren Tyagi. In a nutshell, the rule says that 50% of your net income is spent on your necessities, otherwise known as MUST-HAVE’s. Then next 30% is spent on non-necessities, the Want-to-Have’s. The final 20% goes straight into Savings and Investing.

The Honest Truth

Roughly 20 years ago, I landed my first professional office job. It entailed monthly meetings with my manager, wherein I updated him on my current workload. He was an amiable man and most meetings were sprinkled with little nuggets of life advice.

One of the acorns of advice that has always stayed with me is the following. “Never believe that this place needs you. Always remember that you can be replaced.”

It sounds harsh, doesn’t it? As I look back on those words, I appreciate them because they are the honest truth.

My manager wasn’t being mean or obnoxious. He was being truthful. If I hadn’t been hired to do my job, then my organization would have hired someone else. And if I had chosen to walk out at that very minute, the organization would have tackled the task of finding my replacement.

That particular acorn took root.

For nearly two decades, those words have rolled around in my head. The honest truth they embodied has been one of the underlying reasons of why I save and invest. It is imperative that my money works as hard for me as I do for it. My money must insulate me to the greatest extent possible from the financial consequences should my organization decide that it’s time for me to be replaced, that it can survive without my contributions to its operations.

If you’re somewhat sentient when this post is published, then you can’t help but be aware that a great many people have lost their jobs through no fault of their own because of the COVID-19 pandemic. The news reports are rife with articles of the millions of people who have had no choice but to turn to the government for financial assistance to survive.

However, I suspect that there is a cohort of the Recently-Let-Go who haven’t had to ask for financial assistance. I’m willing to guess that this cohort is compromised of people who’ve worked for a couple of decades and who made the choice to live below their means throughout their working lives so that they could invest their money. I wouldn’t be surprised if this fortunate cohort has made the choice to stay out of debt no matter how often credit was offered to them. And I’ve assumed that this cohort is going to keep a tight, heavy lid on their status so that they can continue to live as they always have – social distancing & hand-washing as required – without drawing the ire of their family, friends, neighbours & former co-workers. Check out the comments on this article.

Continued employment isn’t guaranteed.

As a result of my manager’s words, I’ve always known that my employment was at the whim of someone else. Sure – I’d likely find another position somewhere else, but what if it took me a long time to do so? How would I pay for my life between one employer and the next? Even if I tried to become self-employed (something that has never held any appeal to me), how would I pay for my life before the money started rolling in?

Hearing the honest truth from my manager during a routine monthly meeting incentivized me to do all of the following things:

  • pay off my student loans as quickly as possible;
  • build my emergency fund through automatic transfers every payday;
  • re-pay the loan on my SUV in 6 months by making gargantuan payments every two weeks & by sacrificing a little bit of fun & frivolity;
  • invest a portion every paycheque in the stock market once the mortgage on my principle residence had been paid off;
  • move out of mutual funds and into exchange traded funds once I learned how deeply management expense ratios impacted my overall rate of return;
  • stay out of debt by paying off my credit cards every single month; and
  • pay cash for everything.

I know those last two bullet points sound contradictory, but they aren’t. If I don’t have cash, then I don’t use my credit cards. Once the cash is in my bank account, then out comes my credit card to make the purchase. This method means that I earn cash back or points towards groceries. The charge is applied to my account then I send a payment from my bank account to my credit card. Best of both worlds – I always pay cash while taking advantage of the perks of having my credit cards. If you can’t pay off your credit cards every month, then don’t do what I do. Only spend cash or use a debit card!

Motivation comes from unlikely sources.

It’s taken me a long time to see the link between words spoken nearly 20 years ago and the financial choices that I’ve made in my life. The honest truth from my manager’s lips motivated me to build as big a financial cushion as I could as fast as humanly possible. It didn’t happen overnight, and there were many mistakes made along the way. To this day, payday still means that a chunk of money is set aside for the future.

Another source of motivation for me comes from our current global pandemic. COVID-19 has me re-assessing whether my emergency fund is big enough. For record, I have made plans to increase it. It’s my firm belief that no one has ever regretted having “too much money” during an emergency.

In a similar vein, the money saved from staying home while most everything is closed has been re-directed into sinking funds. There are still big expenses on the horizon. Property taxes will still have to be paid at some point. My home and vehicle insurance premiums are still due in a few months. Birthdays and other celebrations might still require me to open my wallet, even if I can only visit with people via video and telephone. The annually recurring expenses of living will continue to come around, whether we’re still in a pandemic or not.

Do yourself a favour! Go back to my manager’s works and let them sink in. At the end of the day, your employer can always choose to replace you. Sooner or later, there is going to be a parting of the ways for reasons that may be beyond your control. Be proactive – take the steps today to ensure that you’ll be financially okay when that time comes.

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Weekly Tip: Live below your means so that you have money to invest. This is another way of saying pay yourself first. After you’ve paid yourself, then you can get down to the business of paying everyone else.

Surprise Money!

Raise your hand if you’ve found some surprise money in your bank account this past month!

While a great many people have lost their jobs, those who haven’t might have noticed that there’s definitely extra money in their bank accounts. This is called surprise money because most people are surprised by how much they normally spend. Despite the wisdom in doing so, great numbers of folks simply do not track their spending. Staying home to avoid the coronavirus has resulted in far less money trickling out of people’s wallets. When people finally do look at their bank accounts, some are surprised by how much money is still in there!

For my part, I haven’t had to buy a bus pass since February. When I check my bank account, there’s an extra $200 sitting there. Is it a life-changing amount of cash? Not by a long shot. Will it be shuffled into my emergency fund? That’s a big 10-4!

Another of my dear friends confessed to me that an extra $2500 has remained in the household budget because so many things have been cancelled. That’s not an insignificant amount of money!

If you’re among the fortunate ones whose income has not been negatively affected by COVID-19, what are you doing with your extra cash?

  • Have you just transferred your spending to online purchases?
  • Are you paying down debt?
  • Have you directed some love to your emergency account?
  • Is the extra money being diverted into your investment portfolio?

The pandemic is causing many problems for many people – no doubt about it! Through no fault of their own, too many people have lost jobs and are facing extreme levels of financial stress as they figure out how to pay for their lives.

Yet, there are still many who have extra money during this pandemic. No salons – no concerts – no sports eventing – no retail therapy at the mall! So many of the quotidian opportunities to spend money have been curtailed. Wallets are staying closed simply because people haven’t found replacements for the places where the money used to go.

When the pandemic is over, will you go back to the way you used to spend?

This is a question I’ve been discussing with my friends. Some of my dear ones believe that people will change their behaviour for a little while, and then gradually return to old spending patters. Others are convinced that the pandemic will make an indelible imprint on this generation – much in the same way that the Great Depression shaped the money habits of today’s oldest citizens.

Personally, my position is that people are going to go back to their old spending patterns. It might take some time but it will happen eventually. Generation X grew up with credit cards. We’re also very comfortable with the monthly payment plan. For my parents’ generation, one saved up for years to afford to buy a car. Today, it’s about affording the car payment. I don’t see that one little pandemic is going to change decades of spending behaviour too, too much.

We might spend on different things once the pandemic is over, but we will keep spending. Once people feel safe enough to venture out of their homes and back into business establishments, they will return to their ingrained spending patterns. Those patterns are comfortable and familiar. Plus, the Ad Man and his trusty sidekick, the Creditor, will be back up and running, full steam ahead.

Right now, I’m urging those of you with extra money to not squander this opportunity. If you’re able to squirrel away an extra $1,000, then do so. And if it’s less, squirrel that away too. The pandemic won’t last forever. Chances are you will be very strongly tempted to return to your regular spending patterns. After all, you spent your money to enjoy your life before. Why wouldn’t you want to spend money to enjoy your life once COVID-19 is no more than a bad memory?

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Weekly Tip: Build your emergency fund in a high interest savings account. Online bank accounts generally pay more than what you can get from a brick-and-mortar bank. Compare rates online, then open an account. Set up an automatic transfer so that a portion of every paycheque goes into your emergency fund until you have 9-12 months of living expenses set aside for emergencies. Unless you’ve got a very big paycheque, it’s going to take you some time to save up this amount of money. I think you’ll agree that should you lose your job, you won’t regret having taken the time to fully fund your emergency fund.

“Gee! I wish I didn’t have all this money set aside to help me get through this emergency!” said No One Ever.

One of my Biggest Money Mistakes

Tempus fungit… which is Latin for time flies. And boy does it ever!

In 2006, I was fortunate enough to pay off my house. Unfortunately, I wasn’t smart enough to immediately turn my former mortgage payments into investment contributions. Instead, I didn’t start dollar-cost-averaging into the stock market until 2011. This was on one of my biggest money mistakes.

I missed the 2008 stock crash (Yay!!!) but I also missed 2 years of the recovery between 2009 and when I started investing in 2011 (Boo!!!!).

And what did I do with my money between 2006 and 2011? I seem to recall a trip to Hawaii in 2007. I’m sure I made some renovations to my home. I financed my vehicle and paid it off in six months. The rest of the money… I haven’t a clue where it went.

Coulda…Woulda…Shoulda….

Now that it’s 2020, I really regret that I didn’t start using dollar cost averaging the very second that I no longer owed money on my mortgage. If I had, then I would be 5 years closer to my retirement goals. Sure, I’ve got 9 years of consistent investing under my belt but I could have had 14 years of investing behind me. Why did I wait so long? Partly, it was because I listened to well-intentioned friends and family who told me to relax and enjoy my money.

The choice to listen was mine, and I accept full responsibility for it. At the time, I was younger and far less money-wise than I am now. However, I just wish that I’d found blogs like this one – or any of the other super-awesome blogs out there – earlier than 2011. Right now, I follow Personal Finance Club on Instagram. He encourages his followers to “Invest early and often”. You might want to check him out, follow him for a while, learn stuff that you might not already know… or not. The choice is yours.

I love PFC’s mantra and I wish I’d found this Instagram account in 2006. As it is, I started following PFC on Instagram in 2018. By then, I was already investing regularly but I still really like the graphics on his account. In any event, his advice is great. If I’d started in 2006, then I would have had 20 years of retirement savings under my belt by the time I hit my planned retirement date. As it currently stands, I’ll only have 15 years of savings in my kitty.

Unfortunately, I learned too late than procrastination is a time-waster. Even if you love your job, save and invest for financial independence. If your budget will allow, start working towards financial independence while you’re also paying down your debt. If that’s not possible, then start saving and investing your former debt payments once the debt is gone. There’s no need to duplicate my money mistakes! Do not use your former payments for day-to-day living. Instead, turn your former debt payments into investment contributions so that your money starts working hard for you as soon as possible.

Once I finally committed to investing for my dotage, I set up automatic transfers and began building my army of money soldiers. I’m happy that I’ve been able to consistently invest month-in, month-out since 2011. Yet, I still regret that I didn’t start in 2006 so that I’d be that much closer to financial independence.

Procrastination is to be avoided…

You don’t have to in any way adopt, imitate or copy one of my biggest money mistakes. Experience is a great teacher. You can just as easily learn from someone else’s experience as your own. Why not learn from mine? You need not make all the mistakes yourself.

Take a good look at what’s happening to so many people during the COVID-19 pandemic. Far too many people have lost their employment through no fault of their own. From what I’m reading in the media, precious few of those people have enough money tucked away to survive a job loss. They do not have the luxury of not worrying about how to pay for what they need. In short, they were not financially independent when the pandemic hit.

The best reason to consistently work towards financial independence is because you don’t know when you’ll want to stop – or when you’ll be forced to stop – working for a paycheque. If you love your job and can’t wait to spring out of bed to do it, then save for financial independence anyway. Being financially independent doesn’t mean that you’re obliged to quit doing what makes you happy.

Should the unthinkable happen and you stop loving your job, being financially independent also means that you have the option to stop doing what no longer brings you joy. You can quit to do something else without wondering how to put food in your belly.

And if you find yourself unceremoniously tossed out of your job, being financially independent means you won’t be in the position of wondering how to pay for the expenses of your life.

As stated by the Physician Philosopher, financial independence is the escape hatch. His article is about burnout among medical doctors, specifically, but the principle applies to any employment situation that you may want to leave. When you aren’t concerned about financial consequences, it is so very much easier to leave your employment whenever the mood strikes. Conversely, financial independence gives you the luxury of tending to your wounded pride, without any additional financial stress, should your employer unilaterally decide to send you on your way.

Please don’t be a procrastinator! Start working towards financial independence today.

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Weekly Tip: Pay the lowest management expense ratios (MERs) as possible while still meeting your investment goals. When two products are essentially the same yet priced differently, it makes no sense to pay more than necessary to acquire what you need. Use this calculator from the British Columbia Securities Commission to see the impact that MERs have over long periods of time. The lower your MER, the higher your final investment amount.