Author: Blue Lobster

Your Retirement is Your Responsibility

As we’re so often reminded in the media, fewer and fewer employers are offering defined benefit pension plans. These were the pensions that your parents and grandparents might have had – they worked a fixed number of years and their employers would pay them a fixed monthly pension from retirement until death. The defined benefit pension was a form of deferred compensation. If you were receiving this kind of pension, retirement planning did not have to be a priority for you because your employer would be responsible for ensuring that you received money every single month after you left work.

Those days are over. You’ll have to bake your own cake!

In other words, your retirement is your responsibility.

More likely than not, your employer isn’t going to take care of funding your retirement years. This means that the burden falls directly onto your shoulders to make sure that you have grocery money for the days that you keep your teeth in a cup. There’s no way around it. No one else is going to have as much incentive in ensuring that there is some gold lying around for your golden years than you will. So hop to it!

Start Now – Stop Procrastinating!

You can’t save for your retirement if you’re spending all of your money. You’ll need to take some of today’s money and set it aside to pay for the days when you’re no longer earning a paycheque.

First things first – every time you get paid, you must set aside a portion of the money for your future. The new standard is 15% of your paycheque. For my part, I’d prefer to see you save atleast 20% of your income.

Secondly, this money should go into your Tax Free Savings Account or your Registered Retirement Savings Plan. Under either of the products, your money will grow tax-free. With the RRSP, you’ll get a tax refund today but you’ll have to pay taxes later when you withdraw the money. And you’ll have to start withdrawing the money from your RRSP when you turn 71. With the TFSA, you won’t get a tax refund today but you also won’t pay taxes in the future when you make a withdrawal. Unlike the RRSP, you don’t ever have to take money out of your TFSA if you don’t want to. It need not be liquidated.

Thirdly, the money should be invested for growth. There are roughly 7 bajillion portfolios from which you can choose. I’m not a certified financial planner so I can’t tell you how to invest your money. You’ll have to do some reading on your own, or you’ll have to work with a financial planner. (I don’t work with a financial planner because I’ve yet to find a fee-only financial planner in my city.)

How do I invest my money?

I’m so glad that you asked that question!

If you’re like me, you love the idea of building a dividend-paying portfolio in order to create an income stream in retirement. The following is one of many way to create this kind of cash flow. First, you’ll start by opening an online brokerage account. All of the major banks in Canada have their own investing arm. In the interests of complete transparency, I will share with you that I do my investing through BMO Investorline. I am not being paid to share the link to their website.

I’ve set up an automatic transfer to fund this account. A chunk of my net income is automatically transferred to my brokerage account every time I get paid. I use this money to buy units in my dividend Exchange Traded Funds, which I lovingly call my army of little green soldiers.

By buying units in my ETFs every month, I’m taking advantage of an investing method called dollar-cost averaging. I buy at whatever the price happens to be that day. Whether the price per unit goes up or down is not important to me because I’m interested in getting paid my dividends. The more units I have, the more dividends I earn. I don’t ever worry about buying units in my ETFs at the “right price”.

Every month, my dividends are automatically re-invested through my Dividend Re-Invesment Plan. Once again, the power of automation facilitates compound growth within my portfolio. I’m never tempted to spend my dividends because they are re-invested before I can ever get them into my hot little hands.

Educate Yourself

Dividend-paying ETFs are not your only choice for building a solid portfolio for your retirement. You can buy individual stocks. You can purchase bonds, or mutual funds, or real estate investment trusts if you wish. These can all be held in a brokerage account. Use Google to find information about these various products, their benefits and drawbacks, and whether they will get you closer to your goal of a comfortable retirement.

A brokerage account puts you in control of choosing and buying the investment products that will fund your retirement. The flip side is that you will have to be disciplined about putting the money into this account. Again, I can’t stress this enough – set up an automatic payment from your regular chequing account to your brokerage account. This way, your brokerage account gets funded every time that you do!

Overwhelmed by the amount of choice? Check out Vanguard Canada. Again, I’m not getting paid to mention this company. And I do own units in one of their ETFs. I like Vanguard because they offer low-cost investment products. Their website is user-friendly, which means I can find the information that I want and need relatively easily.

There’s always the option of hiring a financial advisor to do your investing for you. I’m not a fan of this method but I feel obligated to bring it to your attention. Good financial advisors will find products that fit your needs, and will invest your money with your best interests in mind. Before you hire a financial advisor, do a Google search on how to find a good one. After all, this person will be working with your money so you don’t want to accidentally hire the next Bernie Madoff.

Other ways to fund retirement…

You could choose to buy real estate. Check out Afford Anything or Bigger Pockets. These are US-based blogs, so the tax information does not apply to Canada and the tax rules are different. Still, the core principle of buying a few homes and paying them off to fund retirement works just as well in Canada.

You could also choose to forego buying real estate, save up a big pile of cash, and retire outside of Canada. This was the choice of the couple behind Millennial Revolution. Since quitting the rat race in their thirties, they have travelled extensively and written two books in addition to running a very informative, educational, and inspirational blog.

In order for your golden years to have any gold in them, you’ll have to start saving and investing today. Don’t let fear of the unknown paralyze you. Just start saving and investing! There’s nothing stopping you from continuing to learn about investing while you’re saving for your future. Don’t fall victim to the belief that there’s one perfect investment, that you’ll irrevocably harm your chances of a comfortable retirement if you make the wrong choice. You’ll have the chance to tweak your plans down the line as your investment knowledge expands.

Your retirement is your responsibility. Do whatever you can today to make it as good as it can possibly be tomorrow!

Freeze your Credit Limit

Recently, I had a discussion with someone who was worried about credit card debt. For ease, Gentle Readers, I shall call this person Oscar.

Oscar’s niece owed over $10,000 on her credit card and Oscar was beside himself! It seemed that Oscar’s niece had been fleeced by an acquaintance who was not repaying the borrowed money and was in fact enraged with Oscar’s niece for not lending out even more money on her credit card.

While the whole situation was bothering Oscar a great deal, I learned that he was most troubled by the fact that the credit card company had increased his niece’s limit without verifying her salary. Oscar somehow believed that the credit card company had acted in an untoward manner! Oscar appeared to be under the impression that the credit card company was in a fiduciary relationship with his niece.

For my part, I was stunned that Oscar would be surprised by the credit card company’s behaviour.

Credit Card Companies make profits, not friends

In case you, Gentle Reader, believe credit card companies act in your best interest, please allow me to clarify the situation for you. Your credit card company has no duty to act in your best interest. Credit card companies are finance companies – they are in business to make money, not friends!!!

As profit-seeking entities, the credit card companies are not going to do anything to stop you from going into debt with their product. Please re-read my last sentence a few times before continuing. Let it sink in. To the credit card company, you are the goose and your feathers are money. They want to pluck you naked.

The credit card companies will increase your limit, charge you interest and fees, and harass you for payment if you don’t pay them back each month. They are finance companies. Their sole purpose is to earn profits for their shareholders by giving you credit so that you pay them back with interest and fees. That is the only service that they are offering you. To believe anything else is to naive and self-destructive. When you go into debt, they make more money.

More often that not, it makes sense for these companies to increase your credit limit beyond your ability to repay the full balance in a single payment cycle. They will do this at a drop of a pin because it’s a good business move for them. Doing so vastly increases the odds that you will be forced to carry a balance and thereby pay them interest at a double-digit percentage.

The credit limit increase is good for them. Conversely, the increase is bad for you. If you are using credit and not paying it off every single month, then you are living beyond your means!!! This situation is very bad because it means that you are living in debt and that you do not have any disposable income to put towards building your cash cushion.

Your Salary is Irrelevant to Any Increase

Credit card companies don’t check your salary before they increase your limit. When you apply for a credit card, you have to state your income. However, once you’ve been approved and issued a credit card, your salary need never be discussed again. The credit card companies don’t care if you earn $1500/month or $25,000/mth. They will continuously increase your limit as often as they can in the hopes that you eventually start paying them interest by carrying a balance from one month to the next.

My wisdom for you is this: your credit limit should never exceed the amount of money that you could repay in a single month. If you have an extra $1,000 per month after all your needs are met, then your credit limit should only be $1,000. You’ll be in a position to use your credit card up to its limit and still pay off the balance without incurring any interest. If you don’t have $10,000 in disposable income each month, then you don’t need a $10,000 limit.

A very smart friend of mine who introduced me to the Disposable Income Method of using credit cards. It’s ingenious and highly effective. I’m sure that the credit card companies hate it! If so, that’s means that you should love it and start implementing it immediately. Briefly, the Disposable Income Method requires you to set your credit card limit at whatever disposable income you have between paycheques. Every purchase can go through your card and you pay your credit card in full each time you get paid. Easy-peasy-lemon-squeezy!

Protect Yourself from Limit Increases

There are two ways to protect yourself from credit limit increases. The first method is to never have a credit card. This method is drastic and foolproof. In today’s world, it’s also quickly becoming unrealistic. Even I use credit cards on a regular basis. However, I never borrow more than I can repay when the bill comes due.

The other way to protect yourself from these increases is to phone your credit card company and to tell them the following: “Do not increase my credit limit without my express request to do so. I don’t need more credit than I have right now. I do not want my credit limit increased without my explicit permission. Please make a note of this conversation in your computer system.”

This conversation works – trust me. I do not want a 5-figure credit limit because I cannot repay a 5-figure debt in a single billing cycle. It has been several years since I’ve seen an increase in my credit card limit. By telling my credit card companies to freeze my credit card limit, I’ve eliminated some of the risk of carrying a credit card. I’ve pre-empted the possibility of spending more than I can repay.

So pick up the phone – call your credit card company – freeze your credit limit. Don’t feel bad or sad or guilty about doing so. Rest assured that the credit card companies will always be there to offer you more credit at very high interest rates. Fret not, Gentle Reader – you can always go into debt tomorrow!

Disposable Income is the First Step

The first step toward any building wealth for the next generation of your family is having disposable income. The more income you have, the faster you can reach this goals. When written out like this, it seems rather simple and obvious, doesn’t it?

I don’t mean to oversimplify the situation, nor do I mean to sound flip. I recognize that there are a great many jobs out there that pay just enough to let workers make it from one paycheque to the next. Workers don’t have the extra money from which to acquire disposable income. Guess what? Your employer doesn’t care. As callous as it sounds, your paycheque is an expense that your employer wants to minimize in order to maximize profit. It’s not personal – it’s business.

It’s your responsibility to figure out how to acquire the disposable income that you need to create intergenerational wealth for your family. Does that mean a second or third job? Would getting a roommate be the smart move? Do you need to upgrade your education to access better employment opportunities? Is there debt in your life that needs to be paid once and for all?

You know the details of your life, so you’re the only one who can answer these questions. Regardless of what you determine, you’ll still need some disposable income in order to achieve your financial goals. Living from one paycheque to the next will not give you the cash that you need to do anything other than think about the next payday.

The first people to teach me about creating a pool of disposable income were my parents. They were big believers in education. It was always preached to us kids that we would go to school and obtain a profession. Money from all baby bonus cheques – now the Child Tax Benefit – was set aside in our bank accounts until the fall, when it was invested in Canada Savings Bonds. The decision of my parents to invest in CSBs paid for a cumulative total of 14 years of post-secondary education for my sibling and I. Not too shabby for people who didn’t attend university themselves!

Getting a good education led to a well-paid career and that comfortable paycheque meant that I could accumulate disposable income. Post-university employment paid so much better than the jobs that I’d held as a cashier, caterer, and bank teller while going to school. I had relatively little debt when I finished school – roughly $15K – so I was able to pay it off quickly. Once that was finished, I had more disposable income because I didn’t have to make student loan payments anymore. When my car loan was gone, the same thing happened – my disposable income shot up. And when the granddaddy of debts was finally eliminated, my former mortgage payments exponentially boosted the amount of disposable income available to me every two weeks.

The first step was accomplished – I had disposable income to invest!

So what was the next step?

Great question! For me, the next step was deciding that I wasn’t going to waste my disposable income on stupid stuff. I chose to pay attention to the people who I wanted to emulate financially. I saw that people who had money were using it to help their children get established in their adult lives. At the time, I didn’t have the right terminology to describe my observations. Thankfully, my lexicon has since come a long way.

Initially, I looked around at my friends, who were all starting their families & paying down mortgages. We were earning similar amounts but their priorities meant that their spending patterns were extremely different than mine. Once debt-free, my financial circumstances aligned far more closely with those of my parents’ friends and those of my friends’ parents.

Although I didn’t know the term at the time, I observed many, many examples of intergenerational wealth in action. I realized that some of my friends had parents who had assisted them with major home renovations or down payments. At least one of my friends had her student loans paid off by her parents. Three of my cousins were lucky enough to have each received $10,000 from their parents as down payments on their first homes. And I also noted that my parents’ friends were assisting their kids in similar ways, by loaning them down payments to buy businesses or their first homes.

These were gifts that went beyond the tradition of paying for a wedding. The parents whom I was observing were using their wealth to improve their children’s lives.

Parents have always tried to assist their children, but my parents had never benefitted from such monetary transfers. My four grandparents had produced 21 children between them. Understandably, neither set was really in a position to gift each of their children down payments, pay their students loans, or loan them money to buy established businesses. My grandparents lived from one paycheque to the next. Their children – my parents, aunts, and uncles – were on their own to figure out financial stuff once they left the nest.

So what are my friends doing now? Many of them have kids entering or firmly ensconced in adolescence, so I’ve had a bit of time to see what kind of choices they’ve made as parents. Most of my friends have a Registered Education Savings Plan (RESP) for their children. Some of my friends have businesses that can be passed down to their children. Others of my friends have invested in rental properties. By the time their kids are grown, the mortgages will be paid and the properties can become cash-cows for the kids. Alternatively, the properties can be sold and the money invested elsewhere.

What I’m observing is that nearly all of my friends are taking “the next step” by using their disposable income to create intergenerational wealth. Very few of my friends are living from one paycheque to the next. While they all complain about the cost of their children’s various activities, not a single one of them is at risk of losing their house or unable to buy groceries for their families. All of my friends are able to meet the necessities for their families, and there is still money leftover for children’s extracurriculars, summer camps, tutoring, etc…

That “leftover money” is the disposable income that my friends have. Once their children are adults, I’m certain that my friends will use their disposable income to assist their children financially. My friends will help with down payments on first homes and businesses. They will pay for schooling, and they will set up RESPs for their grandchildren. My friends’ children will benefit from intergenerational transfers of wealth.

You don’t need to be in a couple nor do you need to be a parent in order to create intergenerational wealth. Two people near and dear to my heart are women have never married, nor are they mothers. However, they are aunties to some pretty spectacular kids. These two women have built wealth for themselves, and will presumably leave their estates to their nieces and nephews. These are smart women who understand the power of investing. They appreciate that the seeds they planted yesterday – via very smart real estate decisions – will bear fruit for the next generation.

What are you doing today to create intergenerational wealth in your family?

Prepare for Burnout

Do you want to know a secret about burnout? Here it is… almost everyone keeps burnout a secret from everyone else.

I’ve attended many graduation ceremonies in my time, my own and those of loved ones. I’ve also had various mentors over the years. While they weren’t all great, they all taught me something valuable. And I’ve also had the opportunity to read many, many books & blogs about career-planning.

Here’s the secret… Not a single one of those sources has ever told me that burnout is a thing, and that I might one day face it. Not a single one of my mentors gave any hint that they were dealing with or had ever dealt with burnout – not a single one of them said a word about it. There was never a hint that decades in a given career could lead to anything other than stability, satisfaction, and challenging work.

It’s astonishing! When you think of how many people you might know who just go through the motions, it’s really quite remarkable that there’s an almost coordinated collusion by those-who-have-gone-before to never tell those-who-are-coming along that they won’t always be happy, engaged, or fulfilled by their chosen career.

Quick! Do you love your job?

Whether the answer is yes or no, you should save money now in case you get burned out at work at some point during your working life. In my humble opinion, people don’t talk about the possibility of burnout when planning their careers. If you’re lucky, you start out eager and happy and engaged. And if you’re very, very, very lucky, you’ll continue to be enthusiastically engaged with your career for a long as you have it.

Not all of us are so fortunate. There are people who simply get burned out and simply. Can’t. Do. It. Anymore! They can’t drag themselves into work another day. If you were to ask them to be honest, they would say that they feel like their lives are being wasted as they grind it out. In short, they hate the lives that they’re living. 

Of course, maybe it’s not your job that’s causing your burnout. Maybe you have obligations to extended family that are stressful. Perhaps you’re having trouble getting out of debt. There could be an undiagnosed physical illness. Whatever the reason, the end result is burnout as you try to handle everything that’s on your plate. The ugly reality is that burnout drains your ability to feel joy, to laugh with abandon, to experience that joie de vivre that makes life so much more enjoyable.

If this is you, then know that this is not a good way to live the only life that you have!

The antidote to your burnout might be a break from work. Definitely speak to a medical professional for a proper diagnosis. At the very least, a doctor can figure out if what you’re feeling is caused by something other than your job. And your doctor is the one who can put you on stress leave if that’s what you need to recover from the horrible feeling of burnout. 

Build Your Stash

Trust me when I say that the bills won’t stop during your recovery period!!!

What do you mean, Blue Lobster?

Money in the bank and cash flow from investments gives you some options when you’re facing burnout. Instead of being miserable and continuing to feel the bleakness that penetrates to the very depth of one’s soul, you have money so that means you can quit if you need too. You have the financial wherewithal to leave employment situations which make you want to cry.

Having a nice, fat cash cushion alleviates any concerns about how to pay for life without a job. Think of your recovery as a mini-retirement, or a little sabbatical. There might not be any income coming into your household, but the cash cushion means that you don’t have to worry about that. You can focus on doing what you need to do in order to feel some joy in your life again.

It would be unfair if I didn’t recognize that there are some great employers out there who recognize that burnout is a reality. If you have burnout and work for such an employer, then you’re quite lucky despite how you feel about your job. If you’re considered a good employee, then you may be able to get time off from you employer to recuperate. In other words, good employees may be offered a sabbatical. Great! Kudos to employers who recognize the benefits of helping their best employees to deal with burnout. However, sabbaticals need to be funded with real money.

And let’s be realistic – this is a benefit that is very rare. Be brutally honest with yourself. Would your current employer give you months off to recover from burnout?

Hopefully, you’re reading this when you don’t have burnout. And if the deities are kind, you will never experience this horrible condition. But as the Wise Ones know, hope is not a plan. Take steps today to start preparing financially for a time when you just might need to take more than a week or two of vacation to re-charge your batteries.

No one likes to think about bad things happening. Sadly, this preference won’t stop burnout from occurring. Be proactive! Take steps now to financially cushion yourself just in case you need to walk away from your job to protect your mental health.

A Little Bit of Wisdom

I’m sharing the following bit of wisdom respecting the mortgage cash account. I don’t think this is a particularly good option for mortgage-holders, but I’m trying to keep an open mind.

The Mortgage Cash Account

My bank holds the mortgage on my rental property. I make bi-weekly payments on my rental property because I want to have it paid off sooner rather than later. By making bi-weekly payments, I’m prepaying my mortgage. Essentially, I’m paying it back faster than required under my mortgage contract.

The mortgage cash account is the accumulation of those extra payments. It’s a visual reminder of how much principal I’ve repaid since starting my bi-weekly payments.

The account is also a visual temptation to spend that money. My bank spins this account as a good thing. They tell me that if some kind of emergency crops up, then I can withdraw money from my cash balance account and that money gets added back to my mortgage. In short, the mortgage cash account allows me to get my extra payments back at a moment’s notice.

Why the Mortgage Cash Account is generally a Bad Idea

At face value, it sounds like a good benefit. In reality, it’s not. This option works best for the bank because it means that I can go back to paying the maximum amount of interest on my mortgage loan. This is not a good thing for me, nor any person who wants to be free of their mortgage debt as fast as possible.

The reality is that I can use that money to go on vacation, buy lollipops, or set it on fire. The money doesn’t have to used for an emergency. There is no obligation to use it on a new roof, or a sewer line repair, or to remove downed trees from my property. The bank doesn’t care how I use that money – they only care that I eventually use it so that they can charge me more interest on it.

Do you see how this could be an impediment to achieving my goal of being mortgage-free? Is it as obvious to you that the bank’s goals are adverse to mine?

Let’s be very honest – most people will simply spend the money from the mortgage cash account on whatever they want. However, if the goal is to pay off the mortgage ASAP, then people should not be spending their prepayments and simultaneously increasing the size of their mortgage!

Emergency Funds are the Better Option

Again, the emergency fund is for emergencies. This is the little bit of wisdom that I want to share with you. No one should be in the position of having a mortgage without also having an emergency fund in place. When the emergency hits, and it eventually will, you shouldn’t be looking to your home to cover the expenses resulting from the emergency.

If you’ve used your emergency funds to pay off the emergency, then you need to re-organize your priorities so that you replenish your emergency fund as quickly as you can. Easy? No, not really. Necessary? Yes, definitely! You always need an emergency fund, no matter what. So do what you have to build one and to keep it funded.

Taking money from your mortgage cash account means increasing your mortgage balance. It means that all your hard work to make prepayments to save on the interest is vitiated. Don’t do that to yourself! If getting rid of your mortgage is a priority, which it should be, then do not use your mortgage cash account. Instead, build and maintain an emergency fund while you’re simultaneously paying off your mortgage.

My Army is Growing

Longtime readers of this blog are familiar with my plan to build an army of little money soldiers. Each soldier is a dividend-producing unit in my investment portfolio. Every month, I direct money to my brokerage account and buy as many units as I can afford in my preferred exchange traded fund.

I’m not proficient at reading income statements or at assessing whether it’s a good time to buy a stock. There are people who are exceptionally good at doing this, like the magnificent fellow who runs the Tawcan website. I’ve chosen a different path to building cash flow from dividends – I simply buy units in two dividend-paying exchange traded funds every single month.

I’ve been doing so for the past 8 years. And I’m seeing the rewards of my diligence. My dividend cash flow covers 50% of my monthly expenses! This is fantastic news! This means I can cut back my hours at work, or move to a lower-paid position, and my lifestyle will stay the same. My dividends are supplementing my day job, but they could also be re-deployed, if necessary, to replace my income!

When I first started building my army of little green soldiers, I’d been hoping that the dividend funds would kick off a few hundred dollars a month by the time I retired. That had been my only goal. However, as I started reading blogs and learning about ETFs, I realized that my dividend cash flow could become a viable alternative to working.

I expect that by the time I’m ready to hang up my hat, the cash flow from my dividends will be several thousand dollars per month. Woohoo! Consistent monthly cash flow is the lifeblood of retirement. And whatever’s not needed can be reinvested to even even more little money soldiers. I don’t spend on things I don’t need or want right now. I’m hardly likely to change this aspect of my personality after I retire.

If you’re interested in building your own cash-producing dividend army, consistent investing in dividend ETFs is one path to take. There are many others! If you’re more inclined to learning the technical aspect of buying individual stocks, then I would strongly encourage you to visit the Tawcan website and learn how Mr. Lai built his portfolio. You’ll then be in a better position to decide which option is more appealing to you.

Make Hay While the Sun Shines

This week, I was very sad after reading an article in the Walrus about how so many people in Canada go hungry on a regular basis.

The article reminded me that being able to eat every day is a privilege that I take for granted. I have enough money so I can go to various grocery stores and buy the food I need to eat three good meals each day. I have money to go to restaurants with my friends. I have sufficient funds to eat fast food when I’m too lazy or too disorganized to have done my meal prep. I have money and, therefore, I have food.

However, eating shouldn’t be a privilege accorded only to those with money. Without food, people die. It’s that simple.

There are many reasons why people don’t have money, why they can’t afford to feed themselves. Unemployment, mental health problems, evictions, rental increases, homelessness, family conflict… These are just a few examples that readily spring to mind. Regardless of the reasons for lack of money, that article from the Walrus made me question if we, as a society, are really willing to let people starve to death for lack of funds?

I don’t have the answer to that question, nor do I have any particular wisdom on how to eradicate the pervasive presence of poverty. My purpose with this article is to encourage you to think about what you can do today to minimize the risk of starvation becoming something that you have to face.

First things first – be grateful. If you have food, shelter, family, health, then you’ve already been blessed with what’s most important. Be grateful for what you have and never take your situation for granted.

After reading this blog for some time, you know that I’m a huge advocate of squirrelling away your money. Yes, it’s important to enjoy each day as it comes but not if it means spending every penny you have. You don’t know when the next emergency will hit, when you’ll get sick, when you’ll lose your job, etc…

The time to save for tomorrow’s emergencies is now. Money is the buffer between you and many bad situations. Money in the bank gives you options when you need them most. Having money in the bank means you can survive between employers, between contracts, between assignments, between paycheques. It means that you can continue to live somewhere with a kitchen and a fridge and a stove and a place to store the food that you will be cooking for yourself. Having money set aside means that you’ve created a bigger gulf between yourself and a situation where you don’t know when you’ll next have something to eat.

Once you’re in that situation, it’s very hard to get out of it because you’re too focused on daily survival to make plans for the future. Take my advice – start now!

I want you to calculate your personal per diem, ie. your daily cost to survive. Track all the money you spend in a month then divide that number by the days in the month. For example, if you spend $3000 per month, then your per diem is $100/day.

Then figure out how long you think it would take you to find another source of income if you lost your current one. Double that timeframe! Finding good paying positions – whether through freelancing, self-employment or working for others – isn’t easy. Be conservative! Assume that it will take longer than you expect and plan accordingly.

Then look at how much money you already have set aside in a savings account. How many days could you survive off what you’ve saved?

Having per diem money put away is your safety net. It should go without saying, but I’ll say it anyway, that the more money you have then the stronger your net.  Per diem money will help you to avoid the risk of starving if your income disappears for a time.

There is no perfect fix to the issue of poverty. However, there are steps you can take to lower your risk of falling into a poverty so deep that you cannot feed yourself.

As a Singleton, there isn’t another breadwinner in the home to supplement your income. It’s all on you, which is both a blessing and a curse. It’s a blessing because you don’t have to save as much money. It’s a curse because you do have to build and reinforce your safety net all by yourself. It’s my experience that the unexpected expenses of life still crop up while you’re building your cash cushion. It won’t always be easy but you’ll have to find a way to save money and also have funds to cover unexpected items without relying on debt.

The cash cushion won’t be built overnight. Depending on how much disposable income you have, it could take you weeks, months, or years to set aside a big ol’ bucket of money. Do not let that deter you! Trust me when I say that this is a goal worth pursuing – no matter how long it takes!

Never ever forget that money is the barrier between you and poverty.

All Hail the Octopus!

This week, I had the pleasure of reading a fantastic article about saving for financial independence and early retirement that was written by Mr. Tako of www.mrtakoescapes.com***. In this magnificent article, Mr. Tako discusses his surprise that anyone would view his choices as “hardcore” on his pursuit to financial freedom. By following his own plan, Mr. Tako was able to retire on his own terms. What some may view as hardcore, others may view as tweaks. It’s all in the eye of the beholder!

While I loved his article, my take-away was slightly different. I was simply happy to know that every small step makes a difference. Sometimes, it feels like saving and investing is a treadmill that’s going nowhere. The destination is so far away, and why can’t I just win the lottery and be done with it already?!?!?! However, articles like Mr. Tako’s remind me that there is an endpoint and that every little step I take gets me closer and closer to it.

Unlike Mr. Tako, I haven’t had many bad jobs nor many bad bosses. For the most part, my career has a many great attributes. I work with very smart people. My work is mentally challenging. I have autonomy over how my tasks get accomplished. I have a nice office filled with natural light. My office plant is big and beautiful, healthy and happy. I’m even happy with my salary since, without debt, my paycheque is more than sufficient to meet my needs.

Still…

At the end of the day, I want to retire and the sooner, the better. When I’m not at work, I’m much, much happier. It’s as simple as that. I have a great circle of friends – I love my family – I’m a bit of a homebody when I’m not travelling. Working gets in the way of that, despite all of the really great facets of my job. When I work, I’m on someone else’s schedule. I’m doing things that mean little or nothing to me. I’m attending meetings that have little palpable purpose. Despite all of the good things that I listed earlier, working means that I have to sell my time to someone else in order to survive financially. If I can find a way to retire early, then I get my time back.

Much like Mr. Tako, I’ve taken steps over the years to find ways to save on daily costs so that I can retire sooner.

At this point, I’d like to fully acknowledge that there is no one plan that will work for every single person. Each of us has to figure out what we’re willing to do in order to achieve the financial freedom that we want for ourselves.

The first big step in the right direction was my decision to take transit. I gave up the daily drive to work way back in 2001. I’m not a huge environmentalist, nor am I troubled by rush-hour traffic. The commute is the same whether I’m behind the wheel or a passenger on the bus. No – my main reason for choosing transit was so I could save on my commuting costs in order to invest money for early retirement. I’m fortunate to live in a location that has excellent transit service for commuters. For nearly two decades, I’ve driven to the park-n-ride, shown my bus-driver my pass, and have happily ridden in safety back and forth to work.

This one small decision 18 years ago has saved me thousands of dollars because I don’t pay hundreds of dollars each month for parking. I fill my tank every 10-12 days. My insurance premiums are lower, and the wear-and-tear on my car is less that it would’ve been with a daily round-trip drive to work.

The second step in my march to financial freedom arose due to a health concern. A sensitivity to caffeine required me to cut down on coffee during my work breaks. Many years back, I went to my doctor and complained of a racing heart. She asked how much coffee I drank. I told her that I had coffee with breakfast, at my mid-morning break, and during my afternoon break. She told me to cut back to one coffee a day and see how I felt. My doctor’s a miracle worker! Within a week, my heart had stopped racing. The upshot was that I was also saving money to be re-directed to my retirement.

Step #3… In 2016, I took the big plunge and cancelled my cable subscription. Again, this wasn’t a strictly financial decision. It wasn’t a money decision at all! I simply got tired of paying for garbage, so I decided to stop. But whatever would I do with the additional money each month that wasn’t going to the cable company? You guessed it – I funnelled the extra money into my investments!

Finally, in 2018, I made another commitment to myself which has positive financial results. I decided to start taking my lunch to work more often than not. Again, it wasn’t really a money decision. Fast food and restaurant food doesn’t taste as good to me as my own cooking. It suddenly struck me one day that I was paying for food that I didn’t enjoy. Taking my lunch to work earns me a double-whammy: good food to eat and more money saved for financial independence.

Like Mr. Tako says in his article, these small steps don’t feel extreme. They feel normal. I didn’t try to do everything all at once. Knowing myself as I do, that’s a challenge that I would have failed. Instead, I added these changes gradually until I reached my satisfaction point.

How about you? What steps have you taken in pursuit of funding your own dreams?

(***Update 2024 – sadly, this website is no longer available.)

What is a HELOC?

What is a Home Equity Line Of Credit? Short answer – it’s a debt trap that’s best avoided.

At its heart, a HELOC is a debt product that banks offer to homeowners which permits the homeowner to go into debt by spending the equity in their home without selling it first.

For example, if you have $200,000 worth of equity in your home, you can get a HELOC for an amount up to $200,000 depending on the lender. Without a HELOC, you would have to sell your home to get your hands on the equity. In other words, someone would give you money in exchange for your house and you could then spend that money however you wanted. There would be no fees or interest payable on that money because it would be yours.

The HELOC is a completely different beast. With a HELOC, you get access to the equity in your home via a loan from the bank without first having to sell your home. This sounds like a good thing, but it’s a debt-trap that you would be wise to avoid.

Banks charge interest on outstanding HELOC balances

You must keep in mind that the banks will charge you interest if you use a HELOC. Again, you’re spending your equity via a loan from the bank. Any bank loan is accompanied by an interest payment. Interest accrues until such time as the HELOC balance is repaid in full and it runs from the moment that you use it.

The interest rate on a HELOC is usually lower than the interest rate charged on a regular Line Of Credit. A regular LOC is an unsecured product, whereas your home secures the HELOC. If you don’t pay back your LOC, the bank cannot initiate foreclosure proceedings and take your home away from you. This is why they charge you a higher interest rate on a LOC.

Banks can foreclose on you if you don’t repay your HELOC

Before extending you a HELOC, the bank puts a charge on the title to your home. This charge against your title is similar to a mortgage. It ensures that if you ever sell your home, the bank’s HELOC will be repaid from the proceeds of the sale. You’ll get whatever’s leftover after the mortgage debt and the HELOC debt have been repaid.

Again, this particular debt product is essentially a loan against your home. It allows you to spend the equity in your home however you want. No one will be watching you to ensure that you don’t spend your equity on items which will not increase your financial security.

Having a charge on your title makes you vulnerable. Should you fail to make your monthly payment on the outstanding HELOC balance, the bank has the right to foreclose on your home to get its money back. Also, the bank has the right to demand full repayment on an outstanding HELOC balance whenever it wants. If you can’t repay the balance when asked, the bank has the right to foreclose on your home to get its money back.

Let’s say that your housing market goes down and the amount of equity in your home drops simultaneously. You house used to be worth $350,000 but now it’s only worth $250,000. Effectively , you’ve lost $100,000 worth of equity in your home. The bank may get nervous because their loan to you, in the form of the HELOC, is no longer backed by an asset that can fully repay the outstanding balance. The bank may decide to cut its losses, which means that they will demand full repayment of the outstanding loan balance. Should you not repay that balance, then the bank can proceed to foreclosure in order to get its money back before all of the equity in your home disappears due to market conditions.

HELOCs facilitate the siphoning of your home equity in dribs and drabs

When you use a HELOC, you are spending the equity in your home instead of increasing it. You are increasing the debt owed on your home each time you spend its equity.

One of the most dangerous ways to use a HELOC is to have it attached to your debit card. There is nothing stopping you from spending your home’s equity on mundane items. Think of trips to the coffeeshop, to purchase concert / sports tickets, to buy clothes, to finance your daily life. If you need a HELOC to survive from on paycheque to the next, then you’re living above your means. You’re working your way into a severe debt trap. Figure out how to free yourself and stop digging a bigger debt hole.

If there is ever a good use for a HELOC, it’s to make major repairs to your home that are required for your safety, i.e. replacing the furnace or the roof.

There is nothing wrong with you spending your home equity on the costs of your daily life if you need to. Just don’t do it via a HELOC! The wiser course of action is to sell your house and get the cash. That way, the entire amount of your home’s equity is available for your life’s expenses. You won’t be paying interest and fees to the bank for the privilege of spending your own money. You won’t run the risk of foreclosure. You won’t be indebted to the bank. And the money is still yours to spend as you wish.