There Are No Easy Answers

Today, I read a very sad story about a 76-year old man who sold his home when his mortgage payment went up. Presumably, the story was about the impact of rising mortgage rates and the lack of affordable housing in Calgary. In reality, what I took from the article was an appreciation of just how risky it is to have a mortgage when you’re on a fixed income.

Now, it should be noted that the article failed to explain why this 76-year old man still had a mortgage!!! To my mind, the journalist who wrote the story – or the editor who removed the relevant details – failed the reading public by leaving the financial questions unanswered. All we know from the article is that the man’s mortgage went from $1,000/mth to $2,600/mth and that he received $2,200/mth in social benefit payments.

Without any confirmation, I’ve tried to be generous and have assumed that he went through a grey divorce and he had to re-mortgage his home so that he could pay half of the home’s value to his ex-spouse. I could be completely wrong, but the bottom line is that his senior citizen has to move out of his home because he can’t afford to repay his mortgage.

When I was born, the mantra to all mortgage holders was to pay off the mortgage as fast as possible. Times have since changed. In the past 20 years, the message has gone out that it’s better to pay the minimum mortgage payment and to invest the difference in the stock market.

Sometimes, I think this is great advice. If you’ve got a 25-year runway ahead of you, then it’s less risky to invest your money for the long-term. You can have your mortgage paid by the time you’re in your 50s and you might still have a decade or more to invest if you retire at age 65. The dollars invested in your 20s might have 40+ years to compound if things go exactly according to plan. You’ll have a paid off home and a comfortable retirement waiting for you. Even if you make a few mistakes with your investing choices, the odds are still pretty good that you’ll retire comfortably.

The calculus changes considerably if you’re starting your mortgage in your 40s or 50s. Going into retirement on a fixed income while carrying a mortgage is like dancing on razerblades! You’re asking for trouble.

Mortgage rates started to skyrocket in 2022 from their historically un-characteristic lows of the previous decade. Rates haven’t stopped going up in 2023. When I worked as a cashier last millennium, any rate under 8% was cause for celebration. My first mortgage rate was 6.50%, and it steadily dropped over the next 20 years. The last mortgage I had in my name was for 2.79%… and I felt ripped off because one of my friends had a rate of 2.49%! I doubt I’ll ever see mortgage rates that low again in my lifetime.

These increased rates are the normal ones. It will take a long time for people to accept that but they are here to stay. The main problem with these rates is that people’s incomes haven’t kept pace with the impact the rates are having on their budgets. People who’ve had to renew their mortgages at rates 3%-4%-5% higher than what they were paying before are having to come up with several hundred dollars more each month to pay back their mortgages. And these are people who are working!

Imagine being a senior on a fixed income. The 76-year old doesn’t have as many options for increasing his income. In this case, he chose to sell his home and is looking for some place to rent. He’s having no luck. Again, the journalist/editor failed to tell us how much he received from the sale of his home and how much of that went to paying off his home equity line of credit. We have no way of knowing whether he’s in a position to buy himself something smaller than his former home. Presumably not since he’s decided to look for a roommate…

Anyway, my point is this. Stories like these should be a cautionary tale. Whatever your current circumstances, strive to stay employed until your debt is paid. Do not retire with debt!

Want to know one of the very worst elements of this story? All of the money that this man put into his house is gone! We don’t know how much of it was siphoned away via his HELOC. What we do know is that all of his payments went to the bank until he couldn’t afford them anymore and now he walks away without enough to buy himself another home. To add insult to injury, he doesn’t even have enough to easily rent another place. He could very well be homeless in a few weeks.

Do yourself a favor and learn from this man’s story. If you have debt, get out from under it. And if you’re out of debt, stay out. It’s so very easy to get into debt but it’s really, really, really hard to get it out of your life. You deserve to have the experience of being debt-free. Live below your means for life!

There are no easy answers. I don’t have any secrets that will make your debt magically go away. All I can tell you is this. If you’re fortunate enough to have some extra money in your budget, then use your good fortune to aggressively pay off your debt. When it’s gone, don’t spend the money on stupidities. Instead, invest it. Save up to pay cash for your next bright-and-shiny-whatever-it-is that you want. Just stay out of debt and don’t become the senior citizen who has to start job-hunting in his mid-seventies. Strive for a debt-free life.

My Criticisms of the Baby Steps

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

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

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

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

Criticism #1 – Working Longer than Necessary

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

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

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

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

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

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

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

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

Criticism #2 – Paying Higher-than-Necessary MERs

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

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

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

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

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

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

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

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

Student Loans are an Anchor

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

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

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

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

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

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

Nuance…

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

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

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

Investing early is a key to building wealth.

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

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

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

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

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

Some people can’t do both.

Fair enough.

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

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

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

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

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

A Potentially Horrible Boss

This summer, I was lucky enough to have a socially-distanced visit with some friends. As we enjoyed our cheesecake, the host mentioned that he was worried about what would happen when his boss retired. My friend explained that his boss’ child would likely take over the company. This likelihood was causing a good deal of angst since the offspring’s… leadership style… wasn’t particularly inspiring nor admirable. My friend was facing the very serious, very probable situation of working for a potentially horrible boss.

The worst part is that there is very little to be done. My friend has sought other employment, yet that pursuit has not been fruitful. Further, there are bills to be paid. The twin goals of paying off the mortgage and saving for retirement still have to be met. There’s no realistic option of just walking away from the bad situation which is looming. Like a great many people, my friend doesn’t have an income-producing portfolio as a safety net.

I had no words of wisdom for my friend. Instead, all I could do was be supportive and listen. However, that conversation has stuck with me. Perhaps I don’t have a way to fix the situation for my friend. Yet, I’m confident enough to believe that I do have a suggestion for those who aren’t yet in my friend’s circumstances.

Assess Your Situation

If you are very, very lucky, then you’re working for pay doing something that gladdens your heart. You’re satisfied with your work life and it’s a source of contentment for you. Your boss is an asset, rather than a point of stress. Still… you should always be aware that this is a situation that can change on a dime. Lots of things can happen. Maybe your current boss takes a promotion, moves away, retires or gets sick. In any of these situations. you’re suddenly facing the risk of a potentially horrible boss taking her place.

Trite though it might sound, the following statement must be acknowledged. Most of us do not have the financial ability to just walk away from our job. We realize that having a steady paycheque ensures we can feed ourselves and pay the bills. The vast majority of people have to keep working and hope for the best. In other words, a potentially horrible boss is a source of stress and there’s little that many workers can do to avoid it.

You, Gentle Reader, don’t have to be one of those people.

Get Horrible Boss Insurance

This is a form of insurance that insulates you from the risk of working for a potentially horrible boss. Unlike car insurance or house insurance, you don’t pay a premium to a company to acquire it. Nope! This is the kind of insurance that you create for yourself.

How so? By creating your own income-producing portfolio over time. The amount of time is up to you. You can save a little bit over the very long-term. Alternatively, you can save a lot over the short-term and engage in extreme frugality by saving up to 70% of your income. Or you can find a balance that works on a time-table that best suits your personal goals.

How you invest your money is your choice. Save-invest-learn-repeat. This is my mantra. Feel free to adopt it as yours too. You can learn about whatever investment you want. Some people are big fans of real estate investing. This is not my area of expertise but I have been devoting some time to learning about it over the past two years.

If you’ve been here for awhile, you’ll have noticed that I’m a big fan of the stock market and dollar-cost averaging over time. You’ve often heard me suggest that you should invest a portion of each and every one of your paycheque in a broad-based equity product, preferably an exchange-traded fund. The fees for ETFs are lower than the fees for mutual funds. Stock-picking is most likely not your strong suit so I’d advise you to only do it with 10% (or less) of your entire portfolio.

Money in the stock market is going to be invested for the long-haul. That means it is going to be invested in the stock market for decades. To be clear, your stock market investment money is separate and apart from your emergency fund money. It also shouldn’t be co-mingled with money you set aside for short term goals, which are those that are to be funded within a year or two. Oh, and you’re going to want to be very disciplined about ridding yourself of debt as fast as you can.

Money Buys Options

Gosh! That sounds like a lot, doesn’t it? Saving for retirement. Building an emergency fund. Funding short-term goals. Paying off debt! Life is meant to be lived and no one wants to be richest person in the graveyard.

Blah-blah-blah!

Believe you me when I say the following. The day that you have to work for a potentially horrible boss, you will not regret having money in your emergency account. You won’t ever regret having a second, back-up income generated by your portfolio. The Ad Man and the Creditor want you to believe that it’s some monumentally unfair disadvantage to not spend every penny you make. They are lying to you! The most precious thing in the world is time. Ironically, it is one of the few things that money cannot acquire. The second most precious thing in the world is having options. Money most definitely purchases options.

If a potentially horrible boss is on the horizon for you, then I promise you that you will want to have the option of getting away from that person. Having money allows you to do that. You need not work for someone who is going to make your life a living hell for want of money.

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Weekly Tip: Make extra payments towards your debts so that you minimize the interest that you pay to your creditors.

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Well, Gentle Readers, there are currently less than 60 days left in 2020. How are you doing with your financial plans? What needs to be tweaked for next year? Which financial habits will you keep in 2021?

Invest Your Money or Pay Down Debt?

The question often arises about whether it’s better to invest your money or to pay down debt.

My position is that you should do both. The reality is that the younger you are, the more time your money has to compound if invested. From the tiniest acorn did the mighty oak grow, and all that. So if you’re younger, you have time on your side. More time means a longer investment horizon, which means larger returns by the time you retire.

On the other hand, debt inhibits the growth of your net worth. The longer it takes you to pay off your debt, the more interest you pay to your creditors. This is not an ideal situation. Instead of paying interest to your creditors, you should be earning a return on your investment. However, you can’t earn any returns if you don’t have the money to invest.

So here’s my proposal – invest while you pay off debt. Why can’t you do both? If the interest rates on your debt are lower than what you can achieve over the long term in the stock market, then pay the minimum on your debts in order to maximize your investment returns.

Mortgages

At the time of this post, 5-year mortgages in Canada can be had for 2.5% and lower. These are lifetime lows, which will likely be around for the next 2 or 3 years. If you’re in a position to lock in one of these ridiculously low rates, then you should seriously consider doing so.

If you have a mortgage and you’re paying the bank 2.5%, then I don’t want you to make extra payments on the mortgage. I want you to invest in the stock market for the long term. Over the long term, the stock market has returned an average of 7% to investors. I want you to learn about investing in index funds. Then I want you to pick one and to start automatically investing your money.

When mortgage rates are at historical lows like they are at the time of this post, there’s no sense in repaying your mortgage faster. So long as you can earn the long-term average stock market return, you’ll be earning 3 times the amount you’re paying on your mortgage. It would be stupid not to do so while you can.

Vehicle Loans

The same rule applies if you have a car loan at a reasonable interest rate. My definition of reasonable is that it is less than 6%. If you’re paying a higher rate, then you can split your investment money in half. One half will still be automatically invested. The other half will be sent to your vehicle loan so that it is paid off faster. When the vehicle loan is gone, then you can put the money back towards your investment. You’re also free to use your regular car loan payment for investing or for something else.

Let’s say you have a monthly car loan of $750 and you’ve got a 60-month loan at 6% (or higher). And you also have $500 per month that you’re investing for long-term growth. Divide the $500 in half, so that you’re now paying $1000/month on the car payment and directing $250/month into your investments. When the loan is paid off, you can go back to investing $500/month. You’ll also have $750 in your budget that no longer has to be sent to someone else. You can keep the $750 in your own pocket.

Oh, and the next time you want to buy a car? Save up for it first! If you can find the way to pay a loan of $750, then you’re just as capable of squirrelling $750 away every month until you can pay for your next vehicle with cold, hard cash.

Student Loans

By now, you should be picking up what I’m laying down.

In the interest of transparency, I will tell you that I graduated with $15,000 of student loans. I made it my mission to repay those loans within 2 years of graduating. With the benefit of hindsight, I have to say that my net worth would be higher today if I’d invested my money in the stock market and stuck to the 9-year loan repayment plan that I’d been on. My shaky memory suggests that my monthly payment had been something like $150. If I’d known then what I know now, I would not have made double and triple monthly payments to pay that loan off so damn fast.

Today, people are graduating with six-figure debts. And the word on the street is that they are not all finding high-paying employment with their very expensive educations.

I still maintain that if you’re in your 20s and 30s with a large student loan, it makes sense to pay the minimum on those loans and invest in the stock market. When you’re in your 20s and 30s, you still have 3-4 decades for the money to compound if you’re not planning on early retirement. Your income will go up as you expand your skillset, refine your expertise, and gain useful experience. Use 25% of your increased income to bump up your student loan repayment. Take another 30% to inflate your lifestyle just a little bit! Make sure the remaining 45% of your increase is invested.

The analysis has to be a lot more nuanced if you’re still paying off a six-figure debt in your 40s and 50s. The question of whether to invest your money or pay down debt isn’t as crystal clear. What I do know for sure is that it’s almost always a bad idea to retire with debt.

If you have student loans in your 40s and 50s, then you need to divide your investment amount between your portfolio and your student loans. Pay those loans off before you retire! Once they’re gone, go back to ploughing as much money into your investment portfolio as you possibly can. Your investment window is going to be smaller due to age. However, that doesn’t lessen the onus you have to yourself to fund your retirement.

Without a solid investment portfolio whose returns outpace inflation, a person on a fixed income is going to have to pay for everything with dollars that are always losing value. Believe me when I say that you don’t want to be paying off debt in retirement.

I’m telling you right now that you need to have a portfolio that can support you when you no longer have employment income. As I’ve said before, pensions are disappearing. It’s on you to set aside enough money for your golden years. Unless you remain healthy, getting older is going to suck enough on its own. You need not make things worse for yourself by being old and burdened by student loans debt.

The Exception!

If you’re carrying credit card debt, forget about investing until that debt has been eradicated. Credit cards carry double-digit interest rates. The chances of your investments giving you a return higher than the interest charged on credit cards are exceedingly slim.

Focus on getting out of credit card debt, then you can start investing your money. Here are the steps to getting out of credit card debt.

  1. Stop using your credit cards to buy things.
  2. Make extra payments to your credit cards until each card is paid off.
  3. As each card is paid off, do not use it again.
  4. When all cards are paid, take your former credit card payments and invest them for the long term in an equity-oriented index fund.
  5. Do not use your credit card without first saving up the cash in your bank account to pay for the eventual monthly bill.

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Weekly Tip: One thing to keep in mind that your portfolio doesn’t stop working just because you do. When you stop working, you won’t simply cash in your portfolio. Rather, you’ll structure your portfolio so that it’s continuously invested in manner that creates a cash flow for you until the day you die. This means that equities will continue to be a steadfast workhouse, ensuring that your portfolio lasts as long as you do.

Beware the Minimum Payment!

Right from the get-go, I’m going to ask those of you who already know this to forgive me for stating the obvious. Minimum payments benefit the lender way, way, way more than they benefit the borrower.

Beware the minimum payment!

When you borrow money from the lender, you’re taking out a loan. And when you do so, you’re agreeing to pay interest on the money borrowed. The loan is governed by a contract, so the very best time to amend the terms of the contract – and thereby the terms of the loan – is before you sign the contract!!! In other words, don’t take a loan if you don’t believe that the terms of the loan will be beneficial to you.

The repayment terms of the loan are set out in the contract. If you don’t like them, or the lender won’t change them, then don’t take the loan. This is the most effective way for you to avoid having repayment terms in your life that may cause you financial grief in the future.

And for those wondering how to buy what you want without a loan, the answer is that you will require a combination of cash and patience. Save up your money then make the purchase. You’ll get what you want. You won’t pay any interest. It’s the ideal situation so strive to make it your reality.

However, there are times when you simply need to borrow money to get what it is that you want. If this is the situation in which you find yourself, then I want you to be very aware of the trap of minimum payments.

Making minimum payments benefits the lender because they can charge you interest on the outstanding loan balance for the longest period of time. If you take out a 5-year car payment, then the loan is structured so that the lender earns as much interest as possible off the loan. In other words, you as the borrower will pay back the maximum amount of interest.

The legal way to minimize the amount of interest you re-pay on the loan is to make extra payments. Get a second job – sell some stuff online – cut some subscriptions from your life. However you choose to find extra money is up to you. The bottom line is that you take that extra money and apply it to your outstanding loan. Go back to the car loan for a hot minute. If you can make extra payments on the loan and pay it off in 2 years instead of 5, then you will keep three years of interest payments in your pocket rather than sling that money into your lender’s pocket.

As of the date of publishing this blog post, the banks in Canada are allowing mortgage holders to apply for a six-month deferral of their mortgage payments. If approved, people who have mortgages won’t have to make mortgage payments for six months. It’s called a mortgage deferral.

This deferral means that the people who took out a mortgage will have to repay the money, eventually. (I’m not an expert on how the program works. If you need the details, please contact your bank.)

Make no mistake. The banks want their money back. The banks lent the money to borrowers at an agreed-upon rate of interest for an agreed-upon period of time. That the banks are allowing borrowers to defer repayments on their mortgages is quite unprecedented in my experience. What I wonder is whether the borrowers understand that a deferral of their mortgage payment is not the same as a waiver. The deferred payments are still outstanding. And borrowers will continue to owe interest on those payments until the money is repaid to the lender.

Again, the banks want their money back. So if a borrower receives a deferral from their bank, the borrower still has to repay that money. And guess what? Interest will continue to accrue on that deferred payment.

What? Are you surprised? Did you think that the banks would stop the interest clock from running? If so, gently hit yourself on the head with a hammer. Of course, the banks are going to continue to charge interest on their loans.

This is not a debate about the morality of the banks during the COVID19 pandemic. What I want to impart in this post is that the second best option is to get out of debt as fast as possible. Minimum payments are not your friends. In the case of a mortgage, the numbers are a lot bigger so a deferral is going to mean a much higher amount of interest will be charged during the deferral period.

If you’re considering applying for a mortgage deferral, keep the following in mind. A deferral means that the money is not being paid back as agreed upon in the loan. It does not mean that the money remains outstanding without interest being charged by the lender.

Allow me to state this concept another way. The interest only stops accruing when the loan is repaid. Paying later means paying more interest. The only way to avoid the interest charge is to repay the loan.

Beware the minimum payment! It never benefits the borrower.

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Weekly Tip: Once you’ve finished making debt payments to a lender, continue making those same payments to yourself. Re-direct your former debt payments to a high interest savings account. You were living without the money when you had a debt, so continue to live without that money when the debt is gone.

Per Diems Move the Needle

One of the best things about being a Singleton is that you alone are responsible for your financial choices. You need not debate each purchase nor do you need to compromise with anyone about how your household’s money will be spent. You have the freedom to choose which of your life’s goals to pursue and how to fund them.

Based on my own experience & observations of others, personal goals often have a financial component. Money has to be sourced somehow. Children have the benefit of someone else generally paying for their lives. They get to write lists to Santa Claus to get what they want. They can even leave teeth under their pillows in order to wake up to money. Adults – not so much. (Some of my friends pay their kids $5/tooth… the power of inflation is real, ladies & gentlemen.)

Enter the per diem

Pray tell, Blue Lobster – what is a per diem?

I first learned of them when I started travelling for work. On top of reimbursements for my meals & accommodations, I earned a per diem for the incidentals that I might have to buy while away from the office and home. Most of the time, I didn’t have to use my per diem so I would simply sock it away in a savings account.

In terms of personal finance, a per diem is simply is a daily amount of money that you pay to yourself.

You can create your own per diem by deciding how much money you want to pay yourself each day. You know how you choose to pay a certain amount each day for rent/mortgage? Student loan payments? Credit card bills? Utility payments?

Add up each of these payments then divide that amount by the number of days in the year. This is how much you’re paying on a daily basis for each area of your financial life. If you haven’t already done this exercise, trust me when I tell you it’ll be an eye-opener!

Next, I want you to pick a number and pay that to yourself. It could be $1 per day, $10 per day, or $100. The amount is up to you since you know your numbers better than I do. Keep in mind that a higher per diem means that you’ll reach your goals and accumulate money faster.

Why do I like this money hack?

I want people to be aware of how they spend their money. I hear so many people complain about never having any, yet I never hear them articulate where it goes. To my way of thinking, setting a per diem forces a person to be very specific about what they want their money to do. They are assigning a purpose to their per diem money. They are giving those particular dollars a task that goes beyond the basic elements of survival. The per diem dollars are going to be allocated towards a person’s most important financial goals, not just towards the nice-to-have-but-not-important-stuff.

Spend your per diem however you want!

Yes – that’s right. At the end of the day, this is your money and you’re the one who gets to decide what to do with it. I’m not familiar with your heart’s deepest desires. I’m a fan of the theatre. Your joy may lie in beach volleyball championships, taking self-development courses, Grand Prix auto-racing, or raising salamanders to sell online.

After selecting your per diem amount, your task – should you choose to accept it – is to focus your efforts on the goals that have the highest meaning for you. The order of your goals isn’t set in stone. Again, it’s your life and your money. You’re the lucky duck who gets to determine the order in which your goals are satisfied. Once you’ve accomplished the highest priority goal, you can move on to the next one and keep moving down your list until you’ve achieved what’s most important to you. In this way, your money is working hard to create the life that you want to live.

For some people, the goal is to take a really awesome vacation once a year. That might mean renting a houseboat for a week every summer. It could mean a weekend with friends or family at a favourite campsite. Maybe it means a six-week trip overseas. However an awesome vacation is defined, the per diem money can help pay for it if you so choose.

For other people, the goal is to pay off a debt, to build an emergency fund, to save for a down payment, to go back to school, or to renovate a home… The goals are as endless as your imagination. The sad reality is that your paycheque isn’t infinite. (And if it is infinite, please leave a comment explaining how you’ve managed to create such a wondrous thing!) No matter its size, your income has limits. That’s why per diems are such a great money hack. They help you to satisfy those desires that are most important to you. Nothing wrong with that!

Two things to keep in mind about per diems.

One – don’t be deterred by how long it takes to reach a goal. It’s obvious but I’ll say it anyway. Some goals take longer to reach than others depending on the size of your per diem. Buying tickets to a concert might take a few days or a few weeks. Gathering the down payment for a second home in Cinque Terre might take a bit longer.

Two – if you use your per diem to pay off debt, then you an added benefit once the debt is gone. Your former debt-payment can be used to increase the size of your per diem. A larger per diem means that you can achieve your next goal even faster. There’s always the option of simply frittering your former debt payment away on stuff and keep the same per diem amount. As always, you’re the one in control of allocating where your money goes.

In my humble opinion, paying yourself a per diem gives you the psychological boost of knowing that each day is taking your closer to your goals. When your head hits your pillow, you can be satisfied knowing that your money is working towards building the life of your dreams. And who doesn’t want that?

Debt is Corrosive to the Creation of Intergenerational Wealth

Debt is a cancer to building intergenerational wealth. The phrase intergenerational wealth conjures up images of the very, very rich who are able to bestow entire empires upon their progeny. Truthfully, the concept doesn’t require anything quite that elaborate. My definition of intergenerational wealth is the ability to provide financial assistance to your offspring in order to help them get ahead as adults. It’s above and beyond that level of sustenance that is legally required of parents. Intergenerational wealth is what you use to assist your child in achieving a better life – financial or otherwise – than the one you’ve had. This type of wealth is created when you’ve acquired assets that can be utilized to fund the major purchases of your child’s life when the time comes.

A few weeks back, I read an article about how black women graduate with the highest amount of student loan debt. It got me thinking. How could these women build wealth for their families if they were saddled with big student loans which required years to repay? And what if they also had mortgages, car loans and credit card debt while carrying student loan burdens? How much money would they have to earn to both pay off all debt and save enough to invest in the family’s future? What kind of impact does debt – student loan or otherwise – have on a parent’s ability to build intergenerational wealth?

My ultimate conclusion was that all debt is an inhibitor to the creation and growth of intergenerational wealth, regardless of the demographic group to which the debtor belongs. Debt of any kind impedes the accumulation of wealth because you’re so preoccupied with paying someone else that you rarely get the opportunity to pay yourself first. Obviously, larger amounts of debt have a greater negative impact on the creation of wealth because it takes so much longer to pay it back. At the end of the day, debt is corrosive to the accumulation of wealth.

If you’re making payments on your student loan, your car loan, your credit cards, and your mortgage, then your money is not being put towards your family’s future. Whatever the size of the debt obligations, whether $500 per month or $5000 per month, the fact remains that you’ve committed to giving that amount of money to someone else in order to pay down your outstanding debt. You’ve agreed to give away the money that could have been used to build a foundation of wealth for yourself and your family.

Recently, I read an interview with a millionaire where a cycle of intergenerational wealth was put into place. The millionaire being interviewed was the daughter of parents who had worked very hard at regular jobs, while also running their own side hustles. Her parents had worked very hard to create wealth for their family. They taught their children the same principles, and the millionaire in turn taught those principles to her own two sons, the grandchildren. Over time, this family had created sufficient wealth that offspring who needed a mortgage did not have to go to the bank. Instead, mortgages were issued within the family from one generation to another. When the millionaires’s sons graduated from post-secondary schooling, each of them already had $200,000 in their investment portfolios. Their money had grown from cash gifts bestowed upon them by the grandparents. (Check out ESI Money if you want to read more millionaire interviews.)

Many parents want to pay for their children’s educations. This is a worthy goal and I have no quarrel with it. In today’s world, an education opens doors and provides opportunities that would otherwise not be available. An education is not a guarantee of success, but it is certainly an asset in the pursuit of success. Parents who save for their children’s educations are providing their children with a gift, i.e. starting their adult lives without student loans. They are gifting their children the opportunity to start with a clean slate. Once employed, their children will not be required to send a portion of their paycheques to the student loan people. Instead, if the children are wise, they will start using that portion of their money to invest for the future and to buy cash-flow positive assets…assuming, of course, that the children appreciate the opportunity provided by their parents’ gift of a debt-free post-secondary education.

The children who wisely take advantage of this opportunity are then in a position to do the same for the grandchildren, when they make their appearance. The children will have continued the tradition of ensuring that the next generation begins adulthood without debt. If the children were also fortunate enough to have invested in assets the grew over the years between their graduation and the start of the grandchildren’s post-secondary education, then those invested assets may still be available for the benefit of the grandchildren and the eventual great-grandchildren.

The cycle of passing down intergenerational wealth cannot flourish if the parents or the children are required to send part of their income to creditors, year in and year out. Creating intergenerational wealth begins with the basic principle of paying yourself first. The accumulation of wealth comes from the act of setting money aside from your paycheque and investing it for a positive return. If your money from today’s paycheque is being used to pay for yesterday’s purchases, then you’re impeding your ability to invest money for your future and for your family’s future. In other words, today’s paycheque cannot be used to pay for tomorrow’s needs and opportunities. Once you’ve given your money away to pay off debt, then your money is gone forever and you must find a way to earn more. Money spent on repaying debt can never be used to change your family’s future.

I am not an expert in parenting, but I have observed families in my life who have established a positive cycle of investing in businesses and assets while also saving money for their offspring’s future. These families are ensuring that the financial lessons are passed down so that each successive generation has the money to live a comfortable life and to both grow and preserve their wealth. One of the other things I’ve observed about these families is that they do not have debt.

I’ve watched as the parents gifted down payments for homes to the children. I’ve seen the parents assist the children to buy businesses. I’ve observed the children purchase income-producing rental property where their parents did not have intergenerational wealth to pass down. Where the parents didn’t have money, they had worked in real estate and had advice to give to their children about how to assess investment properties.  The children’s rental properties will become part of the intergenerational transfer of wealth to the grandchildren. Personally, my brother and I benefitted from such intergenerational transfers of wealth by having nearly all of our post-secondary education funded by our parents.

Please don’t get me wrong. Receiving a down payment didn’t eliminate the children’s obligation to pay the mortgage. However, the gift of a down payment meant that the children were able to start building equity in their homes sooner than their contemporaries who had to save up a down payment.

Even where the parents assisted a child to buy a business, there was still the need for a commercial business loan from the bank which had to be repaid. The parents’ transfer of wealth assisted the child to take advantage of the opportunity to buy a business that he understood intimately at a time in the child’s life when he did not have the money to buy the business himself. In that situation, the child received another form of intergenerational wealth – his parents worked at his business for free for the first couple of years until he got himself established enough to hire his own staff.

The children whose parents did not provide them with intergenerational transfers of wealth still took it upon themselves to start creating a strong financial foundation for their own future children. They purchased property, lived in it, and then rented it when they moved to the next home. Did they have to use mortgage debt? Yes, of course. Are they using the underlying asset to create positive cashflows in their lives? Yes, they are. The tenants pay the mortgage debt, and the cash flow from the properties is directed towards improving the families’ financial future.

I have also observed other families who seemed destined to live paycheque to paycheque. From what I can see, they make decisions with their money which will always require them to remain in debt servitude. From the outside, it looks like they actually love being in debt to someone. When a car breaks down, a brand-new car with a $700 per month payment is immediately purchased. There is no consideration given to the option of buying an adequate used car that fulfills the same purpose of safely going from point A to point B. Student loan debts are not aggressively paid down as soon as possible due to other priorities. Such loans last for ten or more years after the former student has graduated when sustained monetary effort could have eradicated the debt in three years or less. Mortgages are taken out when there is insufficient household income to handle the monthly payment, the utilities, the taxes and the other associated costs of running a home. Unfortunately, the mortgage-holders do not earn high incomes so they’ve essentially made themselves house-poor. They will be forced to live paycheque-to-paycheque until the mortgage debt is gone or until the bank forecloses on them for non-payment.

These families have purposely created situations for themselves where they are unable to create any wealth to pass on to the next generation. In fact, they cannot even create wealth for their own retirements. They purposely seek debt-burdens rather than debt-freedom, and I haven’t been able to figure out why. At the same time, these families want to live a life that they could actually afford if they didn’t have debt payments. They want the toys and the travel and the comforts that come with debt-free living yet they are not willing to do what needs to be done to rid themselves of debt.

Perhaps the distinction between the two families comes from the debt-free choosing a long-term view while the indebted choose a short-term view? I will continue to think about why some people get it and some people don’t, how some families are able to create a comfortable legacy while others are not. In the end, I guess the reason for the distinction doesn’t matter too, too much. The bottom line is that debt always inhibits the creation and the accumulation of intergenerational wealth. Debt prevents people from saving for their families’ future since it requires people to pay for their past purchases.

Just imagine what you could do for your family if you didn’t have to repay debt. How different would your life be? Is there something that you would be able to give to your children and your grandchildren that you can’t give them right now? How much could you change your family’s future if debt were not a part of your life?