Category: Money Mistakes

My Money Mistake – Investing vs. Paying Off a Mortgage

One of the eternal questions that’s raised in the personal finance world is whether one should be investing or paying of a mortgage. I made my choice 15 years ago. In hindsight, my choice could qualify as a mistake but, if so, it’s not the worst one I’ve ever made. As I’ve said before, personal finance is personal and it should be about what makes you the most comfortable when it comes to investing your hard-earned money.

I was raised to not carry debt. It’s a good lesson, and I can’t disagree with it too, too much. That said, there are nuances to debt that I did not learn nor understand until after I’d paid off my mortgage at age 34. I’m going to share my perspective of those nuances with you so that you have the information to make the best decision for your own life and goals.

Different Choices, Different Risks

Jordan and Leslie are both 30 years old when they finally buy their first house. They both have 25-year amortizations, and they both have an extra $1500 per month that can be used for investing or paying down the mortgage.

Jordan decides to pay off his home early. His extra $18,000 per year goes into making extra mortgage payments. He’s in line to pay off his home in 15 years when tragedy strikes. At year 14 of the amortization, Jordan loses his source of income and cannot make his mortgage payments. Within six months, he loses his house to the bank in foreclosure. After years of making mortgage payments, Jordan is left without a house and without an investment portfolio. He has to start over from scratch – find another job, build another down payment, start making mortgage payments all over again, figure out how he’s going to pay for his retirement.

Leslie makes a different choice because she knows that time lost can never be regained. Investments need to be made early so that they have the maximize time to grown. Leslie decides to pay minimum monthly requirement on her mortgage, which commits her to the full 25 year amortization. Leslie invests her extra $1500 per month by fully funding her TFSA and RRSP every single year. Once those two registered plans are maximized, she invests the remaining money in a non-registered investment plan through a brokerage. In short, Leslie chooses to invest $18,000 per year. As with Jordan, Leslie loses her employment income at year 14 of her mortgage.

Leslie’s not worried about losing her house. Why not? Her investments have grown quite nicely over 14 years. She has money in the bank. Her dividends and capital gains are enough to provide her with cash flow to pay the mortgage. They’re not yet enough to replace her entire former income, but they’re enough to keep her afloat until such time as she finds another job.

Even if Jordan and Leslie hadn’t lost their jobs, Leslie would still have been wealthier than Jordan at the 25-year mark. Why?

Leslie’s investments would have had 25 years to grow while Jordan would have only had 10 years of growth. Even if he starts investing his entire former mortgage payments the day after his mortgage is paid off, Jordan’s investments will not grow as large as Leslie’s. Her investments have had an extra 15 years to grow, assuming the same rate of return for both portfolios. Both Jordan and Leslie would have a paid-off homes at the 25 years mark, but Leslie would also have a much bigger cash cushion than Jordan.

Hindsight is 20/20.

Now, don’t get me wrong. The logic of this example was lost on me when I took out a mortgage on my home. As a matter of fact, I don’t even think I saw the options presented this way until after I’d paid off my home. If I’d seen it sooner, I would have atleast thought about it while paying off my biggest debt.

With the benefit of hindsight, I now realize that I should have followed Leslie’s lead. It’s been nearly 25 years since I took out my first mortgage. Had I kept that mortgage and invested my money instead, I’d be that much closer to financial independence. Instead, I chose to become debt-free in my early 30s and have been diligently investing in the stock market for the past 15+ years.

My parents taught me to stay out of debt, and I heeded their advice. Was I wrong to do so? Not really… Yet, if I had learned about more about investing and the compounding of time, I would have made a better-informed decision. I might have better appreciated what it meant to lose those early years of compound growth as I worked very hard to pay off my home in 5 years.

Since you’re best-placed to know your own life goals & dreams, you will make your own choice. Investing vs. paying off a mortgage is a major financial decision. The consequences of the choice won’t be known until long after you make it.

My hope is that you make an informed decision. While you can’t know the future, you can influence it by making wise choices and planning accordingly.

There’s nothing wrong with changing course, if necessary.

If you’re currently making extra payments but you’re doubting that choice, then know this. It is perfectly okay to change your mind. When you know better, you do better. Maybe you stop the extra payments for a few months while you stuff your RRSP and your TFSA. Perhaps you decide to alternate – one month the extra money goes to your mortgage and the next month it goes to your investments. You have to do what makes you most comfortable. And if you decide to keep paying off your mortgage, then do so with the full knowledge of what that might mean for your future.

We no longer live in a world where the majority of people have pensions. For the majority, saving for retirement is up to each individual person. Lifetime employment with the same employer is no longer the standard. Committing to decades of mortgage payments without the security of gainful employment is risky. In Canada, houses are ridiculously expensive so mortgages are often several hundred thousand dollars. I understand why getting rid of such a large debt is a huge priority for people. At the same time, getting out of debt shouldn’t diminish the responsibility you have to funding the Care & Feeding of Senior You Account.

When I think about my own choice through the lens of maximizing my wealth, I feel that I made a mistake and that I should have kept my mortgage for as long as possible in order to invest. Yet when I consider the fact that employment is not guaranteed and funding retirement is on the shoulders of the employees, I think I was wise to eliminate my mortgage as fast as possible.

Will I have the absolute maximum amount for my retirement? No, but I’ll still have enough and that’s what matters most.

Buy and Hold Works!

As a non-expert financial person, my advice to nearly everyone is to adopt a buy and hold strategy because it works over the long-term.

When the pandemic was declared in March 2020, the stock market took a dive. And it wasn’t a sweet, gentle decrease either. It was a stomach-churning drop that saw me lose 1/3 of my portfolio’s value in the space of three weeks. At one point, I just stopped checking the value of my holdings. It was simply too painful!

Despite the drop and despite seeing years of growth wiped out in a matter of weeks, I continued to buy and hold. Every two weeks, a chuck of my paycheque went to my investment account. I stuck to my routine of buying units in my exchange-traded fund. In a world gone topsy-turvy due to a brand-new-to-humans virus, my investment schedule was the one constant that I could rely on.

Besides, I had learned my lesson from earlier market crashes. Back in 2011, the stock market crashed. I made a monumentally regrettable error when I stopped my contributions.

Wrong choices.

I was scared and naive, and I didn’t understand that the market crash was the very best time to be buying into the market. I wanted to wait for the market to recover a bit before adding new money to my portfolio. In reality, I should have been shovelling money into my investment account. Making hay while the sun rises and all that jazz.

Instead, I sat on cash in the bank for six months until I realized that I was being stupid. Who was I to know when the perfect time would be to re-start my contributions? I might be many things but a stock picking expert I was not!

So I picked a day and I just started investing again. And I haven’t stopped. As my income went up, I increased my bi-weekly contributions accordingly. A big chunk of each raise went to my investment account, while a little bit stayed in my pocket to increase my lifestyle. It’s the whole balancing act behind the principle of Save-Some-Spend-Some.

Instead of tying myself into knots trying to determine the very best time to invest my money, I simply invest my money every two weeks like clockwork.

COVID-19 didn’t matter

When the pandemic hit, and one third of my portfolio was obliterated in less than a month, I didn’t worry about my investment portfolio. I won’t say that I enjoyed seeing the daily decreases in my investment balances. What I will say is that I decided not to repeat the mistakes I made in 2011.

With age, comes wisdom… or so I’ve been told. In my case, there was truth to these words. Having missed an incredible investment opportunity 10 years prior, I vowed not to make the same mistake this time around. Even though the rollercoaster that is the stock market downward on one of its biggest descents, I continued to invest my money. I told myself that the losses would be short-lived and that my portfolio would recover.

My words proved prophetic. As anticipated, my portfolio has recovered quite nicely and I’m ahead of where I was just before COVID-19 became a permanent part of our world. I’m quite confident that the Care-And-Feeding-of-Blue-Lobster-Fund will be perfectly capable of replacing my income when the time comes that my employer and I part ways.

If nothing else, the pandemic has solidified my belief that buy and hold works. It’s a simple and straightforward strategy that works because you don’t have to tamper with it too much. The investor has two main hurdles. One, she has to open an account and start contributing. Two, she must continue to contribute while ignoring the talking heads, aka: financial experts who haven’t achieved notable wealth.

The investor doesn’t have to worry about timing the market. Buy and hold works because it puts the emphasis where it should be, on time in the market. It solves the problem of which stocks to buy. Purchasing units in a broad-based equity exchange traded fund means that the investor is buying into a diversified group of stocks. Stock picking is not involved. And that’s fantastic since analysis-paralysis is one of the biggest impediments to success in investing.

It makes sense, doesn’t it? If you happen to pick the wrong stock and lose money, then the odds are good that you won’t be overly eager to invest even more money into the stock market. You might even decide that you’ll never invest in the stock market again. To each their own… but that’s not a great response to having your butt kicked in the stock market.

My Next Steps…

The next move for me will be the same one I’ve been making for the past 10 years. When my paycheque hits my account, a big chunk of it will be automatically siphoned off and sent to my investment account. And on the appointed day, I will buy more units in my chosen investment vehicle. No muss, no fuss. There will be no worry about when to invest. And I won’t spend any of my precious, precious time on trying to find the next Tesla stock.

Instead, I will stick to what has worked in the past and what promises to work in the future. They say that there are no guarantees besides death and taxes. And they may very well be right. I’m going to propose that the buy and hold strategy ought to be viewed as guaranteed-adjacent.

Go Beyond the Letter “A”

With age comes wisdom…or so they say. Speaking from personal experience, I can say that my wisdom is arriving in dribs and drabs. For their part, the birthdays arrive at a seemingly more frequent pace. I’ve made plenty of money mistakes, but I’ve finally learned to go beyond the letter “A”.

Blue Lobster, what the hell are you talking about?

It’s simple. I’ve finally learned to take my own advice about continuing to learn about personal finance. When I was younger, I would read a book and believe that the author’s words were the definitive way to do one particular thing. It never occurred to me that the author wasn’t a subject matter expert. After all, she or he had written a book! Who was I to doubt their greater experience? Or to even suggest that their advice/steps/insight might not be applicable to my individual circumstances?

Thankfully, the good folks behind the X-Men franchise created a villian who uttered words of wisdom that I’ve since learned to implement in my own life: “Take what we need, gentlemen.”

And later on, I came across a variation of the above: “Take what you need. Leave the rest.”

Looking back, I would’ve made fewer money mistakes if I had come across this wisdom sooner. For example, one of my biggest money mistakes was to focus on eliminating debt while ignoring the need to invest in the stock market at the earliest opportunity. I read The Total Money Makeover many years ago. I followed this book’s instructions diligently and focused extremely hard on getting myself out of debt.

What I regret is that I didn’t consider the possibility of investing my money sooner while paying off my debt slightly less agressively. My money mistake was in pursuing one path without giving adequate consideration to the other options open to me. I read this one book and I assumed that it was the optimal path for my life & my money. Then, I followed its steps without question.

In other words, I did not go beyond the letter “A”… I made the mistake of believing that the starting point represented by the letter “A” was the whole alphabet and that I didn’t need to learn anything more than what was in the pages of this single book. I was young and inexperienced, but also so very, very wrong.

Looking back now, I see that taking advice without considering my own individual goals and priorities is never the smart thing to do. There is more than one way to achieve the ultimate objective. Had I taken the time to consider the option of investing sooner while taking slightly longer to pay off my debt, then I would be in a position to retire now. One of my long-term goals has always been to retire as soon as possible instead of waiting until my 60s. By following the path set in the TTMM book, instead of considering all of my alternatives before choosing a course of action, I’ve delayed my retirement date by atleast 5 years. Ouch!

As I’ve written before, I wholeheartedly accept some of the Baby Steps as set out in TTMM, but I do not accept all of them as the one true path to financial prosperity. For those who are financially fortunate enough to do both, I would suggest investing in stock market while also paying off non-mortgage debt. The debt will eventually be gone, and you’ll be left with an investment portfolio that’s chugging along. At that point, you have the choice of investing your former debt payments in order to meet your financial goals faster. Or you can continue with the same contribution level you’d established while paying off debt and use your former debt payments in other areas of your life. In both options, you have an investment portfolio working hard for your 24/7 while you go about the business of living the life you want to live.

That said, I don’t want you to make the same mistake I did. Keep in mind that I’m not a financial expert nor am I licensed to give financial advice. Rather, I’m just an anonymous voice on the internet that enjoys talking about personal finance and sharing what I know. Consider my words and evaluate the source, then determine whether either proposed course of action gets you closer to fulfilling your life’s dreams and ambitions.

I’ve been working hard to practice taking-what-I-need-while-leaving-the-rest in my life. This new-to-me perspective requires me to broaden my horizons by considering things that I would’ve automatically disregarded. Metaphorically speaking, it’s necessary for me to go beyond the letter “A”. The first piece of knowledge is akin to the first letter of the alphabet. This is not the point at which I should simply stop learning. I need to move to letter “B” if I’m going to maximize my chances of learning how to get what I want.

For me, moving from one lesson to the next involves routinely assessing my habits. Some I’ve kept. Others I’ve discarded. I still read about personal finance every chance I get. I’ve purposefully found people who share my love of this topic. I seek out those who give me insightful feedback on my plans & ideas. No longer do I blindly accept everything that’s posited by someone else. By forcing myself to learn as much as I can, I’ve developed a nuanced approach to new ideas about how to achieve my goals. At the end of the day, I’m much better at assessing when to stick to my chosen path and when to tweak it ever so slightly. No longer do I give the opinions of others more weight than they are properly due.

Today, I ensure that I always go beyond the letter “A”. My dreams and priorities are too important to leave to chance. It’s up to me to do my very best to make them come true. Only time will tell if I’ve minimized my money mistakes. Even after decades of reading and learning about personal finance, my education is still not complete. My knowledge is hard-won, yet there’s still more to learn, more to consider.

You owe it to yourself to pursue your own life’s goals too. You are worthy of having the life you dream of, so make sure that you always go beyond the letter “A”.

Choices have consequences

This week, I had a conversation with a dear friend of mine about spending money. She made the observation that if she spends money today, then there’s that much money less to pay for her retirement. I couldn’t argue with her. In fact, I was happy that someone else in my circle of loved ones was thinking about their senior years. Sometimes, I feel like an outcast when I talk about money. It’s one of the reasons I like to chat about it online. It does me good to know that people in my real world are considering how to accumulate the gold for their golden years.

We live in a capitalist culture where we’re exhorted to spend every penny that we earn. Should our earnings not be enough, we’re strongly encourage to borrow money to spend beyond our means. Look around! Outside of the personal finance corner of the internet, there’s almost no discussion about saving money for emergencies, building up a retirement fund, and creating cashflow to replace your income. Instead the overwhelming message is to work hard, spend money, wake up, repeat.

I think this is a terrible way for people to live.

We were not given life just to work and spend money. Our lives should be about time spent with those we love best. We should be striving to spend as much time as possible engaged in the activities that bring us joy. I’m not convinced that we need to live on a never-ending work-spend-sleep treadmill to be happy. The beauty of financial freedom is that it’s a situation where work becomes optional. Being FI means spending your time as you see fit.

One of the universal truths is that choices have consequences.

I want you to think about what you want from your life. Now, ask yourself if your spending choices are getting you closer to or further from that life. If your choices aren’t getting you closer to the life you want to live, then explain to yourself why that is.

Vicki Robin and Joe Dominguez of Your Money Or Your Life have taught us that money is the manifestation of your life’s energy. In short, you trade your life energy for money. It seems only logical that you spend your energy in ways that create the life that you want to live.

From what I’ve observed, people base their spending decisions on short-term thinking. They’re concerned with today, and possibly next week. They don’t really start to consider the long-term until they hit their late 40s, 50s, and sometimes 60s.

I get it. When I was a teenager, I brought home roughly $108 every two weeks from my part-time cashier job. My money went to dinners at Red Robins with my friends, followed by a movie. It was a simple life, and I never thought beyond my next paycheque. Long-time readers know that I had an automatic transfer in place so that $50 was squirrelled away to my savings account. If I could go back in time, I’d tell Young Blue Lobster to just put that money into a broad-based equity index fund (or exchange-traded fund), and then never look at it. The past 30 years have flown by! Had I started investing at 16 instead of 21, I’d probably be retired by now. I would certainly be financially independent.

However, that didn’t happen and I have to live with the consequences of my teen-aged choices. I’ve spend the last few decades teaching myself about investing. When necessary, I’ve tweaked my investment strategy. I’m forcing myself to ask harder questions, to analyze information more critically. I’ve finessed my money-management strategy to the point where it’s on auto-pilot and needs very little attention from me on payday. My choices from yesterday have resulted in both good and bad consequences for me. Had I made different choices, I would be living with different consequences.

Take some time to assess your money choices. Are the consequences of yesterday’s choices bringing you joy or misery? Maybe neither? Are you committed to making more informed choices in the future? What will you do today to get the consequences you want tomorrow?

The choice is yours.

Start Today

When I started investing, I had no idea what I was doing. It’s true.

I was in my early 20s, and my local newspaper had a column about personal finance. I’m older than the internet, so I grew up reading newspapers. I’ll never forget a column about David Chilton’s book The Wealthy Barber. That book changed my life. I bought it, read it from cover to cover, and decided that I knew enough to start investing. So I promptly took myself to the bank and I opened my RRSP when I was 21 years old.

I had the right idea, but I certainly had more confidence than knowledge at that point. After opening my RRSP, I went on with the rest of my life. Every year, I dutifully contributed to my RRSP… which my parents’ accountant told me wasn’t particularly smart since I was a student and my tax rate was super-low. However, he did tell me that I could eventually take advantage of the the RRSP Home Buyer’s Plan so I kept investing. I didn’t know what I didn’t know, so I didn’t ask the right questions in my 20s.

I got a little bit smarter in my late 20s. By then, I knew enough to stop buying GICs. Rates were no longer super high as central banks got a hold of inflation. And there’d been some chatter in the system about something called mutual funds. Great! That was where I’d put my money. So I did. I opened an investing account at one of the Big Banks and dutifully contributed money into it from every paycheque. I even met with the same banking officer each time, thinking that I was “building a relationship” with a financial advisor. After our third meeting, she told me that I didn’t have to personally make deposits with her each time.

Message received! Obviously, I was wasting that bank’s time so I opened an account at Phillips, Hager & North, now known as PHN. They helped me arrange for an automatic transfer of funds that coincided with my paycheque. I picked a few funds and barely thought about my investments unless I received a statement in the mail. I loved PHN! And would have little hesitation in going back to them if I had to leave my current brokerage.

The only reason I moved is because, sometime in my early 30s, I learned about exchanged traded funds and how they have way cheaper management expense ratios. The MERs at Vanguard Canada were much lower than the MERs I was paying on my mutual funds at PHN… so I moved my money again. Similar investment products for a lower price made more sense to me. Why pay more if I didn’t have to?

By the time I’d hit my mid-30s, my house’s mortgage was paid off and I’d heard of something called the FIRE movement. There were tales of people who pursued something called Finance Independence, Retire Early. It was an idea that spoke to my heart. Several years of working had disabused me of the belief that everyone grows up and is lucky enough to work at careers they love. Early retirement sounded like a brilliant idea!

Some how, some way, I stumbled across Mr. Money Mustache and I fell into a deep, multi-year dive into the world of personal finance blogs. It was intoxicating! So many people who had transformed their dreams into reality. Some of them were a decade or more younger than me, but so what? They had the knowledge that I wanted to have so I absorbed as much of their message as I could.

And I learned so very much! My perspective changed from wanting early retirement to wanting financial independence. In my mind, being financially independent is necessary. Being FI is a way to control your time, your autonomy over your life. It gives you the power to say “No!” to whatever it is that you don’t want in your life – atleast the things that can be controlled with money. Early retirement is still something I want, but it’s an option that becomes available to me (and to anyone else) as a result of financial independence. So many of the bloggers I followed used their FI-status to start working at things that they loved. They still made money, but they did so via endeavours that meant something to them. Unlike working for a boss, they were no longer fulfilling someone else’s dream but were busily and happily fulfilling their own.

Eventually, my self-tutelage led me to the sad realization that my dutiful bi-weekly investment contributions were going into the wrong type of investment. I love dividends! Passive income makes me dreamy. So a steady 4-figure monthly cashflow seemed like a marvelous thing…until I realized that I hadn’t taken proper advantage of the bull-run that existed between 2009 and March 2020. I would have seen much higher returns if my money had been going into equity ETFs instead of dividend ETFs! Had I been investing “properly”, I could have retired by now.

(Big sigh goes here.) There’s no sense crying over spilled milk. Once I realized the error of my ways, I corrected my path. All new contributions are going into equity investments. The longevity charts tell me that I have another 40-50 years***, so I still have a fairly long investment horizon. My course correction cannot change the past, but it can certainly prevent me from continuing what I perceive to be a big mistake.

Why am I telling you all of this?

Simply because I want you to start where you are and build from there. Would it have been better to have started 20 years ago? Sure, but you didn’t so stop dwelling on it. You have today so start today. The information is out there. And, no, you won’t understand all of it at first. So what? No one understands all of anything at first. Have you ever watched a baby learning to walk. Poor little buggers can’t figure out that they can’t move both legs at the same time. The slightest twitch of their heads means they topple over. And the first few steps are always quite wobbly. You know what happens? They always figure it out.

It’s the same with money. Start with setting aside some of your money in a savings account. Then move it to an investment account. Pick a product that has a low MER and invest in it for the long term. Don’t be afraid of the stock market’s daily volatility. You’re investing for years, and the market has always gone up over the long term. Keep learning about investing. Tweak your investing strategy if you have to, but try to keep those tweaks to a minimum. Save – invest – learn – repeat. Start today.

*** Never forget that you need your money to work hard for you, even after you retire. Don’t believe that you can stop investing in equities just because your old age security payments have started hitting your checking account.

Mistakes with Money – Hindsight is 20/20

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

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

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

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

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

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

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

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

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

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

Why weren’t they aligned?

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

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

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

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

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

Do You Have a Car Fund?

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

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

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

How much should you be contributing to your car fund?

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

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

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

Can your budget handle a car payment?

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

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

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

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

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

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

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.

Free Shipping

Who doesn’t love the word “free”?

This week, I decided to buy myself some new jeans. I went to the website of one of my favourite jeans-buying retailers, and discovered to my delight that everything was 50% off. Hooray! Jeans I want at a price I wanted to pay… how could I possibly ask for anything more?

And then another little banner popped up on my screen. I could get free shipping if my purchase was a minimum of $100.

Great googaly-moogaly! All I had to do was spend more than I’d planned in order to have someone else pay to ship my desired items to me? I could do that! I’d be an idiot not to spend more than I’d planned to spend, wouldn’t I? And I don’t like to think of myself as an idiot so the only logical thing to do was to search for a way to spend another $40.

So I set about reviewing other pages on the website. I looked at tops. Then I looked at the outerwear & accessories. My furious hunt through the pages of the website led me find another item I wanted under the sale-tab. (For the record, it’s a long-sleeved stripped sweater than only cost $9.49+tax after the discount code was applied.)

Yet, no matter how hard I looked, there was nothing else that I really and truly wanted to buy so my order did not meet the $100 minimum purchase. I would have to… <shudder>… pay for my own shipping. At the end of the day, my chosen items, the tax and the $10 shipping fee came to $83.46.

Afterwards, I thought about it and realized that the Ad Man had successfully convinced me to spend more money than I’d planned. Remember how I said that I only wanted jeans? What did I wind up buying? Jeans and a sweater… Sure – it was only an extra $9.49+tax, but I’d been willing to spend an extra $40 to save $10.

How is that a smart financial move? I would’ve been out $30 more than I’d planned to spend had I simply bought any-old-thing just to hit the minimum purchase amount to avoid having to pay my own shipping fees.

This kind of behaviour is less than financially prudent, aka: stupid money choices.

Don’t be a Dum-Dum

One of my very dear friends taught me this simple, useful piece of advice: don’t be a dum-dum. This advice is golden! I strive to follow it every day, and I think you should too.

Never spend more than you planned to spend just to get free shipping. I can’t make it any simpler than that. Chances are, you already have too much stuff and you’re one of those people who wishes they had more storage in their home.

Don’t buy more stuff, which is the only reason storage is needed in the first place, just to meet a minimum purchase.

If your planned purchase doesn’t entitle you to free shipping, then the only “downside” is that you get to keep your money.

Explain to me how keeping more of your own money is a bad thing? So you had to pay for shipping? So what? The only important consideration is that you spent what you’d planned to spend to buy what you’d planned to buy. Everything else is irrelevant. Do not let the Ad Man convince you otherwise.

I love free shipping just as much as the next person. However, you know what I love more? Having an extra $16.54 stay in my bank account because I didn’t meet the $100 minimum purchase. That extra $16.54 will go towards something else – groceries, retirement, post-pandemic travel. Who knows? The important thing is that $16.54 stayed in my wallet, instead of flying out the door on some item of clothing that wouldn’t have made me happy.

So my shipping wasn’t free. Big deal. I’ll survive to fight another day.

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Weekly Tip: Sell what you don’t need anymore. There are so many platforms that can be used to sell the things that might fit someone else’s need. You need not keep things that no longer serve a purpose for you. And while you won’t get the price you paid for whatever it is that you no longer need, you’ll get back some of your initial purchase. That’s far better than getting nothing back and having stuff cluttering up your home. Always, always, always be safe when you’re selling stuff online!