Category: Single Money

Keep Your Money!

I want you to keep your money. Yes – that’s right. You should put yourself in a position to keep your money.

Obviously, you can’t keep all of it. When you get paid, you have to give away some of your money. It has to go towards shelter, food, utilities, a basic wardrobe, and transportation. These are the necessities. Everything else is a nice-to-have. Beyond necessities, purchases are Wants. If they’re expensive enough, they might even be called luxuries.

Before you spend your money on the Wants & Luxuries, put some money aside to fuel your money-making machine. Ideally, you would pay yourself first, then pay for the necessities, and then pay for the Wants & Luxuries last. Many people don’t do this, and their reluctance to do so befuddles me. Truly, I’m befuddled by this behaviour. When you work so hard at a job that possibly might not fill your heart with joy and gladness, you should save a little bit of that money for yourself so that you can fund your dreams.

The first step to keeping your money is to plan your spending. If you don’t know how much you spend on shelter, food, utilities, transportation, and a basic wardrobe, then keep track of how much you spend. You can do this old school, with pen and paper, or you can use one of the fancy apps available for your phone. Either way, you need to know how much you spend living your current life.

Though I wish this did not need to be said, I’m going to say it anyway. If your monthly spending exceeds your monthly income, then you’re in a bad situation. You are living in debt, and this is a bad situation. It can lead to bankruptcy, homelessness, and other very unpleasant outcomes. If your monthly spending is less than your monthly income, fantastic! This situation is called living below your means. You have money to re-direct towards your money-making machine.

Once you’ve tracked your expenses, then you can plan how your next paycheque is to be allotted. I want you to think about the spending you did on your Wants & Luxuries. How happy were you with those purchases? Did the happiness last a long time or was it fleeting? If you hadn’t made the purchase, how would it have impacted your life? Any chance that you’d consider culling your future Wants & Luxuries purchases to only the ones that bring you joy and fond memories when you think about them?

I would never suggest that you limit your spending to necessities and savings. That’s no way to live. Everyone needs a little bit of frivolity once in awhile. What I am going to suggest is that you carefully evaluate why you made the expenditures that you did. Necessities? Obviously, you spend in this category so that you don’t starve to death a naked homeless person. I want you to focus on the Wants & Luxuries categories. If the purchase didn’t bring you joy, then why did you make it? Was it an impulse purchase? Did that impulse arise from a feeling of guilt? A need to self-soothe? A desire to be liked and included? Once you know why you spend, then you’ll know what triggers to avoid in order to keep your money in your pocket so that you can fund your most important dreams and priorities.

Keep the W&L expenditures that bring you true and lasting joy. Discard all the others. Use those savings to fund your money-making machine. My machine is an army of little money soldiers. Every month, I’m paid dividends from my investment portfolio. I’ve set up a Dividend Re-Investment Plan so that my dividends are automatically reinvested in my divided-paying exchange traded fund. This means that I’ll receive even more dividends the following month. It’s a sweet system!

Your money-making machine need not be the same as mine. You might want to get into rental properties. (And if the talking heads are to be believed, interest rates in Canada are going to go up. This may lead to a slew of foreclosures as people cannot service their mortgages at a higher renewal rate. Should that happen, property values will fall. If you have the money, and the desire to own a home, you may be able to buy a duplex or a triplex or multi-family property and start house-hacking.) There are some fantastic websites out there that can teach you how to do this. It’s not my preference but you should explore all of your options and decide for yourself.

Another money-maker is starting your own business. The entrepreneurs that I know are doing quite well for themselves. They work extremely hard, and are reaping the rewards of their efforts.

Don’t worry if you don’t know what your money-making machine is going to be. You can figure that out while you’re diligently finding ways to keep your money. Trust me! You don’t want to discover some fantastic opportunity and not have the money in place to take advantage of it.

You get one life! Keeping a part of your income from every paycheque is the most reliable way to have the money in place to fund your most important dreams and goals. It makes no sense to spend your life working hard for your money only to then disburse your life’s energy on things that don’t bring you lasting joy. It would be an absolute shame if you wind up regretting the choices that you made because they didn’t get you closer to fulfilling your dreams. Keep your money and build the life that you truly want!

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.

Invest to Beat Inflation

The chatter in the system is that inflation is coming.

Hardly surprising. I would venture to say that inflation is already here. Groceries are more expensive than they were a year ago. Gas prices have risen in my corner of the world. Friends who need lumber are sharing horror stories about the price. There’s not a doubt in my mind that inflation has arrived…and it’s going to get worse before it gets better.

I’m going to suggest that you invest to beat inflation.

First of all, you need to know that I’m not an economist. I am not in any way certified to give you an opinion on how to invest. I know what has worked for me in my circumstances. There are no guarantees that my strategy will work for you in yours.

Secondly, I’ve been around long enough to know that paycheques don’t rise in line with the increased cost of living. It sure would be nice if they did, but they don’t. Your take-home pay will stay the same even though the prices of what you want to buy will continue to go up. In other words, your paycheque has to stretch farther just so you can continue to live way you want. This is inflation at work.

There are several ways to fix this. You could get a raise, or find a higher paying job. Great. If your employer chooses to pay you more money, then pat yourself on the back. Keep in mind that there’s no reason for your boss to give you a raise if she doesn’t want to. I mean, you could be replaced, right? And maybe the next person would do your job for less money… Trust me – this thought may have crossed your boss’ mind a time or two.

If a raise isn’t an option that your employer is willing to pursue, then you can always search for a higher paying job. Should you be lucky enough to find one, hooray! The higher take-home pay can now go towards paying higher purchase prices for all those things that are more expensive today than they were yesterday.

A third, less palatable option to combat inflation, is to cut out all the things that are now too expensive for your still-the-same-size-paycheque. That might mean giving up your gym membership, extracurricular/educational courses, cable, streaming services, books. You might have to move in with roommates, or stop eating out, or give up buying new clothes. There are many ways to cut back, but you can only cut back so much. There comes a point where there’s no more fat to trim.

I don’t want you to get to that point.

What I want is for you to invest to beat inflation.

How does that work, Blue Lobster?

Investing in equities over the long-term results in returns that are higher than the rate of inflation. Equities is a fancy way of referring to the stock market.

You cannot invest in GICs at the bank that only pay you 1.6% and expect to beat inflation. For one thing, inflation may be higher than 1.6%. Secondly, interest is fully taxable at your marginal tax rate. If your marginal tax rate is 27%, then you’re not earning 1.6% on that GIC. You’re only earning 1.168% (= 1.6% x [1-0.27]). Thirdly, GICs lock up your money for atleast a year. The main benefit of GICs is safety. Unfortunately, the cost of safety is too high because your money will be ravaged by inflation. You will effectively be falling further behind financially since you’re only keeping 1.168% of your GIC’s return while inflation is increasing prices by 1.7%.

Investment returns > inflation rate. Good.

Inflation rate > investment returns. Bad.

To avoid the second scenario, invest in the stock market through diversified equity-based exchange traded funds and/or index funds. Consistently save and invest your money into stocks via these investment vehicles then leave it alone to grow. Do not check it every day. The stock market is volatile. In other words, the value of your account will go up and down but the trend over the long term will be upward. If volatility bothers you, then the answer is to not check your investments every day. Avoiding the stock market is most definitely not the solution to your aversion to the unpredictable nature of the stock market.

Stuff money into your TFSA and RRSP and buy equity-based ETFs and index funds. It might take you a few weeks to max out your contribution room. It might take you a few years. That doesn’t matter too much. The important thing is to start today. Get your money working for you immediately. Once you’ve maxed out your registered investment accounts, then keep investing your money in your brokerage account, aka: your non-registered investment account.

How do my investments beat inflation, Blue Lobster?

Over the long term, your investments will earn a return that is higher than inflation. Your registered investments will have the added benefit of doing so without being ravaged by taxes.

For example, assume that inflation is at 1.5% and your investments return 10% over the long term. Also assume that your tax rate is 27%. Your registered investments will be beating inflation by a rate of 8.5% (= 10%-1.5%). Remember! The money that is earned inside your TFSA and your RRSP grows tax-free so you need not concern yourself with your tax rate.

Money earned outside of the shelter of your TFSA and your RRSP is subject to tax. For this reason, you’ll still be beating inflation in your investment account but not by the same amount. The money earned in your non-registered investment account will be beating inflation by 6.205% (= [10%-1.5%] x [1-0.27]).

Disciplining yourself to stomach the volatility of the stock market will be very profitable for you. When the time comes to start living off your investments, they will have grown nicely. Your investments will be more than ample to cover the inflation adjusted costs of living. Ask your grandparents if, when they were in their 20s and 30s, they’d ever imagined a brand new car costing $35,000. Ask your parents if they’d ever thought people would pay $5 for a cup of coffee. Now imagine yourself 35 years from now at the grocery store and realizing that the price of a single loaf of store-brand bread is $9.

By investing in equities today, you will be taking a big step towards outpacing inflation. Start today by taking the following steps:

  1. Open a TFSA, an RRSP, or a brokerage account.
  2. Every time you’re paid, have a pre-determined chunk of your paycheque sent to your investment account. Do this by setting up an automatic transfer from your chequing account to your investment account, ie. TFSA, RRSP or brokerage account.
  3. Leave the investment account alone to do its job.
  4. If available, participate in the dividend re-investment plan. You won’t be spending the dividends. Instead, they will continue to be re-invested for the long haul.
  5. Rest a little bit easier knowing that the long-term average return on your investments is higher than inflation.

You can take steps today to mitigate inflation’s impact on your life tomorrow. Just do it!

Cooking is your secret money-maker!

Last week, someone in the Twittersphere asked people to share their best money-making tip.

Mine was simple – cook at home more.

I’ve never hidden the fact that I consider my kitchen to be a magic money-maker. A few hours each week in the kitchen means that I’m not spending money on over-sized portions of food that might not be as healthy for me as the marketers would like me to believe. I have the benefit of eating whatever I want, and who wouldn’t love that?

At the same time, groceries are cheaper than eating out. Going to the grocery store instead of a restaurant or drive-thru window means that I can put more of my disposable income towards making my dreams a reality. Achieving the goals I’ve set for my finances while still eating well… that’s two birds with one stone, as far as I’m concerned.

So today, I’m sharing some of my favorite recipe sources with you. (Sadly, I can’t share all of them since I don’t want this to be 10,000 word blog post.) Put yourself into the mood to save some money by feeding yourself, then click on the links that follow.

First off, I have to mention Dinner Then Dessert. This is one of my favorite recipe websites. Lots of pictures – many useful tips – suggested recipes that are equally delicious! Most importantly of all, this blogger doesn’t waste your eyeball energy on scrolling through some back-story for her recipes. You can get right to it and start cooking!

If memory serves, Smitten Kitchen was one of the very first websites I started following for recipes. I liked the name because it rhymed a little bit, and because it featured desserts that reminded me of childhood. I’m still looking for one of my very favorite Bavarian apple tart recipes, but this one from SK’s website has very much piqued my interest.

Pinch of Yum is also a familiar favorite that I enjoy going back to time and again. The recipes on this website are packed full of vegetables so the dishes are colorful and drool-worthy. I always feel like these recipes deliver on all my daily mineral and vitamin requirements, which is something that is very, very important.

YouTube is a treasure trove of cooking tutorials. I have spent many an hour watching cooks, chefs, and everyone in between creating some of the most delicious things I’ve ever eaten. One of my newly discovered channels is called Cooking With Claudia. I followed her recipe for creamy garlic butter chicken and potatoes… The extra exercise is well worth the added calories of this dish. It’s divine and makes for very tasty leftovers the next day!

A couple of weeks back, I tried to make some pie dough… It did not go well. And while I managed to flatten it into a disc for the freezer, I’m sure I’ll have to doctor it with some more water and flour when I go to actually make a pie. I wish I’d found this video from Nana’s Cookery before I’d started my Pie Dough Project. Although, truth be told, I’ve lived long enough to realize that either you’re born with pie-hands or you’re not. There isn’t a “no-fail pie crust” in the world that has worked in my kitchen.

Fear not, Gentle Reader! I will continue to try my hand at making pie dough because, although my pie crusts aren’t perfect, they’re still very tasty.

Now another great video channel I absolutely adore is Babish Culinary Universe. This gentleman has in incredibly soothing voice. Watching his video about cinnamon rolls was a treat for the eyes. And I’m not embarrassed to admit that I was drooling as I watched his video about sticky buns. When the pandemic is over, I’m going to get together with several friends so that we can grow larger together while devouring these delicious delights. Not even I can justify eating 12 cinnamon or sticky buns by myself… and I haven’t yet found a recipe for making just one!

Maybe you’re a fan of carbs. (And who isn’t, really?) If so, then check out Savor Easy… where they bake up all kinds of delicious breads. One of my favorite aspects of this channel is that there’s very little talking. It’s all music and visuals…and delicious things for your tummy. Soft and fluffy condensed milk bread, anyone?

You need to eat. I suggest you eat well. It’s something you should be doing several times a day so it’s in your best interest to enjoy it. Get the maximum enjoyment of your food while stretching your dollars as far as possible! Start by cooking and baking for yourself.

We’re still in a pandemic, and it’s not always fun to eat alone as a Single One. I get it. Believe me when I say that I understand. Where I live, dining in restaurants is currently not an option. However, I have access to screens in my house. There’s always the option of a videochat over a nice meal. It’s definitely not the same, but it is way better than the drive-thru.

And look on the bright side. We are so very much closer to the day when the pandemic is in the rearview mirror than we were just a few short months ago. And I’m willing to get that you’ll agree with my prognostication that there will be an extraordinary level of socializing when we finally reach herd immunity. Use your pandemic-time to learn how to cook & bake. I promise that you’re going to love sharing all the recipes you’ve mastered with those nearest and dearest to your heart when the pandemic is finally over.

Emergency Funds – Income vs. Expenses

“Wow! I had way too much money to tide me over when I was unemployed and had bills to pay!”

– said No One Ever

By now, you may heard that it’s best to have 3-6 months of income in your emergency fund. You know your finances better than I ever will, but it seems to me that it’s better to have 6-9 months of expenses socked away for the inevitable rainy day.

Did you see what I did there?

If not, go back and re-read it… there you go! See? In my world, income does not equal expenses when it comes to funding your emergency fund.

The Majority

For a good number of people, the words are interchangeable. It matters not whether they’re saving 6 months of income or 6 months of expenses because the monthly income and monthly outgo are the same number. And who are these good folks? Well, they are the ones who spend every penny that comes into their hot, little hands. They’re people who literally feel money burning holes in their pockets. These ladies and gentlemen will move heaven & earth to spend their money as fast as they can. It matters not if they’re earning a little or a lot – every penny is spent!

These are people who do not live below their means, for whatever reason. For this group, income is equal to expenses.

The Others

However, there is another group of people out there. They are the ones who pay themselves first. Their expenses are less than their income. They’ve managed to create some breathing room in their budget. They have funds that aren’t spent right away. For this second group of good folks, they only need to save 6-9 months of their actual expenses.

There is no point having money sitting idle in an account while waiting for an emergency when it could be sent out to work.

If you’ve been reading my ramblings for any length of time, then you know that I’m an ardent advocate of investing a good portion of your paycheque for long-term growth. This is what I mean when I say that the money not spent on your day-to-day survival should be sent out to work. When your expenses are less than your income, the difference between the two should be invested.

Allow me to be very, very clear. The money that is meant to cover your expenses during an emergency should never be invested for long-term growth. You need not run the risk that the stock market suffers its worst historical drop on the very same day that you lose your job and have to pay the mortgage. Your emergency fund needs to be sitting some place that is both boring and safe, like in a savings account at an online bank. When the emergency happens, you will need to access the funds quickly. You also need to be certain that they will be there. The volatility of the stock market offers no such certainty.

So whatever amount is needed to cover expenses should be in a boring, old savings account.

Money over and above your 6-9 month emergency stash should be sent elsewhere.

Personal Experience

For the sake of transparency, I will confess that what isn’t spent on the Care and Feeding of Blue Lobster is divided into two pots. There’s the long-term pot where I keep my retirement money. That pot is brimming with equity investments that pay me capital gains and dividends every year. Hooray! Then there’s the medium-term pot. This is where I stash the money to pay for things that will happen in the next 1-5 years. This pot pays for the un-sexy necessaries like insurance premiums and taxes. It also covers the fun stuff like vacations, concerts, and gifts.

The bottom line is that these pots are filled with the difference between my income and my expenses. In my case, my emergency fund covers 9 months of expenses. I can now use my money to fund long-term investments and medium term goals, all while knowing that my emergency fund is safely tucked away until I need it.

Why 9 months instead of the minimum of 6? That’s easy. I’ve always believed that it’s better to have more money than needed during an emergency.

A little something else to consider…

Expenses generally include debts. Take your pick – student loans, vehicle loans, mortgage, credit cards, medical, personal loans, veterinary loans, etc… If you’ve used credit, then you have debt. Chances are you’re paying off that debt each month, so your debt payments must be included in your expenses.

Debts don’t disappear just because your job has. That means your emergency fund has to be big enough to cover your debt payments should your income disappear.

But what happens to your emergency fund once your debts disappear?

The necessary minimum size gets smaller!

Excuse me, Blue Lobster? What are you saying?

Let’s say that your monthly expenses are $3500 per month. Part of that is a $1000/mth mortgage (or rent) payment and a $500/mth payment on your vehicle. For the sake of this example, your monthly expenses include $1500 in debt payments.

If you’re building a 6 month emergency fund, you need to have $21,000 set aside to cover your monthly bills in the event of an emergency.

However, once you’ve paid off your debts, then your monthly expenses are only $2000 per month. (This assumes that you don’t replace your former $1500 debt payments with new ones!)

Now, your emergency fund need only be $12,000 to cover six months of your expenses.

Will it take you less time save up an $12,000 emergency fund? Yes – yes, it will.

Getting out of debt means you don’t have to spend as much time building your emergency fund. In this example, the extra $9000 (= $21,000 – $12,000) can be invested for long-term growth that much faster. Ideally, Mystery Person learns to spend cash and doesn’t go back into debt. While Mystery Person goes to work, the $12K sits quietly in an account and the former debt payments are re-directed towards long-term investments.

Saving 6 months will take a long time!

Please go back and re-read the quote at the start of this post. No one promised that saving up an emergency fund would be a quick process. The fact that it takes a long time in no way diminishes the importance of creating one!

Start saving for your emergency fund today. Set up an automatic transfer from your paycheque to an online savings account. Do not get a debit card for this account. Once the money goes in, forget about it. This money is not to be touched unless your livelihood is threatened or gone.

Trust me when I say the following. You won’t want to be worrying about money in the middle of your emergency. Having an emergency fund to pay for things will be a comfort during an emotionally awful time.

Banks are not evil – they’re simply a tool.

Truth be told, it took me a very long time to realize that banks are a tool that will help me achieve my personal finance goals. Every three months, the Big Banks release their earnings. More often than not, those earnings are in the billions, if not the hundreds of millions. And people start frothing with anger at the size of those quarterly earnings. Ink is spilled all over the Internet about how banks are evil and their earnings are obscene.

Two days later, the angry mob has moved on to some other topic upon which to unleash their rage. The banks go back to the business of earning more money so they can hit their next quarterly target.

And I wonder to myself if any one person in the mob realized that banks are a tool?

How banks make money

First off, I want to be very clear that I’m not an expert on the banking industry. I’m just an online citizen who has watched banks operate for the past 35+ years. I even used to work as a bank teller, which was an incredibly educational experience. However, being a bank teller and being a banking expert are two wildly different things.

I’ll share with you what I know.

Banks take money from depositors then lend it to borrowers to earn money. This is the heart of banking. Everything else is a detail.

Depositors have bank accounts and they expect to earn interest on their deposits. As we all know, most bank accounts pay less than 1% interest. Every so often, an online account has a higher rate but it’s usually not anything to get overly excited about.

Banks lend money to people at rates that are higher than what they pay to their depositors. See, from the bank’s perspective, the 1% interest rate is a liability because the bank owes money to someone. Money that’s lent out to borrowers is an asset because it’s going to earn money for the bank.

If the bank owes Depositor 1% per year on a $10,000 bank account, then the bank has a $100 liability since it has to find a way to pay $100 to Depositor in a year’s time. How does the bank do that?

Easy. The bank takes the Depositor’s money – $10,000 – and loans it to Borrower at a rate of 5%. Borrower has promised to repay the bank $500 in a year’s time, because 5% of $10,000 is $500. The Borrower’s $500 debt is the bank’s asset.

The bank collects $500 from Borrower, and pays $100 to Depositor. The bank keeps the $400 spread for itself. Now, I’m sure there are expenses that go along with running a bank, procuring loans, administration of bank accounts, and staffing costs. Whatever is left after paying those expenses is the bank’s profit.

Banks are good at making profits.

Understanding the spread between what is owed to depositors and what is earned from borrowers is what keeps banks profitable.

So how do you turn this to your advantage?

It’s very simple, Gentle Reader. Banks are a tool for you as soon as you buy your first bank share.

Remember how I said that bank earnings are reported quarterly? One of the best features of banks is that they pay dividends to their shareholders. The more bank shares you own, the more dividends you’ll receive.

I used to get irate over bank fees. How dare the bank charge me for using my money? The little vein in my temple would visibly throb if ever I saw so much as a $1 taken from my account to cover an ATM withdrawal, or for anything else.

Eventually, this financial annoyance was removed from my life through 2 actions that I took. First, I opened bank accounts with institutions that did not charge bank fees for daily banking. I was no longer paying bank fees every month. Secondly, I started earning money from everyone else who chose to continue paying bank fees. I bought shares in banks and cashed the dividend cheques every quarter.

I can confidently say that the idea of bank fees no longer enrages me. Even if I do mess up and bounce a cheque, I might have to pay the $35 NSF fee. However, I know that I’ll be getting my money back in a few weeks’ time via my next dividend payment. That fee is a nuisance, but hardly a reason for me to get upset.

Banks are necessary.

I firmly believe that everyone needs atleast two bank accounts – a chequing account and a savings account. The chequing account is for your day to day money. It’s for receiving your paycheque, buying your groceries, paying utilities bills, and the expenses of day-to-day life. Your savings account is for your emergency fund. It’s meant to be a liquid pool of funds that can cover 6-12 months of your monthly expenses. Some people argue that an emergency fund can be 3 months of expenses. I’m a big believer in the idea that more money is better when an emergency strikes so it can’t hurt to have more than the minimum.

Banks are not evil, in and of themselves. Used properly, they facilitate the transfer of money into your investment account. You know that I’m a huge fan of automatic transfers. I’m a proponent of paying yourself first. A portion of every paycheque should be sent to your investment account, so that it can start working to ensure the Future You has a financially comfortable lifestyle.

For my part, I have several bank accounts. And all of them are designated for a specific purpose. Some accounts hold money for my annual travel. (Even during the pandemic, I’ve socked away a few coins for the eventual day when I feel comfortable enough sharing a plane with others.) Other accounts hold money for my annual insurance premiums and property taxes. I have an account for little luxuries like my theatre subscription to Broadway Across Canada. There’s also an account for maintenance and repairs to my home.

Again, banks are a tool – they’re not evil. Learn to use them properly and you’ll find that they offer many great methods for handling your money. Better yet, become a shareholder and receive a slice of their profits every three months. I’ve no doubt you’ll enjoy the feeling of the banks paying you instead of the other way around!

Housing Prices & Interest Rates

When I was a kid, one of the things I learned from my mother was that interest rates are inversely correlated to housing prices. If interest rates are going down, then housing prices are going up.

Over the last 12 months, I’ve seen this lesson play out in real life. By the time this blog post goes live, we will have passed the one-year anniversary of the COVID-19 pandemic. Yet, there are cities in this country where the housing market is red-hot. People are tripping over themselves to buy homes and they’re “winning” bidding wars to do so.

Five-year mortgage rates in my corner of the world had been on offer for as low as 1.84% up until just recently. At the time of writing this article, they’re slowly creeping up but a few can still be found at just around 2%. The Talking Heads in the media are predicting that 5-year rates will increase steadily over the next year. They say that this will be due to the economy fully re-opening as everyone gets their vaccine.

Who am I to argue with the Talking Heads?

The corollary to my mother’s great insight is that house prices drop as interest rates rise. This is due to the fact that fewer people can afford house payments when the cost of borrowing increases. Fewer people buying is a fancy way of saying lower demand. Less demand for something forces sellers to drop prices in order to sell their goods. In the housing market, rising interest rates are very strongly linked to decreasing housing prices.

For the past 10 years or so, the interest rates for mortgages have been less than 4%. I can tell you that my very first mortgage – taken out nearly 20 years ago – was for 6.5%. That seems astronomically high by today’s standards! When I was teenager and working part time as a grocery store cashier, I worked with folks who were thrilled to get a mortgage at 8%. The super-low mortgage rates of the past decade have been normalized, and I worry that people forget that rates can also move in the other direction.

Two Minds

I’m of two minds when it comes to housing. Buying a house was a very smart move for me. I was fortunate enough to buy what I needed at a price that was less than 3 times my gross income. The mortgage payments were less than 30% of my take-home pay. I could afford the repairs and maintenance that come with a house. Taxes and insurance weren’t an onerous burden on top of these other costs. The monthly nut associated with my shelter did not inhibit my ability to invest for retirement, travel, and have a bit of fun with my family and friends.

In short, buying a house was a good move for me… 20 years ago.

Today, twenty years later, I’m not so sure that buying a house would be a good financial move for me. For starters, I would have to choose between servicing the monthly nut of homeownership and every other financial goal. My mortgage, property taxes, insurance, repairs & maintenance would render me house-poor for a very long time. There wouldn’t be room in my budget for things like retirement savings, travel, entertainment, vehicle replacement, or those little luxuries that make like easier. My financial life would revolve entirely around paying for my housing, and there would be no room for my other money priorities.

I used to think that renting was a bad idea. However, my perspective has become more nuanced. If renting allows one to have a balanced life, then I think it might be a good idea. Of course, that balance has to include maxing out all retirement savings and building an investing portfolio. Those investments need to be big enough to pay for rental accommodations when the paycheques stop arriving. Whether you own a house or rent your space, you need to pay for shelter one way or another.

Cheap rates aren’t here to stay.

Today’s very low 5-year mortgage rates will go up. Securing a mortgage at 1.84% is wonderful, but that rate is likely only going to be locked in for 5 years. (And only for those who were lucky enough to grab it!) At renewal, the rate might be 3.5% or higher. Can your crystal ball predict the future perfectly? Will your budget be able to survive the mortgage payment increase that will come with a higher mortgage rate? Are you positive that you’ll still have the same income that you have now?

Even if your job’s salary stays the same, will your other expenses do the same? I’ve noticed that the cost of my streaming service goes up every 18 months or so. The price of food hasn’t gone down, ever. Taxes seem to only ever move in one direction. The list goes on. Life gets more expensive every year, yet salaries and wages don’t always go up in tandem with the increased expenses of every day life.

So even if you were only of the lucky ones to grab a super-cheap mortgage rate for a five-year portion of your mortgage, I strongly urge you to calculate how much your mortgage payment will increase when you renew. It’s not too, too crazy to believe that the bond market will push the five year rate up by 50 basis points each year for the next five years. Add 2.5% to your current rate and see what your new payment will be. Can you handle it?

Alternatives

Your first option is to pick rich parents. It’s been my observation that some parents with an excess of money are willing to help their offspring purchase a home. Financially speaking, it’s wonderful to have that kind of help to get onto the property ladder.

Not all of us can pick our parents, so that means being a little more creative.

If I were starting out today, I’d be looking at becoming a landlord. Either I’d try to buy a house with a rental suite or I would have roommates. There would have to be someone else around to contribute to the mortgage payments. If my salary paid for the minimum monthly mortgage payment, then the tenant’s rent would be what I would use for the extra payments to principle.

Would it be ideal? No. Would it have to last forever? Also, no.

A third alternative would be waiting to buy. Like I said earlier, house prices will come down as mortgage rates go up. Figure out how much of a mortgage you can afford. This number will be different than what the bank says you can afford. After all, you’re the one who’ll be responsible for the payments so look at your budget and be realistic.

Once you know how much mortgage you can comfortably carry, open an account at EQ Bank and start salting that mortgage payment away. This benefits you two ways. First, you’ll get used to having a mortgage payment since you’ll have to make that payment once you’ve signed the mortgage documents. Second, this money will help you make as large a down payment as possible.

I’m not trying to dissuade you from buying a house. Truly, I’m not. I just want you to think long and hard about the financial commitment that owning your own home will entail.

In a world without pensions, I am not persuaded that it’s a good idea for a person to spend 25-30 years paying off a mortgage without the ability to save for retirement. A mortgage debt that leads to an extended hand-to-mouth lifestyle is rarely a good thing. It limits options and inhibits one’s ability to pursue their true dreams, goals, and desires.

The Secret Sauce Isn’t Being Bright

Being bright isn’t a requirement to being successful with personal finance and investing. I speak from personal experience as I don’t consider myself to be overly bright. There are many people in my circle who are much smarter than me and who learn things much faster than I do. Their net worths are not necessarily larger than mine. It’s taken me a long time to accept the fact that being bright has very little to do with whether someone will succeed in the realm of money.

Those who’ve read this blog for a little while know that I’ve erred during my investment journey. I’m the first to admit that I’m not the smartest investor in the room. I’ve made so many mistakes!

  • When I first started investing years ago, I put my money into mutual funds instead of index funds and exchange-traded funds.
  • Investing in mutual funds instead of index funds & ETFs means I paid higher management expense ratios than I needed to pay.
  • I invested in dividend-based ETFs instead of buying equity-based ETFs.
  • I didn’t earn as much as I could have during the 10-year stock market bull run that ended in February of 2020. (D’oh! How I would love to be able to unwind that mistake.)
  • And I don’t increase the rent on my rental property every year. I’m sure there are some in the real estate investment community who see this as a very grave mistake.

Despite these mistakes (and I’ve made way more than 5), I’ve learned that you don’t have to be all that bright to do well in personal finance. You do need to have disposable income, since you can’t invest what you don’t have. I’ve crafted a list of traits that I believe are essential to successfully building wealth.

Being smart is not one of the traits!

You have to start from where you are. No investor has ever made money without starting to invest. Thinking about investing is great but people don’t earn 7% returns on investments they only dream about. They only earn returns on money that’s actually invested in real life, whether that’s in the stock market, in real estate, or in a business. Investing your first dollar isn’t a function of being bright. It’s a function of taking action.

Consistency isn’t dependent on how bright you are either. I’m a huge fan of automated transfers. Every time I get paid, some of my net income is siphoned away from my chequing account. That money is invested to pay for my future goals: retirement, travel, house renovations, whatever. If the money is for a planned purchase that’s not part of my day-to-day basic life, such as groceries, gasoline, and utilities, then the money is automatically whisked into various accounts and it stays in place until it’s time to make those future purchases. Automated transfers have ensured that I’ve always had money going towards my investments.

No one needs to be all that bright to be disciplined. You’ll need to be disciplined if you’re going to stick to your priorities. You’re the only expert when it comes to how best to spend your money because only you know what’s most important to you when it comes time to spend it. It also means that you’re the only one who’s responsible to say “No” to the things that don’t move you towards your dreams. Believe me when I say that there is alway someone who wants your money. Being bright is not a pre-condition of only spending your money in ways that align with your priorities.

Finally, never stop learning. Like I said earlier, I’m not particularly bright. And it takes a long time for me to learn new things and for concepts to sink it. THAT’S OKAY!!!! Learning at my own pace isn’t an obstacle to achieving my goals. If anything, it’s a benefit. Once I’ve been exposed to a new concept, I can learn it as thoroughly as I want to. And once I’ve done that, I can determine whether it will help me meet my financial priorities.

No one is grading your progress.

I’m not in school anymore. There’s no teacher under a time pressure to get through a pre-set curriculum. I’m my own teacher now. Taking as much time as I need to teach myself a particular concept is a good thing in real life. Unlike a school setting, there isn’t a fixed number of hours to be spent teaching one concept before the teacher moves on to the next one. I’ve been investing for over 25 years, and I still don’t understand how Price-to-Earnings ratios work. Is it better if they’re high or low? What exactly do they mean? Do they fluctuate every day? What are the factors that impact them?

Hear me now: I’ve been investing in the stock market for 25+ years, and I did not let my ignorance about P/E ratios stop me from building a solid portfolio that kicks off a nice amount of dividends each year. Admittedly, I’m not a stock-picker. In other words, I don’t buy individual stocks after analyzing their annual reports and doing research into both the company and the industry. If I were an investor who had gone the stock picking route, then I would have learned a lot more about P/E ratios and other nuanced stuff. The information is out there and I would have spent my time learning about it.

When it comes to being good with your money, habits will always beat brains in the long run. Being smart isn’t what helped me the most. Having the investing habit and putting automatic transfers in place has been my secret sauce. Together, these tools have been tremendously more beneficial for my portfolio and for meeting my short-term goals. Once I had prioritized how to spend my money, relying on habits and tools propelled me towards attaining my goals.

Being bright is not an indicator of whether you will be successful in handling your money. Again, speaking from personal experience, you can make stupid money mistakes and still set yourself up for future financial success.