Category: Single Money

Finding the Balance – Saving Money for Today and Tomorrow

When I was a very young girl, I’d heard about a marital method of allocating money to both present and future goals that made a lot of sense to me at the time. Essentially, in a situation where both spouses worked, the household’s present needs would be paid for from one paycheque while the other paycheque was devoted to saving for the future. To my naive mind, this division would be split evenly since obviously both parties would earn the same amount and there would be no reason to fight about money… Ah, the innocence of youth!

 

Now that I’m an adult, I realize that many, many, many factors go into the process used by couples to decide how their money is allocated. Many of my friends are married. As far as I know, not a single one of them uses the “ideal allocation” that I’d envisioned as a child. They’ve worked out money rules that work for their relationships and they all seem very happy with their decisions. Still though, I remain convinced that spending one income while saving the other is a great idea.

 

If you’ve read enough personal finance blogs, you’ll have noted that the common minimum savings target in the online world of personal finance is 50% of your income. There’s often the admonition to save as much as you can, as soon as you can but 50% should be considered the baseline if you want to reach financial independence sooner than 65!

 

The challenge for singletons is obvious! We don’t always have that second income coming into our households, which means it’s not always as easy for us to live on 50% today while saving 50% for tomorrow. Economies of scale are missing since there’s only one paycheque to pay for the entire cost of housing, all of the food, all of our entertainment/travel/debt payments, etc… There are ways around some of these costs. For example, those singletons living with roommates have found a way to decrease their housing costs but not everyone wants to live with roommates. Also, it’s highly unlikely that roommates are willing to fund one another’s retirement accounts from the disposable income that results from lower housing costs! A couple’s desire to share their financial goals and to pursue them over a lifetime together is something that is very definitely missing from the roommate relationship.

 

If you’re a singleton with a side hustle, then maybe you’re one of the fortunate ones whose side hustle income is equivalent to what you earn from your regular job and saving that income already amounts to saving 50% of your income. Or maybe you’re a singleton with a nice, fat paycheque that allows you to live well below your means. If so, then hooray for you! You’re well on your way to funding the very desirable status of being a financially independent person where working for a living is an option rather than a requirement.

 

Singletons without lucrative side hustles or incredible incomes have to find ways to increase the savings target so that they can also reach financial independence and have the option of whether to continue working. Even singletons who love, love, love their current jobs should be saving big chunks of cash from their paycheques. The things that we love about our jobs can change over time. When they do, it’s best to be in a position to leave when those changes become intolerable and it’s even better to be able to leave without financial fears for the future.

 

What’s a singleton to do? As one singleton to another, I would urge you to save money towards your future. Personally, I automatically transfer money from my paycheque to my investment and retirement accounts every single time I get paid. The convenience of automatic transfers cannot be overemphasized because automation is beautiful!

 

If you need a daily reminder to commit to your future, consider the savings method employed by Grant Sabatier of www.millennialmoney.com where he decided to save a fixed amount every single day in order to reach his goal of financial independence and early retirement. Not everyone is able to save as much as Grant does. If you can, great! If not, then pick an amount that you can save and go from there. The point is to start saving money for your future as soon as you can. Once you’re in the habit of saving money, you’ll more likely than not increase the amount that you’re saving so that you can reach your financial goals sooner rather than later.

 

And the reality is that saving something is far better than saving nothing, even if your financial situation doesn’t allow you to hit the target of saving 50% of your income every year.

 

In a perfect world, I would be living on 50% of my income. I would pretend that my Illusory Partner was bringing in the other 50% of the household income and that his income would be going into the bank towards our goals of financial independence and early retirement while continuing to enjoy a standard of living that’s as good as the one I have now. Unfortunately for me, saving 50% of my income would mean that I wouldn’t enjoy my day-to-day life as much as I already do because I’d be living on a very tight budget that wouldn’t allow for the little luxuries that make life sweet. That’s just a fancy way of saying that I’m not yet prepared to cut out any of today’s expenditures in order to save even more for the future.

 

Am I still working towards the goal of saving 50% of my income? Of course I am! Yet, I will freely admit that my choices about how I want to live my life from one day to the next have prevented me from reaching this goal.

 

This particular singleton has made the decision to live below her means and to save as much as possible while still incorporating travel, entertainment, and spontaneous fun into her life. It’s a constant battle, but I’ve managed to create a budget where I save 40% of my net income and I set it aside for my aforementioned goals of financial independence and early retirement. I’m not terribly hard on myself for not being able to save the full 50%. As far as I’m concerned, 40% is still a respectable chunk of money so I think I’m doing okay.

 

The extra 10% that stays in my chequing account is for the small extravagances and short-term goals that are most important to me. It has paid for my recent international trips to Italy (2016) and to Spain (2017). It paid for a last-minute invite to a production of Comedy of Errors at Shakespeare in the Park. It has paid for my annual theatre subscription. It has paid for the costs associated with flying all over North America to attend family reunions. That extra 10% allows me to enjoy life now without having to wait to do all of my enjoyment later. I’ve been able to find a balance that works very well for me.

 

Could I have lived without those little extras in order to save the money? Of course I could have! And had I made that choice, there is no doubt in my mind that I would be closer to my financial goals. However, the other reality of choosing to save more money would be that I wouldn’t have seen as much of the world as I already have. I wouldn’t be as close to my extended family as I am now because I would have missed time with them nurturing the familial bonds. Similarly, I wouldn’t have had as much time with my friends building great memories around time spent doing things that we’ve enjoyed.

 

It’s very important to me to be free of the obligation to work as soon as possible – that’s why I save 40% of my net income and invest it for my future. Hopefully, I will continue to earn raises and receive larger dividend cheques from my army of Little Money Soldiers. One day, I will be in a position to meet my target of saving 50% of my net income.

 

Until then, it’s vitally important to me to live my best life each and every day on the other 60% of my paycheque. I don’t want to reach early retirement and realize that I haven’t nurtured important relationships or that I don’t have enough good memories of my life-before-retirement.

 

It’s taken me the better part of nearly 5 decades to figure out the best balance between my today money and my tomorrow money. Life is so short and the time flies so fast! There is a balance and I’ve been lucky enough to find it.

Singletons & Money

One of the things that I’ve learned over the years is that the principles for saving money are the same whether you’re coupled or a singleton.

 

Pay yourself first… Live below your means… Invest in the stock market for long-term growth… Always have an emergency fund… Buy the proper insurance… Use low-cost index funds to invest… Take advantage of your employer match at work… Maximize any tax-advantaged investment options… Get out debt… Stay out of debt… Save as much as you can as soon as you can…

 

While these principles work just as well for singletons as they do for couples, the fact remains that it’s more expensive for a single person to pay for the costs of daily living than it is for a couple due to economies of scale. For example, a single person might bring home $2500 and have rent on a one-bedroom apartment for $1000. This represents 40% of the single person’s net income. A couple might bring home $5000 and have rent of $1500 on their two-bedroom apartment. The couple is paying 33% more in rent, but spending only 30% of their net income. The couple has more money – both numerically and proportionally – to devote to their other goals. The couple has 70% ($3500) of their money left over to devote to the rest of their lives after paying rent while the singleton only has 60% ($1500). A monthly difference of $2000 is not insignificant for most people!

 

On the flip side, the single person doesn’t have to discuss her money decisions with anyone. The singleton is free to spend or save or donate money however she sees fit. Couples are required to compromise and make joint decisions about money, lest they fight once too often and find themselves singletons once more. Single money means a lifetime of never having to justify an expenditure to anyone other than yourself.

 

I’ve been a singleton my whole life. The personal finance acronym for people like me is SINK – single income, no kids. And while there was a time when I worried if I would ever find a life partner, that time has passed. I simply don’t worry about it anymore – what will be, will be. I haven’t taken the same laissez-faire attitude towards my money. I apply a laser-sharp focus to that area of my life because I don’t have the insurance of a second income tiding me over if I lose my primary source of money, i.e. my job. I know that it’s expensive to run a house, to make renovations, to replace vehicles, to stock a pantry, to do all those things that my coupled friends do on bigger household incomes.

 

When I look at my married friends, particularly my married professional couple friends, I sometimes get envious of the six-figure incomes that they bring into their homes every year. However, all of these friends have children and they’re spending atleast 5 figures every month to run their households, raise their families and service their debts. While they have the larger – okay, much larger – annual incomes, they are not matching my 40% after-tax savings rate. They simply don’t have the room in their budgets to set aside 40% of their take-home income. When their children are finally raised, educated and launched, my friends will be in a position to save as much or more of their money as I do. Their mortgages will be gone and they will hopefully all be out of debt. They will most likely still have much larger household incomes than me.  Yet the reality is that their investments will not have as much time in the market for their returns to compound – I will have been saving for close to three decades, while they will only have 10-15 years to save before the traditional retirement age.

 

You know those comparisons of twins who invest and one twin starts ten investing years before the other one, then stops investing in year 11 yet still winds up with way more money than the twin who started investing in year 11? I’m the first twin, while my coupled friends are represented by the second twin. I’ve been investing for years longer than all my coupled friends, so the math says that I will have a significantly larger cash-cushion even if they start investing buckets of money after their children are grown.

 

Check out this article which does a damn fine job of explaining the benefits of long-term compound investing growth. My situation is akin to that of Chris, or possibly Susan should I choose to stop investing before retirement. My coupled friends will be Bill. They will do well, since half a million dollars isn’t an insignificant sum of money. However, they simply won’t have the same amount of time to let compound interest work its magic on their investments.

 

My savings & investment habits were ingrained early. My parents saved $10 from each of my father’s paycheques when I was growing up and that money was earmarked for university expenses. This explains how I knew to start my investment portfolio by setting aside $50 every 2 weeks from my part-time job as a grocery store cashier. I was 16 years old when I started to save my own money. Fifty bucks was roughly one third of my net income, but it was enough to get the ball rolling. I continued to save money from every paycheque for the next 30 years. Over time, my income grew which meant that my investment contributions grew too. As I paid off my debts (student loans, vehicle loans, and my mortgage), my bi-weekly investment contributions increased. I used part of my former debt payments to increase my standard of living and the rest of it went to investments for my future. Along the way, I happily celebrated my friends’ weddings and the births of their babies.

 

Let’s go back to the example above of the singleton and the couple. While the couple may have an extra $2000 on paper, that money is more than likely going towards the costs of raising a family. They might not be saving anything as that “extra” $2000 gets eaten up by family-related expenses. The singleton might only have $1500 leftover after rent but she has the choice of putting aside the minimum 10% of her net income towards her investments. This would leave her with $1250 (= $2500 – $1000 – $250) to pay for the rest of her day-to-day life but the odds are that her income will go up over time and give her some breathing room. That little pot of money that was started with 10% of her net income will likely continue to grow too, giving her options about whether to continue renting. She might decide to buy a home and to get a roommate to share household expenses. She might decide to become a house-sitter to eliminate her housing costs. So while it is more often than not more expensive to be single, the fact remains that singletons have more options about how to lower their expenses and to increase their income because they only have themselves to think about when it comes to money decisions. Couples with children do not have that same level of flexibility with their money – their kids need to be fed, clothed, housed, educated and entertained.

 

The fundamental principles of personal finance have allowed this singleton to create a comfortable life for herself and I don’t have many regrets about my money. Thanks to my love of all things personal finance and my commitment to continually educate myself about money, I’ve reached a stage in my life where my portfolio kicks off a four-figure income every month. Is the amount enough to retire? No, not yet. However, I’m earning more money every month because I’ve created a positive feedback loop which automatically increases the amount of cash flow that I earn from monthly dividend payments. I fully expect that by the time I retire, my side income will be over $3500 per month. My coupled friends are not in a position to do what I have done, nor to expect what I expect because their priorities dictated different choices with their money.

 

Singletons who follow the principles of investing steadily and starting early are likely to do just as well as couples who earn more money but are raising families. Earlier I said that the expenses of life are more expensive for singletons because there simply is not as much disposable income leftover after the necessities are paid. I stand by this statement. The added expenses of keeping body and soul together makes things harder in the beginning, but they don’t make the final goal impossible. Singletons can still achieve financial independence should they wish. All they have to do is start investing for the long-term, stay out of debt, maximize their tax-advantage investment accounts… In short, all they have to do is follow the principles of personal finance in order to achieve their financial goals.

Cash Flow Diagrams & Passive Income

I’m a visual leaner so when information can be presented in a picture, then I absorb it a lot faster. That’s why I was so damned impressed when I came across the following link on one of my travels through the Internet: Cash Flow Diagrams. In all honesty, this is one of the best links I have ever found!  In a few simple diagrams, Jacob Lund Fisker of Early Retirement Extreme succinctly illuminates the basic underlying principles behind the following concepts:

– paying yourself first;
– acquiring assets;
– creating passive income; and
– benefiting from compound interest.

 

Much ink has been spilled and many trees felled to write numerous books to explain these four foundational concepts. Mr. Fisker has accomplished the same goal with a few hand-drawn diagrams that are not overly complicated nor difficult to grasp. Please, please, please take the time to read Cash Flow Diagrams and figure out if your current cash flow is helping you to get to where you want to be or whether it’s holding you back from achieving your personal dreams.

 

The first diagram is a representation of the cash flow in the lives of those of you who live from paycheque to paycheque without going into debt. You are working hard for your money. When you get your money, you pay for your life and you have no money left over. You have to go back to work to make more money. This is called living at your means. In other words, your means are equal to your money and you spend all of your money between each paycheque. There is no room for investing because you spend every cent you make. This is not a good way to live! There is no breathing room – there is no cushion – there is nothing set aside for the day when you can no longer work. If you’re in this situation, I implore you to find a way to get out of it. Get a part-time job and use the money from that part-time job – or side hustle as it is now called – to get yourself into the position of being able to buy assets as displayed in diagram 3.

 

The second of Mr. Fisker’s diagrams applies to those of you who live from paycheque to paycheque and go into debt. You’re in an even worse situation than the people in the first diagram because you’re using credit to fund your life. Using credit means that you are going into debt. This is a very bad cash flow situation because it means that your money is not enough to pay for your life so you’re relying on credit to make ends meet. You are living above your means, and this is a very bad state of affairs.  The reason why it is so undesirable is that you’re paying interest on the credit that you’ve borrowed. If your paycheque is not enough money to pay for your life already, then it’s an absolute certainty that your money is not enough to cover both your life and the interest owing on your debt. (Again, as soon as you use credit it become a debt!) If you’re in this situation, I would suggest that you do whatever you can to get out of it sooner rather than later. Compounding interest is working against you and keeping you from achieving what you really want from life!

 

If you have disposable income after buying whatever stuff you need to keep body and soul together, also known as: the necessities, then your cash flow is reflected in the third diagram. Disposable income is just a fancy way of saying leftover money. If you, my friend, are fortunate enough to have leftover money, then you are in the enviable position of being able to acquire some assets.

 

What’s an asset? An asset is anything that puts money in your pocket by producing an income payable to you. If you are living below your means, then you have leftover money for investing. And when that leftover money is put to good use through purchasing assets, you are well on your way to creating a stream of passive income. This is a very good thing! Ideally, everyone can get themselves to this point, namely having some amount of passive income even though, at first, that passive income isn’t enough to fund your entire life. Passive income will grow if it is diligently reinvested and left to compound over time. You still have to work, but that’s okay because working means that you’re generating more money to buy more assets that will increase your passive income. Eventually, your passive income will exceed the size of your paycheque. The faster you acquire income-producing assets, the faster your passive income will increase.

 

Once you make it to the fourth diagram, you’re laughing. At this point, the reality of your cash flow is that your assets are throwing off enough passive income to pay for your stuff. In other words, you are not required to work. You don’t have to quit your job if you don’t want to – it’s just that working for a salary is now completely optional. This is a wonderful achievement! You can do what you want with your time because your passive income has replaced your wage as the source of money to fund your life. If you’ve reached this stage, then my hat is off to you – congratulations!

 

The fifth diagram represents retirement. As in the fourth diagram, the cash flow from your assets is sufficient to fund your life and you’ve simply chosen not to work for wages anymore. At this stage, your passive income has replaced your paycheque. Hooray!

 

When I found this article online, I was already living the life depicted in the third diagram. Thankfully, I had no debt and my take-home pay was enough to pay for my living expenses – there was money leftover every payday. My student loans were gone. My mortgage was paid off. I no longer had a car loan.  At that point in my life, I knew that I had to absolutely, positively invest my money after maxing out my registered retirement savings plan (RRSP) and my tax free savings account (TFSA), but I didn’t know where or how or what to do. I didn’t trust financial advisors, so I decided to buy units in dividend-paying mutual funds. (At the time, I didn’t know that mutual funds were vastly more expensive than index funds or exchange-traded funds [ETFs] – now that I know better, I do better!)

 

I set up an automatic bi-weekly transfer of money from my chequing account to my investment account so that I could invest monthly and take advantage of the benefits of dollar-cost averaging. Automating my savings meant that I didn’t have to decide whether to set aside my leftover money. Relying on automation to fund my investment account was an exceptionally smart move on my part because I’m sure that I would’ve been tempted to buy something other than investments if I had to think about saving vs. spending every time I got paid.

 

Did I pick the perfect investment? I doubt it. I’m not that lucky nor am I that smart. Also, my accumulating years have taught me that there is no one perfect investment. I invested in a product that I understood – dividend funds – and set up a dividend reinvestment plan (DRIP) so that my dividend payments were automatically reinvested. I had no idea whether this plan would work perfectly. All I knew at the time was that dividends were a form of passive income. I knew I didn’t have the skills or inclination to read company reports and to follow the stock market. I knew that I wanted an investment portfolio that would supplement my other retirement income when I decided to leave work. Dividend mutual funds – and, later, dividend ETFs – satisfied my list of what I wanted for my portfolio so I picked one and started investing.

 

Dividend payments are my preferred form of passive income so I invest my money in dividend-producing assets. As a Singleton, I don’t have the benefits that come with having another person’s income contributing to my household. Having a reliable stream of dividend income soothes some of the risk of living in a single-income household. My goal is for my passive income to cover my monthly necessities. Once I’ve met that goal, then I’ll know that I can survive on my own even if my salary goes away.

 

As a result of my choices to automate my money and to invest it regularly, I’m now in the position of comfortably earning four figures of dividend income every month. My passive income stream is not yet enough for me to live on, so I still have several years of working in my future. However, my passive income is compounding every single month as it’s added to the new investment purchases that I make with the money that is automatically transferred to my investment account when I get paid. I’m comfortably investing the equivalent of one paycheque every month. I like to think of my dividend income as my side hustle income, even though I don’t have to do anything other than breathe to earn the dividends.

 

Where are you now? And where do you want to be in five, ten, twenty years?  How much passive income do you want in order to live the life of your dreams? What steps are you taking to put yourself in the cash flow position that you want for your future?

Building an Army of Little Money Soldiers

One of my life’s goals is to build a nice, solid flow of passive income without getting a second job. The way I decided to do this was by building an investment portfolio using a dividend-paying exchange traded fund (ETF). I think of the individual units in my ETF as Little Money Soldiers whose sole purpose is to acquire more and more dividends for me every month. The dividend income that I earn can be used any way I want, and right now I want it to fund my dream of financial independence.  Every single month, I add to my army of Little Money Soldiers by buying more units in my ETF and I send them out into the world to do their thing – they do it well. I don’t have to do anything beyond sticking to the plan of contributing to my portfolio regularly and watching my dividends grow. My Little Money Soldiers do the rest.

As a Singleton, my paycheque is the primary source of income in my household. Years ago, I’d heard about how smart couples of means would live on one income and bank the other. Ideally, the really well-off couples would bank the higher income and live off the smaller one. I envied such couples! The reality was that I was not in a position to live on 50% of my take-home pay. I wasn’t willing to live that close to the bone because I wanted to be able to socialize with my friends each month and do some travelling. When I learned about dividend income and started doing some blue-sky dreaming about how dividends could be used to supplement my income, I couldn’t buy them fast enough!

Dividends are a second income in my otherwise single-income household. Unlike married people in a single-income household, I don’t have a partner who can go out and earn some money if my main income source dries up. My monthly dividend income is financially akin to having a partner with a part-time job. If I were to lose my paycheque, my dividends could help me survive from one month to the next. Obviously, I would lose the benefit of the dividend re-investment plan (DRIP) because I would need the dividends to pay for my absolute necessities while I looked for employment. As a single person, the dividend income created by my Little Money Soldiers provides a certain level of psychological comfort because I know that, should I lose my current job, I will continue to have income until I find new employment and start getting a paycheque again.

Right now, my investment portfolio produces a part-time income. If I continue to invest on a regular basis and if I refrain from spending my dividends rather than re-investing them, then my investment portfolio will eventually produce a second full-time income for my household. I will have the financial benefits of an imaginary spouse/partner without the real-life drawbacks that come with sharing money with a sentient human. And unlike other side hustles that are regularly touted on the Internet, my army of Little Money Soldiers goes out to work on my behalf thereby allowing me to indulge my inclination towards laziness. I don’t have to do anything outside of my comfortable routine in order to earn this money. It’s all mine – it’s tax-advantaged – it’s automatic – it’s wonderful!

For the past 7 years, I have consistently been investing in dividend-producing assets. I’ve reached a point where I consistently receive a 4-figure dividend payment every month. And since I don’t spend the money, it is automatically re-invested on my behalf. (Check out this awesome article for a primer on how DRIPs are the next best thing since sliced bread: My dividend employee Steve.)

I was very lucky that my parents were interested in the stock market. Both of them invested on a regular basis so I knew that there was a way to make money without actually having to go to work. Of course, my six-year old brain didn’t quite grasp all the intricacies of what each call from my mother’s broker meant but he phoned on a regular basis. (As an adult, I’m quite convinced that he merely churned her account to generate fees instead of acting in her best interests to make money. Nowadays, my mother invests on her own through her self-directed brokerage account and she’s doing quite well!)

My father’s style of investing was much different. He introduced me to the concept of dividends, and bought me several shares in companies that are still around today. When I was in my early 20s, I opened my own self-directed brokerage account and used my initial principal to buy shares in the various Big Banks. Again, betraying my youth and lack of knowledge, my only criteria for which bank stocks to buy was whether the bank participated in a DRIP. If the answer was yes, I bought $1,000 worth of stock in the bank. To this day, those banks still pay me dividends every quarter. I freely admit that this wasn’t the smartest way to pick my investments, but I could’ve done a whole lot worse! Every one of those banks is still around and the stock price has grown over time. Buying those bank stocks was one of the best financial decisions that I’ve ever made, even if the reason underlying the decision was not well-founded.

As we all know, time waits for no one. I learned more and more about investing by reading books, internet articles & personal finance blogs. They were all consistent that the way to earn outsized returns was to be invested in the stock market. I had little interest in becoming a expert in the stock market but I appreciated that the best historical returns went to those who had equity investments. Buying stocks in companies that paid dividends meant I was investing in equity. Dividend payments were a passive way for me to earn money and to participate in the stock market – to me, it was the best of both worlds! I started contributing more regularly to mutual funds which paid me dividends, then I learned about ETFs and index funds and a light went off in my brain. Why should I willingly pay higher management expense ratios (MER) for my mutual funds when I could buy the same basket of assets through an ETF or an index fund for a fraction of the price?

So, after paying off my mortgage at 34 and becoming debt-free, I turned my focus to building my non-registered investment portfolio. I promptly found an index fund that paid out dividends every single month so it was time to say bye-bye to my mutual funds. I was still investing in dividend-paying assets but I would be paying a lower MER to do so. My new index fund would simply pull the money from my chequing account and the investment would be made. Making the switch was a no-brainer! I set up an automatic contribution from my paycheque to my index fund. My first index fund offered a DRIP feature and I was not responsible for re-investing those dividends into new units of the index fund every month. The dividends were DRIP-ped, i.e. automatically re-invested into more units of my index fund, rather than paid out to me in cash. It was fantastic!

Two years ago, Vanguard came to Canada and I started doing some investigating. Vanguard has very low MERs on their products. One of those products was an ETF that paid out dividends every single month, offered a DRIP feature, and had an MER that was much lower than the one on my index fund. This was a hat trick! I could get all the benefits of my previous index fund portfolio while saving money on the MER and accruing even more units of the ETF every single month. Sadly, Vanguard will not simply withdraw the money from my chequing account – I have to transfer money to my brokerage account. Big deal! For $9.95 a month, I’m paying a much lower MER and earning sufficient dividends which more than cover the cost of the monthly purchase. I spent 15 minutes opening my online account. Then I spent another 3 minutes setting up an automatic bi-weekly transfer from my paycheque to my brokerage account to fund each month’s purchase. I haven’t looked back. Every month, I buy more units in my Vanguard ETF after the last month’s dividend payment has been automatically re-invested.

Earning money through dividends is awesome. I don’t have to do anything other than purchase the underlying asset and the dividends flow to me every month like clockwork. In the words of my very wise hairdresser, it’s money that I don’t have to sweat for. What could be better than that?

Spend Some, Save Some

This most excellent advice came to me from a highly trusted source – my mother.

While we were on our most recent vacation together, I asked her what she believed was the most important lesson to learn about money. In four words, she summed up the cornerstone of every personal finance blog I’ve ever come across: “Spend some, save some.”

For those of you who already peruse PF-oriented blogs, you’ll immediately recognize this alliterative wonder as the admonition to always live below your means. Living at your means, and living above you means, always ends with the result of not having any savings set aside for investing. My mother’s four little words are the bedrock upon which all wealth is built.

Please do not let her mantra mislead you. I can assure you that my mother is is not some penny-pinching old lady who resents the fact that she has to open her wallet. My mother loves fun! She enjoys her family and her friends – she entertains and she travels. My mother is the one who advises strangers at the casino to bet big money, if they can afford it, in order to score the big win. At the same time, my mother doesn’t have a mortgage on her home – she follows the stock market more diligently than seminary students study the scripture – she is always “finding” money that she didn’t know she had. And how does she accomplish this day after day, month after month, and year after year?

The woman lives by her mantra – spend some, save some. My parents were not rich people and they were not university-educated. They were regular people who didn’t earn big money. They had the same struggles as everyone else in raising their family and meeting their goals. When I was growing up, my father put my mother in charge of the household finances. Every two weeks, he got paid and he would sign his cheque over to her. (Back in the day, banks would cash signed cheques without too much fuss. For those of us who’ve known online banking our whole lives, trust me when I say it was a different world – today, no bank would ever do this for its customers!) When his company went to direct deposit, my father’s paycheque went straight into my mother’s bank account and they never fought about money. I’m not being cagey – my parents never had a joint bank account. His money went straight to her bank account, as did the money she earned from her job. It wasn’t until my first full-time job, as a bank teller, that I even realized that joint bank accounts were actually a thing!

So, every two weeks my mother got my father’s paycheque. And every month, she would write out what bills had to be paid. The money came in, the bills got paid, the groceries were purchased, the mortgage was serviced, long-term & short-term goals were funded. It worked like clockwork. Both of them had pensions, but they still ensured that they put money away in their RRSPs every year. They also wanted my brother and I to go to university, so every payday meant that $10 from my father’s paycheque went into our bank accounts so that we could buy Canada Savings Bonds each fall to finance our post-secondary education. As an aside, that $10 bi-weekly contribution grew to be substantial enough to cover 6 years of post-secondary for me and 9 years of post-secondary for my brother. We grew up in the 80s when inflation was high and Canada Savings Bonds were paying double-digit interest rates. Tuition was a lot cheaper in the 90s when we went to school, so our parents “little” investment plan allowed them to achieve one of their biggest goals for their family.

What other benefits came along with the “spend some, save some” philosophy?  If there was an emergency, the money was in the bank to pay for it. Renovations were made to the family home. Birthday parties took place every year without credit cards bills hanging around. There was always money for a movie and snacks with friends. Money was set aside for retirement accounts and investing accounts. (Investment accounts generated dividends that were invested, never spent!) An annual vacation was a given in our household. We spent many an hour in the car driving all over the place to visit family and friends, and to see this great big country of ours. Every few years, we’d even take a trip by airplane. The “spend some, save some” mantra meant that there was a balance between spending money now and spending money later. It also meant that there was always money somewhere: in a wallet, in the bank, in a retirement/investing/emergency account, in the change-jar in the corner of our kitchen.

We live in a world where the AdMan is always, always, always exhorting us to immediately cave to temptation. We’re encouraged to spend every penny we have, and even those we don’t, right away. Personally, I believe that the relentless tide of advertising is one of the many factors leading to the debt burdens of so many people. Adopting my mother’s mantra to “spend some, save some” and repeating it to myself every day is one way to fight back against the tide. It wasn’t until I was grown up that I realized just how well my parents managed their money – they had mastered the art how to live day-to-day while simultaneously saving money for both short-term and long-term goals. Thankfully, I’ve learned to do the same.

What about you? Have you made it a priority to “spend some, save some” in your life?

Priorities

Based on my own experience and decades of observation, I am convinced without a shadow of a doubt that priorities guide how we spend money. To paraphrase Paula Pant at www.affordanything.com, every spending decision you make is based on priorities because choosing to spend on one thing means that you’re not spending on something else. I think a lot of personal finance problems could be solved if people created their own priorities, but they don’t. Many people allow others to set their priorities for them, whether through marketing or peer pressure or societal expectations. People adopt the priorities of others and spend their money accordingly. Sometimes, this method works for them and sometimes it doesn’t.

Ideally, you create your own set of priorities and you’re in a position to pursue them with the support of your friends and family. I haven’t always been so lucky.

After I finished university and started my first professional job, my closest friends would give me a hard time about how I chose to spend my money. In short, they didn’t like the fact that I didn’t spend money on things that didn’t matter to me. They felt entitled to tell me that I “could afford it” – whatever “it” happened to be at the time. I heard their message loud and clear: my spending choices weren’t the “right” ones in their eyes. At the time, I had student loan debt. I had car debt. I owed money on my mortgage. I chose to allot my paycheque to various spending categories and I was very rigorous about paying down my debt while starting to save for my retirement. These were my priorities, and my closest friends at the time didn’t share or respect them.

Only one friend understood my priorities and supported me wholeheartedly. The vast majority of my closest friends did not. They were definitely more spend-y than I was but I couldn’t let their spending choices derail mine. What was my solution? Well, I didn’t get rid of those friends and I still spend time with them today. Over time, I simply stopped talking to them about my priorities and my money. In essence, I cut them out of the financial part of my life because I didn’t trust them to respect my personal goals and dreams. My goals were to establish a habit of saving for retirement, to pay off my student loans, to pay off my car loan, and to pay off my mortgage as fast as humanly possible. I only had so much money to work with and I wasn’t going to let their opinion that I “could afford it” derail me from focusing on my priorities. I was the only person who knew what my goals were and how I wanted to spend my money to achieve them.

Over the years, I read personal finance books and discovered the world of personal financial bloggers. It was in the books and the blogs that I found a niche where my priorities were the norm, where my goals were supported, and where strategies to achieve my hopes and dreams were shared by people who had already achieved similar hopes and dreams. As a result of what I learned from the books and the blogs, I was completely debt-free by age 34 and had achieved a solid six-figure net worth. By the time I was 40, I’d entered the double-comma club.

I also strengthened my relationship with that one friend who’d totally understood my desire to get out of debt and to pay cash for everything. We talked about money and shared what we learned. I remember when she confided to me that she and her husband would put off any and all purchases to the last possible moment in order to focus on paying off their mortgage. I was as excited as she was when they hit that milestone, just as she had been thrilled for me when I became debt-free at age 34.

It took me many years to craft a money system that funds my priorities with minimal decision-making on my part. Right now, I use automatic transfers to ensure that a portion of each paycheque is allocated towards each of my priorities.

– Retirement accounts? Check.

– Investment portfolio? Check.

– Emergency fund? Check.

– Utilities, property taxes, insurance premiums? Check

– Charitable donations? Check.

– Day to day spending? Check.

– Saving for next vehicle? Check.

– Saving for travel? Check.

– Saving for home renovations? Check.

These are the priorities that I have defined for myself and I have honed them over the years. I’ve learned to put very little weight on the priorities that others try to set for me. Their priorities won’t make me happy, but they will drain my wallet and get me into debt. I don’t want that for myself so I stick to what I know will get me closer to the life I want to live.

Over the years, there have been many times when I’ve had to re-order my priorities to ensure that I was doing what I really and truly wanted. Even today, I’m debating with myself about whether travel is more important than home maintenance.

I love travel, but I also need to renovate my basement bathroom and laundry room. These rooms aren’t in complete disrepair, but they will be if I don’t do something in the next 3 years. However, I realize that if I want to see, taste, touch as much of the world as possible then I have to get out there and do it. These priorities are both important to me right now and I see them in my mind’s eye as the two ends of a pendulum. I’ve been trying to figure out how to pay for both in 2019 and it’s just not going to happen unless I win the lottery or discover that a wildly-benevolent stranger has left me a sizeable bequest. I have to pick one priority over the other. In other words, one of the two is going to take a higher priority for me in 2019. I will still accomplish both goals, just not at the same time. I only have so much money and I refuse to go into debt, so something has to wait until I have the cash on hand to make the purchase. Right now, the pendulum is swinging towards the home renovation…but there’s a very good chance that it could swing back towards travel. All I am certain of right now is that one of my two priorities will be satisfied with the cash that I save up in the next year or so.

I’m not perfect, but I am definitely older and wiser now. I have to bite my tongue until it bleeds when I see others making what I view as “bad decisions” with their money. I remind myself that they’re spending their money in line with their personal priorities and that they’re under absolutely no obligation to have the same priorities that I do. Until they ask me what I think of their choices, I keep my opinions to myself. I do not want to do to my friends what was done to me because I didn’t like the feeling of knowing that I didn’t have their support. I don’t have to agree with my friends’ priorities and spending choices, but I do have to respect them.

The world isn’t ideal and you can’t always count on others to support your hopes and dreams. All you can do is figure out what you really want and go get it.