Category: Single Money

Sinking Funds – Making the Most of Your Money

I’ve written about sinking funds before. They’re pools of money that are meant to be filled then emptied, as many times as you want, for as many goals as you have. You prioritize what you want to accomplish then you decide how much money goes into each one. Sinking funds are to be held separately from your emergency fund, your investment account, your retirement account, and your daily chequing account. These funds are where you hold money for your short-term goals:

  • annual premium payments & subscriptions;
  • holiday spending, birthdays & celebrations;
  • travel;
  • tuition and annual fees;
  • house down payments;
  • renovations;
  • vehicle purchases & maintenance;
  • furniture purchases;
  • annual taxes;
  • RRSP & TFSA contributions.

Sinking funds allow you to save first, then spend your money. In case you were unaware, they are highly effective at keeping you out of debt while allowing you to still earn points/cash for using your credit cards. Let’s imagine that you’re planning to take a culinary tour in 2024. Dedicate a sinking fund to that expense and start saving for that trip today. When the time comes to book it, you use your credit card, collect your points, and pay off the credit card bill in full. You can enjoy your trip without wondering how you’re going to pay for it. Sinking funds are simply fantastic!

I have to confess that it took me years to set up all of my sinking funds. The truth is that you can’t save what you don’t earn. Early on in my career, I had a lot more debt and ridding myself of loan payments was top priority. The only sinking fund I could manage to fill was the one for my annual vehicle insurance and annual property taxes.

Monthly Payments Aren’t For Me!

I’ve always hated the idea of someone being able to withdraw money from my bank account every single month. I want to be the one in charge of when money leaves my bank account. The idea of a business accidentally withdrawing a payment twice and then having to fight with that organization to get my money back makes me furious and queasy. As a result, I’ve always chosen annual payments for my insurance premiums and tax payments. My first sinking funds were for those two expenses. Any other goals were funded from my bi-weekly paycheque via automatic transfers.

Once my student loans and vehicle loan were eliminated, I re-directed those payments to other sinking funds. My next big priority was travel! Every two weeks, a chunk of money went into my travel account up to a pre-determined amount. When it was time to book a trip, the money was there. It was awesome!

Did I stop setting aside that chunk of money once it was no longer going to the travel sinking fund? No! Instead, that money was re-directed towards my next highest priority until that pre-determined amount was met. In this way, my sinking funds were funded every year and I had the money set aside to pay for what I wanted.

Homeowners Need Sinking Funds.

Eventually, I moved from my first condo to a house. Woah!!! Anyone who owns a home will agree that it’s a money-pit. There’s always something to be fixed, replaced, maintained, or updated. As soon as I moved into my house, I realized that it was definitely time for a few more sinking funds dedicated to renovations and maintenance. Since being in my house, my sinking funds helped me to do the following:

  • renovated the basement and downstairs bathroom,
  • pour a new driveway, garage floor and walking paths,
  • have trees removed,
  • have landscaping work done,
  • change my main bathroom,
  • install carpet,
  • replace windows, eavestroughs & siding,
  • pour insulation;
  • buy new furniture & electronics;
  • install a new water heater & furnace;
  • remove a shed;
  • install a sprinkler system.

Believe it or not, there are still many other things that I want to do around here. If I hadn’t created my sinking funds when I first moved in, I would be neck deep in debt and stuck on a payment treadmill. Planning out my purchases in advance allowed me to plan out my money too.

It Can Take a Few Years.

For as much as I love my sinking funds, I was never able to fill all of them at the same time. I simply didn’t have enough money. There was no way my paycheque could have paid for everything all at once when I first started. As my income grew, so did the amount that I could allocate to my sinking funds.

Some funds had to be replenished every year, so they went into a dedicated account. Insurance and property taxes come to mind. They need to be paid every 365 days so I group them together in one sinking fund. It has been filled then emptied on a regular basis for the past 30 years. Once that sinking fund is filled, my money goes towards filling my other ones.

Other sinking funds have been for one-time purchases. Trust me – it’s highly doubtful that I will be cutting down the same trees more than once. The monies for one-time purchases goes into an account where the nickname could be changed as needed. “Tree Removal” would become “New Tire Fund” or “BAC Subscription” or whatever else happened to be next on the priority list.

Finally, there are the sinking funds that were put aside due to global events. During the pandemic, I discovered a love of my own backyard. Literally! The summer of 2020 and 2021 were spent in my own yard, tending to my annuals and watering my lawn. International travel fell to the bottom of my priority list. It still kind of blows my mind that it’s been over 3.5 years since I’ve been inside an airport!!!

My point is this. You may have more priorities than money. So what? Use sinking funds to maximize the enjoyment of your money. Ensure that it’s dispersed in ways that will allow you to live your best life. Like I said before, I didn’t start out with enough money to do everything that I wanted. International travel took backseat while I fixed up my house. Fixing up my house took backseat until I was out of debt. Getting out of debt was secondary to stuffing my RRSP as best I could on my entry level salary.

The bottom line is that I had to get a few pay increases under my belt before I could increase the amount of money going to my sinking funds.

If it takes you a few years to set up all of your sinking funds, then so be it. That’s completely normal. Only the privileged can do it all at once. The rest of us have to do more strategizing. The time will pass anyway so you might as well be using your time and your money in ways that get you what you want most.

Know Your Own Numbers

You need not be obsessed with personal finance but you do need to understand it.

Wisdom from the Internet

It’s long been said that information is power. This maxim is just as applicable to your money as it is to anything else. The more you know about your own finances, the better decisions you can make to create the life you want.

In the past few months, I’ve started following a channel on YouTube where people are interviewed about their money. They all have debt, which they say that they want to eradicate. Each of them says they want to live on their own, or start a business, or buy a house. Invariably, all of the interviewees reveal that they don’t know how much money they earn each month. Of the interviews I’ve watched to date, nearly all of the interviewees are paid hourly. Most of them have received a paycheque yet none of them know how much they bring home in a month. None of them!

It’s astonishing to me that they don’t know the most basic information about their financial lives. And it’s not an age thing. The interviewees I’ve seen have ranged in age from 19-32. These aren’t all fresh-faced high school graduates who’ve just left the nest. Most of them live with roommates, so they’ve had a taste of the adult responsibility of paying rent & making sure the lights stay on while putting a bit of food in the fridge.

If you’ve stumbled upon my blog for the first time, welcome! I hope you like it here and I hope you come back. Most importantly, I want you to know your own numbers. This is foundational knowledge. You need to have to this information when setting financial goals for yourself.

*** If you’re already a person who tracks their income, then the rest of this post might not be for you. ***

In order to build the life you want, you need to know your own numbers. I’ve written about the importance of tracking your expenses. The same importance should be placed on tracking your paycheques.

At the very least, know how much money you’re bringing home in your paycheque. This is your net income, aka: money you keep after taxes and deductions. When you spend less than your net income, then you have money to build an emergency fund and to invest for your goals. If you spend more than your net income, then you’re living in debt. This is a bad situation and it needs to be curtailed immediately. If your expenses are exactly equal to your net income, then you’re living paycheque-to-paycheque. Just like being in debt, this is a bad situation because you have no wiggle room. Any unexpected expense will push you into debt because you don’t have an emergency fund. You also don’t have any extra cash flow coming in from your investment portfolio in the form of dividends, capital gains, and interest.

I’m always baffled when people say they don’t know their net income. How can you make financial plans for yourself when you don’t know how much you have to work with?

Nearly everyone has a cell phone. They all come with calendars. Go into your phone, set up alerts to tell you when you’re getting paid. When you get your paycheque, track that amount. You can use a pen and paper, a spreadsheet, or an app. It doesn’t matter. You just need to know how much money will be in your pocket until your next paycheque.

Once you have that number, you can start subtracting your expenses from it. I would suggest that you always allocate money to your needs first. After that, every other expenses is a want. You’re human, therefore food and shelter are your top priorities. Given that you’re working for a paycheque, you’re probably not independently wealthy. So that means your next priority is paying for transportation so you can get to work. Life offers no guarantees. You need to put some money aside in your emergency fund.

Do you still have money leftover after paying for these four critical items? Great! Get busy figuring out which one of your many, many wants is the next most important to you. Cell phone or clothing? Gym membership or gifts for loved one? Pet care or charitable donation?

When your expenses have exhausted your paycheque on paper, then you stop spending. Wait! Are there still things that you want but can’t be covered by your net income?

Then you’ve learned something! You’ve discovered your shortfall amount, aka: the amount of money that you need to earn to pay for all the things you want to buy. Your next step is to figure out how to make more money to cover the shortfall. Maybe you get a promotion. Perhaps you sell some things that you no longer need or use. You could find a better-paying job or get a promotion with your current employer. Maybe you pick up a part-time job or offer your services to people who need them.

Again, information is power. It’s up to you to know your own numbers so that you can figure out what it will take to build the life you want. If you start today, then you’re one day closer to making your dreams come true.

Take Action Today – Don’t Wait for New Year’s Eve!

As you may know, I’m not a fan of New Year’s resolutions. To my mind, if something is good for me, I should start doing it today if it’s in my power to do so. Waiting for some arbitrary date on which to implement something beneficial seems a little… stupid. Delaying means that I’m continuing with something not-good instead of making my life better as soon as possible.

But that’s just me. You do you as you see fit.

There are exactly 6 weeks left in 2022. You might to cast a thought or two towards the status of your money and how it’s done in the past 10.5 months. Are you happy with how you handle money? Do you think that there are areas where your habits & choices could be tweaked? If you could go back in time, would you make the same choices?

Most importantly, what have you learned about yourself from the way you use your money?

Emergency Fund

How’s your emergency fund? You really should be plumping it up. Inflation is still a bear and interest rates are going up. When the emergency lands, you’ll be grateful that your emergency fund is on the larger side. Make sure you’re adding a few dollars to your emergency fund every time you’re paid. It takes quite a while to get it to a five-figure size. Even if it’s only $5, start there and work your way up. More is usually better when it comes to having money in your emergency fund.

I have yet to hear anyone complain about having “too much money” when they’ve lost their job, or had to repair the vehicle they need for work, or had to wait for their sick leave benefits to kick in. An emergency fund is supposed to replace your income for a short-term period until you’re working again. No one really ever knows how long they’ll be out of work, so more is better when it comes to having money set aside.

And since no one ever knows when something will happen that will threaten their income, it’s best that you take action today. Do not wait for the next calamity to arrive before you start funding your emergency fund. Think of the people who lost their jobs when COVID-19 arrived in 2020. Want to bet that many of them wished they’d had an emergency fund in place to cover their bills while they were unable to earn their income?

Funding your retirement – TFSA and RRSP accounts

Maybe you’ve got a pension. Maybe you don’t. Either way, you should be saving for your own retirement. After all, a pension is simply a promise. Sadly, promises get broken. Just ask the pensioners who worked for Sears and Nortel. Those retirees did not get the money that they were promised. In short, these workers held up their end of the bargain by working for their employers for decades with the understanding that they would be paid a pension amount every month. To put it mildly, the employer did not come through on that promise.

Don’t let this happen to you! Start saving money for your own retirement, over and above whatever your employer has promised you. Every time you’re paid, shuffle a little bit of money into your personal retirement account. If you’re fortunate enough to have money for both, start with your Tax Free Savings Account and fill it up before you move on to contributing to your Registered Retirement Savings Plan. Despite their names, do not leave money in your TFSA and your RRSP in savings accounts. Invest your money in the stock market by using exchange-traded funds or index funds that are equity-based.

The sooner you invest, the sooner your money can start to grow. Take action today.

Once you’ve invested your money, leave it alone. If you’re more than 5 years away from retirement, then you’re investing for the long-term and you can safely ignore the Talking Heads of the Financial Media. The THFM are there to generate ratings for their media platform, not to give you a personalized assessment of your current financial situation. If you want that kind of attention, then hire a fee-only financial planner. You’ll pay the bill and you’ll have the assurance that her or his opinion is about your money circumstances. Again, hire a fee-only financial planner. Anyone else is probably just a salesperson who get a commission when you buy a recommended product.

Track Your Expenses

Where does your money go? How many automatic expenses go through your bank account or your credit card? How much do you spend with cash?

It’s my belief that knowledge is power. In order for you to be powerful with your money, you need to know how you spend it. Start tracking your money. Use an app. Fill out a spreadsheet. Pick up a pen and put it to paper. I don’t care what method you choose. The bottom line is that you need to know where all of your money is going.

Armed with that information, you’ll be able to figure out if your spending choices align with your life’s priorities. In other words, are you spending your money in the best way possible to get what’s most important to you?

Right now, we’re in an inflationary period. Everything is more expensive!!! The same dollar buys less today than it did last year. Given that reality, it’s vitally important that you’re satisfied that you’re spending choices reflect your goals. Unless you get a raise, it’s not like you have more money available for daily life. Winning the lottery, inheriting lots of money, and getting an insurance payout are not reliable or predictable ways to obtain more money. For most of us, we work – we get paid – we spend-and-invest our paycheques. Unless our paycheques increase, there’s precious little flexibility to get more money.

You give up time doing whatever-you’d-rather-be-doing to work and earn money. Respect your efforts enough to know where that money is going. Take action today and become intimately familiar with how, when and why you’re parting with your hard-earned money.

Slay the Debt Monster

We all know that it’s incredibly easy to get in to debt. Credit is everywhere! A few clicks on your phone, tablet, or computer and some creditor will be sending you a credit card in moments. Credit and debt are two sides of the same coin. You cannot go into debt unless someone has extended you credit. Alternatively, you can’t be in debt if you don’t use credit. See how that works?

If you have debt, then do what you can to get out. Maybe you take a second job and the paycheque from that job goes straight to your debts. Perhaps you start selling things that you don’t need or use anymore. Money from those sales goes straight to your debt. Do some batch cooking so you can cut back on eating out. There’s always the option of giving up subscriptions for a few months. Do you need all of your streaming services right now? Could you live with one of them for 2-3 months, then switch to a different one later? While they’re still only less than $20 each, if you have more than 5 streaming services then you’re spending close to $100 per month.

Take that $100 per month and throw it at your debts. Pick the smallest debt – pay it off first by adding the $100 to your minimum payment on that debt. Take that former payment and add it to the $100. Apply that payment amount to the minimum payment on the next smallest debt and pay it off. Now two debts are gone. Take those two former minimum payments and add them to the $100. Apply that amount to the minimum payment on the third smallest debt and pay it off.

This method works. You’re making minimum payments on all of your debts, except for the one that’s getting the extra money.

That’s it – that’s the post.

Hopefully, you’re doing okay. No one can predict the future, but I can promise you that tomorrow’s challenges will be easier to handle with money in the bank. Take action today and make the money moves that will help you to make your dreams come true.

Easy money… Why You Should Give a Hoot about Organic Dividends.

Save. Invest. Learn. Repeat.

Blue Lobster

So this blog post will fall under the “Learn” category. It’s just a tidbit of information about organic dividends to add to your investing armamentarium. Do with it what you will.

Long-time readers know that I’m a huge fan of dividend ETFs (exchange-traded funds). Since the start of my investment journey, I’ve relied on DRIPs (dividend re-investment plans) to re-invest all of my dividends automatically. I time my investment purchases to take advantage of each ETF’s ex-dividend date. I felt very smart about dividends. As always, the universe has much more to teach me.

Lately, I’ve been coming across the term “organic dividends” more frequently. Every time I see this term, I ask myself questions: What are these? Do I need them? If so, how do I get them?

First question – what are organic dividends?

From what I’ve gathered, organic dividends are the dividends that are generated when the dividend-issuing company raises the dividend-payout per unit. If I have 1000 units that pay me $0.10/unit in dividends, then I earn $100 in dividends. Fantastic! Those aren’t the organic dividends though.

When the company raises the dividend payout to $0.15/unit, then I get to benefit from organic growth in my dividends… My dividend increase directly as a result of the increased dividend payout. That $0.05 increase in the payment – from $0.10 to $0.15 – results on my dividend payment increasing to $150, without any effort on my part.

Instead of buying 500 more units to get that $150 dividend payment (=1500 units x $0.10/unit), I earned more dividends per unit simply because I own the units. Yay, me! In other words, I didn’t have to invest any money increase the amount of my dividend payment. Instead, my dividend grew organically because the dividend-payout increased. Essentially, I earned more money without doing any more work.

Mind blown! Organic dividends are as wonderful as my DRIP for increasing my dividend cash flow.

Second question – do I need organic dividends?

The short answer is “Hell, yes!”

My portfolio benefits anytime one of my dividend-paying companies raises its dividend payout. I can’t imagine a situation where organic dividend growth would be bad for me. Again, I earn more money without doing more work. Obviously, I’m going to like this fantastic feature of organic dividend growth.

Even if my taxes go up, so what? Dividends are taxed so much less than earned income. Getting an increase in my dividend payments, via organic growth, is similar to getting a raise at work. The organic dividends are way, way better than the raise, because the raise is taxed much more than the dividends are. The tax treatment of dividends is much better. If you want more details, talk to a tax professional.

If you’re fortunate enough to benefit from both organic dividends and a raise at work, then count your blessings, pay your taxes, and go on about your day.

Third question – how does one get their hands on organic dividends?

Well, my sweet… we have to go back to first principles to answer that question.

  • First, you live below your means. If your spend every nickel you earn, then you won’t have any money to invest. You need to have some disposable income to direct towards wealth creation.
  • Second, you automatically transfer a portion of your paycheque to your investment account every single time you are paid. Start where you’re at and increase that amount over time. I started with $50 every two weeks from my first part-time job. Now, I’m investing twice that much every day… on top of the monthly dividends that are automatically re-invested.
  • Third, you buy dividend-paying investments. I like to buy dividend ETFs, but there are also dividend-paying mutual funds and dividend-paying index funds out there. (Never forget that mutual funds are far more expensive than ETFs and index funds so you’re paying more to own them. You should probably stick to ETFs and index funds.) You can even buy stock in companies directly, if you think that’s best.
  • Four, set up a dividend re-investment plan so that your dividends are automatically re-invested for you every time you are paid.

You continue to live below your means so that you always have money to invest. The dividends will start as a trickle, then compound over time. Eventually, they’re a virtual waterfall showering you with money every year. The more you invest, the faster your dividend payouts will grow. When the dividend-issuing companies increase their dividend payout amounts, each of your ETF units (or stock) will pay you more money.

You cannot benefit from organic dividends without first having dividend-paying products in your portfolio. Never, ever forget this.

That’s it. That’s the post. Organic dividends are a great way to increase your passive cash flow. You cannot control when they’ll show up, but you can definitely control whether you’re positioned to receive them. Do with this information what you will.

Some Random Thoughts About Money

Never let it be said that I’ve ever held myself out as a money expert. Truth be told, I have no formal training in financial planning. I’ve read lot of books and lots of blogs, but I’ve never been certified to give financial advice to anyone.

With that said, I’d like to share some random thoughts I’ve had about money over the years. It’s been my observation that there are general principles about money that will work for most people. Here are the ones that I want to share with you. And if you don’t agree with me, that’s fine. I’m not arrogant enough to think I know all the answers or that my way is the only one that works. Take what you need and leave leave the rest.

Take care of your emergency fund

First of all, it’s always a good idea to have an emergency fund. Larger is better, but any amount is better than nothing when the emergency hits. There will be an emergency at some point – it’s not a matter of “if”. It’s a matter of “when”. Do yourself a favor. If you haven’t started an emergency fund, start one today. And if you do have an emergency fund, try to bump it up by 10%. Inflation has been on a tear so whatever emergency you have in your future, it’s going to cost you 6%-8% more due to inflation.

By its very definition, an emergency will not give you a heads-up. It’s on you to prepare for its arrival by setting some money aside for the financial aspects of whatever emergency is headed your way.

No new debt

The next thing you’re going to want to do is avoid going into more debt. If you’re not in debt, then great. Keep it that way. However, if you have debt, then seriously consider working your way out of it. Cook at home more to save money. Eliminate a streaming service or two for a few months and re-direct that money to your creditors. The fact is we’re heading into – or are already in – a recession. Not everyone is going to keep their job, or have an easy time finding one should the need arise. If that might be you, it would be very, very smart of you to minimize the strain that debt payments put on your paycheque.

After all, any money that doesn’t have to go to your creditors is money that stays in your pocket.

Invest for the long-term

Third thing – don’t stop your investment program. If you’ve been here for awhile, you know that I strongly suggest that everyone invest in the stock market. My non-expert recommendation is that you invest for the long-term in a diversified, equity-based exchange traded fund. For the past year, the stock market has been trending down and it’s been extremely volatile. Big deal! The long-term trajectory of the stock market is up and to the right. Over time, the stock market make money for investors. You need not concern yourself with daily movements.

If you’re investing in diversified, equity-based ETFs, don’t stop. Keep investing! However, if you’re investing in individual stocks, then God be with you. I have no idea how to pick winners and wish you the best of luck in your efforts to do so! If you’re not investing in anything, it’s time to start. You cannot participate in the stock market’s recovery if you’re not investing in the first place.

Use your tax shelters first. This means, put your ETFs in your TFSA first then into your RRSPs. Once you’ve filled up those tax shelters, you can invest in a brokerage account. Since TFSA and RRSPs are tax-shelters, the money will grown inside them tax-free. When the money comes out of your RRSP, you’ll pay taxes on the withdrawal. When money comes out of your TFSA, you will not pay any taxes on the withdrawal. Got it? Good. Don’t believe me? Talk to an accountant.

Once your tax shelters are maxed out, then continue to invest via ETFs in a brokerage account. The capital gains and dividends earned will be taxed each yet, but at a preferential rate. This means that they will be taxed at a lower rate than that tax rate you’ll pay on your earned income.

Again, talk to an accountant for professional tax advice.

Quick review:

  • Emergency fund? Check!
  • Debt paydown? Check!
  • Investing for the future? Check!

Now what?

Well, if you’re fortunate enough to still have money leftover, you’ve got many good options.

Might I suggest some sinking funds? The new year is less than 10 weeks away. If there are any particular dreams you want to realize in 2023, then now is as good a time as any to start planning on how to pay for them.

  • Do you want to travel in 2023?
  • Will you be taking some new course(s)?
  • Is it time for that home renovation you want?
  • Do you want to make more or bigger donations next year?
  • Are there any big celebrations or anniversaries that will happen in 2023?
  • Is there a chance you’ll be taking a sabbatical?
  • Will you need to purchase or replace any equipment for your business or side hustle?

Creating sinking funds and filling them up via automatic transfers is a good way to ensure that your priorities are funded. It’s been my experience that my money is frittered away when I don’t have a plan for it. Sinking funds have been a godsend for me since they ensure that money is in place when I need it. Chances are, they’ll serve the same purpose for you if you decided to use them.

And finally…

Remember to enjoy today. So much of financial planning and money management is about the future. While it’s good to take care of Future You, it’s just as important to live in the present. Wishing away your life is no way to live it. Count your blessings and enjoy them while you can. Today won’t ever come again, and tomorrow is promised to no one.

We’re in the Final Quarter!

As hard as it may be to believe, there are roughly 90 days left in 2022. Does anyone else feel that life resembles a roll of toilet paper? In that the closer it gets to the end, the faster it goes? Honestly! It seems to me that we were just starting summer about 3 or 4 days ago .

Yet, here we are in the final quarter of 2022. We’re heading into Halloween, Thanksgiving, Eid, Hanukkah, Kwanza, Christmas & New Year. And for some segment of you, there are various birthdays and anniversary celebrations thrown in there too. It’s the time of year that I’ve taken to calling the Shopping Season.

You may call it something else. No matter. My only question for you is: how are you going to pay for it?

I’m hoping that your upcoming celebrations and festivities will be funded by your money pots, aka: sinking funds, rather than by your credit cards. And if you do use your credit cards, please have the money already set aside to pay the bill in full. As you know, I love my credit cards and gleefully collect points each month. However, I would shred my cards in an instant if I didn’t already have the cash on hand to pay the bill in full each and every month.

Create a plan of attack for the Money Vultures coming for your cold, hard cash … I mean, draft a strategy that allows you to enjoy the Spending Season as you want to. Retailers are still trying to make up for those sales that were lost during the pandemic’s lockdowns. They will be particularly inventive and persuasive as they try to convince you that spending is the only way to show your love. I’m not telling you that you can’t spend your money. What I’m telling you is that you should be smart about how you do so. What things are most important to you? Who are the people who deserve to stay on your gift-list? Is there anyone who should be removed from your list? Are charitable donations important to you? If so, how much do you want to donate this year?

These are the questions that you should answering as we start the final quarter of the year. If you’re paid bi-weekly, there are only 6 or 7 paycheques left in the year. Take the time to figure out how much of each will be spent on the various events that you know will be coming up before 2022 rolls into 2023.

I know people who are absolutely enthralled by Halloween and acquire the most amazing costumes every year. Other people put lots of time into decorating their homes for Christmas. There are those who have to do a significant amount of travel in order to be with their loved ones over the holidays. The Spending Season is chock-full of opportunities to spend-spend-spend on everything for everyone!

It can be a financial disaster that derails all of your other money goals. You don’t have to let that happen. Nope! You have the power to decide how you want to spend your money during the next 90 days. Do not let the AdMan and the Creditor convince you that the only way to appreciate your loved ones is to bankrupt yourself. It’s not true. The people who really and truly love you do so because of who you are, not what you buy them.

Can You Save Too Much Money?

This question recently came up, and I’ve been noodling on it ever since. My whole adult life, I’ve been following the habit of maxing out my RRSP, my TFSA, and saving another chunk of my paycheque in my non-registered investment account. However, yesterday, someone asked me what I was saving it all for and whether I would still be able to achieve my retirement goals if I saved slightly less and spent more money in my day-to-day.

Mind blown!

In all honesty, I have never seriously considered that possibility. When it comes to my own money, I’m very rigid and allow for little, if any, deviation from my money rules. I wanted to hit certain savings targets in my life, and I’m pleased to say that I’ve hit them. It simply never occurred to me that doing so would mean that I would be saving too much money.

Bridget Casey, Ramit Sethi, and Bill Perkins are three people whom I’ve started following online in the past few years. Each of them, in their own way, discusses the importance of operating from an abundance mindset instead of a scarcity mindset. All of them encourage their readers/followers to live a rich life today and to avoid putting off today’s happiness to save for tomorrow’s.

It was brought to my attention that, though I read those books, there’s a very, very, very teensy-weensy, itty-bitty, little chance that I might not be putting their advice into practice. It’s quite possible that I’m operating from a scarcity mindset. Maybe I’m operating out of a place of fear that I won’t have enough, despite all the evidence to the contrary? A very wise and very good friend has suggested to me that I’m in a position where I have enough invested for the future. (Truth be told, I’ve heard that same message or a variation thereof from other people who love me.) The suggestion was made that continuing to save for tomorrow will prevent me from having what I want today. My friend’s words threw me for a loop and I’ve been thinking about them ever since she uttered them.

So again, my question is can you save too much money?

This question leads me to more questions. According to calculations I trust, I will die with several million dollars in the bank if I stick to my current Rigid Rules. I’m a Single. No spouse, no kids. Strictly speaking, I have no natural heirs of my own issue. Does it make sense for me to die with that much money when I don’t have my own children? Isn’t there the slightest possibility that I could cut back on my saving right now and let my current investments ride? After all, I would still die with a nice fat cash-cushion, but I could have a little more fun along the way if I spent more of my money day-to-day.

Yet that viewpoint leads me to the next question that I think is important. Am I unhappy with how I currently spend my money?

My honest answer is that I’m not. In all honesty, when I want something, I buy it. Do I save for it first? Generally, yes – saving comes before spending. Do I stop or reduce my investment and retirement contributions to spend money? No, never. Is this a bad choice?

Until yesterday, I would have emphatically said “No – it’s not a bad choice.”

Today, I’m not so sure. If my retirement will still be quite comfortable, even if I spend a little bit more today, then does it make sense to continue with the same savings habit? Alternatively, should I be forcing myself to spend more money today just because I can?

The goal of life isn’t to simply die with a whole lot of money. Even I can appreciate that such a life is a wasted one. I don’t feel that I’m wasting my life by following my Rigid Rules. Right now, I go out with my friends. I travelled a lot before the pandemic. I spend a lot of time with my family. Buying what I want, when I want isn’t an issue. Could I spend more money on stuff for the sake of doing so? Sure, but I don’t want to fill my house with stuff that I don’t need or won’t use.

My whole life, I’ve been a money planner. I’ve been saving since I was a small child. My parents started us on an allowance. When I started working, I kept up the habit. Never once did I question whether I was doing the right thing by saving something from every paycheque. As my paycheques grew, so did the percentage that I saved and invested. Lifestyle inflation was never a problem for me. Living below my means has always be my guiding financial principle. I created a very large buffer between myself and the financial edge.

Now, I’m entering the second half of my life. The lessons that got me here might not be exactly the right ones to get me where I really want to be. It’s time for me to consider the possibility that I’ve moved into the “and” stage of my life. Up until now, I’ve always believed that I have to choose between various options. However, it’s starting to come to my attention that maybe there are situations where I don’t have to choose. Maybe I’ve reached a point where I can have both.

I can spend money today and still retire comfortably. It might be time for me to force myself to spend, in just the same way that I forced myself to save. Maybe I can cut my daily saving amount and still reach my financial goals. I get one life, and I want it to be as good as I can possibly make it. This means that I need to get back to assessing if what I’m still doing will continue to be the right choice. The strategies that I employed when I was younger may not be the strategies that will benefit me going forward.

Can you save too much money? The question will stick with me for a good while. I’m happy with how I live my life, but I have to consider the possibility that I could be happier. There’s a chance that I could be spending my money in a way that brings me more joy today while still ensuring that I’ll be taken care of tomorrow. And that’s the goal that I should be striving to fulfill.

Fixed Rate Mortgages Offer a Measure of Safety

Last week, I wrote about the challenges of having a variable rate mortgage when mortgage rates are increasing. This week, I’d like to discuss how fixed rate mortgages (FRM) offer a measure of safety. Depending on when your FRM is up for renewal, you have some breathing room to figure out how to handle the increased mortgage payments that are coming your way.

The generational low mortgages, i.e. rates below 3%, are pretty much gone for good. For very brief blip of time, you could get a discounted 5-year rate for 1.39% in 2021! That’s an incredibly low mortgage rate for a 5-year term, one I doubt that I will see again in my lifetime.

Even if you were able to snag a 5-year rate lower than 3% in early 2022, I can pretty much guarantee that you’ll be paying atleast 2% more when you renew in 2027. For my money, I think you should take the following steps to prepare yourself.

Gather information

First of all, start playing around with mortgage calculators. Plug in your own numbers so you can see the difference that a higher rate is going to have on your mortgage payment. It should be obvious that a higher rate on your FRM means that the payment is going to go up. The mortgage calculator’s job is to inform you of the size of that increase.

Armed with that knowledge, you can start making a plan on how to pay for your property when your mortgage costs go up. The last thing you want is to be surprised by a $500 increase in your mortgage payment, or to face a future foreclosure because you can’t pay your mortgage debt.

Build a lumpsum payment

Secondly, start saving the difference between what you’re currently paying on your FRM and what you anticipate paying at renewal. How you save the money is up to you. Here are a few suggestions:

  • Get a part-time job.
  • Bring in a roommate.
  • Cut your expenses.
  • Obtain a promotion or raise at work.
  • Start a cash-flowing side-hustle.
  • Use an insurance payout or inheritance.
  • Sell things you no longer use.
  • Take transit to save on parking fees.
  • Cook at home most days of the week.
  • Save your tax refunds and work bonuses.

Open a separate bank account for this money. Set up an automatic transfer so the money goes into the new mortgage account without any further decision-making on your part. Remove the temptation to spend this money – do not get a bank card for this account! If it’s your priority to be in a position to handle your increased mortgage payments, then you should not be touching whatever’s in this account.

This money is meant to be in place so that you can make a lumpsum payment against your mortgage at renewal time. Lumpsum payments decrease the amount of money being borrowed. Applying a lumpsum to your outstanding mortgage balance will lessen the impact of the higher interest rate’s impact on your mortgage payment. The more of the principal that you pay down, the less money you have to borrow from the bank to pay off your remaining mortgage debt.

Increase your mortgage payments

Thirdly, you can increase your mortgage payment. When I had a mortgage, my bank allowed me to increase my mortgage payment by up to 20% every year. It was a fantastic feature, and I used it religiously. Of course, my initial mortgage payment was something like $300 bi-weekly, so it wasn’t a hardship to find an extra $60 every two weeks. A friend of mine took a different path. Every two weeks, she determined whether to make a lump sum payment against her mortgage. Since her expenses were far more variable than mine, she needed that flexibility. However, the both of us managed to pay off our mortgages way earlier than the 25 years that our lenders had allotted to us.

Your mortgage payment might be over $1500-$2000-$2500, so a 20% increase will pinch a bit harder. However, if you can increase it by any percentage, then do so. The sooner you repay the principal balance owing, the lower the balance that you have to renew. A lower renewal balance results in less of an increase in your future mortgage payments.

Renew now instead of later

Finally, determine if you can lock in a mortgage renewal rate today. This step is for people whose FRMs are coming up for renewal in the next 90-days. Most lenders allow people to renew their mortgages early, usually within 90-120 days from the expiry of the mortgage term.

While it’s not a 100% guarantee, you can confidently assume that the Bank of Canada will be raising the prime interest rate again on October 26, 2022 then again on December 7, 2022. When they do, lenders will take the opportunity to increase their mortgage rates. If you lock in a renewal rate before these dates, you should definitely do so.

A Measure of Safety

I’ve always relied on fixed rate mortgages. I think they’re great for allowing borrowers to know the fixed costs of their shelter for a defined period of time. Having a fixed mortgage payment goes a very long way towards understanding where your hard-earned money must be allocated. My father once told me that, when you know the cost of your shelter, you can build the rest of your budget around it. He was right. Having a place to lay your head is a fundamental necessity so paying for it must always be top of mind.

Assuming that you do not want to sell your property or lose it to foreclosure, it would behoove you to start thinking about how much your mortgage payment is going to be upon renewal. Knowledge is power so use knowledge to your advantage. In this post, I’ve shared a few tips with you on that steps you can take to minimize the impact of increase rates that are headed our way. You will need shelter until the day you die, so please do not procrastinate. Take steps today to ensure that you can shelter yourself tomorrow.

You Should Always Be Saving Money!

There is no way around it. You should always be saving money – some way, some how. Life is expensive, and it only gets more so. Name one essential thing in your life that has gotten cheaper over the years. Food? Nope. Rent or housing costs? No! Gasoline? Not a chance. Utilities? Not a bit. Transit? Slower increases but increases all the same.

Even if you have a fixed mortgage on your home, the cost of borrowing money will go up when you renew. The central banks are on a tear because they want to get inflation under control. That means mortgages are more expensive. Even with a fixed mortgage, the other costs of home ownership have gone up over the years.

While it’s important to live in the present, I would argue that you owe it to yourself to resist the incessant urging of the AdMan and his trusty sidekick, the Creditor, to always be buying. You need to save money for Tomorrow, and there’s a good chance that you don’t know exactly how much you’ll need.

For example, if you own a house, then you should definitely be saving. At some point, your house will need an expensive repair or costly maintenance. It could be a new furnace, a new hot water heater, new windows, new roof, or a new foundation. It’s unlikely you’ll be able to buy another of those things for less than $100. And while a new hot water heater doesn’t cost nearly as much as a new roof, it’s best that you have the cash-money on hand to buy it outright. Your water heater should not be the reason you’re paying interest on your credit card.

And while a new roof is likely going to run you 5-figures, the same principle applies. Start saving money now so that you have the cash in place in 10-15-20 years when you’ll need to replace your roof. Much like successfully saving for retirement, owning a home requires long-term financial planning. I love my home but I’m the first to tell everyone that it’s a money pit.

Saving for retirement should be obvious. Your bills won’t disappear until you die. In other words, you may have parted ways with your employer but don’t assume that means that your bills will have parted ways with you. Whether 25, 45, 65 or 85, you’ll still need to eat and have shelter. Society still demands that you be clothed. No matter how old you become, you will need money for the basics.

You need to invest today so that Tomorrow You will be okay financially. Remember that most people don’t have pensions, i.e. their employers are not saving for them. It’s up to you to save and invest. For those few who do have pensions, there’s a chance that your pension is not indexed to inflation. This means that your employer will pay you a fixed amount when you retire, but that amount will never go up since it is not indexed to inflation. Prices will continue to increase but your pension amount will be set in stone until you die. This is not a good situation to be in if your retirement is going to last a long time. And since very few us know our expiry date in advance, it’s best that you start investing your money ASAP and ensure that your portfolio mix is built for growth.

Maybe you own your vehicle. You should definitely be saving. Oil changes, brakes, tune-ups, various repairs, insurance, registration – all of these things cost money. Ideally, you’ll pay cash for your car. And if you can’t pay cash, then pick the least expensive vehicle you can find that will do the job so that your financing costs are as low as possible. Once your loan is done, continue to pay that loan amount into your Next Car Fund. When the wheels fall off your current vehicle, hopefully you will have enough in your Next Car Fund to pay cash. Then repeat the cycle. This method works best if you can get 5 years or more between vehicle purchases.

Do you have loved ones with whom you like to celebrate things? Are they the people you call when you want to do things? Concerts? Sports games? Picnics? Wine tastings? Movies? If the answer is yes, then you should have some fun-money set aside for those times together. It doesn’t have to be a lot, but every paycheque should see $40-$50 going towards these outings. Life is better when it’s shared with those we love. And while there are free things that you can share with loved ones, there are also times when you might want to spend a little bit of money on them too.

One of the very best benefits of always saving your money is that you can live in a state of debt freedom. Your entire paycheque, after taxes, is completely yours. You need not send any of your hard-earned money to a creditor for a purchase made in the past. You get to keep your money! This is an exceptionally good thing considering how hard you’ve worked for it.

So just remember to always be saving. Whatever it is that you want, try to save for it in advance then pay cash. You won’t ever regret depriving your creditors of interest payments. Trust me on this one!