Category: Tips and Tricks

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.

A Few Basic Tips for an Era of Rising Interest Rates

According to the Talking Heads of Financial Media, the central banks will continue to raise interest rates. This means that credit will continue to get more expensive. In other words, it’s going to cost you more if you need to borrow money for a house or if you have a line of credit. I’ve yet to see anyone talk about whether credit card interest rates will go up as a result of central banks’ increases. Let’s just say that I wouldn’t be surprised if credit card rates increased too.

So what are you going to do about it?

You do you. Take my words with a grain of salt. You know your numbers better than I do. Take what you need from this blog post and leave the rest. It won’t make any difference to me.

Invest

First, don’t stop investing. The stock market is down. In my opinion, which is both very inexpert and completely amateur, the stock market will continue to be extremely volatile for the next 12 months. This means that you should be buying and holding for the long-term. The stock market will recover, but absolutely no one knows when. Buying now means buying low. You want to buy low.

When you do buy, don’t sell. Stock markets are volatile right now. That means the value of your investment will go down on some days, then creep up a few days, then go down again. If you’re buying diversified exchange traded funds and mutual funds, you’re in it for the long haul. The price will gyrate, sometimes wildly. Do not check the price everyday. Invest regularly and believer that, over decades, the stock market’s trajectory is up. When you are investing for the long term, day-to-day price movements are inconsequential to your overall investing plan.

If you’re buying individual stocks, then you’d better know what you’re doing. I don’t invest in individual stocks because I don’t have sufficient knowledge to make wise choices.

No New Debt

Second, don’t borrow any money. This one might be tricky. Again, you know your situation better than I do so do with this suggestion what you want. Don’t borrow any money. If you’re bored with your vehicle and want another one, keep driving your vehicle. Being bored is way less expensive than paying 7.99% to a dealership. (Keep in mind that’s the rate they offer to people with good-to-great credit. I can only imagine the rates offered to those with less-than-stellar credit scores.) Do not finance another vehicle since interest rates on car loans are also increasing. If you simply must replace whatever you’re currently driving, then pay cash.

Maybe you’re ready for a vacation. Great! Pay cash. Perhaps a little self-care is in order? Do what you need to do. Pay cash. The new Bright-and-Shiny has finally been released and you’ve been waiting for it for a very long time. Fantastic and congratulations – go & get it! Pay cash.

It is not a good thing to go into debt when interest rates are going up. And they are going to keep going up for the next little while. Do yourself a favour and pay cash so that you don’t have to worry about them.

Eliminate Current Debt

Third, work on paying off any debt that you’re already carrying. I have no tips on how to change the past. If you’re in debt, then there are precious few ways to get out.

One method has two parts. First, don’t acquire more debt. In other words, start paying for things with cash or debit. Two, pay off the remaining balances on the debt you already have.

Have the money come out of your account as you pay for your purchases. Believe me when I say that you will naturally decrease the number of purchases you make. Fewer purchases results in having money available to make extra payments on your outstanding debt. Sending extra money to your outstanding debts results in those debts being paid off sooner rather than later. Once the debts are eliminated, creditors no longer have a claim on your money. This is a very good thing.

That’s it. That the 2-step method for getting out of debt. While this is a simple plan, it is not easy to implement. Never confuse simple with easy.

The other method to eliminate debt is bankruptcy. If you need to go that route, then talk to a bankruptcy trustee for expert advice. Bankruptcy trustees know the process and can offer you expert advice on how to deal with your situation.

Emergency Fund

Keep your emergency fund as full as possible. If you had to use it, then focus on replenishing it. Now is not the time to be on the high-wire without a safety net, financially-speaking. While you have a paycheque, ensure that a portion of it is diverted to your emergency fund until you have 9 months of expenses in there.

In my inexpert view, the recession is here although it might be nascent. People’s jobs aren’t as secure as they might like. When paycheques disappear, the emergency fund has to be there to take its place. (In an ideal world, everyone could live off the dividends and capital gains from their investments. We do not live in an ideal world.) If there’s a chance your job could disappear, then you need an emergency fund.

If you have an emergency fund, and you haven’t had to use it, then you’re in a great position! You should still consider padding it a little bit more though. Maybe adding another 10% to what you already have in there. No one has every complained about having too much money during an emergency.

Breathe

You’re doing your best. No one is perfect with money. Everyone’s situation is different, and you’re the only person who has to live with your financial decisions. Your money isn’t limitless and you’re making the best choices available to you with the funds you have. The fact that you’re even reading personal finance blogs is evidence that you care about making good choices with your money. You want to live your best life with the money you have.

Good on you! Take things one day at a time. Save-invest-learn-repeat. As you know better, you’ll do better. You can do this!

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.

Learning from my mistakes & doing better

You need not make every mistake yourself. There’s always the option of learning from my mistakes, or others’ mistakes, and doing better. It’s one of the better aspects of being a sentient being who can learn from the world around them.

Back in 2008/2009, there was a recession. I got scared and I stopped contributing to my investment portfolio. This was a huge mistake! (And I’ve made many mistakes over the years when it come to my money.) There’s no way to go back in time and change my choices. So, this time around, it’s incumbent on me to not make the same mistake.

Though the experts haven’t yet called it such, I’m pretty sure that we’re in the very beginning of a recession. The stock market’s gains from 2021 have been wiped out. My investment portfolio has suffered a 6-figure loss! I’ve stopped checking its value because it’s too alarming to see the numbers continue to drop day-by-day.

When my portfolio suffered losses in 2008/2009, I made a big mistake. My error was to stop investing my money while the stock market was on sale. The stock market, as a whole, was falling in value. That means it was on sale! I should not have stopped contributing money from every paycheque. Instead, I should have stuck to my plan and continued to buy units in my selected mutual funds. (At the time, I had not yet switched over to cheaper-and-equally-effective option of buying exchange-traded funds.)

Do not make this mistake with your own investment portfolio. Continue to invest your money!

This time around, I’ve stuck to my plan. A portion of every paycheque is still being re-directed to my selected ETFs. Since the unit price of my ETFs is down, I’m buying more units with the same amount of money. And when the unit price goes back up, which it will, the value of my portfolio will benefit from having bought the additional units at a cheaper price.

If you haven’t started, now’s the time.

If you haven’t started investing in the stock market, now is a great time to do so. Everything is down, which means everything is on sale. Don’t ever believe that the stock market only goes up. Its nature is to go up and down. This is normal. Right now, it’s going down. It will go back up at some point, but you need not worry when.

In my inexpert opinion, money that you don’t need for a long time should be funnelled into the stock market. I used to believe that a person had to be completely debt-free before investing. My views have become more nuanced. If you’re in your 30s, 40s or 50s, and you haven’t yet started investing, I would not suggest focusing solely on your debts. Even if you can only squirrel away $50 each month for investing, do so. As you pay off your debts, you can use 75% of your former debt payment to increase the size of the initial $50 contribution.

Your $450/month payment is finally done? Great! Add $337.50 (= $450 x 75%) to your $50 so that you’re now contributing $387.50 per month to your investment portfolio.

Time in the market is necessary for your portfolio to grow. Starting to invest during a recession is a good thing for you. It means you’re buying when prices are low. The more you buy now, the better your upside when the stock market starts growing again.

Also, you’ll have to develop a thick skin to deal with the volatility of the market. Remember, stock market investing is a long-term play. This won’t be the last recession that you’ll have to endure. Starting in a recession today will make the less volatile times ever so much more pleasant. You’ll also be that much more experienced when the next recession rolls around.

Stick to ETFs to keep your MERs as low as possible.

Learning from my mistakes and doing better means you can avoid paying higher-than-absolutely-necessary MERs. I used to invest in mutual funds. Canada has some of the most expensive mutual funds in the world, which means that people who own mutual funds pay more in management expense ratios that people who own ETFs.

When Vanguard Canada became an option for me, I compared their ETFs to the mutual funds in my investment portfolio. The ETFs were comprised of the same companies that were in my mutual funds. In other words, I could still invest in the same companies for a much lower MER.

I used to pay 1%-1.5% in MERs on my mutual funds. When I only had an investment portfolio of $10,000, the MER shaved off $100-$150 every year. That’s not a horrible amount of money. However, I knew that I would be investing for another 20 years or so, and that I wanted my portfolio to grow much larger than $10,000. The question was whether I wanted the investment company to siphon away more of my money every year. After all, whatever monies weren’t eaten by the MER would stay invested in my portfolio and have the chance to grow over time.

Put yourself in my shoes. Would you rather pay $15,000 or $3500 for nearly-identical investment products? What makes the mutual fund worth an additional $11,000 per year?

Today, my portfolio is brushing up against the Double-Comma Club of $1,000,000. It makes no sense to pay $10,000-$15,000 in MERs each year when I can pay MERs of 0.35% or less.

Save yourself from another one of my mistakes, which was needlessly paying too much in MERs for my investment holding. Invest in ETFs instead of mutual funds. If you’re currently in mutual funds, find a comparable ETF and move your money to the ETF.

Stock-Picking is not for me!

My suggestion that you invest in the stock market while it’s down is NOT for those of you who want to buy individual stocks.

I don’t do stock picking. Personally, I find it takes too much of my time and it’s a very good way to lose money. I don’t have the expertise to understand any given industry, nor how any one company can guarantee dominance in its industry. The only individual stocks I own are the ones my parents bought for me when I was a baby. Again, I don’t do stock picking. I choose to only invest in ETFs because they have built-in diversification and I’m not committing my money to any one company. ETFs allow me to invest in a variety of industries and a much larger number of companies than I ever could otherwise.

To me, stock-picking requires a level of expertise and commitment that I simply don’t care to develop at this stage of my life. There’s always a chance that will change. If you want to do stock picking, then do your research first and make sure you know what you’re doing.

In a nutshell, don’t stop investing in the stock market just because we’re going into a recession. If one of your money mistakes is that you haven’t started to invest, then this is a great time to rectify that error. The stock market is down, which means investment products are on sale. You need to get your money into the stock market, and you need to leave it there to grow over a long period of time. Don’t procrastinate any longer – start today!

Time for a Mid-Year Check-up!

Tempus fungit. It’s a Latin phrase that means “time flies”. Truer words have never been spoken, in any language. It’s already the middle of 2022. How is your money doing? Are you on track to meet your financial goals? If you don’t know the answers to these questions, then it’s time for a mid-year check-up.

Emergency Fund

You need not share your answer with the class. However, you definitely have to be honest with yourself. Have you had to dip into your emergency fund this year?

If yes, then I hope you’re taking steps to refill it. Trust me when I say you’ll have another emergency at some point in the future. Emergencies don’t do your the courtesy of giving you fair warning. They happen unpredictably so you need to replace any monies that you’ve used from your emergency fund this year. Make it simple on yourself. Set up an automatic transfer so that you’re sending $50 or $100 (or whatever your budget will allow) to your emergency fund every time you get paid. If you already have an automatic transfer in place, increase it by $50-$100, or by whatever amount your budget will allow.

If no, then add another $1000-$3000 to your emergency fund. In case you’ve been living on another planet for the past few months, allow me to be the first to say “Welcome back! We missed you! Oh, and you should know that inflation is up 7%-8%. This means that your emergency fund needs to be a little bigger since paying for your emergency just got a little bit more expensive.”

Achieving Your Goals

Cast your mind back 5.5 months to early January. What were your financial goals for 2022? Are you on track to achieving them?

Assess your spending for the past 6 months and determine if your money choices got you closer to, or further from, meeting those goals. Congratulate yourself if you’ve met some or all of those goals already. You did the work so you deserve some recognition of your efforts.

On the other hand, maybe you haven’t been able to meet your financial goals. Do you have any idea why? To answer this question, you must assess your spending to date. The most efficient way to complete this assessment is to review your expenses.

I hope you’ve been tracking your money, whether on a spreadsheet, via an app, or with a pen & paper. Myself? I’m a spreadsheet person. The method really doesn’t matter. Tracking your expenses clarifies whether your spending habits are aligned with your priorities.

And if you haven’t been tracking your expenditures until now, then you should start. Every time a nickel leaves your wallet, record its destination. No one has ever been harmed by knowing where their money goes. Information is power. Seeing a written record of where you’ve spent your money will assist you to align your money with your most important objectives. At the very least, you’ll be able to determine if you’re sacrificing your goals by spending money on that which you’ve decided is less important to you.

You can only spend each dollar once – either it goes to your goals or it goes to your not-goals. The choice is yours.

Check your subscriptions

Summer is here. And it will be gone far too soon. Maybe you’re spending more time outside. If that’s the case, maybe you want to eliminate some of your subscriptions for the next few months. I cut the cord several years ago, but I continue to use other streaming services. Now that I’ve got my garden going, and have many little chores to attend to after work, I could probably cut those services from my budget for a few weeks. It wouldn’t hurt me. I’m very, very, very confident that the service providers will happily take my money in the fall when I move back inside.

You know yourself better than I do. Could you live without some of your subscriptions for a few weeks? No one is telling you to give them up forever. I’m simply suggesting that you live your life without them for a few weeks while you’re doing other things that don’t involve staring at a screen and scrolling endlessly for something to watch. Again, it’s your money so you get to decide how to spend it. I’m simply nudging you to consider whether it’s a waste of money to pay for those subscriptions during the summer if you’re going to be outside soaking up the nice weather while it’s here.

Cut yourself some slack.

No one is perfect. And this goes doubly so for money decisions. You’re doing the best you can with what you know. There are other things going on in your life and they’re probably taking up a lot of your time, energy, and attention. It’s not always easy to pay attention to your money, even though you know it’s important. I get it. I’ve been there too. However, I promise you this – when you know better, you do better.

This mid-year check-up is meant for you to identify any areas that might need some effort. If you’ve veered off-path, then you can course-correct sooner rather than later. Make tweaks as needed, then go back to the business of building the life that you truly want for yourself.

Sinking Funds – Key to Winning With Money!

Spring has finally sprung! We are nearly halfway through 2022, so it’s time to start doing some financial forecasting for 2023. What big expenses do you have to pay for in first six months of next year? And have you set up your sinking funds to pay for them?

While it’s important to live in the present, it’s also prudent to plan for the future. How you’ll spend your money is definitely one of the things that you should be planning well in advance. After all, there’s a fairly good chance that your dreams and goals for your life have some kind of financial component. If you’re frittering your money away on stuff that doesn’t matter to you, then where will you find the money to pay for the things that you really & truly want?

My financial life got immeasurably better when I started using sinking funds, aka: planned spending. Doing so meant that I was saving money for the most important stuff first. When I was younger, I decided that I wanted to have money already set aside for the big, major expenses that come up every year. In my case, those expenses included property taxes and insurance premiums. I had to pay for these necessities even though I didn’t particularly enjoy them. And they were very expensive – several thousand dollars a year. By having sinking funds in place, I didn’t have to scramble to pay my taxes or go into debt to make sure I was covered in case something happened to my car or property.

Please don’t misunderstand me. There are other major expenses that definitely fall into life’s goals and dreams category. For me, travel is a huge spending category. One of my dreams is to visit as many places as I can while it’s still physically comfortable for me to do so. In the Before Times, I was fortunate enough to visit Europe several times and had been planning my first trip to Asia. Then the pandemic hit and my travel plans went on hiatus. That doesn’t mean that I don’t have a sinking fund in place for travel. Au contraire! When I feel comfortable doing so, I’m heading back to the airport and going somewhere. Flights and travel haven’t gotten any cheaper in the last 12 months. Demand for travel is high right now thanks to all the pent-up demand. I’m confident that it will settle again. At that point, I’ll be roaming the world on the money that’s been set aside in my travel account.

How to Start a Sinking Fund

My first step to starting a sinking fund was to track my expenses. I wanted to know where every nickel was going so I could project how much I’d need the following year to cover big annual expenses. My next step was to divided next year’s anticipated expense by the number of paycheques until that expense would be due. The resulting amount was the amount that would go to my sinking fund.

For example, if my insurance premiums are $2600 per year, then I save $100 per paycheque for the following year’s premium payment. (I’m not a fan of monthly debits and prefer to pay my premium in one lump-sum.) When the following year rolls around, I’ll have $2600 waiting to pay the invoice.

It’s no secret that I’m a huge proponent of automatic transfers. I rely on them to put money into my sinking funds and to re-fill the funds as necessary. Over the years, I’ve learned the following tidbit about myself. If the money is available to me, then I will spend it… and generally on things that aren’t that important to me. However, sinking funds remove this option from me. I can only spend what’s leftover after the automatic transfers have gone through!

Another little tidbit I’ve learned about myself is that it’s best if my sinking funds are in another banking institution. While I use my chequing account daily, I access the sinking funds way less often. There’s no need for me to see those dollars just sitting there. It’s best for me that they be squirrelled away so that I’m not tempted to spend them.

Goals, Dreams & Fun Stuff!

Winning with money also means that you have sinking funds in place for your wants too! After I’d successfully set up sinking funds for the un-sexy stuff, I created a few for the non-necessities of life. The things that normally threw a wrench in my budget involved fun: birthday parties, holidays, anniversaries, invitations to concerts, etc…. I want to participate in these things with my family and friends. Money is sometimes a part of those celebrations, whether it involves a present, travel, tickets, contribution to a group gift or whatever. Sometimes fun is free. Other times, it involves money. When it does, I need to have some on hand so I can say “Yes, I’ll be there!” without worrying about cost.

When you have the money, make sure that some of it is going towards your goals and dreams. You shouldn’t feel bad for wanting to achieving what your heart really wants. Maybe it’s a weekend at a creative writing workshop. Perhaps you’ve always wanted to take horseback riding lessons. Some of you might want to take culinary courses in various cuisines. Whatever it is, it’s important to you and you should try to make it your reality. You know best what would make your heart sing. I’m just here to encourage-prod-nudge you into creating a sinking fund so that you improve your odds of making those goals and dreams come true!

Getting Good Advice

When it comes to your money, you want to get good advice. The problem is that it’s very hard to know if you’re getting good advice, or whether you’re being scammed.

For my part, I’ve built my portfolio by myself and I started when I was a young adult. All told, it took me more than 25 years before I went to see a fee-only financial planner. He took my information – he crunched my numbers – he told me that I could retire 2 years earlier than I’d planned. His fee was worth every penny!

Bank Advisors

Reader of Long Association know that I’m not terribly fond of banks. I hate paying bank fees. For the most part, I think lines of credit are poisonous. Debt is not something I encourage people to have. If you take away debt & fees, banks have precious little to offer their clients. My impression of bank advisors is similarly dim.

Banks offer mutual funds to their clients. However, the bank’s offerings are generally more costly than what can be purchased elsewhere. Advisors from Bank A will sell you mutual funds with management expense ratios of 1%-2%. They will not tell you about nearly identical products that can be purchased for 0.35% or less, i.e. exchange traded funds (ETFs).

The advisors who work for banks are not bad people, necessarily. They’s simply employees. Part of their job is to sell their employers’ products to the bank’s customers. They are trained and are knowledgeable about financial products. However, the terms of their employment are such that they will never advise customers to check out the competition’s investment products. Advisors working for banks will never encourage customers – you – to go and see if the same product can be obtained for a lower price. This is just a simply fact. Advisors at Bank A receive their paycheques from Bank A, not from you. Since you’re not paying them, the advisors’ interests are more aligned with their employer’s than with yours.

I went to a Bank near the start of my investment journey. It was a less than great experience.

Was I getting good advice? No.

Did the bank charge me a high management expense ratio? Yes.

As I learned better, I did better. Time to move on.

Investment Companies

After my experience with buying mutual funds from the Bank in my early twenties, I decided to invest with one particular investment company. They had a slick marketing folder, an office in the mall near my job downtown, and I liked their website. What other criteria could I have possibly needed to choose an investment company?

I have no idea if that company is still around. What I do remember is that they charged atleast 1% for their mutual funds. The management expense ratios (MERs) were the same as, or a touch lower than, the Bank’s.

Was I getting good advice? No… but atleast more of my money was directed into my investments and not being paid out in MERs.

As time passed, I moved my money to a different investment company that had far lower MERs for their products. While this second company did not have an office in the mall, they did have a much better website and a wider array of products. (Throughout my whole investment journey, I never stopped reading about money and investing. As I learned more, I made better choices. Like they say – when you know better, you do better.)

I improved my portfolio mix by moving to the second investment company and I saved money on the MERs I was paying. Further, the second company was easily able to set up an automatic transfer from my chequing account to my investment account. Each time my paycheque landed in my bank account, the investment company would scoop out a portion of it to be added to my investment portfolio. This was a free service! Once I’d set it up, I never had to think about it again. I could go about my daily life knowing that my money was being investing for the Care and Feeding of Future Blue Lobster. All was well… for a time.

Bear in mind that I never stopped learning. I continued to read more books from the library and I delved into online articles about money & investing. That’s how I came to learn about ETFs and index funds, investment products that mirrored mutual funds for a much lower price. In other words, I could re-create the same portfolio by replacing expensive mutual funds with cheaper ETFs and pay even lower MERs. Eventually, I had to accept the fact that my second investment company’s MERs were too high when I could get the nearly-identical portfolio elsewhere for less money. Though I really enjoyed the convenience of my second investment company, that convenience wasn’t worth paying higher MERs. Whatever wasn’t diverted to paying MERs would instead be invested for long-term growth. I realized that I could improve my returns by investing my money into ETFs so that’s why I did.

Self-Directed Learning and Investing

At some point in my investment journey, I had opened a self-directed brokerage. When it was time, I moved my portfolio from my second investment company to my brokerage account. In a few simple keystrokes, I sold the mutual fund products and bought ETFs from BlackRock (aka: iShares). Unlike my last investment company, this one did not make withdrawals from my bank account. I had to set up my own automatic transfer so that I could buy units every month. And since I was using my brokerage account, I had to pay a commission.

Big deal! The money I was saving on my MERs was more than sufficient to cover the monthly commission fee. My twin goals were being met: consistently investing every month and saving money on my MERs.

What could be better?

Vanguard Canada was better. By the time Vanguard came to Canada, my self-directed investment education had already led me to its US counterpart. I was ready for their Canadian arrival. Now, I didn’t sell anything from my BlackRock holdings. For the most part, I’m a buy-and-hold investor. The exceptions I can remember were moving from the Bank to the investment company, between my investment companies, and then from my last investment company to my brokerage account.

Instead of selling investments, I simply re-directed future investment dollars to Vanguard’s products instead of BlackRock’s. Again, Vanguard’s offerings were nearly identical to BlackRock’s and Vanguard’s cost less. There was no good reason to pay more money for the same damn thing.

My Fee-Only Advisor

Despite the pride I felt in building my investment portfolio, I wanted an objective review of what I had done. My goal was to retire early on a certain income. Despite my years of self-tutelage, I’d never discovered the formula that could give me a straight answer. Could I retire when I wanted? Or was I looking at another 15 years of work?

So after 25+ years of investing on my own, I went to a fee-only financial planner to get the answers to my questions…. The news was good. It was better good – it was great! He told me that I was on track and that I could retire two years earlier than I’d planned. Woohoo!

For the first time in my investing life, I was getting good advice. The financial planner pointed out a few weaknesses in my investment strategy. He offered me a tentative, new plan and explained how it could improve my returns going forward. However, he also assured me that I had done a very good job by myself and that my goals would be met whether I followed his suggestions or not.

When it comes to getting good advice, I’m a fan of fee-only financial planners. They work for the customer, who is you. They make recommendations, but they don’t sell investment products. That means that they don’t get a commission from someone else for making certain recommendations or pushing the investment-product-of-the-month. You’ll pay a fee for them to analyze your current situation and to create a plan whereby you will meet your financial goals. They will give you advice and it’s up to you whether to follow it.

Have I made mistakes? Yes – many mistakes. I didn’t get great advice to start. The only rule that I’ve always followed was to live below my means. (Even when I was stupid in 2008/2009 and stopped investing when the market crashed, I just piled up money in my savings account until it was “safe” to start investing again.) I saved and invested and switched my investments and kept learning-learning-learning … then more than 25 years later, I finally went to a professional advisor.

Getting good advice is worth the effort. It allows you to reach your goals faster and more efficiently. Though I am self-taught, I have benefitted from many resources over the years. I’m confident that I have the knowledge to separate the good advice from the bad as I continue to fulfill my financial goals. You can do it too. Start today. Save – invest – learn – repeat. When you know better, you’ll do better. I promise.

Is Your Spending Making You Happy?

There are lots of ways to find happiness. Playing with puppies. Mastering a difficult musical piece. Finally accomplishing a goal that means a lot to you personally. However, I like to talk about money in this space so I’m asking you to consider whether your spending is making you happy.

For the record, I want it said that I don’t believe that spending is the path to happiness. No, no, no… not at all! That way leads to madness. As Dr. Seuss has taught us every Christmas, happiness is not bought at the store.

What I’m suggesting is that since you work so hard for your money, you should only spend it on things that will generate happiness for you. That could be buying an experience that means something special to you. It could be donating money to a cause that you believe in very deeply. Maybe you want to gift something special to someone else, or create a celebration in honor of someone you love very much. True, these things all need to be purchased but they’re not the same quality of purchase as a consumer good that will likely just take up space. Will buying another pair of jeans bring you the same amount of happiness as paying the vet-bill to get your fur-baby the care that she or he needs to be healthy again?

Every penny should be driving your happiness quotient up. If your purchases aren’t doing that for you, then I have to ask you to consider why you’re making that purchase.

Novelty is part of the Happiness Quotient

Every fall, various coffee companies release their version of a pumpkin chai latte. I know that this is a seasonal drink. I also know that a great many people look forward to this time of year. (I’m not one of them, but to each their own.) I can only assume that lovers of the pumpkin chai latte are very happy to have the first one of the season. If they weren’t, they wouldn’t readily spend money on them as soon as the drink became available. However, I’m not as easily persuaded that they are as happy with subsequent pumpkin chai latte’s as they are with the first one.

Once the novelty wears off, is the burst of happiness at their seasonal arrival remain as intense on the last day as it was on the first day?

Personally, I think the novelty factor is one of the reasons why experiences bring more happiness than stuff. Attending a concert with friends – traveling – enjoying a great meal! Think about your most cherished memories where you had to open your wallet for whatever reason. Would you gladly pay the money again?

Of course, great experiences can also be had for free. However, I’m talking about the experiences that might have cost you a little bit of money. Unlike stuff that can disappear into the back of a closet, a storage locker, or the garage, we remember our experiences. They’re special because they are unique to us. They have a personal novelty that is unlikely to be purchased from a retail outlet. The ones we cherish most have that 7-star rating, which will last with us for a very long time. They’re not that seventh pair of jeans that we bought from our favorite store.

Maximize your Happiness Quotient

Since people have to trade their energy and time to acquire money, it seems to me that maximizing happiness from every purchase just makes sense. I’d like to suggest that one of your goals for 2022 is to only spend money if it will make you happy. You should aim to only make 5-star, or higher, purchases at every opportunity. If you don’t feel that the 17th pumpkin chai latte is going to make you happy, then don’t buy it. The beauty of the PCL-season is that it is coming back next year.

To be clear, I’m not talking about spending on survival expenses. Food, shelter, transportation all need to be acquired. Maybe you feel happiness that you have the money to pay for your survival expenses. If so, great! Generally speaking, I’m talking about the joy generated by your disposable income, the money that’s leftover after you’ve taken care of the absolute necessities. Do you feel happiness when you spend that money?

Start by tracking your expenditures, then rate how much happiness they generated for you. One-star for “Not happy at all”. Seven-stars for “Happier than I could’ve ever dreamed!” In my humble opinion, you should only spend money if the purchase will hit atleast 5-stars on this rating scale. Anything less is a waste of your money.

Now, I ask you. If your purchases aren’t making you happy, then why are you making them? Is it just habit? Do you spend to make someone else happy? Have you subconsciously bought into the marketers’ false promise that spending money is the same thing as acquiring happiness?

Sit with yourself for a bit. Figure out if your spending choices are worthy of 5-stars or more. If the answer is “No”, then I want you to think about why that is. Each day, you’re presented with so many opportunities to spend your money. Try this experiment. Before you open your wallet, ask yourself if the purchase is going to make you happy. Articulate what it is that you think the purchase will accomplish – create a forever-memory with a loved one? Fulfill some long-held heart’s desire? Put a smile on someone’s face?

Aim to have the rating last a long time.

This past summer, the gaggle of teenagers who lived next door moved away. I miss them. They were all good kids – friendly, responsible, polite. Also, they would shovel my driveway & sidewalk for money. They were the perfect young neighbours! Mid-November of last year, I went to one of my favourite stores and bought a snow-blower. Believe me when I tell that the purchase of a snow blower rated 6-stars on my happiness scale!

On a good day, my driveway will only take 45 minutes to shovel. Then add on another 10 minutes to do the sidewalk at the front of my house. My snow-blower has cut the total time down to 25 minutes… When I finally get the 100’ extension cord I need, I expect that it will take even less time to do this chore since I won’t have to do the sidewalk with the shovel. My driveway is longer than 50’ so I’m still using a shovel for the last 10’ and the sidewalks.

My snow blower makes me happy because it saves me time on a chore that I really dislike. When it’s -30C outside, yet I still need to clear my driveway, that machine moves snow way faster than I can with a shovel. I also don’t have to worry that I’m re-injuring my wrist or my shoulder. And I’m also making the walking surfaces around my house safer for everyone. The snow-blower has continued to maintain its 6-star rating!

You’re going to be spending money in 2022. You might as well be increasing your happiness quotient while you do so. Make this year the one where you strive to only spend your money in ways that only bring more happiness into your life.

Emergency Funds have to keep up!

A few weeks ago, I wrote about how inflation is a money-eater. I stand by that statement. Inflation makes everything more expensive. My cost of living is going up but my salary is staying the same. In light of inflation’s impact, I’m tweaking my emergency fund to account for it. In short, my emergency fund needs to be bumped up by the rate of inflation.

Back in the day, I devoured the idea of having $1,000 set aside for emergencies while I paid off debt. It’s one of the Baby Steps espoused by Dave Ramsey in his book The Total Money Makeover. Twenty years ago, I had student loan and vehicle debt. Once those loans were paid, I worked hard to save up 6 months of money in an emergency account.

Eighteen years ago, when the book was first published, $1000 was sufficient to cover a month’s worth of my fixed expenses. Today, that same amount just barely covers my variable expenses. Today, I’d still have to find another $1000 – $1500 to cover my fixed monthly expenses. Keep in mind, that’s without the burden of a mortgage payment. In my circumstances, a $1000 starter emergency fund is certainly better than $0 but it’s definitely not enough to cover my bills for an entire month.

It strikes me that while the idea of having $1,000 on hand as a starter emergency fund is a good one, the amount is too bloody low. I paid off my debts 20 years ago. According to this handy-dandy inflation calculator, the same $1,000 from two decades ago is worth $1,503.76 today.

It’s no secret that I’m a fan of the emergency fund. In my opinion, it’s good to have money set aside for when the sh*t hits the fan. You owe it to yourself to make sure your emergency fund grows in lock-step with inflation. This particular pool of money won’t help you as much if it’s insufficient to cover your bills when faced with that inevitable emergency.

You know your own numbers far better than I ever could. And if you don’t know your numbers, then it’s time to start tracking them. Having a handle on your money is an integral part of self-care. When your fixed monthly expenses go up, then your emergency fund must be adjusted accordingly. Imagine that you’ve suddenly lost your source of income. The reality is that you’d still have to pay for your shelter, your transportation, your utilities, and your debts. This isn’t the time to rely on debt. Streaming services, wine subscriptions, cable, gym memberships! All of your variable costs should be on the chopping block. Reduce or eliminate these expenses until your income is solid again. They shouldn’t have too much impact on your emergency fund.

So when you hear that inflation is going up by 4% annually, do what it takes to boost your emergency fund! Even an few hundred dollars will help. I’m not saying that you have to bump it up all at once. What I am suggesting is that you squirrel away $5, $10, $20 into your emergency fund every chance you get. Those little dribs and drabs will add up over time. Trust me when I say that no one ever regrets having money set aside during an emergency.

Again, your emergency fund has to keep up with inflation. There’s no way around it. It’s your responsibility to make sure that emergency funds are in place when you need them. And if you’re going to have a starter emergency fund, please make sure that you set aside more than $1000. That amount was chosen nearly two decades ago! Believe me – it’s no longer enough to cover more than a moderately expensive car repair.

Spending Season is Back!

If my various timelines are to be believed, Black Friday is officially next week.

Retailers are running their marketing departments ragged, now that spending season is back. They want you online and in stores, wallets open! You are the prey and their inventory is the bait. They want your money and they want it bad. The question you have to ask yourself is: do you want your money more than they do?

You’ll note that there won’t be any Black Friday sales on your rent/mortgage, your transportation costs, your utilities, your credit card bills, or your other debts. Nope! Those expenses are fixed, and no one’s giving you a break on those.

However, the sales will be on the want-to-have’s, the nice-to-have’s, the things you think you need to Keep Up With the Joneses! And I’m not claiming to be a saint in this arena. For the past 2 weeks, I’ve been debating whether to buy myself a Danish dough whisk. I’d never heard of it until I saw it being used by someone on YouTube. I own a stand mixer, a hand mixer, several other whisks, and a dozen forks. On a scale of 1 to 10, my need for a Danish dough whisk falls at -2. Yet… if I get a good enough Black Friday “deal”, I just might buy myself one.

And the retailers are collectively betting that enough of us consumers will go wild next Friday because everything will be on sale, so why not?

It’s your money so you do whatever you think will make you happiest. I’m not here to stop you from spending your money. You earned it so you get to decide where it goes.

What I am going to do is ask you if you’ve really thought about why you’ll be spending money next Friday. Is it because you’ve waited all year and this is your treat to yourself? Maybe you’ve priced out everything for those one your Christmas list, the prices really will be cheaper next Friday, and you’ll save money? Or is it that shopping on Black Friday is a family-and-friends tradition that you missed out on in 2020 due to COVID-19? Could it be that you’re one of the very luck ones for whom money is no object so you’re free to spend with abandon?

In you’re inclined to start shopping, you should ask yourself if the shopping gets your closer to or further from your long-term financial goals. Will shopping next week help you make your dreams come true? You work so hard for your money that it would be a shame for you to fritter it away on stuff. Do not spend just for spending’s sake.

Way back in pre-pandemic times, the last 5 weeks of the year were a flurry of spending. There may have been travel, whether by plane, bus, car or train. Nearly always, there was entertaining – hosting parties or attending them. Delicious holiday food was everywhere! And the opportunities to shop were endless. After all, Black Friday was quickly followed by Cyber Monday – another day devoted to plucking the dollars from your wallet.

I anticipate that the last few weeks of 2021 are going to more closely resemble life before COVID-19. People want to get back to normal, and that’s understandable. This pandemic has been awful, for any number of reasons! We all want it in the rearview mirror as fast as possible. Personally, I don’t think it’s wise to revive bad spending habits that may have been curtailed in 2020.

Yet, I’m going to urge you to consider exercising a bit more restraint in respect of your spending this year. Do you really need to derail your long-term financial goals to show love to your family and friends? Might there be a way to enjoy the holidays without spending a ton of money? Will the few moments of novelty be worth the credit card bills that will inevitably arrive?

Spending season is back, but you need not be its victim. Determine how much you have to spend. Make a list of where you want to spend your money. Stick to you list. Enjoy your time with family and friends, but don’t undermine your life’s dreams to do so.