Wealth Creation - Millionaire on the Prairie

Intergenerational Wealth – Down Payments

Even though I’m not a parent, I find the topic of intergenerational wealth fascinating. It makes perfect sense to me that parents want to help their children succeed. Parents with wealth are able to give their offspring a boost with so many of the costs of starting adulthood. This week though, I was surprised to hear about parents who are starting down payment funds for their newborns.

My first reaction wasn’t that the parents are nuts, nor that they are helicopter parents. I didn’t even think that the parents were trying to deprive their children of the opportunity to achieve something on their own. Instead, my first thought was that it made sense to start saving at birth. Not even 50 years ago, eyebrows went up when learning that non-wealthy parents paid for a child’s post-secondary education. Kids who wanted to study after high school had been expected to pay their own way through school by working summer and part-time jobs. Today, I can’t think of a single parent in my circle who isn’t financing their children’s post-secondary education through RESPs, co-signing loans, or cash-flowing the tuition bills. My parent-friends all realize that their kids cannot earn enough money from summer jobs & part-time employment to pay for undergrad and graduate degrees.

Over time, more and more parents realized just how expensive a post-secondary education would be. They determined that one of the best ways to help their children become successful in life was to pay for their studies beyond high school. No parent has ever paid their child’s tuition because they believed that doing so would somehow hinder or limit their child’s opportunities for a quality life.

So when I hear of parents who want to save for their newborn’s eventually down payment, I’m not at all surprised by the idea. To my mind, it’s the next logical step in helping one’s child become economically established. Houses are incredibly expensive! Back in the day, a person aimed for a mortgage that was no more than 3 times their annual salary. Those days are long past. When house prices are such that a first mortgage can be 8-10X one’s salary, it’s very realistic to think that it may take 25 years to build a down payment.

Parents who can save for their children’s down payments will do so. They realize that if they don’t do this now, then their children might be priced out of the future real estate market later. Of course, if they’re wrong and their children can acquire a home on their own, then so much the better. The money is still available for something else…maybe the foundation of the anticipated grandchildren’s education fund?

The other aspect of parents saving for their offspring’s down payment is that such actions contribute to the very wealth inequality from which the parents are trying to protect their children. Parental financial contributions reinforce the divide between those who have financial resources and those who don’t. In 20-25 years, the children with down payments funded by their own contributions and those of their parents are going to be better positioned to buy a property compared to children who don’t have the benefit of parental money.

Bridget Casey talks about this phenomenon in her article about the Funnel of Privilege. Essentially, the privilege allows young adults to start investing for their future without the burden of debt. By starting down payment funds in their child’s infancy, wealthy parents are positioning their children on the property ladder sooner. Being handed a down payment means that someone need not spend years saving money from their paycheque to simply by the first property. Instead, that same money would be spent building equity sooner rather than later.

Parents help their children. This has been true since the dawn of time, and I expect it will be the governing order of things until the end of days.

I’ve mentioned before that my parents saved all baby bonus cheques and a portion of money from their paycheques so that they could pay for my brother and I to attend university. I have 8 years of post-secondary, while my brother has 9 years under his belt. I will never complain that my parents’ gift has ever diminished my life and I know that I’m far better off than I would have been without my education. My parents did the best they could, but they were nowhere near able to also save for our first down payments. My brother and I had to save for those on our own.

Did my parents help contribute to the increase in wealth inequality by directing their wealth towards ensuring their children graduated university without debt? Or were they simply taking the natural steps to make sure that their children had the best shot possible at having a successful life?

Wealth begets wealth. It is natural for parents to want what is best for their children. Helping a child to achieve a home is simply the next step for parents who have the money to make such a contribution. These are the seeds of intergenerational wealth.

Know Thyself

One of the keys to getting what you want from your money is knowing who you are. The very first step to getting what you want is identifying it. There is no way around it – you must know thyself.

Are you a person who buys something because everyone else buys it? Or are you saving up for something that may only be magical to you? Do you care about others’ opinions on how you spend your money? Are you a person who can live with the consequences of your choices?

Be very honest with yourself about how you want to use your money. Some people want to use it to impress others. Then there are those who use it to control or manipulate the people around them. A good number of people use their money to alleviate suffering in the world. And there are some who want to hoard money in an effort to build security for themselves.

What do you want from your money?

As the years roll by, my perspective on money is changing. I’ve always been a saver, a very good saver. And when I first learned about the FIRE movement, my goal was to one day save 50% of my income – maybe even 70%! However, as I approached this arbitrary yet magical allocation, I started to seriously consider the impact saving that much money would have on my desired lifestyle.

Thanks to several money mistakes, saving 50% wouldn’t allow me to retire in my 40s…which would have been awesome, since I’m long past the ability to retire in my 30s. I suppose if I were willing to commit to very reduced standard of living, I could retire in my 40s… But I know myself. I don’t want to retire and hope that nothing goes so wrong that I have to return to work. I want to be done with working once I retire. Saving 50% wouldn’t get me there. Even saving 70% wouldn’t give me the kind of retirement cash flow that I want.

So I stopped chasing that arbitrary goal and crunched my numbers. Saving a solid chunk of my paycheque would allow me to retire in my early 50s. And I’d have a little extra jingle in my pockets to enjoy the journey. Speaking of the journey, travel has always been one of my favourite things. The “extra money” that wasn’t squirrelled away allowed me to travel overseas. Before the pandemic hit, I was fortunate enough to visit Italy, Spain, and Ireland. Had I been saving 50% of my paycheque, those trips wouldn’t have been possible… and they also wouldn’t have been possible after retirement because my retirement cash flow would not be enough to pay for them.

See… I know myself. And I know that I don’t want to be a penny-pincher during my retirement. I won’t be keeping tigers on a gold leash, nor skipping across the globe to spend equal time in my 4 homes. However, I will have the flexibility to do more international trips, to make renovations to my home, to replace the appliances as needed.

What I also know is that if I had been smarter sooner, I would have made different choices. There’s no sense regretting my choices because I don’t have a time machine to go back and change them.

Knowing myself means that I’ve made peace with the following truth: I don’t use a budget. My money-management system does not involve very many categories. The only ones I have are: retirement, short-term goals, charity, and Everything Else. I’m a huge fan of using automation to ensure that my first three categories are funded. My paycheque hits my account – my automatic transfers are triggered – I spend whatever’s leftover in my chequing account. The leftover money has to last me until the next payday. I can spend it however I want, on whatever I want, secure in the knowledge that the priorities most important to me are being funded.

Your choices need not please everyone else.

Thankfully, I’ve reached the stage in life where I don’t require a popular vote to feel good about my financial decisions. When I was younger, it bothered me that my friends’ financial priorities didn’t align with mine. I intensely disliked being told that I was “saving too much money.” When others blithely told me “you can afford it”, I would bite my tongue so very hard in order to not lash out in anger. How dare someone else tell me how to spend my money?

I’ve since learned to let those comments roll off my back. Their priorities are not mine. And their hearts were probably in the right place. They honestly believed that their spending habits, which obviously made them happy, would make me happy too. And I’m sure I drove them nuts talking about retirement and investing and saving. Those were the things that made me happy. Over time, I learned to only talk about money with friends who are also interested in investing and retirement planning. Again, knowing myself has led me to find like-minded people who encourage and support me when it comes to pursuing my financial goals.

Know thyself. What is it that you want your money to do for you? Once you’ve answered that question, the next question is whether your money is actually being put towards achieving those goals. Finally, what changes do you need to make to align your spending with your financial goals?

There are no guarantees…

I want to talk about a 2-part interview with Reader B about how he and his wife earn $360,000 each year in dividends. If you’re interested in learning how Reader B accomplished this, please read both parts of his interview at over at the Tawcan website – part 1 is here and part 2 is here. If you’re seriously interested in dividend investing, spend some time on this website. It is one of the best places on the internet to learn about creating a cash flow stream from dividends.

Reader B doesn’t live off his dividends. He and his spouse retired in 2004, and they live off their pension income. They started investing 36 years ago, in 1985. As I understand the article, they eschewed RRSPs and invested solely in Canada. Their portfolio was worth just shy of $1,800,000 when they retired. And because they’ve allowed their dividends to compound since retirement in 2004, their portfolio is now worth over $9,500,000. (You’ll have to read through the interview and the comments on the second part to get the exact numbers.)

That’s pretty damn impressive… Between 2004 and 2021, this couple has increased the size of their portfolio by $8,000,000. Needless to say, this interview has given me some points to ponder. Namely, can I do the same thing?

I started my own dividend investment plan in 2011. Ten years later, I’m on the cusp of earning $30,000 per year in dividends. That’s a decent amount, but it’s not enough to afford me a very comfortable retirement. I’m not comparing myself to Reader B and his wife. Again, their portfolio has been around for 36 years – that’s 26 years longer than mine.

Like the Bs, I’m going to be living on a pension when I retire. That means that I have potential to leave my dividends alone to compound for another couple of decades. I too could see myself with a six-figure annual dividend payment if I don’t use any of my portfolio’s returns during the first chunk of my retirement.

Also like Reader B and Spouse, I don’t have any kids. There are no tuition bills, weddings (other than my own, which at this point is a statistical improbability), house down payments or significant graduation gifts to fund. My pension will be sufficient to keep me in the same lifestyle that I’m enjoying now. Spending the dividends each year will be an option, not a necessity.

The question I have to ask myself is…

… do I want to have a large annual dividend payment if I’m not going to spend it?

Don’t get me wrong! I am utterly fascinating by what the Bs have accomplished, and I will be re-reading their interview to learn more. My question for myself is what is the point of having that much money rolling in if it’s not to be spent at some point?

The 2-part interview was on the mechanics of this extremely successful dividend portfolio. There wasn’t a lot of philosophical discussion about the uses of money, or how the Bs intend to distribute their money once they’re gone. For my part, I think one of the best reasons to emulate the Bs’ strategy is to have funds on hand to pay for my nursing care if I live to be too old to care for myself. Even after inflation is factored in, I’m hoping that $360,000 per year is sufficient to hire a competent and kind nurse who’ll help me with the un-mentionable tasks that come with having an aged body.

Beyond my considerations of future nursing care, I’m at a bit of a loss to imagine how I would benefit from $360K each year if I wasn’t spending it. Again, the Reader B didn’t talk about his intentions for his money. He didn’t discuss how he and his wife feel about their passive income stream. For all I know, the Bs are planning to create a sustainable scholarship fund for their favorite post-secondary institution. Maybe their dividend portfolio will be left in a trust to fund animal sanctuaries. I really don’t know what their plans are, and it’s none of my business.

I’m just thinking about what I would do.

Like the title of this post say, there are no guarantees.

Some of you may remember that I’ve switched my investment plan. As of October 2020, all of my investing contributions have been going into VXC instead of into XDV and VDY. I’d been faithfully investing in my dividend ETFs since 2011. Again, that investment has resulted in a good-sized annual dividend payment. After the market rebounded in 2020 from the pandemic, I wanted to take advantage of the growth in equity. In hindsight, I made the right decision. My portfolio has more than recovered all that it had lost from February 2020 to March 2020.

Now that I’ve digested Reader B’s interview, I have to wonder if I made the right choice. According to his interview, the Bs never deviated from their dividend investing strategy. Did I make a mistake in October 2020? Should I have continued funnelling new money into my dividend ETFs? Should I go back to my former strategy? How will I know if I made the right choice?

There’s simply no way to know the answers to these questions in advance. I’m going to trust the choices I’ve made thus far and I’m going to stick to what’s been working for me. Fortunately, my decisions to date have not led me off course. Having confidence in my own choices doesn’t stop me from learning about the paths to financial success taken by others, assessing their methods, and considering whether to incorporate them into my own.

So I thank Reader B for sharing his story with the world. His decision to tell the world about his dividend investing strategy means that I have another example to ponder. And, even though there are no guarantees, there’s absolutely nothing wrong with considering different options!

Super Powers

FU Money and being FI are super powers…
Dave from www.accidentalfire.com

I’ve written about FU Money before. It’s the money that you have set aside for those instances when you need to tell someone to “make love and go”. It’s not your emergency fund money. It’s not your retirement money. It’s not even your car replacement fund. Nope. Your FU Money consists of those funds set aside for giving you options when you don’t want to work anymore, when you just can’t handle another pointless meeting, nor one more inquiry from your micro-managing boss. It’s the money that will tide you over while you re-group and figure out the next step after you’ve left a situation that was driving you mad.

And long-time readers know that I encourage everyone to become FI, aka: financially independent. Being FI is great because it gives you even more options than FU money. Once your portfolio is kicking off enough capital gains & dividends to pay for your life as you’re currently living it, then you’re financially independent. And you want to know a secret? You don’t have to give up working just because you’re FI!

One of the options is to keep working, if you want to. You need not give up your employment just because your money is making more money for you. Once you’re FI, you no longer need to work but there’s also no need for you to quit your employment either. Again, for the cheap seats in the back, being financially independent gives you the option to work without needing the job. How cool is that?

I’d love to quit. As I’ve mentioned before, I have a great job. I work with very smart people on interesting problems that are mentally challenging. Before the pandemic, I travelled for work. My employer invests in training and I have opportunities to advance my career. I’m good at my job. There are many, many good things about my current position… Yet, it’s not what I want to do for the rest of my life. I want to quit.

So I’m working on developing my superpowers. Do I have enough FU money? Probably. Will I pull the trigger and use it? Probably not. Re-read my last paragraph. My position is pretty good so I don’t foresee a situation where I will be so incensed with my employer that I just walk out the door while giving someone the finger. Unless something changes drastically, I expect my departure to be mutual, respectful, and drama-free.

Still… I have my FU money in place, just in case I’m wrong.

I’ve spent the last 10 years working on developing the second super-power, i.e. becoming FI. It hasn’t always been easy and I’ve made my share of mistakes. However, I’ve learned from them and corrected them when needed. I’ve always believed that it’s okay to make a mistake. What’s not okay is making the same mistake more than once.

Do I still have learning to do? Of course I do! There’s this new thing called Bitcoin that everyone seems to be chattering about incessantly. I owe it to myself to figure out what that’s all about so that I can make an informed decision about whether to invest in it or not.

Despite my mistakes in investing over the years, I have to say that I’m far closer to being FI than I would have been had I not started. Investing money from every paycheque for the past 10 years has done wonders for getting me so much closer to my goal.

Maybe you wish you’d started 10 years ago too. It doesn’t matter. Start today. The time will pass anyway, so you might as well take the steps to build your own super powers. Don’t dwell on what you haven’t done yet. Make a plan to actively put a plan in motion to achieve your dreams. You get one life and you deserve to live the best life possible. If that means having a buffer between you and the Edge should you need to part company with your paycheque, then create that buffer. No one else is going to do it for you. And if you want to remove the golden handcuffs, then build a portfolio whose cash flow can replace your employment income. That way, if you decide to stay at your job, it’s because you want to be there. You won’t be shackled to the paycheque.

Super powers won’t solve all your problems. Life doesn’t work that way. What they will do is give you a financial cushion when you need one the most. They can alleviate the fear of not knowing how you’ll feed/shelter/clothe yourself without your employer’s money. The super powers will give you the confidence and comfort of knowing that you can survive even if you must part ways with your employer, for whatever reason.

Priorities Are Personal

Every day that you wake up offers you the chance to move closer to, or further from, your priorities. You can spend your life’s energy, time, and money in ways that are making your dreams come true. You can just as easily spend your resources making someone else’s dreams come true. One way or another, you will be spending our life doing something. It’s up to you to decide what that “something” is.

As the title of this post states, priorities are personal. There’s a very good chance that your priorities are not going to be the same as anyone else’s. Sure – there are general themes that apply to all of us. We all need food and shelter every day. Yet, some people will only eat organic while others will never learn to cook more than toast. Some people want a water view from their bedroom balcony, while others need easy access to the slopes and mountain trails in order to feel at peace.

The distinctions are in the details. And since this is a personal finance blog, I’m here to encourage you to spend your hard-earned dollars in ways that permit you to achieve your life’s priorities.

Most of the time, the things we want cost money. In the Before Times, I travelled every single year. In 2016, I had started travelling overseas. A big chunk of my annual spending was devoted to this priority – flights, hotels, food, souvenirs, excursions. It added up to $5,000 – $7,000 per year. Travel was one of my priorities so I was willing to give up other things. I ate breakfast at home instead of buying it at the coffee shop before work. I learned to cook more recipes in my own kitchen, instead of relying on the good folks of the restaurant industry. Spa treatments were curtailed. Concerts were foregone in favour of Spotify or CDs. Each of these littles choice allowed me to save between $100-$150 each week in order to fund my travel priority.

You can do the same thing.

List out everything that you want. Whether you cap the list at 10-20-30 things or experiences that you really want is entirely up to you. This is your list of priorities. Once you’ve completed the list, move to step two.

Put this list in order of importance. Is getting a pet more important to you than season’s tickets to a sporting event? Would you rather save for a down payment or go to a weekly happy hour? Does retirement matter more than upgrading your vehicle?

Once you have your priorities in order, you turn your attention to the money. How are you going to pay for all of your priorities?

Honestly? You can’t pay for everything at once. If you could, then there’d be no need to prioritize. You list is meant to help you choose where to allocate each dollar. As each priority is funded, the dollar can move to the next one.

For my part, my priorities are well-defined. Some of them will take a long time to pay for, but others can be funded in less than two years. Priority number one is paying for the annual expenses that will only stop when I do – property taxes and insurance premiums. I know in my heart of hearts that the day I don’t pay my insurance premiums is the day that my house burns down while my car is in the garage. I have an automatic savings plan in place so I can accumulate the money to pay these annual bills when they come due.

Retirement is priority number two. Sadly, I am not a member of the “I Love My Job” Club. My job is challenging, interesting, and well-compensated. I work with very smart people and am part of a well-functioning team. However, I’m not gleefully jumping out of bed every morning in order to do my job. I’m looking forward to retirement so I don’t have to do those parts of my job that I don’t enjoy.

As you may have surmised, travel is priority number three. In the Before Times, I’d be planning my next trip on the flight home. The world is a big place. I might not always have the physical ability to see it. Ideally, I will see as much of the world as I can while I still have the ability to walk, stand, sit, and maneuver without too much difficulty. However, we’re currently in pandemic times so travel is taking a back-burner.

Fixing up my house is priority number four. And by “fixing up”, I don’t mean replacing furnaces and water heaters. Those are things that fall under “maintenance/repair/replace”. No – I’m talking about landscaping projects. I’m taking about new carpet, new paint, new cabinetry. The stuff that has made HGTV so incredibly successful! There’s a good chance that I will be in my house for a very long time, so I want it to be comfortable and to my taste.

Priority number five…

Well, truth be told, there really isn’t one. Maybe replacing my SUV in the next 5 years? Whatever isn’t spent on priorities 1-4 sits in a slush fund, accumulating until such time as there’s something that I really and truly believe will make my happy.

It’s up to you to do the same with your money. From this day forward, think about your priorities before you spend your money. A simple way to do this is to set up automatic transfers to fund your priorities. Hive off part of your income into a savings account – for short term goals only – so that the money is there to pay for your priority. Long-term goals like retirement need to have their allocations invested in the stock market – RRSP and TFSA for registered monies and investment accounts for non-registered monies.

Keep Your Money!

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

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

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

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

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

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

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

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

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

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

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

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

Owning vs. Renting…decisions, decisions!

In the interests of complete transparency, I’m going to say that I am a homeowner. I’ve owned my current home since 2004, and I bought my first home in 2001. I only ever rented for a few years – maybe 2? – before I got my very first mortgage and jumped on the property ladder.

Things have changed drastically in the past 20 years… Damn! I hate typing that out, but facts are facts. Twenty years ago, I was able to buy my first place for $74,000. Fortunately, I bought just before prices in my province went crazy.

I’ve listened to both sides of the own vs. rent debate, and both sides make good points. Personally, I still prefer to own. Why?

When I’m old, I want to have the option of selling my home to pay my bills. Renters do not have that option.

I’ve spent years reading Garth Turner’s advice at the Greater Fool. He strongly advocates that people who own sell today, if not yesterday, so that they can take advantage of the incredibly high housing prices that we are currently seeing in various parts of Canada. He exhorts them to invest their tax-free capital gains, to create a cash flow that will pay for their living expenses, and to become happy, carefree renters. Mr. Turner has written numerous blog posts about the costs of home ownership, and how people routinely discount the costs of maintenance, repairs, taxes, land transfer fees, and all other expenses that come with owning a home. Paying the mortgage is least of a homeowner’s concern. There are so many other ways that a house becomes a financial albatross!

Mr. Turner advocates for becoming a renter, allowing the landlord to subsidize your housing expenses, and investing the difference between rental payments and mortgage payments. I will admit that this perspective is compelling. Having owned my home for years, I am known to refer to it as a money pit. There’s always something that needs to be paid. Renting and living off my investment portfolio does have a seductive ring to it.

…Until I start thinking about whether my portfolio is big enough to handle 20 to 30 years of rent increases. I don’t want to be 75 years old and facing yet another rental increase that means I’ll have to move to a smaller, less desirable location. I know the stock market has returned 10%-12% on average over very long periods of time. That’s all fine and good. Yet, we know that this is an average. Some years, the stock market drops.

If I have a $200 per month rental increase in a year where my portfolio has taken a hit, then don’t I have to liquidate some of my principal to pay my rent? And doesn’t that mean that I’m cannibalizing my portfolio’s capital right when I shouldn’t be touching it? Once the money has been withdrawn to pay rent, it’s no longer able to recover and grow. Selling during a downturn means I’d be decreasing the size of my portfolio at the worst possible time in order to keep a roof over my head.

That is precisely what I should not be doing in my dotage. Remember, the ideal scenario is that my portfolio will always churn off enough capital gains and dividends to cover my living costs.

But what if it doesn’t? What if my portfolio isn’t big enough to churn off sufficient funds to pay for my living expenses once I’ve stopped working? Then what happens? Who comes to my rescue as my portfolio dwindles over the years?

With a house, I believe that I have a few more options. Once it’s paid for, there’s no longer any risk that the bank will foreclose on it. Whew! It’ll still cost me in upkeep and repairs. Those are just a fact of life. However, my house lets me participate in house-hacking if necessary. I can take in a roommate. I can rent my house to someone who needs the space while I live somewhere else. If I needed to, I could sell it and use the money to pay for my long-term care. Or I can die in my own home, secure in the knowledge that no one ever forced me to leave a place where I wanted to live.

I’ve yet to see the pro-renting advocates address the fact that not everyone is able to build a portfolio that is large enough to cover ever increasing rents, and the other costs of living. Mr. Turner’s suggested course of action works wonderfully for people who bought in Vancouver 25 years ago and are now sitting on millions in equity. I’m not as easily persuaded that it works for people who don’t already have a boatload of equity to invest in the stock market. It’s true that a house cannot be sold one doorknob at a time to pay for one’s bills. However, it can be sold all at once and hopefully the money lasts as long as needed.

Life has taught me that there is no one right answer for every situation. If you can build a portfolio large enough to sustain you, then I see no problem with renting. It’s the situation where a large portfolio isn’t in the renter’s future that troubles me. In those circumstances, it’s very difficult for me to believe that renting is better. If the portfolio isn’t sufficiently large to cover life’s expenses, and there’s no home to sell, then what is the renter to do to find additional money?

I will think on it some more. Stay tuned.

Start Today

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

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

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

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

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

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

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

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

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

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

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

Why am I telling you all of this?

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

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

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

Invest to Beat Inflation

The chatter in the system is that inflation is coming.

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

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

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

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

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

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

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

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

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

How does that work, Blue Lobster?

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

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

Investment returns > inflation rate. Good.

Inflation rate > investment returns. Bad.

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

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

How do my investments beat inflation, Blue Lobster?

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

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

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

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

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

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

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

Buy Yourself Some “No!”

Every time you get paid, I want you to buy yourself some “No!”

Whatever are you talking about, Blue Lobster?

It’s simple. When you receive your paycheque, endeavour to not spend all of it.

Now, I know that there are those who are barely surviving from one payday to the next due to a low income. It’s very tough to survive when you don’t have enough money. It must be an awful and harrowing way to live. If I had a simple solution to solving the poverty problem, then I would shout it from the rooftops… sadly, I don’t.

For everyone else, there’s enough money to buy the option of saying “No!” to what you don’t want in your life. You may have heard of this concept by its more traditional phrase – pay yourself first. This is incredibly good advice! And I’ve yet to hear of anyone suffering any kind of adverse consequence by ensuring that they feathered their own nest before dispersing the rest of their income to Everybody Else.

When you save some of your paycheque, you’re buying a quantum of power. That power is related to your ability to buy back some of your time. Think about whether you love your job. Are there days where you just don’t want to work, whether “at the office” or from home? When you’d rather garden in your own backyard or spend the day enjoying the fresh spring air?

Or how about that vehicle payment? The financing company has you over the barrel. If you stop sending them several hundred dollars every month, they’ll repossess your vehicle. How nice will it be to stop sending them money every month? What else could you be doing with that payment?

Whatever your monthly payment is for, does the payment bring you joy? Are you excited and thrilled to see the money leave your bank account every month?

No? I didn’t think so.

Cruel Ironies

You can make more choices about how to spend your time when you’re not as dependent on working for an income. The cruel irony is that there’s no incentive for your employer, your creditors, or the Ad Man to explain this to you. As you’re already aware, your employer needs your labour to enrich the corporate bottom line. This means that your employer has little incentive to encourage you to save for the time when you have enough money to re-direct your labour to your own life’s desire.

Your creditors just want you to continue paying them interest, since they make money off the financing and not the doodad on which you spend their money. (And make no mistake – it’s their money. If it had been your money, then you wouldn’t be paying interest on it.)

Finally, the AdMan is paid by the companies that sell you whatever shiny object that has currently caught your attention. The AdMan really doesn’t want you to save any of your paycheque, because then the AdMan hasn’t convinced you to buy stuff…which is how the AdMan gets paid.

Stop Spending All Your Money

I understand how capitalism works. I really do. Yet, the older I get, the more I also understand that unbridled spending and the yoke of debt are impediments to a happy life.

Want a foolproof plan for getting a tax free raise? Stop going into debt.

Once all your payments are done, then more of your paycheque stays in your pocket. No more $700 monthly vehicle payment? Transfer that $700 to your RRSP. No more $400 student loan payment? Invest that $400 in your TFSA. Mortgage payments gone? Awesome! Start contributing the money to your non-registered investment portfolio. Credit cards all paid off? That’s great – save that money in the bank so that you can pay cash for the next thing that you want.

And a funny thing will happen. When you’re finally out of debt, you’ll really, really enjoy the absence of debt payments.

“Wish I was still sending money to my credit cards!” said No One, ever…

All of that money that was being siphoned off to debt payments can be used to buy yourself some “No!”

That Will Take Too Long!!!

I’m not a magician! And I never said it would happen overnight. It’s going to take as long as it takes. The more debt you have, the lower your income, the longer it will take.

The question is how long you want to continue being indebted to Others. You’re the only person who can decide if you’re willing to make the short-term sacrifices necessary to buy back some of your time freedom.

Alternatively, you can keep your current spending patterns yet still buy yourself some “No!” through increasing your income. You could get a side hustle and devote all income earned from that source to saving and investing. (Back in my day, a side hustle was called a part-time job.) You could invest in real estate and start house hacking. You could start buying dividend-producing exchange traded funds, set up a DRIP system, and just watch your dividends compound over time. You could bust your ass at work and get a promotion, whether with your current employer or with a new one. Either way, your promotion should come with a raise. So long as you don’t spend that raise, you’re heading in the right direction.

You Get to Decide.

Yes – that’s right. The choice is yours.

When your current vehicle is paid off, are you going to drive a paid-for car or are you going to go back into debt?
Do you need all the streaming channels right now? Could you pay for one for a few months, then switch to another one later?
When the pandemic is over, is your gym membership really necessary? Maybe you could walk outside instead of on a treadmill?
Is being able to live without a paycheque for a few years worth learning how to cook?
Is the hamster wheel of living hand-to-mouth bringing you joy? Would you appreciate a lot more wiggle room in your budget?

Money buys you the option to say “No!” to what you don’t want in your life. Harness its power by investing a chunk of your income every time you’re paid. The sooner you start, the sooner you’ll be able to walk away from situations that no longer serve your purpose or no longer make you happy. You’ll have the peace of mind that a financially firm foundation allows. You’ll be able to walk away from employment that no longer aligns with your values…without wondering how to feed/shelter/clothe yourself. You’ll have the comfort of knowing that you’ll be alright even if it takes you a little while to find your next job, if you even want one.

And believe you me… the more “No!” you have, the less often you have to do un-desirable things. I’ve yet to meet anyone who hated having control over how to spend their time and energy. Unless you’re already quite wealthy, the only way to obtain this power for yourself is through carefully investing your own income until your investments allow you to be independent from a paycheque.