Wealth Creation - Millionaire on the Prairie

House-Hacking is Worth Considering

House-hacking can be an amazing tool for building wealth.

You know how sometimes you’re on YouTube watching one thing and then a suggestion pops up on the side of the screen? And you decide to hit play instead of scrolling past it? Well, this week held one of those so I indulged my curiosity and hit play on a video that I otherwise never would have found by searching. For one reason or another, I was watching some videos about tiny houses. I started with this one because I wanted to know how anyone could spend $165,000 to build a tiny 300 sqft house.

And that’s how I discovered Robuilt. I promptly watched several more of his videos and I have to admit that a lightbulb went on after watching his video on house-hacking. I loved this particular video because this fellow goes into detail about how he financed his house-hacking project. He’s not shy about sharing how he obtained the money to build a tiny house, to renovate his basement suite, and how much rental income he’s earning from various sources. The only question I would’ve appreciated hearing him answer was how he and his spouse had initially accumulated the down payment for the purchase of their $640,000 home on writer & teacher salaries, but I guess everyone likes to maintain at least some small measure of mystery.

Anyhow, the lightbulb moment for me was when I realized – deep in the marrow of my bones – that it’s sometimes okay to go into debt if you’re borrowing money to buy real estate. I shouldn’t have been so shocked by this revelation. I’ve borrowed money to buy all of my properties. I’m very familiar with the concept of mortgages, how they work, how to repay them, etc…

Living in a Million Dollar House for Free

No. What shook me to the core was the manner in which Mr. & Mrs. Robuilt went from having a $4000/mth mortgage payment to a $0/mth mortgage payment by borrowing money. This video goes into more detail about how exactly they accomplished this feat so I encourage you to watch it.

Okay – so they bought the house and renovated the basement suite within two months. That rental of that suite netted them at least $2K – sometimes $3K – each month.

Blue Lobster, that still leaves at least a $2K/mth mortgage payment.

Yes, Numerate Reader – you’re right. Having the basement suite wasn’t enough.

The Robuilt’s decided to build a tiny house in their backyard. They’d initially budgeted $40,000 but the project ended up costing them $72,000. They didn’t take the money from the equity in their main home. Instead, they went to a private money lender to pay for this project.

Once the tiny home was built, they eventually rented it for $1800 per month. They refinanced the mortgage on their home to get rid of their PMI, bringing their mortgage payment down to $3700/mth… meaning that they were able to live in their home for free. Oh, and the value of their principal residence had gone up to over $1,000,000 because of the tiny home in the backyard.

Damn…

The Key was Getting Financing

Pay attention to the part where they went to a private money lender. (And they also relied on their credit cards, which is a very risky move because of the very high rates on credit cards. I am not recommending that you do this.)

As I watched the video, I could hear the thunderclap inside my head. You need access to money to acquire property, whether your own home or rental properties. The money can come from your own savings, from a family member, from friends, from a sou-sou, from a lifetime of collecting your loose change… it matters not. You need to get your hands on money to fund your real estate purchase.

And if you don’t have cold hard cash of your very own, then you need financing.

The Robuilt videos opened my eyes to the world of private money lenders. I don’t know all the details about how they work. Nor am I familiar with how they structure the lending terms. I don’t even know the rates or how they assess your credit. And to be clear, I don’t know why Robuilt’s didn’t go to a bank to get the money they needed to build their tiny house.

What I do know is that people who are cut off from obtaining financing are essentially cut off from the opportunity to acquire real estate. And if they’re not cut off completely, then their lack of access to money contributes to their delay in wealth-building. Maybe it takes someone an additional 7 years to be in a position to buy real estate. Whether that’s 7 years to save up a sufficient down payment, or 7 years to clean up their credit enough to qualify for a mortgage or a private money loan, it hardly matters. The result is the same – that person is unable to build wealth through real estate for 7 years.

Financing & Intergenerational Wealth

The thunderclap for me was the realization that access to financing is one of the keys to getting ahead when it comes to building wealth. If you buy rental properties, then you earn the equity while your tenants pay down the debt. If you buy your own home, then you still earn the equity while you pay down the debt. In order to earn the equity in the first place, you have to own property.

House-hacking as displayed in the Robuilt videos wouldn’t have been possible in as short a timeline as theirs without access to financing. That access allowed them to start creating wealth for themselves today. They’re also now able to build intergenerational wealth for their daughter.

It should be obvious that a lack of access to financing inhibits the creation of intergenerational wealth. In this blog post, I’ve focused on one couple who have used financing to buy & build real estate. Their reliance on financing allowed them to craft a situation where others pay for their mortgage. This results in their salaries going to other things, like accumulating another down payment to buy more property if they choose.

I’d like to point out financing can also be used to start a business. People who are more sophisticated than I am use it to invest in the stock market. For the record, there are many ways to use financing to build wealth.

People who don’t have access to financing have fewer opportunities to build wealth. It can still be done but it’s harder because those people have to accumulate the same amount of money from their own earnings. Imagine if your credit was so bad that you couldn’t get a mortgage. Or if you were legally prohibited from owning property. The only way for you to buy a property would be to save money from your paycheque then pay cash for a home.

How long would it take you to save enough money from your paycheque to buy a house? Even if you were house-hacking by living with a roommate?

Access to Financing = Access to Opportunity

The person who has to pay cash for a house doesn’t have the same opportunity to build wealth through real estate as the person who can get financing to buy property. I know that it might take the mortgage-holder a lifetime to repay the debt. After all, that’s why 25-year and 30-year mortgages exist, right?

Assuming the mortgage is paid, then the home can be passed down to the next generation. Imagine where would you be financially if you’d inherited a full-paid for home!

The person who can’t get financing for a home – yet miraculously saves enough money to buy one – can also pass their home down to the offspring. The possibility exists in theory only. It’s just such a monumentally harder endeavour to use cash to buy a home that most people never seriously consider doing it this way.

I’ve always believed that debt-free is the ultimate and best status when it comes to personal finance. This week, I’ve had cause to re-assess my position on debt. For whatever reason, these videos about house-hacking were more visceral for me than anything else I’ve read, watched, or heard. The power of financing and its ability to generate intergenerational wealth was put on full display. I have to admit that my eyes were opened to the possibilities in a way that they hadn’t been before.

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Weekly Tip: Borrow books from the library. It’s free and it’s a better use of your time than scrolling a social media site. There are books on anything that you can think of. Borrowing books is free. Libby is a magnificent app that prevents you from ever incurring a late fee because it automatically returns books to the library for you. Feed your brain – read a book.

Mistakes with Money

Not a single one among us is born knowing how to use money perfectly. Our skill with money comes from making mistakes and learning from them.

For my part, I’ve made several notable mistakes with money over the years. I’ve written before about how I failed to take action with my investment plan for 5 full years. That one still hurts when I think about it. It took me 5 years before I finally rectified that situation by committing a good chunk of my paycheque towards my automatic savings plan. Now, I benefit from using dollar cost averaging to invest my money on a regular basis.

I hate to admit it but choosing to invest in dividend products instead of equity products is one of my biggest money mistakes! Had I started investing in equity ETFs instead of dividend ETFs way back when, then I’d be in a position to retire today…even with the recent volatility in the stock market.

Sadly, this money mistake cannot be un-done. I have been investing in a dividend portfolio since 2011, instead of a broad-based equity exchange-traded fund. The financial media has spent the last 3 months talking non-stop about the pandemic’s effect on the stock market, and how it has brought the 10-year bull run to an end. It’s true – the market took a deep fall in March. However, it has bounced back. It’s still quite volatile, and – in my completely amateur opinion – the stock market will continue to be volatile for the next 2-3 years.

I’ve been forced to realize that one of my biggest mistakes with money was to delay investing in equity ETFs. I’ve only just started investing in equity investments in 2019! It’s true that I managed to catch almost the very tail-end of the bull market, but the smarter play would’ve been to start investing in equity ETFs back in 2011… ideally, back in 2006.

Water Under the Bridge

‘Tis true. I can no more turn back the hands of time than I can lick the spot between my own shoulder blades. We make our choices then we take our consequences.

I shouldn’t be too, too hard on myself. Nine years of consistent investing has yielded a nice little cash flow for me. While my monthly dividends are in the 4-figure range, they’re not quite enough for me to retire just yet. I equate my little army of money soldiers to income from a part-time job that I don’t have to actually perform. Truth be told, it’s nearly a perfect side hustle since it’s money I earn without the sweat off my brow. How cool is that?

So why am I divulging one of my biggest money mistakes to you?

Two reasons. First, people in the personal finance world don’t talk about their mistakes with money nearly enough. The only regular mention I see of this reality is on the ESI Money website, where the millionaires who are interviewed are asked about some of their errors with money. I think it’s important that people realize that everyone who is good with money has made their own mistakes with it. Like I said at the beginning, no one is born as an expert with money.

Secondly, I don’t think that there’s any reason for you to make this mistake yourself. You can just as easily learn from someone else’s mistakes as you can your own. The more information you have, the more likely you’ll be to make a decision that best fits your particular circumstances. I firmly believe that people make the best decisions they can with the information that they have at the time. When you know better, then you do better.

Hard-Won Truths

Money mistakes are unavoidable. Mine isn’t the worst one in the history of the world, and it certainly won’t derail my financial future. And, let’s be honest – I ought not complain too much. I earn a small boatload of dividends month in and month out. How bad of a decision could I have really made 9 years ago?

My investing journey isn’t over. And I’m sure that I will make different mistakes in the future, but I just don’t know what they are yet. I still have choices and options for my money. I can choose to continue building up my army of money soldiers. The other option is to start investing in equity ETFs and take part in the stock market’s recovery. I’m quite confident that the stock market will continue to trend higher. It’s recovered before, and it will recover again. A third option is to simply coast on what I’ve already invested a la Military Dollar, so that I can spend today’s money on today’s things – home renovations, landscaping, a new vehicle, spa treatments, whatever…

I want you to accept that mistakes with money are an inevitable part of investing. That’s why it’s so very vital that you continually learn about it throughout your life, and that you put what you learn into practice. Invest as much as you can as early as you can. Invest for the long-term. Keep your mitts off your investments by simultaneously building an emergency fund for those emergencies that will crop up in life. Live below your means and stay out of debt. Save, invest, learn, repeat – this is a recipe that works.

By following these foundational principles with your money, the impact of your money mistakes will be minimal rather than nuclear.

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Weekly Tip: Set timelines for your goal so you know which ones are short-term, which ones are medium-term, and which ones are long-term. Generally, short-term goals are the one to be accomplished within the next 12 months. Things like vacations and concerts would fall into this category. Medium term goals are one that take between 1 and 5 years to accomplish. Think new vehicle and down payments on a home or a business. Long-term goals are those that will take longer than 5 years. Common examples are retirement and paying off a mortgage. Once you have a timeline, then you’ll be in a better position to prioritize where your money goes and to segregate your money so that each goal is funded.

When Should I Start Saving?

In a perfect world, you would have started saving with the first dollar that you ever received, i.e. birthday money, paper route money, graduation money.

You would have gone to the bank – or your parent would have taken you – to the bank and you would have opened an account. Then you would have deposited that dollar before you’d had a chance to spend it. Everyone seems to know that the sooner you start saving, the better. However, there appears to be a disconnect between knowing and doing.

You’re the only person who can bridge the chasm between knowing what to do and then actually doing it. The truth is that it is quite simple to open a savings account in today’s world of online banking. It’s another very easy and straightforward matter to put an automatic transfer in place, thereby eliminating the need for you to manually transfer money into your savings account. The automatic transfer kicks in every time you’re paid – easy peasy lemon squeezy!

The very next best time to start saving money is immediately. I cannot stress this enough! Savings work best if you take steps to save money. Step one – save. Step two – don’t spend your savings. If you’re not yet accomplishing these two things, then you’re only dreaming about saving… which is all fine and good but it won’t help you very much since you can’t use dreams to acquire what you want. Dreaming about saving is not the same as actually starting to save.

I love dreams as much as the next lady, but dreams don’t put the cream in cupcake. You need to actually start saving – the sooner, the better. I speak from experience. One of the reasons that I’m able to seriously consider an early retirement is because I started saving a portion of my first paycheque when I was 15 years old. I’ve made many stupid decisions with my money over the years, but starting my savings plan in my teens is not one of them.

Now, let’s say there’s a good reason why you can’t start saving today. If this is your situation, then I want you to start saving money on any day that ends in the letter “y”. That leaves you with Monday, Tuesday, Wednesday, Thursday, Friday, Saturday, and Sunday. Each of these is a very fine day to start saving your money.

Whatever else you do, please don’t start saving tomorrow. First of all, tomorrow is promised to no one. Further, it is not a day ending in “y” so it’s not a suitable day on which to start saving. And while I hesitate to state the obvious, I feel that it’s best to articulate the fact that everyone eventually runs out of tomorrow’s. No one ever runs out of today’s – go back to my first point. Today is the very best time to start saving money.

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Weekly Tip: Practice delayed gratification. Wait a day or a week or a month before buying what you want. It gives you a chance to assess if you really want to make the purchase. It also gives the retailer a chance to put the item on sale. This is good because the whatever-it-is-that-you-want will be cheaper if you decide to make the purchase after a prescribed waiting period.

It Takes Some Time

Near as I can figure, it takes some time to become wealthy. There are those who manage to do it very quickly, and they generally fall into one of these three camps:

Being born into wealth.
Winning the lottery.
Inheriting money from someone else.

And I have to give an honourable mention to those who, every so often, invent something that’s so valuable someone pays lots of money for it. Yet, this isn’t always a “quick” way to make money. Usually, it takes a little while … but the possibility of doing it quickly still remains.

For the rest of us who don’t fall into these categories, building wealth is an activity that doesn’t occur overnight. Even for the adherents of Mr. Money Mustache and other FIRE followers, a commonly touted timeframe for building the kind of wealth that allows for early retirement is anywhere from 5-7 years depending on how much money a person has already accumulated.

If you’re not willing or able to live a very frugal life for 5-7 years, then you’re probably looking at 2-3 decades to acquire sufficient wealth that will allow you to live the way you want without having to earn an income. No matter how you slice it, 20-30 years isn’t a short period of time. Yet it’s definitely a sufficient amount in which to build wealth.

Okay, Blue Lobster… so what?

I’m going to suggest that you figure out what best makes you happy and find a way to do that for money. It seems obvious, but the truth is that most people don’t love what they’re employed to do. They do it for the paycheque. I’m not knocking that path. It’s a valid one if you’re a fan of eating, sleeping indoors, and having some measure of comfort in your life. Working for a living has been a time-tested method for ensuring that you can earn money.

Whether your employment brings you joy or not, I’m going to urge you to have your money do the heavy lifting for you. Every time you get paid, you save a portion of your paycheque and you invest it for the long-term. You’ll re-invest the dividends and the capital gains along the way. In the first 10 years or so, these contributions from your paycheque are going to do the heavy lifting of building your wealth. After that, the dividends & capital gains that your investments generate will exceed the contributions from your paycheque. So long as you don’t interfere with the Money Machine, you’ll be creating a very nice cash flow for your later years.

And just to be blunt – “interfering with the Money Machine” means siphoning off your dividends and capital gains instead of automatically re-investing them. The phrase also covers any interruption in your commitment to send a portion of every single paycheque to your investments. Finally, these words also encompass any strange desire you might have to temporarily halt your investment contributions during times of extreme market volatility. Further, the more you save at the beginning, the faster your wealth pile will grow.

The only catch is that it will take some time before you can stop depending on your paycheque.

Simple? Yes. Easy? No.

Not easy, not at all! It has never been easy to save money consistently over a long period of time. There is always a temptation to spend. Saving money is downright boring compared to vacations, concerts, vehicles, clothes, socializing, hot air balloon rides, jewelry, collectibles, camping, road trips, golfing, theme parks, shoes, massages, new furniture, artwork, streaming services, coffee, etc… Saving money reflects a pessimist’s viewpoint because it means that you don’t trust the universe to provide for you in the future. Saving money is viewed as selfish when someone important needs your income, i.e. someone has to make a rent/mortgage payment, a sibling lost their job, a parent needs a medical device.

Building wealth… it takes some time. In some cases, it takes generations. If you’re the first in your family to graduate and earn a higher than median income, are you going to say no to helping younger siblings on their way through school? Will you turn your back on your parents if they need your help?

It’s easy to encourage people to give up the luxuries, the nice-to-have’s, the fun-stuff in order to build wealth for the future. Lately, however, I’ve started thinking about the harder choices that people face when having to choose between spending now and spending later.

A very simple definition of poverty is that it is the state of lacking of wealth. From my observations, poverty affects entire families, sometimes over generations. Few of us would put saving for retirement or a home ahead of paying for a sibling’s groceries, if push came to shove. For the majority of us, the familial bonds are stronger than the need to save for our futures.

Where families have financial wealth, there is less need for financial interdependency. If each adult child can pay their own way, then they need not look to their parents or siblings for assistance. As a result, all of the adult children and the parents are free to save & invest some of their money for the future. The invested money, aka: wealth, can be left to grow because there are no other immediate demands on it. In addition, the adult children will more than likely inherit some portion of the parents’ money once the parents are gone. The wealth moves from one generation to the next, compounding over time.

The less money a family has, the greater the interdependency among its members. When parents can barely keep the lights on, they will turn to the adult children for assistance. This limits the adult child’s ability to build wealth because the money that goes to helping their parents is money that is not invested for the future. The same principle applies if one adult child makes good money but her siblings don’t. More than likely, she’ll feel obligated to assist her siblings and that means less money is available for investing. This family doesn’t get to benefit from intergenerational wealth because all of its wealth is spent in order to survive from one day to the next.

The money is needed now, which means that its owner doesn’t have the privilege of letting it compound to be used at some point in the distant future.

Realistically speaking, building wealth from a position of poverty creates untenable choices for many. When your family needs financial help to survive, are you obligated to sacrifice your financial health? Does your paycheque belong to you or to your family?

And the answer is…?

I wish I had the answer. I honestly and truly do. One of the saddest observations that I’m seeing as I get older is that wealth is funnelling from the many to the few. More and more people are barely making it from one paycheque to the next, even when they make the so-called right choices about how to spend their money. It’s happening at such a fast pace that I wonder if the trajectory can be changed.

Marketing machines are working non-stop to get people to spend money. Sure, we’re in a pandemic (at the time of this post). However, pandemics do not last forever. The advertising industry will go into overdrive once the pandemic is over in an attempt to get people to open their wallets.

And if the pre-pandemic situation is a good predictor of behaviour, people will spend. It might be slowly at first but then they will gradually “forget” to put money into their emergency funds, to only pay with cash, to decline offers for credit.

I don’t have all the answers. What I have is a theory and it is this.

Once the not-rich are barely making it from one paycheque to the next, they reach for a lifeline to maintain the illusion that they’re living comfortably. For a great many people, appearing poor is just as awful as actually being poor. The anchor-disguised-as-help that is offered to those in this particular situation is called credit. So the paycheque that barely covered the necessities is now most definitely incapable of covering the interest charges on the debt. Remember! Once you’ve used credit, you’ve simultaneously created a debt.

The not-rich person (or family) has taken the first step towards becoming trapped in a cycle of poverty. After all, if one cannot survive before taking on debt, then how is one to use the same insufficient paycheque to pay off that debt?

Then there’s the little pesky, incidental problems such as rents eating 50% or more of a household’s income in some cities. Trust me – the high income household aren’t the ones paying the majority of their income on rent. Another pesky problem is the fact that some mortgage are over 7x the household’s income. Again, households with higher incomes can manage to get mortgages which are less than 3x their income.

So going back to where we started, the steps for building wealth are the same all of us who aren’t born rich, who haven’t inherited money, and who haven’t won the lottery. Earn an income. Save a portion of that income and invest it for long-term growth. Re-invest the dividends and capital gains for many, many years. It will take some time, but these steps will build wealth.

The reality of the situation is that not everyone has the advantage of having financially-secure loved ones. The steps to building wealth are grounded in the assumption that investing for wealth is your highest priority. When there are competing and equally important uses for your money, then the choice to save and invest gets much harder.

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Weekly Tip: Keep your emergency fund separate from your other savings accounts. Segregating your money by its intended use solidifies the line between what can be spent today and what can be spent in a true emergency. Emergency funds nestled in their own dedicated account decreases the likelihood that you’ll somehow spend the money on something that isn’t an emergency.

Budget? No, thank you.

I don’t use a budget. I’ve been in charge of my own money since I got my first part-time job, in a grocery store, at the age of 15. Not once since that time have I ever written out a budget in order to allocate a certain amount towards food, towards clothing, towards entertainment, towards X.

If you’ve been reading my blog for the past couple of years, you’ll know that I’m a huge fan of automatic transfers and sinking funds.

Very simply, my paycheque hits my bank account. My automatic transfers kick into high gear. Various amounts of money are dispersed among my many, many bank accounts. (Each account has a very specific purpose!) Then I spend whatever is left in my account.

For the cheap seats in the bank, I say again that I don’t use a budget.

If budgets work for you, then stop reading.

For my part, I’m not against budgets if they work for you. Everyone needs a good money-management system and budgets are one of the options available for controlling spending.

A budget simply doesn’t work for me.

See, if I’m at the grocery store and I see something that I want but which isn’t on my list, then I’m still going to buy it. I don’t want to walk past it solely because it’s not in the budget. (I might walk by it because I don’t need more calories/sodium in my diet, but that’s a different blog topic.) The same principle applies to clothing, shoes, gasoline, whatever isn’t already covered by my sinking funds.

And lest you think that money runs through my fingers like water, I promise you that there is a method to my budget-free madness.

The backbone of my money-management system lies in taking care of the Big, Important Priorities first. Once my priorities have been funded, then it doesn’t matter if I buy a couple of extra things at the grocery store or drive more than I’d intended in a given week. The most important elements of my financial life get funded first so that daily decisions don’t matter too, too much so long as I don’t go into debt. Rule number one of my system is always avoid debt!

Although I’m still fine-tuning it after all these years, the system I’ve developed for myself ensures that my medium-term and long-term priorities each get the lion’s share of my paycheque before I start doing my day-to-day spending. The impulse purchase of a pair of jeans while window-shopping at lunchtime is not going to derail my retirement dreams.

Automatic Transfers & Sinking Funds

The most important quivers in my money-management arsenal are automatic transfers and sinking funds. One of the most burdensome realities of adulting as a Single One is that all the expenses of my household are my responsibility. That means, I pay all the utilities and taxes and insurances. It also means that if I want to travel to Vancouver to enjoy the cherry blossoms in the spring, then I’m the one who has to scrounge up the money to do so.

In the pre-COVID19 days, I had a far more active social life that included concerts, travel, and meals with friends. Those activities have been curtailed for now, but I’m sure that I’ll get to enjoy most of them again.

My point is that I rely on automatic transfers and sinking funds to pay for the expenses of my life. For example, I pay my insurance premiums on a yearly basis. I have a sinking fund for that particular bill. I take the amount I paid last year, increase it by 10%, then divide that number by my annual number of paycheques. The final amount is then automatically sent to my sinking fund every time I get paid. When the premium due date rolls around, I’m not left wondering where to come up with several thousand dollars.

While I realize that some people pay their insurance monthly, I abhor the idea of anyone other than me withdrawing money form my account. I’d prefer not to grant access to my bank accounts to anyone else.

I have sinking funds for all of the following:

insurance premiums;
property taxes;
annual vacations;
birthday and celebration gifts;
Registered Retirement Savings Plan contributions;
Tax Free Savings Plan contributions;
renovations;
MISC.

Yes, I set aside a segment of my paycheque for miscellaneous stuff. I might decide to do something fun and unexpected, so I need to have a bit of money tucked aside for this unanticipated spending. Sometimes the MISC-money has to be spent on not-fun stuff, like a new pair of glasses – they’re quite necessary but they won’t be cheap.

Leftover money gets spent…

Yes, that’s right. Think of my automatic system as a blackjack dealer in a casino. My sinking funds are the players. The deck is my paycheque. Once the system has dealt money to each of my sinking funds, I’m free to spend whatever’s leftover however I want.

Again, I don’t use a budget. The leftover money is spent on groceries, clothes, gasoline, liquor, dining out, whatever I want. What I love best about my money-management system is that I can spend however I want in the very short-term because my medium-term and long-term goals are also being met. It’s the best of both worlds for me.

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Weekly Tip: Consider following the 50-30-20 rule for your money, which I first learned about in the book All Your Worth written by Elizabeth Warren and Amelia Warren Tyagi. In a nutshell, the rule says that 50% of your net income is spent on your necessities, otherwise known as MUST-HAVE’s. Then next 30% is spent on non-necessities, the Want-to-Have’s. The final 20% goes straight into Savings and Investing.

The Honest Truth

Roughly 20 years ago, I landed my first professional office job. It entailed monthly meetings with my manager, wherein I updated him on my current workload. He was an amiable man and most meetings were sprinkled with little nuggets of life advice.

One of the acorns of advice that has always stayed with me is the following. “Never believe that this place needs you. Always remember that you can be replaced.”

It sounds harsh, doesn’t it? As I look back on those words, I appreciate them because they are the honest truth.

My manager wasn’t being mean or obnoxious. He was being truthful. If I hadn’t been hired to do my job, then my organization would have hired someone else. And if I had chosen to walk out at that very minute, the organization would have tackled the task of finding my replacement.

That particular acorn took root.

For nearly two decades, those words have rolled around in my head. The honest truth they embodied has been one of the underlying reasons of why I save and invest. It is imperative that my money works as hard for me as I do for it. My money must insulate me to the greatest extent possible from the financial consequences should my organization decide that it’s time for me to be replaced, that it can survive without my contributions to its operations.

If you’re somewhat sentient when this post is published, then you can’t help but be aware that a great many people have lost their jobs through no fault of their own because of the COVID-19 pandemic. The news reports are rife with articles of the millions of people who have had no choice but to turn to the government for financial assistance to survive.

However, I suspect that there is a cohort of the Recently-Let-Go who haven’t had to ask for financial assistance. I’m willing to guess that this cohort is compromised of people who’ve worked for a couple of decades and who made the choice to live below their means throughout their working lives so that they could invest their money. I wouldn’t be surprised if this fortunate cohort has made the choice to stay out of debt no matter how often credit was offered to them. And I’ve assumed that this cohort is going to keep a tight, heavy lid on their status so that they can continue to live as they always have – social distancing & hand-washing as required – without drawing the ire of their family, friends, neighbours & former co-workers. Check out the comments on this article.

Continued employment isn’t guaranteed.

As a result of my manager’s words, I’ve always known that my employment was at the whim of someone else. Sure – I’d likely find another position somewhere else, but what if it took me a long time to do so? How would I pay for my life between one employer and the next? Even if I tried to become self-employed (something that has never held any appeal to me), how would I pay for my life before the money started rolling in?

Hearing the honest truth from my manager during a routine monthly meeting incentivized me to do all of the following things:

pay off my student loans as quickly as possible;
build my emergency fund through automatic transfers every payday;
re-pay the loan on my SUV in 6 months by making gargantuan payments every two weeks & by sacrificing a little bit of fun & frivolity;
invest a portion every paycheque in the stock market once the mortgage on my principle residence had been paid off;
move out of mutual funds and into exchange traded funds once I learned how deeply management expense ratios impacted my overall rate of return;
stay out of debt by paying off my credit cards every single month; and
pay cash for everything.

I know those last two bullet points sound contradictory, but they aren’t. If I don’t have cash, then I don’t use my credit cards. Once the cash is in my bank account, then out comes my credit card to make the purchase. This method means that I earn cash back or points towards groceries. The charge is applied to my account then I send a payment from my bank account to my credit card. Best of both worlds – I always pay cash while taking advantage of the perks of having my credit cards. If you can’t pay off your credit cards every month, then don’t do what I do. Only spend cash or use a debit card!

Motivation comes from unlikely sources.

It’s taken me a long time to see the link between words spoken nearly 20 years ago and the financial choices that I’ve made in my life. The honest truth from my manager’s lips motivated me to build as big a financial cushion as I could as fast as humanly possible. It didn’t happen overnight, and there were many mistakes made along the way. To this day, payday still means that a chunk of money is set aside for the future.

Another source of motivation for me comes from our current global pandemic. COVID-19 has me re-assessing whether my emergency fund is big enough. For record, I have made plans to increase it. It’s my firm belief that no one has ever regretted having “too much money” during an emergency.

In a similar vein, the money saved from staying home while most everything is closed has been re-directed into sinking funds. There are still big expenses on the horizon. Property taxes will still have to be paid at some point. My home and vehicle insurance premiums are still due in a few months. Birthdays and other celebrations might still require me to open my wallet, even if I can only visit with people via video and telephone. The annually recurring expenses of living will continue to come around, whether we’re still in a pandemic or not.

Do yourself a favour! Go back to my manager’s works and let them sink in. At the end of the day, your employer can always choose to replace you. Sooner or later, there is going to be a parting of the ways for reasons that may be beyond your control. Be proactive – take the steps today to ensure that you’ll be financially okay when that time comes.

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Weekly Tip: Live below your means so that you have money to invest. This is another way of saying pay yourself first. After you’ve paid yourself, then you can get down to the business of paying everyone else.

Experience is a Great Teacher

How are you doing today? I hope that you’re ignoring the gyrations of the stock market and going about your business of self-isolating, washing your hands, and self-distancing. They might not be the most exciting activities, but they will flatten the curve and help to avoid overburdening our hospitals.

As I approach my golden years, I’ve come to accept the maxim that experience is a great teacher. Additionally, I’ve also realized that I can learn from other people’s experience as well as my own. I need not make every single mistake myself. Watching others’ mistakes can be just as instructional.

Today, I’d like to share one of my investing mistakes so that you don’t have to make it yourself.

Back in 2008, the stock market tanked. I remember hearing about the demise of Bear Stearns, and I was shocked. I don’t recall why it was so upsetting since I wasn’t a hedge fund manager at the time, nor was I an economist or any other kind of expert. All I know was that Bear Stearns was a major investing bank and that it’s demise meant that something very bad was happening in the stock market.

So what did I do? I made the second worst mistake available to me. I stopped investing while the stock market plunged.

I’ve made no secret of the fact that I’m a buy-and-hold investor. My investment plan is simple. First, save money from each paycheque. Second, transfer those savings to my investment account. Third, buy units in my chosen exchange-traded funds. Fourth, rely on the dividend re-investment plan to invest the dividends. Fifth, go back to the first step.

I’ve designed the plan to take advantage of dollar-cost averaging. Each month, I invest in my ETFs regardless of the unit price. I completely avoid trying to time the market. “Is this a good time to buy?” is a question that I never ask myself. When I have the money, I buy into my ETF – easy peasy lemon squeasy. This method of investing is know as dollar-cost averaging. I first learned about it in The Wealthy Barber, a great book authored by David Chilton.

Back in 2008, I was not as smart as I am now. Twelve years ago, I freaked out and I STOPPED INVESTING!!!

This was a huge mistake! I should have continued to dollar-cost average into the market during the six months between the demise of Bear Sterns and the recovery which started in March of 2009. I would have been buying during the downturn.

Buying during the downturn is a fancy way of saying that I would have been buying when the stock market was on sale.

It’s good to buy things when they’re on sale. If you want a new pair of shoes, aren’t you happier making the purchase when they’re priced at 35% off? I have a feeling that if you had a choice of buying the identical pair of shoes for $100 or for $65, you’d opt to buy them for $65.

The stock market is no different. On February 22, 2020, the value of the stock market plunged. In other words, it went on sale. The Talking Heads of the media could barely keep from peeing their pants with glee! They had so much to talk about, so much fear to stoke in their viewers and readers. Buy this! Don’t buy that! It’ll be a V-shaped recovery! No recovery for 2 years! Avoid cucumbers!

Okay … maybe they didn’t say anything about cucumbers. But the rest of the statements aren’t too far from the truth.

Once again, experience is a great teacher. I’d already made the mistake of listening to the Talking Heads in 2008-2009. As a result, I did not take advantage of the cheaper prices on the stock market that were available at the time. As the recovery wore on, the stock prices didn’t fall but I did start contributing to my portfolio again. However, I could not overcome the error of not buying stocks when they were super-cheap. My failure to make the right choice 12 years ago means I’ll be working a little bit longer than I’d projected.

I see no sense in making the same mistake this time. So while I’m self-isolating, while I’m washing my hands, while I’m social distancing, I am also continuing to invest in my chosen ETFs. Yes, you read that right. I’m still investing even through this period of excess volatility.

Did the value of my portfolio plunge in February of 2020? You bet your sweet ass it did! And did the value continue to drop throughout March as the stock market roiled due to the COVID19? Again, that’s a big 10-4!

It’s been just 5 weeks since the plunge. My portfolio is recovering, just like the stock market is.

The Talking Heads won’t ever encourage others to follow my simple plan. Despite its effectiveness, my way of doing things is boring and boring isn’t good for ratings.

You see, the stock market is supposed to go up and down. It always has. It always will. Never in its history has the stock market only ever gone up, just like it has never only ever gone down. If you’re going to invest, then do so consistently and automatically. Do your research. Find a broad-based equity exchange-traded fund (or mutual fund if you insist on paying higher management expense ratios). Invest on a regular basis. Ignore the Talking Heads. They can’t tell the future any better than you can.

And in case you were wondering, the biggest mistake you can make right now is to sell your stock market portfolio. For the love all that you deem holy, do not sell! Right now, the prices are low and that’s why you should be buying them.

Like I’ve said, experience is a great teacher. You can learn from mine instead of making the mistakes yourself. Don’t stop investing right now. Stick to your investing schedule and build your portfolio while the stock market is on sale. The second biggest mistake you can make is to halt your investment contributions.

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Weekly Tip: Pay cash for your next car by making a monthly car payment to yourself for as long as possible before you head to the dealership. The payments to yourself will be the down payment, if you’re forced to finance your vehicle. Ideally, you’ll stay out of debt completely because your accumulated savings will be sufficient just pay for your next vehicle with cash.

I am not an Economist

First and foremost, I am not an economist. I write this article as someone old enough to remember H1N1, SARS, the Great Financial Crisis, and the DotCom crash. I’m quite certain that there were other economic challenges earlier in my life but I was young enough, or naive enough, to take no notice of their impact on my life.

Anyone who pays attention such things knows that the stock market is experiencing a great deal of volatility right now. Most people are scared of contracting COVID19. Businesses are shuttered. Some people are losing their jobs. Other people are trying to hoard essential products. Pictures of empty grocery shelves are everywhere.

It’s easy to be afraid right now.

Again, I am not an economist. However, you should have faith that the stock market will recover. When? No one knows. Yet, I am 99.999% certain that this is not the end of capitalism. The supply chains are still running. Grocery shelves are still being stocked. Prescriptions are still being filled.

Very smart people all over the planet are working on a vaccine for COVID19. They will find one.

What I think you should do

Do not panic with your investments! If you can avoid it, then do not sell anything in your portfolio right now. The only way to lock in a loss is to sell when the price falls.

The stock market will recover from this dip. No one knows how whether the recovery will happen by the end of 2020, or whether it will recover in 2 years. However, the impact of COVID19 will become an item in the rearview mirror when the stock market starts to go up again. Just like H1N1, SARS, the Great Financial Crisis, the DotCom crash, and all the other economic shocks that have preceded this virus.

Should you be one of the fortunate ones who has stable employment right now, then I urge you to stick to your current investing schedule. This suggestion is based on the assumption that you have a fully-funded emergency fund of atleast 6 months of expenses. If your emergency fund isn’t this full, then cut out non-essential spending until it’s nice and fat. You’ll never regret having an emergency fund when you need one!

Keep your investing schedule in place. I invest monthly. I plan to continue investing unless circumstances drastically change. A long time ago, I decided that timing the market would only drive me nuts so I’ve never attempted to market-time my investments. Instead, I opted to making regular investments into the stock market every month. Money goes in – dividends get paid & re-invested – money goes in – dividends get paid & re-invested… ad infinitum…

If you have an investing schedule, then stick to it. Right now, investors have the ability to buy equities when prices are low. Again, I’m going to state the obvious – the stock market is low right now. No one – and I mean NO ONE – knows if we’ve hit the bottom of whether the stock market will continue to fall over the next few weeks. Yet, those who invest in a broadband index funds (or exchange-traded fund or mutual fund) and who stay invested for the long-term will see positive returns.

Note that I’m only referring to buying broad-based index funds and similar products during this downturn in the market. If you’re the sort who engages in stock picking, then I wish you all the best. Stock analysis is not something that I would suggest. I have no way of knowing which stocks will recover to unseen heights and which ones will crash when the underlying business fails.

Learn from my mistake

Full disclosure: I am a self-taught buy-and-hold investor who believes in dollar-cost averaging. This means that I skim money from each paycheque to invest in the stock market on a regular monthly schedule. I invest in exchange-traded funds, and I’ve done well.

However, I haven’t always made the smartest decisions with my money. I’ve made significant errors with my own investments. One of the worst decisions I made was back in 2008 when the stock market plunged. The value of the stock market was falling and I made a HUGE mistake. I stopped investing money on the way down!!! My fear took hold and I decided to wait until the “market got better”. Thankfully, I was smart enough not to sell but I wasn’t smart enough to stick to my strategy to dollar-cost average into the market.

Had I stuck to my strategy of investing money every month, I would have been buying during the market crash. This is known as “buying low“, and it’s an exceptionally good thing when you plan to hold onto investments for a very long time.

If I hadn’t erred, I would have taken full advantage of the recovery that started in 2009 and that ran up until a few weeks ago. My portfolio might have been big enough to let me retire a few years earlier than planned had I not made this monumental error.

Though I can’t remember exactly when, I did re-start my investing schedule and I’ve stuck to it ever since. COVID19 is not going to prevent me from counting to save-invest-learn-repeat. I will still move money from my paycheque to my investing account. Every month, I’ll continue to buy units in my exchange-traded funds. I will not stop regular investing this time around.

And if my income isn’t stable?

If your income is variable, or in doubt, then your focus needs to be on eliminating all non-essential spending from your life so you can squirrel away your cash. Right now, your priority has to be survival – rent/mortgage, food & prescription medicines. Everything else has to go on the back-burner until you get a handle on how you’re going to continue to receive an income.

Focus on beefing up your emergency fund. That money that used to go to drive-through coffees? Stick it in your emergency fund. Your monthly massage? Social distancing means massages are out for a while. This is a really good time to cut subscriptions to things that no longer bring you joy. Find the fat in your budget and trim it away so that you have money to live on if your income goes away.

Keep your money liquid in a high interest savings account. Allow me to state the obvious: you will need cash to get you through the hard times in case you lose your job. This is not the time to be making extra payments to your debts, nor is it the time to start investing in the stock market. Gather your money in a safe place so it will be there when you need it.

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Weekly Tip: Stop non-essential spending for the next few weeks. Top up your emergency fund. Stay indoors. Wash your hands. Stay healthy!

Some People Always Make Money

As I write this post, the world is facing the pandemic known as COVID-19. I’m not a scientist, nor am I a doctor. This post is going to be about how some people always make money, no matter what is going on in the world.

This pandemic is a prime example. Unless you’ve been living under a rock, you cannot help but have heard that the global stock markets have been a wee bit volatile as of late. Investors are losing money as the value of the equities in their portfolio drop in tune with the stock market drops.

Yet, some people will be making money right now. Why?

It’s simple, Gentle Reader. The stock market is on sale right now. Much like buying clothing in the off-season, or winter boots at the start of spring, people with money are buying stocks while the stock market is down. Stocks are on sale. This is the time to buy.

Stock Market is Drastically Down

If you have the money, then buy now. One of my favourite exchange traded funds – XDV by BlackRock – was down to $19.93/unit when I checked it at the time of writing this post. It had been near $30/unit a mere two weeks before this article was posted. The portion of my portfolio invested in XDV has dropped significantly, but guess what?

I’m a long-term investor who believes that the market will recover. Now is the time to buy more XDV shares because they’re on sale. Over time, this ETF’s value will go back up and, if I buy now, I will benefit from having bought additional shares when the price was lower than normal due to market turmoil. Do I like seeing the value of my portfolio go down? NO!!! Do I like buying dividend-paying investments when they’re on sale? YES!!!

Do you own research. Check out MorningStar. Visit the Motley Fool website and other websites that teach investors how to invest. Figure out which industries are hurting right now due to the pandemic, and determine if you believe that they will recover once a vaccine is found for COVID-19. When the panic has passed and life gets back to normal, which companies and industries will have the most ground to regain?

Keep Your Powder Dry

In the personal finance world, this phrase means having savings set aside for stock market circumstances like the ones we’re currently facing. It means having money available to invest when the stock market dips. This money is separate and apart from your emergency fund and the money you spend on the necessities of life. The reason you’ve set this money aside is so that you can take advantage of those times when the stock market goes on sale.

Full disclosure – I’m a buy-and-hold investor who believes in dollar-cost averaging. Money is skimmed off my paycheque and into my investment account so that I can buy units in my exchange-traded funds every month. I am not one of the people who has buckets of cash sitting around and waiting for buying opportunities like the ones that are on offer right now.

The people who are deploying their powder right now are, very likely, setting themselves up for some phenomenal returns over the next few years. They’re buying low because the stock market is down. So long as they hang on to their purchases through the recovery, they then have the option of selling high in a few years from now.

Successful Investors Do Not Panic

This is not the time to sell your investments! Even though they may be down, the stock market will not go to zero. The stock market will recover.

Selling now means locking in your losses. You will foreclose your ability to participate in the recovery, since your crystal ball will not tell you exactly when to buy back in.

Turn off your stock market notifications. Don’t look at your portfolio every day. Trust that the stock market will recover. The pandemic is going to cause turmoil, but the stock market has survived turmoil before. This time is not any different – the stock market will recover. You will want to be part of that recovery.

Buy low (which is right now) – hang on during the recovery (which could take a few years) – sell high (which is a few years from now).

Again, some people always make money. They do so because they invest in equities. They don’t panic when things turn volatile. They keep their powder dry. They’re around to participate in the recovery because they never sell. Be like those people.

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Weekly Tip: Wash your hands. Don’t hoard toilet paper and wipes. Stay informed and don’t panic. Don’t sell your portfolio.

Decide – Execute – Enjoy!

The first step to getting what you want is to prioritize your goals. You’re the only one who can decide what you need in order to live the life that you really want. The next step is to create and execute the plan to turn your dreams into your reality. The final step is to enjoy the reward of your efforts. Decide – execute – enjoy!

I’ve followed this three-step plan to achieve many goals in my life, both large and small, long-term and short-term. When I got tired of saying that I’d never been to Europe, I decided to go overseas. Between 2016 and 2019, I travelled to Europe three times. For each trip, I found a way to set aside the money from my paycheque so that I could visit Italy, Spain and Ireland. Getting to Europe was important to me so I found a way to make it happen.

One of the keys to my success was using technology to remove the temptation to spend money on things that didn’t get me closer to this particular goal.

Automatic Transfers are Your Friends

I absolutely and completely love automatic transfers. They are reliable – they’re effective – they’re simple to understand. All a body has to do is decide how much money to put toward a particular goal, and then put an automatic transfer in place. For example, if you wanted to create an emergency fund of $3500, then you could automatically transfer a fixed amount from each paycheque into a separate emergency fund account until you’d saved $3500. Easy-peasy lemon-squeezy!

Once one goal is reached, you simply keep the transfer in place and use the money to go towards the next most important goal.

And you needn’t limit yourself to having one transfer. For my part, I have 4 automatic transfers in place. One is for my long-term goal of early retirement. Another is for short-term goals like travel, house repairs, birthday & holiday presents, theatre tickets, vehicle replacement, and the like. The third transfer is in place for my charitable donations. And finally, the last transfer is in place to cover the costs associated with being a home-owning adult who has bills to pay.

Once my automatic transfers go through, I can spend the rest of my paycheque however I want! My long-term goals are being funded. My short-terms goals are also getting a little love. The costs of running my house and various other bills all get paid on time. And I have money set aside for charity. The rest of the money can be squandered and I can still create the life I want for myself.

I enjoy the theatre and I go several times each year. When it’s time for me to renew my subscription to Broadway Across Canada, the money’s there. Holiday traditions are important to me since they mean time with my family and friends. Is it time to buy some Christmas presents? The money is already there. And let’s not forget those special occasions that aren’t always so predictable. Invitation to a wedding or a spa weekend with friends? The money’s waiting for me.

Sinking Funds are Key to Paying for It All

Automatic transfers are a magnificent way to build sinking funds for all of your anticipated expenses.

While we live in an instant gratification society, one of the realities of good financial stewardship is that we can’t always get what we want when we want it. Credit cards create the illusion that you’re living your best life. They allow users to buy whatever they want the very second that they want something. However, unless that person has the money sitting aside to pay the bill, credit cards burden people with exorbitant interest payments.

Credit cards don’t teach people about patience. Let’t be honest. Most credit card purchases aren’t for emergencies. For a great many people, credit is used because someone doesn’t want to wait a little bit long to buy!

If you’re serious about spending your money on the things that matter most, then take my advice. Siphon a portion of your income every time you’re paid into an account dedicated to your most important goals. Use automatic transfers and sinking funds to acquire the things that you really and truly want.

You work too hard for your money to waste it on purchases that you won’t remember 48 hours after you’ve made them. Create a financial plan for your money by telling it where to go instead of wondering where it went. Automatic transfers and sinking funds are financial tools that will help you to build the life you really and truly want for yourself. Start using them today and move that must closer to achieving your dreams.

Decide – execute – enjoy!

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Weekly Tip: Don’t let websites store your credit card information. Firstly, doing so makes it that much easier for you to indulge in instant gratification purchases. The few extra seconds of typing in your information might be all you need to make you reconsider whether the purchase is moving you closer to or further from your goals. Secondly, if the retailer’s website is hacked, then your information is at risk and your odds of being the victim of identity theft go up.