Millionaire on the Prairie

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  • A Potentially Horrible Boss

    A Potentially Horrible Boss

    This summer, I was lucky enough to have a socially-distanced visit with some friends. As we enjoyed our cheesecake, the host mentioned that he was worried about what would happen when his boss retired. My friend explained that his boss’ child would likely take over the company. This likelihood was causing a good deal of angst since the offspring’s… leadership style… wasn’t particularly inspiring nor admirable. My friend was facing the very serious, very probable situation of working for a potentially horrible boss.

    The worst part is that there is very little to be done. My friend has sought other employment, yet that pursuit has not been fruitful. Further, there are bills to be paid. The twin goals of paying off the mortgage and saving for retirement still have to be met. There’s no realistic option of just walking away from the bad situation which is looming. Like a great many people, my friend doesn’t have an income-producing portfolio as a safety net.

    I had no words of wisdom for my friend. Instead, all I could do was be supportive and listen. However, that conversation has stuck with me. Perhaps I don’t have a way to fix the situation for my friend. Yet, I’m confident enough to believe that I do have a suggestion for those who aren’t yet in my friend’s circumstances.

    Assess Your Situation

    If you are very, very lucky, then you’re working for pay doing something that gladdens your heart. You’re satisfied with your work life and it’s a source of contentment for you. Your boss is an asset, rather than a point of stress. Still… you should always be aware that this is a situation that can change on a dime. Lots of things can happen. Maybe your current boss takes a promotion, moves away, retires or gets sick. In any of these situations. you’re suddenly facing the risk of a potentially horrible boss taking her place.

    Trite though it might sound, the following statement must be acknowledged. Most of us do not have the financial ability to just walk away from our job. We realize that having a steady paycheque ensures we can feed ourselves and pay the bills. The vast majority of people have to keep working and hope for the best. In other words, a potentially horrible boss is a source of stress and there’s little that many workers can do to avoid it.

    You, Gentle Reader, don’t have to be one of those people.

    Get Horrible Boss Insurance

    This is a form of insurance that insulates you from the risk of working for a potentially horrible boss. Unlike car insurance or house insurance, you don’t pay a premium to a company to acquire it. Nope! This is the kind of insurance that you create for yourself.

    How so? By creating your own income-producing portfolio over time. The amount of time is up to you. You can save a little bit over the very long-term. Alternatively, you can save a lot over the short-term and engage in extreme frugality by saving up to 70% of your income. Or you can find a balance that works on a time-table that best suits your personal goals.

    How you invest your money is your choice. Save-invest-learn-repeat. This is my mantra. Feel free to adopt it as yours too. You can learn about whatever investment you want. Some people are big fans of real estate investing. This is not my area of expertise but I have been devoting some time to learning about it over the past two years.

    If you’ve been here for awhile, you’ll have noticed that I’m a big fan of the stock market and dollar-cost averaging over time. You’ve often heard me suggest that you should invest a portion of each and every one of your paycheque in a broad-based equity product, preferably an exchange-traded fund. The fees for ETFs are lower than the fees for mutual funds. Stock-picking is most likely not your strong suit so I’d advise you to only do it with 10% (or less) of your entire portfolio.

    Money in the stock market is going to be invested for the long-haul. That means it is going to be invested in the stock market for decades. To be clear, your stock market investment money is separate and apart from your emergency fund money. It also shouldn’t be co-mingled with money you set aside for short term goals, which are those that are to be funded within a year or two. Oh, and you’re going to want to be very disciplined about ridding yourself of debt as fast as you can.

    Money Buys Options

    Gosh! That sounds like a lot, doesn’t it? Saving for retirement. Building an emergency fund. Funding short-term goals. Paying off debt! Life is meant to be lived and no one wants to be richest person in the graveyard.

    Blah-blah-blah!

    Believe you me when I say the following. The day that you have to work for a potentially horrible boss, you will not regret having money in your emergency account. You won’t ever regret having a second, back-up income generated by your portfolio. The Ad Man and the Creditor want you to believe that it’s some monumentally unfair disadvantage to not spend every penny you make. They are lying to you! The most precious thing in the world is time. Ironically, it is one of the few things that money cannot acquire. The second most precious thing in the world is having options. Money most definitely purchases options.

    If a potentially horrible boss is on the horizon for you, then I promise you that you will want to have the option of getting away from that person. Having money allows you to do that. You need not work for someone who is going to make your life a living hell for want of money.

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    Weekly Tip: Make extra payments towards your debts so that you minimize the interest that you pay to your creditors.

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    Well, Gentle Readers, there are currently less than 60 days left in 2020. How are you doing with your financial plans? What needs to be tweaked for next year? Which financial habits will you keep in 2021?

  • Money in Your Kitchen

    Money in Your Kitchen

    I’ve said it before, and I’ll say it again. There is money in your kitchen! The room of your home where you keep your fridge and your stove, your pots and your pans, your cutlery and your crockery is a treasure of stored value.

    The way to find this money is to use your kitchen for …(drum roll please!) …COOKING!

    Yes, I know this is a novel idea. And yes, cooking results in dirty dishes. I’m even willing to admit that you might not even know how to cook!

    I don’t care. I want you to learn to feed yourself, and to save money while you do it.

    Gentle Reader, there is nothing quite so satisfying as a delicious meal that has been prepared with your own hands. I say this a person who often socialized with my friends at restaurants in the Before Times. Steak – sushi – Thai – Greek – Italian – chain restaurant – bistros, cafes, and holes-in-the-wall! I loved them all, and I freely spent money on food prepared for me by others.

    That said, very few meals – save for everything I ate in Italy – have been as sumptuous as the ones I’ve made for myself. If you eat out a lot, then you’ll understand me when I say the following. After a while, it all starts to taste the same.

    Treats are special when they’re rare

    We all know this. If you only eat out once every three months, then it’s a treat. It happens 4 times a year! It’s rare and that rarity makes it special. You might get dressed up. Possibly, you turn it into a special occasion. Dining out becomes an event and you anticipate it. You might savour each bite because you know it’ll be another 89 days before you eat out again.

    But when you eat out everyday, it becomes part of your routine. It’s as mundane as brushing your teeth but exponentially more costly! When was the last time that you truly and deeply savoured the meal you picked up at the drive-thru window? Or had delivered to your home in an insulated carrier bag?

    Get into your kitchen and cook for yourself. Turn those restaurant meals back into a treat! In the process, the money in your kitchen can stay in your wallet.

    This week, I was lamenting to my sibling that I needed a new recipe for the extra lean ground beef that I’d taken out for dinner that evening. Trust me when I say that COVID19 has robbed me of my love for my own spaghetti and my homemade hamburgers. I’ve made them too often since the pandemic was declared and I don’t want to make them anymore! Though younger and much taller than me, my sibling is very wise in the ways of the kitchen. My younger relative suggested that I make Korean Beef.

    Taking the suggestion to heart, I went to the World Wide Web and typed in the words “Korean beef recipe”. A plethora of results instantly appeared on my screen. I chose the following recipe from Damn Delicious, and I was not at all disappointed. What I love about this website is that so many people leave comments, tips, and insights into how to tweak the recipe. (I readily admit that the recipes can be made as-is and are still very, very tasty!) One such commenter suggested adding julienned carrots to the dish.

    At first, I was afraid – I was petrified. I’d never julienned a carrot in my whole entire life!

    (Apologies to Gloria Gaynor!)

    However, there’s another marvelous invention in our universe called YouTube. It’s almost as good as the local library when it comes to a free resource for learning how to do stuff. I went to YouTube, searched for “how to julienne carrots”, and happily julienned my first carrot a few minutes later.

    Another commenter mentioned that his family liked a lot of sauce, so he’d doubled that portion of the recipe. Guess what? I like lots of sauce too! So I followed his lead and doubled the sauce for my dish. No regrets! Doubling the sauce was a simple, easy, foolproof tweak that would increase my enjoyment of my own cooking.

    So I made the recipe, doubled the sauce, and added my julienned carrot… and I wound up with this…

    Then I added a little extra something….

    Together, they produced the following…

    And it was delicious! As another very wise friend would describe it, I served myself a meal that was yummy-yummy-in-my-tummy! There were enough leftovers for lunches and dinners the following days.

    While I’m quite certain I could’ve ordered a pizza for $9.99 from a well-known chain, I’m equally certain that the pizza would not have tasted nearly as good as my homemade Korean Beef. Yes, I had to do dishes but it was a small price to pay for having a wonderful meal at home. And I received the added benefit of keeping the money I found in my kitchen. :-}

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    Weekly Tip: Start an automated transfer to a savings account. The last time I checked, EQ Bank was paying 1.70% on deposits. I’m as un-impressed with that rate of return as you are. The point is to automate your money so that it’s there when you need it. The money siphoned off via automatic transfer is to plump up your emergency fund. If you’ve already got one that’s nice and fat, then use this automated transfer to save up money for your annual expenses: insurance premiums, property taxes, professional dues, etc…

    Maybe you like to invest in big chunks. Fine. Set up the automatic transfer. Every time the account hits your pre-determined amount, transfer the money to your investments and then keep your mitts off it until you retire. Automatic transfers reinforce the savings habit so, if you haven’t already done so, set up your automatic transfer today.

  • Use This Time Wisely

    Use This Time Wisely

    Gentle Reader, I’ve been working on staying COVID-free. I’ve been staying home, washing my hands, wearing my mask, and trying not to go down the What-If rabbit hole. While I wait for a vaccine/innoculation/nasal spray, I’ve chosen to use this time wisely. The pandemic will end – we will all be able to breathe around each other like the Before Times. Until then, I’m going to use my time to learn things that will save me some money.

    Towards that end, I’ve decided to use YouTube to save money.

    Whatever do you mean, Blue Lobster?

    It’s this simple, Gentle Reader. Like the public library, YouTube is chock-full of free stuff just waiting to be learned by people such as ourselves. This summer, I learned about gardening – both flowers and vegetables – from the very sweet couple who host Garden Answer. Just this week, I stumbled upon a wonderfully soothing channel called Savor Easy, where I’ve watched videos that consist of two hands baking bread or buns. I find this channel to be the antithesis of most social media. It’s very therapeutic because there are no visual distractions. And you can practically taste the final product through the screen!

    Flattening the curve and stemming the spread of COVID-19 requires us to stay home more than usual. Since you’re going to be at home anyway, why not use the time more profitably than binge-watching your favourite show?

    Use this time wisely by learning how to do things that will help your finances. Baking your own bread (or cookies, muffins, cakes, pies, tortes, etc…) will save you some money. You’ll probably enjoy the results a lot more than the store-bought stuff too. The same goes for starting your own flower gardens, or growing your own herbs. Up until this year, I was a huge fan of annuals. However, spending so much time in my own backyard has forced me to re-evaluate my stance. Perennials suited for my climate will come back year after year so long as I learn how to properly care for them. And YouTube has multiple videos that will show me how to do just that.

    Maybe you’d prefer to channel your energies into something that will last a little bit longer than a sheet of cookies, or a season of sunflowers. Why don’t you learn a craft? There are a ton of videos about learning to crochet or how to knit. For the record, I’m a fan of crochet simply because I never stuck with knitting long enough for my index fingers to stop being sensitive to the pointy ends of knitting needles. The only reason I stopped crocheting is because I’d run out of people to give my blankets too. That said, one of my most challenging patterns was calling my name today… so I might have a new project to tackle this winter. (I’ll figure out who to give it to later.) I’ll be home anyway and having a cozy blanket to snuggle under never gets old.

    Perhaps you’d like to get into something even more long lasting. Real estate investing, anyone? You’ve heard me talk about Bigger Pockets before. I still watch the new videos posted on this channel and I learn something new each week. Even though the laws are different between Canada and the US, the math doesn’t change when it crosses the border. You might want to consider whether you can implement the principles discussed on this particular channel. Do you have the interest, desire, and finances to build your own little cadre of real estate properties?

    Use this time wisely to learn something that will add a little jingle to your pocket.

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    Weekly Tip: When renewing your mortgage, shop the market and ask for a lower rate. If you’re about to renew, you know that 5-year rates are under 2%. I make no predictions about how much lower a bank is willing to go, but you owe it to yourself to ask for a lower rate. Trust me – the bank won’t just give you one so you have nothing to lose by asking!

  • Free Shipping

    Free Shipping

    Who doesn’t love the word “free”?

    This week, I decided to buy myself some new jeans. I went to the website of one of my favourite jeans-buying retailers, and discovered to my delight that everything was 50% off. Hooray! Jeans I want at a price I wanted to pay… how could I possibly ask for anything more?

    And then another little banner popped up on my screen. I could get free shipping if my purchase was a minimum of $100.

    Great googaly-moogaly! All I had to do was spend more than I’d planned in order to have someone else pay to ship my desired items to me? I could do that! I’d be an idiot not to spend more than I’d planned to spend, wouldn’t I? And I don’t like to think of myself as an idiot so the only logical thing to do was to search for a way to spend another $40.

    So I set about reviewing other pages on the website. I looked at tops. Then I looked at the outerwear & accessories. My furious hunt through the pages of the website led me find another item I wanted under the sale-tab. (For the record, it’s a long-sleeved stripped sweater than only cost $9.49+tax after the discount code was applied.)

    Yet, no matter how hard I looked, there was nothing else that I really and truly wanted to buy so my order did not meet the $100 minimum purchase. I would have to… <shudder>… pay for my own shipping. At the end of the day, my chosen items, the tax and the $10 shipping fee came to $83.46.

    Afterwards, I thought about it and realized that the Ad Man had successfully convinced me to spend more money than I’d planned. Remember how I said that I only wanted jeans? What did I wind up buying? Jeans and a sweater… Sure – it was only an extra $9.49+tax, but I’d been willing to spend an extra $40 to save $10.

    How is that a smart financial move? I would’ve been out $30 more than I’d planned to spend had I simply bought any-old-thing just to hit the minimum purchase amount to avoid having to pay my own shipping fees.

    This kind of behaviour is less than financially prudent, aka: stupid money choices.

    Don’t be a Dum-Dum

    One of my very dear friends taught me this simple, useful piece of advice: don’t be a dum-dum. This advice is golden! I strive to follow it every day, and I think you should too.

    Never spend more than you planned to spend just to get free shipping. I can’t make it any simpler than that. Chances are, you already have too much stuff and you’re one of those people who wishes they had more storage in their home.

    Don’t buy more stuff, which is the only reason storage is needed in the first place, just to meet a minimum purchase.

    If your planned purchase doesn’t entitle you to free shipping, then the only “downside” is that you get to keep your money.

    Explain to me how keeping more of your own money is a bad thing? So you had to pay for shipping? So what? The only important consideration is that you spent what you’d planned to spend to buy what you’d planned to buy. Everything else is irrelevant. Do not let the Ad Man convince you otherwise.

    I love free shipping just as much as the next person. However, you know what I love more? Having an extra $16.54 stay in my bank account because I didn’t meet the $100 minimum purchase. That extra $16.54 will go towards something else – groceries, retirement, post-pandemic travel. Who knows? The important thing is that $16.54 stayed in my wallet, instead of flying out the door on some item of clothing that wouldn’t have made me happy.

    So my shipping wasn’t free. Big deal. I’ll survive to fight another day.

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    Weekly Tip: Sell what you don’t need anymore. There are so many platforms that can be used to sell the things that might fit someone else’s need. You need not keep things that no longer serve a purpose for you. And while you won’t get the price you paid for whatever it is that you no longer need, you’ll get back some of your initial purchase. That’s far better than getting nothing back and having stuff cluttering up your home. Always, always, always be safe when you’re selling stuff online!

  • Taking Care of Future You

    Taking Care of Future You

    Quick! Take a look at your current net worth. If you had known 10 years ago that it would be what it is today, would you have been angry if you had been forced to save more money???

    The reason I ask is because I’m getting older. And the older I get, the more I notice things. One of the things I’m noticing is that my friends are getting older too. And they’re starting to make worrying noises about not having saved enough for retirement. These disquieting rumblings are leading me to wonder if perhaps people shouldn’t simply be forced to save for their retirement.

    It’s Easy to Put Off Saving

    Want to know why I’m such a huge fan of automating your savings?

    It’s due to the fact that automation removes freedom of choice. I know myself. If I to deliberately choose to siphon money from my paycheque to my future, then I wouldn’t. I’d go through that money like a hot knife through butter! I’d be no further ahead financially but I’m sure I’d have more stuff – clothes, electronics, whatever…

    I’ve curbed my ability to spend away my retirement savings by setting up automatic transfers. My paycheque comes in – the automatic transfers are triggered – I spend whatever’s left over.

    Yet, I’m realizing that a lot of people don’t use automation to improve their financial futures. To be fair, I’m not talking about people who don’t have any fat to cut. Sadly, lots of people are living by the skin of their teeth and an automated savings plan won’t help those people.

    I’m talking about the people who do have fat to cut. The ones who can cut back without eliminating all the little extra in life in order to fund their future financial goals. Many of them don’t do so… a situation that I find perplexing.

    There’s Little to No Urgency

    Perhaps the Ones-Who-Can simply don’t because retirement is so far away. It’s in the distant future, so why worry about it now when it won’t be here for a very, very, very long time?

    Good question.

    The answer is that tempus fungit, which is Latin for “time flies”. Yes, I’m old enough that I took a semester of Latin in high school. It still blows my mind that this year was my 30-year anniversary of graduating high school!

    Your retirement will be here before you know it. Everyone gets the same 24 hours in a day. And they pass by at the same speed for all of us. No matter how busy you are, no matter how full your life is of other priorities, believes me when I say that you will get old…unless you die. Sorry to be so blunt, but it’s the truth. The only people who aren’t getting any older are the ones who have already passed.

    Regardless of how far away it feels, your retirement is on the horizon. Saving up enough money to pay for it is a priority that you should focus on throughout your life.

    Money From Others…

    Yes, that’s right. It’s up to you to pay for your own retirement. Whether you’ll earn CPP, OAS or GIS (or Social Security and its equivalents), the amount of money you get from the government won’t be enough.

    If you’ve been promised a pension, then all you have right now is a promise. The harsh reality is that pensions can fail. Think of a pension as a repository of deferred pay. Your employer pays you less today with the promise that they will pay you after you’ve retired. When a pension fails, it means that the employee who did the work doesn’t get paid as he or she was promised. It sucks and it’s unfair, and it causes a lot of havoc to pensioners who can’t turn back time and go back to work.

    You should be saving your own money to supplement whatever you receive from the government and your pension. If the government and/or your pension still has money to pay you in your dotage, then that’s great. If not, then you’ll be very happy that you made the choice to tuck a little something away over the years. Err on the side of caution and start saving for your retirement.

    It’s Vitally Important

    There’s not much more to say at this point. You know how happy you are when you’re hungry and you eat something? That awful hungry feeling goes away and you can go on about your daily life.

    You will continue to be hungry when you’re retired. You’ll still need shelter, a few clothes, access to transportation, some entertainment once in awhile. When you’re retired, I promise you that you will still yearn for your creature comforts – much in the way that you do today. In order to acquire them, your retirement funds will have to take the place of your paycheque.

    Gathering sufficient retirement funds is an integral step in taking care of Future You. For the vast majority of us, it’s going to take a very long time. So unless you’re next to destitute, take immediate action. Set up a plan whereby you funnel some of today’s money towards tomorrow’s financial needs. I promise that you won’t regret doing so when the time comes to live off your retirement nest egg.

    Yet…

    I suspect you’ll read this, think it’s a good idea, and go on about your lives. There might be one or two of you who actually take my suggestion and plant their money tree. The rest of you… not so much.

    All of us will need money until we draw our last breath. That’s the world we live in. And that’s why I’m starting to come around to the idea that people must be forced to save for their retirement. It cannot be optional. If it’s optional, then people will choose not to do it and that’s a bad choice. No one is telling you to give up all of the things that make you happy today in order to save for tomorrow. Instead, I’m encouraging you to cut back a little bit. This is so you’ll have the money you’ll need for Future You. Isn’t taking care of Future You worth a little bit of sacrifice today?

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    Weekly Tip: Use your tax refund in a way that allows you to pay down some debt (30%), to invest in the future (50%), and to enjoy the present (20%). Life is about balance and enjoying the journey along the way.

  • Higher Level Math Is Not Required

    Higher Level Math Is Not Required

    Let me tell you a little secret about myself… I’m not good at math! Luckily for me, higher level math is not required for success in personal finance.

    Oh, I have a firm handle on the basics – addition, subtraction, multiplication, division, fractions & exponents. However, the higher level stuff like algebra, calculus, and trigonometry were challenging for me in high school. And when I got to university, I took my two required math courses and never looked back.

    Truth be told, my mastery of mathematical concepts ends around grade 11 mathematics, maybe even grade 10. Since then, I’ve been limping along with the basics… and amassing a sizeable net worth along the way. Luckily for me, I didn’t need the higher level math skills in order to start investing for my future.

    If you want the skills, go get them.

    For my part, you need not master those skills unless one of the following two things are true:

    • you want to; or
    • you need them for your desired career

    Had I wanted to pursue a career in science or finance then I would have had to put my nose to the grindstone in order to acquire higher level math skills. The STEM – science, technology, engineering, math – careers required a mastery of math that I just don’t have.

    Thankfully, I didn’t need to master algebra, calculus, and trigonometry to become adept at personal finance. And since I didn’t particularly enjoy high school math, I found a way to build the life I want without having to take many more math courses after leaving secondary school. I’m not saying my decision is the right one for everyone so please do what you think is best for your particular circumstances. If you need higher level math skills to build the life you want for yourself, then go and get them post-haste.

    Is it easy to do?

    Sometimes I think people are intimidated by personal finance because they weren’t good at math in school either. I’m here to tell you that there are three mandatory ingredients to building wealth over a lifetime: an income, an automatic transfer, and opportunity to invest.

    For my part, I pursued investment opportunities offered in the stock exchange. I used to invest in mutual funds, but then I learned about management expense ratios and switched my investments to exchange traded funds. ETFs are much cheaper than mutual funds. Over a very long investment horizon, lower MERs mean that I keep more money in my pocket.

    Some people invest in themselves by starting a business. Some people build portfolios of rental real estate. I think those are great options, but they just weren’t ones that I pursued. Neither of those options necessarily require a mastery of higher level math skills. Successfully running a rental property portfolio requires a mastery of ensuring that the money coming in from rents is higher than the money going out for expenses. A Ph.D in calculus isn’t going to be required to be a successful landlord.

    In any event, an income, an automatic transfer, and the opportunity to invest are the three main ingredients of the secret sauce of personal finance.

    Is the formula simple? You better believe it is! If you have all three, then you’re in a position to increase your wealth.

    Most people can master personal finance with the math concepts that they learn before junior high. I’d always felt bad about my high school math achievements. It was the one class where I struggled, and I never felt smart enough. In spite of his, I’m pretty okay with how I’m doing today.

    Special Advice to the Young…

    If you happen to be a young person reading this post, then I would encourage you to work hard at mastering math and getting those skills under your belt as soon as possible. Remember how I said that an income is part of the secret sauce?

    STEM-careers pay higher incomes. It’s a reality. STEM careers are an avenue to increasing your odds that you’ll earn more than the median income. The higher your income, the larger your opportunity to build wealth. You can choose to save a higher percentage of your income when your income is large. When you’re trying to live on the median income, there’s not as much opportunity to save money. Generally, less money invested means slower growth of your money over time.

    You might not think that’s fair, but I’m not here to argue about fairness. I want you to keep your options open by getting the highest grades that you can in the area of math. Doctors make more than cashiers. Pharmacists and engineers earn more than maintenance and daycare workers. I’m sure you can think of other examples. I’m not debating the necessity of each type of work to the functioning of society. I’m just pointing out the fact that STEM-careers pay more than non-STEM careers.

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    Weekly Tip: Learn to use the word “No” when people ask you for money. You need not be rude, aggressive, or sarcastic. Practice saying “No” in a polite but firm tone. Doing so will ensure that you’re confident and calm when turning down someone’s request for your money.

  • Charitable Donations

    Charitable Donations

    I’ve long held the belief that choosing to donate to worthy causes is a deeply personal thing. Some people donate their time. Others donate their money. Whichever you choose is the right answer for you. At the end of the day, I sincerely believe that donating to charitable causes is a very good use of money.

    When I was growing up, door to door solicitations for money were are regular as the rising sun. In the world before call display, charities phoned people at home to ask them for money. Charities have since moved away from these forms of solicitation and have moved to online options. Today, ads are on social media sites and people can donate with their fingertips. It’s a very simple process for making an online donation to the charity of your choice.

    Charitable events happen all the time. September 2020 was the 40th anniversary of the Terry Fox School Run. On October 4, 2020, there will be a Run for the Cure nationwide for the purpose of raising money to conquer breast cancer. You might want to give money to support a local animal shelter. Perhaps you want your charitable donations to go towards helping the homeless or towards keeping shelves stocked at the Food Bank. There are many, many worthwhile charitable causes, far too many for me to list in this blog post.

    Tax benefits of charitable donations

    The government wants to encourage taxpayers to donate money. Toward that end, the Canada Revenue Agency rewards people who make financial donations to registered charities via tax credits. The more money that you donate, the more tax credits you receive. Tax credits are very useful because they are set off against any tax that you owe to CRA.

    CRA is willing to give you up to 29% of your charitable donations back as tax credits. On top of this, your province will also give you some tax credits. Talk to your professional tax advisor for the specifics that apply to your particular situation.

    *** I am not a tax professional. If you need assistance with your taxes, talk to a qualified tax professional.***

    Do some research first

    Be smart as you donate. Do your research before you open your wallet. While your heart is in the right place, you want to make sure that your money goes to the right place too. Check out the charity that you want to support and make sure that it’s registered. You don’t want to send your money to a fraudster with an impressive website.

    Charitable organizations do not run themselves. They’re required to employ people whose job it is to make sure that your donation dollars get put to their intended use. These employees are paid through administration fees. For every $1 you donate, some portion of it is siphoned away to pay for the daily operation of the charitable organization. The higher the administrative fees, the less money going towards the intended recipient of your charitable donation.

    Once you’ve selected your charity, ask yourself if you’re okay with the percentage of your donation that will have to go to the administration fees.

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    Weekly Tip: Donate to charity. It builds good karma.

  • Commit to a Per Diem

    Commit to a Per Diem

    Per Diem… it’s a phrase that means “an amount of money paid per day.” In the world of personal finance, it’s a phrase that is not used nearly enough. I want you to commit to a per diem.

    That’s right. I want you to pay yourself some amount of money every single day.

    I’ve written about per diems before, but this article is about creating a per diem that’s specifically designed to take care of Future You.

    The Four Steps of the Per Diem Plan

    1. Pick a daily amount to save.
    2. Set short-term goals for your money.
    3. Invest that money.
    4. Don’t spend the money until you retire.

    Step 1 – The Amount

    If all you can afford is $1, that’s fine. When you have more, you can give yourself a raise. The important thing is to get into the habit. Start the habit today.

    Think about it. How would you like to have more than $3500 by this time next year? All it takes is $10 per day. That’s not a whole lot of money in today’s world. If you have it to spare, then I’d like to see you put it to good use. And what better use is there for your money than ensuring that you’re comfortable, warm & fed in your dotage?

    Maybe you’re fortunate enough to be able to put away $20 per day. Great! Do it! I’m not a stickler on the amount that you save each day. However, I am adamant that you save something. Start with whatever you can then increase your per diem as you’re able.

    Step 2 – Set Short-Term Goals

    Like I said above, this per diem is for Future You. When I talk about short-term goals in this context, I don’t mean saving for a vacation or new sports equipment, although you should never go into debt for those items either. You should definitely save first then pay cash at point of purchase.

    No. In this case, your short-term goals are monetary targets. Let’s say you commit to a per diem of $10. Set a target amount of $500 or $1000. Then create an automatic transfer from your main day-to-day bank account to a separate savings account. When you hit $1000 in your savings account, then you invest that amount into an equity-based exchange traded fund or index fund.

    You do not want to keep your money in a savings account. Why? I’ll tell you why – the rate of interest paid on savings accounts is less than inflation. You are losing money by keeping your money in savings accounts for long periods of time. Inflation is a fancy way of saying that the value of your money is decreasing over time. When $100 buys 5 bags of groceries in 2019, but only 4.5 bags of groceries in 2020, then you are seeing inflation at work. Inflation means your money purchases less today than it did yesterday.

    Savings accounts are great to accumulate money that will be spent in the next few weeks or months. (They’re also a good spot for emergency funds, in my opinion. Others disagree with me.) Commit to a per diem going into your savings account. When it hits the target number, you invest the money then start working towards the target again.

    Step 3 – Invest that Money

    You’re free to pick whatever monetary target you want. I like $1,000. It’s a nice round number and it will take roughly 3 months, at $10/day, to achieve. If you can save $20/day, then you’ll be investing money every 8 weeks. Also, it feels good to tell yourself that you’ve just invested $1,000.

    Again, you don’t want to let your per diem languish in a savings account. That money has to work as hard for you as you do for it. That means you simply must invest your per diem money in the an equity-based product.

    I have no idea how young you are at the time you read this post. The bottom line is that the longer your money is invested in the stock market, the better your odds of watching it grow to a nice, big mountain of financial security. That mountain won’t be built until you commit to a per diem.

    Step 4 – Mitts off until retirement

    The money you save today is for Future You. Even though no one is promised tomorrow, it’s best to plan as though you’re going to be here for a long time. It’s very, very possible to find the balance between enjoying the present while saving for the future.

    Wouldn’t it be awful to live to 92 yet you ran out of money at age 74? The social safety net isn’t designed to keep you comfortable. It’s designed to keep you at a level of not quite starving to death. That would be a terrible way to live during your retirement years.

    Allow me to be clear. Your per diem money is not to be touched.

    You’re still responsible for creating an emergency fund, and for replenishing it if you need to use it. Sadly, the rest of life’s expenses don’t disappear just because you’re saving for your future. You’ll be saving for tomorrow while paying for today. Commit to a per diem, then live the rest of your life on whatever’s left over.

    And if you find that you have too much money waiting for you when you’ve finally retired, feel free to leave me a message. I’ll happily take whatever amount of money you don’t want.

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    Weekly Tip: Never grocery shop when you’re hungry. You’ll likely make more impulse purchases and that can throw off your budget. Whenever possible, eat before you go to the grocery store. Make it easy for yourself to stick to your list!

  • The Holidays.

    The Holidays.

    As hard as it may be to believe, the holidays are only a few weeks away. Thanksgiving will be here in another couple of weeks. (Or in November if you’re in the USA.) Then it’s another few short weeks until we celebrate Christmas, or Hannukkah, or Kwaanza, or Festivus.

    While the holidays will be different this year, the fact remains that people will do what they can to keep tradition alive. That might mean mailing more presents, or swapping recipes instead of baking in the same kitchen. It might mean less travel but more time doing video chat. Or it might mean more road trips and fewer flights.

    No matter how you and your loved ones plan to celebrate the holidays COVID-style, there’s a good chance that your wallet is going to take a gut punch before the celebrations are over. The time to start saving for the holidays is now. There are roughly 13 weeks left in 2020. Start setting some money aside each week so that you can pay for the upcoming expenses without putting them on credit.

    Homemade for the holidays?

    I’m going to take a wild guess and say that you’re one of the many people who are staying closer to home. If that’s so, then maybe you have some extra time on your hands. This might be the year that you take up baking Christmas cookies or other holiday treats. If you start a few weeks before the big day, you can probably bake some presents for the people you’ll be seeing.

    After the year we’ve had, and the social distancing we’ve done, I suspect that a great many of us don’t want more stuff. However, we’d appreciate sharing a bite of something delicious with those we’ve missed. Stuff is easily forgotten. Happy time spent together? Not so much. People want the connection… and most of us connect over food in one way or another.

    If you’re doing to be online anyway, try watching some videos of people baking (or cooking) something you’d like to share with your loved ones. I recently discovered the Preppy Kitchen on YouTube. I’ve spent hours watching the host bake delicious desserts. My eyeballs have consumed more calories than I could ever possibly burn off in one lifetime! That said, I’m still considering which of his delicious recipes I will be baking for Christmas dessert.

    It doesn’t have to be a baked gift. You could make or create so many other things to be shared. Here’s one list of ideas that might appeal to you. The internet is a vast place so keep looking if none of these suggestions are the ones for you.

    Spend cash, not credit!

    Maybe you’re not the creative or crafty type. No worries! I’m not either. I bake year-round, but only make Christmas cookies at the end of the year. I’m more of a mall-shopper when it comes to presents for the holidays.

    That said, please follow my lead. Only spend cash on the presents for others. No one wishes for their loved ones to go into debt to get them stuff. Well, maybe kids do but that’s because they don’t understand credit and debt just yet. The adults who love you don’t want you to be financially harmed over doodads and knickknacks. If you must buy people presents, then stay out of debt to do so.

    Figure out a budget of how much you want to spend on others, then stick to it. Thanks to the pandemic, there’s a chance that your discretionary spending on other stuff has been curtailed this year. There’s a chance that the money not spent on commuting, the gym, sports activities, and eating in restaurants has resulted in a little bit more jingle in your pocket. I’m not encouraging you to spend more than you otherwise would! Savings should not be squandered simply for the sake of doing so.

    What I am saying is that, hopefully, it’s easier for you to keep the credit cards tucked away this holiday season. If you’re fortunate, then you can spend cash only to fulfill your desire to give.

    We are two thirds of the way finished with 2020. The holidays are coming up quickly. It would behoove you to start planning for how you’re going to pay for them. I want you striding into 2021 with a smile on your face and without debt on your mind!

    Weekly Tip

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    Make extra payments over the life of your mortgage to minimize the interest you pay over the life of your mortgage loan. This can be done by increasing your minimum payment each year. Or it can be done by putting a lump-sum down against your mortgage. The more extra payments you make, the less interest you will pay to the bank.

  • MER – Cheaper is Better

    MER – Cheaper is Better

    The management expense ratio (MER) is the percentage of your portfolio that you pay to the company that sells you the index fund, exchange traded fund (ETF) or mutual fund that you hold in your portfolio. The fees for these products must be disclosed to potential buyers. Thanks to the wonder that is the internet, you can easily do an online search of any mutual fund, index fund or ETF and find its MER.

    Generally speaking, mutual funds are more expensive than both index funds and ETFs. I’m not entirely sure why other than to say that mutual funds are actively managed. This means that there are a whole lot of people who are researching and analyzing data before doing a whole bunch of buying and selling of various stocks for inclusion in the mutual fund. All of those people need to be paid. There’s a lot of overhead that must be covered by fees from clients in order to ensure that all of that activity is performed.

    In sharp contrast, index funds and ETFs are passive investments. They simply buy into the top companies that meet their investment objective and then it’s done.

    You’ll have to do your own research before you in invest. You can also speak to a fee-only certified financial planner. However, my general advice to most people is the following. If you have the choice of buying a mutual fund or an index fund/ETF, go for the lower cost product so long as you can still achieve your investment goals. It will be cheaper for you in the long run and you’ll wind up with more money in your kitty.

    Take a look at the following MER calculator. It allows you to do a side-by-side comparison of the impact of paying a higher MER on your portfolio. You can control so many variables: your investment horizon, the MER, your starting balance, the assumed rate of return, and your contribution amount.

    See for yourself…

    Start with an investment of $1000 in both Fund A and Fund B. Assume that they are both identical and both of them will help you achieve your long-term financial goals. Commit to contributing $50 per week into your portfolio, which is $2600 per year.

    Enter an annual average return of 7% for both funds. And assume that you’re going to be investing this money for 30 years. The average life expectancy is roughly 80 years for humans. Believe me when I tell you that 30 years is not an unreasonably long investment horizon.

    Here’s where the steak starts to sizzle. Fund A is a mutual fund charging a measly 1.5% per year. In other words, Fund A skims off 1.5% of the value of whatever’s in your portfolio. Fund B is an index fund, or an ETF, which is charging a minuscule 0.05%. Go ahead – plug those numbers into the formula.

    Now, hit the calculate button. What do you see?

    Fund A – with the higher MER – is going to cost you $37,330.78 in fees. On the other hand, Fund B – with the much lower MER – is going to cost you $1,244.36.

    That’s a difference of $36,086.42 in fees. This is money that is not staying in your investment portfolio since it’s being paid to someone else. Why would you want to pay this amount if you didn’t have to?

    Play with this calculator – change the variables – see the impact of higher MERs over a longer period of time. I think you’ll agree with me that when it comes to paying for investment products, the MER matters – cheaper is better.

    Hold up, hold up, hold up!

    Blue Lobster, are there really investment products that pay 0.05% in MER?

    Yes, Gentle Reader, there are. At the time of this post, the website for VanguardCanada is showing two equity products – VCN and VCE – with MERs of 0.05%.

    *** To be clear, I am not being paid by Vanguard Canada for mentioning these investment products. I do own units in VCN.

    All else being equal, cheaper is better. For simple comparison, the Big Six banks in Canada sell mutual funds that are equivalent to VCN and VCE. At the time of this post, the MERs on their products are much higher than 0.05%.

    I have to amend my earlier statement. At the time of this post, the links for CIBC and HSBC do not disclose the MERs for their equity products. To find the MERs for their products, you will have to do a bit more hunting-and-clicking but you’ll get there. The other 4 banks disclose this information on their website with one-click. This tells me that atleast 4 of the 6 big banks are willing to ensure that their customers can easily find the right information to make an informed choice.

    Now you know better.

    Paying a higher MER means less money in your pocket at the end of the day.

    As a general rule, cheaper is better when it comes to assessing the MER of equivalent investment products. I want to be clear that you shouldn’t base your entire investment decision on the MER. It is a significant factor, but it’s not the only one.

    You still have to determine your investment horizon. Is this money for a short-term goal or a long-term goal? If long-term, MER should be given more weight in your decision-making.

    Are you comparing equivalent products? An index fund that invests in short-term bonds should not be compared to a mutual fund that specializes in gold and diamonds. The risk profiles of the two products are vastly different. It is reasonable that they would have different MERs so this factor should be given less weight at decision-time.

    It is a serious money mistake to pay a higher MER. If you want to really blow your mind, go back and change your starting balance to $10,000 and your annual contribution to $5,200. The disparity in MER cost grows to $83,130.29! And if you extend your investment horizon out to 50 years, then you’re saving yourself $442,979.28! Wouldn’t you rather have that extra money in your portfolio in 30 years? I know I would!

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    Weekly Tip: Track all your expenses so you know where you spend every dollar. Despite my constant admonitions to save-and-invest, I know that most people enjoy spending money. However, I want you to be 100% confident that you’re spending your money on things that make your life better. Tracking your expenses is one way to do this. If you see that you’re spending money on things that don’t bring your joy or that make your life worse, stop buying those things. Easy peasy – lemon squeezy!