Renting vs. Owning

I’ve been a big fan of Garth Turner, who blogs over at Greater Fool, for a few years now. He’s a big proponent of creating cash flows for retirement. Towards that end, he has written many, many persuasive posts about why people should sell their homes, invest the equity, and live off the investment income.

It’s not necessarily a bad plan. For a very long time, I thought it was a great plan.

But…

Lately, I’ve come to question how feasible this plan is for everyone who owns a house. If you’ve been in Vancouver or Toronto for a few decades, then your house could likely sell for a high 6-figure amount, possibly even a 7-figure amount. And if you’ve been there for a few decades, then hopefully your mortgage is gone.

Take that sweet, sweet cash and invest it – in a properly balanced and diversified portfolio, a la Garth Tuner. Now you’ve got cash flow coming in from your investment portfolio to pay your rent. If you’re really fortunate, your investments might even kick off enough money for you to live on. Easy, peasy, lemon-squeezy!

Yet I still have doubts…

My only concern with Mr. Turner’s advice is that not everyone has a home that, when sold, will generate enough money to live on. If a person’s in that situation, and sells, then they face the prospect of ever increasing rents. While their portfolio is growing in the background (hopefully!), it’s quite conceivable that their rental increases outpace the growth of their investment income. In this situation, portfolio income isn’t enough to pay your rent. Mr. Turner’s plan no longer works.

Are people really in a better situation if they’re renting and their employment income has to go towards rent, instead of towards buying more investments, because their portfolio’s returns won’t cover the bills?

In that situation, isn’t the portfolio more like a part-time job than a reliable cash-flow on which one can live and eventually retire? And I use the term “part-time job” to convey the idea that, while the income from a part-time job nice to have, the annual amount of money generated isn’t enough by itself to keep body and soul together.

And if their employment income and investment income are both used to pay the rent, then what happens when the employment income goes away?

Then they’re without a home, and their portfolio’s not generating enough money to cover all that needs to be covered.

Renting might not be the answer

One of my greatest financial fears is being an elderly person who rents. Once employment stops, then all expenses have to be covered by pension payments and investment returns. Pensions are disappearing at an incredibly rapid clip. Investment returns aren’t guaranteed, even if you’re one of the lucky ones who managed build a multi-million dollar portfolio before retirement.

It seems to me that a paid-off home is a cornerstone of a secure retirement. People who own their own homes don’t have to be concerned with rental increases or eviction. They can stay in their homes for as long as their health will allow.

This is great!

And yet…

Houses are so damn expensive today! Even if you’re not in Vancouver or Toronto, a $350,000 house isn’t exactly cheap when you’re earning less than six figures. If it takes you 20-25 years to pay off your mortgage, and your employer isn’t promising you a pension, when exactly are you going to have that extra money to set aside in an investment portfolio?

If you’re not one of the people who earns enough money to pay off a mortgage while simultaneously saving for retirement, then maybe Garth Turner is right.

After all, you might avoid rental increases and eviction but let’s face facts. A paid-off house won’t help you buy groceries and heat and medicine in your dotage. Reality being what it is, a person cannot spend their house one doorknob at a time in order to buy what they need, when they need it. Only money can be spent on stuff. A paid for house represents locked-in money. It’s money that cannot be invested or spent unless the home is sold or otherwise mortgaged.

So what’s the right answer?

I have no idea. The older I get, the less I really know for sure.

For many people, housing is ridiculously expensive and it requires a paycheque-to-paycheque existence until the mortgage is gone. Funding one’s own retirement by creating a reliable cash flow is also ridiculously expensive, yet it’s a task that few of us can afford to ignore.

I can certainly see the allure of living off of investment income after liquidating the equity in your home. But so many things have to go right for a very long time for this plan to be feasible. One, you have to properly invest the money. Two, you have to hang on to your investments even when the market drops during a recession. Three, you have to know what to do when black swan events have a negative impact on your portfolio.

Yet, I can also see the hazards of spending most of your working life paying for a house. One, you don’t have significant retirement savings because it took so long to pay off your mortgage. You didn’t have enough time to re-direct your former mortgage payments towards your investment portfolio. Two, you’re making a long-term bet that you’ll always have an income over the 20+ years it might take you to pay off your mortgage. Three, you forever foresake the growth that your money could’ve provided had you invested it in a well-balanced & diversified portfolio.

Again, I don’t know what the right answer is. By way of this article, I simply want you to be aware of the options, the benefits, and the drawbacks. Start figuring out what’s best for you and for your future.

Whether you choose to rent or you choose to own, make that decision with your eyes wide open and fully aware of the opportunity costs of your choice.

Shopping Season

The shopping season is upon us once again! It used to be called the Christmas season or the holiday season but the notion of Christmas or holidays is no longer emphasized.

When I look around, all I see is the emphasis on shopping. Apparently, the proper and just way to show your love to family and friends is to empty your wallet. Every retailer under the sun is exhorting you to spend-spend-spend! If you’ve got a nickel, they’ll happily take it.

Need a gift for your bus-buddy’s grandmother’s snow-shoveller? Then head over to Staples and find just the right thing!

How about a little something for the hostess’ dog-groomer’s roommate’s twin sister? Surely you’ll find what you need at Tim Horton’s.

And let’s not forget to buy a gift for your neighbour’s chiropractor’s assistant’s step-sister’s tennis instructor’s mechanic’s first mother-in-law, okay? Surely, the perfect gift is just waiting to be found on Amazon.

I jest…but not by much.

Gift-giving expectations have exploded.

When I was a child, it was way back in the dark ages. People read by candlelight. A full-sized chocolate bar cost $0.05. It was a 10-mile walk to school, both ways uphill. Back then, a seasonal greeting was sufficient and no one expected anything else.

Today, the retailers have brain-washed us into believing that we should spend whatever it takes to buy something for everyone that we know. It’s insidious! What if my neighbour’s chiropractor’s assistant’s step-sister’s tennis instructor’s mechanic’s first mother-in-law doesn’t like the tin of saltwater taffy that I gave her? I spent $42 on shipping – she damn well better like it!

When we buy into the notion that everyone needs atleast one gift from everyone else, then we tacitly accept that money has to be spent or else someone won’t be happy.

Time – the Ultimate Gift

You know what has worked to create better relationships and strong connections? Spending time with people. Playing cards & board games, completing a puzzle together, or hosting a potluck allows for people to share their lives, talk about their dreams, laugh together, and make some good memories. Time is priceless because it is finite. You only get so much of it and it’s best not to waste it.

When you choose to spend time with someone, you’re giving them something precious. You can’t buy time, but you can use it to create spheres of intimacy where you, your friends and your family can just be. In today’s world, where the constant demand is to do more, be more, spend more, achieve more, one of the best gifts of all is creating a space where it’s okay to just chill, to simply relax, to be together with those whom you cherish.

I’m not trying to pretend that you don’t need some money at this time of the year. If you have to travel or you’re making something that’s not on your regular grocery list, then funds will be needed. If you’re hosting out of town guests, then you’re going to need some extra funds for the additional costs of running a household with a few more bodies. I don’t want to give the impression that this time of year doesn’t deliver some solid punches to your pocketbook.

However, I do want to disabuse you of the notion that buying stuff is the way to find the kind of relationship that you want. No one wants to feel like they’re simply a wallet-on-legs. You want to feel appreciated, not taken for granted. Going into debt to buy gifts for other people is not the way to create the genuine relationship that you most truly desire.

Spend cash! Spend cash! Spend cash!

If I can’t convince you to cut down on the number of presents that you dole out, then perhaps I can persuade you not to go into debt to do so. Keep the credit cards out of your wallet – don’t take them to the mall – most definitely do not use them online! If a website already has a copy of your credit card information saved, then go an delete it immediately. You need to slow down the speed at which you spend your hard-earned money. I call this slowing down process “financial friction”. You will need to create some friction between your viewing of an item and the purchase of that item. Friction will impede your ability to go into debt during the shopping season. This is a very good thing!

Trying to buy someone’s love is a bad idea. Going into debt to buy someone’s love is an even worse idea! If your plan to buy affection doesn’t work, then you’re in debt while also failing to get what you really crave from someone else.

At the root, everyone wants the same thing. People really want to be accepted and loved for who they truly are. They want a genuine connection to others and to know that they are cherished. Your wallet can only buy stuff – it cannot buy the intangible elements of a wonderful relationship.

After all, if your relationship is based on money, then what’s left if the money goes away? How do you know that you’re loved for who you are rather than for what you can buy?

As hard as this may be to believe, I have nothing against gifts! I enjoy giving them and I enjoy receiving them. What I’ve learned over my years is that the amount spent doesn’t correlate to the importance of the relationship in my life. The people in my life love me after shopping season is over, whether I’ve given them a $2 garage-sale mug, a tin of homemade baking, or the latest fancy electronic toy. Tossing aside my financial goals and going into debt to buy gifts for other people hasn’t resulted in stronger relationships.

Look, I’m not telling you to stop buying gifts. I just want you to think about why you’re buying gifts. And I’m going to gently suggest that you spend a little bit less this year in presents. Those who really and truly love you won’t stop loving you if the box under the tree is slightly smaller this year.

Trust me on this one.

Can I Afford It?

Such a simple question, isn’t it?

“Can I afford it?”

At first blush, it seems ridiculous to even ask the question. It’s a yes or no question. Either you have the money or you don’t.

Appearances can be deceiving. Having the money is only the first part of the equation…

Okay, Blue Lobster – just what in the hell are you talking about now?

The question of affording something is much larger than the question of whether you have money. Making the purchase is relatively easy. Take out wallet – hand over cash – get what you want. Easy-peasy-lemon-squeezy!

Nope. Actually being able to afford something means knowing what it is that you really, really want.

What are your priorities for your money?

Prioritizing your money means that you get to say “Yes!” to some purchases while saying “No!” to others. You won’t be able to buy everything you want unless you’re a multi-gazillionaire. And if you are multi-gazillionaire, please let me know so that I can follow you on Instagram.

Let’s say your Fur-Baby needs an operation that costs $1200. Your pet is not suffering and the operation isn’t a emergency, but it is necessary. You’ve got 75% of the cost saved up and you’ve calculated that you can save up the rest over the next 6 weeks if you set aside $50 per week into your dedicated Fur-Baby Fund.

And let’s say you happen to be at the mall with a friend after a year-long week at work. There’s a very nice item on sale for $50. You like the item and you have $50 in your wallet.

Can you afford it?

You tell me. Your pet needs an operation and if you spend the $50 on the mall item, then you won’t have that $50 to put towards the Fur-Baby Fund. You’re the only person who can determine which priority is more important to you. Do you want to pay for the operation or the item at the mall?

Going into debt isn’t an option. Debt put you in chains to your creditors. Debt means committing money you haven’t yet earned to someone else for purchases made in the past. Relying on debt to make consumer purchases is a very bad idea. As you’ve heard me say before, debt is a financial cancer. There’s no need to ask for cancer by whipping out a credit card. Old-fashioned savings and delayed gratification will get you to your financial goals.

Now, knowing that you have $50 to spend, you have to decide: can you afford it?

Saying “No!” is a good thing.

Though only two letters long, this one word is a powerful weapon in your financial arsenal. Though small, this little word is mighty. If used correctly, it has the power to keep you on track towards your dreams.

It’s more than okay to say “No!” when asked to spend money in a manner that doesn’t align with your priorities. You work hard for your money and spending it on non-priority items is akin to lighting it on fire.

To be fair, there are times when it’s perfectly okay to say “Yes!” to spending your money. Should you be so fortunate as to have gobs and gobs of leftover money after your priorities have been funded, then you can probably fritter it away on non-priorities while still meeting your goals.

For the rest of us, frittering is a luxury that should only be indulged in sparingly. The more frittering that is done, the longer it will take to achieve our financial goals. And the less money we have, the more deleterious an impact frittering will have on our money priorities.

Never, ever let anyone bully you into making spending choices that don’t reflect what you truly want. This bring me to the Others.

Don’t let the Others determine your priorities.

There are a great many people out there who are willing to step into your wallet and disperse your money. I call these people The Others. Sometimes, the Others are easily identifiable. You’ll recognize them as the Ad Man and his trusty sidekick, the Creditor. More often than not, the Others take the form of our friends and family. Every so often, co-workers fall into this category too.

The Others have no qualms whatsoever about telling you how to spend your own money. It’s been my experience that the Others think that I should spend my money on their priorities. The very possibility that their priorities aren’t the same as mine is an utterly foreign concept to them.

One time, a friend of mine told me that I could afford a weekend trip to Las Vegas. Truth be told, I was floored by her audacity in opining about what I could afford to do with my money. It would have never occurred to me to tell her how to spend her money. In all honesty, the same thing has happened with members of my family.

Over the years, I’ve learned to ignore the Others’ exhortations to spend money. When I’m feeling generous, I tell myself that the Others just want the best for me. Or that they believe spending money will make me happy. When I’m not so generous, well… let’s just say that I don’t ascribe such kind motives to their opinions. The bottom line is this: I know what my priorities are, and I have a plan for my money. I don’t expect the Others to agree with, understand, or share my priorities. The Others’ opinions of my spending choices are irrelevant to my goals. Since I’m okay with ignoring their “advice”, I always know if I can afford to spend my money on something.

So….can I afford it?

The answer to the question is as simple as 1-2-3. One, determine your financial priorities. Two, use the word “No!” as often as needed so that your money goes where you want it to go. Three, ignore the Others since they most likely want to spend your money on what’s most important to them.

Once this framework is in place, you will be extremely adept at answering the question of whether you can afford it, whatever it happens to be.

Know Where Your Money Goes

It is a simple truism that what gets measured is also what gets managed. I can think of few other places where people fail to put this truism to good work beyond their money behaviour. People will track their calories, the amount of gas they put in their cars, the number of times they work out. Yet so few people will track their own money.

This is very perplexing to me. Tracking your money is one of the first steps towards controlling it. You have to know where you money goes.

Lately, I’ve been hearing a lot of talk about “self-care”. Since this is a personal finance blog, I’m going to put my own little twist on this idea. You can feel free to share this bit of wisdom with anyone and everyone.

One of the best ways for you to practice self-care is to know where your money goes. Every single time you spend money, you should know exactly where it is going and why. Anything less is a self-inflicted financial wound.

When I had cable, I loved watching “Til Debt Do Us Part”. (Sadly, the show has since been cancelled.) It was a TV show about couples who turned to a guru to help them figure out their money before money destroyed their relationship. The very first thing the couples had to do was track their money for a month or so before Madam Guru showed up.

Most of the couples had never tracked their money. I always enjoyed the look on their faces when they discovered that they were spending hundreds of dollars each month on bank fees and coffee! It was as though they’d convinced themselves that small amounts didn’t really count when it came to spending their money.

Does this sound familiar to you? Is it possible that you’re one who believes “it’s only a couple of bucks” each time you buy a coffee? Never mind that you buy coffee two or three times a day, Monday to Friday… which works out to over $1000 per year on coffee alone. That amount could fund a nice weekend getaway somewhere.

Relax, relax! I’m not going to tell you not to buy coffee. It’s your money – that means you get to decide how it’s spent. If you would rather spend money on coffee than on something else, that’s your business. Your money, your choice.

And yet… Who among us hasn’t looked in their wallet or bank account and asked: “Where did all my money go?”

I’m here to tell you that getting a solid answer to that question depends on you. Measure you money so that you can manage it. Given how hard you work for your paycheque, it’s in your own best interest to understand why each of your dollars leaves your hands. In other words, you must start keeping track all of your money.

Some people use Personal Capital. Others use Mint. There are probably many other apps for money-tracking that are unknown to me. Myself? I’m relatively old-school. I don’t keep track of my money with lead pencils by candlelight anymore. Instead, I created two personalized spreadsheets. When I spend money, I keep the receipts then I add the amount spent to the appropriate spreadsheet. If I don’t get a receipt, I make a note on my phone of how much money left my wallet. Every nickel is accounted for. This how I know how much it costs me to run my life.

Thanks to the wisdom of TDDUP, I started tracking my spending in 2016. I have a spreadsheet for the cost of running my home where I track my monthly expenses. Those include lawn care, snow removal, Netflix, phone, power, water, car registration, property taxes, insurance premiums and internet. These are the standard bills that have to be paid on a recurrent basis, whether monthly or annually. Some expenses can be eliminated if I choose since they’re luxuries – lawn care & snow removal – while others are fixed. My car and home certainly won’t insure themselves! And I suspect my municipality will get testy if I were to neglect to pay my property taxes.

I have a second spreadsheet for the day-to-day variable expenses of my life. This document tracks my groceries, clothing, medication, gasoline, parking, entertainment, travel, gifts, donations at work, outside food & drinks, taxis, books, etc… Anything that doesn’t go towards the recurring expenses on spreadsheet #1 is recorded on spreadsheet #2. My goal is to spend less than $1,000 each month on these variable expenses. Since 2016, I think I’ve hit my goal twice!

You see, the beauty of my spreadsheets is that they provide me with information and insights into how I spend my money. Up until a few months ago, when I started cooking at home more often, I was spending atleast 1.5X more on food outside my home than I was expending on groceries. I don’t begrudge the money spent on outside-food (as I like to call it). I was hungry. The food was there. I had money – I ate – I wasn’t hungry anymore. The system was satisfactory… until I started pondering on my priorities for my money.

Was spending so much on outside-food getting me closer or further away from my goals? Was I spending the same amount each month on eating out? Would my money go farther if I cooked my own meals more often than not?

Tracking my money helped me to answer these questions. I was able to look at my historical spending patterns to see where I was spending too much. I analyzed which categories needed to be trimmed in order for my spending to align with my personal goals. The information garnered from knowing where my money motivated me to make better spending choices.

I challenge to you to track all of your purchases for a few weeks. Then determine for yourself if your spending choices are helping you to fund the priorities that matter most to you. Know where your money goes.

Getting Ahead vs. Getting By

You have to earn money to even be able to save and invest a portion of it… by MI154 of ESI Money

There’s a silent assumption in the Financial Independence Retire Early world that is, in my opinion, at the root of the derision heaped on this community. And it is this: everyone has a little bit of extra money that can be invested somewhere.

My position is that this assumption is false.

I’ve no doubt that there are those who believe that they can’t live without unlimited data plans, gym memberships, annual vacations, spa weekends, second homes, and cable TV. People get used to their luxuries. They easily conflate their daily, monthly, or even annual wants with basic survival needs. It’s called acclimation.

And why not? Luxuries make life better.

However, there is precious little useful information for those who are already living without any luxuries. This is a fundamental flaw of the FIRE sphere. Many of the most prominent bloggers of the FIRE community are tone-deaf to this reality. They appear to assume that everyone has money that can be diverted towards investing.

This assumption is wrong. There are many people who are barely making it from one paycheque to the next. Almost half of the Canadian population is struggling to pay their costs of living. These people aren’t setting aside money and then not using it because they’d prefer to struggle. They’re using all of the money that they earn to get from one paycheque to the next.

Now, I realize that some of these people will have some flexibility in their budgets once they pay off their debts. Former debt payments can be re-directed towards investing, a la FIRE-philosophy. This is fantastic news!

Yet, I also realize that there are many people who aren’t in debt…and are still living paycheque-to-paycheque. These are the ones who don’t have the money to spare for investing. And for these people, the FIRE-philosophy is as foreign as breathing under water.

  • Cable and gym memberships were sacrificed years ago.
  • Vacations are only taken in the imagination.
  • Wifi hotspots – if one even has a mobile phone – are the only source of connectivity.
  • Roommates and multiple part-time jobs have been part of the picture for years.
  • Cooking at home isn’t optional – it’s a requirement to ensure that one eats on a semi-regular basis because outside food is out of reach financially.

There are huge swaths of people who have already cut their budget to the bone. What does the FIRE-philosophy have to offer those who have no money to spare?

You need extra money in order to get ahead. And when you don’t have any extra money, you’re relegated out of necessity to just getting by. The FIRE movement offers little instruction on how to go from one stage to the next beyond the simply admonition to earn more money. Now that I think on it, I’m sure that those in poverty’s grip have never even considered the option of earning more money! <sarcasm off!>

Having access to “extra money” is the foundation of building that cash cushion, creating the army of money soldiers, or planting your money tree. If there’s no extra money to be found, then time and focus must be spent on using the available money to simply survive from one day to the next. Without sufficient money, life’s about figuring out where the next meal will come from and how to handle the inevitable rental increase. Heaven forbid that you should get sick and not be able to work. There’s never been enough money leftover between paycheques to build that vaunted 6-month emergency fund.

I’m not pretending to have an answer to this situation. My goal with this post is simply to remind those who have that there are many, many who have-not. If you’re one of the ones who has the ability to get ahead, be grateful. And appreciate that you might only be one misfortune away from falling down the ladder of financial security.

The paths to FIRE are varied but they all start with having a little bit of extra money. Anyone who argues otherwise is blind to the reality of poverty’s vicious grip.

A Faucet of Income

Even if you’re a Singleton like me, the implications of intergenerational wealth may have touched your life at some point. I like to think of intergenerational wealth as a faucet of income that helps younger generations to start their adult lives without debt. It’s a financial tool that allows young adults to master the skills of successful adulthood without being burdened by the yoke of debt.

In my case, my parents were able to pay for most of my education. They did the same for my brother. And had I not moved out during my second degree, they likely would have paid for all of it. I graduated with $15,000 in student loans and was fortunately able to pay them off within 2 years of graduating.

I’ve mentioned before that my parents weren’t rich, but they were long-term thinkers. My “Baby Bonus” cheques were deposited into the bank to buy Canada Savings Bonds from the time I was born. Interest rates were good – the money grew – my (and my brother’s) university was paid for – hooray! This is but one small example of the power of intergenerational wealth.

The parents in my social circle are using Registered Education Savings Plans (RESPs) to fund the costs of their kids’ educations. I’ve no idea how they invest their money, but I admire their determination to ensure that their kids have access to this form of intergenerational wealth when the time comes.

This week, I was listening to Beardy Brandon of Bigger Pockets on his YouTube channel. (Rest assured that I’m not getting paid for mentioning this website.) If you don’t know who he is, Brandon is a very successful real estate investor who runs a very, very successful blog teaching other people how to be successful real estate investors too. In one particular episode, Brandon mentioned buying properties for his children and having them paid off by the time that his kids started post-secondary school.

Wait! What?

Yes – you read that right. Part of Brandon’s plan to create a faucet of income for his family is to buy his children a property when they’re young, have it paid off by the time they graduate high school, and use the rental income and/or equity to pay for their post-secondary schooling. Along the way, Brandon’s kids will learn the real estate investment business while having some skin in the game.

Plans are the Result of Dreams Mixing with Money

Intergenerational wealth starts with a plan. This is not surprising. Yet, a plan without the money to implement it remains a dream. If Brandon didn’t have money, then he couldn’t have bought homes for his children. If my parents hadn’t had money, then they couldn’t have bought Canada Savings Bonds for their kids’ education. Sam Walton had to have the cash set aside to buy the first store way back in the day, long before the Wal-Mart empire took over the world and ensured that his kids never had to run a cash register for a living.

What I find so incredible about the stories of intergenerational wealth is that the parents (or grandparents) set a living-and-breathing example of delayed gratification for their children. They are long-term thinkers who find ways to use today’s money to fund the dreams of a tomorrow that may be well over a decade away. I always imagine young parents holding their new baby for the first time and thinking “How are we going to pay for med school?”

The decision by an ancestor to keep a little bit back in order to invest it in something profitable changes a family tree. The parent is taking a leap of faith, although hopefully a well-researched one. No one knows what tomorrow will bring and there are no guarantees that the investment will pay off. However, choosing to never invest in anything is guaranteed to bring a return of absolutely nothing.

Start Adult Life Without Debt

If not for my stubborn decision to move out of the house, I could have graduated completely debt free. My parents had created a faucet of income that would’ve allowed me that privilege. Instead, I made a short-term decision and there was a debt to pay.

Now that I’m well into adulthood, I have a better appreciation of how significant a gift it is to start adulthood without debt. I’ve paid off a mortgage, car loans, and student loans during my time. I took out the debt knowing full well that I had an obligation to pay it back – no argument there.

However, that doesn’t stop me from envying Brandon’s children who won’t have to take out a mortgage for a home. If they want to live in the homes that their father has bought them, they can. Should they decide to live in another home and have the first one pay the mortgage on the second home, they can do that too. And if they want to travel the world, their rental income can fund their travels. In short, they don’t have to take on debt because their father has created a faucet of income for them. It’s a plan that’s 15+ years in the making – another example of that long-term thinking that I was mentioning before.

Intergenerational wealth is a way to avoid assuming crippling debt burdens in your 20s. Beneficiaries of such largesse are able to start their adult lives on a firm financial foundation.

For example, take student loans. For some people, they’re a path to a financially secure future. After all, one can’t become a cardiologist without somehow footing the bill for medical school. However, there’s no denying that student loans can also trap people on a hellish repayment treadmill because they borrowed $100,000 for employment that pays $35,000.

It’s astonishing to me that people as young as 18 are allowed to take on huge financial debts, yet they’re not allowed to legally imbibe alcohol in many jurisdictions in North America.

“I’d like to borrow $30,000 per year for a degree, please. I have no idea how much I’ll have to pay back for these student loans once the interest is calculated. I’m not certain whether the salary of my desired career will allow me to pay off these loans while still saving for a home, a family, and a retirement. I also have no idea how to calculate how much my anticipated monthly repayment will be.”

“Sure – not a problem. Just sign here.”

“And I’d like a beer.”

“What the hell is wrong with you?!?!! You’re too young to drink!”

Play the Hand You’re Dealt

When you have access to intergenerational wealth, then debt isn’t such a significant factor in your life. You don’t have to borrow money for your education. You might not have to borrow money for a home! Just imagine how different your life would be if you didn’t have any debts to re-pay.

The reality is that not all of us are born to parents who have the money to buy properties for us. Some of us have parents who have the money but also believe that we should take out loans or find another way to fund our educations without their help. What can I say? You play the hand you’re dealt and you do the best you can.

Singleton or not, you have the power to create a faucet of income for someone else.

Living hand-to-mouth means that there’s no room for savings. This is a tough way to survive since you’re always living on the edge. Your income is barely enough to satisfy your necessities of life. This is a poor foundation from which you can build intergenerational wealth, but I’m not saying it’s impossible to do so.

You might want to think about how you’d like your money to be spent when you don’t need it anymore. Do you have nieces or nephews? Maybe there’s a neighbourhood kid who doesn’t drive you crazy? Perhaps you’ve always wanted to start a scholarship for kids interested in the things that tickle your fancy?

Even if you’re not a parent, you have the ability to create intergenerational wealth for someone in your world.

Consistency is One of the Keys

This week, I listened to a story that blew my mind! It was a testament to the power of consistency in investing, through good times and bad. Diane was her name – a lady in her 60s who’d survived divorce from an alcoholic, while raising 4 kids, taking 8 years to get her electrical engineering degree, and starting her professional life at age 42. By the time she’d retired, Diane was worth $5,500,000…. and did I mention that she never earned more than $82,000 per year?

Check out episode 99 on Millionaires Unveiled to hear the rest of her story, a podcast that has recently caught my attention. They focus on interviewing millionaires and the stories are fascinating.

The Financial Independence Retire Early (FIRE) community loves to tell stories about people who figured out who to make a lot of money quickly in order to retire in their 30s and 40s. And to those who can do it, I say “More power to you!”

I would have loved to have retired in my 30s too, but that wasn’t the way that my cookie crumbled. I learned about the FIRE community in my 30s, though the regular channels – Mr. Money Mustache – and went from there. However, no one has been able to teach me how to turn back time so I’ll be retiring in my 50s.

What I loved about Diane’s story is that she had challenges in her life, including cash-flowing college for her children. I mentioned that she had 4 children, but did I tell you that there was a 16-year spread from the oldest to the youngest? Diane was paying for college for 16 years straight and she still wound up debt-free with over $5Million in her kitty.

How in the hell did she do it?

Consistency is the key. Throughout her podcast, Diane emphasized that she and her husband saved atleast 10% of their income throughout their working lives.

Single People, please don’t roll your eyes at this point. Kindly avoid the trap of believing that it’s-easier-if-you’re-married-because-there-are-two-incomes! Diane was very clear that she kept her money separate from her husband’s.

In other words, the money that she has not is solely Diane’s money. Being single is not an impediment to becoming wealthy. It’s possible to become a millionaire even if you don’t become a spouse.

Diane committed to saving 10% of her income from the time she started working in her 20s. At the time of the interview, she was in her 60s. That’s 40 years of investing in the stock market! Diane mentioned that she’s been told to allocate her funds into a 60%-equity & 40%-bond portfolio, but she prefers to keep 70% in equity and 30% in bonds.

That’s two lessons we can take from her story. She chose to save something every payday by living below her means and she invested her savings in the stock market. Time in the stock market helped her investments to grow.

The third lesson from Diane’s story is that you don’t need to make a six-figure income to do what she did. Diane never earned more than $82,000 while she was working. I’ll agree that she earned more than the median income for the average bear, but keep in mind that she was raising children on this income. It’s reasonable to assume that the costs of childrearing ate into whatever was left of her income after she’d set aside her savings.

Creating Wealth for her Family

Diane has also set an example for her children, one that they will hopefully pass down to her grandchildren. Through her actions, Dians has shown her children that consistency is one of the keys to building wealth and that saving money has to happen no matter what. If I understood her correctly, Diane already had children by the time she returned to school at age 34 to study electrical engineering. She worked full-time while studying, and she graduated at age 42. Throughout those 8 years, Diane continued to save and invest from every paycheque like clockwork. At the age of 50, Diane was divorced…and she was worth a cool million dollars. The rest of her money came from the compounding over the next 15 years!

Creating a multi-million dollar nest egg was the first step towards ensuring an intergenerational transfer of wealth within her family. If she chooses, Diane can pay for the post-secondary educations of her grandchildren. By alleviating this financial burden, Diane would effectively be helping two generations of her family. Her children could invest their money towards their financial security and her grandchildren could study and graduate without the burden of student loans. If they are wise, Diane’s children will then use their money to pay for the educations of Diane’s great-grandchildren when the time comes so that the grandchildren can build their wealth.

Do you see how beneficial this cycle of intergenerational wealth can be? Diane’s example of consistently saving and investing for decades is a gift to her children, if they choose to follow it.

Save. Invest. Learn. Repeat.

Just like the rest of us, Diane won’t live forever. It’s time for her to enjoy some of her money while the bulk of it continues to compound and grow. According to the podcast, she is using her money to fulfill her dreams of travelling with her family and creating lasting memories. Good for her!

If you haven’t already started to save and invest, then start today. Open a savings account – set up an automatic transfer so that you save something from each paycheque – invest in the stock market through a broad-based index fund or exchange-traded fund. Live below your means so that you have the money to invest. Save – invest – learn – repeat.

There’s nothing to suggest that Diane had the ability to spend all of her money on her own personal priorities for her whole working life… I’m looking at your Single People Without Children. If you’re a Singleton, then you’re the only person making decisions about where your money should go, which of your dreams to fund, how much you’re willing to invest so that you can create a retirement nest egg for yourself.

Ignore the talking heads in the media. They deliver nothing but a steady stream of hype-and-fear in order to drive ratings. “It’s time to buy! It’s time to sell! It’s time to buy! It’s time to sell!” They have no personal stake in whether you achieve your goals or not, so ignore them.

Saving a little bit of money at a time and investing that money in the stock market will lead to more than a million dollars after a few decades. While your money is working hard for you in the background, you go about the business of living.

Credit cards everywhere!

Earlier this week, I went shopping at Canada’s last remaining national department store. I’ve been searching for black pants for the past few months and I had some time to kill between appointments so I took myself shopping, an activity that I normally hate very much.

To my very pleasant surprise, I found the pants that I was looking for and they were on sale for $29.99. Hooray for Blue Lobster! Exactly what I wanted at a price that I was willing to pay. Does it get any sweeter than that?

So I took my awesome find to the till…and the credit card tussle began.

The cashier asked me if I had a last-remaining-national-department-store credit card, which I’ll refer to as the LRNDSCC for simplicity’s sake.

I said that I did not.

She asked me if I wanted to apply for one.

I said “No, thank you.”

At this point, she gave a look that very nearly had me checking my shoulders to see if I’d grown another head.

The cashier doubled-down. She told me that I could save 15% on my purchase if I were to apply for a LRNDSCC that very moment.

Again, I replied “No, thank you.” And then I threw her for a loop. “I don’t need any more credit.”

I thought she would faint, but she held it together. That cashier indicated that it wouldn’t take but a minute and she repeated that I would save 15% on my purchase immediately.

Once more, and with a smile, I told her “I don’t need any more credit.”

At that point, she stopped pushing the credit card. I have assume that, during her cashier training, she’d been instructed to keep pushing credit until the customer had denied it three times.

She was so perplexed by my refusal that I almost felt sorry for her… until she asked me for email address. I told her I didn’t want any email. She started to tell me that providing my email would allow me to get notice of sales and special offers. I just shook my head. Still reeling from my denial of credit, that hard-working cashier simply gave up and rang up my purchase.

Why not accept the credit card offer?

I thought about this a lot on my drive home. It’s a bit more complicated than the fact that I don’t need more credit. Tis true – I don’t need more credit. I have plenty and it’s sufficient for my purpose. In a certain respect, credit is like dish soap. Why would I use more than I need?

The other reason I didn’t accept the offer was because I don’t believe that the reward was worth the risk.

Risk, Blue Lobster? What risk is there in accepting a store credit card?

Well, there’s the risk that my information will be compromised. The more cyber locations housing my personal information – name, address, social insurance number, salary, etc – the more opportunities for Bad Guys to steal it and engage in identity fraud against me.

Limiting the number of creditors with my information offers me some measure of comfort and control.

Check this out – 37,000 customers from Transunion have had their information compromised. This is not a good thing. I might already be one of those unfortunate customers, so I’ll have to keep a close eye on my credit cards to ensure that my financial identity remains safe. I suggest you do the same thing too.

On a purchase of $29.99, I wasn’t willing to increase the risk of identity fraud simply to save $4.50. Fortunately, I had the extra $4.50 in my budget to make the purchase without impacting my ability to pay for shelter, food & my bare necessities. My choice to spend the additional $4.50 means that I won’t be taking on the risk that Bad Guys hack into the credit card information of the LRNDS and steal my personal information.

The third reason why I didn’t accept the credit offer is simply because having credit in my wallet means being tempted to spend on that card. Why put myself in a position of temptation if I don’t have to?

The 15% discount was a one-time thing. Again, I would’ve saved $4.50 on a pair of pants if I’d accepted the offer. Yet, I would have a shiny new piece of plastic winking at me from my wallet. And the sole purpose of that new little item would be to put me into credit card debt.

So how many credit cards do I have?

I have two. They’re accepted everywhere. One is for my day-to-day, and the other is for travelling. Both of them are free. Both of them offer rewards that suit my lifestyle perfectly. Personally, I see no reason to get anymore credit.

While I’m willing to accept that credit cards are a convenient tool for many people, I still think it’s a great idea to limit one’s access to this particular tool. My rules for this tool are simple – pay it off, in full, every single month. If you can’t do that, stick to cash.

Physical currency will buy you the exact same things that credit cards will, and it provides the additional benefit of preventing you from ever going into debt. Cash is still king for a reason.

The next time you’re offered a retail credit card, be brutally honest with yourself. Think about whether you really need it. Will you be tempted to spend on that new credit card? Is the savings of that particular purchase worth the risk of someone hacking your information?