5 Simple Rules to Become a Millionaire

This week, someone asked me if I would consider writing a post about not drinking a daily coffee in order to become wealthy. I responded that I though the “daily coffee” is a red herring. By following a few simple rules up front, anyone will become a millionaire with enough time.

Rule #1 – Invest

Take 30% of net pay and invest it in well-diversified exchange traded fund. Do this every single time you get paid. If you get a raise, maintain that 30% proportion.

If you can’t start with 30% right away, then start where you can and increase the percentage by 1% every chance you get. I didn’t start at 30% right away either. However, after 30 years of investing, I’ve managed to hit a 40% savings rate. It didn’t happen overnight but it did eventually happen.

The more you can save, the faster you will hit the goal of becoming a millionaire or being financially independent. It’s important to start today.

I promise you that if you don’t invest any money today, then you will have very little of it when you need it the most later.

Rule #2 – Build an Emergency Fund

Some people recommend having 3-6 months’ worth of expenses set aside in your emergency fund. I’m a little more conservative than that. Personally, I would recommend 12 months’ worth of expenses. My personal mantra when it comes to emergency funds is as follows.

It’s better to have it and not need it, than to need it and not have it.

You know your own comfort level far better than I do. Ask yourself if you would rather have more or less money in an emergency fund?

Saving up this much money will take time, probably years. If it makes you feel any better, I’m still working on building up my emergency fund, and I’ve been tackling this project for a long time.

Rule #3 – Pay off your debt

Much like building an emergency fund, it may take some years to pay off all your debt. And I do mean “all” of it: vehicle loans, personal loans, student loans, credit cards, mortgage, etc… If you owe money, pay it off.

A mortgage may take decades to pay off. This is why I think it’s best to invest while paying down a mortgage and building your emergency fund. Should you get an inheritance, a lottery win, an insurance payout, or a huge raise/bonus at work, then maybe you can consider paying off the whole mortgage. There are a many factors to consider before this decision is made so consider it carefully and don’t make any hasty moves.

It might make more sense to invest the inheritance/lottery win/insurance payout/ raise-or-bonus in the stock market for long-term growth, then use the dividends generated to pay off your mortgage. That way, when the mortgage is gone you will still have a cash machine churning out an income for you. Check out this video for more details of this plan in action.

If you spend the inheritance/lottery win/insurance payout/ raise-or-bonus right away, then it’s gone for good.

Rule #4 – Use sinking funds

When there’s something you want to buy, save up for it first before you buy it.

Sinking funds force you to prioritize where you want your money to be spent. I believe that when you work hard for your money, it should be spend on the priorities that will make you happiest. Wasting money on the things that don’t bring you joy seems to be a poor choice. You will never get back the time and energy spent at work. Instead, you get a paycheque. It should be directed to building the life you really want because it represents your precious, precious time and energy.

I realize that our capitalist society does not encourage this way of life. The Ad Man and his trusty sidekick, the Creditor, are relentlessly exhorting everyone to buy everything they want immediately. My rule is about delayed gratification, not a popular choice for most folks.

However, if you want to become a millionaire, then it’s better to not send interest payments to creditors. It’s better that you invest that money so that you can reach millionaires status as soon as possible, if that’s what you really want.

Rule #5 – Spend your money

That’s right. After you’ve eliminated debt and you’ve funded your emergency fund, then it’s time for you to spend your money however you choose without going into debt.

Your investments are happily compounding in the background. Dividends are compounding each year on a DRIP, aka: dividend re-investment plan. You’re continuing to contribute 30% of your net pay even after paying off your debt and fully funding your emergency account. You’re saving up for everything before you buy it.

Keep investing. Stay out of debt. Maintain a fully-funded emergency fund. Rely on your sinking funds to meet your life’s goals.

If you’re doing these things, then you’re following the first 4 rules. Your day-to-day purchases will have no impact on your path to becoming a millionaire.

So spend the rest of your money however you want. Coffee? Travel? Brunch? Spa days? Pets? Hobbies? Wine club? Sporting events? Clothes? Shoes? Vehicles?

It doesn’t matter how you spend your money once the first 4 rules are being followed. Again, spend the rest of your money however you want so long as you stay out of debt.

A Woman Always Needs Her Own Money.

Single or not, a woman needs her own money.

Full stop. I’ll never be convinced otherwise so don’t even try. I’ve lived for a long time and I see the importance of having money in the bank. The only thing that money buys is options. The more money you have, the more choices you get to make about how to live your life. When you don’t have your own money, you’re living at the risk that someone else might take away access to shelter, food, transportation, and everything else that you need to have the life you want.

International Women’s Day was celebrated on March 8, 2024. Think about yourself and the women in your life. What are you doing to take care of your money so that it’s always in place to take care of you?

A good portion of self-care is having money. It’s never explicitly stated but money gives you the ability to walk away from situations that you don’t want in your life. Job sucks but you have money in your FU-fund? Then you can walk away and find another one without worrying about how to pay your bills. You want to move because your new neighbours blast their music until 3am every night? You’ve got the money for the damage deposit already sitting in the bank, waiting to be deployed. You want to take a sabbatical because you’ve been grinding for years and you’re simply burned out? Money in the bank means that your bills will be paid while you replenish your soul.

Always have your own money, Ladies! There should be atleast two bank accounts that only have your name on them. One account should be a chequing account, for day to day expense and monthly bills. The other account should be your investing account. You should be funneling money into your investment account from your chequing account every time you get paid. The money invested in the second account will be there to pay for your life once you’re no long employed. Money invested today funds the retirement of Future You, who will tire of going to work at some point.

You need an emergency fund to cover your life’s expenses if you and your income part ways. The emergency fund keeps financial vulnerability away. Trust me! It is far more precarious to depend on the kindness of strangers than it is to have 6-12 months of income in the bank.

A little bit of today’s money should be spent on those luxuries that bring you joy. You shouldn’t be at the mercy of someone else’s mood every time you want to splurge on something. Do you want to book a trip to Paris? Tokyo? Ghana? Maybe you want a weekend away in a ski chalet? Or maybe you’ve decided it’s time to buy that vintage car you’ve been eyeing. Whatever you little luxury is, you deserve to buy it for yourself without having to worry what anyone else has to say. If you’re dependent someone else for your money, then you’re in the financial position of a child and you need to wait for someone to give you spending money.

This week I heard someone say that money can’t buy happiness. What is equally true is that poverty can’t buy anything. If satisfying your hunger makes you happy, then you’ll need money to purchase food. Grocery stores and restaurants aren’t giving it away for free. Maybe you need medication for a chronic condition, or even a one-off medical concern? If so, then you need money to buy the medicine you need. Camping and homelessness both involve living outside yet one costs money while the other one doesn’t. Tell me honestly – wouldn’t you prefer to say “I went camping” rather than “I am homeless”?

In honour of International Women’s day, I encourage all women to do what they must to get their own money. It is the one tool that can be used however you want. You need money to create the life you want and to pursue the opportunities that come you way. Money amplifies your ability to make choices without needing someone else’s financial permission. Every woman should have that.

Have You Decided How to Spend Extra Money?

Most of us dream of winning the lottery, but there are times when smaller lump-sums come into our lives. What should be done with that extra money?

In my humble opinion, you should split that extra money in the following way:

  • 50% to your investments
  • 30% to your debts (if you have any)
  • 10% to your emergency fund
  • 10% to whatever you want

Investments need to be funded.

My advice is to invest money when you have money. Your Tax Free Savings Account and your Registered Retirement Savings Plan will not fund themselves. It’s up to you to put the money into both of these accounts. Once you’ve made the contributions to your TFSA and RRSP, you have to invest that money so that it can grow over a long period of time.

If you’ve already maxed out your TFSA and RRSP contribution room, then put the money into your non-registered brokerage account. The government taxes capital gains and dividends earned in your brokerage account less than it taxes income received from your employer. This is a very good thing.

So when that “extra money” lands in your bank account, invest half of it.

Pay down your debts.

In an ideal world, you don’t have any debts.

Most of us don’t live in an ideal world. Debt is a part of many people’s lives via student loans, credit card debt, medical debt, mortgages, car loans, etc… I view debt as a financial cancer. Debt prevents you from building your own financial cushion. It prevent you from accumulating wealth. When you send money to your creditors, then you’re unable to invest those same dollars for Future You. Debt limits your ability to make life a little bit easier for Today You.

So when extra money comes your way, send atleast 30% of that amount to your debts. If you want my opinion, pay off any debts that can be paid in full. I subscribe to the Debt Snowball method of repayment because it feels good to get rid of debt. Positive psychological boosts are generally good motivators, so I’m a fan.

Top up your emergency fund.

It takes a very long time to build up an emergency fund. While some people are comfortable with a smaller one, my goal is to work my way up to 12-months worth of expenses. I’ve yet to meet this goal and I’m still working towards it. Thanks to my automatic transfers, I’ll get there eventually.

In the interests of transparency, I’ll tell you that I recently had to pull money from my emergency fund. Accordingly, refilling my emergency fund has moved up my priority list for my money. I need my cushion to be replenished as soon as possible because there’s no way to know when the next emergency will arrive.

When extra money comes your way, it’s an extremely good idea to put atleast 10% of that money into your emergency fund. You don’t know when that emergency is going to land. There is a high likelihood that there will be a financial component to your emergency. Right now, there’s no way for you to know how big that financial hit will be. Trust me when I say that you will be very happy to have some money salted away the day that you have to deal with your emergency.

Spend the rest however you want.

That’s right. I want you to spend the last 10% of your extra money however you want.

While I firmly believe that it’s important to save for the future and to get out of debt, I realize that one of the main benefits of money is buying those things that will make you happy today. Is it a nice dinner out? Maybe a day on the links? Or you need to refill your wine-rack? Perhaps you want to upgrade your phone or your computer? Is there a getaway that you’ve been wanting to do?

Whatever it is, make it happen with the remaining money without going into debt.

Let your priorities guide you.

It’s your money. You’re the one deciding how to spend your extra money. My suggestion allocation of how to use that money is for those who might need help in figuring out what to do with their extra money.

Now, the allocation suggested above is just my preference. Other people might have different priorities for their extra money. Some people might want to put all that money towards paying off their debts. There are others who will put the whole amount into their investments. Of course, there are also those who will see this as “found money” and will choose to spend the entire amount on whatever they want at the moment.

Do what makes sense for your life. Having a plan for your extra money ensures that your priorities are met, and that you’re not left wondering where all that money went.

Make Money While You Sleep

Passive income is my favourite kind. If there’s an easier way to increase my cash flow, then I haven’t found it yet. Generating passive income takes a modicum of effort on the front end, then time does the rest. You will make money while you sleep. It can’t get any easier than that!

When I first started investing in dividend-generating securities, my monthly dividends were roughly enough to buy a pack of gum. It wasn’t exciting and I didn’t tell anyone about them. Instead, I went about the business of setting up a dividend re-investment plan, aka: a DRIP, so that all those little amounts of money could compound as fast as possible. In the meantime, I sliced off a chunk of my paycheque every two weeks and sent it to my investment account. Over time, the monthly amount of dividends steadily increased. The first time I earned $1K in a single month was pretty exciting! My plan was finally working and I could envision living off my dividends in retirement. Woohoo!!!

What I love most about dividends is that they’re the easiest money I’ve ever earned. The money that I invested 30 years ago is still working for me. That fact still blows my mind. Yes – I had to go to work to earn a paycheque. And I had to live below my means, which is just another way of saying that I had to choose to invest-for-tomorrow rather than spend-every-nickel. Finally, I had to leave it the hell alone for a very long time so the DRIP could work its magic.

The beauty of a DRIP is that it compounds the dividends automatically. I don’t need to re-invest the same earned dollar over and over and over in order to see the dividend amount grow. The compound growth from that first contribution will continue indefinitely until such time as I sell the underlying investment. So every time I invest new dollars, I’m increasing the assets that will work for me 24/7/365. Those assets grow for me in two ways. First, each subsequent contribution makes my asset base larger. Second, companies increase their dividend payments. This is known as organic dividend growth, and I love it.

The invested dollars are the ones that are buying me my financial freedom, one paycheque at a time. I can’t deny that the size of my paycheque mattered too. After all, one can’t invest if one has barely enough to cover the bare necessities from one paycheque to the next. Thankfully, I wasn’t in that position. I was fortunate enough to be in a position where I had plenty leftover to splurge on the wants. Instead, I curbed that impulse and chose to invest a good chunk of my disposable income.

(Lest you think that I lived like a miser, rest assured that I did not. I’ve travelled to Europe 3 times in the space of 5 years, visited the US more times that I can remember, attended 3 destination weddings in not-inexpensive locations, maintained seasons tickets to Broadway Across Canada, gone to many concerts at home and abroad, and socialized atleast twice per week with friends. The pandemic slowed me down, but only because everything was closed for a bit. I’ve had many great experiences with family and friends, while avoiding the relentless marketing & exhortations to spend everything I earn.)

Looking back, I credit those three steps – earn, invest, DRIP – with putting me in the position that I am today. If it becomes necessary, I could live on my dividend income. It would be tight, but I could do it. Do you know how comforting that feeling is? I’ve reached Lean FIRE, as the kids call it.

One of my favourite YouTubers talks about how she set up an investment account for the sole purpose of paying for her home’s mortgage. At the time of her video, Dividend Dream had an investment account that generated enough cash every year to pay for her mortgage. Watch her video. After giving it considerable thought, she decided that it made little sense to liquidate her account to pay off her mortgage. I’m convinced that she’s right. When you have a cash machine steadily paying for some, if not all, of your expenses, there is no good reason to destroy it. It makes more sense to keep the cash machine running smoothly so you can live off the income it generates.

Speaking from personal experience, Dividend Dream’s method works. As I said early, my first few dividend payments were enough to buy a pack of gum. Then they grew to be enough to cover my monthly Netflix subscription. Soon after that, they were enough to put one tank of gas in my vehicle. The next big step was paying for half a mortgage payment, then a full mortgage payment. Today, my monthly dividend cheque is enough to cover 90% of my regular monthly expenses – both needs and wants. That’s pretty good, if I do say so myself.

Invested money works non-stop. It doesn’t get sick, need time off, or otherwise stop working for you. Once you get the ball rolling, there’s little else that you need to do. Earn the money then invest it in dividend-producing assets. Time will do the rest. You can sleep without worry, comfortable in the knowledge that you’re earning money through passive income. Unless you’re paid to sleep, I can’t think of a better or easier way to earn money.

Procrastination is the Thief of Time.

Truer words have never been spoken. When it comes to investing your money, procrastination is also robbing your wallet.

See – it’s like this. If you invest $0 today, then you’ll definitely have $0 tomorrow.

On the other hand, if you invest something, then you’ll have way more than $0. The more you invest, the more you’ll have. It’s a simple, direct relationship between the choices you make today and the outcomes that you’ll have tomorrow.

First lesson – invest your money. Start with what you can and work your way up. I suggest increasing your investment contribution by 1% every year. When you get paid capital gains and dividends, re-invest them.

Keep an eyes on your management expense ratios. The MER is the amount of money that is fleeced from your account. I look at it this way. The businesses that offer the investment products need to get paid too. That’s fair. What is not fair is me paying 2% per year instead of 0.35% (or less) for the same product from someone else.

Play around with this investing fees calculator for a little bit. It shows you the impact of MERs on your investment account. The longer you keep your account, the more money is siphoned away to someone else. By choosing good investments with lower MERs, you’ll be keeping more of your returns in your own pocket.

Second lesson – understand the impact of fees. Canada has a reputation for having some of the highest MERs in the world. The longer you pay higher MERs, the less money you’ll have for Future You when you really need it. Try to pick investment products with low MERs.

Don’t be afraid to make mistakes. You’ll always learn more from your mistakes than you will from your successes. Make your mistakes. Learn from them. Don’t make the same one over and over again. Your goal should be to earn-save-invest-learn-repeat. It’s a pattern that should never stop. As you learn better, you’ll do better.

Trust me. I started out investing in mutual funds with one of the Big Six banks. I wasn’t paying a 2% MER, but it was around 1.75%. I didn’t know any better. The Big Six bank didn’t even have a way for me to automatically deposit to my mutual funds every month. I did it in person, which got weird very quickly. So I went to an investment firm. I loved that investment firm, and I got wonderful service every time I called. Unfortunately, while the MERs were lower, they were still pretty high. But I didn’t know any better so I stayed with them.

Eventually, I started hearing about something called exchange-traded funds, or ETFs for short. They offered the same diversification as mutual funds but with MERs that were much, much lower. By the time Vanguard came to Canada, I couldn’t move my accounts fast enough.

Third lesson – make your mistakes fast so you can learn fast. No one is perfect at investing, and everyone makes mistakes sometimes. The key is to learn from your mistakes so you don’t repeat them. The biggest mistake that you can make when it comes to investing is to never start.

If you’re not yet investing, start today. If you’ve started and your MERs are too high, then move your accounts to equally good and less expensive options. If your MERs are low already, then work on increasing your contribution amount by 1%. Make sure you’ve turned on the dividend re-investment plan feature on all your investments. If your brokerage doesn’t allow for a DRIP feature, then move your accounts to one that does. Trust me on this. You most certainly want to have the DRIP in place so that your investment returns compound as fast as possible.

You’re smart enough to learn how to do this. The fact that you’re here, reading my blog, means that you have an interest in attaining financial security at some point. That’s the seed that’s needed to plant your Money Tree. By starting today, you’re preventing procrastination from stealing any more time from you.

4-Wheeled Money Pits Always Need a Sinking Fund

I don’t know if you’ve taken a look at the price of vehicles these days, but they’re not inexpensive. I’m showing my age with the next statement, but I want it to make an impression. Today, there are pick-up trucks that cost more that my first condo, which was $83,000! Unlike today’s trucks, my condo came with a bedroom, a fridge, and a nice view.

My question to you is – have you started planning for how to pay for your next 4-wheeled money pit?

Myself, I hate car payments. The idea of someone reaching into my bank account every month and taking out my money… it makes my blood boil! Nope – not happening. As far as I know, there’s still one sure-fire way to keep the finance companies’ fingers out of my pocket. It’s called paying with cash.

When I bought my last vehicle, I employed what is quickly becoming a quaint, old-fashioned idea. That idea is called paying cash. And even though it was a 5-figure amount, I don’t regret doing so. Paying cash eliminated the need for me to pay interest to a creditor. I hate debt. And I really hate paying debt on a depreciating item. It’s not like my vehicle is going to be worth more in 10 years. Not a chance! Every fifth car on the road is the same as mine, so there’s no possibility that mine will ever be coveted as a collector’s item.

My vehicle is a transportation device, pure and simple. It takes me where I want to go. That’s all it is; that’s all I need it to do. No sense paying interest for the privilege of owning it. I paid cash to acquire it. And now…

Now, I can start saving up for my next vehicle. Ideally, I won’t have to buy another one for several years. That said, the days are long but the years are short. I’m quite confident that, in the blink of an eye, it will be time to buy my next 4-wheeled money pit . When that time comes, I want to have the money set aside to pay cash again.

Today, I encourage you to put yourself in a similar situation. Figure out what it will take to pay cash for your next vehicle.

Whatever you’re driving now, I can promise that it won’t last forever. At some point, it will need to be replaced. Start a sinking fund today. Believe me when I say that shopping for the next vehicle is tad bit easier when you’re not also worried about how to pay for it. And, once you’ve bought next vehicle, you’ll probably love the fact that it didn’t put you into debt. I drove my last vehicle for 13.5 years without a car payment. Trust me – that was one of the things that I loved best about it!

If you don’t already have a sinking fund, go and open a high interest savings account right now. Pick one that doesn’t charge you any fees. You can find one at EQ Bank, if you don’t know where to look. ***

Every time you’re paid, throw a few hundred bucks into this account. Better yet, set up an automatic transfer from the account where your paycheque is deposited to your HISA. When the process is automated, you won’t be tempted to spend the money elsewhere. Technology does the transfer for you. It’s a simple way to ensure that the sinking fund actually gets funded.

If all goes well, you’ll eventually have enough to buy your next vehicle in cash. This is ideal. Think about it for a second. When you have to take on a car payment, that means added stress on your budget. You have to find several hundred dollars every month to pay your creditor or else they will take the vehicle away from you. Where do you cut? Food? Entertainment? Travel? Sports? Gym membership? Self-care? Other fun-stuff? When you pay cash, your budget doesn’t have to suffer. The money is gone – you’ve got your vehicle – debt payments aren’t stressing your budget.

Should you have to buy a vehicle before you have enough to fully pay for it in cash, then the funds that you’ve set aside will become your down payment. The larger your down payment, the smaller your monthly car payment and the less interest you’ll pay over the life of the loan. This is smaller win for your budget, but still a big one. Instead of a $850 monthly car payment, maybe you can get it down to a $300 one. Not ideal, but also not more than $10/day.

If you currently have a car payment, try to pay it off early. The sooner it’s gone, the sooner that money is yours again. Re-direct that former car payment to your sinking fund. Within a few years, you’ll have a nice chunk of change in place for when your current 4-wheeled money pit needs to be replaced.

I’ll say it again, and louder for those at the back. Pay cash for your next vehicle. Start saving for it today so that the money’s sitting there waiting for you when you need it.

*** For the record, I have an account at EQ Bank. I’m not getting compensated for recommending them in this post.

Scared of Making Investing Mistakes? Do It Anyway.

You learn a lot from failure. It’s a more instructive teacher than success.

Everyone makes mistakes with their investments. Warren Buffett started investing when he was 10. Do not let anyone convince you that every investment he’s made in his entire life was a winner. If I had to guess, I’m sure that he’s made a really bad investment or two in his time. No one picks a winner every single time, not even Warren Buffett.

The reason he became super-rich is due in part to the fact that he never gave up investing after making his mistakes. You shouldn’t either.

The fact that Mr. Buffett has been investing for the past 83 years also hasn’t hurt him. Take a page from his book. Once you’ve started down the investing road, don’t stray from the path. Invest – err – learn – repeat. That’s the key to getting good at anything.

You need to start investing today. My inexpert & amateur recommendation is that you start investing into your TFSA. Don’t be misled by the name – Tax Free Savings Account. This account is best used for investing your money, not saving your money.

If you invest $0 this year, then you’ll only be harming yourself. Procrastination is your enemy when it comes to investing your money for long-term growth. Think of how far ahead you’d be with your investing knowledge if you’d started 10 or 15 years ago. Let that be your impetus to stop dawdling and to start doing.

Start with $1/day. That’s $365 going into your TFSA. If you can swing $2/day, then that’s $730 working for you on a tax-free basis. And if you think anything less than $1,000/year isn’t worth attempting, then all you need to set aside is $3/day to have $1,095 working hard for you.

Invest your money…and learn from your failures. No one is expecting you to be perfect the first time out. As a matter of fact, it would be downright weird if you never made mistakes with your money. I’m not suggesting that you make money mistakes on purpose. I just don’t want you to be so paralyzed with fear of making mistakes that you never invest.

If you could remember when you learned to walk, then you’d remember how many times you tried and fell down. Each time, you got back up and you tried again. Your first forgotten lesson was that you couldn’t move both feet at the same time. You next lesson was probably that holding onto something made walking a lot easier. Couches, tables, a bigger person’s fingers – whatever was steady and handy was good enough. Next, you figured out that you could do it on your own but leaning too far back or too far forward resulted in toppling over. It took a bit of time, but eventually you got very, very good at walking. Now, you do it with barely a second thought.

Bottom line is that you mastered walking. The same can be said for investing. Try – fail – learn – repeat. You’ll make errors. So what? Make them quickly, learn from them, then never make the same one twice. Learn from others’ mistakes too. That’s a perfectly valid way to learn a lesson. Re-invest your dividends. Increase your automatic transfer amount as you’re able to do so. Max out your TFSA. Then max out your RRSP. Then open a brokerage account and invest money there too. It doesn’t have to, and very likely won’t, happen quickly but it will happen. So long as you start today.

If you’re 18 or over, open your TFSA. It’s easy. Every financial institution has made it a seamless process to open your TFSA online. Do you have one already? Great! Set up an automatic savings transfer. Every time you get paid, money goes into your TFSA. I would suggest $24/paycheque since we’re going into 2024. You can pick your own number, whatever your budget can bear. In 2024, the maximum TFSA contribution is $7,000. Don’t beat yourself up if you can’t put in the maximum contribution. Anything more than $0 is fantastic!

And if you’re under 18, you can’t legally open a TFSA. That shouldn’t stop you from opening a savings account at an online bank. (Most youth accounts at brick-and-mortar banks are free too, but don’t use a bank where you have to pay fees.) Put your money into your savings account. When you turn 18, open a TFSA then transfer the money over.

Everyone starts somewhere. Your journey won’t be the same as everyone else’s but you do need to start. And once you do, don’t stop. Keep that investment train chugging along by investing a portion of every paycheque for long-term growth.