Automatic Savings Plans Perform Better Than Promises.

Another year is quickly barreling towards its expiration date, and that means it’s time for me to assess what I’ve learned about money and my own behaviour towards it. And this year, the big thing that I’ve learned is that automatic savings plans perform better than promises.

For the most part, I have the same financial goals every year:

  • Max out my TFSA & RRSP contributions.
  • Have a sinking fund for my annual property taxes and insurance premiums.
  • Take a trip, whether domestic or overseas.
  • Renew my Broadway Across Canada subscription.
  • Contribute money towards the education funds of younger family members.
  • Pay off my credit cards in full every month.
  • Invest a big chunk of every paycheque for my retirement years.
  • Buy birthday and holiday presents for family and friends.

These are my priorities each year. Some are long-term goals for my money, while others are very definitely short-term goals. I generally have sinking funds for each of them. These little pots of money make it super-easy for me to pay for big expenditures every year without worry.

That said… yet there is one goal that I set for myself that is just as un-finished as it was at the start of 2023. That goal relates to my emergency fund. You see, I had promised myself that I would add atleast $2,000 to my emergency fund this year. It didn’t happen.

And why didn’t it happen?

Dear Reader, the answer to that question is very simple. Promises about money don’t work as well as automatic savings transfers. Had I spend 2 minutes in January setting up a transfer of $100 every payday from my chequing account to my emergency fund, I would’ve easily hit my goal. Instead, I promised myself that I would send any “leftover” money to cover my future emergencies.

Do you want to take a guess of how many times I actually transferred that leftover money?

Zero. That’s right. Over the past 346 days, I haven’t made a single deposit to my emergency fund.

Ask me what I’ll be doing on the morning of January 1, 2024. You guessed it! I’ll be setting up an automatic savings transfer of $100. Knowing myself as I do, I cannot count on myself to abide by financial promises. Instead, my most effective route to achieve my goal is to use the power of automation and allow inertia to do the work for me. Once I’ve put an automatic savings transfer in place, I’m loathe to interfere with it. Increasing the transfer amount is permissible, but cancelling the transfer is unfathomable to me. This is how I know that creating another transfer to increase my emergency fund will be extremely effective in getting me to my goal.

The part that really chaps my cheeks is that I use automatic savings plans for nearly all of my other financial goals. My cherished sinking funds aren’t funded by well-wishes and good thoughts. Nope! I have automatic savings transfers in place. My chequing account is fat and juicy for roughly 25 minutes on payday before steadily being eroded by my various transfers.

Relying on automation has been one of the most effective methods I’ve used to build my investment portfolio. I don’t have to choose to invest when I get paid because the computers are doing the heavy lifting for me.

So why am I so backwards with my emergency fund? That’s a very good question, but I don’t have any good answers. Here’s the key though… I don’t need to have a good answer before I rectify the problem. I can ponder that problem for as long as my heart desires after I’ve set up the automatic savings transfer to my emergency fund. The questions about why I didn’t do what I should have done can linger for as long as my brain wishes to dwell on them. I don’t really care about the answers. What I have to do is set up a system to save myself from my own bad choices and habits.

In this case, it’s another automatic savings transfer for the win!

What are Your Money Goals for 2024?

At the time of his point, there are 26 days left in 2023. Hard to believe that this year will be done in little over 3 weeks, but that’s the reality we’re living in. Maybe you should take a few minutes to think about 2024 and your money goals for the upcoming year.

If you don’t have any, that’s okay. I’ll lend you one of mine. It’s simple and straighforward:

My money goal for 2024 is to live below my means and invest a nice chunk of my take-home pay.

Now, this isn’t my only money goal. And this one needs a bit of polish because it’s a bit vague. After all, what does “a nice chuck mean”?

For me, it means investing $1 out of every $3 that I bring home. You can choose a different percentage if you want. Maybe you’re hardcore and you want to invest atleast 50%. That’s fine. Or perhaps you’re just starting out and you want to go small, with something like 5% or 10%. It’s not ideal, but it’s definitely a way better than investing 0% of your take-home pay.

The next area that needs fleshing out is the part about investing. After all, money sitting in a bank account is not invested. It’s an emergency account, or maybe even a sinking fund. However, it is most definitely not invested for growth. And I want my money grown big and strong!

For me, investing my money means filling my TFSA and my RRSP with equity-based exchange traded funds. Equity-based ETFs allow me to buy small pieces of a great many companies that are listed on the stock-exchange. As these companies grow, so do my investments in them. At some point, those companies will pay out dividends and capital gains. In a nutshell, this is passive income that is taxed much more lightly than my paycheque. For the record, I love earning dividends and capital gains!

Living below my means is a simple shorthand phrase that means I won’t spend every penny I make. Oh, I’ll definitely spend some of my take-home pay. I just won’t spend all of it. After all, if I spend it all then I’ll have nothing left to invest. Without anything to invest, I’ll have no way of ensuring that my dividends and capital gains grow large enough to replace my paycheque. And that would be a shame.

What about you?

Think about your life. Determine whether you want something different. Either way, carefully consider if the money you have is being used to make your life just the way you want it to be.

And be ruthlessly honest with yourself. Are you spending to impress others? Do you have things just because other people have them?

For myself, I cancelled one of my streaming services today. It wasn’t that I couldn’t afford it. Rather, my motivation for cancelling was that I simply didn’t want to pay for it anymore because it wasn’t making my life better. It doesn’t matter that others have that service. That’s their choice and, hopefully, it brings them great joy. For me, this expense won’t be missed. The money can go towards something else.

Do you have expenses like that in your life? Are you still paying for something even though it no longer brings you happiness? If yes, then what’s stopping you from cancelling that service?

Never forget that you should always be the one in control of your money. You’re a Single Person, which means that you don’t have to consult anyone else about how to spend your money. This is one of the superpowers of being single. Every penny you earn is yours to do with as you please.

Don’t give away your superpower!

Next Steps on the Path

Perhaps you’ve already set up your sinking funds, your DRIPs, and your automatic savings plans. You’ve already done everything to make sure that your money is working hard and churning out those sweet, sweet dividends and capital gain. Congratulations!

What is the next step? Well, I would have to say that your next step is figuring out how to best spend your the rest of your money.

While I’m a huge proponent of savings and investing, I also know that we have to live in the present too. There’s no sense getting to dotage and not having anything to reflect back on. Also, no one is promised tomorrow. That’s why it’s so vitally important to live in the present once you’ve set up systems to have your money automatically invested.

Is there a class you want to take in 2024? If yes, then put it on your list. Are you interested in travelling beyond your city, province, country? If so, then jot that down too. What about moving? Replacing a vehicle? Taking another job? Joining an amateur sports league? Starting a garden?

Whatever it is, write it down. That’s the first step. And then, you prioritize which goals absolutely have to be done in 2024 and which ones can roll over a little bit longer. For example, let’s say you want a new car but your current vehicle works just fine. That’s okay. You can still want another vehicle. All you need to do is take advantage of the fact that your current one is running just fine. Start a sinking fund and throw a “car payment” in there very month. Assuming all goes well, your current vehicle will run until you have enough money to buy the next one.

See how that works? You wrote down a money goal and you came up with a plan to get what you want. By creating a sinking fund and using an automatic transfer plan, you won’t have to go into debt. Maybe it will take a few years to save up for this big of a purchase but so what? If something bad happens to your current vehicle, the money will be there as a down payment on the next one and your car payments – shudder!!! – will go to your financing company instead of your sinking fund.

Let’s go back to the example of you taking a course. Maybe you’ve always wanted to take a culinary tour in Italy. Food and travel combined – what could be better? Write it down. Is this very, very important to you? If yes, then start a sinking fund today for this trip so that you need not rely on debt to achieve this goal. Once your automatic savings plan is in place, the next step is to visit Google and get a list of websites for companies that offer these kinds of tours. While you’re building the stash you need to move this money goal from your Want-To-Do list to your One-of-the-Best-Things-I’ve-Ever-Done list, you’ll be learning about what it takes to get the most out of this kind of trip.

Living the Life You Want Is Achievable

So long as you control how your money is spent, you can achieve all of your money goals. The first step is defining what your money goals. The second step is sticking to your plan. The final step is living the dream life that you’ve created for yourself.

Don’t delay anymore. Decide what you want then go and get it!

The Secret to Wealth? Invest the Difference.

Three little words. These three small words have the power to change your financial destiny if you make the choice to implement them in your life.

Invest the difference. What does that mean?

In a nutshell, it means you should be living below your means. The LBYM-lifestyle translates into always having a gap between what you earn and what you spend. Your goal is to make the difference between your earnings and you spending as big as possible while still enjoying your life from day to day. Then you’ll take that amount, ie. the difference, and you’ll invest it for the long-term. The bigger that amount, the sooner you’ll reap your investment gains. Then you’ll let those gains compound for a couple of decades. At some point, your investment gains will able to support Future You, whether wholly or in part, when you’re no longer able to send your body out to make money.

Kindly keep in mind that staying out of debt is a key part of living below your means. If you’re constantly paying money to creditors month after month after month, then you won’t have those dollars going into your investment portfolio. Also, paying creditors 29.99% when you can only reasonably expect an average return of 8%-10% over the long-term is a losing proposition for you.

Pay off your debts then start investing.

If you have debts, focus on paying them off first.

Unless you’re over 35. If you’ve hit your mid-30s, then you need to invest while you’re simultaneously paying down your debts. Yes – you’ll pay a little more interest this way, since your debts will stick around longer. In my humble opinion, that’s not your biggest concern. Once you’re solidly into your adult years, then you need to start making adult decisions. And one of those decisions is to take care of Future You by investing money for your care and feeding 30 years from today. Once you’ve hit your mid-30s, then you need your money to be working for you as soon as possible. In your case, ASAP = immediately. It doesn’t not mean “tomorrow”.

The trick will be to not go into anymore debt. Make a plan and stick to it. As your debts get whittled away, re-direct 50%-75% of your former loan payments to your investment. The rest of the former payment can be spent bulking up your emergency fund. If your emergency fund already holds 9-12 months expenses, then spend that money on the little luxuries that make your life more comfortable.

Maybe you want to enjoy a nice bottle of wine once a month? Or would you rather travel somewhere? Perhaps you finally have the money to comfortably handle the long-term financial commitment of a pet? You know what you want better than I do. My point is that you should use some of that money to add what you really want into your life.

If you need a plan for how to pay down your debts, I would suggest using the Debt Snowball method. Despite the controversies that are always swirling around the man who made them famous, this method of paying off debt is an effective and straightforward way to rid your life of creditors. Do not go into further debt while paying off your current ones. I cannot stress this enough. Staying out of debt is incredibly important to Future You’s survival and comfort.

Where should you invest your money?

In my humble and inexpert opinion, your money should first go into your Tax Free Savings Account. Then it should go into your Registered Retirement Savings Plan. Finally, you should be investing in your non-registered investment account, aka: your brokerage account.

Don’t feel bad if you can’t max out your TFSA and your RRSP right away. It literally took me years to max out my contributions. (And I treated myself to something nice when I finally accomplished this goal!) Invest as much as you can, as soon as you can. Eventually, your debts will be gone and you’ll have the funds to contribute. Stick to your knitting and you’ll accomplish this goal. Remind yourself as often as you need to that it likely won’t happen overnight.

So those are the broad strokes. Think of them as the first principles of wealth. You simply have to live below your means, stay out debt, and invest the difference. If you do that consistently for a very long time, the odds of you becoming wealthy increase dramatically.

Making the Best Moves to Get Your Dream Life

Before you get too far into the craziness of the Spending Season, take a few minutes to reflect back on the past year.

The next 6 weeks will be filled with the AdMan’s best efforts to get you to part with your hard-earned money. His one and only goal is to make you spend. Cash or credit – either one will do so long as you’re opening your wallet as often and as fast as you possibly can.

Here’s a little tip from me to you. Don’t spend money on things that don’t matter to you. Seriously. It’s okay to say “No” and to keep your money in your wallet.

And this is why now is such a good time to assess if you’re moving closer towards your dream life and your heart’s desires. Only you know what your dream life looks like. And your best shot of getting it is to be laser-focused on the choices you make with your time, energy, and money.

My blog is about personal finance so I’ll focus on the money-stuff. There’s are a lot of other inputs and factors that go into our money choices. I realize this. The truth is that I can only speak about my personal experiences and my own observations of the world. I don’t claim to be an expert in psychology. What I do know is that the first step to getting what you want is knowing what it is that you really want. Without that information, you’re kind of flailing in the wind.

If not now, when?

This question should be the one you ask yourself every time you think about going after what you really want. Tomorrow is promised to no one. There are no guarantees about the future. An amazing opportunity might come around again…or it might not. You have to be prepared to pursue your dreams every single day. And that starts by knowing exactly what they are.

The next step is to start saving & investing for your dream life. Maybe you want to run a cafe in Paris one day. If that’s what you want, then that’s what you’ll start working towards. First things first, you open a dedicated bank account for that dream. And you set up an automatic transfer to start filling that bank account. It might take you a few years to save up a sizeable sum, but so what?

The time will pass anyway.

Read that again. The time will pass anyway.

So start your automatic transfer today, and stick with it. While you’re working and saving and investing, you’re also going to start researching the steps you’ll need to take to make your dream come true. You’ll go online and search “How to own a business in Paris”. Maybe you’ll plan a trip to Paris and see it with your own eyes for a week or two. You’ll take French lessons or figure out if there’s an ex-pat community where they speak your language already.

And while you’re fleshing out your dreams, your money will quietly and consistently accumulating. It will be working for you 24/7. Keep adding to the pot. Don’t make withdrawals – just leave it alone. When the time comes for you to bring your dream to life, the money will be waiting for you.

Make smart choices in the interim.

I’m not telling you to save every nickel. What I am telling you is to stop spending money on things that don’t matter to you. Is eating out for lunch every day more important that your dreams? Would you rather buy your 27th sweater or take a course that gets you closer to the life you really want? Is it better to impress family, friends, and strangers today instead of being proud of and satisfied with the accomplishments of Future You?

You’re the only one who can answer these questions for yourself. After all, you’re the one who is going to live with the consequences of your choices.

As I said earlier, we’re heading into the full court press of Spending Season. You will be subject to advertisements on every single platform and they will all be exhorting you to your spend money. The unspoken promise is that spending all of your money is the secret sauce to having a “perfect life”. Believe me when I tell you, there’s no such thing as a “perfect life”. And even if such a thing existed, I highly doubt that it could be purchased at the mall. Oodles of gifts ensconced in reams of wrapping paper beneath a beautifully-decorated tree make for a lovely advertisement. The harsh trust is that they don’t give you what you really want, which is more than likely connection and community with the people whom you love best. Strong relationships built on trust, love, respect, and admiration aren’t bought with cash or credit.

Keep that in mind as the Spending Season moves into full swing. Don’t let the endless encouragement to spend detract from pursuing your dream life.

Back to my original point… It’s time to figure out whether you’re any closer to the dream life that you really and truly want for yourself. If the answer is not to your liking, then figure out what you need to change to get what you really want. Then go make it happen.

If You Don’t Need It, Then Don’t Buy It!

A very popular shopping day will be arriving near the end of November. How do I know this? Rest assured – the Marketing Machine will not allow me to forget about it for one single instant! Everywhere I go online, there’s an ad about the “low, low prices!” I’m encouraged to “act now” so that I don’t miss out.

Look… I get it. Retailers want to make money. To do so, they need us to give our money to them. That’s how the game is played.

I want you to win the game. So here are my rules for surviving the Spending Season financially intact.

  1. If you don’t need it, then don’t buy it.
  2. If you do need it, then it’s okay to buy it.
  3. If you do buy it, pay cash.
  4. If you pay off your credit card bills in full every single month, then you can use your credit card.

Those are the 4 rules to getting through the upcoming Spending Season. If you follow them, then the odds are very good that you will not suffer from a debt-hangover come January of 2024… which is only 6 weeks away.

Rule 1: If you don’t need it, then don’t buy it.

This rule applies to everything on offer. Clothes. Televisions. Place settings. Bedding. Electronics. Subscriptions. Furniture. Large appliances. Liquor. Home decor. Gaming systems. Computers. Vehicles.***

If you don’t need the bright-and-shiny whatever-it-is that is being advertised to you, then keep your wallet closed. Retailers hire marketing teams that are extremely skilled at convincing you to buy things that you don’t necessarily need. Think about it… Until you saw the ad appear on your screen, you probably hadn’t even thought about getting the next whatever-it-is. You were perfectly content going about the business of living your life and enjoying your day, when the ad popped up and suddenly you were thinking…

“Maybe I do need <insert bright & shiny whatever-it-is> now that this marketer has put this ad in front of my face.”

Do yourself a favor. If you didn’t need it before you saw the ad, then you probably don’t need it after seeing the ad. Scroll past the ad. Choose the text-only option for your reading pleasure. Don’t buy something if you don’t need it.

Rule 2: If you do need it, then buy it.

Obviously, there are those of you who do need to buy certain items. And getting you needs met at 60% off is a very sweet deal. Let’s say your winter boots are 5 years old and basically held together with tape and prayer. It’s time to replace them. This is probably a very good time to do so since clothing retailers are putting things on sale.

You know your situation better than I do. If you truly need to buy whatever-it-is, then go ahead and do so. After all, getting a discount is always nice when you have to buy something that you need. Discounts help your money go just a bit farther.

Just make sure that you’re following rule 3 when you make that purchase.

Rule 3: If you buy it, then pay cash.

Yes. You read that right. If you have to buy something, that’s no reason to go into debt for it. Pay cash. I’m hoping that you had the good sense to save up for your desired item first before making a purchase, i.e. the money is sitting safe and sound in your sinking fund. After all, this very special shopping day isn’t a surprise. Everyone knows that it comes up at the same time every year.

If you’ve been waiting for the discount, then surely you were wise enough to create a sinking fund for this particular purchase. Ideally, you’ve been squirrelling a little bit from every paycheque into a dedicated sinking fund to pay for the things you want this Spending Season.

Again, do not go into debt to make this purchase. The next six weeks are going to be a blur of opportunities to spend money. Many celebrations are going to be taking place. If you’re the one hosting, you’re going to be paying a tad bit more to feed your guests. And if you’re lucky enough to be one those said guests, then I’m assuming that you’re gracious enough to bring some kind of gift for the host/hostess of the event you’re attending. As for all of the various celebrations, there’s a good chance that some of them will involve gifting of some sort.

I call this the Spending Season for a reason. Do not go into debt trying to make everyone’s memories perfect. Buy if you must but spend cash when doing so. The beauty of cash is this – once it’s gone, it’s gone. There’s no lingering debt for you to worry about or on which you will be charged interest.

Rule 4: If you’re have the cash to pay off your credit card bill in full, then you can use your credit card.

This rule is only for those who pay off their credit card bill in full every single month.

You alone know if you’re one of these people or not. Be completely honest with yourself. Failing to pay off your credit card bill every single month means that you’ll be paying up to 29.99% more for every single one of your purchase. That’s 30% more! After a couple of months of compounding at 29.99%, that 60%-discount on your bright-and-shiny whatever-it-is will have been re-directed towards the accruing interest on your credit card.

So, if your sinking funds are stuffed to the brim with sufficient cash to cover your credit card bill, then buy your whatever-it-is with your credit card. Then pay your balance in full when the bill comes due.

That’s it.

Those are the rules for getting through the Spending Season without doing too much financial damage to yourself. Despite what the Ad Man and trusty sidekick, the Creditor, will tell you, there’s absolutely no impediment to your happiness if you resist the urge to spend money on things you don’t need.

Again, if you truly need something, then this is probably a good time to buy it since the discounts are flowing hot and heavy. Just don’t go into debt to buy whatever-it-is. Things are tough enough with inflation still ravaging your dollar. You don’t need inflation working in tandem with sky-high credit card interest charges. That’s like sticking two forks in your own eye! Ouch!

Don’t spend if you don’t have to. If you must spend, pay cash. And if you always pay your credit card balance in full every month, then it just might be okay to use your credit card.

That’s it – those are the rules. Wishing a very joyous, merry, happy Spending Season to All!

*** Yes – that’s right… vehicles. Today, I received an email offering me a “loyalty discount” on a brand-new luxury SUV if I bought it before Black Friday. For those who are curious, my “loyalty” is worth up to 1.5%. I laughed and laughed and laughed, then sighed,… and then I deleted the email.

There Are No Easy Answers

Today, I read a very sad story about a 76-year old man who sold his home when his mortgage payment went up. Presumably, the story was about the impact of rising mortgage rates and the lack of affordable housing in Calgary. In reality, what I took from the article was an appreciation of just how risky it is to have a mortgage when you’re on a fixed income.

Now, it should be noted that the article failed to explain why this 76-year old man still had a mortgage!!! To my mind, the journalist who wrote the story – or the editor who removed the relevant details – failed the reading public by leaving the financial questions unanswered. All we know from the article is that the man’s mortgage went from $1,000/mth to $2,600/mth and that he received $2,200/mth in social benefit payments.

Without any confirmation, I’ve tried to be generous and have assumed that he went through a grey divorce and he had to re-mortgage his home so that he could pay half of the home’s value to his ex-spouse. I could be completely wrong, but the bottom line is that his senior citizen has to move out of his home because he can’t afford to repay his mortgage.

When I was born, the mantra to all mortgage holders was to pay off the mortgage as fast as possible. Times have since changed. In the past 20 years, the message has gone out that it’s better to pay the minimum mortgage payment and to invest the difference in the stock market.

Sometimes, I think this is great advice. If you’ve got a 25-year runway ahead of you, then it’s less risky to invest your money for the long-term. You can have your mortgage paid by the time you’re in your 50s and you might still have a decade or more to invest if you retire at age 65. The dollars invested in your 20s might have 40+ years to compound if things go exactly according to plan. You’ll have a paid off home and a comfortable retirement waiting for you. Even if you make a few mistakes with your investing choices, the odds are still pretty good that you’ll retire comfortably.

The calculus changes considerably if you’re starting your mortgage in your 40s or 50s. Going into retirement on a fixed income while carrying a mortgage is like dancing on razerblades! You’re asking for trouble.

Mortgage rates started to skyrocket in 2022 from their historically un-characteristic lows of the previous decade. Rates haven’t stopped going up in 2023. When I worked as a cashier last millennium, any rate under 8% was cause for celebration. My first mortgage rate was 6.50%, and it steadily dropped over the next 20 years. The last mortgage I had in my name was for 2.79%… and I felt ripped off because one of my friends had a rate of 2.49%! I doubt I’ll ever see mortgage rates that low again in my lifetime.

These increased rates are the normal ones. It will take a long time for people to accept that but they are here to stay. The main problem with these rates is that people’s incomes haven’t kept pace with the impact the rates are having on their budgets. People who’ve had to renew their mortgages at rates 3%-4%-5% higher than what they were paying before are having to come up with several hundred dollars more each month to pay back their mortgages. And these are people who are working!

Imagine being a senior on a fixed income. The 76-year old doesn’t have as many options for increasing his income. In this case, he chose to sell his home and is looking for some place to rent. He’s having no luck. Again, the journalist/editor failed to tell us how much he received from the sale of his home and how much of that went to paying off his home equity line of credit. We have no way of knowing whether he’s in a position to buy himself something smaller than his former home. Presumably not since he’s decided to look for a roommate…

Anyway, my point is this. Stories like these should be a cautionary tale. Whatever your current circumstances, strive to stay employed until your debt is paid. Do not retire with debt!

Want to know one of the very worst elements of this story? All of the money that this man put into his house is gone! We don’t know how much of it was siphoned away via his HELOC. What we do know is that all of his payments went to the bank until he couldn’t afford them anymore and now he walks away without enough to buy himself another home. To add insult to injury, he doesn’t even have enough to easily rent another place. He could very well be homeless in a few weeks.

Do yourself a favor and learn from this man’s story. If you have debt, get out from under it. And if you’re out of debt, stay out. It’s so very easy to get into debt but it’s really, really, really hard to get it out of your life. You deserve to have the experience of being debt-free. Live below your means for life!

There are no easy answers. I don’t have any secrets that will make your debt magically go away. All I can tell you is this. If you’re fortunate enough to have some extra money in your budget, then use your good fortune to aggressively pay off your debt. When it’s gone, don’t spend the money on stupidities. Instead, invest it. Save up to pay cash for your next bright-and-shiny-whatever-it-is that you want. Just stay out of debt and don’t become the senior citizen who has to start job-hunting in his mid-seventies. Strive for a debt-free life.

Your Net Income is the Amount That Counts

People like to talk about their salary when asked about how much they earn. This is hardly surprising, since annual salary is nearly always a larger amount than what you take home. Net income is what you received after taxes and deductions have been subtracted from your gross salary. Whether you get direct deposit and receive a physical cheque, your net income is the number that you should have in mind.

What sounds better? Earning $100,000 per year (annual salary) or earning $68,572 (net income after taxes)?

It always sounds better to be earning the higher salary. This is because our society subtly and not-so-subtly teaches us that it’s always better to earn more. After all, that means you’re worth more… doesn’t it? So to admit to earning a lower amount is akin to telling the world that we are worth less. But I digress!

When it comes time to doing your budget, always work with your net income. Determine how much you take home from your job each month and subtract your expenses until you get to $0. Once you’ve spent all your money, stop spending until your next paycheque.

Don’t ever divide your annual salary by 12 and then subtract your expenses from that amount. Doing your budget this way is a recipe for disaster, an invitation to overspend. It’s the pathway towards a debt-spiral. You need not make your financial life any harder than it already is!

Pay Yourself First… doesn’t work for everyone, sadly.

If you were asking for my advice, then I would tell you to order your expenditures by priority. Personally, I think pay-yourself-first is a fantastic way to live… unless doing so means that shelter and food won’t get funded.

The unfortunate reality is that there are a good many people who barely have enough to pay for shelter and food before the money is gone. I don’t have any easy answers for those folks. They are the working poor. They live hand-to-mouth, not because they want to but because they don’t have enough money to live. They’re paid the lowest amounts permitted under the law. As prices go up and their wages stay the same, they don’t have enough money from one paycheque to the next. I’m going to give them a pass for not paying themselves first since I can understand why eating today might be viewed as more important than retirement tomorrow.

For everyone else, my suggestions are as follows.

Pay Yourself First

Take the first 15% of your net income and put it away for Future You. The money should go into your TFSA. Once you’ve maxed your TFSA, then put your money into your RRSP. Fill these accounts and choose equity investments. Don’t fiddle with this money. It is meant to take care of you in retirement. In other words, when you’re no longer able to go out to work, then you will be relying on this money to generate sufficient cashflow to pay for your expenses until you die.

Necessities Come Next

Next, pay for your necessities. You need shelter, so pay for your mortgage or rent. If you’re a homeowner, pay for the utilities that you need to keep your house running – power, water, heat. You should also pay your property taxes so that your municipality doesn’t take your home away from you. If you’re smart, you’re also setting aside atleast $100 from every paycheque for annual maintenance and unexpected “surprises” that come along with owning a home. Eavestroughs need to be cleared of leaves. Furnaces and hot water tanks need to be inspected, maintained, and replaced. Windows and roofs don’t last forever.

Have an emergency fund for your home and add to it on a regular basis.

Stick Some Money in Your Emergency Fund

There’s an emergency in your future. They are the very definition of spontaneity. You don’t know when one will arrive, but you can be guaranteed that it won’t show up at a convenient time. When it does land in your lap, you’d be best served to have some money in the bank to deal with it.

Whatever your emergency is, you will likely need money to deal with some aspect of it. A flight? A deposit? A hotel stay? New clothes? Repairs to something-or-other?

Just stick money into your emergency fund from every paycheque. Don’t spend this money! When you need it, you’ll be thanking yourself for having the foresight to set it aside in the first place.

Fill Your Belly

Do yourself a favor. Start preparing most of your meals at home. You’ll have more control over what goes into your body. It’s still cheaper to cook and bake for yourself than it is to have someone do it for you. The upside is that food that you prepare for yourself tastes better than whatever you can get at the drive-through window. And when you do go out for a meal, it become a special treat because it’s not something that you do everyday.

Fill Your Vehicle’s Belly

If you need to drive to work, then go and fill your tank. Throw $100 into a dedicated vehicle fund. At some point, your vehicle will need an oil change, new tires, or a tune-up. Whatever your vehicle will need, odds are good it won’t be cheap.

There will also come a day when you’ll need to replace your vehicle. If you can manage it, pay for your next vehicle with cash and bypass financing all-together.

Pay Off Your Debts

Maybe you didn’t find my blog until today so you weren’t aware of the debt trap until you were firmly caught in it. What’s done is done. Your task now is to get yourself out of debt.

Pay off your debts. Personally, I like the Baby Steps and the idea of getting rid of small debts in order to have a few quick wins. It feels good to pay off debts. Use a good chunk of whatever’s left over at this point to pay off your creditors. This might take you a few weeks, a few months, or a few years. No matter how long it takes, just do it.

Once you’re out of debt, don’t go back into it.

Spend What’s Left

Okay… do you have money left after savings, shelter, emergency fund, debt, food, and gas?

If the answer is no, then stop spending. Do not go into debt for non-necessities. That’s a stupid move and you’re not a stupid person. It sucks to not be able to spend your money the way you want to. Focus on what’s come next after your debt is gone. That money stays in your pocket; you don’t have to send it to your creditors anymore!!!

If the answer’s yes, then let’s keep going. My next suggestion to you is to build up your non-registered investment account. Your TFSA and RRSP are registered accounts, so the government limits how much you can contribute to them each year. There are no such limits on non-registered investment accounts. You can contribute as much as you want. I like the idea of contributing $100 per day to your investment account, but you can pick whatever amount you want.

Now, you can spend the remainder of your net income however you want on the luxuries. These are the non-necessities that you don’t strictly need for survival, yet they do make life a little easier. Very often, they can be categorized as entertainment, self-care, sports, gardening, travel, or whatever-it-is-that-makes-you-smile. Spend your money on these things however you see fit.

I’m a little bit cuckoo about plants. In the spring, I hit 3-5 greenhouses and buy too many annuals for the planters around my home. I’m constantly on the hunt for perennials that thrive on neglect, in poor soil, and in the hot sun on the southern wall of my house. Oh, and it has to have pretty flowers. I haven’t found it yet but I spend a good chunk of money looking for it.

Your whatever-it-is is likely not the same as mine yet we both derive pleasure from spending our money on it. There is nothing wrong with this. One of the purposes of money is bring joy to people.

Read a Couple of Books to Optimize Your Spending

If after your non-survival spending is done and you still have money leftover, then you should read Die With Zero and figure out what really, really, really matters to you. Then you should spend your money on that. After all, you only get one life. Whatever money you earn should be spent creating the life you want for yourself. For some people, you might still choose to spend your money in the same way that you would have if you hadn’t read the book. However, atleast you’ll be aware of another perspective before you do.

Actually, now that I think on it a little bit more… maybe you should read Die With Zero after you’ve paid for your survival expenses and before you start spending on the whatever-it-is-that-makes-you-smile. You might also want to consider the words of Ramit Sethi and learn how to build your rich life.

So there you have it. These are the ways that I think you should be spending your money. Whether you follow my suggestions or not is entirely up to you. After all, you know your money situation better than I do. And I fully admit that your priorities won’t be the same as mine. Take what you need and leave the rest.

Tools vs. Anvils – How to Use Your Credit Card

Credit cards are an exceptionally useful tool if used correctly. However, they can also cause great financial harm when the basic rules of use are ignored.

There are two terms that you should know: deadbeat and revolver. Deadbeats do not carry credit card balances from one month to the next and they reap the benefits of rewards programs. Revolvers are the people who do not pay their credit card bills in full and they have to pay interest and fees.

For the purposes of this post, deadbeats use credit cards as a tool. Revolvers are the people who are carrying the anvils, which are in the shape of credit card debt.

Just in case it needs to be said, banks love revolvers and they really hate deadbeats.

The Tool

Your credit card is a tool if you pay it in full every single month before the balance is due. You can use it throughout the month, happily collecting points (or not) as you spend. When the bill is due, it’s paid in full. This is the only correct way to use credit cards, in my humble opinion. So long as you never pay interest, then I think it’s perfectly fine to use a credit card for all of your purchases.

For my part, I know how much I can spend on my credit card before I pull it out of my wallet. I’ve been tracking my expenses for years. As such, I have a good sense of how much I spend in a given month. It’s around $2,500. As such, I never spend more than this amount on my credit card.

Spending more on my credit card than I earn in one month is a recipe for disaster! Expenses go on my card simply so I can earn points towards free groceries. (If I were coupled, I would use the credit card that earns points towards companion fares. If I could find a free cash-back reward card, then that’s the one I would use on a regular basis.)

There are a myriad of reward cards out there. I don’t really care which one you pick. My advice if the same whether you accumulate travel points, grocery points, free movies, or any-other-benefit-that-works-best-for-your-goals. Pay off the entire amount of your credit card bill every single month.

If you’re never carrying a balance, then I think credit cards are a wonderful tool that should be used with abandon.

My opinion changes drastically if you don’t pay off your credit card every single month.

The Anvil

If you carry a balance from one month to the next, then your credit card is an anvil. It is holding you back from spending your money the way you want to. No one wants to send interest to the bank.

If you are paying interest on your credit card balance, then look at your statement. It will tell you how much extra money you have to pay to cover the interest. So on top of the $100 you spent on your initial purchase, you’ll be spending an extra $9 – $29.99 to pay for your whatever-it-is depending on your credit card’s interest rate. Keep in mind that the interest will continue to compound until you pay the credit card balance in full.

This is how credit cards become an anvil. It’s very, very hard to repay a debt when the interest is over 5%. At double-digit rates, your best bet is to cut up the cards, go cash-only for a year or two, and get a part-time job to pay off the debt.

Get Rid of the Anvil

Cash-only means stopping all subscriptions until the credit card debt is gone. We now live in the world of streaming services, wine-club memberships, gym memberships, online subscriptions of every sort, Patreon & Only Fans account, etc, etc, etc… You don’t have to give these up forever. Far from it! Maybe you have to give yourself a hard “No!” for 6 months. All of those “small” subscriptions add up to a decent amount.

Take the amount of those subscriptions/memberships/fees and add them to your minimum monthly credit card payment. Continue to do make these payments until the debt is paid off. While you are paying it off, do not use your credit card to pay for anything! When you make a new purchase, that purchase will only increase your outstanding debt and it will also be subject to interest. You’ll be working backwards if you continue to make purchases on your credit card while trying to pay it off.

Once you’ve paid off your credit card(s), you can re-start your memberships/subscriptions/fees that you were paying before but only up to the amount that you can pay for in full every single month. If your monthly financial commitments are more than you can pay for in full, then you need to cut some of them out permanently until you’re earning enough money to cover their cost.

Once you’re out of debt, you can continue to use your credit card. You need only follow my 3-step plan for staying out of credit card debt for the rest of your life.

  1. Make a purchase on Day 1.
  2. Wait for it to post to your credit card account on Day 3 so that you can earn your credit card points / rewards. (You can check your credit card account online. I check mine every few days.)
  3. Once the purchase has been posted, make a payment in the amount of the purchase on Day 5.

By the time you receive your credit card statement, you will have paid off nearly every charge from the prior 30 days.

Real Life Experience

I think the interest rate on my credit card is 23.99% per year, or maybe even 29.99% per year. I don’t really know because I never pay interest. In my case, I follow the 3-step process outlined above so that I never pay interest on the balance.

Believe you me, the only time I ever want to see a rate a high as 29.99% is when I’m looking at the rate of return of my investment portfolio.*** When I’m the one earning this kind of return, it’s a great thing because compound interest is working in my favour.

Paying 23% or more on a credit card means that compound interest is working against me and hurtling me down into a deep, dark pit of debt. I don’t ever want to pay this amount of interest to a bank!

I’ve had a credit card ever since turning 18. Thankfully, I knew enough to pay it in full ever since the first day. I’m not the bank’s favourite customer because I’ve been a deadbeat since the beginning.

So take this information and do with it what you will. While I have strong suggestions, you are best-positioned to know the circumstances of your life. You will make the choices that you think are appropriate with the knowledge that I’ve shared. The choice to be a deadbeat or a revolver lies with you. Choose wisely.

*** Interestingly enough, I don’t earn anywhere close to these returns even though my portfolio has a significant weighting in the financial sector.