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.

When You Retire Depends on Money in the Bank

Many people think of retirement as a function of age. They think that it arrives at the age of 65 or 70, and that retiring sooner means an “early retirement”. To my mind, this is wrong. Your retirement date is a function of your money. If you don’t have enough money in the bank to retire at the age of 65 or 70, then you’re pretty much forced to keep working until you die. And if you’re fortunate enough to have buckets and buckets of money sitting in your cash-hoard right now, then you have the ability to retire this instant.

When you retire depends on money in the bank. When you have it, you can retire. When you don’t, you can’t. It’s really that simple.

Starting earlier is better.

If you’re in your 20s and 30s at the time of reading this post, don’t fall for the historical dogma that you’ll be working until you’re 70. There is no way for you to know every single detail of your future. Why not strive for optimism? Start saving as much of your paycheque as you can and investing it into well-diversified, broad-based ETFs. Ideally, start with 20% of your take-home pay and live on 80%. As you earn more, you save more.

Track your expenses. Live below your means so that you always have money to invest. Pay yourself first before you pay everyone else.

Set up an automatic transfer to your investment account. Ensure that your earned interest, dividends, and capital gains are all automatically re-invested. Do not spend what your portfolio earns! This money has to be re-invested until you retire because it will be the cashflow that you live on once you’re no longer receiving a paycheque. The sooner your gains are reinvested, the faster they will benefit from compound growth.

Even if you love your current job, or you stand to inheiret money from your family, do this for yourself. Inheiretances can disappear for a variety of reasons. And there’s always a slim chance that you might sour on your job at some point. In either eventuality, it’s best that you bake your own cake when it comes to funding your future.

Finally, it will take a few years to build up a nice little stash. Don’t undermine your efforts by taking money from your future. Prioritize your goals and spend your money accordingly. If it’s not important, then don’t spend money on it.

When you’re younger, time is on your side when it comes to building your retirement nest egg. Don’t waste it!

Middle aged already?

Should you happen to be in your 40s and 50s when you read this post, then continue saving and investing. I would suggest that you continue to invest in equities since you’ll need the money to continue working hard for you even after you’re retired. If you live another 20+ years beyond retirement, that’s still a long time horizon so there’s little need – in my mind – to have more than 35% of your investment portfolio in bonds. Start looking at dividend-paying investments to boost your cash flow once you part ways with your paycheque. Get out of debt and stay out of debt.

If you haven’t started yet, then what are you waiting for?

Don’t spend another second castigating yourself for not starting sooner. Start today. As you pay off your debts, do not incur new ones. Instead, put that former debt payment towards your retirement savings. Car payment gone? Great! Take 80% of it and put into your retirement savings. Mortgage payment gone? Excellent! Take 80% of it and pad your retirement account. Stuff your TFSA first – that money grows tax-free, which is the best-kind of growth to have. Next, fill up your RRSP. This money will grow tax-deferred, which means you’ll pay taxes when you take the money out of the RRSP. Finally, open a non-registered investment account and start filling that once your TFSA and RRSP room has been maxed out.

Earn – save – invest. This is the formula for funding Future You’s expenses. Don’t depend on anyone else to take care of this for you. The government will not provide for you nearly as well as you can provide for yourself. Waiting for an inheritance is a very iffy proposition. Winning the lottery isn’t a solid financial plan.

Your retirement is in your hands. Retirement is a function of money, not your age.

Regretting Financial Mistakes Is a Waste of Your Time

Regret has no place in your financial plan. You’re not perfect and you will make mistakes with your money. Once you’ve identified a money mistake, don’t spend your time regretting it. Simply make a course correction to stop making that mistake and move forward. The past cannot be changed so learn from your mistakes and resolve not to make the same ones in the future.

When I started investing, I picked a dividend investment strategy. I started by buying into dividend mutual funds. Eventually, I learned about management expense ratios (MERs) and discovered that I was making the mistake of paying 10x as much for mutual funds when I could acquire the same assets through exchange-traded funds (ETFs). There was no way to recoup my time or those MERs, so I simply moved my money to ETFs. I made a course correction and moved on.

What is the point of spending time regretting choices that were made when I didn’t have the best information available to me?

Once I learned better, I chose better.

Dividends vs. Growth

A doozy of an investing mistake still hurts. I can only blame myself for this one. My belief in the wisdom of my own choices meant that I didn’t properly consider what was going on around me. I wasn’t learning the lesson, no matter how many times it was hitting me in the face…sigh…

Remember that phenomenal bull-run that was experienced in the stock market between 2009 and the onset of the pandemic in 2020? The one where the S&P/TSX Compound Index grew by 125%? The one where the S&P500 increased by 378%?

Guess who was still investing in a dividend strategy instead of investing in US-growth equities?

That’s right. Me.

It was a huge mistake in my financial planning. I had so much faith in my own choices that I missed out on a fantastic opportunity to invest over the long-term. I made sub-optimal investing choices for 11 years!!! At any point, I could’ve realized how I was missing out on growing my portfolio much, much faster… but I didn’t.

Instead, it wasn’t until October of 2020 that I finally saw that I was again missing out. I was determined to benefit from recovery that followed the pandemic-induced stock market plunge. So I course-corrected. I started investing in an equity-based, well-diversified ETF and I haven’t looked back.

Regret has no place in my financial plan. Of course I wish I had made optimal choices at every single point throughout my investment life, but horses aren’t wishes so this beggar can’t ride. I’ve done what I’ve done and I get to live with the consequences.

And all told, my choices weren’t the absolute worst ones out there. To date, I’ve been investing for 3 decades. My dividend portfolio will ensure that my retirement is nice and comfy. I chose to start young, which is always preferable to starting when old. As far as mistakes go, I could’ve done far worse.

Now, all of my investment contributions are going into the equity-based growth ETF. Its performance is giving my portfolio higher returns, which is always appreciated. I have no plans to stop investing in my ETF, even after I retire. It will continue to mimic both the volatility and growth of the stock market, which is a good thing over the long-term.

Taking a Break vs. Riding the Rollercoaster

I made another huge mistake during the crash of 2009. Instead of continuously investing, I stopped my contributions. Thankfully, I didn’t make the mistake of selling anything while the price was down! Yet, it would’ve been smarter to ride the rollercoaster of volatility during that crash. I would’ve been buying into my dividend-paying companies when they were all on sale!

Woulda. Coulda. Shoulda.

No regrets, remember? Instead, I resolved to never stop investing. As we all remember, the stock market took a huge plunge when COVID-19 was declared a pandemic. Between you, me, and the fencepost, I lost a third of my portfolio’s value on paper. I know because I checked my brokerage account daily during those first few months.

Truth be told, I really don’t know how many paper losses I suffered because I stopped looking at the number after I’d lost that first third. It was too painful.

But you know what I didn’t do? I didn’t stop investing! Even though the market plunged steeply between February 21, 2020 to March 23, 2020, I continued to buy into my dividend-ETFs. And throughout the recovery between March and October of that year, I stuck to my investing schedule and bought many, many, many units in my ETFs-of-choice.

The mistake of 2009 was not to be repeated! Instead of taking a break from investing, I rode the rollercoaster of the stock market. It paid off. Buying those ETF-units when the market was down allowed me to accumulate way more units that I would have otherwise. Each of those units pays more dividends today than they did in 2020. The end result is that my monthly dividend payment is much higher than it was before the pandemic.

Secret Sauce

Like I’ve said before, the secret sauce isn’t being bright. Rather, it’s being persistent. The genius of the secret sauce is following 3 basic steps, over and over and over again.

Make the choice to invest. Then invest. And don’t stop investing.

Everything after that is simply a detail. You follow the steps, and you course-correct when you make your inevitable mistakes. Don’t waste your time on regret. There’s nothing to be gained from that activity. Instead, always remember that you’ll do better when you know better.

Into the Minutiae: Lowering your MERs While Meeting Your Goals.

You should be lowering your MERs, i.e. management expense ratios whenever it makes sense to do so. In short, the MER is the price that you pay for the investment product that you’re buying. It’s a percentage of your investment that is paid to the company that put the product on the market. MERs can range from as low as 0.04% to 2.75%.

As I’ve said before, success with money is within everyone’s grasp because the secret sauce isn’t being bright. Take it from me. I’m not the smartest lobster but I’ve managed to set myself up quite nicely by reading a little bit and following a few simple steps. I’ll share them with you right up front so you can start doing these things for yourself too. I promise that Future You will be very happy if you start and continue doing the following 3 things:

  1. Live below your means so that you always have money leftover to invest. Track your expenses. Cut down on the things that aren’t essential to your survival. Use that money to invest for the future and to build your emergency fund.
  2. Invest 20% of your net income for long-term growth in a well-diversified equity exchange-traded fund (ETF)***. You’ll find the 20% by completing step one. If you can’t find 20% right away, then start with whatever you can and work your way up to 20%.
  3. Re-invest all the dividends and capital gains that your portfolio generates. Do not spend this money! Your dividends and capital gains will bolster the money that you invest from your paycheque. They will exponentially increase the compound growth of your investments. The result of re-investing dividends and capital gains is having your portfolio growing bigger and faster without any extra work from you.

Consistently investing a portion of your paycheque every time you’re paid will vastly improve the odds that you won’t be homeless, hungry, and cold when you’re a senior citizen. If you follows these 3 steps faithfully, you’ll do very for yourself.

My favourite sibling and I were talking about investments and my sibling stated that I hadn’t optimized my investments over the years. I couldn’t disagree. The truth is that I have made mistakes over the years, and I could’ve made smarter choices sooner. However, I don’t flagellate myself too, too much over the choices I’ve made because no one is perfect. For all of the reading I’ve done and people I’ve talked to, here’s the truth. No one has an ideal investment track record. Every single person could’ve made atleast one better choice at some point. Everyone has made mistakes when it comes to their investment journey.

The only mistake that is fatal to building wealth is never starting. Working paycheque-to-paycheque for a lifetime is pretty much guaranteed to ensure that there is no retirement money waiting for you when employment ends.

Thankfully, that is one mistake that I didn’t make. I’ve been investing since the age of 21. Have I done it in the best way possible? Absolutely not! If I could go back and make different investment choices, you’d better believe that I would do so.

The one area where I didn’t screw myself too badly was in relation to MERs. As soon as I understood what they were, I made sure to lower them as quickly as I could.

Again, if you follow the first 3 steps that I’ve set out, Future You will be very happy.

Optimizing your MERs is simply delving into the minutiae.

Check out this expense ration impact calculator to see the difference that MERs make on your returns. Just for fun, plug in a starting investment of $0, an annual investment of $5200, expected return of 7%, and an investment duration of 30 years. Now, change the expense ratio from 0.04% to 2.75%. Carefully review the difference in the future value of total investment and the total cost of the fund.

Keep playing with this calculator, and use your own numbers. Maybe you’re not starting at $0, or you can’t invest $100/week, or the lowest MER you can find for the ETF you want is 0.35%. The point is that higher MERs mean that you keep less of your money over time. If you lower your MERs, then you will keep more of your money. Your time horizon is decades long and you’ll eventually have a 7-figure portfolio size.

Invest in ETFs with low MERs. When you pay lower MERs, more of your money will remain invested over a long period of time. Money that isn’t paid out as fees will benefit from compound growth. That means it stays in your pocket instead of going to the ETF-provider. Look for ETFs that have MERs of 0.5% or less and try to only buy those. You’ll be doing yourself a huge favour.

MERs shouldn’t be the first thing that you consider when you’re looking for the right ETFs to add to your portfolio. But if you want to optimize the returns on your investments, MERs shouldn’t be ignored either. If you have to choose between two ETFs that will allow you to meet your financial goals, pick the one that has the lower MER.

*** In the interests of transparency, I invest my money in VXC. This ETF is from Vanguard Canada. I like Vanguard because their ETFs have low MERs and they give me the diversification that I need to grow my portfolio over the long-term. I am not recommending that you invest in this ETF. I don’t know your circumstances and I’m not qualified to recommend financial investments to anyone. Do your own research and pick an ETF that will best help you meet your goals. If you do decide to get advice, go to a qualified financial advisor.

Easy Money Is My Very Favourite Kind!

I love money. I always have, mainly because it allows me to buy all sorts of things. Hard money is good too, but easy money is better.

Hard money is the kind you have to sweat for. It’s what shows up in your paycheque after you’ve traded away a portion of your very precious, very limited time here in this world. You’ve shuffled a little bit closer to the end of that mortal coil in exchange for some money.

Great! Fabulous! You made the deal, and you got what you were promised. Hard money is earned through hard work.

Yet… if you’re fortunate enough to learn about it before your days are done, there’s a way for you to also receive easy money. This is the money that you don’t have to work for. It just arrives in your bank account – easy peasy, lemon squeezy. Whether you show up at the office, whether you get out of bed, whether you’re at home, at the top of a mountain, on a beach, or at sea. This money flows into your coffers without you having to do a thing.

Is it obvious yet? Easy money is my very favourite kind.

Some of the people in my family have acquired $44,000 in less than 5 years. How did they do that? It’s quite simple, really. They invested under the following conditions:

  • when the stock market was doing well before COVID-19 arrived;
  • when the market plunged at the start of the pandemic;
  • during the tepid recovery between late 2020 and the end of 2021;
  • during the turbulence of 2022; and
  • they’re still investing in 2023.

My family members invested in the stock market without fail and turned contributions of $21,000 into $44,000 without batting an eye. A minimum of $3,000 per year was invested into broadly diversified equity ETFs in each of the past 5 years. In the past 2 years, the contribution amount increased to $6,000 per year.

The initial $21,000 contribution amount is broken down like this:

  • 2019, 2020, 2021 = $9,000 invested ($3,000/yr into equity-based ETFs)
  • 2022, 2023 = $12,000 invested ($6,000/yr into equity-based ETFs)

Despite the ups and downs in the stock market during those 5 years, the invested money has more than doubled. Not bad… not bad at all. Money went in and it didn’t come out. My family members left it alone to do its thing, and “its thing” was to grow quickly in a short period of time. That’s all, folks. It wasn’t more complicated than that.

Someone had to work to get the initial $21,000, right? That was the hard money that has since been turned into easy money… the additional $23,000 of value that no one had to sweat for.

You can do the same thing for yourself, if you’re so inclined. Can you find $100 per week? That’s $5200 per year. Maybe you can only find $25 per week? That’s $1300 per year.

Whatever you can find, then you start investing with that amount and you move up from there. Wiser minds that mine suggest investing in growth stocks. They have a track record of higher returns. For my part, dividends worked for me but it took a long time to get where I am right now. If I had to go back, I’m not so certain that I would make the same choices. My sack of gold is heavy, but it could’ve been much heavier had I been smarter sooner.

C’est la vie, right?

You’re quite lucky in that you get to decide for yourself whether you want to only earn hard money. If you can read this blog, then you can start to make easy money. Slice off some portion of your paycheque every time you’re paid and send it to your brokerage account. I’d suggest opening a brokerage account at a place that has a list of commission-free ETFs that you can buy. As soon as you can buy one unit of a commission-free ETF, do so. When the dividend or capital gains from that investment rolls in, re-invest it and do not spend it.

You’re building a cash-machine. It will take some time. The dividends and capital gains will be paltry at first. Given time, they will multiply. I’ll never forget the first time my cash-machine spit out $100 in a single month. That was awesome! You know what was even better? The first time it generated $1,000 in a single month! Believe you me, the first $5,000 dividend payment has been the nicest yet.

So start today. You too can earn easy money. And if you love your job, great! No one’s telling you to quit. You can do your job for as long as it makes you happy. Earning easy money in no way eliminates your choice to work. However, if there’s the slightest, tiniest possibility that you might not always enjoy working for hard money, then follow my advice. Take the steps now to earn some sweet, sweet easy money later.

Your Emergency Is On Its Way – Prepare Now!

“I have too much money during this time of emergency!”

No One Ever

If you’ve been paying any kind of attention, you’re no doubt aware that natural disasters have touched many people’s lives in fundamental ways. Threats of fire forced the evacuation of the city of Yellowknife in the summer of 2023. A wildfire in Maui destroyed the city of Lahaina, on the island of Maui. People in both cities are displaced and trying to figure out their next steps. I can’t even begin to imagine the stress and anxiety that they are feeling. However, this blog is about money and protecting yourself for the negative consequences that come with not having any.

Being evacuated from your city is an emergency. It is precisely the kind of situation for which one builds and maintains an emergency fund. The people fleeing from Yellowknife had to convoy along a 12-14 hour trip to next major center. That wasn’t free. They had to pay for gas. Those without family or friends had to pay for accommodation if they weren’t willing to stay in the shelters. With only hours to flee, there wasn’t sufficient time to think of everything. Once in a safe location, they had to pay for food, clothes, toiletries, and pet food. It’s doubtful anyone had budgeted for an evacuation that month. For those working hourly jobs, there’s no more income until they go back to work. The emergency fund exists to cover these costs.

Right now, you should be assessing your emergency fund. Ask yourself some hard questions. Is my emergency fund enough to sustain me if I couldn’t work for a month? If I had to flee from a natural disaster, do I have enough to cover my expenses until I can get back on my feet? And if I don’t, then what am I doing to build my emergency reserves?

Unless you’re one of those very fortunate people who have a year’s worth of expenses tucked away somewhere, you should be adding to your emergency fund every time you’re paid. Even if it’s only $10, $25, $50, add it to your fund and leave it alone. When the day comes that you need to rely on those reserves, you’ll be very happy with yourself that the money is there waiting for you.

In my opinion, emergency funds are not “dead money” sitting in a bank. These aren’t the dollars that are meant to fund your retirement, or your short-term goals. You’re not looking to invest your emergency fund to earn a big return.

Your emergency fund is your safety net.

It is there when your income disappears. It exists so that you don’t go into debt when the universe lobs a grenade that blows up your life. Even if you have insurance and you’re going to be reimbursed, insurance companies sometimes take longer to pay than you may like. They might even try to fight you and you may have to appeal their decision on what is covered and what isn’t. Your emergency fund pays for the necessities while you get yourself re-established.

Even after becoming debt free and building my investment portfolio, I still contribute to my emergency fund. My goal is to have a year’s worth of necessities socked away. If anything goes too terribly off-course, I want the comfort of knowing that I can survive for a year. I’ll be able to make decisions without the pressure of needing to earn money immediately. My emergency fund offers me peace of mind. It gives me time to breathe and to think carefully before making my next move.

There’s no reason to wait. If you have an emergency fund, contribute to it from every paycheque. Every dollar counts. The more you can stuff away during non-emergency times, the better. If you can afford it, save an amount equivalent to your age. Increase the amount when you can. Start your emergency fund today if you don’t already have one. Opening an account is as simple as clicking a few links on any bank’s website. Automatically transfer money from your chequing account to your emergency fund.

There’s an emergency headed your way, but you can’t know when it will arrive. Today is the best time to prepare for it financially. When that emergency eventually hits, finding the money to deal with it should be the last of your concerns. Adding money to your emergency fund is entirely up to you. Choose wisely.

Increasing my Passive Income in a Few Clicks

This week, I gave myself a $600 annual raise. No, I didn’t get a promotion or take a different job. Instead, I simply increased my passive income by buying some bank stock. As I’ve said before, salary and income need not be the same thing. There are always ways to increase your income even if your salary isn’t going up as fast as you want it to.

Normally, I’m not a stock-picker. I love my exchange-traded funds because they pay me dividends every month and I get the benefit of diversification. Another way of saying this is as follows. My ETFs generate passive income, which is my very favourite kind of income.

Allow me to be extremely clear. I bought shares in this bank solely because I’d received a stock tip from my sibling who is very wise and very methodical about certain things. Stock tips that come my way are generally disregarded instantly. Like I said, I’m a believer in ETFs and that’s where I’ve been investing my bi-weekly contributions to my investment portfolio since 2011. So why did I listen to my sibling this time around? Why did I act on this particular stock tip?

First, I understand what banks do. They make money, hand over fist, year-in-year-out. Some of that money is paid out to shareholders in the form of dividends. Given that I’m looking to retire within the next 10 years, I want to build a steady stream of reliable cash flow to fund my retirement. Dividends fit the bill. They also receive preferential tax treatment, which is a nice cherry on top of this tasty sundae!

Secondly, the bank I bought pays over $1/share in dividends 4 times each year. For every share I own, I’ll be making $4 per year. An extra $4/year? Big whoop! Remember that it’s an extra $4 per year per share. The more shares I have, the more dividends I earn. And I’m a huge believer in the dividend re-investment plan, which leads to my third point.

Thirdly, my brokerage will allow me to DRIP the quarterly dividends from this stock. I’ll “only” acquire 2-3 new shares every 90 days from this initial purchase, but each of those DRIP-stocks will also earn over $1 per quarter and will also lead to the purchase of even more bank stock. I’ll be benefiting from exponential growth in the number of shares that I’ll own, which means that my passive income will also be growing exponentially the longer I hold this stock.

Fourthly, the dividend payout of these shares is likely to go up. The bank stock I purchased this week has increased its dividend for the past 5 years, so it is considered a Canadian dividend aristocrat in some quarters. (Check out this article from Million about dividend aristocrats if you’re interested in learning more.) Increases in dividend payout are also known as organic dividend growth, a feature of dividends that I like very, very much.

Fifthly, I can keep earning these ever-increasing dividend amounts forever. I’ve created a beautiful money-making cycle that will continue as long as I’m alive. Unless I shuffle off quickly, this stock purchase should soon be paying me $1000 per year, then $2000, and so on and so on and so on. It’s the beauty of the DRIP meeting compound growth.

Finally, if there comes a time when I need to stop my DRIP and live off these dividends, then I can do so. While I’m always thinking of ways to increase my retirement income, I assure you that I don’t plan to live on the entirety of that income unless I have to. For my whole life, I’ve lived below my means. Presently, I don’t see any reason to stop doing so when I retire. The dividend income from my ETFs and my pension should be enough to cover my expenses when my employer and I part ways. If I don’t need the passive income from my bank stock to live, then I see no reason to stop the DRIP.

To recap, dividends generate passive income. Ergo, dividends are my favourite kind of income. This week, I had the opportunity to increase my passive income so I took it. The benefit is that I’ve increased my annual income and I’ve bought myself a little bit of insurance that I’ll have enough money to pay for things when I’m too old to return to the workforce. In the meantime, I’ll sit back and let the magic of compound growth do its thing via my DRIP. It’s all good!

You Will Either Be Rich or Poor

Future You is going to be rich or poor. The choice is yours.

This post is aimed at those folks who fall between the two ends of the financial spectrum. It’s not for those who are already uber-wealthy, nor is it for those who are living paycheque-to-paycheque. Rather, I’m aiming today’s words at the ones who still have to work to pay their bills, who have some fat to cut from their budgets if necessary. These are the people who still have financial options. Choices made today will determine if they are rich or poor in the future.

Inflation eats away at everyone’s spending power. It is imperative that you accept this concept when thinking about Future You’s finances. Prices go up over time. The 18 months prior to this post have been particularly challenging because inflation was nearing the double-digits. Everyone saw prices increase at a phenomenal rate, while their paycheques were not keeping pace. While a 4% raise is always nice, it can hardly compete with 8% inflation everywhere else.

So while inflation has “slowed” as the economists like to tell us, it’s still around. And it’s not going away. Prices are still going up but they’re simply going up more slowly.

The Book-Ends of the Money Spectrum

As I stated to at the beginning, this post is not for the uber-wealthy. They have lots and lots and lots of extra fat in their budgets. Increases in the prices for groceries, gas, utilities, and shelter will have no impact on their lives. No one will be crying the blues for the wealthy ones.

People at the other end of the spectrum are the ones who are living paycheque-to-paycheque. They work, and they earn, and their paycheques are gone in a heartbeat to pay for the cost of living as soon as they land in the bank. After shelter, food, gas, and bills, the P2P-group has very little, if anything, leftover. These good folks are in a legitimately terrible situation. They’ve already cut out the “little extras” and are still barely making it. I don’t have any good suggestions to easily fix their situations.

The rest of the folks land between these two ends of the spectrum. These are the ones who will either be rich or who will be poor. It all depends on whether they invest some of their disposable income into income-generating assets.

Financial Assets Move You Towards The Wealthy End

I’ve spent many decades reading financial articles, websites, and blogs. The one lesson I’ve learned over all this time is that successfully investing for cashflow takes some time but it pays off in the long-run. I chose dividends and I’ve stuck with dividend-investing since 2011. I’ve made plenty of mistakes and my choices were not perfect. That said, my army of money soldiers will help me to weather inflation’s impact on my future income. My employer is not interested in giving me 7% salary increases every year, no matter who hard I work. Yet, my costs of living will continue to rise as inflation inexorably moves forward. I could get another job, but I really don’t want to.

Instead, I’ll have my dividends do the heavy lifting for me.

Years ago, I set up an automatic dividend re-investment plan, aka: DRIP. As my dividends were paid out each month, I would DRIP them into more dividends. Between the DRIP amount and my regular monthly contributions, I was compounding the number of dividends that I was buying each month. Every dividend that I owned paid me a few cents each month. Naturally, I only earned a few dollars each month when I started in 2011. It was hardly enough to buy a cup of coffee. However, it only took a few years before my dividends were generating $1,000 per month for me. And a few years later, they were generating $2,000 each month.

Believe me when I say that an extra $24K per year is more than a 4% raise from my employer. Thankfully, I was one of the people who lived between the extreme ends of the spectrum. After food, shelter, transportation, and utilities, I had enough money leftover for investing and other things. My choice was to invest before paying for the others things, aka: travel, theatre subscriptions, and whatever other non-necessity happened to catch my eye.

Looking back now, I’m very happy that Young Blue Lobster understood that investing was the only way to stay ahead of inflation. Young Blue Lobster intuitively knew that it was perilous to count on an employer, and that increasing one’s income is the responsibility of the person earning it.

Inflation Will Move You Towards Poverty

If you have the means to do so and you choose not to invest, then you are making the choice to let inflation push you into poverty. What used to be affordable becomes less and less so over time. The fact that you can’t afford something is not going to motivate retailers to drop the price. Waiting for the government to “fix inflation” is not a great move either. It’s best that you assume prices will go up faster than your paycheque will increase. Once that first step has been taken, your next best move is to start investing part of every paycheque for long-term growth.

Your investment portfolio will eventually grow to a sizeable amount, and its annual increase in size will outpace your salary gains, whatever they are. The more you invest and the sooner you invest, the bigger and sooner those gains will be. Other than telling you to win a lottery jackpot, I have no feasible ideas on how to earn big money quickly. What I do know, from personal experience, is that buying into the stock market on a consistent basis for many years and always re-investing the dividends (and capital gains) has meant that my annual income has increased far beyond anything my employer has given me. And since I’m on a DRIP, those increases will continue for as long as I’m alive because of the power of compounding and organic dividend growth.

Never forget that there are many forms of income and your employer only controls your salary. Unless you’re already living paycheque-to-paycheque, you owe it to Future You to invest some of your money. Be proactive. Start slicing the fat from your budget today and investing it wisely so that you, not inflation, control when, where, and how to make adjustments to your budget.

Using a Cash Machine to Fund Your Dreams

This weekend, I happened across a wonderful video about building a cash machine to fund dreams. It was created by a YouTuber that I discovered about 2 months ago. She goes under the handle “The Dividend Dream” and I’ve learned a lot from her videos. The one that I’ve bookmarked in my Favorites folder is the one about how she plans to use her dividends to buy a beach house.

Mind blown! What?!?!?!

Anyway, I want to unpack some of the things she talks about in this video. Feel free to watch the video first or watch it after you’ve read my Sunday afternoon ramblings. Just so you know, I’ve watched her video several times already and plan to watch it a few more times. Her example is one that I hope to follow because I think it’s repeatable for anyone, both on a large scale and a small one. Your mileage may vary.

Poor People Thinking

As explained by the TDD, poor people thinking is to earn, cut expenses, save up money, and use that money to pay off debt. This isn’t a terrible plan. Truthfully, it’s a bajillion times better than staying in debt and paying unlimited amount of interest to creditors over your lifetime.

However, it’s not an optimized plan. Poor people thinking doesn’t allow for the creation and maintenance of a cash machine.

If you watch TDD’s video, you’ll hear her say that she started a brokerage account to save up enough to pay off her mortgage. She doesn’t say how long it took her to save up $425,000, but that doesn’t matter. The point is that she started to save and invest her money in dividend-paying stocks. While she was investing her money, she continued to learn strategies for optimizing her wealth. In other words, she never stopped learning. By the time her mortgage was down to $430,000 and her mortgage-payoff account was up to a balance of $425,000, her MPA was earning $23,677 annually in dividends. Her mortgage payment amount was $22,404.

By this point, TDD realized that her MPA could pay her mortgage payments every month. Eventually, her mortgage would be paid and she would continue to earn $23,677 in dividends every year. In fact, she would earn more than that because she would still be investing money into her MPA thereby earning more dividends.

TDD had transitioned to rich people thinking.

Rich People Thinking

While it’s rarely called by this moniker, rich people thinking is to create a cash machine that will pay for life’s expenses. In TDD’s case, her MPA is a cash machine. It generates enough money to pay for her mortgage every month until her mortgage is gone. When that $430K debt is out of her life, she will still have an intact cash machine that will pay her over $23K in dividends every year.

I’m not suggesting that it’s super-fast to invest enough money to generate $23K every year. Of course not! I’m living proof of that. I started investing 30 years ago, and am only now on the edge of earning $40K per year from my portfolio. I made a lot of mistakes over the years, but mid-5 figures of dividends isn’t to shabby.

However, when I started, it didn’t take very long to earn $18 per month. That’s enough to cover my Netflix bill each month. By the following year, I could’ve covered Netflix and something else***. Go and watch TDD’s video and pay attention to the main lesson: once the cash machine is paying for an expense, it will continue to do so forever.

Your assignment, should you choose to accept it, is to start building your own cash machine. Do not be discouraged by how long it will take! Start with small goals and move up from there. The magic of compound interest takes times to impress. Going from $1 of dividends per month to $2 won’t exactly blow your socks off. That’s just a taste of better things to come. Believe me when I tell you that I was very pleased the first time I earned $1,000 worth of dividends in a month. The first time I earned over $5,000 in a month was even better. And now that my portfolio generates more than a full-time employee earning minimum wage in my province ($15/hr)… well, let’s just say that I do very much believe in the power of my cash machine.

*** In the interests of clarity, I will admit that I didn’t spend my dividends…and I still don’t. Instead, I re-invested them automatically through a dividend re-investment plan. What I do instead is track my annual expenses against my monthly dividend payments. Symbolically, my dividends currently pay for 97% of my current expenses. This is a huge jump from only 4.5 years ago! And I’m still investing a chunk of each paycheque on a monthly basis.

When I retire, my cash machine will cover all of my life’s expenses. If I continue to invest a little bit each month, then it will still continue to grow and kick off even more dividends each year.

Your cash machine can do the same thing for you. All you have to do is feed it consistently by investing a part of every paycheque until its returns are enough to cover your expenses. So go back to the start of this article and watch TDD’s video, then watch it a few more times. Do what TDD and I have done and reap the rewards. You’re welcome!

30 Years of DIY-Investing Has Paid Off

When you know better, you do better.

Maya Angelou

This past weekend, I celebrated a rather significant birthday. It was also the 30-year anniversary of when I started my investing journey. As I’m wont to do on my birthday, I considered where I was when I started investing my money and just how far I’ve come on my own. I’m pretty proud of what I’ve accomplished. My parents were smart, but they weren’t rich and they couldn’t teach me what they didn’t know. I learned a lot from books and magazines, then from websites and blogs. As I graduated and earned more, I paid off my debt and invested in the stock market. I was even a landlord up until recently.

Did I do everything perfectly? Hell, no!

To be very clear, I am an amateur investor. That means I don’t have any kind of certification to underpin the choices I’ve made. My financial wisdom comes from lived experience and personal observations. I haven’t been qualified by any governing authority to hold myself out as an expert. I’m an amateur who is going to spout a few words at you.

Take what you need and leave the rest.

Best Moves I Ever Made!

One of the things that I did right was to rely on automation. When my paycheque hit my chequing account, my automatic transfer kicked in to whisk atleast $50 away and into my investment account. From there, I bought mutual funds. When I learned better, I started buying exchange traded funds. First, my contributions all went into filling my Registered Retirement Savings Plan. Then the government introduced the Tax Free Savings Account so my priority each year was to fill up my RRSP and my TFSA. Once I was in a position to fill those registered accounts each year, I turned my attention to investing in a non-registered investment account.

Each year, my employer gave me a slight raise. As my income increased, so did my contribution amount. What’s that old saying? Earn $3, invest $2? Maybe that’s just something I say to myself. In any event, my contribution amount increased each year. In other words, I continued to live below my means even as my means got smaller.

I also used automation to build my emergency fund. Even today, I still send a couple of hundred bucks to my Rainy Day Fund. When I was younger, I’d been told that $10,000 was enough. And then I learned that I should have 3-6 months of expenses tucked away. Today, I’m aiming for a year’s worth of expenses. If anything goes seriously wrong, I can live off my emergency fund for a full year before I have to stop my dividend re-investment plan in order to live off my dividends.

The second smartest thing I did after harnessing the power of automation was to get out of debt. I had about $15K in student loans when I graduated. By saying “No” to myself, a lot, I was able to knock that out in 2 years. Then I turned my attention to paying off my car loan within 3 years. I drove my little navy blue car for 8 years then bought my first SUV. I took out another loan, but sacrificed and lived very small so that I could pay that loan off in 6 months. It wasn’t fun, but it was short term pain for long-term gain.

For those keeping track, the third smart thing I did was to live most of my adult life without a car payment. In my circumstances, a vehicle is a means of transporting my body and my stuff from A to B. It’s only transportation and I see no reason to pay a loan to do so. When I had loans, I figured out ways to pay them off as fast as I could. My vehicles seem to ride better when they’re not weighing me down with debt.

By paying off my SUV in 6 months instead of 5 years, I have 13.5 years of living without a car payment. Yeah… I kept that SUV for 14 years. I would’ve kept it longer but it was a 5-speed manual and my left knee was starting to give me trouble. At the point when I felt I couldn’t safely drive my own SUV, I sold it and bought another one with cold, hard cash.

The fourth smartest move I’ve made is to buy-and-hold. Some of my stocks are the ones that my parents bought for me as a baby. I’ve had those for over half a century. They still pay me dividends every quarter. Maybe $500 per year? Again, my parents weren’t wealthy. The dividend payments aren’t enough to buy more shares, so I re-invest the money rather than spend it.

My other holdings are ones I’ve had for 10+ years. What used to be in a mutual fund with a management expense ratio of 1.76% is now in an ETF with an MER of 0.22%. After all, why would I pay the investment company 1.54% more than I have to for the same product?

In terms of category of investment, I’ve had some for 30 years. Like I said above, my dividend stream is finally enough to support me. That’s the result of my buy-and-hold philosophy.

My fifth best move was to hire an accountant. I’ve owned a few rental properties over the years. She knows tax stuff much better than I do. My accountant has made sure that I don’t get in trouble with Canada Revenue Agency. For that, she is worth every penny. She also answers questions about the tax implications of some of my investing ideas. That information has also saved me from making some big mistakes!

Mistakes? Yeah… I’ve Made A Few!

In terms of mistakes, I made a doozy. Early on, I fell in love with the idea of creating a cashflow of dividends to supplement my pension. Sears went into receivership early in my career and I heard the stories of retirees having their pensions cut. The mess at Nortel also shone a light on how pensioners are at the mercy of their employers’ continued corporate success. I wanted to minimize the chances of my retirement income being disturbed if my pension was cut. So I chose to invest in dividend-paying mutual funds and ETFs.

The smarter play would’ve been to invest in equity-based investment products. Between 2009 and 2022, the stock market was on a tear. That means it was growing and growing, year over year. My dividend products were growing too, but not at the rate of the growth products. I would’ve been far better off investing in equity-products. I finally got smart in October of 2020 and have been investing in VXC ever since.

I didn’t sell my dividend-payers!!! After 12 solid years of investing in dividend products, I’ve got a nice secondary cash flow and it’s growing nicely year over year thanks to my DRIP. It would make no sense to sell those investments just to start from scratch in VXC.

God-willing, I’ve got another 30+ years ahead of me. I’ll continue to invest in equity-based products until I don’t need to invest anymore. Presently, I’m considering the wisdom of using my monthly dividends to bolster my monthly contributions to VXC. I would have to give up the DRIP in order to do so but maybe that’s the smart thing to do since the market is currently low and starting to move back up. Buy low – hold forever. That’s kind of been my plan throughout this self-taught investing journey of mine.

My second biggest mistake with money was being too rigid. I know how that sounds. Sticking to my plan and investing consistently is what has helped me reach the Double Comma Club. That said, I was recently asked if I had any regrets about how I’ve handled money to date. For the most part, I’m good with the choices I’ve made. However, you can’t get to my age and not have atleast one or two regreats.

Looking back, I do miss that I didn’t go to a second cousin’s wedding in Paris. Truthfully, I’m not certain how I got invited since we hadn’t grown up together nor had spent much time together as adults. That said, I had just gotten home from Europe when the invitation arrived. I consulted my budget and there was no way to afford to travel to her wedding without going into debt, so I declined the invitation … (big sigh goes here) … Looking back now, I should’ve gone into debt and gone to the wedding. The debt would’ve been paid off within a few months and I would’ve met some interesting people at the wedding. Did I mention the wedding was in Paris? The City of Lights?

Since then, I’ve been thinking more about what I want my money to do for me today. My portfolio is humming along nicely. My total DRIP almost exceeds what I contribute from my paycheque. I can afford to indulge myself a little bit more when unexpected money shows up. I’m correcting the mistake of being too tight-fisted with my money. In the words of Ramit Sethi, I am learning to craft and build the rich life that I want for myself.

My third biggest mistake is thinking I know better. It’s the sin of hubris. I haven’t always listened when I should, and I certainly haven’t always applied all of the lessons correctly. However, I know this is one of my flaws and I’m working to correct it. No one makes the right choices every single time. That said, I can make better choices for myself if I’m willing to be a little more open-minded and consider viewpoints that are different from my own.

I should have spent less time on Netflix and more time learning from people who’ve done exceedingly well with their portfolios:

This is an error that has cost me dearly, but I’m aware of it now. I choose to do better.

My fourth biggest mistake was paying off my house early. When I sold my first two rental properties, I should have lump-sum invested the money into the market via ETFs. Instead, I chose to pay off my mortgage because I wanted to be debt-free as soon as possible.

I realize now that my mortgage would’ve been paid in due course. I got my first mortgage in 2001, and history instructs that mortgage rates continued to fall until 2022. Looking back, I should’ve renewed my mortgage every 5 years. I would’ve gotten a lower rate each time. I could’ve been paying a mortgage while investing, even though my contributions would’ve been smaller due to having to pay for my house.

Shoulda – coulda – woulda… Too late smart and all that jazz. I still did okay. Those former mortgage payments were re-directed to investing for my future. I had to choose between two sacks of gold, so I shouldn’t complain.

Finally, one of my biggest mistakes is thinking that I knew enough to be a successful landlord. If I had to do it all over again, I would’ve learned to crunch the numbers better before buying my rental properties. The first two properties were a cinch to sell – due to the market, not due to my acumen – and they netted me enough money to pay off the mortgage on my home. The third property was not a good investment for me, despite what I thought at the time. I relied on hope… and hope is not a plan. When I finally sold my last property, I did not make money. It wasn’t ideal, but it also wasn’t the end of the world.

And That’s It.

That’s my list of great moves and big mistakes which have gotten me to this point. If I could go back, I would invest in equity-based ETFs from the get-go. Further, I would’ve gone to see a fee-only financial adviser way sooner to set me up on a plan for my money. Having an objective voice and someone to check my progress along the way would’ve been a good idea. In terms of rental property, I would’ve done a lot more research and learned how to crunch the numbers.

Mistakes? Yes – I’ve made a few. They weren’t the end of the world, and my smart choices have balanced them out. Despite a few missteps here and there, I think I’m going to be just fine. Not bad for 30 years of DIY-investing.