Debt elimination - Millionaire on the Prairie

Three Simple Steps to Master Your Money.

At the time of publishing this post, there are less than 60 days left in 2024. You might want to start thinking about your dreams and goals for the new year. Whatever yours are, I’m going to suggest that learning to master your money should be one of your goals. After all, you’re the person earning the money and you should be firmly in control of what your money does. Trust me. Life is better is when your money works harder for you than you do for it.

There’s no need to wait until January 1 to make the following suggested changes. Believe me when I say that you’ll want to master your money sooner rather than later. Start today.

If you’re a person who likes to make resolutions, then you can implement these three steps on New Year’s Day. Everyone else, I would strongly encourage you to do start following these steps immediately.

Top Up Your Emergency Fund

The goal is to have one year’s worth of necessary expenses set aside. I know that most experts recommend 3-6 months’ worth of expenses. Personally, I don’t believe that this is enough. You’re free to disagree with me, of course. The reality is that it’s better to have a bigger emergency fund than you might need. When your income disappears, you’ll want to have as much set aside as possible to tide you over until you get another paycheque.

Your next job might pay you less than you were earning before. It might take you longer than 6 months to find your next position, or to start earning money from your own business. Being unemployed is a bad situation. Going into debt to pay for living expenses while unemployed makes the situation considerably worse.

Do yourself a favor and set aside more than you need. Your necessary expenses are your shelter costs, your basic utilities, your food, your transportation, your medications, and your phone. If you have pets, then you need to cover their costs too. Everything else should be put on hiatus until you get another source of income.

For most people, it will take some time to hit this target. Setting aside a year’s worth of expenses won’t be quick. There will be many, many temptations along the way to spend re-direct money away from the task of building your emergency fund. Do yourself a favor. Set up an automatic transfer from your chequing account to your emergency fund. This way, you don’t have to think about funding your future emergencies as it will happen automatically through the magic of technology.

Invest Your Money

First things first – track your expenses. Ideally, you’ll do this for a month. Write down what you spend. Figure out which expenses were necessary (see above) and which ones weren’t. Of the second group, identify the ones that don’t make you happy and promise yourself to eliminate those ones in the future.

Whatever money is cut needs to be re-directed towards your investment portfolio. Your investment portfolio consists of registered accounts and your brokerage account. Your registered accounts are your Tax Free Savings Account (TFSA) and your Registered Retirement Savings Plan (RRSP).

Fill your registered accounts before you start contributing to your brokerage account. The TFSA will not generate a tax deduction but the money will grow tax-free forever. You can also withdraw money from your TFSA without paying taxes. The RRSP money is tax-deductible, and money inside an RRSP will grow tax-free. Once you start to withdraw the money, you’ll pay taxes on it. Fill your TFSA to its limit, then focus on filling your RRSP.

Once you’ve filled your registered accounts, then you can open a brokerage account and re-direct your investment contribution. Money invested in your brokerage account is not tax-deductible, and you do have to pay taxes on it every year. Ideally, you’ll be investing in securities that generate dividends and capital gains for you. Dividends and capital gains are not taxed as heavily as interest earned in a bank account or from GICs.

Follow this order of investing every year: TFSA -> RRSP -> Brokerage Account.

If you’re starting from scratch, it might take you a few years to fill up the registered accounts. That doesn’t matter. You’re trying to build a nice, fat money cushion for Future You. Consistency is key, so don’t worry about how long it will take. Just start today and don’t stop.

Pay Off Debt

Ridding yourself of debt is just as important as long-term investing. I don’t want you sacrificing one for the other because you need time on your side. You need to have money invested so it can compound for as long as long possible. This is why you should be investing at the same time that you’re paying off debt.

After you’ve eliminated the debt, you will have a hard-working investment portfolio in place. This is a wonderful thing! It means you won’t be starting from $0 if your debts aren’t gone until you hit your 50s or 60s.

Tighten your belt and learn to say “No”. If you have debt, then I want you to do the following.

Take half of your contribution amount and direct it towards your debt. Allow me to be very clear. You’re already paying the minimums on your debts every month. Half of amount that would’ve otherwise gone to your investments will be added to the minimum payment of one of your debts. An increased payment dramatically shortens the time it will take to pay off a debt. Once debt #1 is gone, add that entire former payment from debt #1 to the minimum payment of debt #2. When debt #2 disappears, add the entire former payment that was going to debt #2 to the minimum payment for debt #3. Repeat this cycle until all of you’ve paid off all of your debts.

Do not get bogged down in deciding whether to use the Debt Snowball Method or Debt Avalanche Method. It truly doesn’t matter. The only thing that matters is your decision to start paying down your debt today.

Both methods will get your out of debt. Personally, I like the Snowball Method since it eliminates the smaller debts first. Paying down debt sucks, so seeing wins as soon as possible makes people feel good.

Once you’ve paid off your debts, take the former debt payments and re-direct them to your registered accounts and your brokerage account.

That’s It. That’s the Plan.

Once you’re out of debt, stay out. Save up for large purchases so that you don’t have to finance them. The one exception is your mortgage. Even I will admit that this is the one purchase where financing is nearly unavoidable without a lottery win, a big insurance settlement, or an inheritance.

Keep your emergency fund fully-funded. If you need to use it, then make it a priority to build it back up again. Life can be funny. There’s no rule saying that only one emergency is headed your way.

Invest for the long-term. Put your money into well-diversified, equity-based securities. Personally, I like exchange traded funds (ETFs) more than I like mutual funds. For nearly the same security, ETFs will cost you atleast 80% less. Read The Simple Path to Wealth by JL Collins. While it’s written for an American audience, the savings & investing principles are equally applicable to Canadians.

You’re already doing all of these things, you say? Fantastic! Use this time to tweak your system, if necessary. Consider increasing your emergency fund by 3%, just to keep up with inflation. It’s never a bad idea to increase your contributions to your brokerage account by an additional 1%. Taking this step every year will make a big difference in how much your accumulate. It bears repeating – once your debt is gone, keep it gone.

That’s it – that’s the plan to master your money. If you do these three things, then you’ll be setting yourself up for success.

Everything else is details.

Buy and Hold – This Strategy Works Exceedingly Well

***** First off, I am not a licensed financial advisor. I don’t hold any of the designations and I’m not an expert in telling people which investments are best for their particular situations. This post is about what has worked for me. It is in no way a guarantee, warranty, or promise that my chosen investment products will work just as well for you.

Now, with that out of the way, let’s get to it…

I’ve used the buy and hold strategy for my entire investing life. This strategy is far less risky than trying to time the market. Market timing as an investing strategy is too intense for my tastes, so I don’t do it. I have little faith in my ability to buy the perfect stock at the perfect time and to also sell it at the optimum moment. In hindsight, I can confidently state that the buy and hold strategy has worked exceedingly well for me. This is most likely due to the fact that I’m something of a passive investor and this method required very few decisions from me. These were the 4 main questions that I asked myself when I started oh-so-many-moons ago.

How much would I commit to investing from every paycheque?
When would I set up my automatic savings plan?
Which exchange traded funds did I want to buy with my automatic savings?
Would I be willing to increase the savings amount each time I paid off a debt or got a raise?

That’s it. Those were the questions that helped me to put my buy and hold investing strategy into action.

Question 1 – How much?

I started my investment journey with $50 from each paycheque. It was easy at the time. I was living at home, so my parents paid for the majority of my life. I had to cover my entertainment with money earned at a part-time job. Everything else was paid for by my folks. That $50 was roughly a third of my bi-weekly paycheque, but I’ve never been a big spender so it wasn’t a hardship.

As I finished school and moved into my career, that savings amount went up. Since I’m a person who drives my vehicles for a very long time, I have years and years between car loans. I kept my Oldsmobile Alero for 8 years, and the loan lasted for 5 of those years. The Alero was eventually replaced by an SUV, whose loan was paid off in 6 months. I kept my SUV for 14 years, and would still be driving it but for knee problems that make it kind of unsafe for me to be working a clutch in traffic. (I still love my SUV and made sure that it went to a good home when I sold it.) Last fall, I purchased my current vehicle in cash. It was a big sum and I didn’t particularly enjoy handing it over, but I really, really, really hate car payments.

Once they were eliminated, former car payments were directed towards my investment accounts. They became RRSP and TFSA contributions. Within a few years of ridding myself of car payments, I was able to make the maximum annual contributions to both my RRSP and my TFSA. No more big rollover balances for this Blue Lobster!

The same thing happened after I paid off my mortgage – my savings amount shot up again! Think about how much you pay for your mortgage or rent. If you didn’t have to pay that every month, don’t you think it would be easier to find the money to invest?

Today, I’m at a very comfortable bi-weekly savings rate, many times higher than the one I started with so long ago.

Question 2 – when to start the automatic savings program?

“Right now.”

In my case, that’s not exactly true. When I was saving my $50 every two weeks, I would actually go to a bank machine and to the transfer myself. (Yes – I’m older than online banking.) I would punch in my numbers and manually transfer the money from my chequing account to my savings account. At the time, I was in high school so I didn’t know about exchange traded funds or mutual funds, or other kinds of investment products. All I knew about were savings account so that’s where my money went.

When online banking became a reality in my life, one of the first things I did was set up an automatic transfer. The money from each paycheque was sent where it needed to go. I’ve had the benefit of using automatic transfers for more than half my life. This means that I don’t have to face the choice of whether to save & invest my money every time I get paid. That question was asked and answered decades ago. No need to ask it again.

As the years passed and I learned more, I put more automatic transfers in place so that each of my priorities and goals could be funded. My RRSP and TFSA contributions were invested in the securities I had chosen. My buy and hold strategy went into action, and I didn’t look back.

Question 3 – What did I buy?

Ah… now we come to one of my biggest investing mistakes. I invested in dividend-paying mutual funds… then, later on, I switched to dividend-paying exchange traded funds (ETFs). The switch occurred because ETFs have management expense ratios that are so much lower than those that come with mutual funds. The management expense ratio (MER) is the on-going cost paid for owning mutual funds and ETFs.

Words to the wise – the MERs on mutual funds are almost always higher than the MERs on ETFs.

I thought of my dividend-paying securities like anything else. Why pay more for the same thing? If I can buy the same 2L carton of milk for two different prices, then I’m going to buy the one that costs less. The same logic applied to my investment products. When I learned about ETFs, I made the switch and didn’t look back.

For decades, I invested my money each month into dividend-payers. My thought was to ensure that I had a steady stream of income in retirements. Dividends receive favourable tax-treatment, i.e. they’re taxed must lower than interest earned on GICs or employment income. Secondly, I could participate in dividend re-investment programs (DRIPs). This meant that all of my dividends were automatically re-invested into buying even more dividend-payers. Compound growth for the win!

Sounds like a great plan, right? Well, I should have been investing into straight equity products. The stock market’s return outpaced what I earned from my dividend-payers. Even with the volatility of a regular stock market, and the crashes that happened in 2001, 2008 and 2020, I would have been so much farther ahead if I had just invested in straight equity ETFs.

Ah well… coulda, woulda, shoulda…

My saving grace lies in the fact that I was using the buy and hold strategy.

Was I buying the wrong thing? In hindsight, yes.
Did I hang onto my investments once purchased, and thereby benefit from compound growth? Again, also yes.
Has the buy and hold strategy worked wonders for me despite my big mistake? Yes!

Question 4 – did I increase my savings amount over time?

You bet your sweet patootie I did!

When I was younger, I had a lot more debt. I graduated with student loans, and I’ve taken out 2 car loans in my life. On top of that, I had a mortgage. My employer has given me raises over the years, but none of those matched inflation.

The “extra” money for my buy and hold strategy always came from not replacing one debt with new debt. Once my student loans were gone, that money was available to be invested. As my car loans and my mortgage were paid off, that money was also re-directed towards my investments.

Now, I’m going to admit that I used part of each former payment to bolster my day-to-day living too. I think I was paying $650 or $750 every two weeks for my mortgage way back in 2006. (And I realize that those numbers are downright paltry compared to the mortgage payments some people are paying today.) However, at the time, they were a big chunk of my paycheque so I was glad to see them go.

At the time, I chose to send $500 of each former payment to my investments and the remainder – whether $150 or $250 – stayed in my chequing account for the little extras. In short, each time I paid off a debt, I re-directed the majority of that former payment to my wants while the bulk of the payment went to my investments. No one is promised tomorrow, but that’s no excuse not to save for it.

The buy and hold strategy has worked exceedingly well for me. I have no reason to believe that it won’t work for you so long as you have a little bit of money to invest. You need not be an expert to start investing. It’s okay if you learn along the way. I did. I had to make tweaks here and there, as I grew more knowledgeable. They key was to start and to never stop. If you have a few bucks to invest each month, you should do so.

Time to Take a Breath

Welcome back! How are you doing? What’s been troubling you financially? Maybe it’s time to take a breath?

It’s been kind of a crazy time for the past few months, hasn’t it? All the headlines and media platforms are screaming about inflation and debt and financial turmoil. No fun for anyone, right? They’ve amped up the financial fear to the next level, and it’s normal to be troubled by that.

I want you to take a breath, maybe even take two breaths. Turn off the media and news reports for 24 hours. Trust me. The bad news will still be there tomorrow. If you miss one day of it, you’ll be helping yourself and no harm will come to the one delivering the bad news to you. Take a breath – relax.

Get Back to Basics

You cannot change the interest rates, and you’re not going to single-handedly bring down the rate of inflation. Those things are out of your control. However, you do hold the power to pay attention to your own financial situation. Focus on your sphere of influence.

Start by ensuring that you’re still living below your means. If you’re not tracking your expenses, start. And if you’re already tracking them, keep doing so. It’s the only way to know where your money is going. Make sure that you’re not spending every nickel. Whatever you don’t spend should split between your emergency fund, debt repayment, and investing for long-term growth.

Inflation is problematic for all of us. What can you do to limit its impact on your life? If you have the space, try bulk buying of staples. Switch to a cheaper grocery store. Try the generic products and see if they’ll do. Cut back on the number of streaming services.

One of the best ways I’ve found to save money is to stay at home. And I know this one might be tough, considering that we’ve just emerged from 2-years of pandemic-related lockdowns and limitations. However, the reality is that staying at home helps me to not spend money. I’ve got the entire library available to me on my tablet, so I can read to my heart’s content. I watch movies on my streaming services. My neighbours are friendly so I get a chance to chat with them while tending my garden. And my garden is a delight since everything is in bloom.

Obviously, I don’t know where you live or what your circumstances are. However, I’m still going to suggest that you consider staying home a tiny bit more than you already do and assess whether this step will keep a touch more money in your wallet. And if doing so doesn’t work for you, then go out. (Please wear a mask though – as of today’s post, the pandemic isn’t over!)

Get Out of Debt

Like I said above, you can’t control the interest rates. Banks are quick to raise rates in line with increases from the central bank. This means that you’re paying more for your variable rate loans – things like your line of credit and variable rate mortgages. I haven’t yet heard of credit card companies jacking their interest rates, but it wouldn’t surprise me if they did.

Again, take a breath. Relax.

Go back to what I said about tracking your expenses. Find the extra money, and apply a portion of it to your debts. You’ll have to make your minimum monthly payments, just like you were doing previously. The extra money will become an extra debt payment.

Very importantly, don’t take on any new debt. This might not always be possible, but you’d be doing yourself a very huge favor if you moved Heaven and Earth to avoid acquiring any new debt.

Whether you use the debt snowball or the debt avalanche is up to you. Both of them will get you out of debt. Once you’re out, stay out.

Build Your Emergency Fund

Your emergency fund probably needs to be bigger.

Relax – take a breath. You can do this too. It won’t happen overnight but it will happen in less time than you think.

Take a portion of that extra money and automatically send it to your emergency fund. I really don’t care how much you contribute. I’d suggest $50 per week, but start with what you can and work your way up. There is an emergency in your future and the odds are very, very good that it will have some kind of financial component.

The time to prepare for it is now. So take a breath. Review your automatic transfer to your emergency fund. Can you increase that amount? Even by $1? The more you can save today, the more grateful you will be tomorrow when you need the money.

As your debts are paid off, use a quarter of those former debt payments to fund your emergency fund. (The other three quarters will be re-directed towards the other outstanding debts, as per the debt snowball or debt avalanche method.) Your debts will eventually disappear, and your emergency fund will be growing at the same time. This is a very good thing.

Invest for Long-Term Growth

The third part of that extra money you found is going to be invested in the stock market for long-term growth.

You’re going to ignore the media. Over the long term, the stock market goes up. Full stop.

You’re investing for decades, not for weeks or months. What happens in the short-term is almost irrelevant. Again, you’re investing for decades. So set up your automatic contribution to your investment portfolio, re-balance it every year, and go on about the rest of your life. Compound interest works best with a long time horizon and steady, consistent monetary contributions.

In the interests of transparency, I can say that I started to focus on my investment portfolio in 2011. I chose to invest in dividend-paying exchange-traded funds. I’m happy to share that I’m on track to earn $30,000 in dividends this year, barring dividend cuts. I’ve learned to ignore the Talking Heads of the Media and to focus on ensuring that I did my part, i.e. using automatic contributions to fund my investment portfolio. Had I known then what I know now, I would’ve invested in well-diversified equity-based ETFs and I would’ve benefitted from even higher returns.

I’m strongly urging you to set up your investment portfolio. If you’ve already done so, then continue to make consistent contributions. So long as you don’t add new ones, your debts will go away. There will come a point when your emergency fund holds 6-12 months’ worth of expenses. At the point, you can use re-direct two-thirds of the former debt payment & emergency fund contributions to investing. The other one third can be used to pay for the nice-to-have’s.

Take a Breath.

Step back from the news for a day, maybe two. The chin-wag of the media isn’t tailored to your personal finances, so you ought not give it too, too much attention. You have a plan for surviving today’s turbulent times. Focus on what’s within your power to control.

Relax.

Do You Have a Car Fund?

A car fund is a tool that will help you stay out of debt. Avoiding car payments is a great way to keep your financial stress to minimum. Your car fund is the place where you save money for your next vehicle. It’s a sinking fund dedicated to the purchase of your next motorized chariot.

Pay cash. I can’t be any clearer than that. Keep saving for as long as it takes you to have enough cash to pay for your next vehicle.

Once you’ve bought a vehicle, continue making that same payment to your car fund. Whatever you’re driving now will not last forever – all vehicles eventually need to be replaced.

How much should you be contributing to your car fund?

That’s an easy one to answer. Go to any car manufacturer’s website and use their loan calculator to determine the monthly payment for the vehicle that you want. That’s the amount that should be going into your car fund every month. If you were planning on making bi-weekly payments on a car loan, then arrange to have that bi-weekly payment sent to your bank account.

This method serves two purposes. First, it will assist you to build the savings needed to pay cash for your next vehicle. While it’s obvious, I’ll say it anyway so that there’s no room for misunderstandings. The more you save, the faster your pile of money will grow. Secondly, and less obviously, saving your car payments in advance of purchase allows you to experience the real-time effects of a car payment on your current budget. If the calculator says your car payment is going to be $600 per month, then that’s the amount you set aside every month.

If you had taken a loan, you’d be making that $600 payment to the creditor. Making payments to yourself tells you whether your budget would’ve been able to handle a payment of that size. By saving the money in advance, the impact on your budget is the same – you’re still giving up the use of that money. The fact that the money is going into your car fund doesn’t alter the fact that you’re not at liberty to spend that money on something else.

Can your budget handle a car payment?

You’ll quickly get the answer to this question by setting aside this chunk of money in advance of your purchase. Either you’ll be able to comfortably live on the whatever’s left over after the contribution to the car fund, or you won’t.

So if the answer to the last question is yes, great – keep saving until you have enough cash to buy the vehicle outright.

Should the answer to the question be no, then you’ve got some decisions to make about your money. Maybe you want to consider buying a less expensive car. Alternatively, you may decide to simply save your money over a longer period of time so you can get the vehicle that you really want. There’s also the option of getting a part-time job, or finding a side hustle, that will bolster your contributions to your car fund.

Avoid taking out a car loan if at all possible. Incurring that kind of financial stress won’t make your life better. Instead, pick a cheaper vehicle and save up your money until you can pay for it in cash.

Finally, if you absolutely must take out a vehicle loan, then follow the tips that I’ve talked about here. Debt beggars the borrower while enriching the lender. It’s in your best interest to minimize the amount of debt that you pay on a vehicle loan.

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Weekly Tip: Make a will. No one is promised tomorrow. The province will divided your earthly belongings according to a pre-determined list if you die without a will. For those of you have specific bequests in mind, get yourself to a competent lawyer to have your will drawn up and properly witnessed. This way, your wishes will be followed when you’re no longer around to tell people what your wishes are.