Debt Freedom - Millionaire on the Prairie

The Debt Is Gone. Now what?

I spend a lot of time talking about paying off debt. Why? For the simple reason that debt impedes you from spending your money on the things that you really want.

Once the debt is gone, what should you do with your former debt payments?

This post isn’t for those of you who already have a plan for your money.

If, however, you’re a person who doesn’t have a good plan for your money, then you should stick around while I drop some pearls of wisdom. Feel free to pick them up as you see fit.

Whatever your former payment amount, I want to divide it by three. One third will go to your emergency fund. The next third will go to your retirement and/or investment account. The last third will go into your chequing account so that you can spend it on upgrading your life.

Build Up Your Emergency Fund

Emergencies can strike at any time. They’re inconvenient that way. And while I don’t know what kind of emergency will land in your lap, I can pretty much guarantee that it will have a financial component. You need to have an emergency fund to handle it.

Some people advise having 3 months’ worth of expenses in the bank. I’m a lot more conservative than that. I think everyone should be aiming for atleast 6 months’ worth of expenses in their emergency fund. Let’s say you lose your job. That’s definitely when you will need your emergency fund to carry you until you can persuade someone else to pay you for your skills and expertise at whatever it is that you do.

It will take a long time to build up 6 months’ worth of expenses. (For those of you who are really, really conservative, aim to build up 6 months’ worth of income!) Debt is a barrier to building a sizeable emergency fund. That’s why I dedicating one third of former debt payments to the task of weaving your financial safety net.

Give Your Retirement & Investment Accounts Some Love

The next third of your former debt payment should go to maxing out your Tax Free Savings Account and your Registered Retirement Savings Plan. These are the two registered accounts where you should be investing money for your retirement. Future You will thank you for doing so.

In the fortunate event that you’ve already contribute the maximum allowable amounts to both your TFSA and your RRSP, you should open a non-registered brokerage account and invest one third of your former debt payment. Your investments will grow tax-free, so it’s to your advantage to invest your money sooner rather than later.

Unlike the TFSA and the RRSP, there is no limit on how much you can invest in your non-registered account.

When your debt is gone, set up an automatic transfer from your chequing account to one of these accounts – TFSA, RRSP, or non-registered brokerage account. Max out the first 2 before you start investing in the last one.

Inflate Your Lifestyle With the Last Third

That’s right. I’m encouraging you to spend your money. After all, you worked hard for it. Now, instead of sending it to someone else, you get to keep it. You can spend it on whatever you want. That’s the beauty of being debt-free!

Maybe you’ve been dying to take a trip? Or maybe there’s something new you want for your home? Perhaps it’s finally time to join that wine club you’ve found? Whatever it is, I want you to buy it. You now have the cash and your purchase won’t impact your ability to invest for the future, nor your ability to save for emergencies.

Maybe there’s nothing you want to buy right now. That’s fine too. You don’t have to spend money if you don’t want to. Keep the money in a sinking fund labeled “Whatever I Want”. When you figure out what you want to buy, if anything, the money will be there waiting for you.

And if there truly isn’t anything want to purchase, then you may want to fill up your emergency fund even faster. No one has ever complained about having too much money during an emergency. You could also send more money to your retirement and investment accounts.

I’m not encouraging you to squirrel away every penny for the future, or for emergencies. However, if you don’t see a need to increase your day-to-day spending, then those are two great options for the final third of your former debt payment.

Another fantastic option is making a charitable donation to causes that you hold dear to your heart. It’s good karma to help others and money is very helpful for those who need it.

So there you have it – Blue Lobster’s suggested use of your former debt payment. Again, take what you need and leave the rest. You earned the money so you get to decide how best to use it to make your dreams and goals your reality.

Debt is the Enemy of Financial Security.

It never ceases to amaze me how easy it is to get into debt.

I haven’t been a child since the last millennium, but I do still remember that people had to apply for credit by filing out a paper form. Today, offers for credit come directly to my email address. The financial institutions pushing credit no longer need a signature. Somehow, tapping a screen has become an acceptable way for people to start the journey into debt. They don’t even need to verify that I’m the one tapping the screen on my phone! Anyone can tap that screen and – poof! – I’m the one who’s responsible for repaying a new credit card. ***

Just this week, a financial institution offered me a credit card with a $25,000 limit!!! Are they crazy? Exactly what algorithm are they using to think that my income could pay off that kind of limit every month? To be clear, I don’t earn enough money to pay off that kind of limit in one month. And since I always pay my credit card bill in full each month, I make sure that I don’t charge more than I can repay.

Debt is a cancer to wealth.

You build less wealth while you have debt payments.

Let’s get one thing straight. Personally, I’ve come to believe to that people should be investing while they’re paying off their debt. I don’t care if it’s $10 per week or $50 per month. A little something needs to be invested for the future until the debts are paid. It may take years to repay your debt. During that time, people should still be building their wealth through investing. Small amounts invested over long periods of time do have a way of growing into very large sums. Time is too precious to waste, so invest while paying off debt.

Try not to think about how much further ahead you’d be if you were able to send your debt payments to your investment account. Obviously, investing more sooner is better. At the same time, investing something is better than investing nothing.

Once the debts are gone, atleast 70% of those former debt payments ought to be re-directed towards investing. The other 30% should be spent on whatever frivolities a person wants.

Don’t go back into debt!

Do what you want with your own money. I’m just here to tell you that going into debt over and over again will prevent you from building any kind of wealth for yourself. Debt is not getting cheaper. When was the last time the interest rate on your credit card came down?

Secondly, if you’re forever going into debt for one thing or another, when are you going to have the monthly 3-figure or 4-figure amount to invest for your future? Do you really want to spend your entire life working just so you can send most of your paycheque to someone else?

I’ve had debt before, but I got out of it.

I used a loan to buy my second vehicle. It was a 5-year loan, and I don’t remember the interest rate. The payment was $325 per month, so a little more than $10/day. I was tickled to death when that car loan was finally done. I’d hated making those payments!

So imagine my shock and horror when the financing company offered me another loan to buy a new car.

WTF?!?!!

At the time, a friend of mine explained that I was the exception. She said that most people would go and buy another vehicle. My mind was blown! I simply couldn’t fathom the idea of going into debt for another vehicle simply because I had repaid my loan. The vehicle I had just paid for was only 5 years old. There was nothing wrong with it, mechanically or cosmetically. Best of all, that car no longer siphoned $325 out of my wallet every month. Why on Earth would I want to go back into debt for another car?

Debt is easy to acquire, yet hard to eradicate.

Read that heading again. The truth is that I’ve never had an easy time getting out of debt, when I’ve had it. It took me years to pay off my mortgage, and I did it rather quickly. As I’ve noted, it took me 5 years to pay off a vehicle loan. I seem to recall that it took me several years to repay my student loans too, and those were relatively small at an amount of $15,000. Thankfully, I’ve never had credit card debt.

Yet, if I could remember how long it took me to acquire the debt, I would have to say that each loan application required less than 30 minutes of my time. My mortgage might have taken a bit longer but it was still less than an hour to be approved.

Mere minutes to acquire over $100,000 of debt… sigh… it’s almost breathtaking, isn’t it?

In very sharp contrast, it took me years and years to pay it all back. And I managed to repay those loans early! There were tax refunds and retro-cheques to help me do so. Most of the early repayments came from delayed gratification and extra payments. According to my memory, I accelerated my mortgage payment every year on the anniversary so I could pay off my principle residence’s mortgage super-early. I started at $304 bi-weekly and had bumped it up to $750 bi-weekly by the time it was done.

I have to wonder why the length of payback is never, ever advertised when creditors are extending debt to customers. Never ever forget this truth – it takes a long time to repay debt.

Debt is an impediment to the life you want.

Sending most of your paycheque to creditors sucks. You work hard, and someone else benefits from your efforts. I’m not at all convinced that most of us want the results of our life’s energy and precious time going to our creditors. We should be in a position to determine where our money goes. After all, we’re the ones who used our blood, sweat, and tears to earn it.

Get rid of your debt. There are many websites offering good suggestions about how to do so. I don’t claim to be an expert. My path to debt freedom included living well below my means and practicing delayed gratification for years. It worked for me because I earned a decent income and was able to keep my expenses low as a Single Person. I didn’t take on many subscription services. I went to the grocery store and cooked my own meals. As I rid myself of debt (student loans, car loans, and a mortgage), a significant chunk of those former payments went into my retirement and investment accounts.

Today, I’m very content with my financial situation and Past Me’s choices about money. Eliminating debt from my life, sooner rather than later, means that I have better options and that I’ve secured a spot in the Double-Comma Club. Creditors are not part of my life and I think that’s great.

*** I minimize the risk of this ever happening by deleting these email offers immediately. Then I go into my trash folder and delete the email permanently. I also never let anyone else touch my phone outside of my presence. If there’s another way to stop unsolicited credit card offers coming to my email, please let me know.

And now, I Replenish the Sinking Fund!

Last month, I went on my first post-pandemic overseas trip. It wasn’t cheap. However, travel is one of my spending priorities so I have a sinking fund to pay for it.

It was my first trip to the Netherlands, with a very short stop in Belgium. I traveled with a dear friend of long acquaintance, who had suggested this trip the fall of last year. After months of blue-sky ideas, we settled on a river cruise since we’d both wanted to do one. And that river cruise was followed by 3 days in Amsterdam. The trip was amazing: canal tours, chocolate-making, stroopwafels, the Red Light District, Keukenhof Gardens! There simply wasn’t enough time to do everything that was on offer in the amazing city that is Amsterdam. Trust me when I say that we made the most of our available time.

First things first. You should know is that I spent every nickel of my travel sinking account:

I used some of the money to upgrade my airline seat, and those extra 4 inches of room were well worth the splurge. (Shout-out to another dear friend who’d made the suggestion to upgrade!)
Purchasing an all-inclusive tourist app prior to leaving home was a fabulous use of funds! That app allowed for free transportation on buses, trams, and the metro within the city. It also gave us free entry to many cool museums and various other tourist spots.
I also had the funds to book a more expensive hotel very close to all the things we wanted to see and do. Had we stayed elsewhere, precious time would’ve been wasted on commuting from one location to another. As it was, we were able to walk to almost all the places on our itinerary. The spectacular Vondelpark was a stone’s throw from our accommocations and the stunning Rijkmuseum was only a 10-minute walk away.
During our river cruise, we realized that the Hague was only an hour away from Amsterdam by train so, without any consideration as to cost, we made a last minute decision to visit the city of Peace and Justice too.
My souvenir knapsack came back stuffed with chocolates, magnets, tulip bulbs, cheese, stroopwafels, and books.

My travel sinking fund allowed me to say “Yes!” to everything I wanted to do, eat, taste, see, and buy. Again, I spent every single nickel of that fund on this trip… And I felt absolutely no guilt in doing so! The money was earmarked for this purpose. I spend freely when I travel because there’s no guarantee that I will ever pass that way again. I don’t want to come home with any regrets or thinking “I should have <insert missed opportunity here to do what I wanted> while I was there.”

Looking back, I can say that this was one of the very best trips that I’ve ever taken.

So, now that I’m home, it’s time to replenish the travel sinking fund. I want to go somewhere new in 2025, and I don’t want to come home with debt. Where I want to go hasn’t yet been decided, but I’m thinking that I’d like to travel in April or May of next year. Destination is very important, but there’s a high chance that I’ll change my mind about what I want to do next year. Scotland had been on the list for 2020, but those plans were destroyed when the world shut down. I haven’t been to Asia yet so it might be nice to go there. Japan has always intrigued me, and I’ve heard many wonderful things about Vietnam. There’s also this culinary course combined with local tours that’s also available in regions of Italy that I haven’t visited yet… So many options!

Determining where I want to go isn’t the main driver here. There’s a good chance that the destination will change a few times. Nope, my first task is to figure out how much to save from each paycheque going forward. If I save too little, then I can’t do my 2025 trip the way I want to without incurring credit card debt. That’s a no-go for me. Literally! I’d rather stay home that pay interest to a credit card company for my trip.

And if I save too much for travel, then my other financial priorities will be short-changed. I don’t want to do that either.

First things first, I’ve considered the size of my paycheque and I’ve figured out how it has to be allocated amongst all of my financial priorities. Long-time readers will know that I have sinking funds for property taxes and insurance premiums – the unsexy, necessary expenses of adulthood. Sadly, they take priority over travel so they have to be funded first. There are also some landscaping projects around my house that are slated for 2024. Gardening has become a hobby of mine and I want more perennials around my home. The kind of plants I want to buy are not particularly cheap, so I need to budget for them. I’m also still a fan of live theatre and those subscriptions don’t pay for themselves.

Thankfully, I’m debt-free. I managed to pay cash for my latest vehicle. Student loans and mortgage debt have been in my rearview mirror for a very long time. As such, I don’t have to have send money to creditors every month. While I use credit cards, the balances are paid in full every single month. A good portion of my former debt payments is put towards travel every time I get paid. (The rest of those payments has already been re-directed towards building my emergency fund and investing for my retirement.)

Even though I spend a lot of time talking about the future, I recognize that money is also meant to be spent to bring us some joy today. The Care and Feeding of Future You is incredibly important. That’s why you should be investing a good portion of every paycheque for long-term growth. When your paycheque stops, your investment portfolio should be ready to take over.

However, taking care of Present Day You is also a serious responsibility. You should be able to do some of the things that you really, really, really want to do now without going into monstrously expensive credit card debt to do so. And that’s why I advocate for sinking funds. Setting aside the money first means that you don’t burden yourself with debt while still getting to do what you want.

Figure out your priorities, then create sinking funds for each of them. When the money is in the fund, spend it as intended without any guilt whatsoever. When you get home, replenish your fund so that you can get down to the business of turning your next dream into a reality.

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.

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.

Make a purchase on Day 1.
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.)
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.

Sinking Funds – Making the Most of Your Money

I’ve written about sinking funds before. They’re pools of money that are meant to be filled then emptied, as many times as you want, for as many goals as you have. You prioritize what you want to accomplish then you decide how much money goes into each one. Sinking funds are to be held separately from your emergency fund, your investment account, your retirement account, and your daily chequing account. These funds are where you hold money for your short-term goals:

annual premium payments & subscriptions;
holiday spending, birthdays & celebrations;
travel;
tuition and annual fees;
house down payments;
renovations;
vehicle purchases & maintenance;
furniture purchases;
annual taxes;
RRSP & TFSA contributions.

Sinking funds allow you to save first, then spend your money. In case you were unaware, they are highly effective at keeping you out of debt while allowing you to still earn points/cash for using your credit cards. Let’s imagine that you’re planning to take a culinary tour in 2024. Dedicate a sinking fund to that expense and start saving for that trip today. When the time comes to book it, you use your credit card, collect your points, and pay off the credit card bill in full. You can enjoy your trip without wondering how you’re going to pay for it. Sinking funds are simply fantastic!

I have to confess that it took me years to set up all of my sinking funds. The truth is that you can’t save what you don’t earn. Early on in my career, I had a lot more debt and ridding myself of loan payments was top priority. The only sinking fund I could manage to fill was the one for my annual vehicle insurance and annual property taxes.

Monthly Payments Aren’t For Me!

I’ve always hated the idea of someone being able to withdraw money from my bank account every single month. I want to be the one in charge of when money leaves my bank account. The idea of a business accidentally withdrawing a payment twice and then having to fight with that organization to get my money back makes me furious and queasy. As a result, I’ve always chosen annual payments for my insurance premiums and tax payments. My first sinking funds were for those two expenses. Any other goals were funded from my bi-weekly paycheque via automatic transfers.

Once my student loans and vehicle loan were eliminated, I re-directed those payments to other sinking funds. My next big priority was travel! Every two weeks, a chunk of money went into my travel account up to a pre-determined amount. When it was time to book a trip, the money was there. It was awesome!

Did I stop setting aside that chunk of money once it was no longer going to the travel sinking fund? No! Instead, that money was re-directed towards my next highest priority until that pre-determined amount was met. In this way, my sinking funds were funded every year and I had the money set aside to pay for what I wanted.

Homeowners Need Sinking Funds.

Eventually, I moved from my first condo to a house. Woah!!! Anyone who owns a home will agree that it’s a money-pit. There’s always something to be fixed, replaced, maintained, or updated. As soon as I moved into my house, I realized that it was definitely time for a few more sinking funds dedicated to renovations and maintenance. Since being in my house, my sinking funds helped me to do the following:

renovated the basement and downstairs bathroom,
pour a new driveway, garage floor and walking paths,
have trees removed,
have landscaping work done,
change my main bathroom,
install carpet,
replace windows, eavestroughs & siding,
pour insulation;
buy new furniture & electronics;
install a new water heater & furnace;
remove a shed;
install a sprinkler system.

Believe it or not, there are still many other things that I want to do around here. If I hadn’t created my sinking funds when I first moved in, I would be neck deep in debt and stuck on a payment treadmill. Planning out my purchases in advance allowed me to plan out my money too.

It Can Take a Few Years.

For as much as I love my sinking funds, I was never able to fill all of them at the same time. I simply didn’t have enough money. There was no way my paycheque could have paid for everything all at once when I first started. As my income grew, so did the amount that I could allocate to my sinking funds.

Some funds had to be replenished every year, so they went into a dedicated account. Insurance and property taxes come to mind. They need to be paid every 365 days so I group them together in one sinking fund. It has been filled then emptied on a regular basis for the past 30 years. Once that sinking fund is filled, my money goes towards filling my other ones.

Other sinking funds have been for one-time purchases. Trust me – it’s highly doubtful that I will be cutting down the same trees more than once. The monies for one-time purchases goes into an account where the nickname could be changed as needed. “Tree Removal” would become “New Tire Fund” or “BAC Subscription” or whatever else happened to be next on the priority list.

Finally, there are the sinking funds that were put aside due to global events. During the pandemic, I discovered a love of my own backyard. Literally! The summer of 2020 and 2021 were spent in my own yard, tending to my annuals and watering my lawn. International travel fell to the bottom of my priority list. It still kind of blows my mind that it’s been over 3.5 years since I’ve been inside an airport!!!

My point is this. You may have more priorities than money. So what? Use sinking funds to maximize the enjoyment of your money. Ensure that it’s dispersed in ways that will allow you to live your best life. Like I said before, I didn’t start out with enough money to do everything that I wanted. International travel took backseat while I fixed up my house. Fixing up my house took backseat until I was out of debt. Getting out of debt was secondary to stuffing my RRSP as best I could on my entry level salary.

The bottom line is that I had to get a few pay increases under my belt before I could increase the amount of money going to my sinking funds.

If it takes you a few years to set up all of your sinking funds, then so be it. That’s completely normal. Only the privileged can do it all at once. The rest of us have to do more strategizing. The time will pass anyway so you might as well be using your time and your money in ways that get you what you want most.

You Should Always Be Saving Money!

There is no way around it. You should always be saving money – some way, some how. Life is expensive, and it only gets more so. Name one essential thing in your life that has gotten cheaper over the years. Food? Nope. Rent or housing costs? No! Gasoline? Not a chance. Utilities? Not a bit. Transit? Slower increases but increases all the same.

Even if you have a fixed mortgage on your home, the cost of borrowing money will go up when you renew. The central banks are on a tear because they want to get inflation under control. That means mortgages are more expensive. Even with a fixed mortgage, the other costs of home ownership have gone up over the years.

While it’s important to live in the present, I would argue that you owe it to yourself to resist the incessant urging of the AdMan and his trusty sidekick, the Creditor, to always be buying. You need to save money for Tomorrow, and there’s a good chance that you don’t know exactly how much you’ll need.

For example, if you own a house, then you should definitely be saving. At some point, your house will need an expensive repair or costly maintenance. It could be a new furnace, a new hot water heater, new windows, new roof, or a new foundation. It’s unlikely you’ll be able to buy another of those things for less than $100. And while a new hot water heater doesn’t cost nearly as much as a new roof, it’s best that you have the cash-money on hand to buy it outright. Your water heater should not be the reason you’re paying interest on your credit card.

And while a new roof is likely going to run you 5-figures, the same principle applies. Start saving money now so that you have the cash in place in 10-15-20 years when you’ll need to replace your roof. Much like successfully saving for retirement, owning a home requires long-term financial planning. I love my home but I’m the first to tell everyone that it’s a money pit.

Saving for retirement should be obvious. Your bills won’t disappear until you die. In other words, you may have parted ways with your employer but don’t assume that means that your bills will have parted ways with you. Whether 25, 45, 65 or 85, you’ll still need to eat and have shelter. Society still demands that you be clothed. No matter how old you become, you will need money for the basics.

You need to invest today so that Tomorrow You will be okay financially. Remember that most people don’t have pensions, i.e. their employers are not saving for them. It’s up to you to save and invest. For those few who do have pensions, there’s a chance that your pension is not indexed to inflation. This means that your employer will pay you a fixed amount when you retire, but that amount will never go up since it is not indexed to inflation. Prices will continue to increase but your pension amount will be set in stone until you die. This is not a good situation to be in if your retirement is going to last a long time. And since very few us know our expiry date in advance, it’s best that you start investing your money ASAP and ensure that your portfolio mix is built for growth.

Maybe you own your vehicle. You should definitely be saving. Oil changes, brakes, tune-ups, various repairs, insurance, registration – all of these things cost money. Ideally, you’ll pay cash for your car. And if you can’t pay cash, then pick the least expensive vehicle you can find that will do the job so that your financing costs are as low as possible. Once your loan is done, continue to pay that loan amount into your Next Car Fund. When the wheels fall off your current vehicle, hopefully you will have enough in your Next Car Fund to pay cash. Then repeat the cycle. This method works best if you can get 5 years or more between vehicle purchases.

Do you have loved ones with whom you like to celebrate things? Are they the people you call when you want to do things? Concerts? Sports games? Picnics? Wine tastings? Movies? If the answer is yes, then you should have some fun-money set aside for those times together. It doesn’t have to be a lot, but every paycheque should see $40-$50 going towards these outings. Life is better when it’s shared with those we love. And while there are free things that you can share with loved ones, there are also times when you might want to spend a little bit of money on them too.

One of the very best benefits of always saving your money is that you can live in a state of debt freedom. Your entire paycheque, after taxes, is completely yours. You need not send any of your hard-earned money to a creditor for a purchase made in the past. You get to keep your money! This is an exceptionally good thing considering how hard you’ve worked for it.

So just remember to always be saving. Whatever it is that you want, try to save for it in advance then pay cash. You won’t ever regret depriving your creditors of interest payments. Trust me on this one!

A Potentially Horrible Boss

This summer, I was lucky enough to have a socially-distanced visit with some friends. As we enjoyed our cheesecake, the host mentioned that he was worried about what would happen when his boss retired. My friend explained that his boss’ child would likely take over the company. This likelihood was causing a good deal of angst since the offspring’s… leadership style… wasn’t particularly inspiring nor admirable. My friend was facing the very serious, very probable situation of working for a potentially horrible boss.

The worst part is that there is very little to be done. My friend has sought other employment, yet that pursuit has not been fruitful. Further, there are bills to be paid. The twin goals of paying off the mortgage and saving for retirement still have to be met. There’s no realistic option of just walking away from the bad situation which is looming. Like a great many people, my friend doesn’t have an income-producing portfolio as a safety net.

I had no words of wisdom for my friend. Instead, all I could do was be supportive and listen. However, that conversation has stuck with me. Perhaps I don’t have a way to fix the situation for my friend. Yet, I’m confident enough to believe that I do have a suggestion for those who aren’t yet in my friend’s circumstances.

Assess Your Situation

If you are very, very lucky, then you’re working for pay doing something that gladdens your heart. You’re satisfied with your work life and it’s a source of contentment for you. Your boss is an asset, rather than a point of stress. Still… you should always be aware that this is a situation that can change on a dime. Lots of things can happen. Maybe your current boss takes a promotion, moves away, retires or gets sick. In any of these situations. you’re suddenly facing the risk of a potentially horrible boss taking her place.

Trite though it might sound, the following statement must be acknowledged. Most of us do not have the financial ability to just walk away from our job. We realize that having a steady paycheque ensures we can feed ourselves and pay the bills. The vast majority of people have to keep working and hope for the best. In other words, a potentially horrible boss is a source of stress and there’s little that many workers can do to avoid it.

You, Gentle Reader, don’t have to be one of those people.

Get Horrible Boss Insurance

This is a form of insurance that insulates you from the risk of working for a potentially horrible boss. Unlike car insurance or house insurance, you don’t pay a premium to a company to acquire it. Nope! This is the kind of insurance that you create for yourself.

How so? By creating your own income-producing portfolio over time. The amount of time is up to you. You can save a little bit over the very long-term. Alternatively, you can save a lot over the short-term and engage in extreme frugality by saving up to 70% of your income. Or you can find a balance that works on a time-table that best suits your personal goals.

How you invest your money is your choice. Save-invest-learn-repeat. This is my mantra. Feel free to adopt it as yours too. You can learn about whatever investment you want. Some people are big fans of real estate investing. This is not my area of expertise but I have been devoting some time to learning about it over the past two years.

If you’ve been here for awhile, you’ll have noticed that I’m a big fan of the stock market and dollar-cost averaging over time. You’ve often heard me suggest that you should invest a portion of each and every one of your paycheque in a broad-based equity product, preferably an exchange-traded fund. The fees for ETFs are lower than the fees for mutual funds. Stock-picking is most likely not your strong suit so I’d advise you to only do it with 10% (or less) of your entire portfolio.

Money in the stock market is going to be invested for the long-haul. That means it is going to be invested in the stock market for decades. To be clear, your stock market investment money is separate and apart from your emergency fund money. It also shouldn’t be co-mingled with money you set aside for short term goals, which are those that are to be funded within a year or two. Oh, and you’re going to want to be very disciplined about ridding yourself of debt as fast as you can.

Money Buys Options

Gosh! That sounds like a lot, doesn’t it? Saving for retirement. Building an emergency fund. Funding short-term goals. Paying off debt! Life is meant to be lived and no one wants to be richest person in the graveyard.

Blah-blah-blah!

Believe you me when I say the following. The day that you have to work for a potentially horrible boss, you will not regret having money in your emergency account. You won’t ever regret having a second, back-up income generated by your portfolio. The Ad Man and the Creditor want you to believe that it’s some monumentally unfair disadvantage to not spend every penny you make. They are lying to you! The most precious thing in the world is time. Ironically, it is one of the few things that money cannot acquire. The second most precious thing in the world is having options. Money most definitely purchases options.

If a potentially horrible boss is on the horizon for you, then I promise you that you will want to have the option of getting away from that person. Having money allows you to do that. You need not work for someone who is going to make your life a living hell for want of money.

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Weekly Tip: Make extra payments towards your debts so that you minimize the interest that you pay to your creditors.

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Well, Gentle Readers, there are currently less than 60 days left in 2020. How are you doing with your financial plans? What needs to be tweaked for next year? Which financial habits will you keep in 2021?

Beware the Minimum Payment!

Right from the get-go, I’m going to ask those of you who already know this to forgive me for stating the obvious. Minimum payments benefit the lender way, way, way more than they benefit the borrower.

Beware the minimum payment!

When you borrow money from the lender, you’re taking out a loan. And when you do so, you’re agreeing to pay interest on the money borrowed. The loan is governed by a contract, so the very best time to amend the terms of the contract – and thereby the terms of the loan – is before you sign the contract!!! In other words, don’t take a loan if you don’t believe that the terms of the loan will be beneficial to you.

The repayment terms of the loan are set out in the contract. If you don’t like them, or the lender won’t change them, then don’t take the loan. This is the most effective way for you to avoid having repayment terms in your life that may cause you financial grief in the future.

And for those wondering how to buy what you want without a loan, the answer is that you will require a combination of cash and patience. Save up your money then make the purchase. You’ll get what you want. You won’t pay any interest. It’s the ideal situation so strive to make it your reality.

However, there are times when you simply need to borrow money to get what it is that you want. If this is the situation in which you find yourself, then I want you to be very aware of the trap of minimum payments.

Making minimum payments benefits the lender because they can charge you interest on the outstanding loan balance for the longest period of time. If you take out a 5-year car payment, then the loan is structured so that the lender earns as much interest as possible off the loan. In other words, you as the borrower will pay back the maximum amount of interest.

The legal way to minimize the amount of interest you re-pay on the loan is to make extra payments. Get a second job – sell some stuff online – cut some subscriptions from your life. However you choose to find extra money is up to you. The bottom line is that you take that extra money and apply it to your outstanding loan. Go back to the car loan for a hot minute. If you can make extra payments on the loan and pay it off in 2 years instead of 5, then you will keep three years of interest payments in your pocket rather than sling that money into your lender’s pocket.

As of the date of publishing this blog post, the banks in Canada are allowing mortgage holders to apply for a six-month deferral of their mortgage payments. If approved, people who have mortgages won’t have to make mortgage payments for six months. It’s called a mortgage deferral.

This deferral means that the people who took out a mortgage will have to repay the money, eventually. (I’m not an expert on how the program works. If you need the details, please contact your bank.)

Make no mistake. The banks want their money back. The banks lent the money to borrowers at an agreed-upon rate of interest for an agreed-upon period of time. That the banks are allowing borrowers to defer repayments on their mortgages is quite unprecedented in my experience. What I wonder is whether the borrowers understand that a deferral of their mortgage payment is not the same as a waiver. The deferred payments are still outstanding. And borrowers will continue to owe interest on those payments until the money is repaid to the lender.

Again, the banks want their money back. So if a borrower receives a deferral from their bank, the borrower still has to repay that money. And guess what? Interest will continue to accrue on that deferred payment.

What? Are you surprised? Did you think that the banks would stop the interest clock from running? If so, gently hit yourself on the head with a hammer. Of course, the banks are going to continue to charge interest on their loans.

This is not a debate about the morality of the banks during the COVID19 pandemic. What I want to impart in this post is that the second best option is to get out of debt as fast as possible. Minimum payments are not your friends. In the case of a mortgage, the numbers are a lot bigger so a deferral is going to mean a much higher amount of interest will be charged during the deferral period.

If you’re considering applying for a mortgage deferral, keep the following in mind. A deferral means that the money is not being paid back as agreed upon in the loan. It does not mean that the money remains outstanding without interest being charged by the lender.

Allow me to state this concept another way. The interest only stops accruing when the loan is repaid. Paying later means paying more interest. The only way to avoid the interest charge is to repay the loan.

Beware the minimum payment! It never benefits the borrower.

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Weekly Tip: Once you’ve finished making debt payments to a lender, continue making those same payments to yourself. Re-direct your former debt payments to a high interest savings account. You were living without the money when you had a debt, so continue to live without that money when the debt is gone.

A Faucet of Income

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

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

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

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

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

Wait! What?

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

Plans are the Result of Dreams Mixing with Money

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

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

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

Start Adult Life Without Debt

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

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

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

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

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

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

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

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

“And I’d like a beer.”

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

Play the Hand You’re Dealt

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

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

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

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

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

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