Tag: emergency funds

5 Simple Rules to Become a Millionaire

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

Rule #1 – Invest

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

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

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

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

Rule #2 – Build an Emergency Fund

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

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

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

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

Rule #3 – Pay off your debt

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

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

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

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

Rule #4 – Use sinking funds

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

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

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

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

Rule #5 – Spend your money

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

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

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

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

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

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

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.

Attaining Your Money Milestones Feels Awesome!

I think it’s important for you to have money milestones, some kind of target that you want to achieve with your money. Maybe it’s getting the first $100 into your emergency fund. Maybe it’s paying off your debt or getting to positive net worth. Perhaps you want to ensure that your portfolio kicks off enough money to pay for your current standard of living. They can be things you want to accomplish in the next six weeks or they can be priorities that will take you years to fulfill. However long it takes you to attain your milestones should not dissuade you from pursuing them. Like they say, from the smallest little seed did the mighty oak grow. Start today.

Whatever your milestones are, it’s a good idea to pat yourself on the back once you’ve achieved them. After all, you worked hard to achieve a goal and attention should be paid. You should thank yourself for the effort and discipline it took for you to achieve your financial goals. If you hadn’t committed, then it’s pretty likely that you wouldn’t have met your money milestones.

Back when I was a kid, I bought myself a reference book about money called Personal Finance For Canadians by Kathleen H. Brown. This 552-page book was one of my very first personal finance books and it led me down the rabbit hole of financial planning. Next up – The Complete Idiot’s Guide to Getting Rich by Larry Waschka. This is one my very favourite money books. The latter had a section about the 5 levels of wealth. You attain Wealth Level Two when your portfolio’s returns matched your contributions. In other words, if you’re contributing $1000 to your portfolio every year, then WL2 starts when your portfolio generates an annual return of $1000.

As I was updating my spreadsheets*** this week, I realized that I’m now at Wealth Level Two. I’ve hit one of my money milestones. My portfolio’s return is more than my contribution. Hooray for me! It took me a blood long time to hit this stage, but I’m very proud of myself right now. To quote one of my favourite little people, “I did it!”

I’ve made money mistakes over the years – see here, here, and here. Due to my many money mistakes over the years, it’s taken me since 2011 to achieve this particular milestone. That’s 12 years! Had I been smarter or more insightful, I don’t think it would’ve taken me this long. I can’t bear to think about how much further along I would be if I’d started investing when I bought the book…last millennium! That said, I’m still pretty proud of myself. I took the initiative to get started and to commit to bi-weekly contributions to my non-registered investment account, no matter what. Whether the market was going up, going down, or going crazy, I stuck to investing a chunk of my paycheque every two weeks. As my salary went up, so did the investment amount. I continued to live below my means. Most importantly of all, I never pulled my money out of the market, even when we experience that gut-churning stock market plunge in 2020 and the more recent volatility of 2022.

Please do not think that I didn’t face temptations to spend my investment contributions on today’s wants instead of my long-term goals. I did, but I know myself. I knew that if I didn’t rely on automatic transfers, then I’d likely spend the money on stupidities. Instead, I put technology to work and lived on whatever was left. Automation is my friend. Once I had an automatic transfer is place, it would take a serious threat to my survival and/or livelihood to persuade me to halt the automatic contributions to my future. Concert tickets, travel, a newer vehicle – all of these could be paid for with whatever was leftover after my long-term goals were funded. The Fear of Missing Out and You Only Live Once philosophies did not guide my investing decisions.

When I first read those two reference books, I was a young adult who didn’t come from money. My parents worked hard, but they were not rich. They taught me how to save money in a savings account and how to buy Canada Savings Bonds. They invested in a few stocks so that I learned a little bit about the stock market and how to earn dividends. The rest of it mutual funds? Exchange-traded funds? Real estate investment trusts? Tax Free Savings Accounts? Canadian Deposit Insurance Corporation? Other investment vehicles? Real estate investing? My parents definitely lit the fuse when it came to investing for my future. However, it was up to me to learn about the other stuff on my own.

It took quite a long time, but so what? The time was going to pass anyway. Today, I’m seeing the results of my discipline. It’s paying off. I’m hitting my money milestones, and that makes me smile with happiness and joy. My life is good. I have everything I need and most of what I want. A few smart choices in my past has allowed me to create a good financial life for myself. I’m attaining my money milestones, and there’s a good chance that I’ll attain the rest of them too.

You can do this. First, identify your money milestones. Secondly, pick an amount of money to direct towards achieving them. Thirdly, set up an automatic transfer so that your money is whisked away before you get a chance to spend it on not-your-money-milestones. Fourth, never stop reading about money. Learn, learn, and learn some more. Fifth, congratulate yourself for starting your financial journal then do so again each time you attain your money milestones.

Will it be easy? Probably not. There’s an entire industry captained by the AdMan and his trusty sidekick, the Creditor, which exists solely to part you from your cash. Even without AdMan and Creditor, inflation is currently kicking everyone in the soft bits so income doesn’t go as far as it used to. Here’s a little tip from me to you. It’s never easy to save and invest. There’s always a reason to put it off.

Don’t let that stop you. If you can only start with $1, then start with $1. Work your way up from there. Get in the habit of saving and investing your money. Once it’s investing, leave it alone to compound. Save – invest – learn – repeat. Time will take care of the rest. Your first money milestone is to start.

*** By the by, I have to admit that I love spreadsheets. They’re rewarding, a visual reminder of how far I’ve come by investing consistently. One of my spreadsheets tracks all the dividend payments that I receive. As you know, I’m a big fan of dividend-paying exchange-traded funds. I’ve invested a good chunk of my portfolio in VDY and XDV. I have other dividend-payers as well, individual stocks mostly, but these two ETFs are the powerhouses of my portfolio.

I’m not an expert but….

I am not certified by any governing body to tell you how to spend your money. My words of advice were earned at the School of Life, a place where all of us are students. I’m telling you this so that you realize that I’m not an expert, but I’ve still learned a thing or two. If you do what I did, you’ll do fairly well with your money over a lifetime. Here are my tips to acquiring a heavy wallet.

Don’t spend every penny you earn.

First off, I’ve yet to meet anyone who’s been harmed by living below their means. Spending less than your take-home income has no downsides, as far as I can tell. The difference between your net income and your expenses is called “savings” and savings can always be stashed away for various things.

Emergency Funds are not optional.

Secondly, life without an emergency fund is an invitation for financial trouble. There’s an emergency in your future. You simply have no way of knowing when it will show up. I promise you this though. No one in the history of the world has ever lamented about having too much money set aside to deal with the inevitable emergency. If you don’t have an emergency fund, start one immediately and set up an automatic transfer from your paycheque to fund it.

It’s going to take a bit of time to build up a decent emergency fund. That doesn’t matter – just start building it. When the emergency hits you smack in the face, you’ll be quite grateful that you won’t have to worry about the financial side of dealing with it.

Investing for Tomorrow You isn’t optional either.

Thirdly, start investing your savings. Yes – some of your saving will go to building an emergency fund. The rest of your savings should be split between your short-term, medium-term, and long-term goals.

One your most important long-term goals is how to feed, shelter, clothe, and entertain yourself when you’re too old to work. Tomorrow You still needs money to survive until the very last day of your life. The steps you take today to invest your savings will increase Tomorrow You’s chances of having a financially comfortable life once employment is over.

You need to start funding your retirement accounts – namely the Tax Free Savings Account and the Registered Retirement Savings Plan.

If you have to choose between filling the TFSA or the RRSP, my recommendation is to fill up the TFSA first. The TFSA contributions do not generate a tax refund, but the money invested inside the TFSA will grow tax-free and can be withdrawn tax-free.

Should you be so fortunate as to have sufficient money to fill both your TFSA and your RRSP, then do so.

If you still have savings After you’ve filled your retirement accounts, then open a non-registered account with an online brokerage. Invest your remaining savings to earn capital gains and dividends. The money earned in your non-registered account will be taxed every year. The upside is that the taxable rate on your capital gains and dividends will be less than the taxable rate on your earned income.

Inflation isn’t going away anytime soon.

Fourthly, inflation is running high. No one knows when it’s going to go down, so assume that things will be increasingly expensive for the foreseeable future. There are no simply answers to this problem, so my advice to you is to cook more of your own food. I love socializing over food as much as the next person. And I do sometimes yield to the incessant call of the fast food window or the food delivery app. However, inflation running at 7%-8% has forced me to be a lot more disciplined. I’m heading to the grocery store instead of tapping out an order on an app. I’m slicing and dicing, mincing and sautéing, frying and baking in my own kitchen. One of these days, I’ll even master the art of meal planning for the week instead of simply for the next 3-4 days.

My advice to you is learn to grocery shop then spend more time in the kitchen. If there’s something you want to learn to make, there’s someone on the Internet who has a recipe and a video to show you how. I can promise you that $60-$80 spent at the grocery store will yield you a ton more food than the same amount spent at a restaurant, fast food outlet, or food delivery service.

Stay out of debt

For whatever reason, our society has decided that it’s a good idea to put people into debt. The scope and manner in which any one person is able to go into debt is truly breathtaking: student loans, vehicle loans, mortgages, credit card debt, etc…

There’s no legal limit either. It’s not like there’s a law which says “No person is permitted to carry more than $650,000 of debt at any one time.”

So long as there is a creditor who is willing to extend you credit, you can dig a deep a hole as you choose. Even after a creditor stops extending you new credit, the hole still gets deeper thanks to the power of compound interest and the piling on of fees.

Do yourself a favor. Don’t go into debt. If you’re already in debt, then work very hard to get out of it.

You know those savings that I was talking about at the start of this post? Take 25% of them and throw them at your debt. You can use the snowball method or the avalanche method to make extra debt payments over and above your minimum payment.

I really don’t care, which method you choose. Just start making those extra debt payments and get yourself out of debt as soon as possible.

Again, I’m not an expert.

I’m just a person who has learned a few things about money from my own experience. I’ve also observed the financial choices and outcomes of others. Getting out and staying out of debt has done wonder for my financial life. Spending less than my net income has allowed me to set aside money for my retirement while also fulfilling most of my short-term and medium-term goals. Cooking at home has definitely contributed to a heavy wallet. My emergency fund helps me sleep well at night.

Even though I’m not an expert, some of these tips might help you too. Take what you need – leave the rest.

Take Action Today – Don’t Wait for New Year’s Eve!

As you may know, I’m not a fan of New Year’s resolutions. To my mind, if something is good for me, I should start doing it today if it’s in my power to do so. Waiting for some arbitrary date on which to implement something beneficial seems a little… stupid. Delaying means that I’m continuing with something not-good instead of making my life better as soon as possible.

But that’s just me. You do you as you see fit.

There are exactly 6 weeks left in 2022. You might to cast a thought or two towards the status of your money and how it’s done in the past 10.5 months. Are you happy with how you handle money? Do you think that there are areas where your habits & choices could be tweaked? If you could go back in time, would you make the same choices?

Most importantly, what have you learned about yourself from the way you use your money?

Emergency Fund

How’s your emergency fund? You really should be plumping it up. Inflation is still a bear and interest rates are going up. When the emergency lands, you’ll be grateful that your emergency fund is on the larger side. Make sure you’re adding a few dollars to your emergency fund every time you’re paid. It takes quite a while to get it to a five-figure size. Even if it’s only $5, start there and work your way up. More is usually better when it comes to having money in your emergency fund.

I have yet to hear anyone complain about having “too much money” when they’ve lost their job, or had to repair the vehicle they need for work, or had to wait for their sick leave benefits to kick in. An emergency fund is supposed to replace your income for a short-term period until you’re working again. No one really ever knows how long they’ll be out of work, so more is better when it comes to having money set aside.

And since no one ever knows when something will happen that will threaten their income, it’s best that you take action today. Do not wait for the next calamity to arrive before you start funding your emergency fund. Think of the people who lost their jobs when COVID-19 arrived in 2020. Want to bet that many of them wished they’d had an emergency fund in place to cover their bills while they were unable to earn their income?

Funding your retirement – TFSA and RRSP accounts

Maybe you’ve got a pension. Maybe you don’t. Either way, you should be saving for your own retirement. After all, a pension is simply a promise. Sadly, promises get broken. Just ask the pensioners who worked for Sears and Nortel. Those retirees did not get the money that they were promised. In short, these workers held up their end of the bargain by working for their employers for decades with the understanding that they would be paid a pension amount every month. To put it mildly, the employer did not come through on that promise.

Don’t let this happen to you! Start saving money for your own retirement, over and above whatever your employer has promised you. Every time you’re paid, shuffle a little bit of money into your personal retirement account. If you’re fortunate enough to have money for both, start with your Tax Free Savings Account and fill it up before you move on to contributing to your Registered Retirement Savings Plan. Despite their names, do not leave money in your TFSA and your RRSP in savings accounts. Invest your money in the stock market by using exchange-traded funds or index funds that are equity-based.

The sooner you invest, the sooner your money can start to grow. Take action today.

Once you’ve invested your money, leave it alone. If you’re more than 5 years away from retirement, then you’re investing for the long-term and you can safely ignore the Talking Heads of the Financial Media. The THFM are there to generate ratings for their media platform, not to give you a personalized assessment of your current financial situation. If you want that kind of attention, then hire a fee-only financial planner. You’ll pay the bill and you’ll have the assurance that her or his opinion is about your money circumstances. Again, hire a fee-only financial planner. Anyone else is probably just a salesperson who get a commission when you buy a recommended product.

Track Your Expenses

Where does your money go? How many automatic expenses go through your bank account or your credit card? How much do you spend with cash?

It’s my belief that knowledge is power. In order for you to be powerful with your money, you need to know how you spend it. Start tracking your money. Use an app. Fill out a spreadsheet. Pick up a pen and put it to paper. I don’t care what method you choose. The bottom line is that you need to know where all of your money is going.

Armed with that information, you’ll be able to figure out if your spending choices align with your life’s priorities. In other words, are you spending your money in the best way possible to get what’s most important to you?

Right now, we’re in an inflationary period. Everything is more expensive!!! The same dollar buys less today than it did last year. Given that reality, it’s vitally important that you’re satisfied that you’re spending choices reflect your goals. Unless you get a raise, it’s not like you have more money available for daily life. Winning the lottery, inheriting lots of money, and getting an insurance payout are not reliable or predictable ways to obtain more money. For most of us, we work – we get paid – we spend-and-invest our paycheques. Unless our paycheques increase, there’s precious little flexibility to get more money.

You give up time doing whatever-you’d-rather-be-doing to work and earn money. Respect your efforts enough to know where that money is going. Take action today and become intimately familiar with how, when and why you’re parting with your hard-earned money.

Slay the Debt Monster

We all know that it’s incredibly easy to get in to debt. Credit is everywhere! A few clicks on your phone, tablet, or computer and some creditor will be sending you a credit card in moments. Credit and debt are two sides of the same coin. You cannot go into debt unless someone has extended you credit. Alternatively, you can’t be in debt if you don’t use credit. See how that works?

If you have debt, then do what you can to get out. Maybe you take a second job and the paycheque from that job goes straight to your debts. Perhaps you start selling things that you don’t need or use anymore. Money from those sales goes straight to your debt. Do some batch cooking so you can cut back on eating out. There’s always the option of giving up subscriptions for a few months. Do you need all of your streaming services right now? Could you live with one of them for 2-3 months, then switch to a different one later? While they’re still only less than $20 each, if you have more than 5 streaming services then you’re spending close to $100 per month.

Take that $100 per month and throw it at your debts. Pick the smallest debt – pay it off first by adding the $100 to your minimum payment on that debt. Take that former payment and add it to the $100. Apply that payment amount to the minimum payment on the next smallest debt and pay it off. Now two debts are gone. Take those two former minimum payments and add them to the $100. Apply that amount to the minimum payment on the third smallest debt and pay it off.

This method works. You’re making minimum payments on all of your debts, except for the one that’s getting the extra money.

That’s it – that’s the post.

Hopefully, you’re doing okay. No one can predict the future, but I can promise you that tomorrow’s challenges will be easier to handle with money in the bank. Take action today and make the money moves that will help you to make your dreams come true.

Some Random Thoughts About Money

Never let it be said that I’ve ever held myself out as a money expert. Truth be told, I have no formal training in financial planning. I’ve read lot of books and lots of blogs, but I’ve never been certified to give financial advice to anyone.

With that said, I’d like to share some random thoughts I’ve had about money over the years. It’s been my observation that there are general principles about money that will work for most people. Here are the ones that I want to share with you. And if you don’t agree with me, that’s fine. I’m not arrogant enough to think I know all the answers or that my way is the only one that works. Take what you need and leave leave the rest.

Take care of your emergency fund

First of all, it’s always a good idea to have an emergency fund. Larger is better, but any amount is better than nothing when the emergency hits. There will be an emergency at some point – it’s not a matter of “if”. It’s a matter of “when”. Do yourself a favor. If you haven’t started an emergency fund, start one today. And if you do have an emergency fund, try to bump it up by 10%. Inflation has been on a tear so whatever emergency you have in your future, it’s going to cost you 6%-8% more due to inflation.

By its very definition, an emergency will not give you a heads-up. It’s on you to prepare for its arrival by setting some money aside for the financial aspects of whatever emergency is headed your way.

No new debt

The next thing you’re going to want to do is avoid going into more debt. If you’re not in debt, then great. Keep it that way. However, if you have debt, then seriously consider working your way out of it. Cook at home more to save money. Eliminate a streaming service or two for a few months and re-direct that money to your creditors. The fact is we’re heading into – or are already in – a recession. Not everyone is going to keep their job, or have an easy time finding one should the need arise. If that might be you, it would be very, very smart of you to minimize the strain that debt payments put on your paycheque.

After all, any money that doesn’t have to go to your creditors is money that stays in your pocket.

Invest for the long-term

Third thing – don’t stop your investment program. If you’ve been here for awhile, you know that I strongly suggest that everyone invest in the stock market. My non-expert recommendation is that you invest for the long-term in a diversified, equity-based exchange traded fund. For the past year, the stock market has been trending down and it’s been extremely volatile. Big deal! The long-term trajectory of the stock market is up and to the right. Over time, the stock market make money for investors. You need not concern yourself with daily movements.

If you’re investing in diversified, equity-based ETFs, don’t stop. Keep investing! However, if you’re investing in individual stocks, then God be with you. I have no idea how to pick winners and wish you the best of luck in your efforts to do so! If you’re not investing in anything, it’s time to start. You cannot participate in the stock market’s recovery if you’re not investing in the first place.

Use your tax shelters first. This means, put your ETFs in your TFSA first then into your RRSPs. Once you’ve filled up those tax shelters, you can invest in a brokerage account. Since TFSA and RRSPs are tax-shelters, the money will grown inside them tax-free. When the money comes out of your RRSP, you’ll pay taxes on the withdrawal. When money comes out of your TFSA, you will not pay any taxes on the withdrawal. Got it? Good. Don’t believe me? Talk to an accountant.

Once your tax shelters are maxed out, then continue to invest via ETFs in a brokerage account. The capital gains and dividends earned will be taxed each yet, but at a preferential rate. This means that they will be taxed at a lower rate than that tax rate you’ll pay on your earned income.

Again, talk to an accountant for professional tax advice.

Quick review:

  • Emergency fund? Check!
  • Debt paydown? Check!
  • Investing for the future? Check!

Now what?

Well, if you’re fortunate enough to still have money leftover, you’ve got many good options.

Might I suggest some sinking funds? The new year is less than 10 weeks away. If there are any particular dreams you want to realize in 2023, then now is as good a time as any to start planning on how to pay for them.

  • Do you want to travel in 2023?
  • Will you be taking some new course(s)?
  • Is it time for that home renovation you want?
  • Do you want to make more or bigger donations next year?
  • Are there any big celebrations or anniversaries that will happen in 2023?
  • Is there a chance you’ll be taking a sabbatical?
  • Will you need to purchase or replace any equipment for your business or side hustle?

Creating sinking funds and filling them up via automatic transfers is a good way to ensure that your priorities are funded. It’s been my experience that my money is frittered away when I don’t have a plan for it. Sinking funds have been a godsend for me since they ensure that money is in place when I need it. Chances are, they’ll serve the same purpose for you if you decided to use them.

And finally…

Remember to enjoy today. So much of financial planning and money management is about the future. While it’s good to take care of Future You, it’s just as important to live in the present. Wishing away your life is no way to live it. Count your blessings and enjoy them while you can. Today won’t ever come again, and tomorrow is promised to no one.

A Few Basic Tips for an Era of Rising Interest Rates

According to the Talking Heads of Financial Media, the central banks will continue to raise interest rates. This means that credit will continue to get more expensive. In other words, it’s going to cost you more if you need to borrow money for a house or if you have a line of credit. I’ve yet to see anyone talk about whether credit card interest rates will go up as a result of central banks’ increases. Let’s just say that I wouldn’t be surprised if credit card rates increased too.

So what are you going to do about it?

You do you. Take my words with a grain of salt. You know your numbers better than I do. Take what you need from this blog post and leave the rest. It won’t make any difference to me.

Invest

First, don’t stop investing. The stock market is down. In my opinion, which is both very inexpert and completely amateur, the stock market will continue to be extremely volatile for the next 12 months. This means that you should be buying and holding for the long-term. The stock market will recover, but absolutely no one knows when. Buying now means buying low. You want to buy low.

When you do buy, don’t sell. Stock markets are volatile right now. That means the value of your investment will go down on some days, then creep up a few days, then go down again. If you’re buying diversified exchange traded funds and mutual funds, you’re in it for the long haul. The price will gyrate, sometimes wildly. Do not check the price everyday. Invest regularly and believer that, over decades, the stock market’s trajectory is up. When you are investing for the long term, day-to-day price movements are inconsequential to your overall investing plan.

If you’re buying individual stocks, then you’d better know what you’re doing. I don’t invest in individual stocks because I don’t have sufficient knowledge to make wise choices.

No New Debt

Second, don’t borrow any money. This one might be tricky. Again, you know your situation better than I do so do with this suggestion what you want. Don’t borrow any money. If you’re bored with your vehicle and want another one, keep driving your vehicle. Being bored is way less expensive than paying 7.99% to a dealership. (Keep in mind that’s the rate they offer to people with good-to-great credit. I can only imagine the rates offered to those with less-than-stellar credit scores.) Do not finance another vehicle since interest rates on car loans are also increasing. If you simply must replace whatever you’re currently driving, then pay cash.

Maybe you’re ready for a vacation. Great! Pay cash. Perhaps a little self-care is in order? Do what you need to do. Pay cash. The new Bright-and-Shiny has finally been released and you’ve been waiting for it for a very long time. Fantastic and congratulations – go & get it! Pay cash.

It is not a good thing to go into debt when interest rates are going up. And they are going to keep going up for the next little while. Do yourself a favour and pay cash so that you don’t have to worry about them.

Eliminate Current Debt

Third, work on paying off any debt that you’re already carrying. I have no tips on how to change the past. If you’re in debt, then there are precious few ways to get out.

One method has two parts. First, don’t acquire more debt. In other words, start paying for things with cash or debit. Two, pay off the remaining balances on the debt you already have.

Have the money come out of your account as you pay for your purchases. Believe me when I say that you will naturally decrease the number of purchases you make. Fewer purchases results in having money available to make extra payments on your outstanding debt. Sending extra money to your outstanding debts results in those debts being paid off sooner rather than later. Once the debts are eliminated, creditors no longer have a claim on your money. This is a very good thing.

That’s it. That the 2-step method for getting out of debt. While this is a simple plan, it is not easy to implement. Never confuse simple with easy.

The other method to eliminate debt is bankruptcy. If you need to go that route, then talk to a bankruptcy trustee for expert advice. Bankruptcy trustees know the process and can offer you expert advice on how to deal with your situation.

Emergency Fund

Keep your emergency fund as full as possible. If you had to use it, then focus on replenishing it. Now is not the time to be on the high-wire without a safety net, financially-speaking. While you have a paycheque, ensure that a portion of it is diverted to your emergency fund until you have 9 months of expenses in there.

In my inexpert view, the recession is here although it might be nascent. People’s jobs aren’t as secure as they might like. When paycheques disappear, the emergency fund has to be there to take its place. (In an ideal world, everyone could live off the dividends and capital gains from their investments. We do not live in an ideal world.) If there’s a chance your job could disappear, then you need an emergency fund.

If you have an emergency fund, and you haven’t had to use it, then you’re in a great position! You should still consider padding it a little bit more though. Maybe adding another 10% to what you already have in there. No one has every complained about having too much money during an emergency.

Breathe

You’re doing your best. No one is perfect with money. Everyone’s situation is different, and you’re the only person who has to live with your financial decisions. Your money isn’t limitless and you’re making the best choices available to you with the funds you have. The fact that you’re even reading personal finance blogs is evidence that you care about making good choices with your money. You want to live your best life with the money you have.

Good on you! Take things one day at a time. Save-invest-learn-repeat. As you know better, you’ll do better. You can do this!

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.

Time for a Mid-Year Check-up!

Tempus fungit. It’s a Latin phrase that means “time flies”. Truer words have never been spoken, in any language. It’s already the middle of 2022. How is your money doing? Are you on track to meet your financial goals? If you don’t know the answers to these questions, then it’s time for a mid-year check-up.

Emergency Fund

You need not share your answer with the class. However, you definitely have to be honest with yourself. Have you had to dip into your emergency fund this year?

If yes, then I hope you’re taking steps to refill it. Trust me when I say you’ll have another emergency at some point in the future. Emergencies don’t do your the courtesy of giving you fair warning. They happen unpredictably so you need to replace any monies that you’ve used from your emergency fund this year. Make it simple on yourself. Set up an automatic transfer so that you’re sending $50 or $100 (or whatever your budget will allow) to your emergency fund every time you get paid. If you already have an automatic transfer in place, increase it by $50-$100, or by whatever amount your budget will allow.

If no, then add another $1000-$3000 to your emergency fund. In case you’ve been living on another planet for the past few months, allow me to be the first to say “Welcome back! We missed you! Oh, and you should know that inflation is up 7%-8%. This means that your emergency fund needs to be a little bigger since paying for your emergency just got a little bit more expensive.”

Achieving Your Goals

Cast your mind back 5.5 months to early January. What were your financial goals for 2022? Are you on track to achieving them?

Assess your spending for the past 6 months and determine if your money choices got you closer to, or further from, meeting those goals. Congratulate yourself if you’ve met some or all of those goals already. You did the work so you deserve some recognition of your efforts.

On the other hand, maybe you haven’t been able to meet your financial goals. Do you have any idea why? To answer this question, you must assess your spending to date. The most efficient way to complete this assessment is to review your expenses.

I hope you’ve been tracking your money, whether on a spreadsheet, via an app, or with a pen & paper. Myself? I’m a spreadsheet person. The method really doesn’t matter. Tracking your expenses clarifies whether your spending habits are aligned with your priorities.

And if you haven’t been tracking your expenditures until now, then you should start. Every time a nickel leaves your wallet, record its destination. No one has ever been harmed by knowing where their money goes. Information is power. Seeing a written record of where you’ve spent your money will assist you to align your money with your most important objectives. At the very least, you’ll be able to determine if you’re sacrificing your goals by spending money on that which you’ve decided is less important to you.

You can only spend each dollar once – either it goes to your goals or it goes to your not-goals. The choice is yours.

Check your subscriptions

Summer is here. And it will be gone far too soon. Maybe you’re spending more time outside. If that’s the case, maybe you want to eliminate some of your subscriptions for the next few months. I cut the cord several years ago, but I continue to use other streaming services. Now that I’ve got my garden going, and have many little chores to attend to after work, I could probably cut those services from my budget for a few weeks. It wouldn’t hurt me. I’m very, very, very confident that the service providers will happily take my money in the fall when I move back inside.

You know yourself better than I do. Could you live without some of your subscriptions for a few weeks? No one is telling you to give them up forever. I’m simply suggesting that you live your life without them for a few weeks while you’re doing other things that don’t involve staring at a screen and scrolling endlessly for something to watch. Again, it’s your money so you get to decide how to spend it. I’m simply nudging you to consider whether it’s a waste of money to pay for those subscriptions during the summer if you’re going to be outside soaking up the nice weather while it’s here.

Cut yourself some slack.

No one is perfect. And this goes doubly so for money decisions. You’re doing the best you can with what you know. There are other things going on in your life and they’re probably taking up a lot of your time, energy, and attention. It’s not always easy to pay attention to your money, even though you know it’s important. I get it. I’ve been there too. However, I promise you this – when you know better, you do better.

This mid-year check-up is meant for you to identify any areas that might need some effort. If you’ve veered off-path, then you can course-correct sooner rather than later. Make tweaks as needed, then go back to the business of building the life that you truly want for yourself.

Are you doing what you want with your money?

Two thirds of 2021 are in the rearview mirror. You should probably spend a few minutes figuring out if you’re doing what you want with your money.

In other words, is your money moving you closer to or further from your life’s goals?

Maybe dealing with your money is just one-more-thing, and you’re dealing with enough. I get it, really! The pandemic is lasting way longer than we’d expected. The climate change consequences are no longer something to worry about later. The impacts are being seen and felt right now, every single day, all over the world. There’s a lot going on and it’s not all good, so that might make it harder to focus on mastering money.

Be that as it may, there have always been lots of significant events going on in the world. Gues what? There always will be. However, while we’re striving to make the world a better place, you still need to put your money to work. The state of the world doesn’t absolve you of the responsibility you have to Future You.

There is a straight-forward way for amateur investors such as ourselves to invest. It’s our best bet to improve the odds that we’ll be able to live comfortably when we’re no longer sending our bodies and minds to work every day.

Allow me to share my secret with you, again. Put your money on auto-pilot! You’ve got enough to worry about and investing money for your future need not be on that list. Set it up once then let the magic of computers do the rest.

  1. Set up an automatic transfer of a set amount of money from your chequing account to your emergency fund.
  2. Set up a second automatic transfer to your investment account. This can also be your retirement account.
  3. Buy units in equity-based exchange traded funds or index funds with management expense ratios below 0.25%.
  4. Don’t withdraw money from your investment account.
  5. Save. Invest. Learn. Repeat.
  6. Live on whatever’s leftover after these transfers have gone through.

Doing these few things will save your bacon when the time comes. You might feel that you want to spend all of your money right now. After all, tomorrow is promised to no one and you only live once, right? There’s a certain seductive allure to that perspective. Resist! You’re going to need money for all of the tomorrow’s headed your way. You might not know how many of them you’ll get, but the odds are very good that you’re going to need money for most of them.

The bottom line is that you should be doing what you want with your money. If you’re not, figure out why and do what needs to be done to change that situation.