Tag: Financial Advice

This is the Greatest Way to Use Credit Cards!

The greatest way to use credit cards comes down to 2 simple steps.

  1. Only credit cards when you have cash in the bank to pay the balance.
  2. Pay your credit card balance off in full every single month.

In the interests of transparency, I will admit that I use my credit card all the time. Gas? Groceries? Travel? Clothing? Repairs? Streaming services? Subscriptions? Theatre tickets? Birthday presents? Electronics?

Yes, yes, yes! I tap my credit card for all of it. I love earning points with my card because points translate into dollars at the grocery store. A few times a year, a big grocery haul can be purchased with points. This is a great thing for my cash flow. Other people I know prefer to swipe for travel rewards. They’ve got large families so travel rewards work to ensure no one family member need be left behind. And I know there are people who simply love getting cash-back. If I weren’t getting “free” groceries, I would definitely be using a cash-back card.

Also in the interest of transparency, I pay off my credit card balance every single month. I have a very simple method for doing so. After I make a purchase on my credit card, I go to my chequing account and send a payment equivalent the purchase amount to my credit card.

I rely on the pay-as-you-go method to keep my credit card balance at $0. Personally, I prefer to pay off the charges right away, instead of waiting to get my statement at the end of the billing period. Making multiple payments throughout the month ensures that I don’t “accidentally” spend the money in my chequing account on something else. By paying the charges as I incur them, I’m not under the gun to come up with a large amount once a month to pay off the full statement balance. Also, paying my credit charges as they arise is a pain the butt. If I don’t want to experience the pain, then I don’t spend.

For those larger-than-normal purchases that crop up in life, I rely on my sinking funds. I don’t swipe my card without having the money set aside already. For example, I replaced my computer this week. I knew a new computer would be a 4-figure hit to my wallet, so I’ve been saving for this purchase for the past 6 months. When I went to buy it, it was no big deal to use my credit card. The money for this expense is already sitting in the appropriate sinking fund. All I have to do now is simply transfer the money over to my chequing account and send a payment to my credit card. Easy-peasy-lemon-squeezy!

By following these two rules, I have discovered the greatest way to use credit cards. I never pay interest. My credit score remains high. I stay out of revolving debt since my credit card balance is always at $0. And I get to collect lots of points that can be used to buy anything I want at my preferred grocery store.

If there’s a better way to use credit cards, please do share with the class.

Not all advice is for all people

As I’ve gotten older, I’ve had to realize that some of the nuggets of wisdom that I hold dear won’t work for everyone. Even my cherished belief that everyone should live below their means is flawed. It is literally impossible to follow the LBYM edict if you most basic needs – food & shelter – outstrip your take-home income. Advising everyone to “live below your means!” is tone-deaf to the reality that not everyone has sufficient means to survive.

Another bit of wisdom that I’ve always questioned comes from the blogger behind GreaterFool. Prior to the pandemic, this blogger encouraged everyone to sell their home, invest the proceeds in the market, and live off the dividends and capital gains. Quite wisely, he took the position that cash flow is more important than net worth. Beneficiaries of outsized tax-free capital gains on their home would be smart to sell it and invest the proceeds in a diversified stock-and-bond portfolio. In turn, the portfolio would churn off enough money to pay rent to a landlord somewhere.

The blogger explained how landlords were effectively subsidizing their tenants. In his view, home prices were going to drop drastically so homeowners would be better off selling their home at high price points and becoming tenants. Before the pandemic, market rental rates were less than the landlord’s expenses to own and operate rental units. The landlord couldn’t increase the rent too much or the tenant would walk away and find somewhere else to live. At the higher end of the rental market, this was a serious concern.

So if a homeowner could sell their home, and their proceeds could cover the rent of a comparable rental property, then it would make sense to sell. The homeowner-turned-renter would realize the tax-free capital gains of their home and move into a landlord’s property. According to the blogger, their invested proceeds would generate enough dividends and capital gains to cover the cost of market rent. The landlord would cover the difference between the rent received and the costs of owning the unit. The homeowner-turned-renter could then cover the rest of their expenses with income from their employment.

The first time I heard this financial advice, I was really impressed. It sounded like a very good thing, but then I started asking questions:

  • what if there was a dividend cut or the capital gains dropped?
  • what if rents went up faster than growth on the invested portfolio?
  • what if the portfolio was compromised somehow?
  • what if the portfolio’s generated returns weren’t enough to rent in the first place?

These are the questions that would keep me from sleeping well at night. Never worrying about how I’m going to pay for my shelter is one of the very best benefits of having a mortgage-free home. Others may feel differently.

I’ve no doubt that the blogger’s proposed financial path would work for some people. After much careful reflection, I realized that I wasn’t one of them.

This advice never sat well with me, even though I own a mortgage-free home. Yes, selling my own home would give me a six-figure sum to invest. In my case, the resulting dividends and capital gains wouldn’t be enough to cover rent for a comparable property in my city. I would have to keep working way beyond my intended retirement date. It would be years and years and years before my portfolio would be generating enough money to cover all of my expenses.

Once again, I’d be sharing walls with strangers and living without those little extras a house brings to one’s life: added privacy, extra room, green space. Undoubtedly, my rent would increase every year and I’d be without any guarantee that my investments would churn out enough money to cover those rising costs. Finally, if I was living off my dividends and capital gains, then I wouldn’t be able to have them automatically re-invested. In short, I’d lose the benefit of compound growth.

Nope. This blogger’s advice was not for me. There were too many drawbacks and too few benefits given my preferences and how I want to live my life.

That said, I could certainly see this advice working for people whose homes were worth over $3,000,000. At a conservative 5% return, there would be $150,000 of favourably-taxed income to spend every year. With that many millions to invest, there might even be enough money to cover inflationary pressures and rising rents.

In my humble opinion, an investment portfolio of less than $3,000,000 wouldn’t work for me. That’s not to say it wouldn’t work for someone else. Again, not all advice is for all people. In my head, going into my dotage while still paying rent to a landlord is rarely a wise course of action. Rents tend to go up. Without the benefit of compound growth over the long term, my dividends and capital gains would eventually become insufficient to cover rising rental rates.

For the record, my house is not worth an amount anywhere close to seven-figures. Investing its proceeds might generate $1000 per month. In my city, that’s currently not enough for the average 2-bedroom apartment. Why would I move from a comfortable-for-me-sized house to an apartment with half as much space, no yard, and less privacy?

With my own paid-off house, I benefit from compound growth of my dividends and capital gains while I’m still working. Yes – I still pay property taxes, insurance and repairs for my home. However, those aggregate costs are far less than what I would pay in rent to a landlord, year-in-year-out. When I eventually stop working, I don’t have to worry about rental increases because I own my home.

The only benefit I see to the blogger’s proposed course of action is immediate lump-sum investing. Someone following his advice would be able to invest a big chunk of money today and benefit from long-term growth. The stock-and-bond portfolio would grow over time and possibly make the homeowner-turned-renter wealthier that someone like me. I rely on consistent bi-weekly contributions from my paycheque to dollar-cost my way into the market. In short, my chosen path was to pay off my mortgage in under 5 years then build an equity-based, buy-and-hold investment portfolio. I’m making contributions but I’m not going to receive the benefits that come from investing a huge lump-sum immediately. This is because it’s always better to invest as much as you can, as soon as you.

The blogger in question is writing for a wealthier audience. I’ll still visit his blog to learn things and to get a perspective on how some of the Wealthy handle their money. I’m seasoned enough to know that I won’t agree with everything this blogger writes. Those best-served by his views are those who have a considerably higher level of wealth than I do.

As you continue to learn about personal finance, you’ll come across many suggestions about what to do with your money. Think carefully! Every money mistake can be undone, given enough time. Yet, wouldn’t it be nice to avoid those mistakes in the first place? Just because something is a good idea or it’s works fabulously for someone else doesn’t mean that it’s the right move for you. It never hurts to remind yourself that not all advice is for all people.

Money Wisdom – Words From My Mother

When I think about where I am financially, I also think about the choices that got me here. Some of them were smart ones. Sadly, many of them were not. Most of the time, I dwell on the money mistakes. Recently however, I got to thinking about the money wisdom that helped me tremendously. Truth be told, it came came from various sources. Unsurprisingly, the advice that came from those closest to me made the biggest impact. Words from my mother, uttered over 20+ years ago, set me down a very good path.

A long time ago, I had a job at a local banking institution. One day, I called my mom in tears. There had been talk about job cuts and I was very worried that I’d lose my job. I had just moved out of the house and wasn’t making a whole lot of money. Rather that offering words of comfort or solace, my mother laid down the hard, pragmatic truth.

“So long as you work for someone else, you’ll always have to worry about losing your job.”

Damn…

Like I said, my mother laid it down. Thankfully, I had the brains to pick it up and to govern myself accordingly. My mother didn’t tell me what to do. She bluntly told me how the real world works. My view of the term “job security” was forever altered by her words. I can’t thank her enough for that!

My mother’s words came back to me as I was listening to a Youtube video while washing the dishes. It was one of those personal finance shows. The guest was explaining how she’d paid off 15 credit cards! She’d been furloughed for 35 days right after being hired. She swore that she would never again allow anyone else to control whether she had enough money in her bank account to pay for her basic necessities. The furlough ended and she got down to the business of paying off her debt and building her emergency fund.

Both myself and the YouTube guest had to make some sacrifices to solidify our financial foundation. We learned from our experiences of having our paycheques threatened. Here is a fact that none of us can escape. We live in a society were money means access to food, shelter, medical care, transportation, clothing, and options. Losing the ability to earn enough money to buy what we need is traumatic, unless you have a sufficient emergency fund to tide you over until the next source of income.

My mother had been completely honest with me. Thankfully, I realized that it was up to me to figure out to build a buffer for myself just in case. You’d best believe that a slice of every at-the-time-meagre paycheque found its way into my emergency fund. When I graduated school and started my career, I continued to divert money into my emergency fund.

I also made it a priority to maximize my RRSP contributions, and then later my TFSA contributions. Even in my 20s, I knew that I would stop working one day. I also knew that I would still need to eat and shelter myself as a retired person. Getting old doesn’t vitiate the need for money. Money for my golden years would have to come from somewhere, and it was up to me to figure out where.

On top of my RRSP and TFSA contributions, I directed a good chunk of money to my non-registered investment account. The words from my mother spurred me into taking action. As a result, I’m in a comfortable position today. If I were to lose my job now, I could survive on the cash flow from my investments. It wouldn’t be a luxurious lifestyle and I’d have to cut some fat from my budget. However, I’d be able to pay my bills without going into debt before finding my next job.

Let’s be real. Just because someone gives you wisdom doesn’t mean that you’re going to follow it. I could’ve ignored my mother’s words and chosen not to fund my emergency account. Had I done so, I would’ve been ignoring the truth and leaving things up to chance. There are so many things over which we have no control in life! Whether to build a financial buffer need not be one of them. Luckily for me, I had a bit of disposable income so I had the ability and opportunity to start saving.

My advice to you is make hay while the sun shines. The words from my mother are just as true today as they were 20+ years ago. Do you have enough money to survive for 35 days without a paycheque? Your next paycheque isn’t guaranteed. You need to be ready in case it doesn’t show up. Building a decent-sized emergency fund is going to take some time so start today. Whatever you can spare after paying your debt and paying for life should be sent to your emergency fund. And if you already have an emergency fund, great! Fill up your TFSA, then fill up your RRSP. If you’ve already crossed those tasks off your to-do list, awesome! Time to start funding your non-registered investment account. In short, you should always be saving a little something from every paycheque.

It’s not easy, believe me. And it takes a few years to get a few thousand dollars set aside. We all know that life isn’t getting cheaper. And paycheques do not grow quickly, atleast not in my experience. On top of that, there’s always someone who’s trying to get their hand in your pocket! We live in a society where we are encouraged, exhorted, and expected to spend every penny that comes our way.

Be that as it may, you owe it to yourself to prepare for the day when you might be the one losing a job or getting furloughed. Should that unfortunate day come, you need to be ready. The bills won’t disappear simply because your paycheque’s gone bye-bye. You need to build an emergency fund and keep it healthy. There’s no time like the present. Start today!

Go Beyond the Letter “A”

With age comes wisdom…or so they say. Speaking from personal experience, I can say that my wisdom is arriving in dribs and drabs. For their part, the birthdays arrive at a seemingly more frequent pace. I’ve made plenty of money mistakes, but I’ve finally learned to go beyond the letter “A”.

Blue Lobster, what the hell are you talking about?

It’s simple. I’ve finally learned to take my own advice about continuing to learn about personal finance. When I was younger, I would read a book and believe that the author’s words were the definitive way to do one particular thing. It never occurred to me that the author wasn’t a subject matter expert. After all, she or he had written a book! Who was I to doubt their greater experience? Or to even suggest that their advice/steps/insight might not be applicable to my individual circumstances?

Thankfully, the good folks behind the X-Men franchise created a villian who uttered words of wisdom that I’ve since learned to implement in my own life: “Take what we need, gentlemen.”

And later on, I came across a variation of the above: “Take what you need. Leave the rest.”

Looking back, I would’ve made fewer money mistakes if I had come across this wisdom sooner. For example, one of my biggest money mistakes was to focus on eliminating debt while ignoring the need to invest in the stock market at the earliest opportunity. I read The Total Money Makeover many years ago. I followed this book’s instructions diligently and focused extremely hard on getting myself out of debt.

What I regret is that I didn’t consider the possibility of investing my money sooner while paying off my debt slightly less agressively. My money mistake was in pursuing one path without giving adequate consideration to the other options open to me. I read this one book and I assumed that it was the optimal path for my life & my money. Then, I followed its steps without question.

In other words, I did not go beyond the letter “A”… I made the mistake of believing that the starting point represented by the letter “A” was the whole alphabet and that I didn’t need to learn anything more than what was in the pages of this single book. I was young and inexperienced, but also so very, very wrong.

Looking back now, I see that taking advice without considering my own individual goals and priorities is never the smart thing to do. There is more than one way to achieve the ultimate objective. Had I taken the time to consider the option of investing sooner while taking slightly longer to pay off my debt, then I would be in a position to retire now. One of my long-term goals has always been to retire as soon as possible instead of waiting until my 60s. By following the path set in the TTMM book, instead of considering all of my alternatives before choosing a course of action, I’ve delayed my retirement date by atleast 5 years. Ouch!

As I’ve written before, I wholeheartedly accept some of the Baby Steps as set out in TTMM, but I do not accept all of them as the one true path to financial prosperity. For those who are financially fortunate enough to do both, I would suggest investing in stock market while also paying off non-mortgage debt. The debt will eventually be gone, and you’ll be left with an investment portfolio that’s chugging along. At that point, you have the choice of investing your former debt payments in order to meet your financial goals faster. Or you can continue with the same contribution level you’d established while paying off debt and use your former debt payments in other areas of your life. In both options, you have an investment portfolio working hard for your 24/7 while you go about the business of living the life you want to live.

That said, I don’t want you to make the same mistake I did. Keep in mind that I’m not a financial expert nor am I licensed to give financial advice. Rather, I’m just an anonymous voice on the internet that enjoys talking about personal finance and sharing what I know. Consider my words and evaluate the source, then determine whether either proposed course of action gets you closer to fulfilling your life’s dreams and ambitions.

I’ve been working hard to practice taking-what-I-need-while-leaving-the-rest in my life. This new-to-me perspective requires me to broaden my horizons by considering things that I would’ve automatically disregarded. Metaphorically speaking, it’s necessary for me to go beyond the letter “A”. The first piece of knowledge is akin to the first letter of the alphabet. This is not the point at which I should simply stop learning. I need to move to letter “B” if I’m going to maximize my chances of learning how to get what I want.

For me, moving from one lesson to the next involves routinely assessing my habits. Some I’ve kept. Others I’ve discarded. I still read about personal finance every chance I get. I’ve purposefully found people who share my love of this topic. I seek out those who give me insightful feedback on my plans & ideas. No longer do I blindly accept everything that’s posited by someone else. By forcing myself to learn as much as I can, I’ve developed a nuanced approach to new ideas about how to achieve my goals. At the end of the day, I’m much better at assessing when to stick to my chosen path and when to tweak it ever so slightly. No longer do I give the opinions of others more weight than they are properly due.

Today, I ensure that I always go beyond the letter “A”. My dreams and priorities are too important to leave to chance. It’s up to me to do my very best to make them come true. Only time will tell if I’ve minimized my money mistakes. Even after decades of reading and learning about personal finance, my education is still not complete. My knowledge is hard-won, yet there’s still more to learn, more to consider.

You owe it to yourself to pursue your own life’s goals too. You are worthy of having the life you dream of, so make sure that you always go beyond the letter “A”.