Tag: Knitting

The Secret to Wealth? Invest the Difference.

Three little words. These three small words have the power to change your financial destiny if you make the choice to implement them in your life.

Invest the difference. What does that mean?

In a nutshell, it means you should be living below your means. The LBYM-lifestyle translates into always having a gap between what you earn and what you spend. Your goal is to make the difference between your earnings and you spending as big as possible while still enjoying your life from day to day. Then you’ll take that amount, ie. the difference, and you’ll invest it for the long-term. The bigger that amount, the sooner you’ll reap your investment gains. Then you’ll let those gains compound for a couple of decades. At some point, your investment gains will able to support Future You, whether wholly or in part, when you’re no longer able to send your body out to make money.

Kindly keep in mind that staying out of debt is a key part of living below your means. If you’re constantly paying money to creditors month after month after month, then you won’t have those dollars going into your investment portfolio. Also, paying creditors 29.99% when you can only reasonably expect an average return of 8%-10% over the long-term is a losing proposition for you.

Pay off your debts then start investing.

If you have debts, focus on paying them off first.

Unless you’re over 35. If you’ve hit your mid-30s, then you need to invest while you’re simultaneously paying down your debts. Yes – you’ll pay a little more interest this way, since your debts will stick around longer. In my humble opinion, that’s not your biggest concern. Once you’re solidly into your adult years, then you need to start making adult decisions. And one of those decisions is to take care of Future You by investing money for your care and feeding 30 years from today. Once you’ve hit your mid-30s, then you need your money to be working for you as soon as possible. In your case, ASAP = immediately. It doesn’t not mean “tomorrow”.

The trick will be to not go into anymore debt. Make a plan and stick to it. As your debts get whittled away, re-direct 50%-75% of your former loan payments to your investment. The rest of the former payment can be spent bulking up your emergency fund. If your emergency fund already holds 9-12 months expenses, then spend that money on the little luxuries that make your life more comfortable.

Maybe you want to enjoy a nice bottle of wine once a month? Or would you rather travel somewhere? Perhaps you finally have the money to comfortably handle the long-term financial commitment of a pet? You know what you want better than I do. My point is that you should use some of that money to add what you really want into your life.

If you need a plan for how to pay down your debts, I would suggest using the Debt Snowball method. Despite the controversies that are always swirling around the man who made them famous, this method of paying off debt is an effective and straightforward way to rid your life of creditors. Do not go into further debt while paying off your current ones. I cannot stress this enough. Staying out of debt is incredibly important to Future You’s survival and comfort.

Where should you invest your money?

In my humble and inexpert opinion, your money should first go into your Tax Free Savings Account. Then it should go into your Registered Retirement Savings Plan. Finally, you should be investing in your non-registered investment account, aka: your brokerage account.

Don’t feel bad if you can’t max out your TFSA and your RRSP right away. It literally took me years to max out my contributions. (And I treated myself to something nice when I finally accomplished this goal!) Invest as much as you can, as soon as you can. Eventually, your debts will be gone and you’ll have the funds to contribute. Stick to your knitting and you’ll accomplish this goal. Remind yourself as often as you need to that it likely won’t happen overnight.

So those are the broad strokes. Think of them as the first principles of wealth. You simply have to live below your means, stay out debt, and invest the difference. If you do that consistently for a very long time, the odds of you becoming wealthy increase dramatically.

Stick To Your Knitting!

This past year has cemented a long-held suspicion of mine when it comes to money. No one knows what the future will bring. People can prognosticate all they want, but that’s hardly a guarantee that their words are accurate.

For months, the Hair-and-Teeth set of the financial media have been talking about the impending crash. They keep saying that a bear market is around the corner. Their message has been consistent, yet… it’s also been wrong. I’ve no doubt that the market will crash at some point, but I’ve also no doubt that they have no idea when it will happen. From where I’m sitting, it’s safe to ignore the chinwag from the prognosticators.

Secondly, there’s been non-stop chatter about the impending increase in mortgage rates. Will rates stay low forever? Nope – they won’t. Has anyone said exactly when they’ll go up? Nope – nothing definite. The last I heard, mortgage rates will start going up at some point in the future. No one knows exactly when, nor does anyone know by exactly how much they will rise.

I understand that financial media outlets are businesses. They exist to make money. In order to do so, they sell financial news. The fact is that they won’t make a profit telling us to invest 20% of our income into equity-based exchange-traded funds. That’s not sexy. It certainly isn’t alarming. Such advice is so bland that it’s equivalent to unbuttered toast. There’s no sizzle so the Hair-and-Teeth set divert our attention and ruffle our feathers with the sexy stuff, the stuff that can be carefully crafted into a fear of what the future might bring.

My advice? Ignore the talk.

Here are a few good reasons why.

They’re not talking about your personal circumstances. Sure – maybe you have a mortgage. And it’s possible the rate is going up in 5 years. It’s equally possible that this is your last mortgage term and you’ll never have to make another mortgage payment again. If that’s your case, what do you care if mortgage rates are going to go up?

Secondly, the 30-second news blurbs are only presenting one perspective. The soundbites are never designed to present options and alternatives. If the market crashes, so what? It’ll go back up. And if you’ve diversified your portfolio through the appropriate mix of equities and bonds, or if you have a long enough time horizon, the next market crash will be an inconvenience. It won’t be a catastrophe. Yet, you’ll never hear the Hair-and-Teeth set discuss any one financial topic in-depth. They’ve got advertisers to whom they are beholden. They present one viewpoint, and that’s it… until they become beholden to another advertiser.

The best reason to ignore the chinwag is because you have a life to live. Take 30 minutes to set up an automatic transfer to your investment account. Spend another few minutes arranging for your investments to be purchased on a regular basis. Ensure your transfers are working as you wish, then go about pursuing your other life goals. You shouldn’t be worrying about your money all the time.

For my part, I’m a buy-and-hold investor. I have been for nearly 30 years. Last year, I tweaked my investment plan just slightly. I’d been a strict dividend investor for decades, which means I’ll earn just over $29,000 in dividends this year. Looking back, I think I erred in not investing my cash in equity ETFs. The stock market was in full growth mode from 2009 to the onset of the pandemic. I could’ve grown my portfolio a whole lot more…<sigh>… live and learn. I can’t complain too, too much. After all, nearly $30,000 per year from passive income is superb. My choices couldn’t have been too, too bad if they’re resulting in that many dividends every year.

My little tweak has been good for my portfolio. I’ll hang on to my dividend investments, unless someone presents a really good reason why I shouldn’t. Future monies will be invested into my equity-based ETFs. Those have done pretty well for me over the past year. Will they be impacted when the bear market eventually arrives? I’m sure they will be. At the same time, I’m equally certain that they will recover as the stock market does. In the meantime, I’ll be buying units each month with nary a regard to whether the market is up or down.

I’m going to suggest that you be like me. Invest your money and let it do its thing. You need not follow nor adhere to the words generated by the Hair-and-Teeth set of the financial world. Just like you, they can’t tell the future. No one can. So stick to your knitting. Create a plan. Execute the steps of your plan. Live your life. Everything else is noise.