Tag: Millionaire

Five Ways to Join the Double Comma Club

First off… not everyone has the financial ability to pursue all of 5 of these tactics at the same time. So, as always, do what you can right now. When you can do more, then do more. This post won’t be about starting your own business or making money through real estate. It’s geared at those who have income, who want to invest some of it for their future selves, and who want to eventually be millionaires. So with that proviso out of the way, let’s turn to the five paths you can take to join the Double Comma Club.

Tax Free Savings Account (TFSA)

The name sucks. It really does. As I’ve mentioned elsewhere on this blog, the government did a disservice to people by calling this a “savings” account. It should be viewed as an investment account. The money that you put into this account will grow tax-free. You can withdraw money from this account and you don’t have to pay taxes on the gains. In light of this feature, this account should be used for investing for the Care and Feeding of Future You.

There are rules about contributing and withdrawing money in the same year. You can read those details here. Essentially, if you take any amount of money out in a calendar year, i.e. 2024, then you cannot return that same amount of money to your TFSA in 2024. You can return that money in 2025 or later. (If you mess this up, then the Canada Revenue Agency will penalize you. So don’t mess up.)

Right now, the annual contribution room to TFSAs is $7,000. Ideally, you’re able to stuff that much into your TFSA all in one shot. If you can’t, please don’t let that stop you from contributing something. Set up an automatic transfer so that you’re contributing something to your TFSA every time you get paid.

If you’re paid bi-weekly and you contribute $50/paycheque, then you’ll be setting aside $1,300 in a year. That’s way better than $0/year. Remember, this is money that will grow tax-free. Start where you can and increase your contribution amount as you’re able to do so.

Should you come into a lump sum of money, then stuff your TFSA right away so that it can start growing for you as soon as possible. The sooner your money is invested, the higher your odds of reaching the Double Comma Club. Here are some examples of lump sums:

  • inheiretance
  • tax refund
  • divorce/lawsuit settlement
  • lottery win

Do not let the money just sit in the account. You must invest it. Personally, I invest my money in the stock market by using exchange-traded funds from Vanguard that are in the equity category. Equity products are those that are growth-oriented. They are suited for people who don’t want their investments decimated by inflation. Equity products have more volatility, but they deliver the best return over the long-term. You should be stuffing your TFSA with equity products to maximize the compound growth of your contributions. When it’s time for Future You to live off the money in your TFSA, you’ll be glad that your cash cushion is as large possible.

I used to invest in dividend ETFs because I loved the monthly dividends they paid me. However, I would have done better overall by investing in growth-oriented ETFs. Don’t make the same mistake that I did. Start investing in the growth-ETFs first. You can worry about getting dividends later.

Registered Retirement Savings Plan (RRSP)

In all fairness, it takes $269.23 bi-weekly to contribute $7K to your TFSA. If you’ve been fortunate enough to max out your TFSA contributions every year, then you should do the same with your RRSP. You can find out how much RRSP contribution room you have by going to CRA’s website.

The RRSP gives you a tax deduction for every dollar that you contribute. It’s a tax-deferred account, which means that you pay taxes on the withdrawals that you’ll eventually have to make. In short, the government will make you draw down your RRSP starting at age 71.

In the mean time, the money in your RRSP will grow tax free!

There’s a lot of debate about whether the RRSP is a tax-trap. In my little opinion, it’s better to pay taxes on money that you have than not pay taxes on money you don’t have. When Future You is too old or too ill to work, you probably won’t mind having a fat and juicy RRSP that gets taxed when you withdraw the money that you need.

As with the TFSA, I would urge you to stuff your RRSP with any lump-sum monies that you received. Do so after stuffing your TFSA. After all, the TFSA is the home of money that will never be taxed. As such, you should aim to have as much of your money in your TFSA as you possibly can.

If you’re not in line for lump sums, then go back to your tried-and-true automatic transfer. Each time you’re paid, send some money to your RRSP. When your income goes up, the increase the transfer amount. Eventually, your RRSP contributions will be maxed out. Yay for you!

Invest in equity-products, ideally ETFs. I’m not a fan of mutual funds because they’re too expensive. They have higher management expense ratios than ETFs, yet they do not – and cannot – guarantee higher returns. If I’m not getting a higher return, then why would I pay more money?

The MER is the slice of each investment dollar that goes to the investment company offering the product. My ETF has an MER of 0.22%. This means that $0.22 of every $100 that I invest goes to Vanguard. I used to own the equivalent mutual fund (at a different company), where I was paying an MER of 0.76%. Essentially, I was paying an extra $0.54 for every $100 invested. I saw no good reason to continue that trend so I switched from mutual funds to ETFs.

I know that $0.54 is a very trivial amount of money. Keep in mind that eventually you will be worth over $1,000,000. At that point, the extra MER of 0.54% means that the MER to be paid will be $5,400 per year. This is unnecessary! I don’t know about you, but I don’t see any need to fork over an extra $5,400 to anyone when I can get the same thing for less. Check out this calculator and play with your own numbers if you need more convincing.

Non-Registered Investment Account aka: Brokerage Account

Okay – this is where the steak starts sizzle. Unlike the TFSA and the RRSP, there’s no limit to how much you can invest in your brokerage account. You will pay taxes on your capital gains and dividends each year, but that is not a reason to avoid investing in this account. If anything, you want to earn as many capital gains and dividends as you possibly can because they aren’t taxed as heavily as income you get from your employer. I’m not a tax expert so speak to an accountant if you need more details. Trust me when I tell you that you need a brokerage account to better your chances of joining the Double Comma Club sooner rather than later.

Let’s say you’ve maxed out both your TFSA and RRSP. Don’t cancel that bi-weekly contribution. All you need to do is re-direct it to your brokerage account. Never forget that your automatic transfer is proof that you’re living below your means. It’s the amount of money between what you earn and what you spend. When you see money being automatically sent to your various accounts, be proud of yourself! Living below your means is no easy feat.

Once the TFSA and RRSP are fully funded, you should re-direct your automatic savings to your brokerage account. After all, you’re used to living without that money in your budget. Also, investing every time you get paid is a fantastic habit. There’s no good reason to break a good habit. The money going into your brokerage account will be working alongside the money in your TFSA and RRSP to ensure that Future You lives a comfortable life.

In my little old opinion, you should be investing atleast 25% of your take-home pay. (For transparency sake, I’ll admit to investing one third of my paycheque. It’s a good chunk and it’s easier to do when one is debt-free and childfree.) As always, the choice of how much to save is yours alone. It’s the money you earned so you have final say over where it goes.

For the third time, you can contribute lump sum amounts to your non-registered account.

The money should be invested in equity-focused ETFs with low MERs. My definition of low is anything less than 0.35%. Others only buy ETFs with MERs less than 0.10%. Don’t let the MER be the sole factor you consider when purchasing your ETFs. I have one ETFs with an MER of 0.55%, but it’s consistently paying me a 4-figure dividend every month so I’m loathe to sell it at this point.

Pay Off All of Your Debts

I have to admit that I had qualms about putting this method in the fourth position on my list. You see, I didn’t follow my own advice. I paid off my debts first – student loans, car loans, mortgage – then I seriously started investing. My former mortgage payment went into mutual funds and later ETFs. The same thing happened with student/car loans.

Looking back with the wisdom gained from experience, I should not have accelerated my mortgage payments every year. I should have been putting that money into the stock market. I would’ve had my mortgage for a lot longer. (It was paid off in 2006.) However, I also would’ve had a lot more money in the stock market, which was on a tear from 2008 to 2020. In short, investing my money in the stock market sooner would have meant greater compounding over a longer period of time on a bigger pile of cash.

Live and learn.

You need not repeat my mistake.

If you have the money, pay off your debts while you’re investing for Future You. It’s in your interest to ensure that you have as few financial obligations as possible. Make all of your minimum payments as required while stuffing your TFSA and your RRSP. If your debt is paid off before you’ve stuffed those accounts to the gills, then take that former debt payment and send it to your other debt payments. In this way, your debts get paid off faster than originally planned.

Should you receive a lump sum before your debts are entirely gone, I would suggest splitting it in half. Send half of the lump sum to the Care and Feeding of Future You accounts, aka: your TFSA and then your RRSP. Ensure that the other half goes to your debts, particularly your credit card debt if you have any. That’s almost always the most expensive debt so it’s in your best interest to get rid of it first.

You’re free to do what you want with your hard-earned money. I kindly ask that you consider investing for your future while at the same time you’re working hard to pay down your debts.

Oh, also – once you’re out of debt, don’t go back into it. Do what you need to do to save up your money before you spend it. Paying as you go is far preferable to committing future income to today’s needs.

Spend Your Money

Yes – you read that correctly. I want you to spend your money – not all of it, but some.

Look. I know that I am constantly asking you to invest a part of your paycheque for the future. But I also realize that every single one of us lives in the present. We should all be able to enjoy some of our money today. Right?

My story involves a lot of travel, entertainment, and various stuff. It’s just that it arrived at different times of my life. Once I’d paid off my house, I started sending my former mortgage payments to my RRSP and my brokerage account. When the TFSA came into being, I started sending money there too.

And while I was paying off my mortgage and investing for Future Me, what was I doing to live in the present?

I was eating out with my friends two or three times a week. I travelled to the US to see family and to visit different places. I went to concerts. I did renovations to my house. I bought my beloved SUV. Once I’d maxed out my accounts and hit a savings rate of 1/3 of my take-home pay, I decided to spend a little bit more money. Some people want to hit a savings rate of 50% or even 70%. Living on that little of my paycheque wasn’t the goal for me. I could achieve my goals by saving one third of my paycheque. Everything over and above that target could be spent however I wished. In my case, I started travelling overseas. I did bigger renovations to my home. In the past 8 years, I’ve been to Europe 4 times… and that 8-year period included 4 years of not travelling by plane. I even paid for a professional financial planner. (That was money very well-spent because he told me that I could retire 2 years earlier than I’d planned!)

That’s a long-winded way of saying that you should spend some of your money along the way. Investing for Future You and paying off your debts are two very important financial goals. Living in the present is also a very important financial goal. Spend some of your money today so that you’re building up your inventory of memory dividends and making your dreams come true. Future You will thank you!

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.

Money-Making Magic – Real Estate Investing

It’s taken me a few years but I finally understand how to create money from real estate re-financing. It’s another aspect the money-making magic of properly investing your money.

Right off the top, I want to tell you that I have never done this. In other words, my understanding of the process is only theoretical and it is not based on my own experience. I have never bought a property, renovated it, and then re-financed it to extract my investment.

Secondly, I want to be explicitly clear that I am not telling, instructing, advising, recommending, or otherwise encouraging you to do this with your money. It’s just a theory that I have finally understood so I want to share it with the world via this blog.

I’m a fan of the podcast Millionaires Unveiled. In episode 145, the hosts were talking to a guest who had made significant money in real estate. The guest used the same BRRRR method espoused by Brandon Turner at Bigger Pockets. You may also want to check out Graham Stephan on his YouTube channel, where he goes through a detailed example of how to profitably invest in real estate.

A Simple Example…as I understand things!

Purchase Price – $80,000. Renovations – $20,000. Total Investment – $100,000. After Repair Value – $150,000. Re-Finance & Cash Out @ 85% of ARV – $127,500. Free Money to Investor – $27,500.

So let’s un-pack this.

In this example, the investor bought a property for $80,000 in cash, meaning that there was no mortgage debt to the bank. (This example also works if the investor invests a 20% down payment – $16,000 – and gets a mortgage for the remaining $64,000. Either way, she’s still buying an investment property for $80,000.)

Renovations of $20,000 were made to the property. At this point, the investment in the rental property is $100,000 = $80,000 + $20,000.

The money-making magic starts when the investor goes to the bank to get financing on the property. (If the investor had had a mortgage, then she would’ve “re-financed” the property.) In the example above, the bank appraises the property at $150,000, which is $50,000 more than the investor’s total investment. The bank agrees to finance 85% of the ARV, which puts $127,500 back into the investor’s hands. As we all know, $150,000 x 85% is equal to $127,500.

(And if the investor started with a mortgage, she would go to a second bank to re-finance the property. She would then pay off the mortgage of $64,000 at the first bank, and be in the same position as if she had paid the full $80,000 up front. $127,500 – $16,000 – $64,000 – $20,000 = $27,500.)

Since there is now a mortgage on the property, equivalent to $127,500, the investor uses the rent from that property to pay back the mortgage. If everything goes perfectly, the rent will also cover other costs such as insurance, property taxes, and repairs.

In this example, the investor has earned $27,500 in free money through the money-making magic of real estate investing. Remember, she invested $100,000 of her own money ($80,000 + $20,000) and is walking away with $127,500 after financing her property. There are three things to take-away from this example.

  • The investor now owns an investment property while also recouping her entire $100,000 investment. In other words, she has none of her own money in the property.
  • If everything goes right, someone else is paying the mortgage and costs of this property with a little something leftover for cashflow to the investor.
  • Finally, the $27,500 is tax-free money. This is money that was derived from a higher appraised value. She’s removed some of the equity from the property and put it in her own pocket.

If you decide to start real estate investing, get proper accounting and tax advice from professionals you’ve paid to do work on your behalf. Do NOT take accounting and investing advice from blogs on the internet.

Lots of Things Have to Go Right for This to Work

The rewards are bountiful when things go right. In our example, the investor had the money to invest. The appraised value after the renovations was high. The bank was willing to finance 85% of the property value. There was a pool of available renters who could afford to pay a rental amount that covered the mortgage payment and associated costs of the investment property. The market rental price was high enough to cover the mortgage payment and the aforementioned associated costs.

Let’s say the bank had only wanted to finance 65% of the ARV. Our investor would have only been able to pull out $95,700 (= $150,000 x 65%). She would not have pulled out her entire $100,000 and the increase-in-equity-through-the-power-of-smart-renovations amount of $27,500.

Or let’s say that the real estate market had dropped between the date of the purchase and the date of the new appraisal. The bank tells our investor that the appraised value had come back at only $115,000, instead of $150,000. Even at the 85% ARV financing, the bank would only give the investor $97,750 (= $115,000 x 85%) to put towards the purchase of her next investment.

Another area where the plan could’ve gone haywire is the renovation costs. If our investor had budgeted $20,000 for renovations but wound up paying $50,000 for renovations, then her investment amount in the property would be $130,000 (= $80,000 + $50,000) instead of only $100,000. If the re-appraised value remained $150,000 and she could finance the property at 85%, she still would not be extracting her full investment of $130,000 because the bank would only be giving her $127,500.

Finally, there’s always the possibility that the renter stops paying the rent and the investor is forced to pay for the property. Every dollar out of the investor’s pocket is a decrease in the return from the investment property. The money-making magic has suddenly been turned into a money-sucking curse.

Research, research, research!

Like I said at the beginning, I finally understand the theory behind the money-making magic of real estate. It’s taken me years and many, many, many hours of listening to various podcasts & YouTube videos, but I finally get it. Now that I do understand it, I personally think it’s disingenuous to use click-bait language like “buying real estate with none of your own money.”

Obviously, at some point, you will need money to invest in real estate. It’s more accurate to say that there isn’t always a need for your own money to stay locked inside your investment properties… Okay, I get it – my language isn’t nearly as catchy and it would never qualify as click-bait.

However, that doesn’t change the fact that I generally know what the pundits mean when they use the click-bait language. I’m not a real estate investment expert. I haven’t put this theory into practice, and I’m not certain that I ever will. What I am certain of is that I finally understand – in a very rudimentary way – how a person can own real estate without keeping their money in an investment property. If the stars are aligned just right and nothing goes awry, real estate investors have the ability to own real estate without their money remaining in their investment properties.

It’s certainly not risk-free, but it does sound like it could work if everything goes right. If it’s something that you’re interested in, then I suggest that you start learning as much as you can before you start investing.

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Weekly Tip: Pay off your mortgage before you retire. It’s not good to go into retirement with debt. You will more than likely be living on a fixed income. Do what you can to ensure that creditors aren’t take a bite out of your fixed income every month. You won’t regret the fact that you’re mortgage-free when you’re retired.

Book Review – Quit Like A Millionaire

Two people I’ve been following online for the past few years – Kristy Shen and Bryce Leung – wrote a fabulous book called Quit Like a Millionaire. You should read it sooner rather than later. (And let me be very clear, right up front – I am not being compensated by anyone for this review.)

Kristy and Bryce are also the masterminds behind the magnificent blog called Millennial-Revolution. And while some of the tidbits of the book have been disclosed on their blog, I can assure readers of MR that there’s so much more to their story that they haven’t already divulged online.

Their story is great for a variety of reasons. To start off, Kristy came from poverty. Her parents immigrated to Canada when she was young and she’s worked very hard to achieve her current success. I can’t tell her story as well as she can. However, this is a very accomplished woman whose initial idea of wealth was having a single can of Coca-Cola. Kristy has worked her ass off to earn her wealth!

Another thing I love about Kristy & Bryce’s story is that it’s a great example of how living below your means and wisely investing in the market can propel you to financial independence very early. Despite the volatility that they faced during their initial years, they stuck to their plan to invest in equities to achieve their goal of early retirement. Did I mention that they retired at age 31?

I’m not trying to blow smoke. Their means were more than adequate. Both of them graduated with engineering degrees and, together, they were earning a six-figure income within a year of graduating. Unlike the majority of people who start earning big-money after graduating, this dynamic financial duo chose to save very large chunks of their paycheque and to invest it in the stock market.

Show of hands – are you saving big chunks of your disposable income? Or have you made the choice to spend every penny you make?

Do what you want! It’s your money after all. I’m simply going to tune you out when you complain that you don’t earn enough to do what they did. You’ll need to show me your expenses and your income if you want to convince me that you can’t live below your means and invest for long-term growth. Knowing where your money goes is the first step towards controlling it.

That’s another beautiful element of Quit Like a Millionaire! Kristy and Bryce tracked their expenses for years, and then they disclosed them in the book. In other words, they laid bare the money choices they made each year to live the life they wanted while pursuing financial freedom. Not every blogger does this so I give them kudos for being so transparent. Even though they were making bank as DINKs, they never lived on more than $51,000. And you want to know what’s even crazier?

They spent $51,000 shortly after graduating from their engineering program. Every year after that, their annual spending went down while their incomes continued to go up!!! This is a couple who understood the perils of lifestyle inflation and fought against it, hard. They continued to live cheaply while still traveling, investing, and enjoying life with their friends. Kristy and Bryce didn’t become hermits or give up anything that really, really mattered to them. They prioritized their goals and made sure that their money was funding their dreams of attaining early retirement.

Kristy and Bryce also made the wise decision of finding a crusty but trustworthy financial advisor who helped them invest their money when they decided not to follow the herd’s example. Kristy and Bryce earned their early ticket to financial freedom, in part, by not yoking themselves to a huge mortgage. (Again, I’m not endorsing Garth Turner. No one is compensating me for mentioning him or his blog. I’m just stating the facts as I understand them. If you want to work with a financial investor, then I encourage you to do your due diligence to ensure that you pick the right person for the job.)

Another magnificent feature of this book lies in the appendices. Kristy & Bryce teach you the formula for creating a spreadsheet that tells you when you’ll reach your own Financial Independence number.

Oh, come, Blue Lobster! Everyone already knows how to do that!

Well, excuse me! I’ll be the first to say that I didn’t know how to create such a spreadsheet. However, I know now and that means a little bit more knowledge to help me reach my goals. I was contemplating using some of my savings to pay off my rental property, but thanks to Kristy and Bryce’s formula I now realize that doing so would set my retirement date back by a couple of years. As they do on their blog, Kristy and Bryce’s Quit Like a Millionaire will teach you stuff that you might not already know.

A new year starts in a few days. Much ado is being made about the fact that a new decade also starts in a few days. So, if you’re looking to make some changes in your financial life, then you should do yourself a solid. Take a few hours to read this book and figure out for yourself how to Quit Like a Millionaire.