Tag: Portfolio

A Potentially Horrible Boss

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

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

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

Assess Your Situation

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

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

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

Get Horrible Boss Insurance

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

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

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

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

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

Money Buys Options

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

Blah-blah-blah!

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

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

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

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

Invest Your Money or Pay Down Debt?

The question often arises about whether it’s better to invest your money or to pay down debt.

My position is that you should do both. The reality is that the younger you are, the more time your money has to compound if invested. From the tiniest acorn did the mighty oak grow, and all that. So if you’re younger, you have time on your side. More time means a longer investment horizon, which means larger returns by the time you retire.

On the other hand, debt inhibits the growth of your net worth. The longer it takes you to pay off your debt, the more interest you pay to your creditors. This is not an ideal situation. Instead of paying interest to your creditors, you should be earning a return on your investment. However, you can’t earn any returns if you don’t have the money to invest.

So here’s my proposal – invest while you pay off debt. Why can’t you do both? If the interest rates on your debt are lower than what you can achieve over the long term in the stock market, then pay the minimum on your debts in order to maximize your investment returns.

Mortgages

At the time of this post, 5-year mortgages in Canada can be had for 2.5% and lower. These are lifetime lows, which will likely be around for the next 2 or 3 years. If you’re in a position to lock in one of these ridiculously low rates, then you should seriously consider doing so.

If you have a mortgage and you’re paying the bank 2.5%, then I don’t want you to make extra payments on the mortgage. I want you to invest in the stock market for the long term. Over the long term, the stock market has returned an average of 7% to investors. I want you to learn about investing in index funds. Then I want you to pick one and to start automatically investing your money.

When mortgage rates are at historical lows like they are at the time of this post, there’s no sense in repaying your mortgage faster. So long as you can earn the long-term average stock market return, you’ll be earning 3 times the amount you’re paying on your mortgage. It would be stupid not to do so while you can.

Vehicle Loans

The same rule applies if you have a car loan at a reasonable interest rate. My definition of reasonable is that it is less than 6%. If you’re paying a higher rate, then you can split your investment money in half. One half will still be automatically invested. The other half will be sent to your vehicle loan so that it is paid off faster. When the vehicle loan is gone, then you can put the money back towards your investment. You’re also free to use your regular car loan payment for investing or for something else.

Let’s say you have a monthly car loan of $750 and you’ve got a 60-month loan at 6% (or higher). And you also have $500 per month that you’re investing for long-term growth. Divide the $500 in half, so that you’re now paying $1000/month on the car payment and directing $250/month into your investments. When the loan is paid off, you can go back to investing $500/month. You’ll also have $750 in your budget that no longer has to be sent to someone else. You can keep the $750 in your own pocket.

Oh, and the next time you want to buy a car? Save up for it first! If you can find the way to pay a loan of $750, then you’re just as capable of squirrelling $750 away every month until you can pay for your next vehicle with cold, hard cash.

Student Loans

By now, you should be picking up what I’m laying down.

In the interest of transparency, I will tell you that I graduated with $15,000 of student loans. I made it my mission to repay those loans within 2 years of graduating. With the benefit of hindsight, I have to say that my net worth would be higher today if I’d invested my money in the stock market and stuck to the 9-year loan repayment plan that I’d been on. My shaky memory suggests that my monthly payment had been something like $150. If I’d known then what I know now, I would not have made double and triple monthly payments to pay that loan off so damn fast.

Today, people are graduating with six-figure debts. And the word on the street is that they are not all finding high-paying employment with their very expensive educations.

I still maintain that if you’re in your 20s and 30s with a large student loan, it makes sense to pay the minimum on those loans and invest in the stock market. When you’re in your 20s and 30s, you still have 3-4 decades for the money to compound if you’re not planning on early retirement. Your income will go up as you expand your skillset, refine your expertise, and gain useful experience. Use 25% of your increased income to bump up your student loan repayment. Take another 30% to inflate your lifestyle just a little bit! Make sure the remaining 45% of your increase is invested.

The analysis has to be a lot more nuanced if you’re still paying off a six-figure debt in your 40s and 50s. The question of whether to invest your money or pay down debt isn’t as crystal clear. What I do know for sure is that it’s almost always a bad idea to retire with debt.

If you have student loans in your 40s and 50s, then you need to divide your investment amount between your portfolio and your student loans. Pay those loans off before you retire! Once they’re gone, go back to ploughing as much money into your investment portfolio as you possibly can. Your investment window is going to be smaller due to age. However, that doesn’t lessen the onus you have to yourself to fund your retirement.

Without a solid investment portfolio whose returns outpace inflation, a person on a fixed income is going to have to pay for everything with dollars that are always losing value. Believe me when I say that you don’t want to be paying off debt in retirement.

I’m telling you right now that you need to have a portfolio that can support you when you no longer have employment income. As I’ve said before, pensions are disappearing. It’s on you to set aside enough money for your golden years. Unless you remain healthy, getting older is going to suck enough on its own. You need not make things worse for yourself by being old and burdened by student loans debt.

The Exception!

If you’re carrying credit card debt, forget about investing until that debt has been eradicated. Credit cards carry double-digit interest rates. The chances of your investments giving you a return higher than the interest charged on credit cards are exceedingly slim.

Focus on getting out of credit card debt, then you can start investing your money. Here are the steps to getting out of credit card debt.

  1. Stop using your credit cards to buy things.
  2. Make extra payments to your credit cards until each card is paid off.
  3. As each card is paid off, do not use it again.
  4. When all cards are paid, take your former credit card payments and invest them for the long term in an equity-oriented index fund.
  5. Do not use your credit card without first saving up the cash in your bank account to pay for the eventual monthly bill.

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Weekly Tip: One thing to keep in mind that your portfolio doesn’t stop working just because you do. When you stop working, you won’t simply cash in your portfolio. Rather, you’ll structure your portfolio so that it’s continuously invested in manner that creates a cash flow for you until the day you die. This means that equities will continue to be a steadfast workhouse, ensuring that your portfolio lasts as long as you do.