Tag: The Automatic Millionaire

Find Serenity in What You Can Control

Sometimes, I think that people procrastinate about starting their investment portfolios because they don’t understand every element of how various investment products work. They’re afraid to invest and to lose their money. I can understand that fear completely. Believe me when I say that I share that fear too!

However, it’s a fear that can be tamed if you can find serenity in what you can control.

Here’s the thing. No one can control the stock market. Contrary to what you see from the Talking Heads of Financial Media, there really isn’t any way to control what happens in the future. People can predict – they can approximate – they can calculate likelihoods. These are fancy way of saying that the chinwag is simply a guess. It might even be an educated one, but it’s a guess all the same. Allow me to assure you that there is not a single one among us who always knows which stock will soar like Facebook or tank like Enron, ascend like Tesla or plunge like Bre-X.

You can’t control the vagaries of the stock market nor their impact on your investment portfolio. Only God knows what’s going to happen with any particular stock in the future.

That said… there are three areas where you do have control. Your choices in these areas will have a significant impact on the growth of your investment portfolio. Think of these areas as levers that can be manipulated to increase the odds of you amassing great big buckets of cash. If you manipulate all three levers, then you can vastly improve your portfolio’s return.

Amount and Frequency

You control the size of the contributions to your investment portfolio. How much you save is the single most important factor influencing the amount of money you ultimately accumulate. The more you save and invest, the faster your money will compound and grow. The best returns in the world will not get you to your goal if you don’t actually contribute money to your investment account.

Play around with this compound interest calculator if you don’t believe me. At a steady rate of return, a higher contribution grows faster than a lower contribution. In other words, a $500 contribution will compound faster than a $100 contribution.

The second most important factor, in my humble opinion, is the frequency of the contributions. I’m paid every two weeks, so I contribute to my investments every two weeks. Personally, I think it’s best to contribute when you have the money to do so. You should always pay yourself first when you get paid. That means taking some portion of your income and investing it for growth. If you haven’t read it yet, get your hands on a copy of The Automatic Millionaire by David Bach. It’s great!

If you’re paid bi-weekly, then contribute bi-weekly. Paid monthly? Invest monthly. Go back to the calculator and compare the difference in future value between investing monthly and investing annually. The difference is attributable to the effect of compounding.

My advice to you is to invest as much as you can as early as you can. Start harnessing the power of compounding interest immediately.

Control Your Fees

A second very powerful lever within your control is the management expense ratio (MER) of your investment product. The MER is the fee that you pay to the purveyor of the investment you buy. In short, it’s a skim from every dollar you invest and that money is spent to pay salaries & overhead to make the investment available to you.

You control the impact of these fees on your portfolio by choosing investment products that have lower MER fees while delivering equivalent results. You are the person who is choosing the products where your money will be invested. (Or maybe you’ll go with an investment advisor. I don’t have an investment advisor.)

Mutual funds are more expensive than exchange-traded funds and index funds. However, they both allow you to invest in equity products and bond products. My opinion is that it does not make sense to pay more for an investment when an equally good one is available at a lower price. However, if you want to pay a 2% MER (or higher!) on your investments, instead of a 0.25% MER for the same investments, then you are free to do so. You are an adult and, after all, it’s your money. You earned it and you get to decide what to do with it.

However, please make an informed decision. Take a look at this investment fee calculator to see the impact that fees have on your portfolio’s overall performance. If you’d rather have less money at the end of your investment horizon, then go with the higher MER. However, if you’re interested in maximizing your cash cushion, then choose investments with low MERs.

In the interests of transparency, I can state that none of the MERs I pay are higher than 0.25%. That means for every $1000 that I invest, I pay my investment company $2.50. If I had to pay an MER of 2%, then I would be paying $20.

Imagine having a nice 6-figure nest egg of $750,000. Would you rather pay $1,875 per year in MERs of 0.25%? or $15,000 per year in MERs at 2%?

Duration of Systematic Contributions

This is just a fancy way of saying that you are in charge of how long you make contributions to your investment portfolio. How long are you willing to commit to investing for your future?

I’ve always been a nerd about money, and I’ve been contributing to my investment portfolio for 2.5 decades. Let’s just say that I’m old enough to remember the Freedom 55 commercials and they struck a chord with me. I’ve been gunning for early retirement ever since!

I won’t lie to you. Without a lottery win, inheritance, or sizeable payout from somewhere, it’s going to take a good amount of time to build an investment portfolio that’s capable of replacing your income. If you’re living on 50% of your take-home pay, you can get it done in less than 17 years. Don’t believe me? Check out this handy-dandy little calculator if you want to play around with your own numbers.

For most of us, it’s going to take many years of steady investing to build a nest egg. You are in charge of whether you start now or tomorrow. In other words, you’re the person who controls whether to procrastinate on such a long-term endeavour. Once you do get started, you’re also the person who’s in charge of whether to continue investing.

Investment Portfolios Don’t Fund Themselves

Now that you know what you can control, put that knowledge to good use. Set aside a chunk of every paycheque and use an automatic transfer to make sure it’s re-directed to your investment account. Pick investments that are diversified and geared toward long-term growth. Make sure your investments have MERs under 0.5%. Keep investing and ignore the Talking Heads. Over the long-term, the stock market goes up. Day to day gyrations should not guide your investment choices. You’re in this for the long-term.

Never stop learning! Read books and blogs. Ask questions. Remind yourself that when you know better, you do better. It’s best to make mistakes with small amounts money than with large amounts of money. So when you make a mistake, forgive yourself and learn from it then move on. Find serenity in what you can control.

The time will pass anyway. Why not start today?

Retirement is coming, one way or another.

What the eyes don’t see, the heart won’t grieve…

Anonymous Online Poster

No matter how you look at it, retirement is coming.

And if you’re fortunate, you’ll get to pick when you retire. Should Life have other plans for you, then retirement may arrive unexpectedly. Either way, retirement is in your future. One of the best things you can do for Future You is to start saving today.

This year, the contribution deadline for the Registered Retirement Savings Plan is March 1, 2021. In other words, if you put money into your RRSP on or before March 1, 2021, then you will get a tax deduction that can be used against any taxes that you owe for the 2020 tax year.

Here’s a handy-dandy little chart to show you the maximum amount of money that you can put into your RRSP this year.

What’s that? You say that you don’t have $27,830 lying around to make this year’s contribution?

Do you have $1?

Fear not, Gentle Reader. The numbers listed on the chart are the maximum contribution limits. In an ideal world, you would have no trouble at all socking away this much money.

If you’re not one of the Very Fortunate Ones who can easily plunk $27,830 into your RRSP without batting an eye, then fret not. You will do what you can until you can do better. It’s really not more complicated than that.

If you can afford $1 per day, that’s $365 per year. It’s not a lot but it’s a whole lot more than nothing. If you don’t start saving this tiny daily amount, then I can assure you that you’ll regret your decision. Retiring solely on social benefits will not be comfortable.

At $5 per day, you’re looking at $1,825 per year. That’s not too shabby, but it’s also not the cat’s pyjamas. It means one less snack per day, or one less fancy coffee. (Hat tip to David Bach, who is the author of The Automatic Millionaire. This is one the first books that put yours truly on my current financial path.) Save a few calories – use your kitchen to save some money – throw that money into your RRSP and let it grow over the years.

Kick it up to $10 per day and wow! Now, you’re contributing several thousand dollars in a year. In a lot of places, $10 each day is less than you’d spend on parking your car at work. It’s less than getting a burger, fries and a drink at a fast food place. It’s not a whole lot of money, but it can certainly get you to the retirement you want if you consistently put it to good use. If you don’t believe me, check out what Mr. Money Mustache has to say about the $10 bill.

Pick your per diem.

I trust you see a pattern. By implementing a per diem for your RRSP, and setting up an automatic money transfer, you’ll be improving the chances that you’ll have a financially comfortable retirement.

Whatever amount works for your budget, that’s the amount that you should be sending to your RRSP. Before you even ask, $0 per day is not at all an appropriate amount to be saving.

Once siphoned from your daily chequing account and into your RRSP, your money will grow tax-free until withdrawn. How large will it grow? That’s up to you and/or your financial advisor.

In the interests of transparency, I will tell you that my portfolio is invested in exchange-traded funds with Vanguard Canada and iShares. I’ve gone to a fee only advisor for advice, but I do my own research and make my own investment decisions. I’m currently putting my money into equity products, after having spent 9.5 years investing solely in dividend ETFs. I’m a staunch buy-and-hold investor. That means I don’t sell after I buy. I buy what I believe to be good investments and then I just leave them alone for years and years and years. I still have the bank stocks that my parents bought for me when I was a baby…and I haven’t been a baby for a very long time!

You owe it to yourself to spend some time learning about investing your money. Save your money via automatic money transfers. Invest your money in equity products. Learn, learn, learn – as much as you can! There are books, blogs, YouTube, and people who all have information to share. Then repeat the process. Save – invest – learn – repeat!

Do not procrastinate.

Every day that you don’t open your RRSP and invest your money is a missed opportunity to grow your money in a tax-free environment. This is important because money grows faster when it is not taxed. To be very clear, money grows on a tax-deferred basis in an RRSP and you will pay taxes on the money when your withdraw it. However, if all goes well, retirement is a long way away and your money will grow into a giant pile. While you won’t be happy to pay taxes, regard that tax debt as evidence that you’re not going to be poor in your retirement. Poor people don’t pay taxes. You don’t want to be poor in your retirement.

I digress. Retirement is coming, one way or another. If you’re procrastinating about opening and/or funding your RRSP, then stop! Today’s technology means you can open and fund your RRSP from your hand-computer. You no longer need to go to a branch or talk to a human to complete these functions.

Time waits for no one. Take the steps you need to take so that you can put as much as you possibly can into your RRSP. This is a fundament step that you need to take to better your chances of having a financially comfortable dotage and being able to handle whatever financial challenges come your way when you and your income part ways.

Never Stop Reading!

Learning doesn’t stop with graduation. You should never stop reading. Read everything that you can get your hands on. Reading opens your mind to new ideas & perspectives. No one says you have to agree with everything that you read, but you owe it to yourself to learn as much as you can in the time you have left.

Since this is personal finance blog, I’m going to talk about the personal finance books that have shaped my financial life.

The Automatic Millionaire by David Bach

I loved this read for its simplicity and ease of implementation. After reading it, I didn’t have to spend too much time setting up my automatic transfers. 20 minutes? Maybe 30 minutes? In less than an hour, I’d created a system whereby a portion of my money went to my long-term goals, another portion went to my short-term goals, and the rest stayed in my chequing account to get me from one day to the next. Easy-peasy-lemon-squeasy!

I’ve been using automatic transfers for more than 2 decades. They eliminate the need for me to remember to transfer money from my chequing account to my investment account. The money is magically in place when it’s time to make an RRSP or TFSA contribution. There’s money waiting to be deployed to pay my monthly utility bills. Learning how to automate my money at a young age set me on a good path when it came to personal finance.

The Wealthy Barber by David Chilton

There’s something special about your first. I was 21 years old when I read this book. I was naive and very un-sophisticated when it came to money matters. However, this book impressed upon me the important of starting my Registered Retirement Savings Plan as soon as possible so I did. I was a student who paid nothing in taxes, hence I got a full tax refund back every year. Still, those little contributions to my RRSP have since grown into a nice six-figure income. What I took from this book is that investing is best started as soon as humanly possible.

The Two-Income Trap by Elizabeth Warren and Amelia Warren Tyagi

Senator Warren’s book was my first foray into the political implications of personal finance, and the risks that are associated with dual income families spending both of those incomes. I promised myself that if I ever married, I would make sure that my partner believed in living below our means just as much as I did. That way, we could live for today while still saving and investing.

While I’ve never married, I still set aside a good chunk of my salary for investing purposes. Mental gymnastics allows me to split my household income into two! Sometimes I pretend that the monthly dividends generated by my portfolio are the take-home pay of my imaginary spouse. It’s the best of both worlds – a second income without any money fights about how it will be spent!

Debt-Proof Living by Mary Hunt

This book was fantastic. I loved it because it gave me an infrastructure for how to set up my short-term money. One of the best ideas I’ve ever come across is the Freedom Account. Its purpose is to cover the irregular expenses that come up every year, but aren’t emergency expenditures. Think of things like oil changes, clothes purchases, pet expense, vacations. These are the expenses that do not occur regularly but still have to be covered. You don’t know exactly when you’ll have to pay for them but you know it’s going to cost some money.

I’ve had my Freedom Account for decades, and it’s been my safety net more than once. If you don’t have one, I suggest that you get one.

The Richest Man in Babylon by George S. Clason

It’s a parable that’s also a quick read. I loved this book! The financial principles about savings and investing have been around for centuries. And so have the mistakes that people make with their money. This parable touches upon the difficulties of not spending every nickel earned, finding good mentors, investing properly, and repaying debts. It’s also about the fact that get rich quick ideas are scams, more often that not. Building wealth takes time and consistency, but almost anyone can do it by following the right principles.

Quit Like A Millionaire by Kristy Shen & Bryce Leung

This inspirational story of retiring in one’s early 30s will stick with me for a long time. I learned about the challenges and strategies for early retirement. This book opened my eyes to idea of living outside of North America in order to save money. I learned about how to segment my money so that I wouldn’t have to sell from my portfolio during a market downturn.

Kristy and Bryce are the brains behind the Investment Workshop, one of the best free sources I have ever found for learning about how to create, maintain and re-balance your portfolio. Take advantage of their lessons to set yourself on a path for a comfortable retirement, early or otherwise.

Again, never stop reading!

As I’ve said before, you need not make every mistake yourself – you can learn from the mistakes of others. Books are a source of knowledge. They’re free from the library. Even in our COVID-19 circumstances, you can still access library books – you simply need to go online instead of into a building. Never stop reading!

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Weekly Tip: Create you own pension by investing your money towards your retirement. Fewer and fewer employers are offering pensions to their employees. This means that you have to save for your own retirement. If you don’t save the money for Future You, then no one will. Start today by squirrelling away a little bit of money, invest it for the long-term, learn a little bit more about investing, then start over. Save, invest, learn, repeat!