Tag: Wealth Creation

Is it Better to Invest or Pay Off Debt?

One of the perennial questions in the sphere of personal finance is whether it is better to invest or pay off debt. The answer is nuanced and there is no one right answer for anyone.

Money has to be invested in the stock market for as long as possible. Time is required so that capital gains and dividends can be accrued and re-invested on a consistent, long-term basis. In other words, compound growth works best when given a long time horizon. These facts favour paying the absolute minimum on your debts while investing money into the market.

On the other hand, paying debt for longer than necessary means that you’re sending interest payments to creditors. Consumer debt can have double-digit interest rates. Unless you’re paying 0% interest on your debt, you can be guaranteed that you’re paying interest to someone for the privilege of having borrowed their money. Debts have a way sticking around much longer than we’d like. From that perspective, it makes sense to pay off debt as fast as possible and to delay investing.

Both good options. Which one is best?

This is where nuance must be applied. Each person’s situations is different. Yet, the following remains true. Dollars spent to repay money owed to creditors cannot be invested in the stock market for long-term growth. If you devote 5 years to pay off non-mortgage debt, aka: consumer debt, then that means you’ve lost 5 years of compound growth for your investment portfolio. It might take longer than 5 years to eradicate your debts. The bottom line is that your money needs to be invested today, preferably yesterday, so that it can grow as quickly as possible.

Why not do both simultaneously?

As I’ve matured and gained wisdom, I’ve started to ask myself why the choice has to be so stark. Is there a really good reason why a person cannot do both? Why not invest and pay down debt at the same time?

Presumably, you are not living paycheque-to-paycheque. This means that there’s some extra money in your budget. If there wasn’t, then this question wouldn’t even come up in the first place. The reason you’re asking the question is because you want to make best use that extra money.

Let’s say you have an extra $250 per month. Why not send half to your investment portfolio and send the other half to your debts? I call this the Half-and-Half Method.

If you invest on no-commission platform, then you’ll be investing $125 each month for the Care and Feeding of Future You. This is a respectable start. (As you earn more money and pay off your debt, this amount should be increased.)

The other $125 can be put towards your debt as an extra payment. Some people apply extra money to the lowest balance, in order to get rid of it faster – the Debt Snowball Method. Other people choose to direct extra money to the debt with the highest interest rate, in order to pay as little interest as possible – the Debt Avalanche Method. Personally, I like the snowball method because it delivers a sense of accomplishment sooner rather than later.

Remember that nuance I was mentioning earlier? Well, there are two factors that I look at in any situations. There are probably more, but I’ve yet to ponder them sufficiently to discuss them with you in this post.

Age

The younger you are, the longer the time horizon. For this reason, I think you can devote slightly more to your debt repayment than your investments. If you’re under 30, then I’m okay if 60% of your $250 goes to debt repayment while 35% goes to investments.

Every compound growth chart out there shows that younger people can invest much less money each month to achieve the same final amount as someone who starts investing at later ages.

That said, I don’t want you to think that investing $0 is acceptable. It is not. You should be aiming for atleast $100 per month when you’re in your 20s. Again, as you pay off debt and/or increase your income, you’ll need to increase this amount.

If you’re 30 and older, definitely use the Half-and-Half method. You don’t want debt payments in retirement, especially if you’ll be living on a fixed income. However, you’ll also want to build a nice cash cushion for your retirement. The Half-and-Half method allows you to do both.

Length of Time To Pay Off Debt

This one appears to contradict my Half-and-Half method. Still, I do like the sense of accomplishment that it provides. If you can knock out a debt in 90 days or less, then commit the entire $250 to doing so and forego contributing to your investments for 3 months.

The caveat here is that this is a one-time option. I don’t want you to delay investing for 90 days, then delay investing for another 90 days to knock out another debt, and then delay investing again. Serially focusing on paying off one debt at a time is simply focusing on paying off debt. If you pay off a 90-day debt only to incur another debt that can be paid off in 90 days, then you’re better off using the Half-and-Half method. Clearly, debt is going to be a structural feature of your life so you need to be investing atleast some of your money for the Care and Feeding of Future You.

Too Long, Didn’t Read!

Is it better to invest or pay off debt?

The answer is to do both at the same time. The need to provide for Future You does not diminish just because you’re paying off debt. Contribute to your investment portfolio while you’re paying off your debts. Eventually, your debts will go away and there will be a nice cash cushion waiting for you later on down the line. It’s the best of both worlds.

Invest your money bit by bit until you’re rich.

Look… I’m not an expert on the economy. I don’t have crystal ball, nor can I tell the future. I’m in the same boat that you are – inflation is way up, house prices are crashing, mortgage rates are increasing, stock markets are wildly volatile.

What does all this mean from one day to the next?

I don’t know. And neither does anyone else.

During these economic challenges, my financial goal is to stay on track. I can’t control the stock market, but I can control whether I continue to invest. For a very long while, I’ve shaved off a good chunk of my paycheque and have automatically invested it into my various exchange-traded funds. When the market was going up, I was investing. And when the market was going down, I was still investing. Right now, the market is correcting. Guess what? I’m still investing my money, bit by bit.

My advice to you is that you should be investing too. Start where you are right now. Pick a broad-based equity fund and automatically have some of your money invested into it every time you get paid. Start with $1/day. When you’re able, increase that amount to $5/day – then $10/day – then $20/day. And if you want to invest even more than that, be my guest. The more money you invest, the better.

You start where you are, and you do what you can. I’m not going to promise that it will be fast or easy, but I can assure you that the formula is quite simple. Consistently investing some of your money on a regular basis will work.

The Talking Heads of the Financial Media should be ignored. They cannot tell you your future because telling the future accurately is an impossible thing to do. Their job is simply to talk about what might happen. Listening to them will not calm you down. I would even venture to say that one part of their job duties is to increase ratings & views. Right now, there are enough economic shocks and global catastrophes to keep their doom-and-gloom chinwag flowing for a very long time.

Again, you should ignore them. Concentrate on your own goals.

You need to focus on that which is in your control. Despite how it may seem, you have more power than you may think where it comes to your money. Firstly, you can control how much you choose to invest from your disposable income. If you invest $0 today, then you’ll have $0 tomorrow. The more you invest and the longer you leave it to grow, then the more money you will have. It’s that simple.

Secondly, you get to control whether to listen to the Talking Heads. Go back and re-read what I just wrote. They are to be ignored while you stick to your knitting. Quick refresher! Your “knitting” equates to consistent investment in equity-based ETFs or index funds over a long period of time, regardless of whether the market is up or down.

Thirdly, you are in control of ensuring that you choose to re-invest the dividends and capital gains to increase the power of compounding your returns. Dividends and capital gains are money that you didn’t have to sweat for. You lived without them before you earned them. Continue to live without them and just re-invest them. At first, they’ll be worth pennies and maybe a few dollars. After a few years, you’ll be earning thousands. They will continue to get larger so long as you re-invest them for further growth.

Finally, you and only you control whether you start today or whether you allow procrastination to flourish. It should be obvious by now that I want you to stop procrastinating. Do not let analysis paralysis stop you. Start investing today. You won’t make a “perfect” decision, and that’s okay. Nobody else is making “perfect” investing decisions either. Just start today.

From here on out, I want you to be investing bit by bit until you achieve your financial goals. Start today. Keep going when it’s hard. Don’t stop until you’re rich. That’s it – that’s the plan. Implement it.

Know Your Ex-Dividend Date & Maximize Cash Flow from Dividends

This post is about creating cash flow by understanding ex-dividend dates. Buying a share in companies that pay regular dividends is way to creating passive income for yourself. Once invested, your money will be put to work. The dividends will come to you for as long as you own the shares. It’s a great way to create a steady cash flow for your later years, when you’re no longer will or able to send your body out to work. If you’ve sent your money out to work instead, then you have some assurance that it will generate an income for you at some point.

I am not promising you that this method of generating a retirement income will be quick. I’ve been investing for decades. While I’ve learned a lot along the way, I’m still not at the point yet where my dividends can support my current lifestyle. My first dividend payments amounted to tens of dollars per year, then hundreds of dollars per year. I’ve finally reached the point where I’m earning a five-figure amount of dividends on an annual basis. It’s comforting to have that passive income, even if I still have to rise-and-shine for my employer most days of the month.

You should definitely consider whether a dividend portfolio would be a good fit for your finances. If you need to hear an inspiring story about someone who did phenomenally well at divided investing, then please check out this 2-part interview at the Tawcan blog.

Dividends & Date of Record

Companies pay dividends to shareholders who buy their shares before the ex-dividend date. There is a date of record that entitles shareholders to a portion of the profits that are distributed as dividends. It’s a very important date to know if you’re planning to receive dividends. If you aren’t listed as an owner of the underlying security on the date of record, then you won’t be paid any dividends even though you bought shares or units in that security.

Every stock, mutual fund, index fund or exchange-traded funds that pay dividends will list their ex-dividend date on their website. Personally, I have a good chunk of my portfolio invested with Vanguard Canada in the VDY ETF. This ETF pays dividends on a monthly basis. I receive dividends based on a distribution price per unit. For the most part, I know in advance just how much money I’ll receive from this security before it’s paid to me. I simply multiply the number of ETF units I already own by the distribution price to be paid. So long as I’ve bought my units before the ex-dividend date, I can get an accurate amount of the dividends that I will receive on the payment date.

Click on the link and scroll down to the bottom of the page. There, you will find the distribution frequency for VDY. Pay attention to the ex-dividend date. If I wanted to be paid on any new purchases of ETF units, then I would have to buy those new ETF units before March 31, 2022 in order to get paid dividends on those units on April 8, 2022. This is because I have to be listed as the owner of those new units on the record date, which is April 1, 2022. If I’m not listed as an owner on April 1, 2022, then I won’t be paid for those units in the month of April. Instead, I’ll start receive payment for those new units in the following month.

As I said earlier, companies pay dividends to those who are listed as an owner of the underlying security on the date of record.

Creating a Cash Flow of Passive Income Takes Time

Knowing the ex-dividend dates of the securities that you’re buying will help you to forecast your cash flow. Once armed with this information, you have the ability to know exactly when you’ll be receiving your passive income.

In the interests of transparency, I can advise that I spent years and years investing in dividend-paying ETFs. (In October of 2020, I tweaked my investment strategy and have been investing new contributions into VXC.) My two dividend ETFs of choice are VXC and XDV. As with VXC, the link for XDV will disclose its distribution dates and amounts. Both of these ETFs pay me dividends every month.

I track my purchases on a spreadsheet. Each month, I update my spreadsheets with the distribution price. This way, I’m able to calculate how much passive income I’ll be earning. It’s awesome! Unlike the money from my 9-5, these dividend payments are effort-free money. Contributions to my portfolio that were made 10 or more years ago are still churning out passive money for me.

When I was a child, my parents purchased bank stocks for my brother and I. I still own them today. Those stocks have paid me dividends for decades. I just wish my parents had been wealthy enough to buy me more! Now that I’m at my current stage of life, perhaps I should do that for myself.

Procrastination is your enemy

When it comes to investing, procrastination is a cancer. It slowly and irrevocably eats away at the potential growth of your portfolio. Your money must be invested in order to work its hardest for you. Creating a steady, reliable cash flow based on dividends won’t happen through wishing and hoping and good thought. You need to actually invest the money then leave it alone to do its thing.

If you let procrastination win, then you’re not investing before the ex-dividend date. That means you don’t receive your dividends until the following month. At the start of your investment journey, you might be missing out on a few cents or maybe just a dollar. Big deal, right? It is a very big deal. The sooner you receive your dividends, the sooner you can re-invest them through a dividend re-investment plan aka: DRIP.

While you’re building your dividend portfolio, you want to earn dividends as soon as possible. They can be re-invested with your regular contributions so that the following month’s dividend payment is even bigger. Compound growth is a key to increasing your dividend payments every month. If you invest after the ex-dividend date, you’re not doing yourself any favors.

Now, I know that you can only invest when you have the money in hand. This is why I suggest that you set up an automatic transfer so that a chunk of your paycheque is diverted to your investment account. Doing so means that you have money to invest. Sometimes, the transfer will take place after the ex-dividend date. While this is unfortunate, it’s also out of your control. You cannot invest what you don’t have.

By the same token, procrastination is entirely within your control. I don’t want you to set up an automatic transfer and just let the money accumulate. If it’s not invested, then your money isn’t being given the opportunity to grow. When you’re interested in pursing cash flow through passive income, then you need to be investing your money in dividend-paying securities as soon as you can. I do my investments every month, but you may want to do your investing quarterly or every other month or once a year. Whatever you choose, ensure that it’s result of your choice and not the result of procrastination.

As with everything you learn in life, you have the option of how to put the lesson to use. If you want passive cash flow, then start today. Get your money invested. Buy your securities before the ex-divided date. Then go about your daily life while your dividends do their thing in the background.

Commission Free Investing is Fantastic!

Allow me to be very transparent, right from the start. I’ve had a non-registered investment account with BMO Investorline for decades. They’ve recently introduced a list of exchange-traded funds that can be purchased for free. Let me tell you say it again. Commission-free investing is fantastic!

I suspect that this move to providing commission-free purchases is in response to newcomers such as Questrade and WealthSimple. I don’t have an account with Questrade or WealthSimple, but it’s my understanding that their platforms both allow investors to buy ETFs for free.

This is wonderful. Commissions on investments through brokerages can run from $4.95 to $9.95. If you don’t have to pay them, then you can invest your former commission fee. Remember! The sooner you invest your money, the sooner it can start compounding for you. One of your goals during your accumulation phase is to invest your money as soon as you can. Investing without commissions allows you to do that.

For my part, I buy units in my preferred ETFs every month. Luckily, my paycheque is bi-weekly. That means, money shows up in my account every 2 weeks. I siphon off a chunk for investing. Every other paycheque, or every 4 weeks, I take my investment-money and buy more units in my preferred ETF. At the same time, my ETFs pay me dividends every month. While all of my ETFs are on the dividend re-investment plan (DRIP), there’s usually a little bit of dividend money left over after I’ve received my new DRIP-units.

For example, my ETF might pay me $100 in dividends. If my ETF is trading at $15/unit, then I only receive 6 DRIP-units valued at $90 (=$15 x 6). That leave $10 in dividends sitting in my account. Four weeks later, the same thing happens. I receive another $100 in dividends and my ETF is still trading at $15/unit. Again, my DRIP feature kicks into action and buys me 6 more units, leaving another $10 worth of dividends in my account. (For the ease of calculation, assume that my ETF’s trading price stays the same. In real life, the price of my ETFs fluctuates from month to month.)

Wait a minute – hold the phone! Now, I have $20 in “leftover” dividends. Yet the cost of each unit is still only $15. Since there’s no commission to buy, I simply do a trade for 1 unit at $15. There’s still $5 leftover in my account, since $20-$15=$5, but who cares? I’ve done all that I can to get as much of my money working for me as soon as possible.

This is why commission-free investing is fantastic! More of my money can be invested sooner. The more units I have, the more dividends I earn the following month. This is self-reinforcing cycle that increases my passive cashflow, via DRIP-units and commission-free units. As I’ve said before, passive cashflow is awesome. You work once – you invest money earned from your blood, sweat and tears – that investment pays you dividends. So long as you don’t spend them, those dividends earn you more dividends as they compound over time. What’s not to love about this process? Now that you know about it, you can create the same system for yourself.

Earn it once, invest it until retirement. Dividend ETfs have been the bedrock of my investment portfolio for the past 10+ years. Happily, I can report that my dividends hit the 5-figure mark years ago. At this point, I expect that they will be a very nice supplement to my other retirement income when my employer and I part ways. Up until a few years ago, commission fees constrained how often I reinvested my “leftover” dividends. Today, those fees no longer a concern. Whenever I have enough money in my account to buy a unit in one of my ETFs, I’m investing it immediately. The sooner my money’s invested, the sooner it can start to compound and to increase my passive cashflow.

Ever since commission-free investing has been available, I have done my best to take advantage of it. You should take advantage of it too!

A Primer on How Banks Make Themselves Rich

The first thing you should know is that I am not a banking expert. I worked in that industry on a part-time basis while going to university. That was 20+ years ago. Currently, I am what you would call “just” a customer. I don’t have access to private banking, nor is my business significant enough for the executives at the banks to care about me. This primer on how banks makes themselves rich is based entirely on my personal experiences as a customer and my part-time job at ATB before moving into my current career.

Savings Accounts

Customer A: “I should start saving some money.”

Banker: “Great idea! We can put you into our Never-Fail, Best-Option savings account. It pays you interest. The more you have in there, the more you earn.”

Customer A: “I like earning interests on my money. I’d like to open one of those accounts please.”

Banker: “Easy-peasy-lemon-squeezy.”

The account is opened. The customer goes away. The banker has the customer’s money and is wondering how to make it grow. After all, Customer A was promised that interest would be earned on her funds. The banker certainly wasn’t going to pay the customer with money from the bank’s own pockets! A lightbulb goes on as the banker realizes that money can be made from lending. An idea begins to germinate. If the Banker only had to pay out a fraction of the interest charged to lend, then the bank would make buckets of cash!

But how to make that happen?

Mortgages

Customer B: “I need to borrow some money to buy a property.”

Banker: “I can help you with that. The interest rate on our mortgages is very fair.”

Customer B: “That sounds good. Where do I sign?”

The banker is gleeful. Two customers! One brings in the money to be lent to the second. The bank only has to pay Customer A an interest rate that is a tiny portion of what’s being charged to Customer B. The difference between the two rates will be spent on administrative costs & other expenses, but any leftover is profit. How many other ways could the Banker come up with to make money?

Lines of Credit

Customer C: “I’d like to borrow money, but I’m not sure when or how much I’ll need.”

Banker: “Not a problem. We’ll set aside some money just for you. If you don’t use it, then there’s no charge. If you do use it, then the interest rate will be the prime rate + 3%. We’ll start charging you interest from the minute that you use your line of credit, but you only have to make the minimum monthly payment. You can pay it off whenever you want to.”

Customer C: “Awesome! Thank you!”

Auto Loans

Customer D: “I want to borrow money to buy a new vehicle.”

Banker: “I can help you with that. We’ll secure the loan with the vehicle. If you don’t pay the monthly note, we’ll repossess it.”

Customer D: “Sounds fair. Thanks!”

Credit Cards

Customer E: “I’d like a credit card please.”

Banker: “Done. Now, it charges a double-digit interest rate.”

Customer E: “Double-digits? That’s kind of expensive!”

Banker: “You know what? You’re right. So I’m going to do this for you. We won’t charge you any interest at all so long as you pay off the full balance when the statement is due. Think of it as a grace period. If you don’t pay it off in full, then I’ll charge you interest… and other assorted fees for late payment.”

Customer E: “Okay. Can I have my credit now please?”

Service Charges

The Banker wants to make even more money. The spread between interest paid on savings accounts and the interest earned on mortgages and other debt products is pretty good… However, the Banker is convinced that there is a way to increase its profits. Customers had always paid for drafts and certified cheques, but those instruments were often rare and not guaranteed income to the Banker. In a world of electronic transfers, fewer and fewer people need such services. Yet, everyone still needed to pay their bills, send electronic transfers to each other, make loan payments, and clear cheques.

Banker: “I could charge them just for having an account! Or I could offer them a so-called free account, but charge them by the transaction. People are inherently lazy about switching banks. I might lose a few customers but most of them will stay with me…and will pay me every single month to use their own money!”

The Banker add service fees to its bank accounts. Presumably, these are to cover the costs of providing services like utility payments. The Banker tell people they can pay per transaction, or they can pay a flat monthly fee for unlimited transactions. Better yet, customers can leave several thousand dollar in their account at all times in order to have the monthly fee waived completely.

Customers: “This sucks!”

Banker: “What are you going to do?”

If you’ve ever wondered…

…how banks make themselves rich, I hope this post gave you some insights. Banks make money because they have a vested interest in getting customers into debt. They profit when people borrow money. That’s the heart of their business. Everything else is a detail.

The vast majority of us will need to borrow money at some point. Assuming you’re interested in paying as little as possible to do so, here are some things to consider:

And should you be in a position where you cannot avoid owing money to the bank, then do yourself a small favour. Start buying shares in the banks! In Canada, banks pay out dividends every single quarter. Their profits are going up and their shareholders are benefiting. If you become a shareholder, then atleast some of the interest and fees that you pay is coming back to you every year. After sufficient period of time, all of the money that you’re paying to the bank will be returned to you in the form of annual dividends.

Now you know.

One Less Impediment!

For those about to invest, we salute you! There is now one less impediment between you and your financial goals.

Back in the dark ages, which is when I first started my investment portfolio, buying securities through a brokerage was expensive. For many years, I had automatic contributions withdrawn from my bank account by a private investment company. While I was busy learning about new products, individual investors were gaining the ability to access various products due to the rapid growth of technology. By the time I had learned about exchange traded funds and the importance of low management expense ratios, it was relatively cheap to do online transactions with my brokerage. It took some convincing but I finally moved my portfolio from the investment company to my brokerage. Regardless of who held my portfolio, I continued to dollar-cost average my way into the market each month.

Today, I’m happy to write that market competition has partnered with technology to make investing even easier for today’s investors.

As the number of financial services firms expands, the Big Banks are being forced to stay competitive with trading platforms that offer commission-free trades. This means that the banks’ brokerage arms allow customers to buy certain securities without paying a commission. In other words, it’s free to invest your money in more and more places!

This is is fantastic news. Why? It normally costs $9.95 to place a buy/sell order. For people who believe in dollar-cost averaging into the market, it costs roughly $10 each time a purchase is made. Long-time readers know that I divert a chunk of my paycheque to my investment portfolio every payday. Every 4 weeks, I buy more units in my chosen exchange-traded fund (VXC). I care not whether the market is up or whether it’s down. My plan is to buy and hold for the long-term. The execution of my investment plan is simply: buy more VXC units every 4 weeks and hold onto them.

So I was tickled pink when my brokerage*** announced that it would allow customers to purchase certain securities without paying a commission. My favourite dividend ETFs were both listed (XDV & VDY). Unfortunately, my happiness bubble was quickly pricked by reality. The fates have conspired to keep my equity ETF off the list of the commission-free securities!

This is great news!

Even though I’m still paying commissions, it’s fantastic that there are now so many commission-free options from which people can choose. The upshot is that there is one less impediment between people and their investment goals. Fees, MERs and commissions are all hurdles to clear on the journey to your investment goals.

Think about it. Any money that is not paying for commissions can be re-directed towards investing for your future. You and I both know that compound growth needs time to work. The sooner you start investing your dollars, the better.

Commission-free investing means that you can invest more frequently. Like I said, my dollar-cost averaging plan entails monthly purchases. I made 13 trades each year since I invest every 4 weeks. However, should there ever come a day that my ETF of choice makes it onto the commission-free list, I will be buying more units every two weeks.

Why increase the frequency of buying? Two simple reasons. It would be free to buy more frequently. Also, my money can’t grow unless it’s invested. I want to give compound growth as much time as possible to work its magic.

Do your due diligence.

My brokerage is with one of the Big Six banks. I’d be surprised if all of the big brokerages didn’t have their own list of securities that can be purchased commission-free. If you’re already investing, find out if you still need to pay commissions. And if your brokerage isn’t offering commission-free trades, ask yourself if its other benefits are worth paying commissions. If not, move your portfolio!

I spend a lot of time telling you to be cautious about the management expense ratios that you’re paying. (Again, any MER over 0.50% is way too high!) Commissions are another area where you should be paying close attention. Most big banks will charge you roughly $9.95 to make a trade through their online brokerage platform. It will cost even more if you make the trade over the phone with a human being, assuming that you can connect to real live person.

If you’ve already started to invest, then great – keep it up! Should your securities be on a commission-free list, even better. Now, you can bump up your contribution amount by whatever amount formerly went to paying commissions. Compound growth works faster if your money is invested now instead of later.

And if you’ve not yet begun investing for the Care and Feeding of Future You, what are you waiting for?

There is one less impediment to doing so. Start today!

*** Full disclosure – my investment accounts are with BMO Investorline. While I’d prefer to not pay a commission, I’m certainly not going to alter my investment plan due to this situation.

Buy and Hold Works!

As a non-expert financial person, my advice to nearly everyone is to adopt a buy and hold strategy because it works over the long-term.

When the pandemic was declared in March 2020, the stock market took a dive. And it wasn’t a sweet, gentle decrease either. It was a stomach-churning drop that saw me lose 1/3 of my portfolio’s value in the space of three weeks. At one point, I just stopped checking the value of my holdings. It was simply too painful!

Despite the drop and despite seeing years of growth wiped out in a matter of weeks, I continued to buy and hold. Every two weeks, a chuck of my paycheque went to my investment account. I stuck to my routine of buying units in my exchange-traded fund. In a world gone topsy-turvy due to a brand-new-to-humans virus, my investment schedule was the one constant that I could rely on.

Besides, I had learned my lesson from earlier market crashes. Back in 2011, the stock market crashed. I made a monumentally regrettable error when I stopped my contributions.

Wrong choices.

I was scared and naive, and I didn’t understand that the market crash was the very best time to be buying into the market. I wanted to wait for the market to recover a bit before adding new money to my portfolio. In reality, I should have been shovelling money into my investment account. Making hay while the sun rises and all that jazz.

Instead, I sat on cash in the bank for six months until I realized that I was being stupid. Who was I to know when the perfect time would be to re-start my contributions? I might be many things but a stock picking expert I was not!

So I picked a day and I just started investing again. And I haven’t stopped. As my income went up, I increased my bi-weekly contributions accordingly. A big chunk of each raise went to my investment account, while a little bit stayed in my pocket to increase my lifestyle. It’s the whole balancing act behind the principle of Save-Some-Spend-Some.

Instead of tying myself into knots trying to determine the very best time to invest my money, I simply invest my money every two weeks like clockwork.

COVID-19 didn’t matter

When the pandemic hit, and one third of my portfolio was obliterated in less than a month, I didn’t worry about my investment portfolio. I won’t say that I enjoyed seeing the daily decreases in my investment balances. What I will say is that I decided not to repeat the mistakes I made in 2011.

With age, comes wisdom… or so I’ve been told. In my case, there was truth to these words. Having missed an incredible investment opportunity 10 years prior, I vowed not to make the same mistake this time around. Even though the rollercoaster that is the stock market downward on one of its biggest descents, I continued to invest my money. I told myself that the losses would be short-lived and that my portfolio would recover.

My words proved prophetic. As anticipated, my portfolio has recovered quite nicely and I’m ahead of where I was just before COVID-19 became a permanent part of our world. I’m quite confident that the Care-And-Feeding-of-Blue-Lobster-Fund will be perfectly capable of replacing my income when the time comes that my employer and I part ways.

If nothing else, the pandemic has solidified my belief that buy and hold works. It’s a simple and straightforward strategy that works because you don’t have to tamper with it too much. The investor has two main hurdles. One, she has to open an account and start contributing. Two, she must continue to contribute while ignoring the talking heads, aka: financial experts who haven’t achieved notable wealth.

The investor doesn’t have to worry about timing the market. Buy and hold works because it puts the emphasis where it should be, on time in the market. It solves the problem of which stocks to buy. Purchasing units in a broad-based equity exchange traded fund means that the investor is buying into a diversified group of stocks. Stock picking is not involved. And that’s fantastic since analysis-paralysis is one of the biggest impediments to success in investing.

It makes sense, doesn’t it? If you happen to pick the wrong stock and lose money, then the odds are good that you won’t be overly eager to invest even more money into the stock market. You might even decide that you’ll never invest in the stock market again. To each their own… but that’s not a great response to having your butt kicked in the stock market.

My Next Steps…

The next move for me will be the same one I’ve been making for the past 10 years. When my paycheque hits my account, a big chunk of it will be automatically siphoned off and sent to my investment account. And on the appointed day, I will buy more units in my chosen investment vehicle. No muss, no fuss. There will be no worry about when to invest. And I won’t spend any of my precious, precious time on trying to find the next Tesla stock.

Instead, I will stick to what has worked in the past and what promises to work in the future. They say that there are no guarantees besides death and taxes. And they may very well be right. I’m going to propose that the buy and hold strategy ought to be viewed as guaranteed-adjacent.

Another Little Criticism

Learning about personal finance and investing has been a hobby of mine for the better part of 30 years… wow – that’s a long time! No wonder I make those odd noises when I get up from the couch…

Anyway, one of the first books that set me on my successful path was The Total Money Makeover by Dave Ramsey. I loved this book! I was in undergrad when I read it, and I promised myself that I would follow its tenets once I had graduated and was earning real money.

I’m not sad to say that this is one promise to myself that I’m glad I broke. See, while I still think that the debt snowball is a brilliant strategy for getting out of debt, I’m not so sure about the other steps.

In particular, I take strong issue with the step about only investing 15% of your income after you’ve gotten yourself out of debt.

What’s wrong with 15%?

On the fact of it, saving 15% is a great goal to strive for. My question for other personal financial afficianados is why stop at 15%? If you can comfortably save 20% or 30%, or even 50%, then why not do so?

See, somewhere along the line, I discovered FIRE. It’s an acronym for Financial Independence, Retire Early. Thanks to the vastness that is the Internet, I went deep down the rabbit hole of FIRE. I learned about people who saved 70% of what they earned, who’d lived on $7,000 for an entire year, who’d retired in their 30s! Eventually, I discovered Mr. Money Mustache – a fellow Canadian, whose face-punch imagery caught my attention from the word go.

The FIRE community is varied, like any other community. However, the one thing that they do seem to share is the belief that you need to save more than 15% to become financially independent anytime soon. There’s even this handy-dandy retirement calculator floating out in the world. (Plug in your own numbers – see if you like the answer!)

FIRE and Dave Ramsey seemed to have a lot in common. Both financial perspectives eschewed debt. They both emphasized having an emergency fund and saving for retirement. There are even many in the FIRE community who think Dave Ramsey is great, and happily pay homage to him.

Yet Dave Ramsey… is remarkably quiet on his thoughts about the FIRE movement.

Why is that?

Look. I can’t speak for Dave Ramsey or his organization. Maybe he’s a huge fan of FIRE, but it’s not part of his company’s mission statement. Or maybe he hasn’t heard of FIRE yet. There are a million reasons why he sticks to advising people to only save 15% of their after-tax income.

My theory is that FIRE is an anathema to employers, and Dave Ramsey is a businessperson who needs employees to work for him. As an employer, it makes no sense to encourage the pool of talent from which one draws to become financially independent. Employers have the advantage when employees are dependent on a paycheque. I think that this was most beautifully illustrated in the blog post of other fellow Canadians over at Millennial Revolution.

Allow me to be clear. I’m not for one minute suggesting that Dave Ramsey speaks for all employers. Of course, he doesn’t!

What I am saying is that it would not be in Dave’ Ramsey’s best interest as an employer to encourage the pool of potential employees to strive for financial independence. Think about it. Being FI gives jobs candidates more negotiating power since they don’t need the job to survive. The beauty of the FIRE philosophy is that it gives people choices, including the choice to work for personal satisfaction without consideration of the paycheque. After all, just because one is FI does not meant that one has to RE. If your job brings you joy and you’re also FI, then your are truly and wonderfully blessed. No need to retire early if you don’t want to.

Think about how terrifying that must be for an employer. If money is the primary tool to control the workforce, then what weapon is left when money is not effective? A financially independent pool of employees means the employers have to find another tactic to persuade people to work for them.

In my very humble opinion, 15% isn’t enough.

If you’ve paid off your debts and your budget has breathing room again, I don’t see why you should be implicitly encouraged to spend 85% of your money. Spending at that rate keeps you tethered to your paycheque longer than you may like.

Until recently, I didn’t really consider why Dave Ramsey doesn’t encourage people to pursue financial independence. Yes – some people won’t be able to save more than 15% of their income, even if they’re out of debt. I get that. If you don’t have it, then you can’t save it. However, those aren’t the only people who listen to him.

My question is more about why those who can save more are not being encouraged to do so.

Again, the only theory that makes sense to me is that he doesn’t want to use his platform to encourage financial independence. I find it odd. Firstly, I don’t believe that everyone who calls his show for help loves their job so much that they want to stay for as long as possible. Secondly, one of the very best things that money buys is freedom from doing what you don’t want to do. Thirdly, financial independence doesn’t mean that people become lazy and idle. Instead, it gives them the time to work on what truly makes them happy.

Currently, I believe the following. Pursuing FIRE status will always be an employee-driven social movement. Given its nature, it has to be. After all, as a group, employers cannot maintain their vice-like grasp on power where there is a financial balance in the employment relationship. When employees have the ability to walk away without negative financial consequences, employers run the real risk of losing employees’ labour. A vision remains a vision unless there are minds and bodies that can bring it to life.

The concept of financially independent employees is adverse to the employer’s interests. It’s hardly surprising that employers are not advocating that their employees put some of their focus on saving and investing.

Getting back to Dave Ramsey. His book was written long before the FIRE movement hit the mainstream. I do not believe that he suggested a 15% savings rate in an attempt to maintain the imbalance of power between employers and employees. That’s a pretty broad stroke, and it’s not one I’m intending to make.

What I am willing to say is that the practical effect of his advice to only save & invest 15% works to give employers the upper hand. I’ve had many good jobs in my lifetime, yet none of my employers has encouraged me to save and invest for my future. There’s never been any kind of nudge towards financial independence.

Think long and hard.

The sooner you invest your money, the sooner you can hit the target of being financially independent. There may come a day when you no longer love your job, for whatever reason. When that day comes, you’re going to need to have money in place to pay for those pesky expenses of living like food, shelter, clothing, etc…

I’m not telling you to not follow the Baby Steps. What I am telling you is to think about their practical effect on your personal finances. Take what works… leave the rest.

Boost Your Income!

I’m going to take a leap of faith and assume that, if you’re reading this, then you also wish that you made more money. You work hard – you’ve got bills – there are things you want to do with your money. However, it seems like there’s never enough money to go around. You’ve applied for promotions but they always seem to go to someone else.

What if I were to tell you that there is a way to boost your income without a promotion?

It’s called investing your money!

Speaking from experience, I can tell you that I’ve applied for promotions and not gotten them. While being passed over was a bruise to my ego, those missed promotions were never a blow to my finances. And you know why? It’s because my investment account does the heavy lifting of increasing my income each and every year.

What?!?!!

Yes – it’s true. While it wasn’t a fast process, investing a portion of my disposable income every single month has been very beneficial for me. I’m not a particularly savvy investor, so I invested the lion’s share of my money into two exchange traded funds that focus on dividends – VDY and XDV. I also took advantage of the dividend re-investment plan – aka: DRIP – to ensure that all of the dividends I earned were automatically re-invested.

I used to earn a few dividends each month. Now, I earn a few thousand. Yes – you read that right. My decades-long habit of investing a portion of my paycheque each month continues to reward me handsomely. Diligent investing has resulted in a situation where my annual income goes up every year… without me ever having to rely on my boss for a promotion. I won’t lie to you – it’s a pretty sweet situation!

Now, go back to where I said that I’m not a particularly savvy investor. If I were as smart then as I am now (or atleast as smart as I think I am now), then I would’ve invested in equity-based exchange traded funds. As you may or may not know, the stock market was on a complete tear from 2009 to March of 2020. People who had invested in equities made buckets & buckets of money so long as they stayed invested. My dividend ETFs have been good to me, but equity-based ETFs would’ve been so much better!

There’s atleast one investor out there who has absolutely no qualms about sticking to dividends throughout his career. I can certainly understand why – he and his spouse now earn $360,000 in dividends each year. (Part 1 and Part 2 – thank you to Tawcan for sharing this interview with the world!)

Can you imagine? You’re busily going about the daily business of living and your portfolio is kicking off $30,000 in dividends per month! Even before his retirement, I’m sure this couple was making a solid six-figure income off their dividend portfolio every year. And I’m equally sure that they didn’t worry about whether they got the next promotion in the pipeline.

The Career Funnel

Most organizations with employees have what I like to call a career funnel. There’s many people at the lowest levels, but fewer and fewer position for people as you move up the organizational chart. Managers have a set number of people reporting to them – so it goes, all the way up to the top. Naturally, as an employee moves up the career funnel, it gets harder and harder to obtain a coveted promotion. While many may try, only a very few will succeed. This is the way of the hiring pyramid.

It would behoove you to not be too, too dependent on getting a promotion in order to live the life you want. I’m certainly not discouraging you from pursuing promotional opportunities! Of course not! What I am suggesting is that you work on a Plan B, while you’re building your career.

And that Plan B is to ensure that you’re investing some portion of your paycheque for your future. I’ll tell you the same thing I would tell 18-year old Blue Lobster if I could travel back in time. Invest no less than 15% of your net income into an equity-based exchange traded fund every single time that you are paid. Leave the money alone for 30 years and let it do its things. At the 30 year mark, start adding some bonds to your portfolio to temper the volatility.

Again, I’m no expert in the area of investing so do your own research. Save as much as you can – invest it in ETFs – leave it alone to grow – ignore the talking heads on the media. Equities are volatile, but they’ve always gone up over the long-term. They will boost your income if given enough time. If you can’t stay invested for the long-term, then you’ll have to find some other way to increase your annual income. Maybe that means killing yourself at work so that you improve your odds of getting that promotion.

The Unappreciated Benefit of Boosting Your Income Through Investing

First off, I want to say that I’m very fortunate to work with smart, pleasant people who are helpful and considerate. My team has each other’s back. We share knowledge and insights with each other. And when we disagree on issues, the discussions are respectful and all parties try to see the other perspective. My work is challenging and my colleagues all contribute to an extremely good working environment. If I ever have any regrets about retiring from my current position, they will be that I will no longer have as much contact with these people as I do now.

That said…

I’ve heard from many in my circle that their work environments are what can only be described as toxic. Some of my dear friends work with or for horrible human beings. They’ve tried to find other positions but haven’t yet found better working conditions that will pay similar amounts of money. Like many people who have no choice about staying in their job for the foreseeable future, they have to eat sh*t and they can’t really complain about it.

If you’re able to boost your income via your investment portfolio, then you can drastically cut back on the amount of crap that you have to take from colleagues and bosses. Think about it. If your investment account could churn off enough for you to meet your survival needs, then wouldn’t it be possible for you to supplement that with a lower-paying job?

And you wouldn’t have to keep that lower-paying job forever. I’m not suggesting that in the least! What I’m trying to say is that your investment account could help you preserve your mental health. You could avoid very bad things like depression and burnout. Your investment account gives you a path out of a toxic work environment, without trying to get a promotion. And once you find a job that doesn’t make you feel dead inside, then you can go back to living on your salary, re-instating your DRIP, and continuing to contribute to your investment account.

If you’ve been reading my blog for a while, then you know that I harp on diligent investing & saving, month-in-month-out. This is an ideal to which everyone should aspire. However, I’ve been alive long enough to know that very few are able to do this. There are some things in life that are more important than saving and investing. In my view, preserving and protecting your joie de vivre is one of those things.

Next Steps…

So if you have the disposable income to do so, start investing today.

And if you’re one of the ones who’s already started, then pat yourself on the back and keep going.

It will take some time, but your investment account will eventually allow you to wean yourself off the need to get promotions to maintain your lifestyle. By all means, continue to apply for those promotions if you wish. If you get them, great. A higher salary means you have that much more to invest. After all, whatever increase you see in your take-home pay should be properly allocated between today and tomorrow.

If you don’t get the promise, then you need not fret. You can still be content in the knowledge that your investments are building your income without any influence from your employer. Even without the promotion, you’re increasing the likelihood that, financially, you’ll still be just fine.

Finding the Balance

One of the biggest downfalls of the online personal finance community is the lack of balance. I suppose that’s partly due to the fact that we’re all competing for eyeballs on the screen, and extreme headlines garner more attention. It’s unfortunate though. I think more people would be willing to consider pursuing FIRE if they understood that an important element is finding the balance.

God bless him, but Jacob Fisker’s desire to live on $7,000 per year is not one that holds any appeal to me. That level of frugality makes me a little ill. Even the idea of being “face-punched” – popularized by a grand-daddy of FIRE, Mr. Money Mustache – isn’t particularly enticing. Fret not – I do understand the phrase is a metaphor. It’s meant to remind you that stupid decisions with money are just as painful as being hit in the face.

To each their own, right?

Well… maybe. Personally, I think that pursuing financial independence would benefit many people. In a society that abhors unionized labor, pursuing financial independence is the only way for employees to gain some measure of power in the workforce. At the end of the day, business owners need employees. It’s a power-dynamic that is ripe for abuse and exploitation when one party desperately needs money. You – or any employee – can minimize the risk of experiencing such exploitation by pursuing financial independence. When you have the financial resources to walk away from your job, you’re tilting the power dynamic back in your favour. I think that this is a good thing.

At a bare minimum, financial independence gives you choices. In our capitalistic society, financial independence is as much a status symbol as anything else. It’s a signal that someone has enough resources to spend their time how they wish. And isn’t that one of the biggest draws of being rich? Not having to do what someone else tells us to do?

The reality for all of us is this. We each only get one life and finding the balance is key to living a good one. That’s why it’s important to spend some of your money today.

Look, I know that I spend a lot of time telling you to save and invest your money for the long-term. There’s no denying that I think you owe it to Future You to create a sizeable investment portfolio. At the same time, I don’t ascribe to the belief that investing money should be a goal unto itself. Money is pointless if you’re not going to spend it.

Furthermore, no one is promised tomorrow. You have no guarantee that you will be alive in 5-10-25 years to enjoy all the money that you accumulate in the interim. By finding the balance, you’ll be able to spend some of your dollars today on the things that make you smile.

Of course, you should always invest part of your paycheque for the future. I’ll never change my mind about that. What I also want you to do is shave a little bit from each paycheque to spend today. Make no mistake! I don’t want you spending money needlessly. Rather, I’m suggesting that you spend on things that truly make you happy.

Consider taking the advice of Ramit Sethi – ruthlessly cull expenses from your life that don’t bring you joy and spend freely on the ones that do. To me, finding the balance means diligently adhering to my mother’s advice to spend some, save some.

It’s taken me a long time to learn that there has to be a balance. Like I mentioned above, each of us gets one life. We owe it to ourselves to make it as good as we possibly can. It’s important to find ways to enjoy the journey while planning for the future.

The balance is different for each of us. What brings you joy might generate indifference in someone else. No matter. Do what you must to find the balance in your own life.

*** My comments are not meant for those living on low incomes. Obviously, those on low incomes are doing what they can to survive. I don’t have the answer to the plight of the working poor. Telling low income workers to simply “earn more money” isn’t effective. It’s insulting. If they could, they would.