Tag: Wealth Creation

Super Powers

FU Money and being FI are super powers…

Dave from www.accidentalfire.com

I’ve written about FU Money before. It’s the money that you have set aside for those instances when you need to tell someone to “make love and go”. It’s not your emergency fund money. It’s not your retirement money. It’s not even your car replacement fund. Nope. Your FU Money consists of those funds set aside for giving you options when you don’t want to work anymore, when you just can’t handle another pointless meeting, nor one more inquiry from your micro-managing boss. It’s the money that will tide you over while you re-group and figure out the next step after you’ve left a situation that was driving you mad.

And long-time readers know that I encourage everyone to become FI, aka: financially independent. Being FI is great because it gives you even more options than FU money. Once your portfolio is kicking off enough capital gains & dividends to pay for your life as you’re currently living it, then you’re financially independent. And you want to know a secret? You don’t have to give up working just because you’re FI!

One of the options is to keep working, if you want to. You need not give up your employment just because your money is making more money for you. Once you’re FI, you no longer need to work but there’s also no need for you to quit your employment either. Again, for the cheap seats in the back, being financially independent gives you the option to work without needing the job. How cool is that?

I’d love to quit. As I’ve mentioned before, I have a great job. I work with very smart people on interesting problems that are mentally challenging. Before the pandemic, I travelled for work. My employer invests in training and I have opportunities to advance my career. I’m good at my job. There are many, many good things about my current position… Yet, it’s not what I want to do for the rest of my life. I want to quit.

So I’m working on developing my superpowers. Do I have enough FU money? Probably. Will I pull the trigger and use it? Probably not. Re-read my last paragraph. My position is pretty good so I don’t foresee a situation where I will be so incensed with my employer that I just walk out the door while giving someone the finger. Unless something changes drastically, I expect my departure to be mutual, respectful, and drama-free.

Still… I have my FU money in place, just in case I’m wrong.

I’ve spent the last 10 years working on developing the second super-power, i.e. becoming FI. It hasn’t always been easy and I’ve made my share of mistakes. However, I’ve learned from them and corrected them when needed. I’ve always believed that it’s okay to make a mistake. What’s not okay is making the same mistake more than once.

Do I still have learning to do? Of course I do! There’s this new thing called Bitcoin that everyone seems to be chattering about incessantly. I owe it to myself to figure out what that’s all about so that I can make an informed decision about whether to invest in it or not.

Despite my mistakes in investing over the years, I have to say that I’m far closer to being FI than I would have been had I not started. Investing money from every paycheque for the past 10 years has done wonders for getting me so much closer to my goal.

Maybe you wish you’d started 10 years ago too. It doesn’t matter. Start today. The time will pass anyway, so you might as well take the steps to build your own super powers. Don’t dwell on what you haven’t done yet. Make a plan to actively put a plan in motion to achieve your dreams. You get one life and you deserve to live the best life possible. If that means having a buffer between you and the Edge should you need to part company with your paycheque, then create that buffer. No one else is going to do it for you. And if you want to remove the golden handcuffs, then build a portfolio whose cash flow can replace your employment income. That way, if you decide to stay at your job, it’s because you want to be there. You won’t be shackled to the paycheque.

Super powers won’t solve all your problems. Life doesn’t work that way. What they will do is give you a financial cushion when you need one the most. They can alleviate the fear of not knowing how you’ll feed/shelter/clothe yourself without your employer’s money. The super powers will give you the confidence and comfort of knowing that you can survive even if you must part ways with your employer, for whatever reason.

Err on the Side of Caution

There are few among us who really and truly find deep life satisfaction from our paid employment. If you are one of these Fortunate Few, then you are truly blessed. For the rest of the good people reading this little blurb, I would urge you to err on the side of caution.

Whatever do you mean, Blue Lobster?

Gentle Reader, do your Future Self a good turn. Even if you love your job today, always invest part of your paycheque for long-term growth. Start small if you must – $1/day – but just start. There’s no guarantee that you will still love working tomorrow. You may wake up one morning and want to do something else with your life. Yet, if your only source of cashflow is your job, then you’re a little bit stuck. Doing what you love may not pay the bills, and that can impede your ability to shelter, feed, and clothe yourself. No one wants to be impoverished.

Recently, I hit something of a milestone – 20 years with the same employer. Not many people can say that these days, so part of me is kind of impressed with this achievement. However, another part of me is counting down the days until retirement. While I’ve been at my job for a long time, I’m not as enthralled with it as I was when I first got here decades ago. Time has flown by in the blink of an eye! Had I known then what I know now, I would’ve made some different choices.

From my vantage point, the message of investing for the future is not sufficiently impressed upon the new or younger employees. Bright-eyed and bushy-tailed, clutching their newly-minted credentials, eager and excited – these newbies rush headlong into the new careers and probably enjoy the challenges and responsibilities that come with their first grown-up job. And that grown-up job probably comes with a grown-up paycheque, or atleast one that’s bigger than the part-time jobs they may have held up to this point.

Throw in a little pent-up demand and it’s the perfect recipe for the start of paycheque-to-paycheque living. It’s also a great way for employees to become beholden to their jobs. Monthly payments come in a wide variety of flavours: mortgage/rent, vehicle payments, student loans, streaming services, memberships, subscriptions, etc… What do they all have in common? They all take little bites of your paycheque. Each one allows you to make life a little more comfortable today. They very definitely prevent you from seeding your investments to ensure your future financial comforts. And they keep you tied to a job.

I’m lifting my voice and urging the young or new Eager Employees to just take a breath. Contrary to the “advice” of the Marketing Machine, there’s no requirement to commit every penny to spending. In other words, you need not spend it all now. I’m here to spread the message that it is perfectly okay for you to slice off some of that brand-new paycheque and invest it for the future.

Why consider doing this?

Take a look around. Are there any… ahem… senior employees lurking about? Do they seem filled to the brim with passion and energy about their current positions? Perhaps they are less enthused about devoting 2 or 3 decades of their lives to the workplace. Is there even the slightest possible chance that very deep down in their hearts they would leave their jobs if they had the money to do so?

If the answer might be yes, then ask yourself if you want to in their shoes when you hit your 20th year of working for someone else. Wouldn’t you rather have the option of working because you want to and not because you have to?

Err on the side of caution. Create a stream of cash flow from your investments. How? By buying investments that pay dividends and capital gains. Instead of spending those investment returns, re-invest them consistently. The more you invest today, the faster your investment returns will compound. If you want an excellent example of someone who has put together a solid investment plan by investing in dividend paying stocks, check out Bob Lai’s story at Tawcan. He regularly updates his investment portfolio returns and tracks his dividend growth. If I understand him correctly, he will be relying on a steady stream of dividends to fund his retirement. Another great blog to follow is that of Mark Seed at My Own Advisor. I’ve learned a lot from both sites, even though I may not have adopted and followed every single one of their recommendations.

Allow me to very clear – your investment portfolio should be working harder than you do. Invested money works 24 hours a day, 7 days a week. It doesn’t get sick, take vacations, or need time off to attend to personal matters. The sooner you put your money to work, the better. Investments can work magic for you but they do need time to grow.

And when the time comes when you no longer want to work for a paycheque, your investments should be able to fund your lifestyle.

Think about Future You and err on the side of caution. If you love your job in 20 years, then you’ll be happy at work with a generous cash cushion on the side. Nothing wrong with that! However … if there’s a chance that you won’t be so enamored with working every day, then you should be taking steps now to create the option of leaving if working become unbearable. I strongly urge you to do the following:

Your investments will give you options when you’re ready to part ways with your employer. You won’t have to worry about the axe falling, since you’ll have a nice, big cash cushion upon which to land. Your investments can be arranged so that they replace your paycheque. How nice is that?

And if you find yourself among the Fortunate Few who still love their employment after 20+ years, then so much the better. You’re doubly blessed – a job you love AND an investment portfolio that churns out dividends & capital gains. It’s the best of both worlds.

Mistakes with Money – Hindsight is 20/20

As I’ve said before, you need not make every mistake yourself. You can learn from the mistakes of others and make better choices for yourself. Luckily for you, my hindsight is 20/20. If you’re facing the choice between paying off your debt or investing your money for growth, perhaps my experience can offer you some insight into the best choice of your circumstances.

Roughly 14.5 years ago, I had a choice between paying off my primary mortgage or investing a six-figure lump sum of money into the stock market. At the time, I owned two rental properties and my tenants both told me they would be moving. Faced with the prospect of having empty rental units, I immediately chose to sell. It literally never occurred to me that I could get new tenants. I was a young landlord who hadn’t heard of people like Brandon Turner of Bigger Pockets or Coach Carson. No one in my family owned rental properties so I didn’t know where to find the mentorship or guidance that would have opened my eyes to my many options.

Unfortunately, I reacted poorly and made a decision out of fear. Instead of doing a basic Google search on what to do when tenants move out, I sold off my rentals within weeks of each other. The housing market in my corner of the world was on fire!!! I’m sure it was the easiest money my realtor had ever made.

I took the proceeds from my rental properties and paid off my primary residence. Within a few weeks, I was completely debt-free! Woohoo!

What would’ve happened if I’d invested that money and kept my mortgage?

Firstly, I would not have had to pay a penalty. The mists of time have obscured the exact numbers, but I do seem to recall paying a penalty for breaking the mortgage on my primary home. Where I live, you can break a mortgage without penalty if you’re selling your home. However, if you’re simply paying off the mortgage, then the bank wants you to pay the interest that would’ve been paid as per the mortgage contract.

I was younger, financially un-sophisticated, and completely committed to being debt-free. So what did I do? I paid a 5-figure penalty to break my mortgage. That was definitely a money mistake! I had the cash from my two rental properties. I could’ve simply carved out a chunk of it to cover the remaining years’ payments under my mortgage agreement, and thereby avoided the penalty, while investing the rest. When the mortgage was up for renewal in a few years after the sale of my rentals, I could have just paid off the mortgage debt in full. Alternatively, I could have invested the whole lump sum and simply kept up with my regular mortgage payments until the mortgage was discharged.

By paying off the mortgage on my primary home, I didn’t invest as much as I could have in the stock market as soon as I possibly could. If I’d invested those proceeds in the market, then I’d be a hell of a lot closer to my original goal of retiring at 50.

We know that, up until the onset of the pandemic, the stock market has rewarded investors with a very long bull-run. Full equity portfolios have done amazingly well between 2009 and 2020. Brace yourself! My rental proceeds were over $100,000. Had I been as wise then as I am now, I would’ve invested that lump-sum of cash and continued with my life-long habit of investing a chunk of my paycheque every time I got paid. My investment portfolio would’ve definitely landed me in the Double-Comma Club by now…. and my mortgage would still have been paid off in good order.

Instead, I focused on becoming debt-free. I chose to pay off my debt instead of investing for my future. My actions were not aligned with my goals.

Why weren’t they aligned?

That’s a good question. Thinking back, my own ignorance about investing is the root cause of the mis-alignment. I didn’t know as much then as I do now. Also, I’d been watching the global monetary chaos created by the financial crisis in 2007-2008 and I wanted no part of it. Being debt-free felt safe. I didn’t have the luxury of relying on someone else’s paycheque to support my household. I very much craved the security of owing not a single nickel to anyone! In other words, I let my ignorance and my fear of being in debt guide my actions.

That global financial crisis caused the stock market to drop. Today, I know that such declines are to be relished because they are excellent buying opportunities. Steep drops mean that the stock market has gone on sale, and that it’s time to load up on quality investments in good companies. Back then, I naively determined that the “smart” course of action was to wait until things settled down before investing any money in the market. As I’ve written before, I waited far too long to start investing. Sigh… this is why hindsight is 20/20. Coulda-woulda-shoulda! I delayed the implementation of my investment strategy for years. It was the wrong move!

Now that I’m older, and wiser, I realize that I should have invested my lump sum. The market started its recovery in 2009. Sure, I would have invested in 2006 and then I would have gone through the rough years until the recovery started. It wouldn’t have been terribly fun, but it would have been quite profitable. Like I said earlier, that course of action would have gotten me much closer to my financial goals.

Don’t feel too, too sorry for me. Like I said, I used that lump sum to pay off my house. I haven’t had a mortgage on my principle residence in over 14 years! Trust me when I say it’s a good feeling. Not having a mortgage means a smaller overhead for my life. My emergency fund need not include 6-9 months of mortgage payments. I don’t have to worry that the bank is going to take away my home. Instead of forking over mortgage payments, I can make contributions to my investment portfolio. I sleep better knowing that my largest debt is in my rearview mirror.

Like they say – if I knew then what I know now, I would’ve made different choices. Hindsight is 20/20…c’est la vie!

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?

The Wisdom of my Folks

When I was growing up, my parents always encouraged to be a professional. I was told to aim for dentistry, medicine, and law. My parents wanted me to be a professional so that I could always create a job for myself. They knew, and wanted me to understand, that working for someone else meant that my financial security would be subject to my employer’s whim. They wanted me to have the security that comes from having the power to earn my own income.

This post is about reminding you that your wage is a burden your employer tolerates until such time as it can be eliminated. It’s not personal – it’s just business. The goal of a business is to maximize profits. This goal is met by lowering a business’ expenses. Your salary is an expense that your employer is always looking to trim and/or eliminate.

One of your goals should be to start, maintain, and grow a financial foundation. You shouldn’t be at the mercy of an employer forever. There should come a point in your life where you’re working because you want to, not because you have to.

Not everyone can be a professional, Blue Lobster!

I hear you, and I agree with that sentiment. Fortunately for you, there is one proven way for you to protect your financial health from the risk of losing your paycheque.

That method is called planting your money tree and making it grow. Not everyone can be a professional – this is true. But nearly everyone has the ability to set some money aside to create an investment portfolio.

Protect your financial health by having a stream of income that’s independent from your paycheque. Work on increasing that money stream until it’s big enough for you to survive on just in case your paycheque disappears at an inconvenient moment. Dividends, capital gains, interest on savings accounts – these are all forms of income that, if sufficient in quantity, can be used to replace your paycheque should the need arise.

You have an obligation to Future You to construct a solid financial foundation. Building your investment portfolio will create a waterfall of income that will eventually replace your paycheque. Investing your money for long-term growth today will allow you to substitute your paycheque with investment income tomorrow.

Nothing lasts forever.

Make no mistake – your paycheque will eventually disappear for one reason or another. You’ll get fired. Or maybe you’ll get too sick to work. Maybe your employer’s business will fail. Hopefully, you’ll retire on your own terms. Only the poorest among us are required to work until the day they die because of their finances. If you choose to work until your dying breath, make sure that you’re doing so because you want to and not because you have to.

The wisdom of my folks boils down to the following. A professional has more control over their income stream than an employee. If you’re a professional working for yourself, then there’s no conflict of interest because you’re both the boss and the employee. In both roles, your goal is to increase your profit because it is your income. When you work for someone else, they will increase their profit by reducing your income if they can. And if your salary can’t be reduced, then there’s always the option of simply not increasing it. This is a situation where the interests of the employer and the employee are at odds. As a professional, working for yourself puts the interests of the employer (you) and the employee (also you) in alignment.

I remember working in a grocery store when I was in high school and undergrad. I started at $6/hr. My salary went up every six months until I hit $9/hr. My boss told me that was the top range for a cashier. At the time, I just accepted it because what choice did I have? Well, I had a lot of choices but was not knowledgeable about them. I could’ve found another part-time job. I could’ve moved to the competitor, who was paying more. However, I didn’t know any better so I stayed. My point is that my employer imposed a limit on how much I could earn. I couldn’t do anything about that situation since I wasn’t my own boss. I wasn’t a professional.

It’s your choice.

Always remember that you have choices about where to put your disposable income. By my definition, disposable income is what is spent on the wants and not on the needs. If you’re already tucking a good chunk of your disposable income into your investment portfolio, then good on you. For the rest of you, what are you waiting for?

Having disposable income allows you to increase the odds that you will have a stream of income when your paycheque eventually goes away. Invest your money for long-term growth so that it’s working as hard as you do. Consistently invest from every paycheque you receive. People will tell you not to invest until all your other debt is gone. I no longer agree with that view. To my mind, time is too precious a resource. You need your investments to bake for as long as possible, even as you’re working hard to eliminate your debts.

Similarly, there’s a lot of debate about how much to save. Some argue for a bare minimum of 10%. Others push for 15%. My personal view is that you should save as much as you can, as soon as you can. Building an investment portfolio whose income stream will eventually replace your paycheque will take a long time for most of us. The sooner you start, the better.

We can’t all be professionals working for ourselves. Yet, it is still possible for the majority of us to reduce the fear of losing our paycheques. All that needs to be done is to start, build, and maintain an investment portfolio of our very own. It’s a very big goal and it might take decades to achieve. That doesn’t matter and you shouldn’t let it deter you. Future You needs to be fed, clothed, housed, and nurtured. Start taking care of Future You today.

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Weekly Tip: Cut back on how much TV you watch so you can get rid of cable. And you need not subscribe to every streaming service out there. Doing so means that eventually, your subscriptions will cost just as much as cable and you will be no further ahead.

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?

Higher Level Math Is Not Required

Let me tell you a little secret about myself… I’m not good at math! Luckily for me, higher level math is not required for success in personal finance.

Oh, I have a firm handle on the basics – addition, subtraction, multiplication, division, fractions & exponents. However, the higher level stuff like algebra, calculus, and trigonometry were challenging for me in high school. And when I got to university, I took my two required math courses and never looked back.

Truth be told, my mastery of mathematical concepts ends around grade 11 mathematics, maybe even grade 10. Since then, I’ve been limping along with the basics… and amassing a sizeable net worth along the way. Luckily for me, I didn’t need the higher level math skills in order to start investing for my future.

If you want the skills, go get them.

For my part, you need not master those skills unless one of the following two things are true:

  • you want to; or
  • you need them for your desired career

Had I wanted to pursue a career in science or finance then I would have had to put my nose to the grindstone in order to acquire higher level math skills. The STEM – science, technology, engineering, math – careers required a mastery of math that I just don’t have.

Thankfully, I didn’t need to master algebra, calculus, and trigonometry to become adept at personal finance. And since I didn’t particularly enjoy high school math, I found a way to build the life I want without having to take many more math courses after leaving secondary school. I’m not saying my decision is the right one for everyone so please do what you think is best for your particular circumstances. If you need higher level math skills to build the life you want for yourself, then go and get them post-haste.

Is it easy to do?

Sometimes I think people are intimidated by personal finance because they weren’t good at math in school either. I’m here to tell you that there are three mandatory ingredients to building wealth over a lifetime: an income, an automatic transfer, and opportunity to invest.

For my part, I pursued investment opportunities offered in the stock exchange. I used to invest in mutual funds, but then I learned about management expense ratios and switched my investments to exchange traded funds. ETFs are much cheaper than mutual funds. Over a very long investment horizon, lower MERs mean that I keep more money in my pocket.

Some people invest in themselves by starting a business. Some people build portfolios of rental real estate. I think those are great options, but they just weren’t ones that I pursued. Neither of those options necessarily require a mastery of higher level math skills. Successfully running a rental property portfolio requires a mastery of ensuring that the money coming in from rents is higher than the money going out for expenses. A Ph.D in calculus isn’t going to be required to be a successful landlord.

In any event, an income, an automatic transfer, and the opportunity to invest are the three main ingredients of the secret sauce of personal finance.

Is the formula simple? You better believe it is! If you have all three, then you’re in a position to increase your wealth.

Most people can master personal finance with the math concepts that they learn before junior high. I’d always felt bad about my high school math achievements. It was the one class where I struggled, and I never felt smart enough. In spite of his, I’m pretty okay with how I’m doing today.

Special Advice to the Young…

If you happen to be a young person reading this post, then I would encourage you to work hard at mastering math and getting those skills under your belt as soon as possible. Remember how I said that an income is part of the secret sauce?

STEM-careers pay higher incomes. It’s a reality. STEM careers are an avenue to increasing your odds that you’ll earn more than the median income. The higher your income, the larger your opportunity to build wealth. You can choose to save a higher percentage of your income when your income is large. When you’re trying to live on the median income, there’s not as much opportunity to save money. Generally, less money invested means slower growth of your money over time.

You might not think that’s fair, but I’m not here to argue about fairness. I want you to keep your options open by getting the highest grades that you can in the area of math. Doctors make more than cashiers. Pharmacists and engineers earn more than maintenance and daycare workers. I’m sure you can think of other examples. I’m not debating the necessity of each type of work to the functioning of society. I’m just pointing out the fact that STEM-careers pay more than non-STEM careers.

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Weekly Tip: Learn to use the word “No” when people ask you for money. You need not be rude, aggressive, or sarcastic. Practice saying “No” in a polite but firm tone. Doing so will ensure that you’re confident and calm when turning down someone’s request for your money.

House-Hacking is Worth Considering

House-hacking can be an amazing tool for building wealth.

You know how sometimes you’re on YouTube watching one thing and then a suggestion pops up on the side of the screen? And you decide to hit play instead of scrolling past it? Well, this week held one of those so I indulged my curiosity and hit play on a video that I otherwise never would have found by searching. For one reason or another, I was watching some videos about tiny houses. I started with this one because I wanted to know how anyone could spend $165,000 to build a tiny 300 sqft house.

And that’s how I discovered Robuilt. I promptly watched several more of his videos and I have to admit that a lightbulb went on after watching his video on house-hacking. I loved this particular video because this fellow goes into detail about how he financed his house-hacking project. He’s not shy about sharing how he obtained the money to build a tiny house, to renovate his basement suite, and how much rental income he’s earning from various sources. The only question I would’ve appreciated hearing him answer was how he and his spouse had initially accumulated the down payment for the purchase of their $640,000 home on writer & teacher salaries, but I guess everyone likes to maintain at least some small measure of mystery.

Anyhow, the lightbulb moment for me was when I realized – deep in the marrow of my bones – that it’s sometimes okay to go into debt if you’re borrowing money to buy real estate. I shouldn’t have been so shocked by this revelation. I’ve borrowed money to buy all of my properties. I’m very familiar with the concept of mortgages, how they work, how to repay them, etc…

Living in a Million Dollar House for Free

No. What shook me to the core was the manner in which Mr. & Mrs. Robuilt went from having a $4000/mth mortgage payment to a $0/mth mortgage payment by borrowing money. This video goes into more detail about how exactly they accomplished this feat so I encourage you to watch it.

Okay – so they bought the house and renovated the basement suite within two months. That rental of that suite netted them at least $2K – sometimes $3K – each month.

Blue Lobster, that still leaves at least a $2K/mth mortgage payment.

Yes, Numerate Reader – you’re right. Having the basement suite wasn’t enough.

The Robuilt’s decided to build a tiny house in their backyard. They’d initially budgeted $40,000 but the project ended up costing them $72,000. They didn’t take the money from the equity in their main home. Instead, they went to a private money lender to pay for this project.

Once the tiny home was built, they eventually rented it for $1800 per month. They refinanced the mortgage on their home to get rid of their PMI, bringing their mortgage payment down to $3700/mth… meaning that they were able to live in their home for free. Oh, and the value of their principal residence had gone up to over $1,000,000 because of the tiny home in the backyard.

Damn…

The Key was Getting Financing

Pay attention to the part where they went to a private money lender. (And they also relied on their credit cards, which is a very risky move because of the very high rates on credit cards. I am not recommending that you do this.)

As I watched the video, I could hear the thunderclap inside my head. You need access to money to acquire property, whether your own home or rental properties. The money can come from your own savings, from a family member, from friends, from a sou-sou, from a lifetime of collecting your loose change… it matters not. You need to get your hands on money to fund your real estate purchase.

And if you don’t have cold hard cash of your very own, then you need financing.

The Robuilt videos opened my eyes to the world of private money lenders. I don’t know all the details about how they work. Nor am I familiar with how they structure the lending terms. I don’t even know the rates or how they assess your credit. And to be clear, I don’t know why Robuilt’s didn’t go to a bank to get the money they needed to build their tiny house.

What I do know is that people who are cut off from obtaining financing are essentially cut off from the opportunity to acquire real estate. And if they’re not cut off completely, then their lack of access to money contributes to their delay in wealth-building. Maybe it takes someone an additional 7 years to be in a position to buy real estate. Whether that’s 7 years to save up a sufficient down payment, or 7 years to clean up their credit enough to qualify for a mortgage or a private money loan, it hardly matters. The result is the same – that person is unable to build wealth through real estate for 7 years.

Financing & Intergenerational Wealth

The thunderclap for me was the realization that access to financing is one of the keys to getting ahead when it comes to building wealth. If you buy rental properties, then you earn the equity while your tenants pay down the debt. If you buy your own home, then you still earn the equity while you pay down the debt. In order to earn the equity in the first place, you have to own property.

House-hacking as displayed in the Robuilt videos wouldn’t have been possible in as short a timeline as theirs without access to financing. That access allowed them to start creating wealth for themselves today. They’re also now able to build intergenerational wealth for their daughter.

It should be obvious that a lack of access to financing inhibits the creation of intergenerational wealth. In this blog post, I’ve focused on one couple who have used financing to buy & build real estate. Their reliance on financing allowed them to craft a situation where others pay for their mortgage. This results in their salaries going to other things, like accumulating another down payment to buy more property if they choose.

I’d like to point out financing can also be used to start a business. People who are more sophisticated than I am use it to invest in the stock market. For the record, there are many ways to use financing to build wealth.

People who don’t have access to financing have fewer opportunities to build wealth. It can still be done but it’s harder because those people have to accumulate the same amount of money from their own earnings. Imagine if your credit was so bad that you couldn’t get a mortgage. Or if you were legally prohibited from owning property. The only way for you to buy a property would be to save money from your paycheque then pay cash for a home.

How long would it take you to save enough money from your paycheque to buy a house? Even if you were house-hacking by living with a roommate?

Access to Financing = Access to Opportunity

The person who has to pay cash for a house doesn’t have the same opportunity to build wealth through real estate as the person who can get financing to buy property. I know that it might take the mortgage-holder a lifetime to repay the debt. After all, that’s why 25-year and 30-year mortgages exist, right?

Assuming the mortgage is paid, then the home can be passed down to the next generation. Imagine where would you be financially if you’d inherited a full-paid for home!

The person who can’t get financing for a home – yet miraculously saves enough money to buy one – can also pass their home down to the offspring. The possibility exists in theory only. It’s just such a monumentally harder endeavour to use cash to buy a home that most people never seriously consider doing it this way.

I’ve always believed that debt-free is the ultimate and best status when it comes to personal finance. This week, I’ve had cause to re-assess my position on debt. For whatever reason, these videos about house-hacking were more visceral for me than anything else I’ve read, watched, or heard. The power of financing and its ability to generate intergenerational wealth was put on full display. I have to admit that my eyes were opened to the possibilities in a way that they hadn’t been before.

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Weekly Tip: Borrow books from the library. It’s free and it’s a better use of your time than scrolling a social media site. There are books on anything that you can think of. Borrowing books is free. Libby is a magnificent app that prevents you from ever incurring a late fee because it automatically returns books to the library for you. Feed your brain – read a book.