Increased Savings or Increased Income?

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This is an ever-evolving question that depends on your present situation and goals, those that exist currently and those you aim to achieve in the 1, 2 and 5 or more years. It’s the, “which came first the chicken or the egg”. IF you spend all your time trying to decide which one first, odds are, you will starve to death so start with one. I had periods in my life where I had one job and was solely focused on savings, and other periods where I was working two to three  jobs and trying to combine raising my income and my savings rate as I was intentionally pursuing a goal that I was determined to achieve.

People always ask for tips and tricks on how to progress faster to their goals. My first question to them will always be there same: “Do you know where your money is going?”. If you don’t know where your money is going, how to do you expect to have an idea of what you can save? So people are able to outspend their money issues but that isn’t exactly a repeatable strategy to say the least and is not recommended

First, you will need to break things down to the very beginning and learn if you need a budget in the first place.

When you are talking about the basics, I don’t want to use the “B” word, but creating a budget is a big part of it if you are starting out. You need to see where the holes in your financial boat are and if they can be plugged. Anyone can create a budget, it’s a fairly simple process. From here it is important to find what you are being intentional about and what you are spending on the things in life that give you value. If buying a $4 cup of coffee from Starbucks brings you value and joy then spend away. No one should ever tell you what you value and what you shouldn’t, that’s up to you to decide.

It is the elements that don’t bring you joy and value that you can trim. There are always things in our spending that we can curb and modify and it’s important to be open and flexible with it as we go. Just remember to always pay yourself first.

Once you have the basic budget down, you can shift your focus to looking at increasing your income. It could be simple tasks as small as looking what others in your field are making and determining a game plan as to how to broach that topic with your employer to ask for a raise. (“I will teach you to be rich” by Ramit Sethi is a great book that can help you get the groundwork done to help you broach this topic at work.)

Not comfortable doing that? Look at what you are spending your money on and see if there is an easier or cheaper alternative to those goods and services you can get to replace what you currently have (e.g, switching phone carries, cancelling television and moving to streaming platforms, etc.). These are some small tricks that you can do to lower your expenses and ultimately increase your income.

We live in the age of the gig economy. There are endless ways to market yourself and your skills into a side hustle, adding an additional stream of income. Even during COVID, people are getting incredibly creative by selling custom made masks , creating online courses to teach others new skills, opening a digital printing store for the pictures you’ve taken on your travels around the world, or by providing a service such as food delivery or ride sharing. Don’t let people tell you there’s no way to make money other than your normal 9-5 job. There are millions of ways to make some extra money if you are willing to put in the work.

Not everyone is going to want to try their hand at a side hustle or pick up a second job because it just doesn’t fit them. That’s perfectly fine! This might not work well with everyone as we all have various levels of responsibilities in our life and things that demand different amounts of our time. Some people have kids or are taking care of their parents and it’s not always feasible as a result. But if you say you don’t have time because you are binging Netflix multiple hours a day, then maybe there’s a better use for your time. Why not try and take a skill  you are good at and find a way to see if you might solve someone’s problem! Good at spreadsheets? Market your skills in bookkeeping for a small local business. Enjoy creating collages and building furniture? Create yourself a Pinterest page to show off your creations and maybe turn your passion project into a small business.

Odds are you won’t be able to totally replace your normal income overnight or even after a few months. But if you were able to market your skills and create something that brings values to others you will have a new stream of income you would be able to tap into. From there you can move your passion projects into smaller lines of business for you. From there you can use the extra income to invest in your business to watch it grow, invest for longer term gains, increase your spending or take the trip you always wanted to. This money is free for you to do with at your own choosing.

All it takes is an idea with a little dedication. Rome wasn’t built in a day and neither was any profitable business. What is the worst that can happen? You fail? So, what, people fail every day. You only really fail if you give up and never try again. If it is something important to you, why not stick to it and keep going.  You are trying to improve yourself while learning something new along the way.

Good Debt vs Bad Debt

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Most people do not know the difference between good debt and bad debt. Most do not even know there are different types of debt. One can be a powerful tool that can help you create a lifestyle of your dreams, whereas the other can set you back, hold you down and keep you stuck relying on your job a lot longer than you would have hoped for. Depending how you have grown up, you have probably had the mentality of either always having debt or being told to never have debt unless you must. If you must get it, make sure you pay it off as soon as you can and do not get any more debt.

This logic can be flawed as bad debt does nothing but burn a massive hole in your pocket as well as your spending habits because you are obligated to pay that money back. It will always keep you paying someone back and struggling to ever enjoy your money.

Let us have a closer look at which both debts are quickly with a few examples as to what they are and how they can either improve your situation or destroy it.

Good Debt

Good debt is viewed as borrowing money to buy an appreciating asset. This is used by the financially savvy to purchase investments that will in turn generate income producing assets.  This comes in a few forms, with these being some of the most common:

  • Business Investments
  • Stocks
  • Rental Property
  • Private Lending

Small business investments are great because not only are you the boss, but you are also creating something for yourself that you are in turn selling to make a profit, either through a service or restaurant. You are no longer reliant on someone else for your paycheck as you can create one yourself. Every business starts small and with the right drive and motivation, the more problems you can solve the better your business will become. Amazon was not built in a day, but it easily solves hundreds of thousands of people’s problems every day.

If you are not interested running your own business, you can always invest in other companies through stocks. Stocks allow you to buy small parts of the company without requiring you to sit in on all the board meetings or working for the company. Companies that grow and solve more problems will see their share prices grow and become more valuable. If the company decides to in turn start giving out rewards to shareholders through dividend payments, this is a happy causality.

Warning: this can be good debt but can also lead to a bunch of debt if you are attempting to trade on margins (borrowing money you do not have to invest in a company). If you lose the money that was loaned out to you, not only do you have nothing to show for it, but you have now converted this over to a bad debt that now has recurring interest payments. I cannot stress this enough but taking out student loans or other types of loans to invest is extremely risky and can get you in financial trouble quickly.

Rental properties are another type of debt that, if implemented correctly, can boost your income and net worth through the four wealth builders of real estate. These four wealth builders are:

  • Loan Pay Down
  • Cash Flow
  • Taxes
  • Appreciation

Loan pay down is when you are renting out a house and the mortgage is now being paid by your tenant, meaning you are no longer covering this expense out of your pocket. Cash flow is when the leftover cash after paying the mortgage, property taxes, HOA or Condo fees, insurance, utilities (if you are covering any of them) and reserves funds have been accounted for. The good news here is that some of these expenses are part of running the business and can be deducted for taxes. Therefore, you will not end up paying all of this out of pocket and you will more than likely be paying taxes only on your leftover cash flow. Finally, the last wealth generator of real estate is appreciation. This is when your property goes up in value over time.

There are a few compounding affects that this can have if you are a buy and hold investor. It is a win if your place appreciates in value. Your unit appreciating will allow you to slowly raise the rent a little bit each time, in turn providing you some extra cash flow. After a while, your equity will be growing from the loan pay down and from the appreciation in value of the house. This provides you with more options where you could refinance, pull out your initial investment (if it has appreciated enough) and purchase another property if you choose.

Private Lending can be a tool used to invest in all of the asset classes above but might not always be something that people are comfortable with or get around to. This type of lending tends to be a little more commonly associated with real estate ventures then the others but if you are further along your journey nd have a little extra cash, why not turn around and lend it out on good deals and trying to get a slightly higher return?

The reason this tend to be slightly more common in real estate ventures is if someone with a good record or with the knowledge of looking to expand their portfolio comes along and presents you an outstanding deal, you can choose to create a private loan with them that could let them purchase the property with your loan while agreeing to higher returns for the first 6 months to a year before they go and refinance and move the property to a conventional mortgage. While doing this, you are able to lend out your money for a slightly higher then normal return. Private loans tend to be in the ball park of 10-15% interest per year.

Warning: This is a creative venture that people can pursuit however there are many risks to pursuing this type of venture. Please consult with your financial advisor when considering these types of deals in the future.

Bad Debt

This type of debt is the antithesis of financial freedom. Bad debt is more common and more widely and readily accessible than ever before. Everyone you talk to now has debt and it varies greatly in its type, shape and size. Bad debt is simply borrowing money to purchase a depreciating asset. Bad debt, while not always avoidable, can be avoided and managed better if a sufficient strategy is put in place ahead of time. Sometimes bad debt is necessary as it is the only solution to a particular problem or situation; when that is the case, it should be the #1 priority to be paid off.  A few of the most popular kinds of bad debt are:

  • Payday Loans
  • Car/Boat Loans (Financing or Leasing)
  • Student Loans
  • Mortgages or Home Equity Lines of Credit (sort of)
  • Credit Card Debt (generally ranging between 12 to 25% annual interest)

Very briefly, I have never heard of a good situation that started with “I got a payday loan because of X”. I understand that these services exist to help people out who are in a little bit of a pickle but please plan so that you can avoid them. They are special types of loans because they are paid back all at once instead of over time. This means if you borrowed money once, you would have to pay a fee to renew the loan and if you do this multiple times, you will owe more in the recurring fees than the original amount loaned. These are readily accessible through money marts, online or through banks and private loans. This is essentially robbing Peter to pay Paul because at the end of the day you still owe the money. If you do not overspend and you will be able to avoid this trap. If you build your emergency fund, you should be able to all but eliminate the use for this type of debt.

These types of debt are all bad in their own special ways. Things like cars and boats are depreciating assets (also known as liabilities) right from the second you drive off the dealer’s lot. Immediately they have lost approximately 30% of their value. These can quickly become double whammies when you are leasing them. Leasing vehicles has very few positives as not only are you renting a car for a certain number of years, but there are rules about how far you can drive per year, maintenance agreements that state you need to come to their dealership for servicing, amongst having to secure financing.

The only scenario where leasing a car could make sense is if you are a company’s executive or a contractor working in a new city for a few short years before moving back home. That is the only possible reason I can imagine that leasing a car is justifiable. If anyone has any other scenarios where leasing a car makes financial sense, please leave a comment!

Did you know that in the United States, the average person takes approximately 18 years to pay off their student loans? Here in Canada, it is a little closer to 10 years. I honestly believe that student loans have their place for some people. Here is my big issue with them: you are letting a 17- to 20-year-old decide what they want to do with their life, and they can charge it all to their future self to pay the debt later. Regardless of if they did not finish the degree, switched programs or switched schools entirely, they must pay back the money. That is a massive decision to leave to a young adult without knowing the greater consequences.

The average tuition in Canada for a post-secondary education is approximately $7,000 per year. With on-campus residence you are looking at closer to $18,000 a year. Multiply this number by four and you will get a rough estimate of what a 4-year degree costs on average in Canada. For someone living in locally, this number comes out to around $28,000 a year.

Letting an 18-year-old decide they are going to take on almost $30,000 of student loan debt with an average of 2.75% annual interest when the odds are, they have not even made anything close to that in their life to date is absolute madness. It is not anywhere as close to the absurd numbers that happens in the United States, but it is still a tough pill to swallow. That is a lot of debt to saddle someone with in order to get an education. If it took you the average 10 years to pay off that student loan you would have paid close to $34,500, [DD2] meaning you paid almost an entire extra year of tuition in interest. The world is changing and not all careers require a degree, but for lots of things you still require four years of post-secondary education to even get your foot in the door.

Mortgages are, in many cases, a natural type of debt that people have. I consider mortgages to be the lesser of bad debts here because at the end of the day, we need a place to live. The issue with mortgages comes when you start taking out a Home Equity Line of Credit (HELOC) against your house to go on vacation or buy a new car. As you pay down your mortgage you are gaining equity in your property. The more you pay down the quicker the equity grows. However, some people view this as their savings account and decide to apply for access to these funds and use them to purchase liabilities that will further destroy their financial positions in the forms of trips, boats, cars, etc.

Not only are you paying interest on money you previously paid down, but you are now using your own house as the collateral that this money is borrowed against. Messing around with a HELOC can get you into loads of trouble if you do not stay on top of it. It is much easier for most not to have them.

Credit card debt is easily the most common type of debt yet can be the most destructive in a multitude of ways. The reason is quite simple: credit cards give you the ability to get whatever you want now and pay for it later. It seems straight forward enough; the issue is when the outstanding balance isn’t paid in full and the interest starts to accrue. This starts as a small amount but can add up very quickly if you do not nip it in the bud. On top of the debt there, doing so will allow you to begin tanking your credit score. This can affect all types of debt because instead of getting good interest rates, you are having to pay premium points as you become a risk to anyone who loans money to you.

Figuring out the difference between good debt and bad debt will very quickly open your eyes to the world and show you how in control of your own life you are. We think that we have choices, but when you need to go to work to pay the bills the illusion of choice disappears, and we are only then working to pay off the bad debt.

What To Do With My Raise?

What are my options after a raise?

One of the most popular questions regarding personal finance is what to do when you get a raise at work. Everyone likes being told they are getting a raise and seeing a couple extra bucks in your account every paycheck. This seems like a straightforward math question that shouldn’t be too hard to solve, however, there is emotion tied into it because we sometimes have a hard time looking at money without emotions.

This is a good reason to have yourself an investor policy outlining what happens when new money comes in. You have a few options and depending where you are in your journey, you will more than likely lean more heavily towards one option than the other.

Pay Off Your Debt

If you have debt, you should not be going out to treat yourself with a brand new Mercedes or going on an all-inclusive trip to Mexico. I hate to break it to you but until all your debt disappears, these should not be an option to you. I’m just trying to look out for you and help you get ahead instead of always playing from behind.

If you are already in your debt pay down process, there’s good news! You have just found a little extra every paycheck that you can use to further eliminate the debt. If you have $5,000 worth of debt with a minimum payment of $250 bi-weekly, it would normally take you 10 months to pay it off. Let’s say you now earn an $350 bi-weekly. By adding this money from your raise, in turn it will only take 7 months to pay of that debt.

You managed to save yourself 3 months of time. Now not only was your debt paid off in full earlier, but you now have $350 of income that was servicing debt now freed up that you can invest and start generating yourself more future income.

Increase Your Emergency Fund

Some debt already paid off? Perfect! Now there are a few more options at your disposal. Let’s start with the most basic option that we have. Why not save that money and build up your emergency fund if you don’t already have one? It’s definitely not the sexy choice but it does have the most calming affect for you as it will allow you to sleep better knowing that you have a healthy and sizeable emergency fund saved up. I like to have approximately 4 months’ worth of expenses saved. I’d also recommend keeping it liquid, making it readily available if you need cash fast.  

The further down your journey and the more streams of income you have, the less reliant you will be on your emergency fund. Why? Because if you have other sources of income coming in (Side hustles, Cash Flow from rentals, Dividend payments, etc.) you will have other sources available to you to replenish it quickly or mitigate the need of a larger fund.

Increase Your Mortgage Payments

You have no debt other than your mortgage payments on your house? Why not try to cut that down as quickly as you can. Let’s say you have a house with $300,000 remaining on the mortgage for another 25 years at 2.14%. That monthly payment equates to roughly $1,291 that you are paying towards your principal on your house. That is also the base number required to service your mortgage. Now, if you add the extra money that you have from your raise on top of this, you will be able to accelerate your payments and chop off some time.

Topping up your payments will not only help you in the long run of making your mortgage disappear quicker, but when it comes time to refinance your house down the road and rates go back up (rates will not stay this low forever) you will have more wiggle room because you had already paid off a larger chunk as you were going. Now you will be able to stay closer to your base payment as rates go back up. On top of this, you will be paying less in interest at the same time as having paid off the house faster. This results in less money you are giving to the bank and more money in your pocket.

By increasing your mortgage by $200 a month you can save yourself $15,703 in interest. You also paid off your mortgage 4 years sooner, bringing your total amortization time down to 21 years.

Depending on your stage in life, there are some drawbacks to paying down your mortgage faster. If you are in the younger demographic, making the extra payments on your mortgage are nice because you are freeing yourself up quicker, however you could possibly be missing out on some larger returns in the market if you were to invest it (we will touch on that shortly). If you are in the older demographic, your house is probably your last remaining piece of debt keeping you tied to your job. Having this mortgage taken off your ledger will allow you to live completely debt free, with no major bills due.

Increase Your Investments

For some people that math is quite simple. Let’s say you save that that $100, invest it, and get an annual return of 8%. With a 2.14% mortgage (current rates at the writing of this post), the math would tell you that you have a greater advantage investing it and getting the net positive ~6% annual return rather then paying off the low interest debt.

Looking at it quickly, you will be hard pressed to find people who don’t believe the market will be higher in the next 25 years than it is today. The gap of 6% a year compounded over 25 years can quickly add up to a large sum of money. In this case, it adds up to just shy of $140,000 you would have on its own if it was invested. That’s a lot of money for just topping up your investments by the amount of your raise and letting that ride.

If you are tacking this extra $100 on top of our other investments, you are going to be accelerating your investment growth by consistently adding more money into the market for long term growth.  

Here is the real kicker with this option: it really depends what your relationship is with money. For some people, the math tells them that it’s a better utilization of their money to invest it and get the surplus return, however, there is something magical about watching the amount that you have remaining on your mortgage get chipped away faster than expected.

This almost seems like a trivial issue that would be easy to decide between, but sometimes our emotions get in the way and block our judgement. It’s nice to have a guideline to fall back on that would help us figure out the best way to deploy our money. Both options have their own benefits that can help you further down the road. 

What I Do

Personally, I do a little bit of both. I have my baseline lifestyle that I live at which is very similar to what it was when I started working. I take every raise I receive and I put it towards making extra payments towards my mortgage with the intention of using some of the equity in my property to purchase a rental property. I did this for 4 years prior to refinancing my property.

Now I still pay a little extra towards my mortgage because I like round numbers, but the rest of it has been shifted to going straight into investments. I find this an effective strategy because I’m putting my money to its highest and most effective use. If I were to let that money come into my account every paycheck I would easily find a way to spend it. Money without a job will find its way to spend itself every single time.

This is what I am comfortable doing because I understand the time-value of money and the faster that I deploy it in the market the better chance I have to make it grow faster in index funds. At the same time, I like putting that little bit extra down on my mortgage bi-weekly to see my mortgage shrink even a little quicker.

Do I need a budget?

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The word “budget” is probably one of the words that people hate hearing or using the most. It could be because it gives off the semblance of a contained lifestyle or a mentality of limitation. People don’t like that. No one wants to be told how much they can spend or what they can afford. Some would rather wait until next month or next year to look at their finances.

Here’s the thing, your finances aren’t going anywhere. Just because you don’t look at where your money goes doesn’t mean that everything is taken care of on that front. This could not be further from the truth because your money is like a toddler; if you don’t keep an eye on them they tend to create chaos rather quickly, and in the case of your money it will find a way to spend itself very quickly!

So the main question people have is rather quaint: Do I need a budget?

Unless you have a few million in the bank or won Cash for Life, I hate to break it to you but you need a budget. Here’s the thing though, everyone has a budget, and whether they stick to it or not is a whole other question.

Now you might strongly disagree because it gives a mindset of limitations, but what if you changed the terminology from “budgeting” to “tracking you’re spending”? Think of it as a way to improve yourself rather than the limiting yourself. People want to bring out the best in them and try to make their situation better than the way it was the day before.

Let’s say you wanted to lose some weight, but if you are still eating everything that you see not caring about the caloric intake or your macros, odds are you probably won’t get too far. So why not take a few minutes and track your progress. You aren’t going to lose all of that weight overnight, but if you worked on removing somethings from your routine that were holding you back, you would be more focused on achieving your goal and getting to your targeted weight. It’s the same concept with your finances. If you want to get things under control, you need to know where your money is going.

Spending Breakdown

Why not treat your finances as if you were running a business? Every business has a budget and they have the goal of turning a profit every month. In this case, instead of you turning a profit every month, your goal should be moving towards a position of stronger financial stability and away from a paycheck to paycheck lifestyle.

Let’s have a look at the average Canadian household and see how their money is being spent by category.

Most of the money is tied up in a combination of 4 categories. Those categories are shelter, food, transportation and taxes. Those categories account for roughly 65% of the average Canadian household’s income. Budgeting shouldn’t feel like you can’t enjoy the small things in life like a coffee from your favorite coffee shop or drinks out with friends. The issue with 90% of budgets isn’t the $5 expenses, unless they are recurring, it is often the issues are with the $500+ expenses.

There are ways to contribute to lowering all of these sections. There is always something that can be done if you think you are overspending in certain categories. Here are a few tips and tricks that I have used.

Creative Solutions

Spending too much on your housing expenses? Maybe you have too much living space or you are trying to fill the house for the family you want rather than the family you currently have. Or if you have extra rooms, why not rent some of them out to lower your living expenses and boost your own cash flow.

Spending too much on food? Most people tend to lump their eating out money into this category as well and that is likely the first part of your spending that you should be able to reduce. It has become somewhat normalized to eat out multiple times a week. What if you only ate out once a week instead of 3 or 4 times? You should be able to drop that category by a couple percentage points and free up some money for other areas.

Spending too much on transportation? There are plenty of ways around this! Maybe you have a car payment that comes out every two weeks. What if you didn’t need your car because you lived in an area of town that has good public transit? (If you live in Canada, you might find this funny because it doesn’t seem like any city has good public transit). Instead of having a car, why not bike everywhere or walk? You get the dual benefit of saving money not having to drive everywhere while paying for parking but you are also getting some exercise out of it as well.

An easy way you could do this is by combining some of your categories to try and really pear them down. What if instead of living a 30 minutes from the office, you moved to a place that was near your building, allowing you to sell your car and walk to work. It seems crazy to some to do this, however if you are intentional about minimizing some of these categories there are ways of combining them with creative lifestyles that will allow you to maximize your budget.

Flexibility is a must when you are designing your budget. Make sure that you include things in it that make you happy and that you enjoy. Don’t slash everything to the bone and try to live with a tight wallet or you may end up feeling burnt out. There has to be some flexibility in your budgeting. You have to keep in mind that you need to enjoy life a little too.

What about my Debt?

On the graph above there wasn’t no debt that was listed out on it. It is individually broken up into the categories already. Your car payment is tied to your transportation costs, credit card debt is possibly in miscellaneous, and maybe your student loan debt is in your education portion.

Debt is extremely common and it comes in all shapes and sizes. You should always try to limit and remove your debt as quickly as possible. Doing that will allow you to spend your money how you would like rather than having the obligation to pay off your debts.

If you need a new car but are barely able to scrape by with your bills, you cannot afford to lease or finance a new car. It doesn’t matter if you are offered 0% financing for 48 months, you are still making a monthly payment that will already have you strapped for cash and living paycheck to paycheck with hopes no other unforeseen expenses arise.

If you have debt, you should focus on eliminating it as quickly as possible. Debt hanging over people is what gives them the pit in their stomach, causing them to be unable to look at their finances.

If you have debt, get a piece of paper and list them all out. Include all of the information you think that you need to know including:

  • Who is the debtor?
  • How much is the outstanding balance?
  • What is the interest rate?
  • Is there a time frame on the loan?
  • How much is the minimum monthly payment?

It’s important to have everything listed out so that you can see exactly where you have debt and who you owe money to. It’s going to be scary to list everything and see how much is owing. Once you have this list[BK2] , focus on your debt as fast as you can. Doesn’t matter if you are using the debt snowball technique (making minimum payments on all debt, then paying off the smallest debts first to get them out of the way before moving on to bigger ones.) or the debt avalanche technique (making minimum payments on all debt, then using any remaining money to pay off the debt with the highest interest rate.).

Once you start eliminating your outstanding debts, you will see that your budget begins to get less strenuous and the weight of debt will start to lift off of your shoulders. Once the small battles are out of the way, the game gets a lot easier.

Looking for Help?

There are apps that will help you track your spending as well. If you are looking for budgeting tools, there are plenty out there. Mint or You Need A Budget (YNAB) are two popular apps. If you don’t want to use third party applications, most of the major Canadian banks now offer their own version of tracking apps that will link to your accounts and send an alert when you are spending against your budget . These are handy tools that people use every day. If you are someone who enjoys tracking things yourself, you can always use a cloud-based spreadsheet (e.g. Google Sheets) to track your purchases on the go, a basic Excel sheet, or just a readily accessible journal to write in.

Allocate a little time at the end of each month to review your expenses for the month. Doing this will allow you to get a clear idea as to where your money is going and how it is being spent. If you don’t track it and don’t give your money a purpose, it will find a way to spend itself. This does not have to be long, even 20 minutes of either logging your info or taking a look at possible future expenses will go a long way towards getting your finances in order.

Odds are after a few months of doing this you will start to see patterns in your spending that you might feel you should pay more attention to. Take a look at your subscription services. How many of them have you used in the last month that justify the cost? This is a perfect way that companies have succeeded in getting money from people. Perfect examples are gyms – if you haven’t been to the gym in the last 3 months (possibly more with COVID-19, but this is more in general), why are you still paying for it? Go cancel that right away and stop throwing away your money. There are always categories that people can cut back on. You don’t need to have everything in life. You just need to have the elements that bring you value and happiness.

If you think you are overspending in a category, try reducing or cutting some elements out for a bit. Eating out too much? Try planning out your meals for the week or try making the meal you would typically order-in.

Reviewing my spending

I like to take about 20 minutes on the first of the month to do a brief review of my spending from the previous month. While looking ahead to my next month, I ask myself a couple questions:

  • Are there any special events that I need to be aware of? (Birthdays, holidays, celebrations, etc.)
  • Are there any bills due this month that aren’t normal occurrences? (Property Taxes, License Plate Registration, etc.)
  • If I over spent in a category, is there a reason for it?
  • Were there any outliers or is it the beginning of a new trend possibly?

I like to treat my spending like a game. My goal is always trying to grow my gap between income and spending so that I can invest the difference. The more that you can grow the gap between your spending and your income while investing the difference is the key to a life of abundance. This is the secret equation of the wealthy that has been mastered by millions.

Why parents don’t talk to their kids about money?

Growing up, we openly discussed finances. This was normal to us, as we grew up at a young age learning the value of what a dollar is, what it can give you and how you can transform that dollar into something bigger if you put it to its best and highest use. It took me until I got my first job at 15 to see that this was not normal. A lot of people appear timid talking about their finances. I understand that this can be a deeply personal topic for some people. I like to talk about money and have for a long time.

I’ve been over to friends’ places and their parents have been very engaged with us, talking about a multitude of different things and trying to help their kids and teach them things they have learnt. Other places I’ve been told “we don’t talk about money here”. It’s quite an interesting topic that has some polarizing point of views on each side. Some are valid cases, and some are nonsensical, but here are three reasons why parents likely don’t talk to their kids about money.

Parents don’t know themselves. So how can they teach their kids?

Some parents just don’t know where their money goes. It comes into the account and flows out without any purpose or direction. Some families have one parent that will handle the finances as the other wants nothing to do with it. Some just have no desire to learn it and would rather have someone else handle all of their money. When they were kids it was a taboo topic in their house growing up so they have always had the same sensitivity to it today. No one taught them and they did what they thought was the best or was enough to get by.

The basics weren’t taught to them so they have been flying by at the seams of their pants all of these years. If they don’t look into it themselves and try to understand what’s happening in their own financials, it’s possible that they are one emergency breaking down away from spiraling out of control. They don’t need to be accountants or CFO’s to talk to their kids about money.

Even if you aren’t a genius you can teach them the value of money and what it can do for you. If you didn’t have the best financial standing growing up, wouldn’t you want your kids to be better off than you were? Why not try to help them more than you were helped before. It might seem like a daunting task but even starting with how a credit card works can really be a lifetime of a difference between a pile of debt with a shaky financial standing and confidence in their financial future.

Parents don’t want to tempt their kids with the presence of an inheritance

This can easily kill a kid’s motivation. If they find out they are going to receive a large trust fund at a certain age, will they be motivated to go pursue something or will they just run out the clock doing whatever they want at whatever costs until they get the access to the fund? Giving anyone a large sum of money with no financial knowledge can only lead to disaster.

It’s similar to lottery winners who go broke shortly after they win. They partially go broke because they spent it all but that’s only half of the equation. The other half is that they went broke because they had no knowledge of what to do with the money and how to make it last. It went out almost as fast as it came in. This can get extremely dangerous because if the kid in turn has no motivation and has been taught nothing about finances, what’s preventing them from decimating that account within the first six months and going back to the old habits of no motivation and living in your house until you they are 35? A fool and his money are easily separated if they have no sense of what they value in their life.

Parents are embarrassed about their own situation.

They have spent their entire working careers building up the semblance of wealth. Living the way everyone told them to live. Buying the nicest car, the biggest house on the street and always going to the next best place for vacation. This can come at the expenses of other things. Maybe they have a credit card that hasn’t been fully paid in months or they are a little behind on the bills but don’t want to admit it. They live their live playing the game of never checking their account so they don’t know how much money they have or being spent. Once they look and see massive outstanding numbers they begin to panic and think of quick solutions to get them out of trouble.

So their solution is to go get more money to pay off that debt. That comes in the terms of a second credit card, a line of credit or using some of their homes equity to pay off their debt and destroying their financial position even more. You don’t need to buy the newest IPhone, hottest shoes or brand new Mercedes if you can’t afford to pay your credit card off in full every month. It’s hard to admit our own mistakes if we fail to accept them or even acknowledge them. The fear of knowing how much they owe controls their actions and spending more than the peace of mind of owing nothing.

These can be touchy subjects for parents because as kids we look at them to be the authoritative figure in our lives from an early age and we expect that they know everything. Sometimes parents don’t know everything and possibly have their own bad habits as well. Talk to your parents, ask them to think back to when they were young. I’m sure they have told you a little bit about how they’ve grown up. They have probably followed a similar path to that of their parents and more than likely, taught the same things they were taught.

I’m thankful for the way my parents taught me, but I think that it’s now up to me to do a better job for my kids and them for their kids. I was taught the fundamentals to begin to build my skyscraper. When building a skyscraper, you can’t build it on a foundation that is shaky or not deep enough. You need to build it on solid ground and know that whatever you stack on top of it will hold under any circumstances and still be there in 50 years.

It’s up to us to be open and honest with them about how just like making money and investing compounds your growth, stacking a whole bunch of bad lessons and habits can destroy your financial position.

This is a touchy subject for some people because it’s so easy to spend a dollar then it is to save a dollar. It’s so quick to dig yourself into a hole and spend money fast but it’s a lot harder to get yourself out of it. Maybe soon it wont be as taboo as we all think it is.

What is FIRE and how do we retire early?

Make life what you want it to be. Photo taken by my buddy Ian.

Imagine you are 45 years old waking up and not having to go to work. You get to wake up and pursue your passions, go to the gym, go golfing or travel and never have to worry about work, deadlines or money again. That sounds like quite the dream. Many people can do this even faster than 45; some have done it before they have even turned 30! It’s rare but this does happen.

For others, maybe not so much. Some people have a tough time imagining themselves retiring before the standard age. Maybe it’s because they didn’t save enough earlier or maybe because this is the way everyone was taught. Get a job, work for 35-50 years and then you get a few years down the road to enjoy the fruits of your labor. Though there is nothing wrong with that if that’s what you want to do.

However, there is an entire community out there of people who come from all different backgrounds, ethnicities, genders, professions and from all different walks of life that have managed to escape the rat race of the 9-5, Monday-Friday grinding slog of work and only living for the weekends. It’s scary to think that there is a way to avoid this from an early age. These people are known as the Financially Independent Retire Early community or FIRE for short. They are people who live like no one else now, so that they can live like no one else later in life.

Quite honestly, it’s not for everyone and it does take some self-commitment, short term sacrifice and living slightly different than everyone else. I’m not saying that they all eat beans and rice every meal, they just choose the things that matter to them in their life and don’t try to keep up with the Jones’s because little do people know, the Jones’s are broke. Who are the Joneses? They are the new neighbors down the street that just bought the biggest house on the block. They lease the brand new Mercedes SUV, take the $5,000 trip to Mexico every year, she buys the new Gucci handbag, and he looks like a Ralph Lauren polo model on his way to the country club, while having their house and lawn professionally taken care of. On the surface that life style probably sounds amazing! However, odds are most of it is financed with credit cards that are leveraged to the hill, a paycheck that barely stretches far enough to cover all of the bills, massively crippling car payments and one emergency from having their house look like Buckingham Palace to looking like a shack in the bayou . Doesn’t sound too great anymore does it?

For those who are looking to change up their ways a bit and don’t want to retire early, they probably fall more into the category of Financial Independence, Refocused Energy. The latter is probably a better use of the acronym because it seems that people spend so much time wanting to not be at work that when they are able to retire either early or not, they in turn focus their energy on new things. Whether that be travel, running their own small business, catch a serious golf addiction or whatever it may be, as long as it makes you happy and you are passionate about it, then pursue whatever you want.

Personally I’m looking more towards securing myself with a FI lifestyle rather than a FIRE lifestyle right now because I love my job and at this point in time there are further places I want to progress to in my career. One day, I may like to be able to pull the plug early and pursue things that interest me more. For right now though, I am content building up my career, my passions and my portfolio.

There are multiple stages of FI listed by various bloggers and financial gurus. All of them have the same end goal: being able to pursue your own passions and dreams without having to worry about money. But their difference lies in the paths that they take to get there. Some believe the best way to get there is to never have debt, pay off the house as fast as you can, don’t use credit cards and only buy investments once you have reached a position of 0 debt, regardless if it’s good or bad debt. Others believe that you can use good debt to your advantage and help build up your portfolio as long as you are doing it responsibly, while some build a six figure business on something that they are passionate about and eventually sell it down the road. As you can see there are many ways to get to where you want to go; you just have to choose the path that suits you best. No one will be able to tell you what will work for you. Everyone has their own story and philosophy on what works for them but ultimately it is up to you to design the life that you want to pursue.

You to determine what your priorities are and fine tune your plan to meet your criteria and that way you have an idea where to start. That is one of the truly amazing things about the personal finance community. It’s not the numbers that people throw out there. It’s about the stories of how people got to where they are now, the struggles they had to go through and overcome, the curveballs that were thrown their way and how they hit them out of the park. Everyone has their own perspective and story to tell.

Here’s a key take away from this that I think people need to understand. You don’t try to pursue this lifestyle because you hate your job and you want out of it. Maybe you do hate your job and you want out, you grind so hard gutting it out for years saving money and investing waiting for the day to get out of the rat race. Finally that day comes and the weight is lifted off of your shoulder from your last day at work and you are satisfied. Next day rolls around, you are just roaming around the house trying to figure out what to do. Next thing you know a month goes by and you are looking to go back to work. Why? Because you never built a life style that you wanted, you spent so long running away from your job that once you got away from it, you had no idea what to do.

Before you figure out what your FI number is going to be, you need to think of the life you are planning on living. Look around at your current lifestyle and ask yourself, would you like to be able to sustain this lifestyle in the future and in retirement? Maybe you want to have more luxuries or possibly have a different lifestyle. Here are some things you might want to consider. Where are you living? Are you living in the same house you are now or maybe you decided to do some geo-arbitrage and just travel around the world living in a few different countries for a few months at a time? What are your passions and hobbies? Do you enjoy wood working and making tables and chairs or do you have a passion project restoring an old Camaro in your garage? Or would you like to travel around the country and visit all the small villages and take in what you can? Depending on how you view your life post working career it could affect your numbers in a fairly drastic way.

Sounds nice right, but how do we find out how much we will need? First you need to determine your current expense for the year, if you aren’t sure, go back and look. If you think you will be able to survive on 40k a year with no debt and a fully paid off house in the future the number is pretty easy to get to. Your FIRE number is 25x your yearly expenses, in this case, the number is $1,000,000.

Using the 4% rule of thumb is a guideline that when you hit your FI number, you will be able to draw down a small portion of your portfolio every year that will let you live off of it and not have to work again. Some people won’t need 4%, some will need more and some will need less depending on market cycles and economies. If you go to and run a few simulations on how long your money will last. Using the $1,000,000 listed above with a 4% withdraw rate, there is 95% chance you will have enough money. Not only that, the average of the portfolio that you would have is still 80% higher then what you had originally targeted.

Simulation was ran with a 30 year time frame.

Worse case, if you start drawing down on your portfolio too fast, you have a few options to fix it. You can either start to spend less, curb your spending or worse case you go back to work for a bit. Really though is it that bad? As Joel from FI180 said “your worst case scenario of going back to work, is everyone else’s normal life”. Now it really doesn’t seem that bad, does it?

Now a million seems like a long way away, and it might be for some people, but to get to a million, you need to get to $100,000. From there you had to get to $10,000, from there, $1,000 and before there, you had to start. There are multiple different levels of FI but all of them tend to start at the same place.

Every journey begins with the first step. If you aren’t sure of what maybe you would like or what you want your life to look like. Take a few minutes maybe and consider things you would want in your post retirement life. From here the journey can really start to begin.

Removal of Debt

The first step is to remove all of your high interest debt from your life. Mortgage rates are so low right now that you can leave this part out of the equation, but there will be a future post tied if it’s a good move for you to pay down your mortgage.

Debt that needs to be paid off includes but is not limited to; credit card debt, student loan, car loans and the list goes on. Anything that isn’t mortgage debt needs to be cleared because that does nothing but tie you down tied to your 9-5 as you need to have the money coming in to pay those bills. Not eliminating this debt keeps you stuck in neutral on this journey because you won’t be able to start moving forward building wealth if you are always paying down debt.

Emergency Fund

Once you have all of those paid off, then comes the tedious, but arguably most crucial, part of this entire journey. Funding your emergency reserves. You need to build a reserve fund that you can use to weather through the storms for when they come, because they do. Your furnace goes out in the middle of the night? Use the emergency fund. Car needs to go to the shop for a $1,500 bill to fix your breaks? Use the emergency fund. Want to go on that trip down to Mexico for a week for $1,200? Do not use the emergency fund for that. That is not an emergency, that’s an excuse to use this pile of cash you saved up. This is not the purpose of it. When you pull from your emergency fund, you must replace it ASAP. Watch how well you start sleeping knowing you have some emergency money socked away.

Your emergency fund should be able to sustain your basic needs for a few months. Everyone has their own rule of thumb for how big it needs to be. Some people have it at three months of expenses, while others have increased it to a year’s worth. Your situation is going to be different than others as it is based on your expenses, lifestyle and stream(s) of income.

Building and growing investments

After that the real fun starts. Use the amount that you were putting aside for your emergency fund and start sticking that money into your investment accounts and get that growing. It doesn’t matter if its $200 or $2,000 a month, get that money working for you. The earlier you start getting that money working for you in the market, the more wealth you are likely to accumulate.

At this point you have crossed the 1km mark of a 15km race. It’s not necessarily about how fast you want to finish the race. It’s the consistency of your pace that works for you. Keep the amount you are putting in there consistent and if you can increase the number, increase it but constantly be putting something into your investment accounts. You are going to get there as long as you build yourself an investment system and stick to it. If you can funnel more at the start of your journey you can ease off a little on the back end and enjoy life a little more but the point is that you need to get started as early as possible because you owe it to yourself to live the life of your dreams.