Things Financial - 09 Money is Math

When I was a child I would sit in front of the black & white TV and watch “The Undersea World of Jacques Cousteau.” Jacques swam under water longer than anyone could hold their breath and, oh, the things he saw! I wanted the freedom that he had.

About 35 years ago I learned to scuba dive. It was, at first, very unnatural and very unnerving.

For the introductory lesson I strapped on all of the gear and the lead weights that would sink me to the bottom of the pool. I climbed into the shallow end. I put the rubber thingy in my mouth and took a couple of breaths. It worked. I put on the mask and tried a couple of more breaths. It worked. I sat down on the pool bottom with about a foot of water over my head. I held my breath. I didn’t want to breathe. “I’m under water. It’s unnatural.”

I thought to myself, “You have to trust the technology. You have to trust the technology.” I could look around the pool and see the technology working for other people. Some sitting, like me. Some swimming. Bubbles coming from their mouthpiece. I had seen Jacques using similar gear. I told myself, “You have to trust the technology.”

I took a slow, nervous breath. Not a full one. It worked. The technology worked.

After that, each breath became deeper and more confident. The technology worked.

Why am I telling this story? Because I think it’s similar to, and more interesting than, my first steps into saving and investing. But I’m going to take that story on a second little side trip first.

Money is numbers.

If I ask you how much you make you’ll give me a number. If I ask what you pay in rent you’ll give me a number. If I ask you for a loan you’ll ask me to name a number.

Saving money is math. Saving money is addition. It’s the money you already have plus the new money that you put on top.

Investing money is math. Investing is multiplication. It’s the money you have saved times the Rate of Return.

It can be hard to trust the math. It can feel unnatural. It can feel wrong. Especially at the beginning if you’re unfamiliar with it (like breathing underwater). But if you look around you can see the math working for other people. To be successful with money you have to trust the math. The math works.

I’m not going to show you anything complicated in these blogs. No get-rich-quick miracles. You can take control of your money and do a lot with it if you can do Junior High School math.

In finance, percentages are everywhere. If you can handle percentages the money-numbers will start to line up and give you a different (easier?) view of your financial options and financial future.

That’s about it. If you can do exponents some of the calculations get faster but that’s not super important in the early stages. Addition, subtraction, multiplication, division and percentages will open up a big chunk of the financial world and make it understandable. That understanding will not only help you make good financial choices, more importantly it will help you avoid bad ones.

How does the math relate to my story?

I started to think seriously about my financial future when I was around 35 years old. Following the very old pay-yourself-first plan I built a financial safety net (a Hard Times Fund) while taking a few years to learn about stock investing. Investing – not trading. Math is very important to successful investing but it doesn’t have to be complicated.

Saving felt like drudgery for the first few years. Math said this plan would work but I didn’t feel sure. I became more confident the first time that my annual returns were equal to one monthly contribution. And excited when they equalled my quarterly contribution (3 months worth). And really excited when my annual investment returns exceeded my annual contributions.

I had done the math years ahead of time and this result had been predicted but it didn’t feel real or even possible when I started. But it happened. I trusted the math. The math worked.

You know why I told the Jacques Cousteau story but why tell the rest of this? Because I have a couple of people in my life (with university degrees) that have asked for financial advice but who don’t what to do the math. One says he’s intimidated, one says he’s incapable. They want the freedom that I have without understanding how that freedom came about. It’s like asking to dive down to a shipwreck without understanding how scuba equipment works. You could try, but it will probably end in disaster. I can’t help them.

If you can’t or won’t do the basic math associated with handling money you’ll be lost at sea. The financial sharks are circling. And they’ll pick you clean.

Things Financial - 08 The equivalency of Cash – Money is Time

When I was in my teens I used to hear the expression “Time is Money.” It was usually heard in close proximity to, “Get back to work!”

For a long time I interpreted the saying as something like, “I’m paying you to work, please honour your part of the contract.” That made perfect sense to me. It wasn’t until years later (when I was a better employee) that I had a rethink about it.

The winter was cold and dark and business was slow. I thought, “I need a vacation. All my bills are caught up. I’ve got a few dollars in the bank. I can afford it. I’ll just ask the boss for a little unpaid time off and go south for a few days.” And so I did.

A few years earlier I’d had a different job, been living hand-to-mouth, lucky to have twenty bucks left after paying my monthly bills. Now I was making closer to the Canadian Median Wage after more than half a decade of being one of the working poor. Now I could afford a vacation. Now I could take the time.

About then is when the phrase came back to me, ‘Time is Money,’ and I realized that in some ways it could be taken as literally true. And if Time is Money then Money is Time. Having the money in the bank allowed me to take the time away from work.

Maybe that’s not a big revelation to most people but it was to me. Having a few dollars in the bank grants a lot of freedom.

I’ve never objected to working. I’m not one of those guys who dreamt of striking it rich and retiring at 30. I had friends with those dreams, but they weren’t mine. I like working. That wasn’t the kind of freedom that I was looking for.

The kind of freedom that I found the most satisfying came when I looked for a new job. Knowing that I was in no hurry and knowing that I didn’t need to take the first job I was offered. It was a super good feeling going into a job interview saying, “This is what I can do for you. What can you do for me?” rather than hoping to not blow the interview. I became a negotiator, not a supplicant. I could be choosy about whether the job would be a good fit for me.

A job that is a ‘good fit’ generally makes a happier, more productive employee. A good boss will notice that and make an effort to keep you happy.

But Time is not really Money – Work is Money

On the internet I sometimes see people claiming that money is useless and without value; that it is created out of nothing. I guess things could appear that way if you are far removed from its creation. (A lot of these same people will be more than willing to give you their ‘vary valuable’ crap and take away your ‘completely useless’ cash. How generous!... The offer should tell you something about their true beliefs.)

Money isn’t created from nothing. Value is created by valuable work and money is the thing (the place holder) that we choose to represent that value. So money is an artificial creation, true, but it doesn’t come from nothing. It is an offshoot of both created value and a societal agreement to accept this place holder that we use to represent that value.

Credit doesn’t come from nothing either. Credit is created by the borrower’s promise, and demonstrated ability, to do valuable work.

Credit and money both spend exactly the same way. You can’t tell the difference between them in the economy.

What I am trying to say with all of this is that if you want a comfortable amount of wealth be prepared to work for it. And try to do ‘high value’ work. Your earliest investments should be in yourself. The investment doesn’t need to be money, it can be time and work. Improve your skills. Improve your knowledge. Use the library, it’s free.

Starting out is the hardest part. It took me years to get the ball rolling.

Things Financial - 07 Pay Debt or Save Cash?

Pay off your debt.

That’s really all I have to say about this topic. I can explain my reasoning for those who need a little convincing.

In an earlier blog I mentioned my preference for reducing expenses rather than increasing income. There’s nothing wrong with increasing income. I’m all for it. However, I really like my time off so decreasing spending is a way to spend less time in the office or at the job site. A relatively easy way to decrease expenses is to not pay interest on your purchases. Interest on debt is an expense with no material return. It’s money you spend and get (almost) nothing for. You do get a thing sooner rather than later, but at a cost.

A few years ago a co-worker, who made just as much money as me, bought a car. He went to a used car franchise with “on site” financing. The car he bought was not super expensive, $5,000, but they gave him a 5 year loan for it with a 28% interest rate. This gave “Easy Payments” and increased the final price of the car to about $8,800.

I’ll say this another way which I hope will make it clearer to some folks:

My co-worker and I made $32 an hour. We took home about $25 an hour after taxes. That means that he had to work for 200 hours (5 full weeks) to pay for the car. Then he had to work another 152 hours (just about 4 more weeks) to pay for the “Easy Payments.” That’s 152 hours of work for which he got nothing more than he already had. You could think of it as him working 4 weeks without getting paid for it, because that’s how it looked to his bank account.

This is the same pattern that many sellers of credit will use. “Easy Payments” in exchange for increased cost to you. In general, the easier the payments the longer you’ll take to pay off the purchase. The longer you take to pay it off the more it will cost you in the end.

If my co-worker had less debt at the time he may have been able to get a bank loan at 10%. That loan would have cost about $900 rather than the $3,800 he paid. Better yet, if he’d had the money in the bank to just buy the car he could have saved the full $3,800 cost of the loan.

“Then shouldn’t I be saving rather than paying debt?” you might ask.

Don’t get me wrong. Saving is great. I encourage you to do it. Just not at the expense of carrying debt one day longer than you must. Pay off debt first. The simplest reason is because interest on debt generally adds up faster than interest on savings.

Example: $1,000 in a GIC might pay $40 interest in a year. If, at the same time, you carry $1,000 on a VISA or MasterCard it will cost about $220 in interest. Saving that $1,000 will make you $180 poorer by the end of the year. In Finance Speak that difference would be a ‘net loss.’

Worse than that, if you have the GIC in a Non-registered Account you’ll have to pay income tax on it. You’ll probably end up with just $30 after taxes. At year’s end you’ll be $190 poorer. Also, some card companies will increase your interest rate if you carry a balance for a few months thereby charging more from the people who can least afford it. The poor get poorer.

It might feel good to see money in your bank account but it can cost you in the end. Save only your Emergency Fund then get working on debt repayments.

Whether you pay off your smallest debt first (snowball style) or your highest interest debt first (avalanche style) is up to you. Just pick one and start there.

A couple of other reasons to pay down debt are because it makes you a ‘better credit risk’ and it frees up space to borrow. Not that you should re-borrow after paying off a debt.

The eventual goal of your financial plan should be to get into a position where you never have to borrow money again. Where you can just buy the things you need and not worry about making payments into the future. But near the start, if you aren’t in that position yet, you may have to borrow – but only for the things you need, never borrow for what you could do without.

These days a lot of people seem concerned about Credit Scores. In the olden days of my youth it was only institutional lenders that were interested in such things. Now I hear of landlords and prospective employers asking after Credit Scores. Paying your bills regularly, on time, and paying your debts off will greatly improve your Credit Score.

If your Emergency Fund is weak (like $500) and you haven’t started your Hard Times Fund but you have been paying down your debts, during an emergency you might be able to re-borrow at a lower interest rate than you were previously paying.

Now I hear you ask, “If it’s better to pay debt than save money why have an Emergency Fund at all?”

The answer is, “Because the Emergency Fund is for small emergencies.” A bank, with its lower rates, is unlikely to lend you $500 or $1,000. If you need to borrow that amount of money you’ll be looking at a cash advance on a credit card or a payday loan. Credit cards frequently have cash advance fees and higher interest rates than for purchases. This makes them a poor choice for borrowing. And you should never, EVER borrow from a payday loan place. I personally would rather go to the States and sell my blood.

Debt today means a poorer tomorrow. Pay that stuff off now! Build a better future.

Check out “CBC Marketplace Payday Loans” on Youtube

https://www.youtube.com/watch?v=Ea2-qytKw6Q

if you like (financial) horror movies.

Things Financial - 06 Ways to economize when you’re just starting out

Economizing, reducing expenses and saving money, comes naturally for a few people but not for many others. Dave Chilton in his book The Wealthy Barber Returns argues that it is unnatural and evolutionarily unwise to save for a tomorrow that may never come. He’s probably right.

Our society has largely removed us from survival-in-the-wild situations and placed us into a situation where the competition is for dollars, which can be saved and grown, rather than for food, which must be consumed before it rots and becomes useless.

Once you’ve made the decision to put some money aside for the future how do you start?

It’s always easiest to make money when you already have some. After all, the rich get richer. Savings have a way of ‘snow-balling.’ Things start slowly at first but, over time, they build and pick up speed.

But what if you don’t have any money? You’ll have to get some by doing some extra work or cutting some expense. Which method you use may be forced by circumstance or be a personal preference. My choice was to cut expenses. (I figured I already worked enough and most of the jobs that I worked at figured that they didn’t want to pay me over-time.)

Cutting expenses will feel unpleasant at first but look for something that you might be better off without. Vices are a good place to start. If you smoke or drink you already know that these things are bad for you in the long run. You don’t have to cut them out completely (‘cause they’re fun) but set yourself a limit. Ration yourself. Aim for, say, two thirds of your habitual consumption. When I started cutting expenses it started by cutting down trips to the bar and beer consumption.

If you don’t have vices, congratulations. Look for other places to cut expenses. Coffee shop drinks, restaurant lunches, extra drives to the store, entertainment expenses (movies, streaming services, book & magazine purchases), anything else you can think of. Spend less than you bring in. And be honest with yourself.

I’ve known people with money problems and people with weight problems. One of the things that I’ve seen in common with many of them is failure to accurately track their own behaviour. One might spend or eat without noting the action. When asked, they might deny that it happened or say that it’s so small an amount that it’s not worth worrying about.

It’s all worth worrying about. Especially if you have a problem with it. If you truly want what you claim to want, count everything. Don’t fake yourself out. It will only cause failure and stress.

Learn to do tasks that you might pay others to do. If you have a vehicle, learn to change your own oil. Learn to install your own winter tires. If you’re not a renter learn basic plumbing & electrical. Changing one light switch or unplugging one drain or changing one toilet valve can sale hundreds of dollars. None of these skills are hard to learn and once the neighbours know that you’re capable they may call on you. I get beer and food for small repairs all the time. Those both reduce my expenses, too.

You may choose to work more to increase your income. This is a good idea if it seems best to you. Just make sure that you save the extra income. On the rare occasions that I took extra work I would save half and spend the other half. This gave me both money in the bank and a small reward for the extra work. This may be a good plan for you to follow once you’re already living within your income.

If you have spare space in your home consider taking in a roommate or border. If you live by yourself consider moving in with a friend. Either of these is a big step that can produce, or expose, relationship problems so think carefully before you take the leap. With housing being a major expense, sharing costs can also produce major savings over an extended period.

I’m pretty easy going so I had roommates, until my mid 20’s, who helped pay the rent. When I was mid 30’s and bought my home I brought in borders who helped pay the mortgage. To me it felt like a Dire Straights song – Money for Nothing.

After a month of following one or more of the suggested approaches to economize/save you should have a few dollars. Even $20 is a start. $100 is better. More yet is better yet. You can use this money to start saving more.

Some of these ideas will seem simple, and they are. These are things that worked for me and should work for you too.

Everyone eats and supermarkets put things on sale on a rotation. Watch for specific items going on sale every 3 weeks, every 4 weeks, every 6 weeks, every 13 weeks, semi-annually and annually. Learn the rotation at your favourite store. If something non-perishable comes on sale buy enough of it to last until the next scheduled sale. Concentrate on shopping the sales. Learn to tell the difference between needs & wants. Try not to pay full price for anything that you need and never pay full price for things that you want.

Never pay full price for toilet paper, it’s on sale a lot and keeps indefinitely.

Use the money you saved to economize on your weekly purchases and remember to bank the money you save this way, too.

Never buy something just because it’s on sale. Make sure it’s something that you really need and will use. - Shortly after I left high school a friend of mine bought a truck tire...Because it was on sale. More than 50% off. It was a good deal for that truck tire. Unfortunately my friend didn’t have a truck. And the tire didn’t fit his car. And it’s really hard to re-sell a single tire....True story. The moral being that it’s not a good deal if you can’t use what you bought or if it goes to waste.

If you’re someone who makes a lot of short drives by yourself, get a bicycle (or use the one you’ve already got). Ride the bike for any trip less than 10Kms. You can frequently find a bike at a garage sale for less than the price of a tank of gas. I ride my bike between 500 & 2,000Kms a year. Even if you drive an economy car with today’s fuel prices you can save over $100 a year and be healthier, too.

Don’t use credit for any of your daily needs or any of your wants.

If you have debt, pay it off. Get that monkey off your back. Anything other than a mortgage needs to be gone as soon as you can make it go away. Don’t even think about investing in anything beyond a bank account until you’ve cleared all other debts.

Debt sucks the money out of your pockets. Interest gets added every month and that is just an over-payment for something that you bought in the past and may not even own anymore.

Paying off debt saves interest charges. Interest charges are a constant drain on your resources. It’s spending for nothing and it’s money that you might not have had to spend if you’d started with a little money in the bank...which you should have soon.

Concluding:

Set your mind straight and accept that saving feels unnatural to some people. Maybe it feels unnatural to you. That’s not a reason to not do it.

You can’t spend all the money you make and still have money. Once you’ve spent it it’s gone. Find a way to decrease your spending or increase your income, even if only temporarily. Get comfortable with having money sitting in the bank.

As soon as you’re a few bucks ahead start investing in yourself, your knowledge, your health and your groceries.

Work to get and maintain a bank balance of at least $500. A lot of people will say that you should aim to get $1,000 in the bank before moving on to the next step but I’m going to say that if you are used to being broke then $500 is good enough. Just work to maintain that bank balance. Emergencies happen and you’ll be glad you have it

Pay off any non-mortgage debt.

Once you get this far you are started on your way. There is still a long way to go but if you can make it this far you have proven to yourself that you are capable of controlling money and can have a financially better life than those whose money controls them.

Things Financial - 05 Where does my money go? – Canadian Account types

Once you get the flow your money under control. Once you’re spending less than your take-home pay, you will need something to do with that extra money. Every financial advice book will tell you build an Emergency Fund. I’m telling you to do the same thing. Put away some money. But where? You’ll need a place to put it.

There are more than a few choices of places to park extra money. And there are more than a few people who would be glad to take your extra money for themselves. Beware of people who offer plans to get-rich-quick or who offer easy money. Many such ideas are scams that result in you getting-poor-quick.

The first place you should think of putting your money is in a bank.

Banks get a bad rap. (That’s Old-People-Speak for “nobody like them.”) There are some expressions that show how people feel about them. I’m sure you’ve heard a few. Expressions like, “Arctic winters are as cold as a banker’s heart.” And the true statement from my-mother-the-farmer, “The only way a bank will lend you money is if you can prove to them that you don’t need it.”

The above refer to a bank lending money (and wanting it back). But if you have money on deposit at a bank they will guard it zealously. And if they fail in their duty the Canada Deposit Insurance Corporation (CDIC) will cover deposits & interest up to $100,000 per depositor. If you have less than $100,000 your money is safe in any CDIC insured bank. If you have more than $100,000 you can probably skip the rest of this Post.

Ask if the bank of your choice is CDIC insured.

If you prefer a Credit Union over a bank, they have ‘Credit Union Stabilization Funds’ which function in a similar way to the CDIC. These funds seem to be province by province rather than national. I’m not as familiar with credit unions so be sure to ask for details at the Credit Union of your choice.

Once you’ve picked where to put your money, then WHERE do you put your money?

This next bit can get confusing because some investments are also referred to as ‘accounts.’ (The English language isn’t always the best for communicating ideas.) I’ll use a capital “A” (Account) for a bucket that has special tax rules & a small “a” (account) to indicate an investment type.

There are different types of Accounts and different kinds of investments available inside those Account types. I like to think of the the Account types as buckets that you can put different kinds of investments into. I haven’t used every type of Account that’s available so I won’t talk about all of them, I’ll only talk about a few of them here.

There are Registered Accounts and Non-registered Accounts. Non-registered doesn’t mean that nobody knows about them or that they aren’t safe, it just means that there are no special tax rules when you use one.

The main purpose for using a Registered Account is that, if you use it correctly, you can pay less Income Tax. There is a lot of information on the Canada Revenue Agency (CRA) website about various Registered Accounts including their requirements, benefits and restrictions. Check the CRA site for the most current information.

Some Account Types:

Most people have Non-registered Accounts. This is the sort of thing that you’ll be offered when you walk into a bank as a new customer. Unregistered Accounts are the usual kinds of accounts like chequing accounts or a savings accounts by various names. You may also get offered a Market or Trading account if you ask about getting into the financial markets (stocks, bonds, mutual funds and such). Don’t do that yet.

Your bank can also offer Registered Accounts (see the CRA site). Common ones are Registered Retirement Savings Plan (RRSP), First Home Savings Account (FHSA), Tax Free Savings Account (TFSA), Registered Education Savings Plan (RESP), and Registered Disability Savings Plan (RDSP). If you or anyone in your family has a disability I hope you already know about that last one, most banks aren’t quick to suggest it.

These different Account types (buckets) have different tax rules as well as rules about who, when & how much can be contributed (deposited) and who, when & how much can be (or must be) withdrawn. In many cases you swap restrictions on your money for a lower Income Tax bill.

Of these Registered Account types my favourite right now is the Tax Free TFSA. I think every adult should have one. There are very few Government Imposed restrictions on your money. You can have more than one as long as you don’t exceed your maximum contribution limit for all of them combined. (As of 2025; $102,000 for most Canadians. If you turned 18 in 2010 or later your contribution room will be less.) Use a TFSA for any money that you don’t have a plan to use in the following 90 days. Use it for your Emergency Fund. Use it for your Hard Times Fund. Use it for any long term savings that wouldn’t be better in a different Registered Account.

There is no special deduction when contributing to a TFSA but any growth in you investments are tax free and withdrawals don’t count towards income. To compare; interest earned in a Non-registered Account is taxed at the Ordinary Income rate, which is the worst (highest) tax rate most people pay.

Some Investment types:

There are many kinds of investments plus many other places to put your money that people will call “investments” but that don’t fit the dictionary definition.

When you are just starting out and don’t have a lot of money the first investment you should have is a Savings account. It’s just a place to park your money where you can get at it quickly & easily and that pays (usually) a small amount of interest. Your bank may offer more than one kind of Savings account. Read the pamphlet or website before choosing an account. Banks may limit withdrawals & transfers in exchange for higher interest. There may be fees for things that you don’t expect. The fact that a Savings account pays interest is what makes this an investment.

You might also use a Chequing account but in these days of low inflation many don’t pay interest, so they don’t really meet the definition of an investment. Many times a Chequing account is just a convenience.

Your bank will also deal in Guaranteed Investment Certificates (GIC’s). These normally require a you to ‘lock in’ your deposit for a given period of time in order to receive the highest interest rate. The bank may also have GIC’s that don’t require a ‘lock in‘ period (“cashable,” “redeemable” or “pre-encashable” GIC’s). They will pay less than a ‘locked in’ GIC and should pay more than a Saving account.

If you invest in a GIC be sure to specify where your money should go at the end of the contracted term. If you don’t give instructions many banks will automatically lock it in for a further year at the then-current interest rate. Don’t ‘lock in’ your Emergency Fund or Hard Times Fund. That money should be available on short notice. You don’t want it where you can’t get it. Using an analogy: You don’t want your plunger locked in the neighbour’s safe while your toilet overflows, you want it where you can get your hands on it immediately.

And that’s about as far as you need to go until you’ve paid off any non-mortgage debt: Savings & Chequing accounts plus a TFSA for your Emergency and Hard Times Funds with those 2 funds in cashable GIC’s.

In future articles I’ll give more detail on some of the Account types; the advantages and disadvantages of the different buckets. I’ll also talk more about different types of investments (bonds, mortgages, some stocks, etc.) and things that are sold as investments that don’t quite fit the dictionary definition (metals, options, crypto, collectibles, etc.).

Things Financial - 04 Have a Plan for Your Money

Whether you’re making it, spending it, saving it, investing it, giving it away; you should have a plan for your money. Without a plan money tends to drift away from people. It seems to evaporate. So make a plan.

Make a realistic plan.

It’s easy to imagine fabulous wealth or abject poverty. But most people will never have one and will work hard to avoid the other. Try to come up with a realistic plan for that middle ground that so many people occupy. - A lot of people end up in the middle ground so you should have a plan to make the best of it.

I may be able to help frame things with a little bit of math.

If you work 40 hours a week and 50 weeks a year (2 weeks holiday, yipee!) that’s 2,000 hours a year. If you’re ambitious and start working from your 15^th birthday to your 65^th you’ll work 100,000 hours. As I write this (near the end of 2024) a tradesman in my area can expect to make about $32 per hour and could make $3.2 million in a life time. Try figuring how much you might make in a life time.

It may look like a lot when you see it written like that but the number needs paring down. First, you’re unlikely to work 100,000 hours. You’re unlikely to start working full time at age 15. You could start at 18 and work until you’re 68, but good paying, steady employment for 50 years will be hard to find. Even the most employable people have down times. There will be economic downturns and lay-offs and down-sizings. Unemployment will cut into lifetime pay. Or you might go to university and not start working until you’re 23 or 28, perhaps graduating with substantial debt.

Whether you go to university or straight into the workforce you can expect to fall short of the 100,000-hour mark. 80 to 90,000 hours is more realistic and 70,000 wouldn’t be out of the ordinary. I’ll say 85,000 hours for this example. (Which is pretty close to the number given at moderngov.com.)

With the reduced hours our tradesman makes $2.72 million in his lifetime. Of that he can expect to hand 20% or so over to the government for income- and various other withholding taxes. Now he’s left with $2.17 million with which to live most of his life. This amount is about 2/3’s of the first number that we worked out, $3.2 M. How much is 2/3’s of the number that you worked out for yourself?

We can toss in a little over $200,000 for Canada Pension and Old Age Security during the expected 16 years of retirement. The tradesman now has $2.4M has to last him from 18 to 81 years old (Eighty one years being the average life expectancy in Canada; but half of all Canadians live to 90).

The money has to stretch out for 63 years (or 72 years for half of Canadians). It has to cover food, heat, light, phone, housing (rent or buy), transport (vehicle + fuel + maintenance + insurance or public transit), clothing, entertainment (restaurants, movies, vacations, toys, electronics, hobbies), raising the kids, charity (if he can afford it) and geriatric care when he gets old. If you just divide out the numbers it comes to around $3,800 per month. It’s better than minimum wage but still not very much in today’s economy. The tradesman needs a financial plan to make sure that he won’t run short of money.

Everyone needs a financial plan. It doesn’t need to be elaborate or be cast in stone but you need some sort of a plan. The oldest and most basic is the “pay yourself first” plan. It’s been around, in some form, for centuries.

“Pay yourself first” is just another way of saying that you can’t spend every cent that you make as you make it. You have to save something for the future. Hold back some amount from every pay-cheque. Ten percent has been the recommended amount for many years. Recently some folks are calling for 15 or 20% but I don’t believe that is possible for most wage earners. When I started saving I started at about 4 or 5%. It was hard but got easier. And the percentage went up over time.

Once you have some money put aside some portion of that (but not all) should be invested for long-term growth. This is also a system that has been around for some hundreds of years. If done properly it can lead to a better life for you and Generational Wealth for your descendants.

Start by thinking about a plan to put some money aside. Plan how you’re going to get it. Plan how you’re going to keep it. Your future self will thank you.

Things Financial - 03 Standard advice – Everybody says the same things

Most financial advisors and financial advice books will tell you same thing and I’m pretty much going to repeat it in this article. If you already know to spend less than you take home, if you already know to build an Emergency Fund if you already know to pay off debt if you already know to build a Hard Times Fund, all before you look to longer term goals, if you already know all of that then you might want to skip this....but you may not.

First, a story.

The very first thing you need to do, before you can save a dime, is figure out what you have spent your money on in the past. And don’t ‘fake yourself out.’ Be honest.

When I was 20ish I spent more than I earned. I had no money and had bills coming in. I guess that made me pretty normal for my age. The first time a bill came in that I couldn’t pay immediately, I just delayed it. Made a partial payment and went about my business of being young.

The next month the bill was larger and there was an interest charge that I didn’t like the look of. I felt I had to do something about this. I mean, I was spending money and getting nothing for it! That’s no fun.

I was short on funds, again, and made only a partial payment, again. I realized that I didn’t have a clear idea of where my money was going...except for that interest charge.

I guess I knew that I paid rent & heat & light & groceries but those things didn’t add up to my whole pay cheque. I needed a system of tracking my spending. It turned out to be pretty simple.

I put a basket on top of the fridge and got a paper receipt for every dime I spent. I tossed the receipts into the basket every night....Well, that’s not perfectly true but it was effectively true. I did have to make some receipts myself if I bought something from the ice cream truck or such like. I’d jot a number on a piece of paper with a one-word note for what I’d bought and toss that into the basket.

And going to the bar was a special case. Since I was unlikely to keep perfect track of my spending as the beers flowed I devised a slightly different system. Before going out I’d count the money in my wallet and write the amount on a scrap of paper (Usually the torn off corner of an envelope that a bill came in.) and put the paper in my wallet. In the morning, after I’d had enough coffee, I’d recount the money in my wallet and subtract it from the number on the paper. That told me how much I’d spent, even if I didn’t have a clear memory.

I’d write the new number on the paper scrap along with the word “bar” and toss it into the basket. Oh so easy.

At the end of the month I totalled the receipts in broad categories; home expenses, groceries, transport, bar, restaurant, cloths, etc. I found the physicality of going through the actions and seeing the pile of receipts in the basket made the exercise more real for me.

What was the result? I was really quite surprised. I was spending about a quarter of my take home pay at the bar and another big chunk eating lunch at cafes.

The bar was the big expense and I didn’t want to give up drinking. Fortunately I never thought of the bar as a place to meet women (there are better places for that) I went there to socialize with my friends. A work-around turned out to be easy. It turned out to be cheaper if I just bought a case or two of beer, cooked up a big pot of spaghetti and invited anyone who wanted to come over to my place every Saturday evening to watch Hockey Night in Canada.

It worked out well. I got to socialize. I got to drink beer. I didn’t have to drive home. Everybody thought I was a great guy (at least as long as the beer lasted). And I saved money.

I would still go to the bar on special occasions. I’m not a monk.

I also knocked off the cafe lunches. That was harder. My supervisor called me “cheap” in front of some of the other guys because I wouldn’t go for lunch with the crew. There was social pressure to conform but after a couple of weeks of eating bag lunches it went away.

It took about 4 months to catch up on my bills but after that things got easier. I kept up the receipts-in-the-basket thing for a couple of years, just to keep myself honest.

Society is going mostly cashless these days so counting money in the wallet may not be practical any more. If you buy with a charge card you should be able to reconstruct your spending form the bill, it lists where you spent. If you shop with a debit card you may not know where you spent the money. Get receipts or write notes. It may take a couple of months to get the hang of it.

So here comes the standard advice:

Track your spending. Don’t fake yourself out. Every dime that leaves your hand needs to be accounted for. Sometimes the mere act of tracking is enough to get you to spend less.

If you have money left at the end of the month, great! You’re on the way. If you’re short of money then look for places that you could reasonably cut down. If you spend all that you make you’ll never ‘have’ money. And paying interest charges is like taking a pay cut.

Now put aside an Emergency Fund. Most people will tell you $1,000 is what you should have. I’m going to say that if money is so tight that it will take you months to save that much then aim for $500. Keep your Emergency cash in a place that you can get it reasonably quickly. Don’t lock it into a GIC or Retirement Account. Don’t buy Options or Crypto (more on those later). Put it in a bank or credit union savings account, a high interest one if possible but in a savings account. A Tax Free Savings Account (TFSA) is best.

Next pay off any non-mortgage debt that you have. No taking on new debt. Stop using your charge cards. No new loans from the payday loans place. No new rent-to-own contracts. No new debt.

For paying off existing debt there are 2 systematic methods. The common names are ‘snowball’ and ‘avalanche.’ Both methods involve making a list of all of your debts.

To ‘snowball,’ list your debts from lowest to highest. Make minimum payments on them all then take every spare cent and pay down the the debt at the top of the list, your smallest debt. Do that every month until it’s gone. Then do it with the next debt on the list. You’ll be making larger payments than you made on the first because now you are free of that first minimum payment. Pay off the second debt. Now you have eliminated 2 minimum payments. Move onto the third and keep going. Each paid off debt releases more money to deal with the next. It’s like getting a small raise every time you pay off a debt.

To ‘avalanche,’ list your debts from highest interest rate to lowest rate then follow the same pattern as the ‘snowball,’ making minimum payments on all, then putting every spare cent against the debt on the top of the list.

Psychologically the ‘snowball’ is more satisfying and probably the most successful. ‘Avalanche’ is slightly faster and slightly cheaper but too hard for many people to stick to because progress may not appear as obvious.

Once you’re out of debt you can start on truly saving for a better future.

Pump your Emergency fund up to $1,000 if it’s not already there. Then build your Hard Times Fund to carry you through job loss, lay offs and economic down turns.

Lucky people might make it this far in a year of two. Others may take 3, 4 or 5 years. Or, like my friend in a previous post, 20 years. But I haven’t met anyone who told me that the effort wasn’t worth it.