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.