Monthly Archives: April 2017

The Personal Finance Mountain

  1. The Oh, Sh*t Moment

This moment is different for everyone, but it’s the point where you realize you’re not happy in the foothills anymore. For an awful lot of people, it seems to be related to debt.

For me, it was when I really wanted to quit a job I hated, but realized I couldn’t because I still owed a bunch of money in student loans. I hated that feeling and I decided then and there to figure out how to make sure I would never be trapped in a job I hated again because of money.

For some people, it’s a desire to escape the rat race way before the average retirement age.

For others it’s something entirely different.

However you want to slice it, it’s a realization that your money is controlling you, instead of the other way around. And that you’re just not going to put up with that crap anymore.

If that’s where you are, congrats! Welcome to the personal finance mountain.

  1. Budget

This word gets such a bad rap, but a budget is actually empowering! How can you get a job done if you don’t even know what tools you’re working with??

Here’s the deal – grab a bottle of wine or your favorite mocktail or whatever you generally choose to eat/drink your feelings – and just do it.

A budget is breakdown of your monthly and annual expenses.

It’s important to do both because those one time annual expenses like eye doctor visits, contacts, car insurance and registration, etc. can really eff up your monthly budget if you leave them out (I speak from experience).

A monthly budget includes set expenses like rent, loans, car payments, Internet, cell phone bills, etc. It also estimates variable amounts like groceries, electricity, and gas. You also include amounts for occasional items like gifts, medical expenses and entertainment.

You know you best, so adjust the set up so it works for you. If you do most of your spending using a credit card, you can just backtrack a month and add up each expense to get an estimate of what you’re currently spending on each category. If you usually use cash, you’ll have to collect your receipts for the next month so you can see how much you’re spending.

Once you know what you’re spending each month, you can look at your income. If everything is covered, great! If it’s not, you’ll be able to see where you can cut back.

Once you’ve got an outline of your monthly budget, you can do your annual budget, which is usually a little easier. These are your annual expenses that occur a few times a year or less. By figuring them out in advance, you can save a little each month for them so the money is ready to go when you need it.

Here’s the great thing about budgeting and the personal finance mountain – at the start of your climb, it’s your best tool. The more carefully you tend to it, the better everything is going to go for you, but as you climb further up the mountain, if you did a good job with your budget back down at base camp, you don’t need to tend to it as much later on.

Woody Harrelson Is a Terrible Debt Collector

He was bad at his paper route. And not a great hype man for a lame gym. But as the actor tells Wealthsimple, he’s gotten better at money over the years, partly by not needing to spend much of it.

I was 9 or 10 years old when I got my first job, delivering the Houston Chronicle. Here was the problem: I was good at delivering newspapers, but I was terrible at collecting money from my customers. When I did my collection rounds, a lot of people would be like, “Hey, can you come back tomorrow?” And I’d say, “Sure, no problem. Sorry to bother you.” But day after day they always had an excuse or they’d pretend not to be home, and as a little kid, my collection efforts had no real teeth.

The way it worked, I’d buy the newspapers in bulk from the publisher as an independent contractor, and once the customers paid me, I’d turn a small profit. But despite all my hard work delivering papers, with my ineffective collection efforts I’d usually have a net loss. I’d hoped to make a little spending money, but I didn’t make money — I lost it. Sometimes in life, the middleman gets squeezed. On the other hand, that paper route sure got me a lot of exercise. I always try to find the silver lining.

The least expensive things can be the most personally rewarding. My wedding, for example. The whole event cost a total of $500.

In my early 20s, I was living in New York City, and I’d take just about any job I could get. I waited tables mostly, but I also did all kinds of weird side gigs. One time a friend of mine started working at a cheap local gym that happened to have some famous members, like Madonna and the guys from Kool & the Gang—this was 1983, and their song “Celebration” was all over the airwaves. The owner of the gym wanted to do some grassroots advertising and hired my friend and me to ask other neighborhood businesses — bars, coffee shops, laundromats — if we could place ads for the gym inside their store windows. The lure for them was that if they let us put up a poster, they’d get a free membership to the gym and might catch a glimpse of Madonna or Kool & the Gang. For us, we got a couple bucks for every poster a business owner agreed to hang. It was a lot of door-to-door hustling. Fortunately, my people skills had improved since I was a kid with a paper route. But the posters didn’t seem to make a difference: Even with Madonna, “Celebration,” and all our grassroots energy, the gym didn’t survive. That said, I met a lot of interesting people around the neighborhood, and the money in my pocket helped me get by, so I don’t count any of it as a wasted effort.

Wealthsimple is investing on autopilot

Over the years my relationship with money has shifted in some ways, but in other respects, it has stayed the same. These days, when I go into the grocery store, I’m not calculating the cost of each item. I don’t need to be as penny conscious as I used to be — I just grab and go. But I was raised to be conservative in my spending habits, so I always seek a balance: I don’t want to be a spendthrift, but I also don’t want to be needlessly lavish.

Every once in a while I treat myself with a special purchase. The most extravagant I’ve been is when I bought a Tesla not too long ago. I like the way it drives, and I really like the idea of reducing my carbon footprint. But often, I’ve found, the least expensive things can be the most personally rewarding. Take my wedding, for example. The whole event cost a total of $500.

How to Save $100,000 by Age 25

I won’t lie. These factors may have contributed to my general enthusiasm about life. But there’s another reason I sometimes stare into space and smile at nothing (even if anyone in the vicinity thinks I’m a crazy person).

For the first time in my life, I have absolute freedom to only pursue the things that interest me. The last two decades have been an uninterrupted freight train of schooling and work, so it’s a pretty surreal feeling. There are moments of pure elation, and even the occasional faint trace of guilt. Did I cheat, somehow? Surely it can’t be this easy? I’m waiting for a giant skyhook to descend from the heavens and hoist me up by the seat of my elephant pants, violently jerking me back into reality.

It wasn’t until 2013 that I even twigged this was an option. I’d been working as a business journalist for a couple of years, and one of my responsibilities was researching and writing personal finance features.

I’d chosen the topic of ‘net worth’, which is defined as everything you own, minus everything you owe. Naturally I was curious what my own net worth was, so I did the math.

It was a negative number. My savings and other assets were completely wiped out by my debts – and then some. Finding out you’re worse off now than when you first entered the world as a naked, screaming, hairless maggot is kind of depressing.

It wasn’t much consolation knowing most twenty-somethings were in the same boat, especially those with student loans. Unlike them, I made my living lecturing people on how to be good with money. The first penny dropped: It was time to shift up a gear.

Around this time I’d also started learning about the ‘early retirement’ and ‘financial independence’ movements. It turned out there were cadres of rebels around the world who flat-out rejected consumerism. They laughed mightily at the thought of 40 years of wage slavery, and retired decades earlier than everyone else.

I interviewed one of the rebel movement’s unofficial leaders, Pete Adeney, who saved enough cash to quit work at age 30 so he and his wife could spend more time with their boy.

Another penny dropped. The money habits of Pete and his peers were some next level shit. Conventional personal finance “wisdom”, like the stuff I’d been dishing out, was that you should aim to save 10 per cent of your after-tax income. These guys saved half their pay, or more – and they did it in style.

How to Win the Jackpot

The more I read, the more pennies dropped. Soon they were gushing out like I’d won the jackpot, albeit on the cheapest slot machine in Vegas.

This is the bit where I’m meant to plug my guide to red-hot growth stocks, or sign you up to some scammy forex trading course.

Should You Pay Off Your Mortgage Early?

Don’t Forget About The Baby Steps

I’ve followed the Baby Steps for about six years now, and I’ve become an absolute die-hard fan.

Here they are, in order from top to bottom:

  1. Save up $1,000 for a mini-emergency fund
  2. Pay off your consumer debts (car, student loans, credit cards, etc.)
  3. Save up 3-6 months of expenses for your real emergency fund
  4. Invest 15% into your retirement
  5. Save for your kids’ college education
  6. Pay off your house
  7. Become wealthy and give

Note that if you’re on Steps 1, 2, or 3, you shouldn’t be investing OR paying your house off early. Before you even consider either option, you should be debt free except your home and have a fully-funded emergency fund.

Pay Off Your Mortgage Early? Absolutely.

If given the choice between investing extra money in the stock market (beyond the standard 15%) and paying off my mortgage, I’d choose paying off the mortgage every. single. time.

You know that 4% interest rate that you’ve got on your mortgage loan? If you pay off your mortgage early, you don’t ever have to pay it! Basically, it’s like locking in an investment for 4% that has absolutely no chance of going down…ever. If you pay off a $150,000, 30 year mortgage, that equates to over $100,000 in guaranteed “earnings”! (the other suckers end up paying $250,000 for a $150,000 house).

When you invest, you’re taking on the risk of losing money…which everyone fails to mention for some reason. Sure, you might earn 8%, but there might also be a downturn and you lose 20%. If that happens, I bet you’d start wishing that you paid down your house!

Oh, and as for the tax savings, it really doesn’t amount to much…especially in the later years of your loan. If you’re lucky, you save 0.5% with this incentive, which is hardly enough to keep me from being 100% debt free!

Increased Cash Flow

Are you sick of being cash poor all the time? With money going toward your bills, food, kids, and YOUR HOUSE, it’s pretty easy to feel strapped. But what if you didn’t have your house payment? What if, instead of having that $1,500 go to the bank every month, it went into your own pocket?

That would be pretty sweet, huh?

Well it’s absolutely possible. Pay off your mortgage early and your bank account will fill up faster than you ever thought possible! Plus, you’ll have options that you never even considered before.

Without a house payment, we decided to:

  • have my wife stay at home with our daughter (which we absolutely LOVE)
  • buy a nicer kid-hauler (our 2008 Toyota Sienna has been AWESOME!)
  • go on more vacations (Sanibel Island, here we come!!)
  • invest more heavily for our future (early retirement perhaps??)

Escaping from our mortgage payment each month has been nothing short of excellent. I can’t ever imagine going into debt over a house again.

Increased Peace of Mind

Our house is ours and nobody else’s. If we lose our job and find ourselves short on cash for a stretch of time, we don’t have to worry about the bank coming and taking our house away from us.

If you owe more than $1 (yes, that’s one dollar) on your home, then the bank has every right to take it from you. Their name is still on the deed.

Don’t think for a second that you’re invincible. Foreclosures happen to regular people every single day.

The Kick-butt Effect of Increased Focus

I’ve saved the best for last. This is the reason that disproves every single investment brainiac out there.

If you remember from earlier, advisors often state that the stock market averages 7-8% and your mortgage interest only costs you 4%, so ignoring the mortgage and investing in the market is the obvious answer…. yeah, I don’t think so.

First of all (as we’ve already mentioned), there’s risk in that 8%, but there’s also another element that intelligent people often forget to factor in:

It’s your emotions.

My Real-Life Example

When my wife (now ex-wife) left me in 2012, I wanted nothing more than to break all ties with her. I didn’t want to see her, I didn’t want to hear from her, and I certainly didn’t want to owe her any money!

This is when I waged war on debt. I paid her the decreed $21,000 in just six months, and then I paid off my $54,000 mortgage in under a year!

This is the power of emotion (in my case, anger).

If my financial advisor told me to invest $75,000 in two years, do you think I would have done it?

Absolutely not. 

I would have told him he was nuts and that it was impossible. I never would have even tried.

How much would I have invested instead? If I were fairly aggressive, I maybe would have put $20,000 away.

So let’s have a look here:

  • $20,000 * 8% = $1,600
  • $75,000 * 4% = $3,000

BOOM! Thanks to the power of emotions, paying off debt can absolutely be more advantageous than investing in the stock market!

It’s Your Turn

I write about this stuff all the time, and I can affirm the fact that being out of debt is an incredible place to be, but I can’t get out of debt for you. This decision and action has to come from you.