April 2018


What if budgeting is the problem, not the solution?

Budgeting is a must-do. Like flossing. By setting targets and spending within each of the categories, we are spared from financial ruin. We can even set aside some money for savings. But does it actually work? Has anyone budgeted their way to wealth? And why are personal finances getting worse, despite all the new budgeting tools? Is budgeting a bit like dieting?

Budgeting has some built in flaws

It is really tough to do. Unexpected expenses pop up. Splurges throw the whole the whole thing askew. And setting up and tracking the results, even with an app, isn’t fun. Like an unscheduled meeting with HR.

But there’s more. Some cash outflows like education, meditation, exercise and healthy eating can improve our personal and financial wealth while others like fast food, oversized bar tabs and “retail therapy” send our health, wealth and happiness in reverse.

Budgets are built around the idea of fitting expenses into an income level. A luxury new car lease may fit into a budget, but might a simpler used car free up money for debt reduction or investment? And how would your life really change with a less costly vehicle? Or what about one less car in your life, and some biking, walking, transiting and Ubering in its place?

Budgets also have a static feel, once you “make” a budget in a month, the job is complete. If you are under an expenditure target, it frees up funds for more expenses as a spending reward. That could have been a wealth builder.

To build wealth, why not track wealth?

In business, we manage what we measure. So why track expenses to build wealth? Why not track wealth to build wealth?

Wealth, or net worth is the difference of what we own and what we owe. If we start to track our wealth instead of our expenses, some interesting things happen:

  1. We view “good” and “bad” expenditures differently. Spending on learning and tools can lead to future wealth increases. Spending on things that depreciate drags down our wealth.
  2. Raises represent an opportunity to save more and retire more debt, rather than an opportunity to increase the household budget.
  3. Reducing debt comes into focus as high interest costs drag down our wealth and slows our progress in paying them off.
  4. Staying tuned to our investment performance becomes important as it can build wealth while we sleep. Or while scuba diving in Cozumel.
  5. Expenses are still important since reducing them frees up money for building wealth. A focus on wealth helps us cut boring expenses like utilities, repairs and insurance costs while freeing funds for experiences, travel and wellness. We can seek out “do-betters” by scanning last month’s credit and debit card statements.
  6. Thinking about net worth helps us steer away from Hedonic expenditures and the negative effects they have on our psyche and finances. Check out Mr. Money Moustache’s great post on Hacking Hedonic Adaptation.
  7. Having a net worth focus makes us want to set up an automatic savings deduction from each paycheque, and increase it as we find more efficient ways to spend.

Let’s look at some examples

What does a purchase of a $40,000 new car do to our net worth? Driving it off the lot, its value drops by 15% or about $6,000. Sales taxes are $5,200 where I live. Air conditioning tax of $500, tire tax of $100, Freight and dealer prep of $800. All vaporized. So, the day we buy the car we dropour net worth by $12,600. Financial freedom delayed. Maybe cancelled.

Buying a year old one for $32,000 sees no depreciation the day we buy it, taxes are $4,160 and the other expenses disappear. So, we drop our net worth by just the taxes, preserving about $8,000 of net worth and moving us closer to financial freedom. And that is just on the day of purchase. More savings every year that follow. Notice too, that financing makes the new car financially uglier.

Looking at the performance and cost of our investments is an area that doesn’t even show up on a budget but it easily visible in a net worth chart. Having money in high cost mutual funds that have lagged the market vs seeing stronger performance through savvy low-cost investing, or a robo or human advisor with a strong performance record can easily double our returns.

Finally, debts don’t show up on a typical budget, but their interest costs slow our progress to financial freedom. Monitor the value of your debt over time and keep a separate debt sheet to look at the interest expense of each. Dave Ramsey suggests a “snowball approach” to pay off the smallest debt first, then apply those payments to the next larger one. Clever.

How to get started on wealth tracking

Making financial decisions based on what you can “afford” in your budget is a way to keep things in balance for the short term. Taking a net worth view can help you build wealth over time. Start by building a simple net worth statement. You can build your own or start with the Cashflow Cookbook Net Worth sheet and Debt sheet. Download them for free here. Enter everything you own, and everything you owe. Update it every month to start and then switch to quarterly after 6 months or so. It will change the way to think about your finances and set you on a path to financial independence.

Let me know your thoughts.

Want to accelerate your debt reduction and savings? Check out Cashflow Cookbook. 60 financial recipes that can add more than $2 Million of net worth over 10 years.




If you have any university or college almost-graduates in your family, they are about to be launched as young professionals in their chosen field. However comprehensive their program, it likely included everything they need to succeed in their career, but little to nothing about how to succeed financially once they start to earn. They are nearly defenseless against thousands of marketers who are cleverly looking to prey on their paycheques. Although they don’t want your advice on dating, clothing, or music, they do need your help getting set up financially. Mom and Dad, I am talking to you.

Step 1. Start their financial library

Get them on the habit of reading a good personal finance book a month. Spend a hundred bucks to get things started. Best investment ever. The right books will shape their thinking and build good habits from the start. Here are some great ones:

  • The Richest Man in Babylon – George Samuel Clason – timeless lessons about how to make money work for you, vs the other way around. Cool Babylonian vibe. Great for history majors!
  • Rich Dad Poor Dad  – Robert Kiyosaki – turns around the notion that the rich people are the ones with the BMWs. They’re the ones with the payments. Who knew? Dads with small hats are often the ones with the cattle.
  •  Wealthing Like Rabbits – Robert R. Brown – a whimsical and fun tour through everything about personal finance. Perfect all-in-one starter kit.
  • Moolala  – Bruce Sellery – Simple, unintimidating five-step plan to get your grad started on a great financial path. His podcast on iTunes is also worthwhile.
  • Mr. Money Mustache Blog – Best blog on inspired living through frugality. Personal favourite post – “How to move heavy appliances on your bike”.  Strangely addicting. Bad ass vibe. And free. Subscribe your kid.
  • Carrick on Money Newsletter – sign up here (scroll down) – great survey of the freshest personal finance thinking on the web. Everything from frugal tips to mortgage rules and that great Canadian enigma: To TFSA or RSP?
  • Young Money Podcast – Tracy Bissett – has guests with every angle on how to set up young people for financial success.
  • Cashflow Cookbook – I know, I know – a bit shameless. But 60 easy financial “recipes” to save your grad a fortune on every kind of recurring expense. Wish I read it in my 20’s. Bonus: enough cooking puns to fill a roasting pan.

Step 2. Help them with the big decisions

After 4 years of enduring cold pizza, smelly roommates, grimy clothes and crowded buses, junior may want to rebound with some well-earned luxury. A new car, a one-bedroom apartment, a high-end gym membership. A Roomba on 5 easy payments. Kidding on the last one. At least my kids never longed for cleaning gear.

But these recurring expense decisions can have a big impact on their wealth over the coming years. A common mistake is to look at what can “fit” into their paycheck vs what will optimize their wealth (and financial freedom) over time. Shared accommodation can save $1,000 a month vs living solo. Living in your basement for the first year can save another $500 a month while they get started. (I told my kids that zoning laws don’t allow it, am hoping they never check the local statutes). A 3-year-old modest car can save $500 a month vs a new, more luxurious one. Skipping a car and walking or biking can save another $500. Learning to make a few easy meals can save them another $200 a month or more on dining out.

Together these tweaks can free up a thousand or two a month toward their TFSA and/or student loan pay down. Getting these habits in place can spare them from being chained to paychecks into eternity.

Step 3. Set them up a net worth spreadsheet

Lots of people talk budgeting. Not sure how many people actually track to one. Not my idea of fun. And good luck selling the idea to your kid! A better approach is to track net worth: what you own minus what you owe. Very simple. It may well be negative when they start, but that’s no problem. Have them update it each month as they carve out funds for debt payment and savings. It’s gratifying to see the numbers go from red to black over time, or to see more commas emerge in the bottom line. It’ll give them the freedom to start their own company, take a world travel sabbatical, buy a house, or retire early and help people halfway around the world. Seek meaning instead of seeking a living. 

The act of tracking net worth makes everything look different. Buying a new car plunges their net worth the day they drive it off the lot. A used car likely increases both what they own and what they owe, but their net worth doesn’t change. Hmm. A mall splurge on clothes they don’t wear takes a toll on net worth. Quality stocks growing in their TFSA increase their net worth without them doing anything.

Tracking net worth provides new lessons all the time and gets them thinking different. Maybe some lessons for you here as well! You can download a simple free net worth tracker in the Utensils Section, and check out my blog post that will help you learn to use it.

Step 4. Get them all the accoutrements

No need to even go to a bank branch. Charge up your wireless mouse and have at it! Help them get set up with a chequing account, credit card, TFSA and a savings account. Get automated bill payments set up for rent, cell phones, and gym memberships. It’s critical to get some automated savings in place right from the start. Something like payroll deductions for RSP or stock purchase plans, or biweekly chequing account deductions that head straight to their TFSA. Start the savings habit early! As they find ways to save, encourage them to increase their contributions and watch their net worth grow.

Step 5. Do a student loan review

If junior racked up some loans in the pursuit of knowledge, help them assess the right payback schedule and options. Are there cheaper ways to borrow? How can they optimize their expenses to pay it back sooner?

Be sure that the student loan is included in their net worth tracker and that they avoid adding more debt while whittling it down to size.

Step 6. Help them understand their company benefits

If they have been successful in finding a job, it’s time to review all of their company benefits with them. Company savings plans (401K, RSP matching, stock purchase plans) offer a great way to start their savings and it can be worth some sacrifices to fully take advantage of these plans. Many young people leave this free money on the cubicle.

Company medical and dental benefits are also worth a read. Most new employees can get their teeth around the dental plan, but they may miss some of the other benefits later in the booklet like eyeglass plans, massages (what the heck?) travel insurance, and prescription medical. Read the benefits book with them. Kind of like you used to with Harry Potter. Less magical. More profitable.

Above all, help them get a great start on their life

After all they have an asset that we don’t have. Their youth. Make sure they get the most out of it.

Photo Credit: David Marcu

Amidst the threat of a small nuclear war with our friends in North Korea, a former Playboy bunny threatening a tell-all against the POTUS, a Facebook security debacle, and, oh yeah, an emerging global trade war, the stock markets have become a bit uppity. A little divey. Some real lurching movement. Most of us are feeling a bit woozy because of it.

Keep calm and think long term

We investors tend to stay calm and stay invested as we think long term — just as we were taught. Steady, as long as the markets ascend. When stocks obey gravity and plunge, that long-term idea seems like a fad as we sell like crazy, hoping to salvage a few crumbs before the real Armageddon begins. Once the fear settles, we wait a bit for the trend to clear. Then we buy in a frenzy, hoping not to miss out on the rising action. But by the time the trend is clear, most of the gains have already happened. Crap. We missed out. That’s why the average equity fund investor earns just 4% over 30 years while the average S&P equity fund earns 10% over the same period. How can that be? It’s the investor sabotaging himself. Overthinking that boring buy and hold idea.

If my investment statement calls, I’m out

While the logic is there, and the math confirms it, it still hurts to look at the statements. All that money. Gone. What if your investments drop by more than your entire contributions for the year? No way that feels good. All that scrimping and saving, and it’s just not there. Maybe you should have splurged on the quartz counter-top…

Long-term means long-term

It becomes easier to think long term if your investments actually are long term. If you’re saving for a house as well as education or some other worthy goal that is just 1-5 years out, investing in stocks is risky. Over the long term, stocks have always won. But that only works if you actually have the time to wait. In the short term, it is anyone’s guess. I’d say stay in GICs.

The Power of Dividend Stocks

Still, even with all of this long-term talk, how do you feel good about a stock market downturn? Dividend stocks offer a different view since they pay a return — usually quarterly. This money is excess capital that is returned to you, the shareholder. Some of these companies have paid these dividends, and increased them for 10, 20, or more years. Often at rates much higher than inflation!

We can think of these dividend stocks like golden egg producers that keep spitting out more golden eggs each year. Cool! When the stock markets plunge, they go on sale. Even better. The eggs hold their value and there are more of them every year. And the chickens that lay them go on sale. But wait, there’s more.

Through these companies directly or through your online broker, you can set up a Dividend Reinvestment Program, or DRIP. Sounds complicated. Rather than gathering the eggs each quarter, the DRIP lets you give them back in exchange for more chickens, which produce even more eggs. And then more chickens. And still more eggs. And so on. More and more eggs each year!

Staying calm in a rough market

So let’s translate this into more vegan and financial terms. Enough chickens. Selecting a group of stocks with a long history of paying rising dividends is a good place to start. Focus on companies with good balance sheets in relatively future-proofed industries. Set them up in a Dividend Reinvestment Program (DRIP) so that the rising stream of dividends continuously buys more stock. If the markets rise, feel good about the increased value of your investments. If the markets fall, feel even better about buying more of these great companies, on sale, automatically. Of course, no stock is bulletproof. That is why you need a portfolio of them, nicely diversified by geography and industry, never with more than 5% exposure to any one stock.

How to get started with dividend stocks

To get started, check out Lowell Miller’s classic, The Single Best Investment: Creating Wealth with Dividend Growth. In the book, he points out the power of dividend stocks and provides some guidelines for selecting good ones. John Heinzl of The Globe and Mail also has some good ideas in his Model Dividend Growth Portfolio. You can also implement the strategy with Dividends focused Exchange Traded Funds (ETFs) from companies like Vanguard and iShares. If you have a good advisor, work with them to develop a sound portfolio that aligns with your financial plan and risk profile.

In Canada, gains from the dividends also have tax advantages relative to other types of earned income. This makes them especially attractive to hold in a cash account. When you get to retirement, you may have enough income just from this rising stream of dividends alone!

As always, investors should do their own research prior to trading in securities and consult a financial professional if they lack the knowledge and experience to trade on their own.

Not enough money to invest?

Check out Cashflow Cookbook. It includes ideas to free up as much as $13,000 a month of expenses to use for debt pay down and investing in dividend stocks.

Are you a dividend investor? Anyone else loving the downturn? Tell me in the comments.

Photo Credit: Matt Bowden on Unsplash