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Surfing to Financial Wellness

Financial wellness has become a thing.  Corporate wellness programs that focus on exercise and healthy eating are now expanding their scope to include financial wellness and organizations are realizing that helping employees stay financially fit is a great way to reduce their stress and keep them focused on their work.  My calendar is filling up with speaking engagements to help employees think about how to optimize their finances. In addition to education on financial wellness, organizations promote their internal financial programs like matching RSPs, company pension plans and Employee Stock Purchase plans.

Why don’t employees sign up for free money?

While the financial wellness sessions are well attended, it is often tough to increase participation rates in programs where companies actually offer employees free money. How can this be? Although these kinds of programs offer employees a chance to access free money, participation requires money, and that becomes an issue for many.  Joining an Employee Share Purchase Plan, signing up for a RSP matching program or even joining a company pension plan, all require a piece of a paycheque. Which means that they compete with kids programs, home repairs, Zumba classes, car payments and everything else in the budget.

A similar issue happens in other aspects of personal finance. Nearly half of Canadian credit card users don’t pay off their credit cards each month despite punishing interest rates north of 20%. (BMO ‘s 2015 credit card report). Consumers select longer mortgage terms even though slightly higher payments could knock years off the loan. We select car loans with an average duration of 69 months and often roll in negative equity from our last car loan. Only about half of university students have their education funded by an RESP, leaving $7,200 of free government funding on the table.

Are you swimming up financial waves or surfing down them?

So it seems that we are swimming up the financial wave rather than surfing down it. If we could free up some monthly cashflow, we could access this free money and accelerate our ride to financial wellness.

  • Freeing  up cashflow would let us participate in company programs like share purchase plans and matching RSP plans. These plans often provide free money in addition to a growth opportunity
  • Having available funds would mean that we can take full advantage of government giveaways like RESP grants, RSP tax deductions and tax savings by maximizing TFSA contributions
  • With some extra monthly cash we could pay off our credit card balance in full, saving us from ongoing interest charges
  • Extra funds would also enable the ability to pay cash for other purchases, eliminating the need for additional consumer loans.

By getting ahead of these things, our money starts to really work for us. Free money from our employer programs can help drive us forward. We can reduce the interest cost and the impact of taxes that are pulling our finances backwards.

How to ride a wave of financial wellness

So how to get on the wave and let our money do the work? Here are some thoughts:

  • Make a list of all of the government plans that are relevant for you (TFSA, RSP, RESP etc) and the extra value to you of getting to full participation in each and the cashflow needed to do so.
  • Build a similar list of all available employer plans inclusive of pension plans, stock purchase plans and RSP matching programs. Again, calculate the extra value to you of getting to full participation in each and the cashflow needed to do so.
  • Then list out the annual interest cost of not fully paying off any revolving credit each month. Eliminating that can also add extra value to your net worth.

Then look for ways to make some changes to start surfing down the waves. As an example, by getting your credit cards paid off, you could save on monthly interest payments. Could that interest amount be the extra you need to enrol in your company’s share purchase plan? Bit of a two for one. Is there a way to reduce household expenses to maximize RESP contributions and take advantage of the maximum government grant of $7,200 per child? Its money that you will need, might as well have it come from the government, rather than you. If you need more ways to find savings to enjoy the benefit of these programs, check out the ideas in Cashflow Cookbook. If your company has a matching RSP program and you are tight on cash to contribute, complete a form T1213 (available here) to reduce the tax withheld by your employer. You won’t get a tax refund in the spring, but it will ease your cashflow so that you can join the program and get the employer provided benefit.

By making some simple changes you can surf a wave to financial wellness and let your employer, the government and even your financial institution help.

What ideas have you found to surf your way to financial wellness?

Photo credit Jeremy Bishop on Unsplash.

 

 

 

 

 

 

The Secret to Great Investing

In Cashflow Cookbook, I curated 120 of the best ideas to free up cashflow for debt repayment or increased investment. Through the power of compound growth, relatively small monthly savings can result in building real wealth over time. Many of my readers have applied the concepts and are now keen to get their money to work for them. One of the most common questions I get is, “What is the secret to great investing?”

At a recent speaking engagement, a similar challenge was raised. An audience member was interested in the ideas in the book but questioned an example I had used of an investment growing at 7%, seeing that as unattainable. Looking at the history of the stock market over the long haul, the rate of return of money that stayed invested through wars, recessions, 9/11 and every other type of peril is about 7%. The Vampire that drains investing returns is usually the investor them self, pulling money out of the market when things look scary (selling low) then clamouring back in as markets rise (buying high). Not a winning approach. Studies have shown that fund investors typically underperform the funds themselves for exactly that reason.

So what is the secret to great investing?

But back to the question, what is the secret to great investing? There is no shortage of analysis of stocks, many with conflicting opinions. And many studies show that researchers carry a bias toward positive reviews to avoid the conflict that comes with a negative one. So how do you pick the winners and what is the secret to great investing?

I don’t know that there is a single secret, but I think that one of the keys is to understand the major shifts that are happening and ensure that your portfolio is on the right side of those shifts. Let me give you some examples from the last few years of some of these structural changes and some of the investments that I made.

 

Major Trend or Shift(s)

 

Company

 

Last 12 month’s Performance

Artificial Intelligence, blockchain, machine vision NVIDIA +82%
Outsourced IT, IT Infrastructure CGI +25%
eCommerce (software) Shopify +94%
eCommerce (shipping packages) FedEx +24%
eCommerce (core business) Amazon +79%
Mobile Computing Apple +32%
Out of Reach Housing Costs Canadian Apartment REIT +27%
Social Media and Digital Advertising Facebook +26%

 

Are technology trends the only thing to consider?

Did I win on every investment I made? Absolutely not. Could these stocks have suffered from some calamity that might have thrown off their returns? Absolutely. Should investors conduct other types of securities analysis and ensure that possible investments are secure. 100%. As an example, FedEx rival UPS was more or less flat over the past year. Not all trends are technology-related. The housing cost one above is an example. Global warming leading to more violent storms is another. And bear in mind that a trade war, misguided nuclear missile or even, ahem, a bad tweet could drive a big dip across the overall market.

But all things being equal, why not have the wind at your back as an investor? By overlaying known trends in addition to sound analysis, there could be some incremental gains to be had. Could Lance Armstrong beat me in a bike race? Sure. But what if I had a huge downhill and he was climbing over the same distance? Well, OK, he would likely still beat me. But you get the idea.

What are the shifts ahead that will impact stocks?

So the history lesson was great, but what is the secret to great investing going forward? And where do we find the trends that will provide the right kinds of tailwinds? One of my investing favourites is Mary Meeker’s Internet Trends Report. It comes out every year around June 1st and it is one of the best ways of learning about the tech trends in the year ahead. Best of all, it is free. You can have a look at it here. The McKinsey Insights iOS app is another great and free source of information on emerging trends. The Motley Fool website has tons of great articles on these kinds of trends. For each trend, think about the securities you hold. Will the company benefit from using the new technology? Are they a maker of the technology? Or will their company become roadkill as the technology becomes more popular? Younger people aren’t familiar with the old red and yellow Kodak logo, but today it serves as a grim reminder of the effect of being on the wrong side of a technology shift.

How do you apply your knowledge of the trends?

Once you build your knowledge of the trends, how do you apply it? Work with your financial advisor to discuss how some of these trends might affect your portfolio. If you invest on your own, look at your holdings to see how they might be affected by some of these technology shifts. For many of these trends, there are exchange traded funds that focus on the themes. Examples would be Vanguard’s VGT, which holds high technology names, or HACK, a cybersecurity focused fund. Be sure to balance these ideas with other blue chip holdings of the broader market.

The securities mentioned are for illustrative purposes only. Investors should always conduct their own research and consult a financial advisor before buying any security. Stock markets are subject to volatility and investors should ensure that any investments are suitable for their risk profile.

Disclosure, I hold all of the securities above personally.

Where are you getting your information on trends? What trends will affect share prices going forward?

Photo credit Chris Lawton – Unsplash

Is Budgeting Limiting Your Wealth?

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.

 

 

 

6 Simple Steps to Financially Launch Your Graduate

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