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Wealth without budgeting or sacrifice

In Part 2 we looked at some steps to build wealth and to stop worrying about money. We talked about tracking our wealth as a key step and got our head around the power of compounding. Specifically, how to get it working for us rather than against us. Then we considered how to convert our joy of shopping to a joy of wealth building.  We saw the power of a reduction in a recurring expense and the wealth that can build over time.

In this section, let’s look more at some examples of spending changes and some other easy tweaks and the effect they can have on reducing our money worries.

Mindful spending on discretionary things

I was watching Marie Kondo on Netflix a few nights back (don’t ask) and she was busy “tidying up” someones house. To the uninitiated that means examining each item in one’s home, in a special order, and discarding that which “doesn’t bring joy”. In a typical episode, she banishes dozens of garbage bags of joyless matter to reduce clutter and improve the positive juju in the home. While the houses look much better after she completes her craft, it does beg the question…What if people never bought all of that stuff in the first place?

Clothing is a popular item since people typically only ever wear about 25% of the clothing they buy. The rest hangs out (literally) in the closet for a few years, then makes a trek to a yard sale or a thrift shop. Is that a big deal? In a typical Tidying Up episode, about a dozen garbage bags of clothing are removed. Let’s say there are 20 items per garbage bag and lets say each item cost $50. So about $1,000 per bag, or $12,000 in total. Say each haul accumulates every 5 years which means that we are wasting about $2,400 a year or $200 a month. What happens if we invest that at 7% over, say 30 years?

Looks like it adds another $250,000 of wealth. In part 2, we saved $100 a month by renegotiating one of our regular bills and that added close to $125,000 of wealth over the same period. So with a couple of easy tweaks, we added $375,000 of wealth over a 30 year period. So we have have nearly doubled the retirement wealth of the average North American  with a couple of changes. In other words, we have started building wealth without budgeting or sacrifice.

But I want to get rich now!

This begs the question, “What if I don’t want to wait 30 years to become rich?”. There are a few answers to that:

  1. If you start working at 23, 30 years later, you are only 53 and statistically, you still have about 35 years of life ahead. Better to enjoy those years with the extra $375,000 than without it. You will particularly think that way when you reach that age.
  2. We are just getting started with a couple of ideas. What if you could find $800 a month of savings that you invested? That would add another $1 million to your stash.
  3. What you do with the incremental wealth is up to you. Pay down debt faster, increase your investments, donate it to a school in Kenya, or retire early and launch your singing career. The point is that these changes give you options and freedoms.
  4. Maybe the most interesting point is that you didn’t have to work harder to gather this $375,000 and you didn’t have to give anything up. You spent an hour on the phone with a service provider and whittled down a bill, and you got a little more mindful on your clothing shopping. Actually buying things you needed rather than buying something, returning home and seeing 4 of them hiding in the back of your closet.
  5. Notice too that we built all this wealth without budgeting or sacrifice. And no spousal arguing. So far.

Small income boosts make a big difference

Let’s say you have a household income of $100,000. Here in Ohio, that brings in about $6,000 a month. If you were able to save $1,000 a month that would be 12% of your gross. Let’s assume that the rest of your bills consume the other $5,000. (You can grind those down easily with some of the ideas here.)

If you could earn an extra $12,000 a year after tax, that would double your savings rate from 12% to 24%. Over a 40 year career, investing that extra $1,000 per month would add an extra $2.6 million to your wealth. Or let you retire a lot sooner with a lesser amount. Where does the extra income come from? Applying work raises to savings vs increased consumption, a rental property, a moderately successful blog or any of hundreds of other ways of extra earning. Do a bit of Googling on that. 

Note that the original $1,000 of monthly savings could also grow to $2.6 million over 40 years for a total of $5.2 million at retirement. And nothing to say that there may not be another $1,000 a month that could be saved and invested from within the original income. And all this works if you are making $200,000 or $50,000, just scale the numbers to suit.

Improving your investment returns

Through all of this, we have used 7% returns in doing the math. I am often asked why I use 7% when bank savings accounts offer next to nothing in returns. The answer is that you need to have investment returns well beyond those offered in bank savings accounts to build any kind of wealth. With no real investment returns, inflation will gobble up the value of your savings. The average return on the US stock market over the last several decades is about 8%, so 7% is not unreasonable. In an earlier blog post, I offered some ideas on how to exceed that by partially investing in a basket of stocks that are aligned with current trends. All of the stocks that I mentioned in that blog have continued to soar. But aside from stock selection, there are plenty of low risk ways to improve your returns including:

  1. Not getting in and out of the market based on news headlines. Time in the market beats timing the market. invest for the long haul.
  2. Not acting on hot tips from Uber drivers, Reddit forums or dentists.
  3. Being sure to diversify your holdings by industry, geography and investment type.
  4. Tracking your investment returns each year and knowing whether you are beating the market indices of each asset class.
  5. Keeping your investment costs low, and especially avoiding the issue of high investment fees and returns that lag the market.
  6. Aligning your investment mix with your life age and stage, your risk tolerance and your

So how much of a difference does the return percentage make? As we looked at earlier, at 7% a monthly investment of $1,000 over 40 years will build to $2.6 million. Increasing the return to 8% yields a nest egg of nearly $3.5 million. Wow.

Summary

  1. Look for ways to reduce recurring expenses.
  2. Shop more mindfully and sidestep buying things you would never use.
  3. Look for ways to increase income.
  4. Apply the freed up funds from 1, 2, and 3 to debt pay down or incremental investment.
  5. Understand your investment returns and avoid the usual pitfalls that lower returns.

Part 4 looks at a whole other gearshift to build wealth. It’s one I didn’t really understand until later in life.

What have you done to build wealth more quickly? Let me know in the commentsWealth without budgeting or sacrifice.

Photo credit Mohamed Nohassi at Unsplash

In Part 1 we looked at how to stop worrying about money and found a few key themes. One is the tug of war between enjoying money now and saving for the future. We touched on the idea of saving 10% of our incomes with a vague notion that can set us up for financial bliss. We saw some tested financial concepts from the experts, but damn they are hard to implement. Another tug of war. But we also hinted that there is a way to actually get to financial wellness. Heck, let’s aim for financial joy.

What we will find is that we can eliminate these financial tugs of war and get the debt to fade away and the wealth to build, month after month.

Your wealth will start growing when you track it

If we want to lose weight, a thermometer is of little use. Driving a car, it’s difficult to discern the speed by checking  the rear view mirror. If you want to build wealth, you need to track your wealth. What you own, minus what you owe. It’s just one number. If it is rising, you are building wealth. If it is falling, you are losing wealth. Knowing that number and tracking it over time is the simplest and most powerful thing you can do. It changes everything and makes you think about the implications of your spending decisions.

  • Should I bother to renegotiate my cell phone plan? Yep. The one hour call might save you thousands over the next few years. Turns out calling your cell phone company is a powerful return on your time.
  • Is it worthwhile to add a swimming pool to our house? Not unless you really love it. You are unlikely to recover the costs with the new buyers. And the maintenance costs and the $400 a month or so to heat it might add up to hundreds of thousands of missed investment opportunity. See below.
  • What kind of car should I buy? Up to you, but know the cost difference over the time you’ll own the car. Here is an example.
  • Is there a cheaper way to get prescription drugs? There sure is! Have a look here.

Write a best selling wealth app, or just borrow a cocktail napkin and a pen from a bar or download my template, but get started on tracking your wealth. Use your records to go back a few months to see how things have been going. As you make decisions, think about what they do to your wealth. Start tracking it today. That’s your first piece of homework.

For lots more details, read my post on tracking your wealth.

Einstein was correct about compounding

“Compound interest is the eight wonder of the world. He who understands it, earns it. He who doesn’t pays it. “              –  Albert Einstein.

When I was first working, there were lots of wise grownups counseling me to save my money. Interest rates were around 5%. So if I were to, say, save $1000 in my first year of work, at 5% interest I would have made $50 in interest at the end of the year. The tax man might take $20, leaving me with $30. Big deal. So I could go for lunch at the end of the year. Clearly the advice made no sense.

So I lived well. Nice apartment. new car (complete with loan). Some student debt. Floating some restaurant and bar debt on a credit card. I could almost squeeze everything in each month. I never heard the Einstein quote, but I was living the dark side of it. A big part of my income went to paying debt. And that interest was dragging my wealth backward. It was fun to be earning and buying new things but I was building no wealth. Stuck on an earn and spend treadmill. I wish I knew then how to stop worrying about money.

Change your money relationship

Scientists talk about a brain chemical called dopamine. It fires up when we get a pleasure hit of some sort. Buying a new pair of jeans – light hit. Picking up a brand new car – medium hit. Closing on a fancy new home, whoa, – huge hit. Then came retail therapy, shopping without even needing anything, just in search of the dopamine hit. Wow! And it does give you a buzz, at least for a few days until the credit card bill arrives and the dread sets in.

Money can buy happiness when it buys freedom, much more than when it buys things. If the focus of money shifts to future freedoms from today’s things, everything changes. The gamification comes through watching your wealth grow and setting up financial wellness for the future. Small changes make a big difference over time. This is especially true for recurring expenses. Let’s say we call a provider (cell phone, insurance or internet) every six months to optimize our bill and by doing that we can save $100 a month which we invest at 7% in a registered account. Here is the effect over time:

The power of small savings over time
The power of small savings over time

Wow. Turns out Einstein was right. We could retire with an extra $123,000. Not bad considering that the average North American retires with a net worth of just about $200,000. And notice that we didn’t actually give anything up, other than a phone call every 6 months. Oh and that was just one item! What other bills can we look at?

Elegantly reduce expenses

Earlier, we referenced the idea of a spending tug of war. It seems like a win/lose, zero sum game proposition. Enjoy your money now, or save it for future financial wellness. But the reality is much sexier than that. We can have both through some more elegant spending decisions. It turns out that there are simple ways to save on every category of spending. With no haggling, no yelling and no sacrifice. I got curious about all of this in 2015 and started a list that morphed into a book that includes $13,000 of monthly savings ideas. Get a copy on Amazon or here. Maybe the best investment ever.

Apply to Debt or Investments

Once you find a spending hack, that frees up, say $100 a month, it’s yours to keep. Buy a new pair of jeans every month, find something to spend it on at the mall or drink it down at the bar.

Or you could use it to pay down debts faster. Or increase your monthly contribution to your IRA or 401k (or TFSA or RSP for my Canadian friends). That’s where the magic happens. That $100 a month becomes $123,000 by the time you retire. And that is just one savings area. What if you could free up $400 a month? Or $2,000? Lots of my clients and readers do. It means they can retire with a lot more. Or retire a lot earlier. Or just lower the monthly burn to the point where it doesn’t need to get funded on credit cards. They stop worrying about money. If you really want to kick your wealth into gear, check out this idea of surfing to wealth.

Whether you are desperate to get out of debt, or keen to grow your investments, these simple principles make a big difference.

Part 3 looks at some more wealth building examples through more mindful spending as well as some other powerful engines to boost your wealth.

What clever savings ideas do you have? Let me know in the comments.

Glider Photo credit by Konrad Wojciechowski of Unsplash

One of the fun features of money is that there are so many ways to worry about it. The FIRE (Financial Independence, Retire Early) crowd are worried that they aren’t saving enough to be able to pack it in at 35. And fiercely jealous of their friends who just retired at 32. Retirees are worried that they will outlive their savings. Graduates worry about paying off their student loans. CEOs worry that they will look limp when their peers outshine them on the Bloomberg highest paid reports. But the real worry happens when people live pay check to pay check and struggle each month to make ends meet and to decide which bills get paid. Studies put that number at around 50% of American households. CNBC estimates that the number has risen to 63% due to Covid-19.  And Canadians aren’t much different with 53% living paycheque to paycheque. And it happens at all income levels. Ask Nicholas Cage or Mike Tyson.

So how to stop worrying about money?

A solution lies in the new frugality movement. Over at fellow blogger, Mr Money Moustache, he reveals his annual budget for his “luxurious” lifestyle of around $20,000. Netflix has some great shows on tiny homes with couples crawling over each other to cook dinner. Or we could find stock market “hidden value gems” like GameStop and hope that the upward momentum carries on forever. (Didn’t end well.) Then there is a popular approach called “budgeting” where couples or families guess targets for each category of spending, then assign blame at month end as the targets are voraciously breached. Its a bit like the quarterly business review process at a company. But more violent.

Tell me I don’t have to give up my avocado toast

But most of us don’t want to give up our lattes, avocado toast and daily glass of wine. We want a home big enough that we don’t have to store groceries under our beds, we don’t want to gamble on risky investing ideas and there doesn’t seem to be much fun in budgeting. So how do we build wealth without BS (Budgeting and Sacrifice)?

Can you read your way to financial wellness?

From about age 25 to 30, I set a goal to read one personal finance book a month. I read about Benjamin Graham, Warren Buffett, Peter Lynch and the investing greats, loved the Wealthy Barber, The Automatic Millionaire and Rich Dad, Poor Dad. My nightstand held The Single Best Investment, The Richest Man in Babylon and How to Get Rich. The habit continues, recently reading books from some Canadian colleagues including Rich is a State of Mind, Burn your Mortgage, Beat the Bank and Wealthing like Rabbits. Which to choose? At about $25 each, the return will dwarf any other investment you will make. Go. Buy. Borrow. Learn!

Good concepts, but hard to do

Most of these books advocate a simple set of rules that take a lifetime to soak into our thick noodles. Live within your means, save 10% or more of what you make, then get that money working for you in stocks, bonds, real estate or a business. For financial investing set an investment allocation plan (stocks, bonds, real estate, cash) choose stocks or funds more cleverly than everyone else, buy and hold, minimize investing costs and be smart on your taxes. Pretty basic and incredibly powerful. But most of them run counter to our basic human instincts. Even though the advice is  sound.

  • Who wants to buy stocks when prices are falling? Hmm. You don’t like it when things go on sale?
  • What if the markets tank right after I buy? They may, but they are extremely likely to rise over 10 or 20 years.
  • Do I keep holding? This stock has done nothing all week! Set down your phone and go for a walk.
  • Who wants to own bonds when they yield next to nothing? They might be helpful during market downturns.
  • Who wants to be a landlord and deal with leaky toilets? It might be a path to wealth.

Where’s the fun in saving 10% of my income?

Let’s go back to the part about saving 10%. Where’s the fun in that? So much cool stuff to buy. And the money goes so fast. Often there is nothing left after the necessary expenses, last month’s credit card bill, the car payments, the mortgage, some nice dinners out, a new iPhone and a few other splurges. And why save anyway? Who knows how long we will be here – might as well enjoy it now. So if there is no way to save 10% (or, worse, anything at all), the whole plan gets derailed and we are back to waiting for each pay check. No financial freedom and we’ll need to learn to love our jobs. For a long time. How to stop worrying about money?

Saving starts the process. It builds a flock of special geese that lay financial eggs like interest and dividends. Keep trading-in those eggs for more geese and the process accelerates. Do it right and you will get to the point of financial wellness. That’s when those financial eggs show up dependably into your bank account every month, pay for all the bills, travel, great food and smooth scotch you can handle. All while you are doing, well, whatever you want. But it all starts with saving, and that’s about as much fun as dieting. It seems like a zero sum game. Save for tomorrow or enjoy today?

Is there a way to save for the future and enjoy today?

Back in 2015, I started thinking about this problem. I discovered a couple of nifty ways to save on car washes and home alarm monitoring. Both with minimal effort and minimal sacrifice.  What other ideas were out there? I started a list. Then calculated what would happen if the savings were used to pay down debt or if they were invested. The list became a spreadsheet. The spreadsheet became a book, a blog, a newspaper column and a speaking career. Turns out the savings are material, Cashflow Cookbook includes over $13,000 of monthly savings ideas. Yes monthly. In every category like housing, transportation, food, household, lifestyle and financial. Will all of them work for you? Unlikely. But are there a few ideas that could save you $200 to $2,000 a month? Likely. Commit that money to debt pay-down or more investments and your wealth will soar.

Your money worries are fixable

The experience has changed my life and I know that the ideas can change yours. Helping others learn how to stop worrying about money feels great. But if it’s a beautiful day, I go for a bike. If it’s rainy, I get out a guitar or read a book. I rarely set an alarm and I spend as much time as I can with my wife, family and friends. Thank heavens for Zoom and free long distance. When the pandemic ends, some great travel will begin. Bills are on autopilot and money worries are long gone.

Your money worries are fixable. Now is the time to do it.

  • Stop living pay check to pay check
  • End the bickering about money
  • Don’t sacrifice your life for money
  • Cease your savings challenges
  • Replace budgeting with enjoying life
  • Abandon your retirement worries

In How to Stop Worrying About Money Part 2 we will look at a simple model to get started, a fun way to track your progress, the incredible power of some painless changes and the simple steps you can take right away.

Stay safe. Enjoy life.

Gordon

Photo credit Pixabay

Have you summoned up the courage to check your investment returns? Overcome by the temptation to sell it all in case we face a Hollywood-style dystopian future? Or do you have some new money to invest and are terrified that it may get swallowed up by the Coronavirus, leaving you broke. In short, how to stay calm as the Coronavirus infects your investments?

Let’s take stock. Of stocks. Over time. Back in January 1985, I was a fresh grad of Western University, with my first real time job, a full head of hair and some leftover muscles from my time in the college weight room. The Down Jones Index (a measure of the US stock market’s largest companies) stood at 1,286.77. It was a precarious time to invest since it was right after the 1981 recession. People lost homes. Jobs were scarce. But fast forward to today (March 6, 2020) and most of my hair and muscles are gone. But the Dow Jones index has risen to 25,701. If you held on to your investments since 1985 you would have seen an annual compound growth rate of 8.92%. Not bad! And that includes the big Coronavirus drop. Even better, your returns would have been bolstered by another 2% in dividends.

Key learnings about investing through a crisis

This long term growth happened despite the 1987 Black Monday crash that caused a drop of 33%, the dot com bubble of 2000-2002, the 9/11 tragedy and the 2008 financial crisis. In hindsight, they were all great buying opportunities, but at the time, they all felt like armageddon. This is the first time the Coronavirus is infecting your investments, but lots of other crises have taken a bite. Looking back, there are some key lessons to be learned:

  1. Stock markets can look scary in the short term. Here is the view of the Dow index as the Coronavirus fears hit:
    Dow Jones Index during the Coronavirus crisis
    Dow Jones Index during the Coronavirus crisis

    Ouch! Thats a big drop. And the red color adds to the sense of panic. Makes you want to sell and get out until the carnage is done. But here is a view of the same stock market index over the longer term. Almost hard to find those same crises as this collection of companies continue to grow their businesses over time.

    Dow Jones Index
    long term view of the Dow Jones
  2. The stock market is a long term investing vehicle. As Warren Buffet likes to say, “it is a device for transferring money from the impatient to the patient”. No one knows what it will do next week or next year, but over longer horizons it offers an opportunity to grow wealth. We know three things about crises: the current one will end, a new one will follow and through them all the patient investor enjoys long term wealth building. When I speak about financial wellness, audiences often ask how to attain returns of more than 2%. The answer is the stock market mixed with patience.
  3. When you buy stocks you are buying a part of real companies that move oil, make cellphones, create software and haul things around. Think like an owner, because you are one. Don’t buy and sell on emotion and whim. By owning a company, you have employees selling things, making things, writing reports and fussing about new ways to make you money. As an investor, you get to relax and watch TV on the couch and let them do the work and bring you the rewards. Enjoy that process.
  4. Invest in quality companies for the long haul, not hot tips from your work mate, hair dresser or the internet. The most speculative companies take a beating in a crisis. Blue chip companies simply carry on producing profits. Pipelines, telcos, banks, insurance companies and stable, on-trend technology companies can be great wealth producers over time.
  5. Include dividend stocks in your portfolio. The steady stream of dividends provide income if you need it, or they can be reinvested automatically (dividend reinvestment program or DRIP). DRIPS use the dividends to automatically buy more of the stock using the dividends. As a bonus, when stock prices drop, DRIPS automatically take advantage of the sale, buying more. Learn more about the beauty of dividend stocks here
  6. Diversify by investment type and by geography. Having some bonds in your portfolio cushions the ride. Since the Coronavirus drop happened on Feb 12, 2020, my Vanguard bond fund (BND) is up about 3.5%. Not bad. It also pays a yield of 2.6%, so the cash rolls in even as markets falter. Canadians tend to have too much invested in Canada which is only about 3% of the world market. Branching out to US and international markets is important to reduce risk and build returns.

    Vanguard BND fund performance
    Vanguard BND fund performance
  7. If you lack investing knowledge or are prone to acting on emotion, get an accredited financial advisor in between you and your money. The cost of their advice can pay for itself if they can prevent you from acting in a panic, buying on bad tips or selling during a crisis. They can also help with tax and estate planning and a host of other financial advice. Shop carefully, they are not all created equal.
  8. When a crisis hits, like the current one, stay calm. Know that the companies you own will fall in value, but they will recover over the long term. Resist the urge to sell. Remember that no one rings a bell at a stock market low so that you know when to buy. And there is no buzzer that sounds at a peak warning us to sell. Accept that stock market gains and losses are part of the business of investing.

So how to stay calm as the Coronavirus infects your investments? Stop checking the value of your portfolio and trust the employees of all of those companies to continue to work hard and build you wealth. Stay in solid, well run companies and invest for the long run. Oh, and wash your hands!

To find ways to free up more cash to invest, have a look here.

Photo credit Ani Kolleshi at Unsplash.