Reduce bill anxiety!

Ugh. There it is. That gnawing feeling that there is something not so good in your finances. Maybe you have a sense that you missed a past due bill? Perhaps a fear that those last few purchases put you into overdraft? Or maybe there is a masked money monster on your desk, lurking under a jumble of bills, bank statements, cat toys, tax receipts, charging cables and lint. Whatever the situation, let’s permanently reduce bill anxiety in your household.

Let’s start by setting up your money into 3 pots:

Your Savings Pot

Your Savings Pot(s) are anywhere you send money to decrease debt or increase your investments. It might include registered accounts, work pensions, investment accounts or aggressive mortgage pay downs.

• Ideally, get your savings money payroll deducted and straight into your Savings Pot. If that isn’t possible then set up an automatic monthly transfer from your Fun Pot where your income gets deposited each month.
• Your Savings Pot is a priority. It sets you up for financial freedom. Do some quick math and see how much of your gross income you are saving.
• Add up how much you save each month. Include what goes into your registered accounts like your IRA, 401(k) (or TFSAs and RSPs for Canadians) as well as what you are saving in cash accounts and divide that by your monthly gross income.
• If the result is less than 10%, you need to free up some cash to increase your savings rate. Are you saving 10-20%? You are well on your way to financial freedom. Crushing it with a savings rate of 20-50%? Please reach out to me and let’s do a case study on you!
• If you are overwhelmed by bills, and can’t save anything at all, you may end up working longer than you would like.  Find ways to grind down your monthly bills and/or your fun expenditures. Check out my blog posts or some of the ideas in Cashflow Cookbook.

Some savings come with extra sauce

• If your company offers company pension plans, company sponsored 401(k) plans or company stock plans it is their way of trying to give you free money! Don’t say no!. Look for ways to free up cash and participate.
• The government wants to help too! Tax advantaged plans like IRAs, 401(k) and 529 education savings plans (TFSAs, RSPs and RESPs in Canada) also provide free money by reducing the taxes you would otherwise pay. When your government offers free money, don’t say no to that either.
• Sometimes debt repayment can be the best place to ‘save’. As an example, say you are carrying $30,000 in credit card debt at 22%. If your tax rate is 40%, paying that off is like investing in a government bond that pays 36%  interest! Bit of a no brainer. *

Boom! Savings are covered. Just let that pot simmer. Nothing to worry about, you are on track for financial freedom. As you earn more, be sure to generously top up your Savings Pot. On to the Fun Pot.

Your Fun Pot

Your Fun Pot is just a checking account where your paychecks or other income get deposited each month. An automatic monthly transfer pours bill payment money to your Bill Pot each month. The rest is yours to enjoy.

• You may want to do all your spending on a rewards credit card to pick up some cash or travel points, then pay off the card every month from your Fun Pot. I like the reward credit card finder from SmartAsset (or the rates.ca credit card  finder for Canadians)
• If you share your finances with someone else, be sure to have regular communications about this account. What  larger expenses are planned for this month? Where do we stand now and what trips, dinners and things are left to buy?
• With the bills out of the way in the Bill Pot, it is much easier to manage your fun money. No surprise bills coming out that kick you into overdraft hell. Less arguing about money. A way to reduce bill anxiety.
• Look for ways to get more for your fun money spend. Clever ways to share things vs buying your own? Better ways to buy things? Or even ways to save on vodka?

Your Bill Pot

Automating and streamlining your bills is a great way to reduce bill anxiety. Here are some steps to get things under control:

1. Pull out each of your recurring bills (cell phone, internet, gas, electricity, insurance etc) and calculate the average monthly spend for each and total them up. Add 10% for good measure.
2. Set up a separate “Bill Pot” account that is only used to pay your recurring monthly bills. This account will have 6-12 bills a month drizzling out and one monthly payment coming in. Find the lowest cost account that can do that.
3. Set up an automated transfer for the amount in step 1, coming from your Fun pot into your Bill Pot once a month.
4. Set up a browser favorites folder on your computer called “Household Bills”. Create accounts with each of your service providers with automatic bill payments coming from your Bill Pot Account. Bookmark each of them into your Household Bills folder. Lovely! While you are at it, select the paperless billing option. Add each of your bill accounts to your Household Bill folder on your computer and use a password manager so you don’t have to remember dozens of passwords like Ye$EyElike2Golf.
5. Double check that everything gets paid as you transition between manual bill payment and this automated approach.
6. Enjoy bill freedom. Throw out all of that paper. Let those companies do the filing for you. Want to retrieve an old bill? Have a sudden hankering to review last May’s gas bill? Go to Household Bills and peruse away. No hassles, no overdue bills, no paper, no stress.

The fine tune

Once you get everything in place and your bills pay themselves, you have managed to reduce bill anxiety, eliminate a lot of paper and automate your savings, it’s time to fine tune things:

• Call each of your providers each year and make sure that you are on the best plan, getting the best rate and enjoying all of the discounts. They would love to hear from you. An example script for speaking with your cell phone provider is here. Some gentle mention of the competition or actual shopping of the competition never hurts. Once optimized, reduce the money flowing into the Bill Pot and increase your Savings Pot if you can. Set a reminder to call each provider every year or use online comparison tools like Zebra (For US car insurance) or rates.ca (Canadian car and home insurance, credit cards, life insurance and more).
• As you reduce these boring and painful bills, use the freed up cash to reduce the monthly transfers into your Bill Pot and increase your automated monthly Savings Pot contributions.  If you are already saving 10-20%, then splurge with a higher Fun Pot.
• Not a bad idea to set up an emergency account or have access to a credit line to cover unforeseen emergencies like broken dishwashers, dog operations or car crash deductibles.

At Retirement

In retirement, keep going with your Fun Pot and your Bill Pot.

Your Savings Pot now replaces your income and just pours cash into the other two every month. Keep seasoning your Bill Pot by optimizing your expenses. Monitor your Savings Pot to make sure that you don’t outlast it. And enjoy yourself! You’ve earned it!

*If you want an explanation of this 36% government bond, leave a comment below and I will respond.

If you enjoyed this post, please subscribe to my blog, and share on social media.

How do you set up your accounts? What did I miss? Please let me know in the comments.

How to beat bank savings rates

Sometimes you wonder how they say it with a straight face. Two tenths of one percent? How can they even call it a savings account?  At 0.20% it would take 360 years to double your money. If you invested all of your earnings at 0.2%, moved back in with your parents, skipped coffee and cut your own hair, you still couldn’t retire before 136. There has to be a better way to invest. So how do you beat bank savings rates?

And what of those articles comparing bank savings rates? In depth comparisons of banks paying 0.74% on their accounts vs a paltry 0.20%. Why bother with the comparison? What difference does it make? Say you had $50,000 to invest. At 0.74%, at the end of a year you would have made $370 of interest and the government would take away, say 30% in taxes, so you are left with $259. At 0.20% you would pick up a tidy $100 in interest, with the tax person taking her $30, leaving you with $70. So at the end of the year, by shopping for savings rates, you would be ahead by $189. That might net you a dinner for two with wine, but not a real wealth builder. So shopping around isn’t a way to beat bank savings rates.

Short term vs long term

For short term goals, you have little choice. You need somewhere to accumulate money that won’t fluctuate, lest a chunk of it vanishes just as you need it. The low interest rates are the price you pay for some certainty that you won’t take a loss right when you need the cash. But for longer term savings goals like retirement and building wealth, you need exposure to stocks to create growth.

How do we know that stocks rise over time?

Over time, stock markets rise. That has been proven over decades, through wars, depressions, pandemics and whatever is coming next. What are my predictions for next week, next month or next year? No idea. And neither does anyone else. But why do they rise?

Most of you likely work for an organization of some sort. And that means you have a boss sending pressure your way to do your part to help the company make more money, look for ways to do things cheaper, avoid expensive lawsuits or hire people who can do all of the above. Sure, there are a few slackers, but the rest of the company feels that same pressure and is working hard to perform. If it is your own company, you know all of these same pressures, except it is you sending the pressure to yourself. The net of all that hard work is growing profits which increase the value of the company and its stock.

If you owned stocks in that company, you benefit as all of those people make sales calls, slash costs, reduce taxes and grow the company, all while you do nothing. Not bad. Now suppose you own stocks in a few companies instead of just one. If some are mediocre, the rest will likely cover them as all of those people all work to get their bonuses, while their bosses try to get their larger bonuses, all the way up the chain. So owning the stock of a few companies protects us from the risk that the company will go out of favor, the CEO gets charged with something immoral or another company makes a better widget.

Could we own the whole market?

Well what if we could own a little bit of all of the companies that trade on the stock exchange? Wouldn’t that further lower the risk and improve our returns? And indeed it could! You can do that through Exchange Traded Funds (ETFs). You can buy them just like stocks, but they effectively give you a little slice of hundreds or even thousands of stocks. All full of employees working like the Dickens to make their bonuses as you binge-watch Netflix on your iPad. In fact, Netflix and Apple are in lots of ETFs, so you can even benefit by other people watching Netflix and buying iPads. Hmm. One of my favorites ETFs is Vanguard’s VTI fund. It includes thousands of US stocks, including Netflix and Apple.

So how have these ETFs done over time? Can they beat bank savings rates? Well heck yah! Let’s look at VTI as an example. Here is its chart:

So 20 years ago, you could have bought the fund for $56.50 and today it would be worth $207. Not bad. It quadrupled over 20 years. That is the same thing as earning about 6.71% a year, every year for 20 years. But that’s not all, it also pays a dividend of about 1.3% which means that you would have a total return of about 8%. That’s a lot better than 0.2%

But what about the drops?

Imagine that you bought 1,000 shares of VTI in September of 2007. You would have paid $76,960 of your hard earned money to do that. But then the financial crisis hit and your investment would have sailed down to $36,810 in February of 2009. That is a drop of more than half. Ouch! Does that mean that even the stock market can’t beat bank savings rates?

No it just means that the market is unpredictable in the short run. It is still a great place to build wealth over the long run. Say you invested in January 2020 just before the virus hit. You would have bought in at $163.52. Just 2 months later your share would have plunged to $128.91. Ouch. But if you hung on for a full year until January of 2021, your share would be back to $193.99. A gain of nearly 19%. Over the short term no one knows what the markets will do. Over the long term they do well!

Conclusions

• The way to beat bank savings rates is to not use them to power your long term savings.
• Use savings accounts as short term money storage.
• To build wealth use a mix of stocks and bonds that are aligned with your age, stage and risk preference
• Exchange Traded Funds can be a low cost way to add exposure to the stock market with lots of diversification
• You can augment Exchange Traded Funds with specific stocks if you are confident in certain investment themes. Read more on that here.
• When you buy any kind of stocks or ETFs, remember that you are holding them for the long haul, don’t read the headlines or be tempted to sell at every piece of bad news.
• If you aren’t confident investing on your own, retain a competent investment advisor
• As you get closer to any goal, including retirement, you may wish to reduce volatility with a heartier mix of bonds and cash.

I have used Vanguard’s VTI fund for illustrative purposes. Investors should conduct their own research or consult a financial advisor. I hold VTI as part of my investment portfolio.

To free up more funds for investing, check out my blog and Cashflow Cookbook where I detail ways to free up to $13,000 of monthly savings.

What are you doing as an alternative to beat low bank savings rates? Please let me know in the comments and share this post to help others!

photo credit Roman Synkevytch on Unsplash

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