I’ve heard the “Pay Yourself First” Cliché so many times that I have seriously started to doubt the process. It sounds so simple that is becomes unrealistic. I always thought that money has to come from somewhere no matter what you decide you do with it. But after my latest personal finance experience, I have started to doubt it!
I’m sure you all understand how to use the “pay yourself first” method, but just in case you have been hunting bears inNorthern Canadafor the past 25 years, here’s a quick refresher. When you use this strategy, you determine yourself as being your most important creditor. Forget about your mortgage payment, food and electricity bills; the first place the money goes is to you.
This is why you should setup a systematic investment into a cash account (or a money market fund) that will be taken as soon as your paycheck is deposited. This is why it will be the very first thing you pay with your income. This money can be used to pay off debts, go on vacation or fund a project such as retirement, buying a home or your children’s education. The point is never to use this money for anything else but its purpose. It truly becomes your priority.
Telling people to pay themselves first just sound like wishful thinking. You simply have to setup the automatic payment that will take money outside of your account and you will be able to save money. You can *technically* save for anything you want, all you need is to setup this periodic investment.
I used to think that if you can’t afford to go on vacation, it’s not putting money aside from a deficit budget that will make it happen. Sooner or later, you will be forced to take money from your line of credit or credit card to fund other operations while your savings grow. And if you net your assets and your debts, you will still be in the hole. So many financial gurus used this tag line that it started to turn me off.
I guess that the ultimate purpose of life is to learn something new, isn’t it? Well this is what happened to me over the past 12 months; I used the “pay yourself first” technique and realized that it worked!
In 2012, one of my personal financial goals was to open anRESPaccount to fund my children’s education. I wanted to start with a systematic investment of $200 per month. I have three children and I really want them to go to school and do what they want with their life. This is why going to school is so important for me. A year later, I opened theRESPaccount and it is now has over $3,600! At this pace, they will have roughly $90,000 to split when they will start University. With $30,000 each, I will be able to pay a good part of their stuff!
The most incredible part is that I didn’t go into more debt since I started saving money for my kids. In fact, my debt level is pretty stable as you know already. But I didn’t increase it by $3600 either!
This is why I believe that wishful thinking might work again to a certain degree. By taking away $200 per month from my bank account, I force myself to think twice about other expenses such as restaurants, vacations or renovations. I have to think twice because my bank account is now showing as much money as it used to since the extra is being sent to another account; my kids account. Who would be evil enough to take money out of a kiddy account? I can’t do that! Hahaha!
It’s working so well that I’ve started an additional investment on the side. Later in 2012, I opened another RESPfor my nephew. I’m putting another $25/month aside for him. It’s not much but since I opened it for his 1st birthday, he will still have around $10,000 at the age of 20.
Then, I started to think about my three kids going to a private school for high school. William is making the big step in four years so I better be ready. Here comes another $100 per month in a TFSA!
Once my wife starts her daycare in September, I will set another systematic payment of $1,100 per month toward my line of credit (currently at $100). I reviewed my debt payment plan and started with my highest interest loan; the pool loan. In 5 months, I’ll clear this debt with the money available in my line of credit. Then, I’ll hit my personal loan for another 5 months and so on.
If it all works out, I might as well start a savings account for my municipal taxes, vacations and car & house maintenance. By opening three more accounts, I’ll be able to create cash reserves all over the place and never have to run after my money again. I better do that right away now that I’ll have extra income coming in! hahaha!
Friendship and money. Always a fun topic. As you work on growing your career, starting a side business, and trying to get out of debt, you’ll start to feel overwhelmed at times. We all know that there’s nothing like going out with friends to shoot the breeze and have a few drinks. What would happen if you lost your friends over money? What would you do if money ruined a friendship? These are all thoughts that we don’t want to think about. The reality is that we will friends over money issues.
I wanted to talk about how you can prevent money ruining a friendship and to look at ways to overcome awkward financial situations:
I personally am totally against the idea of loaning money to friends. A financial loan between two long time friends or family members is always going to be awkward. You’re either going to have to be on the side where you swallow your pride and have to ask a friend for money or you’re going to be on the side where a friend comes to you to ask for money. Both sides suck.
My advice on this issue is simple and I feel that one question needs to be answered by both parties: how will this money be paid back? If a friend can’t pay you back the money for whatever reason this will cause obvious hardship on your friendship. This is why you need to come to an understanding right away before the money is handed over. There needs to be a plan for paying the money back and a deadline in place. If not, then you might not see your money for a long time, which would definitely kill the friendship. I also recommend that you loan an amount of money that you’re comfortable with never seeing again. There’s always the slight possibility that your friend won’t be able to pay you back. You don’t want this amount to be high enough to ruin your own financial situation.
Loaning money will get odd and so will splitting the bill when you go to a restaurant that’s way out of budget for one of the people involved. It’s easy to get envious here. If you make $30,000 a year and your friend that you’re at dinner with just pulled in a new salary earning him $100k per year, the natural instinct will be to want them to cover the bill or to pay a larger chunk. They make more money than you, so they should pay more of the bill. This isn’t how it works though.
From my own experience I found that the best way to deal with splitting the bill is by deciding on the location in advance. Everyone should agree on the location in advance, instead of being surprised about getting dragged into an expensive place. If you’re budget is tight you really don’t want to get stuck in a restaurant where the main course is over $50. If you’re the friend that has a deep financial buffer, you don’t want to put your friends in a position where they’re spending way too much money on food. By deciding on an affordable location in advance you guys can all enjoy your evening with worrying about how much the dinner will put you behind on your budget.
At the end of the day there’s a solution to every awkward situation that will arise between you and your friends as it relates to finances. This is just apart of life. With that being said, it’s time for some general tips to help you not resent your friends for making more money and how you can benefit from hanging out with friends that make more money than you:
We have a friend that makes lots more money than us. The major caveat is that he works insane hours. I’m talking 18 hour days with no social life at all. I’ve heard others make remarks about him and how he’s so rich. It’s simply unfair to resent someone that’s willing to put in the long hours to earn more money. We all have different values in life. Some of us value money more, while others place a greater emphasis on the relationships in life. Either way, it’s not worth resenting anyone for holding different values than us.
You have tangible proof that it’s possible to earn lots of money in life. Don’t fall behind in life by chasing false hopes and trying to get rich quick. Very rarely does anyone get rich quick or while slacking off all of the time. Being around like-minded people should motivate you to strive for more.
You should never let money get in the way of a solid friendship. Hopefully after reading this article you’ll be able to better deal with financial situations with your friends.
(photo credit: petroleumjelliffe)Google+ Comments: 8 Read More
I was driving my car to work this morning (an hour ride each direction, there’s time to think a lot!) and I was thinking about the recent economic events and how they were reported in the media. I got this idea because as a banker, you are constantly confronted against what has been reported in the news and how your clients perceive that news.
When you look at how the media reports economic news, there are 2 big issues:
#1 Most individuals have a very limited background in finance/economics but since we all deal with money, think that they know what they are talking about. Therefore, they will take any economic news to the first degree and won’t do further research to understand fully why there is a recession or why there is a bull market.
#2 The Media industry (especially newspapers) is in the midst of a business model crisis. Therefore, the new “good” journalist is the one who reports the “biggest news”. So let me ask you a question:
What is more interesting between the following news items:
#1 The housing market in Canada will generally slow down based on our economic review and some inflated markets such as Vancouver, Calgary or Toronto might be facing a more important correction in housing prices.
#2 There will be a housing bubble burst in Canada! Interest rates will rise to 7%, people will lose their jobs and then their homes. Florida is nothing compared to what is coming our way!
I’d say that most editors will take option 2 as their headline . I have my opinion on the topic (housing bubble in Canada?) but let’s take a look at some major economic news from past years:
2007: Oil price will rise to $200/barrel; We don’t have much oil left.
Back in 2007, we were surfing on a huge oil price rise and more and more “specialists” with tons of diplomas were writing theses on how little oil was left on earth. Gasoline was ridiculously high, people were investing in oil income trusts like they were GICs offering 10% interest and Alberta was so prolific that they cut their taxes and their inflation went through the roof.
Result in 2010:
- The barrel of light sweet crude is struggling to get to $80
- Nobody talks about the lack of oil anymore or about all that was spilled into the Gulf of Mexico
- We don’t even care to report US oil reserves in the news (at one point, it was reported weekly!)
2008: Economic crunch; this is the end of the capitalism and all banks will follow it to the grave
In 2008, the market plummeted like it was the end of the world. Economists on Oprah were declaring that our economic system will never survive and that our banks will collapse. Even in Canada, it was the end of our Canadian banks. They saw their stock price fall by 50% in a span of a few months.
Result in 2010:
- We are getting out of a big global recession but capitalism is not dead.
- Most banks survived and Canadian Banks showed interesting profits, even throughout the crisis.
- The stock went back up almost to their peak prices in 2008.
2009-2010: Economy is back in Canada; Interest rate to jump through the roof!
After seeing Australia increase their interest rate in late 2009, some economists increased significantly their Canadian interest rate forecasts. We were talking about the Bank of Canada increasing their rate faster than expected. I even heard about variable interest rates going up to 7% within the next five years (I wonder if the same guy called the lowest interest rates for 2008 back in 2003 ).
Result in 2010:
- The Bank of Canada didn’t budge until June 2010 (which was announced 18 months prior)
- Variable interest rate hikes by 0.50% so far and no important increase is forecast for the rest of the year.
- Inflation is under control and there is no need to hike the interest rate anyways.
So back to 2010: Canadian housing bubble to burst or housing market going to slow down to a normal level?Google+ Comments: 3 Read More
*** Hey! Where is part 5? It’s over at INO Blog… It’s about asset allocation according to your age. (link will be updated later on today)***
If I was to start over my financial life, I would do something differently: I would buy a property right after signing my first employment contract. During almost 4 years, I gave $30,000 in rent instead of building equity within my own property.
When I was young, my parents basically lived on the profit made on each property sold. They used to buy a property, move into it, do renovations and sell it 2 years later. They always though (and they still do!) that real estate was a sure value. In fact, they always told me that property values always go up. Wrong!
Those who bought big properties back in 2007 and 2008 in USA or Western Canada can surely tell you about it. Making money from real estate is not an absolute basic of personal finance. While the real estate market is more stable than the stock market, it doesn’t mean value cannot drop.
Property value in Alberta and British Columbia dropped by 20% so far and it is even tougher in some states down south such as Florida and California. Back in the 90’s, several North American regions saw their property value remain stable for 5 years straight. Considering inflation, those people had probably to wait 10 years to make a decent return on their “investment”.
The main risk when you purchase real estate relies within liquidity:
#1 To ensure the property maintenance. There are no points of buying a huge property when you can’t put furniture in it!
#2 If you plan on sell your property to pay something else or do another project, it may take more time than expected.
#3 It is harder to get the equity from your property (you either have to sell it or request a mortgage). In both cases, fees can occur.
#4 Your main residence should not be considered as an investment. It constantly requires that you inject money for taxes, maintenance, improvements, etc. On the other side, your main residence will never generate stable income. The only gain will be realized once you have sold it (usually to buy a bigger one and stick to the very same situation!).
You Are Better Be A Owner Than A Renter: Revisited
Real estate should not be considered as the Investor’s El Paradiso. There should be a big difference to be made between owing your main residence and rental properties. While the first remain an expense that you must buy according to your means, the latter can generate interesting profit (and stable income from rent over time).
In both cases, it is highly important to revised your budget and consider all expenses related to real estate before making a decision. If you can afford it and you do not face liquidity problems previously mentioned, investing in real estate may be quite profitable.
I hope you liked my series on investing rules revisited. Do you have any other investing rules that don’t fit our financial landscape anymore?
Find the full 6 investing rules revisited:
Part 6: If You Are Young, You Should Invest the Biggest Part of Your Portfolio into Stocks
image source: flickr
Before I was born, gold was used as the reference value for our monetary system. Each country had their dollar linked to gold and depending on the fluctuation; they had to purchase more gold to maintain their economy. Since history is written, gold always played an important role in the economy. It was once used as a payment method but we now prefer credit cards… they are lighter
This would probably explain our unconditional faith in gold. When the world is about to fall apart, we all agree that gold will remain a sure value. When we are not able to give a value to a piece of paper written $20, we will still recognize the value of a golden piece.
This is how several investors though of selling their stocks and transfer most of their investments into gold. They though it would be a good idea because:
#1Gold always has an intrinsic value (so do good company by the way)
#2If several people do the same thing, chances are that the price of gold will go up and they will have made a good investment being one of the first player to play their card.
Unfortunately for them, the price of gold hit the very same brick wall than stocks, bonds and real estate. Therefore, gold has proven its limit as a “sure value” during market crashes.
There is a strong mechanism regulating the price of gold: the consumer. When the price of gold goes up, it is followed by the price for golden jewelleries. Then, the demand for jewelleries decreases and the price of gold is back under pressure.
An additional factor to consider is the recent investment from mining companies in the discovery for golden mines. This should increase the offer of gold on the market and stabilize the price.
So while we think that people may leave the US dollar to buy gold, the price of this precious metal might not jump. The above mentioned mechanisms will slow down the price progression and help create equilibrium.
Gold Goes Up When Stock Markets Go Down: Revisited
It is still true that gold will show a smaller volatility and may protect a part of your investments from the market turmoil. However, this should not be used as the ultimate solution to protect your portfolio against markets drops. Those who think that investing in gold will bring back their losses from the stock market might be deceived.
However, holding 10% gold in your portfolio will improve your diversification and reduces your risk.
Google+ Comments: 4 Read More
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