It may sound like a financial planning topic but this is only common sense: you need an emergency fund. If you are young and starting your career; you need an emergency fund to cover for a job loss. You have a young family and a mortgage; you need an emergency fund to cover a broken washing machine. You grow older, don’t have any debts; you still need an emergency fund to cover for healthcare. As you can see, all your life, you will need an emergency fund.
In financial planning, we often talk about 3 to 6 months worth of salary. If I look at my own situation, this would mean having $16K to $32K. This is a huge stack of cash to be sitting in my bank account doing nothing. Worse than that, if you are like me and have a young family, you know all to well that your money is going towards groceries, activities and clothing. Therefore, there isn’t enough money left to #1 pay off your debt, #2 save for retirement, #3 pay off your mortgage and #4 build an emergency fund.
We will all agree that we need an emergency fund. If tomorrow I need $5,000 to repair my house or because I’ve lost my job, I don’t want to put this money on my credit card. The problem is often finding the money to build your emergency fund. Most people can’t save more than 1-2K per year (besides all other obligations). So how can you save 3 to 6 months worth of income?
This is when you have to think outside the box and leave the savings bank account to frugal people. I will never be able to save that much money in my bank account, so I’ve figured out other ways.
Huh? How can spending more money on an insurance contract assure that I won’t need an emergency fund? By taking disability (or salary) insurance. This type of insurance kicks in when you are unable to perform your work. If you are depressed, ill, or break your leg, you can use disability insurance. This will compensate a part of your salary and will help you avoid falling into credit card debts. I have a pretty good plan insuring 70% of my paycheck in the event of disability. This would be enough to cover most of my expenses already.
Disability insurance is also offered on credit products to cover your payment (for a mortgage as example). Unfortunately, it is not cheap.
I just read an interesting take from Dividend Mantra saying he would rely partially on his dividend payoutsif he were to lose his job tomorrow. Last month, he made $700 in dividends and this is enough to cover his rent. Not bad, huh? In my opinion, having a second source of income is probably the best solution to fund your emergency fund. The money doesn’t sleep in a bank account in the meantime, but will quickly take care of part of your bills if you lose your job.
My dividend income is all in a registered account for tax purposes. This is why I can’t use Dividend Mantra’s technique. However, I do have my online company generating several thousand per month. If I was going to lose my job, I would not go for another one. I also have my employer stocks which fluctuates from 1K to 5K most of the time (this is because I keep selling them each year to pay off other debts).
If I have an unexpected one time purchase to make (like a washing machine or an expensive car repair), I also have a line of credit. I could put a few thousand dollars on this as well if I had an urgent need for money. I would rather use a line of credit as emergency fund than having 10K or 20K sitting in a bank account earning 1%. This idea is simple; you are losing money if you use real cash to fund your emergency fund. You could save interest on your debts or make money investing if you would use this emergency fund instead of having it sleeping in a bank account. This is why I think it’s better to pay off your debt but leave a line of credit open and available on the side for emergencies. If you don’t use it, the line of credit is free of charge!
I often talked about the importance of having a plan B on this blog. The idea of a plan B is to get a way out of financial trouble in case of an emergency. When something bad happens in your life, your emotions put you on the edge and your head doesn’t think right. If your emergency plan is already drafted, you only have to look and follow it. No second thoughts, no hard decisions to make. They were all done in the plan when you had your mind set to think about it.
The good news is building an emergency list is not too hard nor complicated. It only takes a few minutes of your day and it can be revised on a yearly basis to make sure all your solutions are still in place. Here’s mine as a reference:
#1 70% of my income in case of disability (insurance)
#2 An average of 3K quickly accessible through my employer stocks
#3 A side business where I could rapidly withdraw 3K per month to sustain my lifestyle
#4 An average of 3K available on my line of credit to withdraw at anytime
#5 If I was going to lose all my income source for a while, I still have 50K in a registered account where I can withdraw money from it but pay taxes
Do you use cash to fund your emergency fund or do you use other means? What do you think of my plan?Comments: 3 Read More
I just had a very interesting discussion about money with my partner not so long ago. He is the only guy on earth with whom I can discuss this incredibly taboo topic of sex money! We both know each other’s salary, bonuses, net worth, debt level, etc. We don’t judge and simply share.
Sometimes it is quite a relief as I couldn’t tell anybody about my financial situation (besides you guys, but it’s not like a real face-to-face discussion!).
I was telling him how my saving plan was going to fund my children’s private education. I opened a TFSA last year and started saving with a modest $50 every 2 weeks. This year’s goal is to increase it to $150/2 weeks to make sure I have 2 years’ worth of private school at the time the eldest child starts. Even then, we made the calculation and I will be in the hole by $7,500 once the second kid finishes high school. Yet, I still have the third one to fund!
In my opinion private school is not a luxury. For me, it’s like saying that education is a luxury. That getting a good diploma, a good job is a luxury. For me, private school is mandatory (oh boy… I expect some serious discussions now ).
From what I can see at elementary school in my neck of the woods, is that our system drags everybody down. Good students are left aside with no benefits but to correct the work of others. In other words; they work for free while the teacher has less work on his/her shoulders. We focus on children with problems (behavioural or cognitive) and I’m totally okay with that. The problem is that while we put the focus on children who need help, the good students are stuck to their chairs waiting. It happened to me when I was in school and I see it happening with my kids now.
I also have the chance to compare what my children learn at school with what one of my friend’s children learns at a private elementary school. Both our sons are in 3rd grade. While mine has 1 hour of English per week, the other is already able to keep a simple conversation in both English and Spanish. He is as good in French as my child and has learned two other languages at the same time. He plays more sports, does more math, more of everything. This is why I can’t afford to let my children miss out on private school once they reach high school.
I attended both public and private school when I was a kid. I did elementary school in a public environment (actually went to 3 different schools since my parents moved often) and completed high school in a private institution. The funny part is I didn’t want to go to private school. All my friends were going to a public school nearby and I had to take the bus and go to this unknown environment.
All that for what?
A better education my parents said.
The private school was okay but I wasn’t in love with it either. To be honest, I stuck to the point that my friends weren’t there and as a teenager, I didn’t care about a better education. But after a few years, I realized something: this is not only about a better education.
I was able to compare what my friends were doing at public school versus what I was doing at private school. The difference was huge!
We had more resources (brand new gym, new computers, a 400m trail, etc)
We had more projects (young entrepreneurs, theatre, improv, elite sports, etc)
We learned a lot more (I had the option to attend higher level math class, physics, English, Spanish, etc)
People were motivated (we didn’t have any dropouts hanging around, disturbing the class)
In other words; the public school has everything the private school had, but the private school had it better on all points. I would have been pretty bored to go to a public school as the system is the same as in elementary school; they focus on the problems and let the good student wait in their seats. I think school should be more fun than that!
Ironically, my children will follow the same path that I did: public school at first and then private next. I just can’t afford elementary private school (6K per kid, so 12K/year…). But I can plan for high school. Since I can’t use money from my RESP (Registered Education Saving Plans are for post secondary school), I need to find the money elsewhere. In the upcoming years, I’ll have to focus on that and probably reduce my spending elsewhere.
I’m not a fool either. I know that private school won’t guarantee my children good jobs in the future. They can still dropout and hang around in a park. But there is one thing I know; I’m going to give them a full deck of cards to play with. It will be up to them to manage and do something with it.
Comments: 10 Read More
Some say money is the root of all evil, I say money is the root of all dispute…
I’ll tell you upfront, I love money. Nah! That is not completely true, I don’t love money, I love what it brings: freedom, entertainment, comfort, security and good wine! My biggest financial goal is to be able to spend whenever I want. This is what I call financial freedom; living your life without having to worry about what’s left in your bank account.
I don’t expect to live an extraordinary lifestyle with a lot of expenses. But I don’t want to restrain my budget to the basics for living either. This is a balance that is quite hard to reach and I’ve been battling to find it lately. For the past 18 months or so, I’m on a crusade against debt. I’ve updated my net worth statement last week showing the first sign of real progress in almost two years. I’m proud of what I accomplished recently yet not proud of the time it took me to realize my problem.
I’ve been aware that I was living over my budget for almost the past four years. This is exactly when my wife quit her job to stay home. At that time, I was working a project of mine called The $1,500 project. The goal was to generate an additional $1,500 in net revenue stream so my wife could quit her job and we could live a better life. I did find the money but additional expenses came into play as well. I didn’t budget that part properly.
I haven’t accumulated too much debt over the past four years for a guy who lives beyond his means. The reason is quite simple; I also generated some sizable bonuses since I work in the financial industry. My average bonus over the past four years is $37,750. Even after taxes and RRSP contributions, I still have about $12K in my pocket each year to tackle my budget. That’s another $1,000 per month. With this money, I was able to pay back a part of my debts. My total debts are showing $312K and the highest I was in the past four years was when I bought my RX-8. In June 2010, I had $334K in debts. So in the past three years, I’ve paid down 22K in debts while I increased my assets from $480K to $565K.
When I look at my situation over the past three years, I can’t say that I’ve headed in the wrong direction. My net worth has jumped by 100K in 36 months, that’s pretty good! But the problem remains the same: I have to count on my bonus to bring my debt level down. I’ve been working on this problem for a while and found it very hard to find a solution until I had a discussion with my wife at the beginning of the year.
After we came back from Disney, I realized that I had to speak with my wife about a touchy topic; money. Since I work in the financial industry and my wife has little interest in finance, I manage all the financial aspects. I don’t update her very much about our situation since she is very insecure about money. Since I’m a big leverage fan and used our line of credit several times in the past to fund projects (trading on the market, start my online company, etc), I thought we were better off this way.
The problem is that she didn’t know that I was actively battling against our debts and that I was looking for a way where I can pay down my debts on a monthly basis within our budget instead of waiting for my year-end bonus. She is definitely not the type of woman who spends without counting. She is very careful with the household expenses. Still, managing a household of five can lead to more expenses when you don’t keep a close record of them.
It wasn’t easy to tell her that we had to take a closer look at our budget and cut down on our own expenses. We used to go out to the restaurant once in a while and treat ourselves; this time is over for now. It sucks to tell your wife that you are not going to go to the restaurant or the spa next weekend, nor in the following weeks months.
Since I’m the only income earner of the family, I feel a pressure to bring in enough dough for everybody. We can’t complain as we are living a great life. But I live the pressure of maintaining the same level of lifestyle alone. Having this discussion with her felt like I haven’t been able to complete my part of the deal. I wasn’t making enough money so we could spend as we want. In the end, it was admitting a failure on my part.
I also tend to enjoy life and rarely think twice before spending. This is why it was so rough to explain my wife that I changed and wanted to slowdown with our expenses. However, my wife didn’t take it badly at all. At first, she was worried about our financial situation. But I explained to her that it wasn’t that bad but we needed to take control of our budget today and not wait for bad luck to happen!
I now feel better about this whole story since we are now a team facing our debts, I’m not alone anymore and this makes a big difference for me! We are now working together to find alternatives and ways to save money and the results are showing already. I should have definitely not taken that long to speak with my wife about money management!
Comments: 15 Read More
December 31st… the last day of the year to make things right! What have you done for the past twelve months? Are you proud of what you have accomplished? The best way to know if you have done something with your life is to setup goals at the beginning of each year and follow them. Here’s where I am at with my three main goals:
- Dropping down under $300K in debt
- Opening an RESP and invest $2,400
- Make over $130,000
Let’s start with the unachieved goal…
This year has been such a bummer on my budget that I even quit on paying off my debts. I can’t say that I’m really proud about it but I have to accept what happened; I kept spending without bringing in the dough. I literally closed my eyes and dove into consumption like you would dive into a pool when it’s burning hot outside… speaking of which… my pool was a huge expense that was not properly budgeted for. In addition to that, my sport car broke every month for 5 months in a row at the beginning of the year. Even worse, I kept my eyes closed and bought my family a trip to Disney… Oh! And I forgot; I got the brilliant idea of switching jobs which threw my bonus down the toilet. Finally, having a third kid brings its wealth of expenses as well. Wow!
yeah… I really quit on paying off debt in 2012.
But you know what? I don’t care!
We spent the whole summer in the pool;
I still LOVE driving my sport car every day;
My trip to Disney is an incredible opportunity to spend time with the kids;
The job switch will become the best move I have ever done in my life over the next few years;
And the joy of a third child is just simply priceless.
So I’m not proud of failing on my first goal, but I don’t really care what happened to my finances. I’m young and full of energy. Even better; I’m darn good at making money and I’ll just make more in 2013 to drop that darn debt level under $300K!
Having three kids is quite a challenge when they go to college and you get the bills. This is the reason why I wanted to open a Registered Education Saving Plan. I was a bit late in the year to open it and couldn’t find enough money to catch up to my goal of investing $2,400 in 2012. At least, I put $1,600 in so far and will continue to invest $200/month (plus subsidies) in 2013. At this pace, I calculated that I’ll have roughly $30,000 per kid to fund their tuition. Since I live in Quebec, this should be more than enough to pay for everything.
In the future, I’d like to increase it in order to be able to buy a duplex for them when they will move to another city. This would be awesome if they could share an apartment that is mine. Since I will have to help them to pay rent, I would rather buy the darn apartment and build some value! But I’m not there yet… I’ll have to wait a few years before I can think of this plan!
At the end of November, I already spilled the beans and told you that I will be making roughly $131,000 in 2012. The drop in income compared to 2011 ($176K) is directly linked to my bonus that is a lot smaller this year. It’s normal; I’m starting a new book with no clients, there was an adaptation period to go through. It was a tough year to go from hero to a barely average employee. Still, I was able to rake in a great income!
But I’m already past that dark period and rocking my way through the beginning of my new year at work (starting on November 1st). I’m already at 30% of my objective after 2 months and still working on other deals.
We are going to leave the year 2012 in a few hours and it’s now time to look at what I’m going to do next year!
Yeah I know, I wrote about that… a year ago! I expect my debt level to be roughly where I left it at the beginning of 2012. So it means that I’ll have 12 months to drop my debt by $20,000 if I want to pass the psychological mark of $300K.
The good news is that I have absolutely no expenses planned this year. No pool, no newborn, no car repairs (lol! As if I could predict that!), no expensive vacations. All of this totalled over than $20,000 in 2012 so I should be fine .
I want to pay off my consumer debt since it was the first time since I got my first full time job that I have accumulated consumer debts. Now I have way too much on my plate and definitely need to settle down and deal with this crap. Fortunately, I’m not paying high interest on it but I would rather not wait too long before I see interest rates going up!
I’m planning on using my online company dividends to pay my debts off. I should technically be able to live off of my day job income and use 100% of my company derived income to pay off my debts. I also significantly decreased my insurance costs throughout 2012, this will definitely help put some money aside!
In 2012, I opened up an RESP for my kids, in 2013 I want to open a TFSA… for my kids! William is turning 8 in 2013 and I will need funding to send him to private school in a few years. It’s very important that my kids benefit from the top education and the best resources are only available in private school. I have personally seen the difference between private and public school and it’s not an option for me.
In order to fund it without having to hit my head on the wall each month, I decided to open a TFSA account and start putting some savings aside. Once I will pay off a part of my debts, I will open my TFSA account and start investing $100 or $200 per month.
Financial goals for the year wouldn’t be goals without an income goal! After dropping from $176K to $131K this year, I want to go up half way and make $150K. This would be the definition of my perfect level of income. If I continue to close deals at work at the same pace, making $150K this year shouldn’t be a problem.
In addition to that, I have some good ideas to make money from my online company and have made sure that I’ve put the money engines in place at work to reach my goal. If I can crush it, this will only mean that I’ll be able to enjoy life even more
Yeah… that’s actually not a 2013 goal but a 2014 goal! I want to go to Hawaii with my wife in 2014 because it will be our 10th wedding anniversary. I’m not the type of guy who enjoys all included in Cuba so I thought that jumping from one island to another could be more entertaining!
The deal I made with my wife was that I want to pay cash for that trip. I guess it will cost something in the range of $10,000 so I had better rack-up a healthy bonus to get us there! This is also the reason why I started working on this goal a year in advance! Let’s hope that it will work!!
I also have a personal goal that has nothing to do with finance; I want to lose weight. I’ve been carrying a few extra pounds in 2012 due to the lack of intensity in my workouts. I tried to do it 4 times a week but I didn’t make it most of the time. Part of it was due to the lack of sleep (thx Caleb!) and the other part was due to the lack of motivation. I want drop under 180 pounds (currently sitting portly at 193). 175 would just awesome but I will need to cut down on my eating habits at the same time while working out intensively four times a week. I have done it in the past, so I know that I can do it again!
2012 has been a rough year in many aspects (money was flying out the window, my online company was hit by Google twice and building a new book of clients is not the easiest thing to do!).
But I’m glad it’s over. I look forward to 2013 with hope and optimism. Most of the things that happened in 2012 can’t really happen again next year so I should be able to crush it like I do best ;-).
What about you? What is your #1 goal for 2013?Comments: 4 Read More
I particularly enjoy the period of end of November and December as it is the moment of the year where I resume my successes and failures and setup my goals for next year. Last year, I’ve wrote about my biggest personal income report ever making $176,000. Was I able to repeat it this year? Not at all… but I knew I couldn’t since I started a new book with new clients.
For those who are in the business, you will understand how hard it is to start from scratch and show a big 0 in the $ under management column. Even thought I knew I was going to make less money this year, I made the move for several reasons:
- I save 2h30/day in transportation time
- I also save the cost associated to this transportation
- I increased my base salary
- My future potential bonus is better than my previous job
- I have the opportunity to work for the best department in the financial industry (private wealth).
Nonetheless, all these very good reasons don’t pay for my mortgage at the end of the month! Lol! But I can’t really complain as “on a bad year” I made slightly over $131,000 this year.
As you know already, I’m the only income earner in a household of five. This is why I feel additional pressure to make money in order to insure that my wife and three kids live a great life without money problems. This is also for this reason that I have built a sideline business to ensure stable income over time. My online business represents 27% of my overall income this year (as compared to 19% last year). It’s been three years that both my partner and I are benefitting from our online company even though we don’t pay ourselves salary. We are better off leaving the money inside the company to ensure its growth as opposed to bleeding it right away.
In 2012, our online revenues didn’t grow since Google hit both private ads and our traffic on sites that were doing well with Adsense. Nonetheless, we should make roughly the same revenues we earned in 2011 as we were able to generate additional sources of revenues such as our newsletter, affiliate programs and our eBook (now showing over 300 copies sold already!!!).
My other source of income is obviously my day job. I’ve separated this source of income into 3 different parts:
My base income is super important since it is my main source of income throughout the year to pay my bills. I was able to increase it this year by having a promotion to work in private wealth. While I know I could make a lot more money if I was a broker paid strictly on commissions, the security behind a stable biweekly pay check is awesome when you have a young family. I just don’t want to stress with money and have to work 70 hours a week to compensate for this stress.
The most interesting part of my day job is the time when I receive my year-end bonus. It is usually the most interesting moment. But not this year and this is my biggest disappointment of the year. I knew it was coming because I started a new book, but my bonus is nothing compared to what it was last year. I don’t even want to write down the drop in % as I would cry! But sometimes you have to accept taking a step back to move forward. I did this back in 2008 when I barely increased my overall income and suffered from another drop in bonus. In 2009, this career move allowed me to jump from high 60s to over 100K. I hope I’ll be right again this year!
Most people don’t consider their employer’s benefit as $ in their pocket and I think they should. But I don’t consider all my benefits because some of them are too complicated to calculate. For example, I ignore my insurance and pension plan benefit. I know they count as an important part of my overall income but I can’t really put a dollar sign in front of it.
I do consider the interest I save on my mortgage because I work in the financial industry and I have an additional rebate on my interest rate. The other thing I consider is the “free” portion of my employer stocks paid by my employer. Since I cash out my stocks each year, this is clearly cash in my pockets!
My overall sources of income from 2011 to 2012 have been relatively stable. In fact, each part increased besides my bonus. Here’s how it is distributed:
As you can see, the main difference between 2011 and 2012 is the importance that my bonus is taking in my overall income. On the other hand, if I consider how much I save in gas and transportation cost, there is a big part of my loss of bonus that is being compensated! Plus, I don’t feel tired anymore which is priceless.
I was happy to see my overall income staying well above 100K even though I’ve turned my back on a potential bonus over 35K for a 4th year in a row. Overall, my other sources of income have proven that my “personal business model” is solid and can provide over 100K in income even in a bad year. A 6 figure income is great for a single individual but when you factor in that I have to compensate for my wife’s income, I’m not making more than any family household with two average salaries of 50K each.
In the upcoming year, I’ll be first working on increasing my bonus. I’m already working on a plan to generate a bonus over $25,000. It’s not going to be easy as I will have to do around 150% of my objectives while my book size is a quarter of what it should be. I’m still in the dark as of to what my exact objectives and payouts on bonus will be for 2013 so I’m currently working with this year’s metrics. I hope it won’t change much and that my plan will be successful. I have identified where I can get business to with my existing clients and made a list of potential clients I can approach. The rest is pure mathematics: the number of calls you make gives the number of appointments you get gives the number of deals you close .
My base salary and employer’s benefits are fairly stable over time and I should only see an inflation adjustment on them. I wish I could get more but it’s impossible in my position. The only way I can get a bigger raise on my base salary is to crush 2013 and build a huge book. At that time, I will be in a good position to ask for a raise. In the meantime, I’ll stay quiet and concentrate on my job!
As for my online revenues, I don’t expect a huge increase this year either. The reason being we are paying off our corporate debt at a super high pace. We were at $100,000 in corporate debt at the beginning of the year and we are now showing $73,000 as of November 1st. We should continue to reduce our debts by about $3,000 per month for the next 2 years until we have nothing left owed. Then, I should see a huge increase from my online income, hehehe! More seriously, I expect to increase my online income by 5% only this year in order to leave enough liquidity to the company so it can pay back its debts. In 2 years, we will have a marvellous debt free money making machine.
Overall, my income goal in 2013 will be to reach $150,000. This won’t be as great as my record year at $176,000 but this should be enough so I can treat myself to a nice trip ;-). The only reason why I focus so much on money is to be able to treat myself and my family. If not, there won’t be any reasons to bust my ass like I do!Comments: 15 Read More
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