By reading this title, you must think: “man, this guy has guts! He writes about getting out of the rat race and then, he’s telling us that debt is a good thing”. Well… I must admit that at first glance, I don’t make much sense. The whole purpose of reaching financial independence is to generate enough cash flow to sustain your lifestyle. Therefore, the less debt you have, the easier it is to reach financial independence. So tell me, how come borrowing is one of the best moves you could ever make?

Why Do You Fear Debt?

I’ve been thinking about why people are so afraid of debt. Here are the possible reasons I have found so far:

a)      Educational background (we have been told by our parents, by school and by the Church that debt is evil and that we should always spend within our means).

b)      Financial Gurus (most “great financial gurus” are literally preaching a frugal lifestyle and to avoid debt at all cost even if it means using half a tissue paper)

c)       Fear of losing (this is more understandable: if you have too much debt, you could eventually default and lose your house/car/lifestyle. Nobody wants that)

d)      Hate to pay interest (that is another good point: when you borrow money, it always costs more to pay it back than paying cash in the first place. Interest sucks!)

I might have forgotten one or two more reasons why people fear debt but in general, you probably fall into one of these 4 categories. When you think about it, they are not dumb reasons. In fact, some of them are easily defendable points. In front of this info, most people would agree that having debt is a bad thing and someone that is debt free is to be considered “rich”.

Well, I completely disagree with that. Debt can be so useful that if you are trying to pay them off ASAP, you are missing something.

What is the worst that can happen?

If you have too much debt, the very worst thing that can happen is going bankrupt. This is the worst case scenario; losing everything. I might have a different point of view on debt because I have a different background than most people. At the age of 14, my parents went bankrupt. It is important to say that, back in the 90’s, my dad was making over 100K already. My parents were spending their money as it was coming in. While there was lots of money coming in, there was lots of money going out! When my dad lost his contract, it took only 3 months until there was no money left and had to declare bankruptcy. We lost our big house, big cars, no more vacations, we lost everything… in fact, I even remember my mom looking for spare change under the cushions of the couch to buy a pint of milk at one point!

However, losing everything is not as bad as it seems. It sucks big time but you just get over it. You learn to live with less money in your pockets and you start working hard again. Surprisingly, 4 years later, my parents had started a new company and were making even more money than back in the 90s! You couldn’t tell they went bankrupt and had lost everything a few years back!

What have I learned from this?

I’ve learned 2 things from going bankrupt as a teenager:

#1 don’t overspend and make sure you have a backup plan (I have my budget under control and I can always rely on my online company to pay my bills if I lose my job)

#2 losing everything is not that bad (so I don’t have to fear debt)

Now, it’s not because I don’t fear debt that I should go to the bank and fill my pockets with loans! In fact, one should only borrow to build assets and avoid consumption related debt. For example, don’t finance your vacation . Make sure you have a budget for it!

Where I’m a bit different than others is that I always calculate where my money will generate the most benefits. Then, since my mortgage is at 2% and I can easily generate more than a 2% yield, I invest in the stock market and my company. Therefore, instead of focusing on paying down my debt, I think I should focus on creating more assets.

Over the past 3 years, I have noticed that my spending habits have increased significantly. Unfortunately, not all my debts and expenses are related to creating assets. I have also increased my lifestyle a lot. This is why I am now trying to pay down my debt as I consider that if anything happens right now, I will definitely run into a tough time even if I can count on my online company to cope with my salary loss. My other goal is to drop my debts to eventually give me the option of quitting my day job. I really like what I do right now but just having the option possible would make my day!

Are you afraid of debt? Do you sleep well at night? As long as my interest rate is low, I do!

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Last year, I wrote down my 2010 financial goals and followed up during summer to know if I was in line to make it. You know what? I crushed all my 2010 goals! This year, I’ve established 3 financial goals :

#1 Paying off all my credit cards (22K!)

#2 Increase my net worth past 200K (from 152K)

#3 Get in the Top 3 Financial Planners in Montreal and Make 150K

Those were pretty ambitious goals as they required both lots of effort and money! This is also why it is very important to follow-up today with my goals and see where I stand:

Paying off my debts

I suck!!!! Back in January, I was at 22K in personal loans and credit card debt. As of last weed, I’m at 28K!!!! How can I be so bad? The first reason is called central A/C that cost $7,000! The second reason is because I didn’t use my employer’s stock yet to pay off my debts. Since I’m paying a very low interest rate on my debts and the stock is going well, I’m waiting . I should be able to pay down my debts faster in the second half of the year. But let’s be honest, I definitely count on my year-end bonus to clear this mess… I’m still not worried about my situation as things seem to be under a better control now ;-D

Increase my net worth

I don’t know why but creating assets and making money always sound easier for me when compared to paying down my debt! I started the year at 152K and I’m already at 180K. The last $20,000 doesn’t seem to be quite a challenge since my house and pension plan values should cover this. In addition to that, I will max out my Jan 2012 RRSP contribution by 9K so aiming 200K is like a done deal .

I’ll actually concentrate on pumping my net worth a little bit higher and try to reach 250K by the end of Jan 2012. I can’t wait to see if I’ll be able to make it! If worse comes to worse, I guess that with our next share valuation update in May 2012, I’ll be going over 250K!

Top 3 Financial Planners in Montreal, Making 150K

Well this is another great challenge! As of today, I know I am part of the top 10 for sure, but the top 3 is always hard to determine until the fat lady sings . Everything can change until the very last minute, so I’m still in the dark to know if I’ll make it or not. I know that I’ll have a record year in 2011 compared to my previous 3 years as a financial planner. However, it doesn’t mean that others won’t have a record year too! I still have about 3 months (our financial year ends on October 31^st) to work on it and I have a few good deals on the table. At this point, I can tell you that the difference between 10^th and being top 3 is about luck. If you get the right timing to bring in the numbers and another planner doesn’t, you go through and make THE year .

The good news comes when I look at my potential bonus and overall income. Last year, I had a record year at $135,000. If I don’t make the 150K, I’ll be darn close! I was able to manage an interesting income raise last month and I should be looking at a bonus between 30 and 40K. So if I keep working the way I do for the next 3 months, the 150K will be mine this year!

Final thoughts

Overall, I’m pretty happy about what I see over the mid year. Reviewing my financial goals is helping me keep focused and I know now that I need to put more emphasis on paying off my debts while my net worth and income goals will be reached simply through following what has been implemented so far.

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This is a guest post by Teacher Man from My University Money

Hello fellow personal finance readers.  I go by the pen name “Teacher Man” due to the fact that I recently graduated from university and am in my first year of teaching high school.  My partner and I have recently started up a website aimed at helping young people (with a specific focus on post-secondary students) who are dealing with ‘the real world’ of personal finance and money management for the first time.  The inspiration for our website came about when my partner and I were reminiscing about our time in university, and came to the conclusion that if we knew then what we know now, we would have been a lot better off.  Thus, My University Money was born.  Our goal is to help young adults and their families (or anyone for that matter) in their quest to learn how to succeed in their educational, financial, and career pursuits.  I have been a long time reader of TFB and would like to thank him for the opportunity to write a guest post and share some insights with a larger audience than our meagre following!

As I stated above, I have followed The Financial Blogger for quite a while now, and it was through this blog and a few others that I became aware of the Yakezie network.  This was a watershed moment in my journey through the world of managing my affairs as an adult.  The amount of knowledge and wisdom I have subsequently found on the blogs and comment boards of the Yakezie members is truly astounding.  It was only when I truly stopped to think about this that an idea came to me.

This is the first semester I have been fortunate enough to teach a business course in high school.  It is a grade 10 general business course and it gives me a lot of freedom to choose my own topics and focuses.  I had been looking forward to the opportunity because I thought that it would be easy to engage students with material that was obviously so relevant to their lives.  While it hasn’t been as easy as I expected, I have had some success.  When I first looked at the teaching materials for the course I was astounded to find the materials were terribly old, and the recommended curriculum was vague enough to be useless.  Unfortunately this is not uncommon in the education world.  At this point I set out to find some resources and put together a course that I thought would give students an introduction into the most important areas of personal finance.  Luckily my principal is very ‘hands off’ and is fine with whatever I choose to teach as long as it semi-related to business and the students are learning something!

One day after looking through yet another textbook I thought was ok, but fairly mediocre, I realized that just about every single blog in the Yakezie network held more relevant information and advice than these textbooks.  If I could somehow take out the most important ‘golden nuggets’ and channel the combined knowledge of the group, I figured I could put together a pretty comprehensive resource that was made by people more intelligent and well-educated than myself.  As a bonus, it would be a great spot for people to learn something new, and possibly debate the relative importance of certain parts of personal finance.

I have patterned my course in large part on many of the themes that TFB and the rest of the Yakezie group write about weekly.  I have also read a lot of personal finance literature and found that most personal finance books are more helpful than the textbooks currently on the market.  Perhaps the best model I have come across so far has been, “The Wealthy Barber” by David Chilton.  His chapters and general approach to teaching personal finance have been very useful to me.

Before I briefly outline what my course currently focuses on I should probably explain that if you haven’t talked to a group of grade 10 students lately you might be quite surprised at what you find.  The attention spans of today’s youth seem to be nanoseconds at times.  They are incredibly good at multi-tasking simple jobs, and equally poor at focusing on any single concept.  Without first showing them the personal connection to their immediate life you stand almost no chance of holding their attention for any length of time.  These parameters often limit the course from venturing into specifics such as the importance of mutual fund fees for example, so concepts must be general enough to be easily grasped, yet specific enough to be practical.  The eventual goal is to see just how all of you would organize the course if you had the freedom I have.  I am challenging TFB and all of his readers to put their stamp on the education of today’s youth instead of just joining the age-old chorus proclaiming that, “Kids these days don’t have any common sense when it comes to work or money.”

Here is a brief description of how I currently structure the course:

1) The Importance and Uses of Money

Money can be used to purchase things, as a store of wealth, or as capital to produce more money.  It is merely a tool.

2) The Fundamentals of Earning Money

What are the different ways people earn money?  We look at jobs, deductions from a pay cheque, taxes, renting, buying and selling for profit, and “Investment Income” which I leave pretty vague until chapter 4.

3) Budgeting and Basic Personal Banking

Sometimes I forget how taboo money is in a lot of families.  Many of these students have no idea how to manage money other than, “You spend until you don’t have any left and then you work harder to get more.”  Interestingly enough, if our government and certain individuals stuck to that basic premise we would be way better off than we are today!

The kids learn that just because a job advertises at $10-per hour, this doesn’t mean you will get $80 in your hand at the end of a work day.  They learn how to budget monthly and annually.  Finally, they learn how credit cards can be pure evil or great little tools, and we touch on some of the other options of modern banking.

4) Saving and Investing

What is the difference between putting your cash in a mattresses and putting it in a chequing account or savings account?  The kids then learn about the intense power of compound interest and how it can make them rich, or poor forever.  We briefly look at average return on investment rates of each of the asset classes.  Everyday I drill home the, “Pay yourself 10%” mantra that is cliché for good reason!

I also like to do an interesting exercise where we look at how much a pack of cigarettes a day costs.  We take the money that we would have spent on cigarettes and put it in various types of investments.  The kids are always amazed to see that they could be a millionaire by 60 if they juts put their smoking money into basic bonds.  I don’t really let them in on the dirty secret that due to inflation that million isn’t what they think it is, I prefer to focus on the anti-smoking, pro-saving lesson.

5) Insurance

How insurance works and the principles of shared risk/risk management.  We go into detail on life, car, house, disability, medical etc.

6) Macroeconomic Basics – Supply and Demand and Inflation

This is where you start to lose a lot of kids.  I just try to give them a very superficial understanding of economics so they can begin to understand the world around them.  My theory is that if I can give them the terminology, and some essentials, then learning about more complex economic issues, or just reading the business section of the newspaper won’t seem so intimidating.

7) How a Business Works

We try to look at a lot of case studies.  I live in a rural area so farms usually make for great examples of logistics, sales versus expenses, borrowing to invest, economy of scale, marketing, world demand, payroll, capital costs and some interesting tax situations.

“Through the Eyes Of an Entrepreneur”

As a treat (usually on Friday afternoons) the kids get to watch various episodes of Dragon’s Den (Canadian version).  I will pause the show when the initial pitch gets made so the kids have to figure out the valuation of the company and make some predictions.  This has unwittingly become a great teaching tool because the kids are so engaged!  The end of the year project is going to consist of them coming up with a product and business plan of their own, to pitch to 5 teachers/dragons.  I have really high hopes that the kids will get some ‘authentic’ learning from this that they will actually remember because of the hands-on experience.

Ideally I would like to get into some more macroeconomic stuff, but that gets pretty tough with grade tens.  I would also like to show them more about how the stock market works, but again, it seems students really have a tough time grasping it.  It’s appears too abstract to them.

So, now is your chance to directly influence the financial education that someone will be receiving!  Let me know what your suggestion is and why it is so important, and I guarantee it will be taken into consideration.

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I came up with the idea of writing about the difference between a financial planner and a stock broker when I realized during a conversation with one of my clients that the difference is not that obvious. So for those who are dealing with a financial planner or a stock broker, you might not even know what they can do for you and which one you need. I’ll try to make it clear with this article.

Certification

As I have previously mentioned, a Financial Planner needs a CFP certification (which stands for Chartered Financial Planner) in order to call himself a financial planner. To become a financial planner, you need to pass a specific exam. In some places, such as Quebec, you also need a certificate in financial planning before applying to write the exam. This obviously ensures that the financial planner has a minimum  knowledge before he starts his job .

In order to become a stock broker, the only certification required is a “trading license”. Depending on if you are in the States, Quebec or somewhere else in Canada, the name of the license can differ but the result is about the same; you buy a big book where it explains what the stock market is, the difference between bonds, equities and other types of investments, etc. Once you have read it, you pass the exam and you get your “license”.
Overall, we can say that the certification to become a financial planner is much harder than to become a stock broker.

What a Financial Planner can do

A financial planner is like a general practitioner doctor. He will cover the 7 fields of financial planning with his clients:

- Insurance / Protection (life, disability, critical illness)

- Legal aspects (marriage rule, divorce, etc.)

- Personal finance (budgeting, financing, etc.)

- Tax optimization

- Investing

- Retirement planning

- Estate planning

In real life, very few financial planners will cover all the fields. Most financial institutions hire financial planners to do investing, retirement planning and sometimes financing. However, when you find a good one, he should go over all the aspects of your personal finance. He should refer you to a specialist for insurance (an insurance agent), estate planning and legal aspects (lawyer, notary) as well as using a tax expert or an accountant when required.

As for investing, most financial planners cannot trade stocks. In most cases, they can build investment portfolios with mutual funds and work with you on your asset allocation. However, they can’t give you stock recommendations or trade for you. Forget the ETF products as well, they are not authorized to trade them (unless they have their broker’s license….)

What a Stock Broker can do

Obviously, the main thing that a stock broker does is… trades stocks . However, most stock brokers are leaving the stock trading portfolio model for investment solutions that are easier to manage for their clients such as:

- Investment baskets (created and traded by their firm)

- ETFs

- Private investing / discretionary investments (with known portfolio managers)

- Even mutual funds!

Why are they leaving the stock trading model? Because, in most cases, a stock broker is always as good as his last trade. Clients are getting very impatient these days and they expect miracles from their brokers. Therefore, they expect them to buy only stocks that will go up….which is obviously impossible. Then, when stock brokers switch to “managed” investing solutions, they create a buffer that gives them more time to “satisfy” their clients. The biggest advantage of a broker is that he has access to all investment solutions on the market. It can be the hottest mutual funds, the latest bond issue or a custom made ETF portfolio; the stock broker can do them all (as opposed to the financial planner).

Who is the best?

The real question should be what are you looking for? A financial planner is very helpful to manage your overall finances as he is the only one with the knowledge to guide you in all the personal finance fields. However, if you are looking to get stock advice or trade ETFs, the financial planner won’t be of a great help. But to be honest, I think that people are definitely overreacting towards the management fees of mutual funds (for funds that are less than 2%). Paying between 1% and 1.75% is not too much to have your portfolio managed by professionals. ETFs are surely interesting but if you don’t know how to trade them, it’s like giving a Ferrari to a 16 year old kid who has never driven…

If you have a strong grasp on your personal finances already, maybe you only need a broker. But then again, make sure you are dealing with a professional. I know amazing stock brokers and some very questionable ones too… as is the case for most professions

In some very rare cases, you will meet a financial planner with a broker’s license. Then, you have basically hit the jackpot .

Some people will tell you that they would rather be on their own…. I’d say it’s a poor answer unless you have a strong financial background and a high interest in managing your portfolio and finances. I believe your finances should be managed by a professional much like you require the help of a dentist to manage your dental care or a doctor for your overall health. It doesn’t mean that you have to close your eyes and blindly follow your financial advisor, but asking him questions and following his lead will surely increase your net worth .

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Hmm… just writing the title and thinking about the topic tells me that it’s a one to write about!

Should you spend and enjoy life right now?

Should you pay off your debts and save money for your retirement?

What if you die at 45 and never had one great trip in your life?

What if you die at 95, starving in a small apartment for the past 35 years since you hadn’t saved a penny?

How do you balance spending now and saving for later?

First off, am I the right person to tell you anything about this topic? Since 2008, I have increased my debt faster than the Canadian Government. While my assets and my income are growing even faster, I’m not sure that I am managing my budget right now. I spoke of this issue recently in my net worth update; I’m having a hard time managing my bi-weekly paycheck while I am receive 30% of my annual income in a bi-annual bonus. This causes an obvious challenge to balance a budget throughout the year. But in the end, I always payback my debt… go figure!

Spending Vs Saving; it’s all about risk management!

Some will tell you that you are better off spending all your money as you earn it and enjoy life as they know someone who passed away too young to enjoy life. Others will tell you  to live a simple life, pay off your debts and that you will have all the time in the world to enjoy your retirement once you are there.

I think the first group of people is not thinking enough about tomorrow, but they are surely enjoying life to its maximum right now. The latter will never enjoy their retirement. In fact, most of them will continue to save money and live a simple (and perhaps boring) life. After so many years of restraint, it becomes a habit. And many people that are used to this lifestyle and feel uncomfortable when they spend money. So there is no right answer; it’s all about risk management.

Do you want to take the risk of not having enough money at retirement versus taking the risk of never using your hard earned money? This is the right question.

So Where is the balance? The balance is in the bucket!

I think the balance is found when you are able to create a bucket for each goal. At first, you can start with a simple structure of 2 buckets:

Bucket A: Having fun

Bucket B: Saving money for later

The point is to setup bucket B pretty soon:

- establish automatic payments on all your debts (to make sure you pay everything according to the plan).

- establish an automatic investment plan for your retirement account (pay yourself first).

- take out life, disability and critical illness insurance (protect your biggest asset: YOU!)

Then, should you have enough money left over to fund bucket A, have fun:

- extra spending (dining out, clothing, traveling)

- extra (controlled) debt (remortgage for renovation, car loan, etc.)

Bucket A should be a lot smaller and not as restricting as bucket B (which is a major problem for most people; they spend more on hobbies and extra debt than on their house payment and retirement investment account!).

When I look at my situation; my bucket B is pretty solid:

- I have maximized my RRSP contribution (and continue to do so each year)

- I have a solid pension plan

- I have a set payments on my car loan and my mortgage (and I don’t plan on changing cars for the next 5 years or more).

Then, I can play with my bucket A:

- spending on vacation with the kids, clothing budget is on the kids too!

- extra debt to finance my central A/C

My only problem is my credit card debt repayment (which is being done with my variable income). Since 2008, my things have gone a bit sideways but now that I am well established, I’ll have to increase my bucket B and start paying them off within my monthly budget and not wait for my performance at work to use my bonus!

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