April 15, 2014, 5:00 am

What is The Best Emergency Fund?

by: The Financial Blogger    Category: Personal Finance

 

 

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.

 

HOW MUCH SHOULD BE IN 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.

 

SO WHERE DO YOU GET THE MONEY TO FUND IT?

 

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.

 

 INSURANCE

 

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.

 

HAVE ANOTHER SOURCE OF INCOME

 

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).

 

HAVE A LINE OF CREDIT

 

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!

 

HAVE AN EMERGENCY LIST INSTEAD OF AN EMERGENCY FUND

 

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

 

*If you want to read more about this, I’ve already described my plan B here and there.

 

Do you use cash to fund your emergency fund or do you use other means? What do you think of my plan?

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April 8, 2014, 5:00 am

How I earned a second paycheque in my spare time

by: The Financial Blogger    Category: Business

 

This is a guest post from a blogger fella Robb Engen. After some discussion, I realized that he was running several online gigs on the side and his wife has even stopped working! He would definitely qualify for my post “Successful Double Income Stories That Don’t Lead to Quitting Your Job.” Enjoy!

 

One thing I’ve always admired about Mike is that he has managed to negotiate a four day work week so he could devote more time to his side business.  He’s struck the perfect balance between entrepreneurship and a steady paycheque.

I don’t have a four day work week but I left the job where I was working 60 hours a week in the busy hospitality industry and headed to the public sector where the hours are much more flexible and I’m home from work before 5:00pm every night.

Rather than spend my ample free time on the couch watching television or lurking on Facebook, I research and write about personal finance and investing on my blogs as well as for a national newspaper.

It all started the year my first child was born and – after she settled into a sleep routine – I found that I had nothing to do in the evenings after 7:00pm.  I started reading blogs like Million Dollar Journey and The Financial Blogger and realized that instead of consuming content all night long I could be creating my own.

Most personal finance blogs were all the same: 30-something guys trying to save and invest their way to financial independence.  I wanted something different to stand out from the pack so I talked to my mother, a former financial advisor with one of the big banks, about a tag-team approach to the blog.

The Boomer & Echo blog was launched a few months later.  We split the writing responsibilities and managed to publish five articles a week for two years.  Within eighteen months we had 100,000 page views per month and earned over $3,000 per month in advertising revenue.  The extra income allowed my wife to stay home full time to look after our two kids.

I’ve learned that you need to diversify in order to be successful online.  I went on a guest posting spree for a few months to promote my blog and got noticed by the personal finance editor at the Toronto Star.  Now I get paid to write a bi-weekly column for a major media outlet!

I also found a niche that I liked to write about – rewards cards and loyalty programs – so I started the Rewards Cards Canada blog.  The niche happened to be underserved at the time and had the potential to be highly profitable with the right affiliate partners.

Earlier this year my mom and I started a fee-only financial planning service where we help clients identify their financial goals and write a plan to achieve them.

The point is: I spread my risk from one online income source to many different ones, and even though my main blog has suffered from lower search traffic in the last year or so, my side income has continued to grow.

I expect to generate about $65,000 in revenue this year from advertising, referrals, freelance writing, and the new planning service.  The best part is that I can do all of this during the evenings and on weekends and still have plenty of spare time to play with my kids, go out with my wife, or stay home and watch Netflix.

Robb Engen is one-half of the Boomer & Echo blogging team.  He recently started a new blog called Earn Save Grow that features stories on how to earn more rather than spend less.

 

A Few Notes from TFB…

 

Last week, I discussed about four other guys doing what Robb is doing; use their free time to work harder for themselves instead of working harder for the boss. The result is always the same: more money in your pocket than you can even imagine.

 

I appreciate the insider view of the personal finance Boomer & Echo provides. I try to give a similar feel to this blog as I think people should know more about the banking and financial industry. This is definitely a great and unique angle to approach personal finance. But you can find your angle too, or find something completely different to talk about and still make money.

 

Turn off that darn TV, find something you are passionate about and start working on your website. I’ll make a bet with you: I bet you won’t quit your job with your new site but I bet you will beat your day job hourly wage!

 

If you have other stories to share like this, I definitely want to hear about them!

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April 3, 2014, 5:48 am

Private School is the Way to Go – Public School….

by: The Financial Blogger    Category: Personal Finance

 

 highschool

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!

 

PRIVATE SCHOOL IS NOT A LUXURY

 

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.

 

MY OWN EXPERIENCE – PUBLIC SCHOOL SUX

 

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.

 

DO YOU THINK PRIVATE SCHOOL IS THE BEST PLACE TO SEND YOUR CHILDREN?

 

 

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April 1, 2014, 5:00 am

Successful Double Income Stories That Don’t Lead to Quitting Your Job

by: The Financial Blogger    Category: Alternative Income,Business

 

 

We often read on the web about dotcom moguls who quit their job to live free and happily in the marvelous world of internet. For a while, I was skeptical about these crazy stories until I met a few of these bloggers personally. Still, I can totally understand why some of you are not too convinced it’s possible to literally live from your computer.

 

I recently dug into my network to find people who actually decided to increase their income and live a better life by creating a lucrative sideline. Through these five stories, I want to show you how it is possible to put your knowledge and talent to work and make more money than you are earning today. You can keep your job and make more income… it truly works!

 

MATT FROM DUMB PASSIVE INCOME

 

I’m starting with Matt’s story because I believe it is the most accessible and incredible at the same time. I met this guy through my master mind group (read more about this story here) about year ago. He was like most readers on this blog: a guy with a job and a website trying to figure out how to make a few bucks from it. At the beginning, I remember he wasn’t making much. In fact, his first income report (July 2012) showed a net profit of $27.13. Trust me, you don’t want to convert this amount into an hourly wage! But 18 months later, he reported a net profit of $971.10 working about the same hours he used to when he started.

 

A thousand a month is certainly not enough to enable anybody to retire from their cubicle. But the point is exactly that: look at how this guy is putting his free time to work and earn $12,000 more in net income each year. This is better than any promotion you can get. What is really neat about his small business model is that it can be done by anybody! He didn’t do anything extraordinary, he just systematically applied what he learned month after month.

 

His main sources of income are split as follow:

#1 Keyword research service: Matt understood very clearly how to efficiently work with Long Tail Platinum Pro – keyword research software. Most people who want to build a niche site lack time to search for keywords or are very bad at finding the right ones. Matt’s keyword research service is a hassle free keyword research report delivered by email within seconds.

#2 Adsense: Using his own talent to find good keywords, Matt is building small niche sites and earns about $400-$500 per month from Adsense with these sites. Nothing fancy or complicated, just a good concept applied systematically.

 

#3 Affiliate Sales: He uses his blog to promote tools he uses to build his websites. This is the most common practice on the internet but it works!

 

By the way, on top of working full time and having this side gig, Matt is also a husband and father of two great kids.

 

JON FROM AUTHORITY WEBSITE INCOME

 

Another guy from my Master Mind Group is an engineer who works lots of hours both at work and on his sites. Just to make sure he will burn out, Jon is also a father ;-). Yet, he finds enough time to build a relatively passive income business on the sideline.

 

Jon started to report his journey in October 2012 with a loss of $192.98. He recently posted record net income at $12,194 (shoot! This guy beat me with a blink of an eye!). He started with the idea of building another of those classic authority websites driven by affiliate sales.

 

He successfully built a resource for student debt consolidation. But instead of stopping his success at this point, he worked on this model and created a complete process to build niche website (remember, he is an engineer).

 

He actually uses his main talent at work to build a sustainable business. Through his efficient processes, he offers now two great search engine ranking systems. The first one finds expired domains and build links from it to your niche site. The second is a complete private blog network to build links and increase your ranking.

 

While his numbers are fairly impressive, Jon has no intention to quit his job at the moment. The thing is that he built a business that doesn’t require too much of his time and he can simply cash in from both work and his sideline. The beauty of his model is also the high price he can charge through both services. You don’t need many clients each month to reach 12K/month when you charge up to $599 for a full package!

 

TOM FROM CANADIAN FINANCE BLOG

 

The next two stories don’t include fabulous numbers and they are not reported. While I have a pretty good idea of how much they make since I’m in the same business as them, I won’t disclose my evaluation either.

 

Tom started 1 or 2 years after me in the Canadian personal finance blog universe. He quietly followed my path and started to build an online blog empire like mine. While I’ve always been pretty upfront with my empire, he remained quiet about it. All I can say is that he owns his share of the web and keeps making money from his financial websites.

 

I know he has a good job and kids. Yet, he finds time to make more money on the side through his blog. He uses multiple partnerships and hires writers to run his empire. He is now in a better position to enjoy life while raking in a few bucks every month.

 

I don’t know how he founded his first blog purchases but all I can say is that you can easily achieve a blog empire if you reinvest your profits for a while… or, like us, you borrow a few bucks to make your first purchase! I don’t know which method he used, but one thing is for sure, he owns a great portfolio of websites today and earns passive income better than any promotion he could have gotten at work. He preferred to work extra hours for himself instead of giving them to his boss – wise decision.

 

KYLE FROM MY UNIVERSITY MONEY

 

Kyle’s story is quite interesting too as he is a young and motivated teacher who thought financial education is sorely lacking in our society. Since his day job income potential is pretty limited (not that he is making a bad salary but he can’t really get promotions year after year), creating another source of income was the perfect plan for his situation. I bet it’s the case for many of you!

 

He even wrote a great book for students (I strongly suggest you buy this book for your kids!) called More Money for BEER and Textbooks. He explains how savvy students can get more for their money and keep partying over the weekend (we all know students don’t study over the weekend, been there, done that ;-) ).

 

Kyle is making money from a blog empire as well, while earning royalties from his book and now recently launched a pod cast. Guess who his latest interview was with…; Tom from Canadian Finance Blog!

 

He runs a similar business model as mine as he also partnered up with his best buddy; Justin (they even wrote the book together!). The two of them are doing remarkable work in bringing simple financial concepts to the community and helping them understand how to manage their finance. This is another great success story of a good side gig.

 

Don’t forget to get the book!

ME!

 

Well… I guess you already know about my story now ;-). Since 2008, I average about 100K in gross income from my online empire. I have a partner so you have to divide this number in two but still, 50K gross income per year is not bad.

 

I use my extra money to pay off my debts, travel and pay for utility bills. The other great thing is that I always get a premium computer or iPad since I need them to work with. It’s not always easy to work full time at a very demanding job, being the father of three and keeping my wife happy by cooking supper on Fridays and Saturdays ;-).

 

More seriously, I’ve slowed down with my business since our third child arrived but I can now see how to manage my schedule and get back full force with my online business. In the meantime, the money kept coming in and while it was tougher these past two years, it still a very generous sideline. I can’t imagine how I could earn this much by working more for someone else!

 

Because here’s the key: if you have a passion, take a few hours to work for yourself each week and you’ll start earning more than working for anybody else!

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March 27, 2014, 5:04 am

Index Investing; Is It Always Better Than Mutual Funds?

by: The Financial Blogger    Category: Investment, Market and Risk

 

 

Sometimes, I have the feeling that people think that managing their investments is as easy as making a peanut butter sandwich in the morning…

 

From what I’ve read in the financial industry for the past ten years, high management fees (called MERs) charged on mutual funds hurt a small investor’s portfolio. In fact, if we look at the Canadian industry, most investors pay about 2% (and sometimes more!) to invest in mutual funds. In other words, if you invest $1,000 and your fund make 5%, you only earn $30. The other $20 is paid to the mutual fund company to cover their management fees (and the advisor selling the fund). When you think about it, this is a 40% commission based your investment return.

 

It gets worst: imagine if the fund you invest in dropped -5% during a bad market. Your statement shows -7% or a loss of $70. Mutual fund companies will get their 2% no matter what, the rest goes in (or out!) of your pocket.

 

Unfortunately, mutual funds were, for a long time, the only way one can diversify in multiple products (company shares or bonds) managed by professional in a single trade. An investor could buy one mutual fund including a part of safer investments (like bonds), Canadian companies along with American and international company shares. For someone who doesn’t know how to invest, mutual funds are expensive but do the job.

THE ETF REVOLUTION

 

As is the case in any industry; when a product is overpriced or shows high profit margins, other players come to the market to offer an alternative. The first player to come with an alternative to mutual funds was probably Vanguard, one of the first ETF firms in the US. ETFs (exchange traded funds) are another way to buy multiple stocks (or bonds) with one trade.

 

Explained simply, an ETF is a group of investment products (mostly company shares or bonds) representing a “basket”. For example, the ETF iShares S&P/TSX 60 (XIU on the stock market) represents the 60 biggest companies traded on the Canadian market (the TSX). Someone buying 1 unit of XIU is buying a basket containing the 60 biggest companies traded on the Canadian market. He doesn’t have to know them, he doesn’t even have to manage them in his portfolio, the ETF does it all for him.

 

What’s the difference between buying a Canadian stock mutual fund or the XIU? About 2% in management fees! While most Canadian stock mutual funds will charge over 2% in management fees, the XIU fees are set at 0.18% (source ishares.com). Therefore, the portfolio manager taking care of the mutual fund must outperform the ETF by 2% before generating $1 for the investor. Here’s a quick example:

Investment Fees Investment Return Net Return $1000 Invested
Mutual Fund

2.18%

5%

2.82%

$28.20

XIU

0.18%

5%

4.82%

$48.20

 

As you can see, there is a big discrepancy between the mutual fund and the ETF even if they show the same investment return (before fees).

 

SO WHY DO PEOPLE STILL INVEST IN MUTUAL FUNDS THESE DAYS?

 

Here’s my answer: because it’s harder to manage your portfolio than it is to make peanut butter sandwiches!

 

Then, some people will suggest a “coach potato” investing style. The coach potato approach is to select a few ETF indexes that reflects your risk tolerance. Let’s say you want a balanced portfolio (roughly 50% in the stock market and 50% in bonds). You could build a portfolio with only 4 ETFS:

50% in a bond ETF replicating the DEX universe (Canadian bonds in general)

25% in an ETF tracking Canadian stocks

15% in an ETF tracking US stocks

10% in an ETF tracking International stocks

 

I agree that pretty much anybody with a calculator, a sheet of paper and a pen can build such portfolio. Then, you rebalance your portfolio twice a year to make sure you always show the same % (sell high, buy low). That’s a pretty effective method to manage your portfolio and track your investment return to the markets (95% of portfolio managers don’t beat their benchmark on the 5 year return). On top of this, your management fee is under 0.50%… this is at least 1.50% cheaper than the same investment in a mutual fund. If you invest $100K in this portfolio, you save $1,500 per year just in fees!

 

But it’s not that easy. Nope: managing your portfolio is not that easy.

 

HERE’S WHAT HAPPEN WHEN THE GAME CHANGES

 

Last years, bonds were paying a ridiculously low interest rate and bonds started to lose value upon the rise in interest rates. This is why XBB (a Canadian ETF tracking bonds) shows a negative return of -2.37% over the past 12 months. Add the bond interest rate paid by this ETF (3.26%), you get a small investment return of 0.89%.

 

How can you explain that most mutual funds did better with their fixed income (bond) portion? After a good talk with a friend of mine who’s a super fan of ETF investing, I noticed that his bond performance weren’t that great over the past 3 years. This was mainly explained by the poor Canadian bond returns.

 

At first, I assumed it was the same environment for everybody… until I checked a few mutual funds performance records. Most mutual funds show better returns during the same period… how can this be possible? It’s not because portfolio managers were better. It’s because they included other classes in their fixed income portfolio such as high yield bonds, international bonds and US bonds. This is how, for the past 3 years, mutual funds are able to beat a classic coach potato portfolio: because they include several other investment classes.

 

YEAH… BUT YOU CAN REPLICATE THE SAME MODEL WITH ETFs

 

It is true that if you had replicated the exact same model with 8 or 10 ETFs, you would probably have beaten the mutual fund. But here’s the thing: who is going to tell you how to make such a portfolio if you adopt a coach potato investment style? Not your online broker, he simply performs the trades. Not your advisor because you don’t have any. Your neighbor? Maybe.

 

I guess now you can see where the problem with ETF investing lies: you still need a good financial background to build and manage your portfolio. If you do it only after reading a few books, chances are that your investment returns will be lower than mutual funds even after their huge fees.

 

I wouldn’t risk opening the hood of my car to start working on the engine to solve a problem, I wonder why people think it’s that easy to invest money…

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