Not the B-Word!

Not the B-Word!

New Year, New You

Sometimes when I’m trying to find a blog topic, I try to get super creative. I envision questions that people may have in relation to what’s going on in the world and I try to give some form of analysis or opinion to further educate my readers.

My most recent point of inspiration came from an article title about how businesses (mainly gyms) were scrambling with the new restrictions in place. I could go into a macroeconomic spiral of small businesses and their impact on the economy, and maybe one day I will, but it made me think about how all those employees have been going back and forth from work to laid-off, and how the most pressing financial questions they have are about day-to-day finances.

Yes, today, we’re going to discuss the B-Word: Budget.

So first off, I have only met a small (and I mean small) hand full of clients who enjoy budgeting. For most, a budget is a set of handcuffs from which they want to break free. Because, as many have experienced, you typically build a budget when money is becoming an issue. With that perspective, the goal of a budget is to eventually ditch the budget altogether!

I like to tell my clients that a budget is much less important to financial success than one may think. If the goal of budgeting is to buy yourself time until you can catch up on bills or get a pay raise at work, you end up locking yourself in a vicious cycle of never feeling at peace with your finances.

So what’s the solution? Is there an alternative, or is it all doom and gloom?

Never fear, Garrett’s super-helpful-and-wildly-inspirational blog post is here!

Let’s talk about perspective and psychology for a moment.

If we look at our spending habits in the way described above, we are always looking for a change. Intrinsically, our financial plan relies on a constant swing from a financial freedom to financial restriction. In that case, budgeting is the consequence of either reckless spending (i.e. recovering from Christmas), or bad luck (an unexpectedly large repair to your car). The goal is to choke back spending to a point where you can ditch the budget and get on with life. The only problem is that Christmas is a yearly holiday and you never know when the transmission will fall out of your car.

What if we looked at budgeting as a behavior rather than a prison sentence? When you count each individual dollar, it’s hard to imagine, but if we look at your budget as a filter, we can avoid the repeat offenses.

Here’s how I see it. There are only three types of expenses:

  1. Necessary (needs)
  2. Unnecessary (wants)
  3. Waste

Obviously this is an oversimplification, but the process of creating a behaviour starts with making things simple.

So, first step: Define your needs. Traditionally, these only include the items that are required to take care of yourself and your family. Rent, groceries (not snacks), clothing (basic, not ‘extra’), etc. At the end of the day, when you look at your list of ‘needs’, you should not be able to remove anything from that list without the risk of mortal suffering.

Wants are a bit different, but may be extensions of needs. For example, I have 10GB of data with my phone plan. Do I need 10GB? Absolutely not. I don’t really need any data. For business, I need a phone, but the additions to my plan (and the phone itself) are all wants and not needs. This would extend to designer clothing, snacks, and other items that can be removed from your life without affecting your foundational well-being.

Waste is everything that falls through the cracks. When I sit down with clients and start the discussion around budgeting, we make a list of everything they expect for monthly expenses. We then compare that to how much money they bring in monthly. Quite often, we look at the difference and see that there should be a couple hundred dollars left over.

When I ask them if that feels right, they seldom agree. Even though their ‘budget’ says they should have $500 in unallocated income, they often feel like they live paycheck to paycheck. This is where ‘waste’ comes into play. We sometimes refer to this as the “latte factor”. No one budgets for coffee, because it’s typically such a small expense. But when you get a Starbucks coffee 4 days a week, at $5 a drink, the waste adds up. Inevitably, there will almost always be some degree of waste in a budget, but the behaviour change we want to build will allow us to not sacrifice the “Needs” and “Wants” for “Waste”.

That brings us to a few general rules of thumb:

First: Pay yourself first. This seems like an obvious strategy, but it is often disregarded in practice. When you get paid, do you start by paying off your rent, putting money onto the credit card, and making a grocery run? If there’s any money left over, you take yourself our for a nice lunch? What happens at the end of the month? Most often, unless your income far exceeds your expenses, you are waiting eagerly for the next paycheck. Paying yourself first means that you put money into savings before you do anything else. This requires knowing what your needs are, because you will have to pay for those, but get some money set aside for emergencies or long term savings before you get caught up in the extra stuff. Often, the ‘savings’ portion of someone’s budget is left for the end. They say to themselves, “If there is anything left after my expenses, my lunches, and my lattes, I’ll put something away for the future”.

The problem is that there is almost never money left, because there is always something that seems to take priority. For example, debt. Getting into the habit of paying yourself first can a) change your mindset around all your other expenses, and b) allow you to not rely on debt as much.

Think about it this way: most of my clients SHOULD have a few hundred dollars in unallocated income each month. If they put that money into a savings account first, then dealt with other needs, then wants, they may still have some money left for their lattes, but they know that they can spend that extra money without sacrificing their future savings goals.

Second: Budget your waste. If drinking expensive coffee is a common occurrence for you, don’t leave it in the waste category. If it isn’t something you want to give up entirely, start to track it. Sometimes the realization of how much it burdens your expenses can give the expense new perspective. This is true whether it’s weekly coffee, multiple streaming subscriptions, or other extra purchases.

Third: Think before you spend. The point of changing your behaviour around budgeting is that it should be treated as an exercise and not a punishment. Instead of looking at cutting expenses as a consequence, think about it as an opportunity to have more options in the future. The mental shift takes time and attention.

I have heard of multiple devices that have been used successfully to help with the shift. One of them is freezing your credit card in a block of ice or putting it in the fridge. The simple act of having to go to the freezer to get your credit card before making an online purchase gives you an opportunity to rethink your purchase decision. How easy has online shopping made it to buy something without thinking? They save your credit card information, have your address saved and ready to go. All you have to do is press “Continue” and it’s at your door a few days later. Their goal is to give you as little time as possible to change your mind.

Another tactic is to put all your coffee (or other activity) money in an envelope. This forces you to see the bills before you buy, rather than being able to ‘tap’ for $5 here or there. It takes effort, and it is awkward at first, but it gives you an opportunity to question whether or not you should be buying it.

The third tactic is a simple reward system. I’ve used this successfully in the past, especially when it comes to buying coffee. If I’m craving something sweet, I’ll tell myself that I have to accomplish something first. This could be as simple as cleaning the bathrooms, doing the dishes, or running an errand I’ve put off while I’m out. Sometimes, I still get a coffee, which is perfectly fine. Other times, I finish my task and the craving has subsided. All of a sudden, I’ve transitioned my mental space from needing that coffee to something else entirely. Not only have I crossed something off my to-do list, but I’ve also distracted myself long enough to let the craving pass. I’d say this has reduced my coffee expenditures by 50%.

Here’s what I’m not saying.

I’m NOT saying that budgets are bad, or that you shouldn’t use a complex budget system to track your expenses. I have seen clients use physical (or digital) budgets with great success and failure. The element that is often missing from people when they fail at budgeting is their mindset. They define financial freedom as being able to spend however much they want and indulge every craving without needing to consider consequences. That’s quite often not the case. Financial freedom is having a process that allows you to spend without sacrificing your future. Some people achieve this by finding a profession that pays such a high income that they don’t have to put on any restraints, but many people’s reality dictates that there is some form of discipline in place.

So where do I start?

It takes time and energy to make a change. Right now, if it weren’t for lockdowns, I’m sure we’d be witnessing the New Year’s rush at the gym. People head in with the idea of cutting out all their bad habits and creating a “New Me”. The problem is that, by February, they’ve dropped the 5 pounds, feel like they were successful, and revert to their old habits. The people who are at the gym year round have built dedicated processes and habits into their lifestyle to make their physical health a priority.

It is no different with budgeting. A new years diet simply restricts you until you’ve lost weight, but the habits that you built over the rest of the year are still there when you let your guard down.

So start with the simple things. Write down what falls into your needs, wants and waste categories. Look at the ways you spend your money and start with small and manageable changes. The gym enthusiasts didn’t start out by going to the gym 5 days a week and eating super healthy. They started by cutting McDonalds out of their diet and replacing it with a home cooked meal. Consistent small changes make a long lasting difference.

There’s a 1% rule that I like to reference. If you make a 1% change to your lifestyle each week, you are 52% better off by the end of the year.

All it takes are small consistent changes to be successful.

First-Time Homebuyers: Guide to the Buyer

First-Time Homebuyers: Guide to the Buyer

 “To rent, or not to rent?”

That is the question facing a lot of young people today. In my position, I have heard just about every consideration and factor people use to make this decision. The overwhelming comment I hear is “I don’t want to pay someone else’s mortgage”. I’ve said it, and to an extent, I still agree with it.

I have to frame my recommendation based on the bigger picture. The decision is often more complicated than people anticipate. Different factors I consider when helping someone decide on whether they should ‘pull the trigger’ on a house purchase are: cash flow, risk exposure, equity, unexpected costs, and liquidity. Cash flow is by far the biggest consideration.

Cash-Flow

When I was starting my career as a paramedic in Sudbury, my wife and I entertained the idea of purchasing a house. My views on paying someone else’s mortgage were set in stone, and I wanted to move away from renting as quickly as I could. What stopped us (and I’m glad it did) was cash flow. We had an awesome renting situation and if we were to jump into a position of ownership, it would have made our financial situation tight. We would have had to pull back on other expenses (mainly luxuries), to accommodate the mortgage. In essence, we would be ‘house-poor’.

Risk Exposure

This has to do with your down payment. If you save $30,000 for a down payment, you may feel prepared for the purchase. What happens if you use all of your savings to buy a house, then lose your job or have an unexpected expense? Are you in a position where buying a house means sacrificing your emergency fund? We can transition the conversation to the use of debt instruments (credit cards, lines of credit, etc.) as a temporary ‘fix’, but I think most people would agree that going into more debt is not an ideal outcome.

Equity

It’s hard to argue against the investment growth attached to real estate. In MOST cases, real estate grows in value, but we are currently living in a ‘bubble’. The unfortunate thing about bubbles is that they eventually burst. We are strolling into a period of time where home owners are statistically making less (compared to the cost of living), saving less, and in more debt. The idea that a 25 year old can be a home owner on a normal income is becoming less appealing (and more unlikely) because it puts them in a large financial obligation that is unsustainable. This becomes even more apparent in bigger cities like Toronto and Ottawa. I was working with a couple a few months ago and their view on their house was that they would ‘keep it as long as they could’. Building equity is great, but sacrificing stability and flexibility is sometimes too high a cost.

Unexpected Costs

If you’re a renter, you may have experienced the inconvenience of having to call your landlord when the hot water tank stops working. Now imagine if you had to pay for the repair yourself? Stack this on the unexpected costs from lawyers, accountants, taxes, etc. and it can make a manageable mortgage seem overwhelming.

Liquidity

Liquidity is simply the ability to get cash from your investment. If you had to sell everything you own and cash in all of your investments, how hard would it be to sell your house? And would you have to sacrifice the equity you were building to sell it quickly? Today in Kingston, we’re in a seller’s market. When the market shifts, the buyer will hold the power to get the most bang for their buck, and it makes it hard to protect the equity you hope to rely on in the future.

Government Help?

New home buyers may have heard of assistance programs like CMHC (Canadian Mortgage and Housing Corporation) and the government’s First Time Homebuyer’s Incentive. These are offered to help young people buy their first house, because even the government realizes that there is a housing bubble. CMHC fees (1.8-4% of your mortgage) are essentially a mortgage insurance that you must pay into unless you can produce a 20% down payment on your first home. This coverage protects both the buyer and the lender in the event that you can’t pay your mortgage.

The First Time Homebuyer’s Incentive is a bit different. The government essentially steps in and funds 5%-10% of the value of your new home with the stipulation that you pay them back the same percentage when you sell. This means that if you buy a house for $300,000 and they give you $15,000 (5%), you’ll owe them 5% of whatever you sell the house for. A few years go by and you sell the house for $350,000. You’ll also be writing a cheque to the government for $17,500.

There’s always a catch, and with this incentive, the catch is that the government gets to participate in the built-up equity within your home without taking any risk. Whether you sell based on your own decision, or the house is forfeited to the lender, they will get their money back. So the question I get asked is, “When would it make sense to do this”? and it’s a great question!

There are two streams of thought in my mind. First, I try to remember that ‘cash flow is king’. If the 5% from the government allows you to have more flexibility with your cash flow to save and invest, you may come out ahead. This way of thinking holds true as long as you don’t actively put money into your house. For example, if you were to buy the house and take the government incentive, you have created some flexibility with your cash flow. If you were to take your excess cash flow, save it, and use it to re-do the kitchen, you’ve increased the value of the house, and in doing so, the value of the government’s return on it’s investment.

Now there’s also the second consideration, and that is CMHC fees. If you have to pay CMHC fees, your mortgage is subject to an insurance cost of at least 1.8%. Currently, on the CMHC mortgage calculator, the rate is 4%. So, you buy your house for $300,000 and you have your 10% down payment. Whether you take the government incentive or not, you’ll be subject to CMHC fees. On the other hand, if you have 15% on your own and use the government incentive to take you to the 20% threshhold, you’ll end up potentially saving money. For example, a $300,000 house with a 15% down payment would result in a mortgage of $255,000 + $10,200 in CMHC fees (4%). A 20% down payment would save you the CMHC fees and in order to forfeit the equivalent amount to the government’s investment return, your home’s value would have to grow to a value of $504,000 ($25,200 = 5% of $504,000). That result is unlikely, and if it happens, you wouldn’t have much to complain about UNLESS the equity in the house was built on costly home improvements.

What’s the Real Return on Investment?

For math students, think about it this way. Every dollar you put into your house, you’ll repay at least 5 cents (but usually more) to the government. A $10,000 renovation may raise the value of the house by $15,000, of which the government will recapture $750. You still make $4250 in equity, but instead of paying back just 5%, you’re siphoning off 7.5% of your additional investment back to the government.

So, my final thoughts on buying a house as a young adult?

Be smart.

Don’t get sucked into the idea that you “have to own a house by the time you’re in your mid 20’s”. Without wanting to sound disrespectful, it’s an idea ingrained in our minds by an older generation who had different considerations to deal with than we have today. If you want/need to buy a house, be prepared for the reality and expect the unexpected costs that are associated with ownership. If you can take part in the housing market without stretching yourself too thin, it can be a good way to build long-term equity, but it’s not the guaranteed investment it’s made out to be. The fact that the government is increasing support for young buyers is a telling sign that they recognize the unsustainable growth that the housing market has been subject to over previous years. If you decide to buy a house, think about how the different programs and incentives will hinder you or benefit you in the long run.

Purchasing Power: The Effect Time Has on Your Money

Purchasing Power: The Effect Time Has on Your Money

The market is a scary place. If you decide to open up the Globe and Mail to check the daily news, you’ll find a stock market ‘ticker’ sitting smack-dab in the middle of the page. This is the equivalent to vending machines putting the most popular candy at eye level. Right now, with the current market situation, the tickers are often red, and from a psychological standpoint, red is a dangerous colour.

So in times of uncertainty like this, a common reaction is to revert to hiding your money under your mattress. Though it’s not a terrible idea to keep some cash on hand for emergencies, did you know that you are actually losing money by doing that?

Most people think they are protecting their wealth by putting it in a shoe box and leaving it alone, but in reality (and in market terms) that money is showing a negative return year after year. The principle is called the ‘Erosion of Purchasing Power’.

What is Purchasing Power?

Imagine your grandparents (or great grandparents) living through World War 1. 1917 was the highest inflation year in Canadian history at ~19%. What does that mean? The loaf of bread or jug of milk that cost $1 at the beginning of the year, cost $1.19 by Christmas. Inflation is the increased (or decreased) cost of goods and services over a period of time (usually a year).

1917 was an anomaly. We had just come out of the World War, the global economic landscape was changing, and a lot of policies were born out of that period of time. More recently, the government has strictly tried to maintain an inflation rate of ~2%/year.

Now, lets go back to the shoe box full of cash in the closet. Let’s assume that there is $10,000 in the box and it was put aside in 1970 as a way to start saving for retirement. Back in the 70’s, you could buy a house in Toronto for ~$30,000, so $10,000 was a substantial amount of money. The yearly income in Canada in the 70’s was averaging between $5,500 and $7,000/year (based on minimum wage being $2.60/hr).

First off, having $10,000 to put in a shoe box for retirement in the 70’s was a big deal. That was almost 2 years worth of salary. At the time, you could buy 1/3 of a home in Toronto, live without going to work for almost 2 years, or achieve a vast number of other objectives usually reserved for the top 1%.

But the box is in your closet collecting dust. Inflation is slowly raising the price of goods and services around you and you forget about the cash. Fast forward to 2020. You are ready to retire. You suddenly remember you stashed this great wealth in your closet and you go to collect it. Sadly, you see just $10,000 in a box.

The loaf of bread that cost $1 now costs $4. The land alone where you could have bought the $30,000 house is worth $800,000+.

Your $10,000 will afford you a nice vacation, but doesn’t come close to the basic income needed for a family to survive. The power that you had to purchase goods with that $10,000 has declined dramatically over the 50 years that it sat in a box.

How do you avoid inflation?

Short answer is that you can’t. Inflation is a result of a variety of factors including currency value, debt load, import/export ratios, interest rates, and taxation. The good news is that it can be counteracted. The new equivalent to a box in the closet is GIC’s (Guaranteed Interest Certificate). They are the ultra-low risk investment that will help your money keep pace with inflation.

But do you want all of your money to keep pace with inflation, or would you rather take some risk and have the land worth $800,000?

The Three Bucket Approach

This is some free advice, and I use this template with a lot of clients because it quenches many of their hesitations and concerns.

Imagine you have 3 buckets, and all of your savings will be in one of those 3 buckets. The first bucket is your bank account or cash in the shoe box. Its purpose is to provide a source of cash that can be accessed quickly in case of emergency. If you need to book a quick flight or get a repair on a car, this is where you turn to first.

Side Note: Many people accept credit cards as their “quick access” solution, but that more often leads to major debt problems.

The second bucket is your short term goals. The goals themselves are dependent on you as an individual, but the idea is to provide quick access (liquidity) while obtaining some growth for the future. often this bucket contains a portion of their emergency fund. It allows your emergency fund to reflect the changes brought on by inflation.

The third bucket is your long term goals. For some people, there would be very little change in how your long term and short term goals are invested, but generically, you can afford to accept more risk when you have a longer period of time. Higher risk should result in higher returns.

This approach is a foundational piece to people’s investment strategy, and a key deterrent to the erosion of purchasing power. For perspective, if the $10,000 from our shoe box simply kept pace with inflation (a non-adventurous goal), it would be worth ~$68,162.86. Back in 1970, $10,000 gave you options. In 2020, $10,000 doesn’t reach as far or present the same opportunity.

Now if we translate the conversation towards the future, what kind of freedom would you have if you let your money’s purchasing power erode? Are you helping your ‘future self’ accomplish their goals? Planning for the future is more than putting money into a box. It’s asking yourself: how will this money impact my family’s quality of life down the road? Do you want to see the opportunities diminish with time, or know that when the time comes, you’ll have to tools available to take advantage of whatever comes your way?

The Novice Investor: Piecing Together Your Investment Vehicle

The Novice Investor: Piecing Together Your Investment Vehicle

Investing… Stocks… Bonds… Mutual Funds… Markets… Internal Rates of Return… Value versus Growth Investing… ESG Investing… Portfolios… ETFs… Savings Rates… Risk Profiles…

There is so much out there when it comes to the parts and principles of investing that it can be hard to digest. On one hand, we are told to invest, and on the other, we are told to not do anything without knowing what we’re doing. That ideology can force a rift in people’s planning and cause them to be idle. I have had clients who sit on tens of thousands of dollars in their bank account, and most often the reason is that they don’t understand their options.

The richest men in the world have built their fortunes by having multiple streams of income. Jeff Bezos, the founder and owner of Amazon, is currently the richest man on earth. If we looked at his income strategy, you would see multiple inflows. First, he has his salary from Amazon. Secondly, he has his Amazon shares that increase in value as the company grows. Third, I imagine we would find that he has money tucked away into shares of other companies, which are also growing. All of these sources accumulate to roughly $2500 per second in income (from “The Registered Citizen”).

Especially with the current ongoing crisis, there are lots of headlines that say you should stay away from the world markets. Oddly enough, you can often find a link nearby that will tell you how to setup a ‘side-gig’ from home to earn more money. Each person has a unique situation, and in this post, I would like to explore how you can design your own secondary income streams. I will be using the analogy of a car, as it makes it easier to conceptualize investment components.

First, I would like to define the difference between ‘Active’ and ‘Passive’ income. It’s pretty self-explanatory, but active income (also known as “earned income”) refers to income you have to physically make. This would include going out to a job and getting paid a wage/salary. Passive income on the other hand is income gained for you by others. Investing falls into the category of passive income.

For the purpose of simplicity, I will speak in terms of mutual funds (which I will define later). Investing can be broken down into two parts: Equity and Fixed Income.

Equity:

Equities, also known as stocks, are the engine of our car. To have ‘equity’ in something is to own it. For example, Jeff Bezos has equity in Amazon because he owns shares (or stock) in the company. As the company increases in value, the market price of your shares increases. This means that every time you purchase something on Amazon, not only does Amazon’s revenue increase (which increases Jeff Bezos’s salary or bonus), it also increases the value of the company, therefore increasing the price of each share.

It doesn’t necessarily have to be companies. There are some investments that hold their equity in other areas, such as gold. In this case, the fund manager will buy gold, and sell ‘shares’ of the gold on the open market. As the value of gold increases, the value of each share also increases and people can sell their shares for a profit. 

Equities can define how fast and how long your car will run. Within equities, you can dive into asset qualities and other specifics that can be as different as the electric engine is to a V8 supercharged sports car’s engine. Equities give us the power and growth potential we need to earn our passive income.

Fixed Income:

Fixed income (also known as ‘bonds’) are the safety features of the car and this form of investment is far simpler than equities. In every sense of the phrase, it is an “IOU”. You, as the investor, are lending money to governments or companies for them to use in their operations. This is a lower risk and lower reward strategy for investing. The company or government gets a loan, and you receive a regular interest payment. For example, if you were to lend Amazon $10,000, they would pay you an interest payment (i.e. 1.5% or $150) either annually or divided monthly and return the $10,000 balance at the end of the term.

One common factor you’ll often hear about bonds is related to the interest rate.

If we paused time and looked at interest rates now, we would see a sharp decline in a new bond compared to 1 year ago. This is because the Bank of Canada (along with other country’s banks) have dropped interest rates in an attempt to stimulate the economy. Interest rates play a large role in the ‘risk’ associated with a bond, but that analysis is for another post.

Traditionally, bonds are a much safer way to invest, as there is little risk of a government or company not honouring and paying that debt back, but it also carries a lower reward. Your $10,000 does not participate in company growth in the same way equities do.

In regards to it’s relationship to our car analogy, with fixed income being the safety system, bonds protect the car as it moves. If there was an event that was cause for concern (for example, the markets dropped in value and you were unable to go to work), the fixed income component would preserve a portion of the investment to limit the damage.

The whole purpose and the relationship between equities and fixed income is to get you from Point A (where you are now financially) to Point B (retirement, first house, education, etc.). This is where mutual funds come into play.

Mutual Funds:

What are mutual funds?

Again, by their name, it is easy to guess that they are a funds designed to be invested by multiple people pooling their money toward a mutual goal. There are lots of different types of mutual funds. For example, there are funds designed for people who want to invest in certain parts of the world, different industries, or even subject to certain moral or ethical standards.

At it’s core, a mutual fund is a makeup of equities and/or bonds that provide growth opportunity while minimizing the downside potential. Since everyone’s risk tolerance and time horizon is different, finding the right mutual fund (or funds) to invest in takes more thought than most people would imagine. If you are considered ‘high-risk’ you may want a mutual fund that holds more equities than bonds. Vice versa, if you were closer to retirement and wanted to preserve your investment, you would lean toward a higher allocation of fixed income and safety.

Common Question: How is this better than buying individual stocks?

Quick answer: it depends. Do you have the time?

A long time advisor once shared an analogy with me that I thought was powerful. Unfortunately, it is highly visual, but I will do my best to paint the scene.

Diversification is one of the main strategies used by mutual funds. Imagine you have a pencil, and that pencil represents a stock. It can be any stock you’d like, but it is one single stock. You have heard that this company has a strong future and will grow in value for you, so you ‘get in at the ground floor’, and invest everything into that company. Now, fast forward in time. We have an event such as the recession of 2008, the tech bubble of 2000, or the current COVID-19 crisis. That company is put under financial stress, as this is an unforeseen position and the world is rapidly changing. Some companies are able to adapt and survive, and others can’t change fast enough and are forced to shut down. A real example of this may be the loss of mega-companies such as Sears. Sears couldn’t adapt to cater to the online shopper and subsequently ‘died out’. Any stock that Sears had is worthless today.

bunch of pencilsSo… take your imaginary pencil and bend it. Imagine that you bending the pencil is the company going through a stressful period. Does it snap? Maybe not, but you, as the share holder, are not protected from the companies failure. The money you invested could be gone.

Now imagine you have a box of 50 pencils, each pencil still representing a single stock. You take them out of the box, you strap an elastic band around them, and you try to bend them all together.

They don’t break so easily.

The difference between trying to buy individual stocks and buying a mutual fund, is that the mutual fund offers greater diversity and protection from market fluctuation. Theoretically, you could go out and buy 50 individual stocks and manually create your own diversification, but most people would find it takes a lot of work to purchase, research, value, sell, re-balance and execute a specific investment strategy while also earning income at their own career. The mutual fund offers a much simpler solution to investors and can create a stream of passive income.

Summary:

The value of not putting all of your eggs in one basket is that you are more protected from a depressed market. A crazy and unexpected event occurs and some of the companies feel the stress, but even if one company falls to the wayside, your portfolio is held together by the remaining mix of equities and fixed income.

Creating passive income can be more than working a 9-to-5 career and investing in mutual funds, but investments are a staple in most successful people’s financial structure.

I want to circle back to my original analogy.

A car has a single purpose. The kind of car, how fast you drive, and where you are going is up to you. But at the end of the day, the car’s role is to transport you from where you are now to where you want to be in the future. If you start your journey without enough gas in the tank or with worn out tires, you are putting yourself at risk of stalling or having problems down the road. Like an investment strategy, a car with proper care and maintenance will ensure you eventually reach your goal.

Proper investment strategies can provide peace of mind when traveling down life’s roads. You never know when there will be an unexpected twist or turn, and being prepared is a key to success.

Investment Psychology: greed, fear

Investment Psychology: greed, fear

I’ve been putting together a presentation for a group of young professionals and I have been focusing a lot of the discussion around investment psychology. This illustration came up quite a bit and I think it demonstrates a problem with common investment philosophy. The statistics show us that people love to buy high and sell low, and Carl Richards’ book presents that really well with this picture. It was a reminder to me why good advice is so important to navigating today’s financial landscape.

Christmas debt – ‘Everyone’ has it

Christmas debt – ‘Everyone’ has it

Getting ready for Christmas and New Years and wondering where the money is coming from? Or are you thinking about how you’ll be paying back the debt created by the holiday season? There are creative ways to access money without racking up your credit cards and emptying your savings account. It all starts with a plan to provide access to your money when you need it.
The First Jump

The First Jump

Saving is hard work. For most families, it can be hard to adopt the “Live tomorrow on today’s dollars” mentality. The reality is that most Canadian families live paycheck to paycheck. Even if you believe that you should be saving for retirement (or other goals), it can be overwhelming to understand where that money comes. How do you live tomorrow on today’s dollars if you can hardly live today with today’s dollars?

This is where a new mentality comes into play.

They say the hardest dollar to save is the first dollar. Like diving boards at a swimming pool, that first jump in the water is the most terrifying as a child. You stand on the edge of the water, and your mind is focused on fear. “What happens if I slip? Will my head come above the water? Will I be okay?”

That first jump teaches you a critical lesson. You can do it, and it wasn’t as bad as you thought it would be. That experience leads to higher and higher jumps, and before you know it, you’re at the top of the ladder looking down and wondering why you were scared in the first place.

Saving for your future begins with the first commitment to jump. It takes courage and it takes discipline.

Paying Down Debt

Paying Down Debt

“Debt repayment can be the best investment they can make. The less debt you have, the more you can save for the future.” We live in a culture that says “Live today on tomorrow’s money”. It’s a vicious cycle that puts restrictions on your financial freedom.

Read the entire article from the Financial Post (January 17, 2019) – ‘Paying down debt should be a priority for low income workers, but it’s still important to save, experts say‘.