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.

Factcheck your Finances: Understanding the Cost of Investing

Factcheck your Finances: Understanding the Cost of Investing

Any service has a cost. If I were to call a plumber, I would be charged a fee for the service call as well as the repair cost. That’s over and above the cost of his or her labour. The benefit to me is that I get to enjoy a working tap or a drain that keeps water from getting all over my floor.

Weighing whether or not you need the service of a Financial Advisor is a similar decision. As a Financial Advisor, my ‘rule-of-thumb’ is to say that you should have an advisor, but that may not always be the case. The real question that needs to be answered on a personal level, is ‘does the cost of investing outweigh the value of investing?‘.

A Tale of Two Investors

Let’s paint two pictures. The first is of a person who has experience in financial industry, general knowledge of economics, AND has time to do their research. Side note: a ‘general knowledge of economics’ seems pretty vague, but I define it as knowing what factors go into making investment decisions and knowing what questions to ask. If you don’t know enough to understand what you DON’T know, you’re in for a lot of surprises.

The second person is someone who works away from the financial industry, may or may not enjoy trying to follow the markets, but doesn’t have the time/energy to keep up to date with what’s going on in the investment world. We’ll come back to them in a second.

What is the Cost of Investing?

First, I’d like to go over fees and what they actually represent.

Usually people talk about fees as if they are interest rates on a loan, the idea being: lower is better. The ‘standard’ fee you will see attached to different funds and ETFs is a MER (Management Expense Ratio). This is just one of the factors that goes into the ‘cost of investing‘. This fee is shared by the investment company and investment dealer, and is how your advisor gets paid.

For example, if a Fidelity Global Equity fund had an MER of 2.5%, you would see 0.208% (2.5%/12) deducted from your account each month. A portion of this fee goes to Fidelity Investments to pay their expenses (taxes, administration costs, registration costs for registered plans, and management/research). The other part goes to the dealer and pays similar expenses on their side. Your advisor may get paid a salary (more common in banks) or they’ll get a portion of the dealer’s fee.

ETFs have much lower expenses than mutual funds simply because they are typically not actively managed (buying and selling stocks on a daily basis to try and out perform the market). If I was building an ETF, I would look at an index (the S&P 500 for example) and copy/paste it into a fund. I would buy all the same companies and hold them in the same proportions. Once the initial stocks are purchased, very little work goes into the maintenance of the ETF.

ETFs have evolved and now have the availability of limited research options which help bridge the gap between a ‘no-research’ model and a mutual fund. A mutual fund would use the S&P 500 as a benchmark and build a portfolio with a similar mandate, but with the objective of beating the index. Their goal would be to outperform the S&P 500 by buying better companies, adjusting their asset proportions, or waiting until some of the ‘over-priced’ companies go ‘on sale’. This requires a team of analysts and managers, and therefore requires a higher fee.

The other factors that go into the cost of investing are time and flexibility, among others. When you put money into the market, whether through your advisor or through third-party services, you are essentially tying up that money. You, as the investor, sacrifice your financial flexibility. If you put money into a non-callable (locked-in) bond for example, part of your return is designed to compensate you for not having access to your money for a period of time. Some funds will also invoke a ‘short term trading fee’ if money is invested and devested within a short period of time (usually three months). Time, on the other hand, is a resource that is in finite supply. You can either use your own time to do research yourself or pay a professional to do that research for you (seen in MERs).

What are the options for DIYers?

If you have internet access and a set of eyes, you’ve probably seen many ads for companies such as Wealthsimple, Questrade, or some other DIY investment platforms. These services boast low or $0 fees as their lure away from the traditional banking relationship. So it begs the question, “will I be served better by advice or by a lower fee?”. On these platforms, you are often left to your own devices to chose individual stocks or ETFs, or you’re lumped together with other DIYers and placed in 1 of maybe 5 portfolios preselected by them based on a questionnaire you answered.

If we look at the question above and apply it to investor #1, the answer may be ‘lower fee’, and I don’t think that’s a bad assumption. The beauty of the low cost model is that if you’re already making all the decisions with your money at the bank, you can have a similar experience without paying for someone else to facilitate your plan. You have the ability to look at the investment market through an educated lens and make decisions that will generally lead in the right direction.

Investor #2 is a different story. I follow reddit threads every now and again because it gives me a unique look at how DIY investors view and create their own portfolios. Some do a great job and talk about diversification, asset allocation, and contribution disciplines. Others try to speculate and ‘guess’ at how companies will respond to the markets based on their own bias. For example, one individual invested in an outdoor motorsports company because they liked their ATVs. There was no due diligence done around the company,  it was simply a bias towards their product.

The most common ‘theme’ I noticed is that most of the ‘redditors’ had investment proposals already created. They went online in search of validation and confidence from other users that they were making the best decisions. More simply put, they were bouncing their ideas off of this internet forum and using the other users as their collective ‘advisor’. Sometimes that works and you get some great feedback. Other times you get the opinion of the ‘wrong’ people and you end up in a ‘blind leading the blind’ situation.

Are you #1 or #2?

Rarely do people connect themselves perfectly to investor #1 or #2. My experience is that investors fall on a spectrum. Some clients want to have their hand held and will take my advice and recommendations very willingly. Some have their own understandings and background knowledge and use me to facilitate and ‘fact-check’ their understanding. My role, and how I earn my ‘fee’ as an advisor is to provide enough value to my client that they don’t resent the fee they pay.

This looks different for each client. For my hand-held clients, it’s giving them access to recommendations that they wouldn’t have come up with themselves. That fee saves them time and energy when it comes to decision making, while also providing confidence that there isn’t an obvious ‘hole’ in their plan. For my independent clients, it’s a matter of expressing ‘approval’ or alternatives that they may not have thought of or known existed. Either way, if I (or any other advisor) is not providing enough value to justify the client’s expense, we should not be surprised when a client moves to a different platform.

Your choice.

I think that choosing a financial advisor is like anything else in life. If my car breaks down, I can choose to fix it myself or take it to a mechanic. He’s a professional who has spent years honing his abilities to recognize and diagnose problems. He also has the tools to fix them. For me to do it on my own means I have to spend time and money going out and researching my car’s problem, buying the tools to fix it, and hoping I get it right. Financial advising SHOULD be the same, and if you find yourself wondering where your advisor adds value, you should be re-evaluating their role in your financial planning.

Having an advisor adds to your cost of investing, but it can also produce better rewards. Those rewards may not always be financial, but they should be valuable. Some of the ways you should seek value is through advice on how to reduce your taxable income, how to best take income in retirement, how to best save for specific goals, and/or how to feel secure in your portfolio’s risk-to-reward relationship.

Don’t be afraid to be picky with choosing your advisor. Advisors should be knowledgeable and able to make un-biased and educated recommendations that have your best interests at heart. You work hard for your wealth, and you should put your trust in someone who understands the importance of protecting it.


In Times of Turmoil

In Times of Turmoil

I don’t think anyone would be confident in saying that they are comfortable in times of turmoil. Whether we’re talking about finances or family, by definition, turmoil is a distruptive force that can shake the “norm”. Though we are currently facing a “time of turmoil” as COVID-19 isolation and economic factors play their role in dustrupting our normal way of life, this blog post is less to do with what is going on outside our front doors, and more to do with how we learn from this experience.

There will be a time when we look back on this crisis, however long it lasts, and a number of things may come to mind. For some, the memories may focus in on the hardship of unemployment and family struggles. For others, they’ll remember the endless TikTok videos about how people are creatively using their obscene amounts of toilet paper. The question I will be asking myself when we return to a period of normality, is “how did I grow through this change?”

I am a person who thrives during stress. When I was a paramedic in Sudbury, I loved the high stakes calls, because it gave me a chance to use the skills I had spent years learning. When we finished a high-stress call, we would often have a period of discussion, called a debrief. It allowed us a chance to talk openly about the call, but it also gave us an opportunity to grow and improve our craft. We would discuss the positives and negatives of the situation, with the goal being to make sure that next time we experienced a situation of turmoil, we were better prepared to face it.

So the question I pose to you, the reader, is this. Imagine we are sitting in a coffee shop in a year’s time. I’m drinking a decaf mocha, we’re still laughing about how Trudeau said “speaking moistly” on live television, and everything is back to “normal”. What would you want to have happened in your life, both personally and professionally, to be able to say, “I grew through the experience and I came out on the other side in better shape than I started.”? For me, I am working at continuing my business as best I can, but I am also using this time to better connect with my family while we’re all together (excluding my brother, who is stuck in Ottawa).

My last “time of turmoil”, was during the time I lived in Alberta. And though it does not compare to the experience we are having as a community, I still came away from my time there having learned important lessons. I worked at a car dealership. Making a long story short, I came away from that experience having learned that money is not worth the sacrifices I was making. That principle has made it easier for me to focus on my new goal of connecting with my family. It takes the edge off of the burden of financial worry, and instead lets me focus on building my business to be client-focused, rather than income-driven.

The bottom line is that change is inevitable. Some of us will change for the better, some will fail to adapt. My advice for those who have a plan, whether financially or personally, is to stick to the plan. One of the best pieces of advice I ever received was from my Dad (who probably got it from someone else, but that’s not important). He said, “Never doubt what you know to be true in the light, when you can’t see it in the dark”. In the world of financial advising, I stress to clients that we “stick to the plan”. But the lesson is true outside of your finances. Take this time to evaluate the goals you had for yourself. Dig up the old “bucket list” and explore how you can achieve those goals and tie up those loose ends. I know that I have a partially finished bachelor’s degree, and this might be the time to finish that part of my education.

However you are dealing with the COVID crisis, start answering the question from the coffee shop. Turn this “turmoil” into a time of opportunity! Start working on the small things that will give you the peace of mind to answer the question, “I’m proud of myself.”

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.