Articles

Salary Vs. Employee Stock Options

   As you grow in your career, you’ll find an increasing number of opportunities that contain Employee Stock Options (ESO) as part of your compensation package. The question is, are these stock options worth it?

What is an ESO?

   An employee stock option is a financial instrument that specifies certain terms as to when you can buy a company’s shares. Most commonly these ESOs will be offered with a set price, and a vesting period.

   While the price is self-explanatory, the vesting period bears careful consideration.

   A vesting period is a predetermined amount of time that must pass before you can execute, or buy, the shares in the option. These can be slowly released over time (33% per year for 3 years), or your options could vest all at once (100% after 3 years). 

Public Vs. Private Stock Options

   A share is simply an ownership stake in the company. That means both public and privately traded companies can offer stock options, but there are considerable differences that you need to understand.

   As a public company is traded on a financial market, those shares are easily bought and sold. This makes it easy to liquidate your position, or unlock the cash that was held behind those shares.

   Private companies aren’t quite so straightforward. 

   For a private company, where there isn’t an open market for those shares, getting rid of them can be considerably more challenging. To sell, you would need to wait for a liquidating event. This could be in the form of a merger, acquisition, or an IPO, or far more infrequently, if the company allows you to sell to a private offer. The key point here is that your money, tied up in shares of a private corporation, could be very hard if not impossible to recover.

Risk Vs. Reward

   Ultimately whether you should look for ESO or salary in your compensation agreement depends on your risk tolerance. Investing in a single company is risky. Stock Options are therefore a riskier option to taking your compensation through salary.

   While we would all like to think our efforts at work will make the company successful, companies rarely hinge on the efforts of just one person. There are a variety of factors at play, which could impact the future share price. While you could see some incredible returns, those same stock options, assuming you can even sell them, might produce a 0% or even negative returns in these ever-changing market conditions.

   Another element of risk is introduced by the vesting period, as a lot can happen in that time. Maybe you realize your job, or the company, isn’t for you. Or the company decides that you aren’t the right fit, or to move in another direction. Anything unvested at that point in time would be lost to you.

   Finally, any compensation tied up in Stock Options isn’t available to you as cash to spend. While the returns on ESOs can be remarkable, they only benefit you if you don’t need the cash now, and can afford to wait for the vesting period and/or liquidating event.

Are ESOs Right For You?

   Ultimately, only you can answer that question depending on your own financial position, and financial goals.

   When I was offered an ESO a couple years ago, I turned down the opportunity in favor of cash in hand. My financial plan had our first home purchase planned, and the cash was more valuable to me than potential returns at an unknown time in the future. Living happily in that first home now, I can say the decision was the right one. 

   But, times today are different for me. If the same opportunity was presented today, I would gladly take on the risk, with the right company.

   So you see, there is no right or wrong answer. How you decide if an ESO is right for you will depend entirely on your situation, and that answer can change as you continue to grow through life. What is important is that you understand your financial plan, where you are, and where you’re going. As long as you’re comfortable with the risk, an ESO might help speed you along your journey.

When Should You Combine Finances

   For many of us, talking about money is a touchy subject. How much we earn, how much we’ve kept, how money makes us feel. Partly because of our baggage that we associate with money, and partly from social pressures, it can seem quite challenging to bring up the topic. 

   How then, with an already potentially sensitive topic, do you bring up shared finances? At what point, if ever, does it change from mine and yours, to ours?

Marriage and Building a Life

   Contrary to popular belief, the “right” time to join incomes and financial resources isn’t when you get married. That milestone does change a lot of things in your life, but combining financial resources isn’t dependent on crossing that bridge.

   Instead, you should bring up the topic of sharing resources when you start building a life, taking on obligations that require inputs from both parties.

   For myself and my partner, that happened when we purchased our first home together. And further reinforced with the addition of our puppy, Sadie, to the family unit. With those financial obligations, it made sense to start pooling our resources, at least in some capacity, to cover the mortgage and veterinary bills.

   Some other couples will face their own milestones at different times in their lives. Maybe it’s after marriage, but it could quite easily be before any knots are tied. 

   More important than opening a joint bank account though, is having those conversations with your significant other. Understanding your partner's relationship with money is essential to having a healthy, loving relationship. 

Questions To Consider Before You Combine Finances

   Before you look at pooled resources, you should make sure you understand what you’re getting yourself into. This means an open and honest conversation is in order. Here are some questions that you should be able to answer about your partner:

Do they have any outstanding debts? School loans, automotive loans, mortgages, or credit card debt?

What are their spending habits like? How much are they setting aside for the future?

What does retirement look like? Lifestyle? Age? What is their plan to get there?

How much can you spend without asking permission? (This is a key - discretionary spending is essential for the freedom it offers.)

How does money make them feel? What kind of emotional baggage are you loading into your truck?

   There aren’t any wrong answers here. But with conflict over money being a leading cause of marital problems, they are very important questions to ask. The right decisions are only possible when you start from an informed foundation.

   Combining your financial resources isn’t for everyone. But done for the right reasons, it can certainly make your lives easier. As long as you enter into the arrangement with good intentions, and open, honest communication, you’ll be primed for success.

Raise the Stakes

   How long does it take to design and implement a financial plan?

   Recently when posed that question at a virtual conference I was attending, a woman in the crowd volunteered, "6 weeks".

   But that is, quite honestly, bullshit.

   A good financial plan might only take you 4 hours to complete. 4 hours. Not 6 weeks.

   Of course what this lady was implying was that to find those 4 hours, it would take her 6 weeks to complete. It's not a question of how long it takes, but rather how much energy and focus is directed at the problem.

What Are Your Priorities?

   The areas that you choose to focus on will determine the results that you achieve. As Tony Robbins has said throughout his seminars and books; “Where focus goes, energy flows.”

   We all work on what is most important to ourselves, and our accomplishments, in that moment.

   If you are struggling to complete a task in a reasonable amount of time, perhaps it’s time to reevaluate your priorities. Often it isn’t a question of “Is this important?”, because we all have many important decisions and plans to juggle. The question needs to become more specific, “What is the most important thing to do today?” 

   If the 6-week plan lady was in a different set of circumstances; creditors calling, repo-men showing up to take her car. In that situation, her response would have been very different. She would be willing to put in the work now, today, to get started down the path to a brighter financial future.

   Changing your perspective, upping the stakes can help you reevaluate what truly is important, and help you start taking steps to be better tomorrow than you are today. And that doesn’t just apply to your financial plans, but to everything. Your health, your relationships, your career. Anything that isn’t where it could be in your idealized future can benefit from this process of prioritization.

Up the Stakes

   If you are still struggling to make the daily disciplines a reality, try bringing the future closer to you. Not walking around the block today isn’t going to kill you tomorrow. But what if it did? That compounded loss of strength will catch up to you eventually. Often we put things off for longer than we should, until it’s too late to change without radical intervention.

   The US Government Accountability Office estimates that close to half of Americans aged 55 and over have no retirement savings. That’s tens of millions of adults who have delayed taking action for too long, leaving themselves vulnerable. But as the old Chinese proverb says, The best time to plant a tree was 20 years ago, the second best time is now.

   What are you going to start doing differently today, to ensure that your future is all you dream of and more?

Who Should You Invest With?

   There is an ever increasing number of firms and institutions that are offering investment platforms. But with so much competition springing up, who should you invest with?

What Are Your Financial Goals?

   The first place to start is to look at your financial goals. What types of investments are you looking to hold? Are you planning to manage all your investments yourself? Or is a financial advisor, or a robo-advisor more your speed?

   What types of assets do you want to be invested in? ETFs? Single stocks? Crypto? Real estate?

   Many of the main brokerages that you’ll find, such as those offered by the big banks, have a select listing of available investments. Often if a newer asset class, such as cryptocurrency, is in your plan then a single brokerage often isn’t enough.

   The other element to consider here is the availability of the types of funds you want. Many of the larger, traditional financial institutions carry an increased product offering that you can’t access anywhere else. This is often the case with mutual fund companies, especially with corporate programs if you are so fortunate. The fund selections that you can make through those programs often aren’t even available to the non-institutional investor.

   Once you narrow down what your ideal investments involve, you will be better able to narrow down the list to those platforms that provide all the benefits you need.

Pay to Play

   Of course, narrowing down the list of who can provide you the services you want to use is only the first step. Each of those platforms carries their own set of fees. And those fees aren’t always balanced among the different investments. For example, many firms have somewhat reasonable commissions on stock trading, but the costs to take on more complex financial instruments like options becomes exponentially more expensive.

   Look at your financial plan, what are the costs to perform your desired style of trading? What do those costs mean to your total returns?

   The other side of costs is the benefits that you receive for those fees. What are you actually receiving in exchange for your hard earned dollars? The internet has brought about some magnificent changes, but an automated chatbot certainly doesn’t inspire confidence, especially when dealing with a problem with your financial accounts. The availability to speak with someone who can actually help resolve your problems isn’t something so easily overlooked.

House of Cards

   Going hand in hand with paying to play is the complexity of your financial system. While it is certainly possible to minimize your fees by having investments at a variety of institutions, that also makes it harder for you to keep on top of your balance sheet. There is some merit to having a central dashboard that you can check periodically to know that you are on track financially. 

   With all the various logins, coupled with multi factor authentication, it can already seem harder to access our own accounts than it would be breaking into Fort Knox. We all have busy lives, which means if we can make just one piece a little bit easier, that is truly valuable.

   Unfortunately, as your financial situation evolves, things will continue to change. A new job might mean a new pension/RRSP provider. Or your evolving relationship might see you looking into different financial instruments (like a mortgage or car loan), or even consolidating accounts with your partner. 

   You won’t ever be able to wrest control over everything from the twists of fate. Start with what you can control, your financial goals and plan, and build the best system that you can with what you have now. And periodically check back in to make sure your system is still right for you as you grow through life.

Harvest Time: The Right Plan

   Over the past several weeks, we’ve been pulling in the harvest from the backyard vegetable garden. To satisfy my curiosity, I often compare with other fellow gardeners, looking to see how my harvest compares to theirs. Through those discussions, I’m able to learn what others have done, and apply some of the ideas that have proven success into my own plans.

   Some of the lessons that I learned, if you choose to borrow them, could see you richly rewarded.

Plant Early

   The first lesson that I learned, which undoubtedly resulted in my harvest being smaller than I would have liked, is to plant early.

   I put off getting the seedlings into the ground for several weeks, never quite finding the time to dig out and build the garden plot. That procrastination cost me valuable time, time that I cannot find more of to let my seeds grow.

   If you want an abundant harvest, get to planting early. The longer you tarry, the smaller your rewards will be. With your investments, much like gardening, requires time to grow. If you hesitate too long, you simply won’t have enough time to let those money trees dig deep roots.

Protect Your Plot

   The next lesson is to protect your plot. 

   Checking out other people’s gardens can be an educational moment, but it certainly won’t help you with your own harvest if the weeds and the critters attack your garden while you’re out comparing with your neighbors. Nay, the time you spent coveting thy neighbors juicy tomatoes and crunchy peppers would be better spent ensuring your own garden is healthy and cared for.

   This certainly impacted my garden this year. I didn’t spend enough time watering and tending to those young plants, and my harvest reflects that.

   Spend the time caring for your garden. The investments you make, ensuring that there are no weeds leeching away precious nutrients will pay you back tenfold. And once you’ve got those weeds cleared, get out of the way. It’s hard for that little plant to grow with you standing over it, blocking the sunlight, watching it 24/7.

   To improve your harvest, make sure your plants can grow. Cut out as much of the bad stuff, like investment management fees, that place a drain on your garden. But once you’ve done all you can, selecting the lowest possible investment fees, then get out of the way. Investments, like gardens, need some time and space to flourish beneath that glorious sun.

Happy Harvest

   Harvest time. The final lesson. Take your harvest without complaint.

   This is perhaps the most important lesson. While starting your garden early, and tending to it all summer are essential, when it’s time to pull the produce off the vine there’s naught else you can do to change the outcome. 

   The old adage says it all; you reap what you sow.

   If you didn’t plant early enough. If you didn’t pull the weeds, water the soil, protect your harvest from all that would do it wrong (I’m looking at you, squirrels). If you could have done something differently, but you didn’t, then blame won’t help you now. 

   What-if’s and If-only’s sure don’t fill up the dinner plate.

   Take what you can, from all that you made for yourself. And take it, if not with a smile, then at least without a frown. These are the fruits of your labour after all.

   Fortunately, with gardening, you can always learn from your mistakes, and do something different next year. Financially, you won’t have that second chance luxury. That’s why it’s even more important to learn from those who travelled the roads before you - what strategies work, and what doesn’t. 

   Apply those lessons to your own journey, so that when it does come time for you to bring in your harvest, you’ll be walking in fields of plenty.

EGS: Up In Smoke

   How do you know which ETF to buy?

   With so many options out there, many people are centering their investment decisions on their own core values. This can be seen with the rapidly increasing popularity of ESG funds. 

What is an ESG Fund?

   ESG stands for Environmental, Social, and Governance, which roughly means that the companies selected to be held in the ETF abide by certain constraints. This could be minimal environmental emissions, or good labour relations. Simply put, these funds put your money where your heart is - protecting this world and all that's good in it.

   With climate change concerns, a slew of labour disputes, or corporate scandals rocking the foundations of capitalism, it's no wonder that ESG funds have surged in popularity in recent years.

   But all that glitters isn't gold. Or green in this case.

Europe, The Leading Edge

   With trillions of dollars invested through these funds, it's no wonder that companies are marketing about their green initiatives, their social justice programs, and their strict governance protocols. Unfortunately, as we can see in Europe, many of those marketing efforts are more about blowing smoke than actually following through on those lofty promises.

   After growing by more than 2 trillion dollars from 2016 to 2018, European ESG funds fell under some scrutiny. The subsequent restrictions looked at the 2015 Paris Climate Accords for guidance. What does constitute "green", or environmentally friendly activities. Following the tightening of the ESG definition, money invested in Europe's ESG funds shrunk to 2016 levels, a decline of over 2 trillion dollars.

   Meanwhile, in markets without such strict definitions, the amount of funds in marketed ESG funds skyrocketed, jumping by more than 5 trillion dollars from 2018 to 2020 in the US.

   While that doesn't mean that ESG funds are bad, it does seem to indicate that ESG is now more of a marketing ploy than a real business decision. If, or rather, when regulators do crack down on skirting on the edge of ESG regulations, we should expect that many funds will lose that ESG badge.

Blowing Smoke

   How do you know if your favorite company is actually a bad guy?

   That is exactly what European regulators hoped to uncover, and now the SEC has its eyes set on the US markets. What they are trying to prevent is a practice called “greenwashing”. 

   Greenwashing is where a company, through its marketing and PR efforts, deliberately mislead the public about the environmental impact of their business activities. While the examples are widespread, such as downplaying the waste caused by clothing production, the reasons are clear. There is really no way of protecting the public, by law, from the buzz words used by marketers.

   Words like “sustainable”, or “green”, have no legal definition.

   If you truly are trying to invest in an ESG company, you’ll need to research that company’s environmental activities, and uncover if there are actual results behind the PR claims. This of course is exponentially harder when looking at an ETF that invests in dozens of companies at once.

   Environmental, social, and corporate governance concerns will continue to shape how businesses operate. This bodes well for investing in companies whose practices you resonate and agree with. As the ESG movement continues to pick up steam, expect some of the posers to be caught and kicked out of this exclusive club.

Trading and Taxes

   How often do you buy and sell financial instruments?

   With the increase in popularity of various investments over the past few years, more and more people are investing in new markets. Whether that’s buying the hottest NFT, or dipping your toes into the crypto markets, trading is on the rise. 

   Those new investors are exciting - it’s fantastic to see people take control over their financial future.

   But, the lack of good education also means it's quite easy to make some potentially very costly mistakes.

   One important consideration for frequent traders lies in superficial losses.

What is a Superficial Loss?

   A superficial loss occurs when you sell an asset at a loss, and shortly thereafter purchase a very similar (or the same) asset. If that replacement asset is purchased within 30 days, the capital loss incurred on the original sale is disallowed from a tax perspective. This means you could lose money, and still have to pay additional taxes on it.

   This is especially prevalent on day-trading volatile securities.

   For example, let’s say you got caught up in the Dogecoin mania earlier in the year. With the valuations bouncing +/- 10% or more in a day, placing the right bets could have made you a lot of money. 

   But through those trades, if you incurred a loss as prices declined, only to buy back in, those capital losses would be disallowed. While this might seem unfair, preventing you from netting your capital gains and losses against each other, there’s a good reason for this. The tax agencies created rules like the superficial loss rule to stop tax evasion schemes.

   But it’s not all bad news. If you are regularly buying and selling the same asset, you lose out on the capital loss, but your cost basis for capital gains is reduced. Essentially, the loss that you incurred is added to the cost of your investment, thereby reducing the eventual capital gain (or increasing the eventual capital loss). This cost adjustment is called the “adjusted cost basis.”

Adjusted Cost Basis

   To illustrate this point, consider the following example:

   On September 1st, you sell your shares in ABC Co. for $20. The shares originally cost you $22. This leaves you a capital loss of $2 / share.

   Then, on September 15th you purchase shares in the same company ABC Co. for $15 / share.

   Because the sale and then repurchasing of the same asset occurred within 30 days, the original capital loss is disallowed. Instead, the tax calculations transfer that loss of $2/share to the new purchase price. What this looks like is the $15 in actual cost per share from September 15th, plus the $2 / share superficial loss. Therefore, on September 15th, from a tax standpoint the adjusted cost basis of each share in ABC Co. is $17 ($15 actual cost + $2 superficial loss).

   If you eventually sell those same shares for a profit, the amount of taxes you pay on those capital gains is reduced by the amount of the superficial loss.

   Superficial losses can increase the complexity of tax filings by a significant amount. If you are actively engaged in buying and selling frequently (Day-trading), it might be advisable to seek professional help for your tax filing. 

   Everyone should be investing in their financial future, but getting tripped up over a tax code violation would certainly put a damper on those good plans. The right knowledge, and an eager spirit will set you safely on the path of controlling your own financial future.

Upgraded: Home Renovations That Are Worth The Cost

Have you thought about improving where you live?

If you own your home, one topic that will come up sooner or later is home improvements. To upgrade the kitchen appliances, a fresh coat of paint in the bedroom, or new living room windows.

I’m sure if you take a quick look around your home, there’s a few areas that you would like to spruce up. But the cost of those home renovation projects quickly adds up. And the argument that “all improvements will increase our home value” really doesn’t stand up.

With cost in mind, which of those projects will deliver on the value promise? And which of those projects are on the “nice to have” list.

How Do Home Renovation Projects Measure Up?

If you’ve a hankering after binge watching too much Holmes on Homes, or Property Brothers to start swinging a hammer in your home, there are a few area’s that our friends over at HGTV would start with. Fortunately, when you’re focused simply on resale value, smaller projects often have a better payoff.

Minor updates to a dated bathroom and kitchen might actually see your bank account topped back up after selling, with almost 100% of the renovation costs translating into home value. Unfortunately, these projects do have diminishing returns. The more extensive the project and those costs don’t add as much value.

Fixing up the basement or adding a room in the attic will also see a return of around 90%, meaning the cost of the renovation will slightly outpace the increase in property value.

Directing our attention outside, certain renovation projects again come out ahead. Fixing up the landscaping, fresh grass, etc. will directly improve the property’s value. Looking at hardscaping though, such as a new patio or deck, will likely not increase the property value by the cost of the project.

When the Numbers Change

Looking into the cost/benefit of certain renovation projects is an important consideration. But sometimes it’s not quite so clear cut.

Think of the last time you were looking at properties. Scrolling through the listings, you judge the property and its perceived value by the images you see. And the listings that don’t have the right mix of photos? They’re simply disregarded.

What this really means to you is that your property needs to have a certain set of attributes to even be considered. While that kitchen reno might not be adding its full cost in appraised value, by not having that renovation done, your homes’ value might be suffering. That lack of attention invariably drives your home value lower.

Ultimately, your neighborhood will help dictate the returns on those projects. Having the nicest kitchen in the area does add value, but you’ll still be constrained by the economic standing of that neighborhood.

It’s Not All About the Money

It’s easy to take our inspiration from those television shows, and get caught up in the economic impacts that these shows are based on. But it’s equally important to think about those renovations from the perspective of a user. This is your home, where you spend most of your life. If making some changes will improve the quality and enjoyment of your life, then it shouldn’t matter as much about what those renovations mean to your property value.

When considering what projects to undertake, if you aren’t immediately doing this to sell, then you should be considering what will bring you the most joy. Would you love to host backyard parties? Then maybe that new patio is worth the expense, for the extra joy your home will bring you.

Home renovations are a great way to increase your home’s value, but sometimes it isn’t all about the money. This is your home, and the joy and satisfaction you’ll experience from sitting in that prettied up room certainly need to be valued.

Time To Become Wealthy

   Why is it that some people start with nothing, and make something remarkable of themselves, while others seemingly start with everything and yet amount to nothing?

   There are a myriad of successful people, the veritable rags-to-riches stories that fill us with so much hope. If they can do it, so can I, we think.

   But what is it that they do, and how can we replicate that success?

   Not everyone who finds untold wealth starts a tech company from their garage, or hosts popular daytime TV shows. Very few run media companies, or airlines, or launch rocket ships into orbit.

   Those super successful don’t share gender, age, race, or even personality traits. And while there are a few viable answers, undoubtedly one of the most important is a strategy that everyone can employ.

Hit the Pause Button

   In today’s always-on world, there is no escape from the emails, messages, likes, shares, and all other manner of communication. And each of those pings and dings sets off a little chemical reaction inside of us. It thrills and it kills. And best of all, it’s always there, right in arms reach.

   That dopamine buzz is instant, and it’s constant. We are forever rewarding ourselves right after performing any form of action. We share our ideas, or our good deeds on social media, and immediately we are rewarded for whatever it is that we’ve just done.

   That kind of immediate gratification is as intoxicating as it is lethal. It’s completely crippling our dreams, and our plans to do better.

   Hit the gym, and look for those shredded abs a day later. Save (invest) a couple dollars, and look for those killer returns at the end of the week. Do something nice for a friend or loved one, and expect an immediate boost in our relationships.

   But the super successful have long since learned that to become wealthy, to live a rich, full life, we need to slow down.

   Killer returns don’t happen overnight. Getting ripped takes hundreds of hours in the gym and on the track. And relationships are like trees, they need constant nurturing for months, maybe even years, before they’re ready to bloom and produce fruits.

Have Faith

   Oxford Dictionaries defines faith as having complete confidence in something.

   Today, take a page from society's elites’ playbook; have faith. Believe that by saving and investing today, that sometime in the future those dividends will start paying you back. Invest in your health; both your mind and your body, and trust that they will continue to serve you well for many years to come. Nurture the seeds of love and friendship (and maybe plant a few more), for those relationships will produce the most beautiful flowers, the most delicious fruits of your labour, if only you pour enough of yourself into them first.

   Delay looking for the rewards of your efforts just a little longer than everyone else. For the longer you let your efforts steep, the stronger, more powerful those rewards will eventually be.

   The longer you stick to your action plan of investing; through money, time, and energy, into the things you believe in, the greater your rewards. You just need to have a little faith that your efforts will pay off, even when you can’t see the immediate payoff from your actions.

Slowly Sinking in Savings

   Are you saving too much?

   Surely the answer can’t be no, right? Since when would a personal finance article chastise someone for saving too much? 

   But the answer might be far more complicated than you give it credit for. 

   No matter the stage in your life, if your cash is sitting idle, you are actually losing money.

Eroding Your Savings

   One of the primary factors that applies a drag on our financial well-being is inflation. Simply put, inflation is the reason that your grocery bill costs you more now than it did a year ago, for exactly the same items.

   Inflation is a very complex mechanism, reflecting the changes in prices over time. And it’s not news to us. Everyone’s grandparents have a story where a fist-full of candies only cost a quarter at the corner store. These days, that same fist-full will cost you a tenner easily.

   What it does mean though, is that stockpiling cash that you earn today will allow you to buy less in the future. 

Why Are Prices Changing (Again)

   Inflation is caused by a combination of different factors. The first of which is simply based on expectations. Everyone believes that the same services will cost more next year than they do this year.

   I see this all the time in my work at a software company. Each of our contracts provides for an annual uplift, so the $100 cost this year becomes $105 next year. This is the same reason that your phone bill increases year after year. You aren’t necessarily guaranteed better cell reception, or faster speeds, but your price increases nonetheless.

   The next factor behind inflation comes from the input side. When the costs to make a product increase, those increased costs are passed onto the consumers through higher prices. And there are limitless reasons for higher input costs. Higher gas prices, increased shipping costs, minimum wage hikes, etc. all play a role in making products more expensive to make. Costs that inevitably get passed onto the market. 

   The third element that impacts inflation comes from the other side, the demand side. When more people want to purchase something than supply can accommodate, the price goes up. That’s why when the lumber mills shut down for COVID (supply reduction), the cost of lumber skyrocketed (demand outpaced supply). We see a similar situation with computer chips as well, with the secondary market reselling for far above an already inflated sticker price.

When Treading Water Isn’t Enough

   What does all this mean? Well, it means that when you save a dollar today, it will buy you less in the future. How much less depends on inflation.

   If the government was able to effectively influence inflation, that dollar would be able to buy 2% less each year. 

   But this past year has been anything but normal. July 2021 statistics released by the Bureau of Labor Statistics show that the same basket of goods has increased in cost by 5.4% in the last 12 months.

   Let that sink in for a moment.

   If you have extra cash sitting in a high interest e-savings account, like what I recommend for your emergency fund, that cash has effectively lost 5.4% of its value in the past year alone! Even if you are incredibly lucky to still be earning interest, you’ve likely still lost 5% of your purchasing power in the last year.

How To Stay Afloat

   If losing 5% for diligently saving seems scary, it should be!

   Having too much extra cash sitting in your accounts is actually costing you money. If you want to have a brighter financial future, you need that extra money to go to work for you.

   In the same trailing twelve months (TTM) ending July 31, 2021, the S&P 500 index increased in value by 17.99%. After inflation, that’s still a whopping 12.59% return in the same period!

   This week, run the numbers. Do you have too much cash sitting in your accounts? 

   Make sure you’ve got your near-term purchases funded, and some cash set aside for your emergency fund. If there is anything leftover though, make sure that cash is working for you. Because the alternative is slowly bleeding that savings account dry.

   Investing can be risky. But it’s far less risky to do something than to be eroded down to nothing from inaction. Mitigate the risk by buying a market index ETF, and put those extra dollars to work for you, so that one day you don’t have to work for your savings.

Predicting The Future (Interest Rates)

   What would you do if you knew the future? Would that change your decisions today?

   Paying off your loans early, especially on big ticket items, can save you tens of thousands in your lifetime. All it takes is a small, extra contribution each time you pay.

   When we looked at the savings from paying just an extra 10% each month on your mortgage, you owned your million dollar house almost 3 years earlier, and saved almost $50,000. 

   But there was one major element that we overlooked for simplicity. We didn’t consider the future.

What does Tomorrow look like?

   In our preliminary analysis, we assumed that the future would be exactly like today. In that I mean, we didn’t account for an increase in interest rates above the historic lows that we’re experiencing today.

   But interest rates will increase. 

   And that increase might come sooner than you think.

How to Predict the Future

   Anticipating changes in the economy is an exceptionally complex task, one that nobody can get perfectly correct all the time. While the specifics might be hard to get accurate, the general trends are easier to spot.

   To start with, you need to look at the macroeconomic factors, or what is happening in the broader world. How much are consumers spending? Is inflation on the rise? What about government fiscal policy?

   Ultimately, interest rates are determined by supply and demand. The more demand, the higher the interest rates can be asked.

   In recent history, as a byproduct of COVID-19, governments have been printing money, effectively increasing the supply of capital. This drove interest rates down. But, as government stimulus is slowly retracted, that extra capital in the economy will dry up, tightening the supply, and thus increasing interest rates.

Using a Crystal Ball

   If all that analyzing macroeconomic trends seems complicated (it is), it might be a better idea to leave that to the experts. Assuming, of course, that most of you are not economists working on government fiscal policy. 

   If you, like most people, are not shaping fiscal policy, you can take a much easier approach to determining the future interest rates.

   You could Google what the projected interest rates will be. From a reputable source, that will give you a good indicator. But there’s an easier way.

   Instead, just pull out your crystal ball.

   Undoubtedly you see commercials flickering across the TV during your favorite programs, or popping up on your Instagram feeds, or even YouTube’s advertisements. You’ll be able to see the changes in the economy through their promotions, deals, and advertising. The best example is from automotive manufacturers. 

   Three years ago, it was common to see “0% APR for 72 months”. Everyone was offering financing that was effectively free. Fast forward to today - what are those same advertised rates? A Toyota Rav-4 would see you holding over 3% interest for 36 months, or north of 4% for the equivalent 72-month term.

   Those increasing rates, and higher rates for a longer term, indicate that the financial guru’s at fortune 500 companies are expecting rates to rise in the near future. Can you really afford to bet against them?

How Does This Impact You?

   Maybe you aren’t in the market for a new car. But looking back at our mortgage example from earlier, the numbers can change significantly.

   Remember our $800,000 mortgage on a million dollar home? With a 2.5% interest rate, our monthly payments were $3,161. On that first payment, almost $1,500 went to pay down principal.

   If the rates were 5% instead, our monthly payment would be $4,295. An increase of $1,134 (35%) each month. And the amount of principal we pay down in that first month? Only $961.

   An increase in interest rates can radically alter the cost of anything that you have financed, nothing more so than your home. While 5% might sound steep right now, remember that the economy has seen mortgage interest rates well over 10%.

   Which brings us back to pre-paying your loans. The savings of 2.5% in interest, while nice, might only save you $50,000 over 30 years. But when (not if) interest rates do rise, and your fixed interest term is up, the new rates you’ll be offered might not be quite so rosy. Your monthly payments will increase, and the total cost of your home skyrockets.

   Paying more down now will mean you have to refinance less in the future at potentially higher interest rates. This single act makes your savings on interest jump from $50,000 to a much higher number. Not only that, you won’t suffer as much a change in your monthly payments. 

   We are experiencing a golden opportunity for anyone looking to make a big ticket purchase. The cost of borrowing is dirt cheap, and those goods will never be this cheap ever again. If you do take the plunge, financing that new; car, boat, house, whatever. Make sure you are taking full advantage of the cheap rates, and paying down as much as you possibly can now. 

   This single act will make future you a whole lot happier, and a fair bit wealthier too!

Life-Saving Your Life’s Savings

How much is your house costing you?

One of the biggest misconceptions in personal finance is the cost of various big-ticket items. The largest of those purchases is the home you own.

In standard practice, you’ll put down a deposit, let’s say 20% to mitigate any extra fees by CMHC (Canadian mortgage insurance). The balance of your home is covered by a loan from a financial institution, with the promise to pay back over a set period of time. Many mortgages these days have 30-year payback periods, with fixed interest rates for 5 years.

The question is, how much does that home cost? Let’s use a million dollar home in our example, as the average cost of a home in Toronto is now sitting just above that million dollar mark.

Ignoring costs and taxes, that million dollar home consists of $200,000 paid up front (20% down), and an $800,000 mortgage. At an interest rate of only 2.5%, capitalizing on today’s historic lows in interest rates, with a pay-back period of 30 years.

Plug those values into a mortgage calculator, and you’ll see how much that million dollar home is actually costing you:

Standard Mortgage Loan Calc

With interest on your mortgage, you are paying a whopping additional 34% on top of the cost of the home!

And, that is with today’s exceptionally low interest rates. An increase in interest rates would make that amount much much more.

But all is not lost! There are options that can help save you tens of thousands of dollars throughout your life. This option is called a loan prepayment.

How Does Loan Prepayment Work?

A standard mortgage will always have an allowable amount that you can prepay each year without penalty. Additionally, most car loans are structured the same way.

What this means is that you can pay extra to the bank, in order to reduce your loan principal. The loan principle is the amount you borrow, and that is what the interest is calculated on. By prepaying that principle, you can reduce the amount of interest you pay by a significant amount.

Contrary to popular belief, loan prepayment doesn’t mean making the same payment as your standard mortgage payment, it’s substantially less. Because early in the loan’s life most of your standard payment is used to pay down interest, by pre-paying the principle down, you are able to reduce the total amount outstanding by a significant margin.

Take our example above with the million dollar loan. That work’s out to monthly payments of $3,161. By paying an extra 10% per month, only an additional $316.10, you can save yourself 5% of the purchase price over the life of the mortgage. That works out to just over $47,500 in savings, almost $50K! And the cherry on top is that your home would be fully paid for 46 months earlier (almost 4 whole years).

Mortgage Loan Prepayment Calc

For a smaller additional payment made each month, you could save yourself almost $50,000 in your life. That’s a sizeable addition to your other savings, and would certainly go a long way towards your other financial goals.

Careful of the Fine Print

Of course, this sounds almost too good to be true. A small additional payment can save you tens of thousands of dollars throughout your life?

The answer is: yes, but...

While your standard loans will allow prepayment, there is a limit to how much you can pre-pay without facing penalties. For some of you that number is 10%, for others its 20%. Before you start sending every spare dollar you have to pay down you loans, make sure that you know what the fine print says. You don’t want to save on interest just to pay the same amount back in penalties!

While most advice on savings says “cut back on this and that”, this advice is different. It’s in a class of its own in terms of wisdom and impact. Pay a bit more now, and you will reap tremendous benefits throughout your life.

The best part is that this advice works for every type of financing arrangement. Pay your car loans off quicker, and you’ll see extra dollars in the bank at the end.

Suffering through slightly more financial pain now, will put you on the path to tremendous financial gains in the future. Your future is in your hands, now you have the tools to make that a brighter place to live.

Small Steps, Big Results

   How much do you need to set away to reach your financial goals?

   For many of us, reaching those big financial goals will take many, many years. And looking up now, it seems the mountain top is well beyond your reach. When even the climbers well ahead of you look a long way off from the top, and even they are hardly pin-pricks against the enormity of the mountain.

   It would be all too easy to be overwhelmed, standing there at the bottom. All too easy to throw the towel in. All too easy to just sit down.

   But every successful hiker knows, there is no shortcut to the top. Sure, there’s easier and harder routes to take. But no matter what path you travel, the only way to make any progress is to just take a step. And then another. And another. 

   Do that, just one step at a time, and soon enough when you look back, you’ll hardly even believe where you are, and how far you’ve come.

   We can apply this mentality to all of our goals. Breaking each momentous task down into just the next step.

   You don’t set out to write a book, you just need to write a sentence. 

   You don’t run a marathon, you just run around the next corner. 

   And you certainly don’t lay down on a mattress made of cash. You just set a small piece away. When you do that today, and tomorrow, and the next day, and every day from now on, one day you’ll look out from your own mountain, shocked by how far you’ve come.

How Big A Step?

   How far do you need to stride each day to make it to the top of the mountain?

   Of course, the answer depends on the size of your mountain. And how long you have to climb it. 

   But no matter how big your mountain is, you’ll only reach the top by putting one foot in front of the other.

   To help you decide on the size of the step you need to take each day, take a look at the chart below:

Latte Factor Table

A Game of Inches

   The above chart shows how much you need to set aside each day, with the assumption you contribute those funds on a monthly basis, earning 6.5% after-tax annually.

   This type of analysis, popularized as the “Latte Factor”, shows that saving a small amount each day will help you reach your financial goals.

   The key here is, take a small step each day. Don’t get hung up on cutting coffee from your life, or some other equally trivial excuse. This has nothing to do with your morning cup of Jo. 

   But for those who are already tapped out, those who can’t find an extra 2 pennies to rub together. Looking at your costs, like your latte, might provide that small step. It could also be cutting your cable. Or negotiating a discount on your phone bill.

   In the infamous words of Al Pacino (Any Given Sunday, 1999), “Your find out life is a game of inches, like football. ... The inches we need are everywhere around us.”

   Each day, find that step. Each day, take that step. Do that, and one day you’ll look up from atop your mountain, staring at the wondrous beauty of a world and a life lived on your terms. And each night you can wrap yourself tightly under that blanket of financial freedom.

Pumpkins and Mason Jars

   Amidst the soil and seeds lived a pumpkin farmer. He spent his days working the fields, tilling the soil, planting his seeds, tending his beloved crop. 

   One day, as he walked through his pumpkin patch he found a glass mason jar lying in the field.  Curious to see the interesting result, he pushed the freshly sprouted pumpkin inside the jar to grow.

   Weeks and months went by, and the farmer forgot all about that tiny little pumpkin in a jar. Until, one day at harvest time, he walked yet again down that row. To his surprise, that tiny little pumpkin had grown. It filled the jar, a perfect mold of the shape. Sitting beside the enormous pumpkins, the perfect jack-o-lantern carving type pumpkins, this tiny jar-shaped pumpkin looked rather odd. 

   And it certainly was. 

   Here was a pumpkin that could easily fit in the palm of your hand, while the pumpkins that grew to the left and the right were enormous, the size of a basketball and considerably heavier.

   But what was different about that pumpkin? It grew from the same seeds, in the same soil, drinking the same water. Why was this pumpkin unable to grow beyond the jar, into the big, beautiful pumpkins we see sitting on store shelves?

   This problem presents itself in your life too. No more so than when you start to look at money.

   For so many of us, values in our lives have been boiled down into dollars and cents. It’s how we spend our time, investing those precious few hours each day for a paycheck. All in the hopes that one day, we no longer need to make that trade. But, when will that be? The question of “how much is enough?” has plagued us for all time, and likely always will.

   Have you ever said, or heard someone say, “If I made that much money, this and that would never be an issue for me.”

   One of the problems with writing about personal finance is exactly that. How much is enough? 

   Each of us is currently living inside our own mason jars. Some bigger, some smaller. But each of us is just like that little pumpkin. We grow until we fill our jar. No bigger, and no smaller.

   It’s very easy to look at another person’s jar and say, “I wish I had that much.” And just as easy to look elsewhere and say “I could never live in a jar that small.”

   This is why, when we start planning your personal financial plan, it is important not to look at someone else’s jar. You need to only focus on what you have, the size of your jar. If there are chances for you to increase the size of that jar, that’s fantastic, but the measure isn’t in comparison with someone else, but rather with what you used to have. 

How Much Is Enough?

   How much should you put away then? The target isn’t a million dollars. It’s not 5 million, nor 10 million. The target that you need to aim for is only in proportion to the size of your jar. Because that’s what you know. You know your jar. You live there.

   When you’re looking into planning your personal finances, don’t covet thy neighbor. Examine what you have, and build your plan around that. 

The Right Size Jar

   What is the right size jar for you?

   Start where you’re at. Take a portion of what you make right now, and set it aside for the future. No matter the size of your current jar, you need to be filling that piggy bank for the future too.

   Estimate the amount of earnings you’ll be making at the peak of your career. 80% of that number should be the amount you plan on drawing when you’re no longer working full time for a paycheck.

   Finally, take that number, and divide by a reasonable number between 2.5 and 4%. That will estimate the size of jar that you’re working towards, in your life. Your target, based on you. Not your neighbor, your family, or your friends. Your jar, for you.

   This will put you on the right path towards financial independence. After all, this is your life, your journey.

   There is no need to look at the pumpkins growing on your left and right. You only need to become all that you were meant to be. To grow into as big a jar as you can, without discouraging yourself by comparing yourself to your neighbor, and certainly to not sell yourself short and living in a jar that’s a few sizes too small.

Fractional Shares: Investing for Everyone

   Do you own Tesla (TSLA) stocks? What about Amazon (AMZN)?

   One of the common issues with incredibly popular stocks like these is that their prices reflect that immense popularity. With an individual stock trading in the thousands of dollars, it can be quite challenging to add these to your portfolio, especially if you are trying to keep that portfolio well diversified.

   Trading platforms in the United States have figured out a solution to this, through fractional share ownership. And finally, that solution is now available in Canada through WealthSimple Trade.

What is Fractional Share Ownership?

   Fractional shares are exactly what they sound like - a piece of the pie, but not the whole pie. For example, if ABC co. is trading at $1,000 right now, and you only have $250 to invest, you can purchase 25% of a share (250/1000 = ¼ = 25%).

What Does Your Fractional Share Buy?

Dividends, and Other Stock Events

   In the above example, we bought 25% of a share in ABC co. If ABC co. decides to declare a dividend of $10, your fractional share will mean you are entitled to 25% of that dividend, or $2.50.

   Similarly, if there was a 2-to-1 stock split, where the number of stocks are doubled, your 25% of one share will become 50% of a share (25% * 2 = 50%). 

Voting

   As a shareholder, you are an owner of the company. That means you have a vote about how the company operates. Most fractional share ownership programs do not allow voting on any fractional shares. If you have 25.6 shares, you would only qualify for 25 votes from your fully owned shares, and the remaining 0.6 shares wouldn’t count.

Fractional Shares: Other Considerations

   One important note about fractional shares is that not every company’s shares are available. To run this kind of purchasing program, there needs to be sufficient trading volume to support these fractional share trades. Ultimately this means that only the most popular shares will be available for trade in this matter.

Are Fractional Shares A Good Thing?

   Anything that lowers the barriers to entry is a good thing. It can be far less intimidating to invest $10 than $10,000. Not only does that mean more people can get into investing, it also lowers the psychological walls that investors occasionally build in their minds. Those new investors can still build a well diversified portfolio without having large sums to invest. 

   And that, opening the doors of investing to anyone, is a good thing.

   If you’ve been looking for a way to start investing, fractional shares have made that even easier. Start putting your money to work for you, so that one day you don’t need to work.

The Three Investments Every Canadian Needs

   There are 3 essential investing accounts for anyone looking to become financially independent.

   Each of these accounts have their own advantages and disadvantages, but put together, they form an important foundation for your financial dreams and plans.

   The 3 accounts you need are, a Tax-Free Savings Account (TFSA), a Registered Retirement Savings Account (RRSP), and an unregistered investment account.

Why These Three Accounts?

   While there are several important factors at play for successful investing, there are two that you can directly control. The amount that you invest, and the length of time in the markets. These three accounts provide several key benefits, helping hit those key levers.

Tax-Free Savings Account (TFSA)

   The TFSA is one of the most important accounts for Canadians. Being tax-advantaged, it helps you minimize taxes paid on growth. As a result, your invested dollars stretch further than they would in an unregistered account.

   This works by contributing after-tax dollars, similar as you would in an unregistered account. But the perk here is that because those funds are already taxed, you won’t pay tax again on withdrawals, including any associated investment growth.

   Of course, with such an incredible tax saving, the government limits the amount that you can put in, to a cumulative lifetime limit based on your length of residency in Canada. If you’ve been eligible since the account creation in 2009, you can contribute up to $75,500.

   This account should be used early and often to minimize taxes paid on investment growth – the sooner you can max out this account, the more you can let time play its role, capitalizing on the compound growth over time, all tax-free.

   With more money in your pocket after taxes, the TFSA is an investment account that every Canadian needs to have.

Registered Retirement Savings Account (RRSP)

   Your RRSP is the second account you need in your quest for financial independence.

   The RRSP is again tax advantaged, this time as a tax deferral. Instead of contributing after-tax dollars, any contributions made to your RRSP help reduce your taxable income for the current year. This means you pay less tax now, and have more funds to contribute to your investments.

   Of course, the government always gets paid. Instead of paying taxes now, you pay your income taxes on withdrawal in the future. Unlike the TFSA mentioned above, taxes paid on the RRSP also include paying taxes on investment growth.

   Increasing the amount you can contribute, through the powerful tax deferral mechanism, helps you put more money into the markets to take advantage of additional compounding over time.

   Once again, this investment account has a limit, this one based on your total income. You can contribute up to 18% annually, with unused contributions saved for contributions in the future.

   This account also has the advantage of being tax-advantaged in the United States as well, which means that any investments made in US markets are subject to less foreign withholding taxes. Given the relative size of the US markets over Canadian markets, this opens up substantially more investment opportunities without those pesky taxes.

Unregistered Investment Accounts

   To round out the trio of investment accounts, you’ll need just a simple investment account.

   This account doesn’t have any perks of course, no tax deferrals, no special treatments. But, it also has no limits.

   Unfortunately, the two accounts mentioned above, the TFSA and RRSP, both have investment contribution limits. Those limits mean that those accounts alone likely won’t be sufficient to reach financial independence, and require to be supplemented by additional investments.

   By maxing out your TFSA and RRSP contributions, you capitalize on the tax savings that are available to you. The rest of the journey comes down to consistent, hard work, and your third necessary account for financial independence, the unregistered investment account.

Your Guide to Credit Scores

   Credit scores can make our lives easier, or vastly more complicated, depending on our rating. But what are these credit scores? How are they calculated? How are they used? And, where can you see yours? 

What is a Credit Score?

   Credit scores are a measure of your financial trustworthiness. Based on a sliding scale between 300 and 900, the higher your credit score number, the better. Put simply, a high credit score indicates to lenders that you are less-risky, and that you have a good track record of paying your debts. Different reporting agencies have different calculations, and even different scoring ranges, but in general a high score at one agency will match a similar score from another agency. As a result, finding your credit score from a single agency will give you a good indication as to where you stand.

How are Credit Scores calculated?

   Different agencies calculate credit scores differently, and even the calculations are proprietary and not known for certain. That said, the most common scoring calculation used is the FICO score. In general the FICO score can be broken down into 5 core areas, generally weighted as follows.

  • 35% Payment History
  • 30% Amount of Debt
  • 15% Length of Credit History
  • 10% New Credit
  • 10% Credit Mix

   While this isn’t an exact formula, it’s a good estimate as to the most important criteria. Each category influences your credit score. Let’s look at how it all stacks together.

Payment History

   How well you have paid your bills in the past is the biggest influence on your credit score. Are you paying everything on time, every month? By routinely making your payments for all your bills, you indicate to lenders that you are reliable, which drives your credit score higher.

Amount of Debt

   The amount of debt you have, and the amount you use also plays a role. In general, you want to be below 20% of your total allowable consumer debt. For consumer debt, credit card limits and lines of credit are the most important types. It is important to make the distinction between types of debt here, since mortgages and auto loans can be rather large, you won’t be adversely penalized for using them, despite throwing off your total debt usage ratio.

Length of Credit History

   How long you have had an established credit history impacts your credit score. The longer you have had credit available to you, the better your score will be. This of course impacts young people and immigrants the most, as they haven’t had the time to establish their credit history yet. 

   Another consideration in this area comes with cancelling sources of credit. For example, it might be beneficial to hold onto your oldest credit card or line of credit even if you don’t use it anymore because it proves you have a longer credit history.

New Credit

   Applying for new credit can drive your credit score down. This is seen as risky behavior, as you obtain new sources of credit in a short period of time. As you prove that you can manage the level of credit that you are eligible for, your credit score improves. Again, this doesn’t mean that you shouldn’t find new sources of credit, indeed there are good reasons to change credit cards, etc. But, making a lot of changes at once might make you appear more of a credit risk, and your credit score will adjust to reflect that.

Credit Mix

   The final element is credit mix, or the types of credit available to you. Having a diverse array of credit options improves your score. This can be a combination of auto loans, credit cards, lines of credit, mortgage, etc. Being able to effectively manage multiple sources of credit indicates to lenders that you are financially responsible, and your score is higher as a result.

How are Credit Scores used?

   Arguably credit scores are the most important number in your financial life. They impact everything from housing rent and job applications, to the interest rates you pay on loans. Your credit score can even impact your relationships, with studies showing that your credit score can even impact your dating. 

   Credit scores are used as a measure of your financial risk. A lower number indicates that you are more risky, and therefore lenders demand a higher interest rate to account for the increased risk. This means that being financially responsible isn’t just good practice, it’s also saves you money! The difference of a fraction of a percent on large items like auto loans or mortgages can mean thousands, or tens of thousands of dollars in savings over your life.

Where do you find your Credit Score?

   You are entitled to a free copy of your credit report each year from each of the credit scoring bureaus. For our US readers, you may request your credit report here:

https://www.annualcreditreport.com/index.action

   For my fellow Canadians, you may request your credit report from Borrowell here:

https://borrowell.com/

   Knowing how credit scores are calculated, what your score is, and how to find it is important. This three-digit number can have quite an impact on your financial future. As with any scoreboard, why not try and set the highest score you can? Your whole financial life will be better for it!

What is a Good Credit Score?

   Credit scores are extremely important in your financial life. Understanding what they are, and how they are calculated is important. But even then, what qualifies for a good credit score? And what about the other end of the spectrum, what is a bad credit score?

The FICO 8 as a Credit Score Benchmark

   While there are a few different credit scoring formulas, one of the most common is the FICO 8 score. Your FICO 8 score will provide a very close estimate to where you stand among all credit scoring methods. This is important to note, since when you retrieve your credit score from one of the different credit reporting companies, the number they provide should be close, but will not be exactly the same. This is partly because they are likely using a slightly different formula than the FICO 8. For that reason, using the FICO 8 as a benchmark will provide a very close approximation of your credit worthiness.

What is a Good Credit Score?

   The FICO 8 score, and all credit scores, are broken roughly into the following bands: Poor, Fair, Good, Very Good, and Excellent. A good FICO 8 score is in the 670 - 739 range. Individuals with scores in this area are generally not turned down for loans, and shouldn’t experience too many financial roadblocks. Unfortunately, the reverse is true. Individuals scoring below 670 may experience difficulty finding a credit card, and will pay higher interest rates on their loans. This is in addition to the other non-financial aspects, such as experiencing more barriers to job markets. The chart below shows the ranges of the FICO 8 score.

Better than Good

   A Very Good and Excellent credit score is even better than good (obviously). Individuals who achieve this range of credit score generally receive more favourable interest rates on loans, and have greater access to debt. Entering this level, over 740, will result in better financial options, and hence make your journey to financial freedom even easier. If you have an interest in achieving financial freedom in your life, there’s a good tangible target to shoot for: a credit score over 800.

Dividends You Can’t Live Without

   Dividends provide an avenue for you to see a return on your investment without having to “cash out”.

   This idea of dividends spans far wider than simply your financial plan. Those high-paying dividends can be found throughout your life. 

Where Are These Dividends?

   As you hit the gym day after day, week after week, your health improves as a result of your consistent commitment. The investments that you are making into your body pay off in small ways; a little extra energy at the end of a long day, a little less pain on a walk/hike with your loved ones, that little bit extra strength that makes all those little tasks just that little bit easier.

   And there are some big payouts too. That healthy lifestyle reduces the incalculable cost of major surgeries, saving you from constant pains, and months of lost time in recovery.

   Those dividends are received in the loving moments with your family. Or a deep conversation with good friends. The types of relationships that pick you up when you’re down. The relationships that support your dreams as you reach out for them. The relationships that give you a sense of peace during the stormiest days.

How Do You Get Dividends?

   There is no shortcut here. Dividends are only paid out to those who make the investments first.

   If you want to live a rich life, you need to make sure that you are putting the right amount away. You need to ensure your investments in all areas of life are well funded.

Dividends Without Investment

   Unfortunately, we see all too often the outcomes of people who don’t invest enough. When the account flickers in the red. When that cheque comes back marked insufficient funds.

   These shortfalls manifest themselves in all sorts of ways. Our failing health a few years before we should. An estranged child who just can’t find that connection with their parents. The divorce papers that sever a once loving union.

   These returned cheques happen all too often in today’s day and age. With Canadian divorce rates hitting or exceeding 40% according to the Divorce Collaborative in Vancouver. In “A Statistical Snapshot of Youth at Risk and Youth Offending in Canada” cites a juvenile delinquency rate of 6%. Of course these studies only pick up the worst offenders, when a wayward child embraces crime as they rage against the world. There are countless others who simply never narrow the emotional distance with their parents.

   With eye opening statistics like these, one has to ask, “where does it all go wrong?” 

Where It All Goes Wrong

   The biggest issue is that those investments are hard to measure. It’s often too hard to know that you’ve been letting those investments slide, until it’s far too late to do anything about it. You don’t get a quarterly investment report from your spouse and children. Oftentimes it’s hard to even tell if those little payouts we all spend occasionally were the result of dividends, or we had to sell some equity to make the withdrawal.

   See, nobody sets out with the intention of under-contributing to those key areas in life. The trade-offs are far more insidious than most people give them credit for.

   Let’s take the most common example: our ambitious young professional. 

   For simplicity, we’ll use “him” and “his” to indicate those small insidious choices. But this scenario works equally well for our female readers.

   Our young man does what so many others of his age group have done. He went to college for 4 years, and walked out with a degree. It’s time to get to work.

   He takes what sounds on paper like a decent job, but he’s starting from the bottom. No worries, his parents say, you’ve got to put in your dues before you can make it in this world. Sounds easy enough for our ambitious young man. He’s no stranger to hard work. Heck, this is a great opportunity to outshine his contemporaries.

   That salary says 40 hours, but those first couple of years go by in a flash. Days are long, and weeks longer. But he’s making some headway, professionally.

   As he ages, day by day, his twenties start slipping away. No matter, he’s got a steady girlfriend, and there’s even talk of marriage and babies. Those blessings come sooner than he could have planned, he’s still got a long way up that corporate ladder. No matter, his new wife is understanding, and the baby is simply too young to know better. Besides, a couple more years of these long hours and he’ll finally have made it.

   Before he knows it, that little baby is about to start school. It’s unfortunate that work took up so many hours when they were young, but the job is finally good now. Besides, he’ll just put in some extra time to forge those bonds when his kid is a little older. It certainly won’t be long now before he can really take his foot off the gas - he’s put in the hours, it’s time for that professional investment to start paying dividends, right?

   That first decade of marriage was a whirlwind. Career promotions interspersed with a growing toddler, upgrading the house a couple of times, even a new car in the driveway! Both professionally and financially, our young hero is crushing it.

   Then one day, after a grueling week at work, he arrives home. Takes a quick look into his child's bedroom, just a bit too late again to read that bedtime story. As he heads off to see the wife, he has a sense something is wrong. Did he forget a birthday? Surely not their anniversary, right? 

   Just like the other 40% of that statistic, he quickly realizes when he sees those papers on the kitchen counter. All those years, those long hours at work. He hadn’t been as vigilant, setting aside time and energy for career growth, but failing to make those investments in his family. His wife, his baby, they hardly knew who he was anymore. Those long hours, the “understanding” that he thought was established. That wasn’t a dividend of the relationship, that was a withdrawal. That account was in overdraft, and the tax collectors were at the door, brandishing a life fine labelled “divorce”.

   And who could he lean on for support? Those once cherished friends had stopped calling, he was always just so busy. Phone calls went from weeks to months, to haven’t heard from them in years.

   Throughout all those years, he’d been filled with nothing but good intentions. Chasing the good life. They’ll all thank me someday for the sacrifices I’ve made, he thought.

   If only someday could have come sooner.

How To Avoid That Fate

   What can you do to ensure the accounts in your life are growing in the right direction?

   Just like you receive a monthly or quarterly investment report, you need to make your own report to evaluate the different areas in your life. Are you making the right choices in relation to your goals? Are you considering everything that is important in your life when you set those goals? 

   Our young hero in the above story certainly had goals. But those goals didn’t include his relationships with family and friends. And while he was measuring his progress up the corporate ladder, he failed to measure the impact that grind was having on those closest to him.

   Each season, take an inventory of those important elements in your life: career, finances, relationships, romance, spirituality, and physical health. Are you making investments? Or are you withdrawing too much? 

   Success (and failure) isn’t one grand gesture, it’s the thousands of tiny choices made each day. Too many choices in favor of one of life’s priorities over another will tip the scales. Just make sure you know how much is sitting in each of those accounts, so that you can avoid life’s terrible bankruptcy courts.

What is a Dividend?

   When you buy a company's shares, what are you investing in?

   When you invest, you are becoming part owner of that company. Which means you’re buying the rights to their current assets, and the revenues they generate in the future. The earnings that the company will make in the future has a value, which is what drives the share price.

   But the reason for you to invest isn’t so that your company makes money. It’s so that you make money.

   There are two ways that can happen, share price appreciation (growth), and dividends.

What is a Dividend?

   A dividend conveniently derives its name from the mathematical equation, a number divided by another number. In this case, the numbers are the total amount of a company's income to be shared with the owners.

   As a shareholder, you are entitled to the declared amount for each share you own. The company then pays you, the owner, that amount of money on a set date.

Why are Dividends important?

   As an investor, you want to grow your investments. Dividends is one way that can happen, as a company pays out some of its growth to you. Some companies pay out dividends so reliably, that people build their investment portfolios around them. Those companies, like Coca-Cola, have been paying a regular dividend each quarter for many many years, which can provide some comfort to investors. Those investors actually plan for that dividend to be paid as part of their financial plan.

DRIP, drip, drip

   Building dividends into your financial plan will eventually lead you to talk of DRIP strategies. DRIP, or Dividend Reinvestment Plans, take the dividends that would have been paid out, and purchase more shares with those earnings. In this way, your investment can keep growing as you buy more and more shares with the earnings that you make. This is especially important for a few reasons.

   Firstly, DRIP plans can avoid the additional transaction costs of purchasing more shares. Most consumer trading platforms charge a fee per transaction as trading commission. When using DRIP, those investments are made by the managing company, and not you. That means you can avoid those trading commissions, and keep more of your money working for you.

   The second benefit is equally as important as cutting the fees. This is time in the market. DRIP plans take your “cash” earned from the dividends, and invest it immediately back into that stock. While the convenience shouldn’t be overlooked, the biggest benefit is that you don’t need to think about the investment. Taking the choice out of the equation helps you reinvest those monies faster, which cuts the incalculable cost of inaction..

DIY DRIP

   Unfortunately, some DRIP plans are administered by third parties that have terrible fee structures. Coca-Cola is one such company. The administrators of that plan charge fees for each reinvestment, often in excess of what a private investor could achieve with their own trading platform. In those instances, it would be more advantageous to take the cash when the dividend it paid, and immediately reinvest back into those stocks. While more labor intensive, this DIY approach can cut down on the total fees paid. 

   The DIY plan also doesn’t carry the second benefit. You need to make that conscious choice to reinvest, which opens you up to all sorts of biases. 

   If a DIY DRIP plan is your investment strategy, you need to set clear operating principles of when to use those proceeds to buy additional shares. It’s far too easy to succumb to the mentality that “the price will be lower tomorrow”. Those market timing games are addictive, and almost never pay out in your favor.

   Dividends can provide an exciting and different investment strategy. Whether you’re a DIYer or sign up for a commercial DRIP plan, dividends provide an excellent avenue to grow your investments, or simply provide cash flow for you to enjoy.

 

Important Reminder:

Dividends are a privilege, not a right. A company can decide to stop paying dividends at any time. If you’re looking into a DRIP investment strategy, you should be focusing on companies with a long (10+ years) history of paying dividends. Those companies are less likely to cancel their dividends, due to shareholder (owner) expectations.

How Do You Use Your Resources?

   Are you putting your money to work for you? How do those choices impact the rest of your life? And what about the other resources that you have?

   These questions are important to answer to achieve the best results in your life. Too often we start with the first question without thinking about our own unique life situations. To help you align your actions with your life goals, you should be thinking about your future first.

   Looking at asset allocation and financial products too early in this process can lead you terribly astray. So before you open up your investing app and start scrolling through stock tickers, pull up a seat and a piece of paper. It’s time to turn on the most powerful computer you own.

Find Your Goal Posts

   Before you can lay any plans, financial or otherwise, you need to set your goal posts. These goal posts will help you dial in your aim on what is truly important to you, and provide a measurable indicator of how you’re doing. 

   What are your goals? Travel the world? A cottage on the lake? A new electric vehicle? Early retirement?

   These are your goals. Jot them down. Set those goal posts.

   Once you think you’ve got your sights set, think about why those goal posts are there. Is this something you truly want? Too often we find ourselves playing the most unrewarding game of following the follower. When we play that game, the goals that find their way to the top of our lists aren’t really our goals at all. Instead, they are the goals of our family, our friends, our children. Society's “goals”, not yours.

   Be honest with yourself here. Are those goal posts really yours?

Measure Your Progress

   Once you know what your goals are, you need to analytically scrutinize what is actually required to reach them. How much does your dream life actually cost?

   Have you ever guessed how many jellybeans are in a jar? Or how many ping pong balls fit inside an empty 747? Humans are usually pretty poor at estimating how much is required when the amounts get large. Without using some tools of analysis, we usually guess at numbers that are either way too high, or way too low. That’s why we’ve looked at different tools like the 4% Rule, to help narrow down the answer to the question, how much do your goals cost?

   Using tools like the 4% Rule will help you understand how far away those goal posts really are. Irrespective of whether those posts are 100 steps away or 100,000, knowing the distance will let you know how far you’ve come and how far is left to go.

Allocating Your Assets

   Once you’ve examined your life, and where you are heading, you need to look at how to get there. To do that, we examine how you assign your assets.

   Traditionally, people assume that asset allocation boils down to how much you put in different investment categories. Real Estate, Fixed Income, Stocks, Crypto, Foreign Currency, etc. Those financial products are important, but often leave off Human Capital. Your skills, your time, your energy. 

   How you invest your resources, particularly time and energy, has a huge impact on your financial future. Investing more in your skills and well-being will increase your value as an economic contributor. As you become better at your job, you increase your ability to earn.

   After you’ve invested in yourself, you need to look at how to put your money to work. While low cost ETF’s serve as the backbone for financial advice that I deliver, that isn’t the only lever you have to play with. Some people need to be changing how much is invested in each area.

   For example, picture Fred as having a stable job as a teacher. His earnings are relatively flat year over year, and he has a high level of job security. Depending on Fred‘s goals, he might want to look to be more heavily invested in stocks (low cost ETF), willing to take on the additional investment risk given his relatively low-risk career.

   Suzie on the flip side, is a commission-only sales rep. With variable income, she might want to look into higher weightings in fixed income investments, to help smooth her earnings out throughout the slower periods.

   How you allocate your resources is incredibly important. But it’s also a very personal decision, heavily influenced in where you are, and where you’re going. 

   What are your goal posts? Are you moving in the right direction? Does how you invest your time, energy, and money all align with the direction you chose? Invest wisely, and there’s no limit to how great your life can be.

How Do ETF Management Fees Work?

   Have you ever wondered how ETF Management Fees work? There is a management fee aspect, but those funds aren't regularly withdrawn from your bank account. 

   Are they paid when you make a purchase?     Or when you sell?

   Those looking for some financial voodoo will be quickly disappointed.

   Unlike stock trading, where you pay fees on each trade either a percentage or a flat amount per buy or sell order. ETF’s aren’t structured the same way. While your provider might still be charging transaction fees, those aren’t included when looking at the Management Expense Ratio (MER) for an ETF.

   The boring reality is that your management fees are paid out of the funds assets, which usually include a portion of cash. Those fees, usually paid monthly, are simply transferred out of the funds operating bank account directly to the administrators.

   That’s the simple answer. Once a month, the fund pays the administrators their set percentage with the funds from the operating account. 

   How unglamorous. No withdrawals from your trading account. No pre-authorized debit. No bill in the mail. It’s all taken care of automatically on the back end.

But, If I Don’t Pay the Fees…?

   By now you’re likely thinking that something doesn’t add up. You can buy once, hold forever, and never pay a fee? But there is literally an advertised fee. 

   I mean sure, it comes from the operating account. But that monthly payment has to come from someone, right?

   And right you are. Those fees are actually baked into the advertised price that you see on the exchange. Any premium incurred by those fees will be reflected in the price of the ETF unit.

   The cash to pay for those fees comes from the returns from the fund itself. Imagine you hold a unit of ETF ABC, which indexes to the S&P 500. Certain companies in the S&P 500 grouping will do very well, and others not so much. The ETF is designed to follow the performance of the index as a whole. As such, the fund is periodically rebalanced (remember, this is one of the tremendous benefits of ETFs). 

   During rebalancing some of the winners will be sold, crystalizing some of the upside from those winning investments. The proceeds of the sale goes into the operating fund, which then buys more shares of under-represented stocks. 

   But not all the proceeds are used for repurchasing, some of that cash is kept behind and paid out as management fees. 

   This creates a drain on the ETF’s returns, which is in turn reflected in the price that you pay. A lower return calls for a lower price.

   Ultimately, you do pay for those fees through the price you pay (or receive when selling), and the returns of the ETF while you hold. Since those fees aren’t directly coming from your account the same way commission or transaction fees do, they can be easy to forget about. But make no mistake, they do exist, and you are paying for them.

   ETF’s carry some excellent benefits for those who aren’t professional traders. I believe those benefits certainly outweigh the usually paltry costs. But nothing in this life comes free, which is why it is so important to know the management fee percentage on your chosen ETF.

What Happens If My ETF Closes?

   Do you own ETFs?

   It’s no secret to any of my readers that I am a strong advocate of ETFs. I would argue that an ETF has a place in everyone’s investments, based on the benefits that it provides. But, with many more index funds than stocks, it is inevitable that some of those funds will fail. What happens to you if that happens?

Index funds can close?

   Yes. Index funds can close, and in fact do close down far more frequently than you’d imagine.

   While there are many reasons that an ETF might be shut down, it usually boils down to profitability. 

   A quick recap of ETFs: an ETF is simply a group of investments placed into a basket and sold together as a package. The administration is done by the fund provider, for a fee which is built into the returns that you’ll see.

   If an ETF (or mutual fund) can’t operate profitably, the fund is shut down. What that means, is if the administration costs to monitor and trade in the selected basket becomes too costly, and the demand isn’t there to pay for those higher costs through management fees, the fund is shut down. 

Example: An Oil-Centric ETF

   To illustrate, picture an ETF that tracks the major oil companies. Owning that ETF gives you an exposure to all the oil and gas companies, without being too heavily leveraged in one specific company. In this way, when another oil disaster like the BP oil spill harms the stock price of one company, you aren’t as dramatically affected compared to someone who invested the same amount in BP shares directly.

   But, times change, and so do consumer preferences. Investors could start leaving the oil and gas investments in favour of greener pastures. Literally. As investors become more environmentally conscious, the demand for our hypothetical Oil-Centric ETF could diminish. In that case, while oil and gas still exist, fewer and fewer dollars are invested in our ETF. As those investors withdraw their investments, the administration costs don’t change. 

   People are still needed to track the index, and manipulate holdings whether there are 10 investors or 10,000. Those costs when borne by the 10,000 might be manageable. But the management fees derived from just 10 investors won’t be sufficient to make money on the operation of the ETF. In this case, the ETF would simply be terminated.

What If You Still Have Money In The ETF?

   What if in the above example you were one of the 10 investors who still owned the ETF when the managing company decided to shut it down?

   Closing down an ETF is not like a stock going bankrupt. The ETF is just a collection of investments. While the fund might no longer be traded, the underlying investments still have value. As a result, when the ETF declares that it will be shut down, you won’t lose all of your invested monies.

Shutting Down an ETF

   Given the huge number of ETFs available at any given time, closing down and starting a new ETF happens extremely frequently. Perhaps by necessity, or simply just through practice, the process is relatively simple.

   A few weeks before the ETF has it’s “stop date”, an announcement is made to all current ETF owners, outlining the intention to close the ETF down. This notice period provides ample time to sell your stake, if desired. But, the notice period is long enough that you don’t need to panic sell. While there might be some price adjustment, it shouldn’t be major. Remember, that the ETF derives its value exclusively from the underlying shares. While the ETF might be disappearing, those shares are still being actively traded.

   If you haven’t sold by the stop date, the ETF begins liquidating it’s holdings in the underlying stocks. At that point in time, you won’t be able to buy or sell anymore. After the ETF holdings are liquidated, your proceeds will be funded back to your investment account.

   Ultimately, your monies are returned to you for you to continue investing in those greener pastures.

Some Closing Remarks

   While closing down an ETF sounds extremely simple (it really is simple), there are still a few things to note. If you do elect to hold until the stop date, the managing company may charge a “dissolution” fee when they return your investment dollars to you. Also, since selling the whole ETF position is more complex than your normal trading, those funds might be tied up for 6-10 business days. The temporary loss of access to those funds is an important factor to consider when deciding whether to sell or not.

   One final element of note is that the underlying assets of that ETF are actively traded stocks. This plays several roles when evaluating the decision of if/when to sell. If the ETF is trading lower than the market value of the underlying shares, it might be wiser to hold until the fund is dissolved. But, those underlying shares are actively traded. Any gains and/or losses that the fund incurs during the wrap up proceedings are yours to keep, no matter which way the scorecard shows.

ETFs Still Have a Place

   If after reading this you’re suddenly having doubts about ETFs altogether, let me allay your fears. The types of funds I typically recommend, such as the S&P 500 index funds (SPY, VOO, etc.) are all extremely popular. They aren’t going anywhere. If you invest in a reputable broker's (Vanguard, Fidelity, BlackRock, etc.) main market funds, you won’t ever have to deal with the closing of an ETF.

   As you begin to get more niche with your investing preferences, you might start to encounter such scenarios. Being vegan might be an acceptable dietary choice, but when it comes to investing, a healthy dose of everything won’t lead you astray.

The Times They Are a-Changin’

   As Bob Dylan wrote, the times they are a-changin’.

   Every year, around this time, we are blessed with some of the capitalists greatest minds sharing their thoughts, history, and even predictions of the future. Now both in their 90’s, Warren Buffett and Charlie Munger took to the stage once more at the Berkshire Hathaway’s annual shareholders meeting. Once again, these two brilliant minds didn’t fail to impress.

   During the meeting, Buffett asks a simple question:

How many of the top 20 companies (by market capitalization) are the same now as they were 30 years ago?

   Think of the biggest companies you know of today. Not just the Facebooks’ and Apples’ of the world, but also the oil and gas goliaths that seem to be unstoppable. How many companies have stood the test of time?

   None. Zero. Zilch.

   Of the 20 largest companies in 1989, none of those companies made it to the top 20 list in 2021.

   And the top performers in today’s market? Some of those companies hadn’t even been imagined 30 years ago.

The Times They Are a-Changin’

   What does this mean to you? Well, it means that the world doesn’t slow down. It means that your best bets today aren’t worth a grain of salt against the unstoppable momentum of time.

   Of the top 20 companies in 1989, Japan held the trophy for the most companies on that list. Today? Not a single Japanese company breached the top 20.

   Things that couldn’t possibly be conceived 30 years ago happened. The Japanese economy ground to a standstill, and their capital markets haven’t fully recovered even now. And in their place now stands a list of companies born into the changing world. Amazon, Apple, Alphabet, Facebook.

   If there’s one thing the past teaches us, it's that predicting the future is impossible.

   This is why Buffett’s messaging for new and experienced investors hasn’t changed. Don’t bet on a company. Even if you aren’t flat out wrong, that bet likely won’t stand up to the test of time. 

   Instead, bet on the market. Bet on the continued growth of companies, both new and old. Bet that industries will continue to evolve, and that evolution will bring new star players to the field.

   Just as companies like Tesla and Rivian are disrupting the traditional gasoline powered motor vehicles industry, similar changes will be felt in every industry across the world, over time.

   When planning for your future, especially a future that lasts 30 years or more, the only safe bet is to bet on the system. Taking a total market approach will help you benefit from the up and comers, and the growth of world economies.

   This is why even Buffett himself has set up instructions for the management of his funds when he dies. His widow will be given a portfolio of a 90% S&P 500 ETF, and 10% Treasury Bonds.

   You can argue all you want about the asset allocation choices that Buffett has made, but it goes to show that even one of the world's wealthiest persons drinks his own Kool-Aid. 

   Believe in capitalism. Believe in progress. Believe in your future. A total market fund, at least a fund with wide exposure (like the S&P 500) will serve your long term investing strategies now, as well as 30-years from now.

Were you just robbed?

   The Pareto Principle is all around us, from our homes to our relationships, all the way to the workplace. The principle states that 80 percent of our results come from 20 percent of the activities. But that also means that 80 percent of our time is spent kicking the ball in the wrong direction. 

   The majority of your efforts aren’t being directed at those real rain making activities. And that’s robbing you of the impact that you're capable of producing.

   But how do you stop robbing yourself?

   The Pareto principle is telling us something we all know. Not all of our work is created equal. Certain types of work that we perform really add value, and other tasks that we do aren’t anywhere near as important. As a professional, you know which tasks you do that are value-add. Often, those are the tasks that you were hired to do, the tasks that you are evaluated on in performance reviews.

   If you still can’t narrow the list down, ask your boss! They’ll be happy to tell you what is most important to do. 

   In one of the major projects that I am involved with, one of our key contributors faced this dilemma. Her experience (let’s call her Jane, not her real name) is likely one that resonates with you, either in your own life, or you see in your co-workers.

   Failing to plan and prioritize effectively, Jane was caught up in the habit of being busy. But as we’ve discussed, not all tasks are created equal. While our unfortunate heroine of this story worked herself into the ground, the small fires that she was putting out day after day weren’t really driving the needle. As a result of spending too much time and energy on the wrong 80% of activities, the company failed to meet its implementation deadlines.

   One of the other challenges that we all face is understanding exactly how much a certain activity is worth. Which tasks in that 80% of low value are worth the least? If you could answer that, it would be far easier determining which tasks to cut out.

   The impact of not prioritizing on the vital work for the implementation means that we need to leverage consultants to do the work instead. Downstream implications of those missed deadlines aside, the hourly cost for not working on the implementation will be $250 USD per hour that we now need to outsource. 

   What does that actually mean?

   When looking at Jane’s schedule, she spent hours building reports that will only get a cursory glance at best. Hours more responding to emails and troubleshooting basic system issues that anyone on her team could have done. All of those activities are worth far less than the $500,000 USD annual salary that we’d be saving if we didn’t need to hire a consultant. (Annual cost: $250/hour * 2,000 working hours annually.)

   Why look at the annual cost?

   Sure, the implementation consultants are only brought on for an extra 2 weeks, or a total cost of 80 hours * $250, or $20,000. But extrapolating the impact of your decisions to the entire year shows the seriousness of the situation. Those errors in prioritization affect you day after day, week after week, those errors add up. 

   It’s far too easy to think that spending an extra hour on email, or gossiping at the watercooler, or any other low-value activity isn’t affecting you. But just as in Jane’s case, spending an hour on a $20/hour activity and not on a $250/hour activity has just cost the company $230 USD. 

   You bear those costs too, every time you do something that isn’t in that list of the 20% that Pareto identified.

   How do you stop robbing yourself?

   Become very clear on what you’re worth. And then look at the tasks that consume your life force. Are you working on tasks that are worth more than you’re paid for? Or less than?

   That doesn’t just mean looking at your annual salary. What about where you want to be financially. Is that six figures? A quarter million annual salary? Think about what your number is, and work backwards. How much is that each week? Each day? Each hour?

   If you want to stop robbing yourself, make sure the tasks that you spend your time on deliver that value. Hour after hour, day after day, week after week. Do that, and you’ll truly earn that paycheck that you’re thinking of right now.

Appendix 1

Here’s a chart showing the value of a $250,000 / year salary.

Term Cost
Annual $ 250,000.00
Month $   20,833.33
Week (50 working weeks) $     5,000.00
Day (250 working days) $     1,000.00
Hour (2,000 working hours) $        125.00
Half Hour $          62.50

Oh the places you’ll… Sit?

   Quickly, which chair is the most comfortable in your house?

   Is it your sofa chair? Your office chair?

   I'll bet that nobody said their dining chairs. Why is that? The dining room, where you invite your guests, where you want to show off your heirloom family silverware and china plates. Wouldn't it make sense to have nice chairs to round out the experience?

   Ultimately though, we need to consider the utility of those decisions. To upgrade the dining chairs is to reallocate those financial resources from something else. Is a dollar spent on dining room furniture going to improve your life the most?

   To live a rich and comfortable life, you don’t need to have the nicest of everything. In fact, you really need only a few nice things to radically improve your life.

   Warren Buffet jokes about exactly this, suggesting that most middle class families will drive nicer cars than he does. For someone who doesn’t spend much time behind the wheel, even with an abundance of money, his dollars have a far greater impact if he applies them elsewhere.

   What was the answer to your most comfortable chair?

   Now think about your life, and how much time you spend in any one given place in your household. Are you ensuring that the places within your house that you spend an inordinate amount of time are the most comfortable that you can make them?

   We spend an estimated 30 percent of our lives in bed, is your mattress contributing to your better sleep and physical health? If you work from home, what about your office setup?

   I spend a disproportionate amount of time in my office, anywhere from 80 to well over 100 hours a week, whether that’s reading, working, playing games, or simply thinking. I get far more utility for my dollars spent if I make sure that I have a good setup. Given how much time I spend, it was only sensible that I get a good office chair. Having better posture is an investment as much in today’s comfort as in protecting my body for the future.

   The Pareto Principle, or the 80/20 rule works well to describe this phenomenon. 80% of the outcomes are driven by 20% of the inputs. 

   In our chair example, we spend 80% of our time sitting in 20% of the chairs in our house. But we can see that principle applied throughout our lives. 80% of the kitchen work is done by 20% of the knives. 80% of our walking is in 20% of our shoes.

   Finding those 20% of activities and items that produce 80% of our results in any activity is essential. When you start identifying, and improving those 20% of inputs, you can maximize the utility, and live a far richer life.

   If you want to live a richer life, make the most out of the few areas that really drive value for you.