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.

Prioritizing Success

   Have you ever felt your day just get away from you? Looked down at the clock and realized it's almost quitting time, and you haven't even started those things you planned on.

   We all have days that seem to get away from us. When our best laid plans are derailed just minutes after we open our eyes.

   Losing a day's worth of productivity hurts. But for many people, those endless to-do lists at work and at home are a fact of life. They find themselves caught on the treadmill of other people's priorities. Constantly running in place, and all too often, leaving their enormous potential untouched.

   There's no difference between you or I, and the best in our fields. So how do they do it?

   How do top performers retain their focus day after day?

   Top performers know that to remain the best in their field, they need to focus on delivering value. Day after day, month after month, year after year. The moment they stop producing the results they are paid for is the moment they slip off the top of the podium.

   We’ve looked at this before. Top performers know what they need to do to create massive value. But that knowledge isn’t worth much if we can’t escape the prison of those endless to-do’s.

   What practical steps can you take to keep yourself off the hamster wheel, and focused on the things that matter to you?

Bucket your Task List

   The first step in overcoming overwhelm is identifying what actually needs to get done.

   We’ve talked about being 1% better every day, so let’s use 1% of our time to get clear on what is important. This 15-minute planning exercise is deceptively simple, and alarmingly illuminating on what is important.

   First, decide on the 3-5 projects and tasks that are important for you to get done. It’s important to limit this number to just a handful, to really reap the benefits of your mind focusing on just a few problems. In a corporate setting, these priorities should be aligned with your KPI’s. The better you perform on your priorities, the better your performance, and the more value you add.

   Once you have your priorities, take a look at your To-Do list. Assign those To-Do’s to a priority. I prefer to simply number my priorities (more on this next).

   For every given priority project (numbered 1-5), you may have any number of tasks and to-do’s assigned. That simple structure will help you understand what you need to do now to move the needle. Of those priorities, you will also be able to look at which one is most important / valuable. If time is a constraint, focusing on the most valuable activities will still help you deliver.

   As you go through this exercise, you will undoubtedly come to the same realization as everyone else. You have more items on your To-Do list than you can reasonably allocate to your priorities. These tasks are distractions, and the reason that most people fail to realize their potential. Spending your time and efforts on tasks that don’t impact your priorities means that you are working on someone else’s priorities. For these tasks, simply delete them from your task list. You’d be surprised about how infrequently someone even circles back on those items.

Prioritize your Priorities

   You know what you want to get done. You’ve identified the 3-5 priorities that you have already. Now it’s simply a matter of scheduling the time to work on it.

   Make sure you have dedicated blocks of time in your calendar where all you will work on is those priorities. I prefer sending myself meeting invites, and sitting in a conference room alone. This gives the clear message to everyone else that I am not to be disturbed.

   Other strategies are to put on your out of office, or simply exit out of email and internal chat programs. A cautionary note re: going AWOL - some companies and bosses will take offense to not being able to reach you at all times. Make sure you set clear expectations in those circumstances, to ensure that you are measured on your results, not your attendance.

   As you begin to solidify your planning practices, you will undoubtedly be surprised by two things. The first, how incredibly efficient you can be when you have uninterrupted moments to get your work done. And the second, is that despite your best guesses, everything always takes longer than you planned. Make sure you’re setting aside enough “extra” time to close off anything you don’t get squared away in your original focus session.

Prioritizing in Practice

   When I approach this, I always start with 3-4 priorities for the week. Deciding on what my most important, or most valuable, project is for the week, I label that #1. #2 for the second most important, and so on and so forth.

   Then I do the exercise of assigning those numbers to my To-Do list. Since my lists are all electronic, anything that doesn’t get assigned a number gets deleted. While that might seem extreme, I have learned that even just seeing other people’s projects on my task list drains away valuable mental energy.

   Then, I take my calendar, and start scheduling off time for me. Anywhere from 45 minutes to 4 hours at a time. But the sweet spot is usually between 60-90 minutes. Any longer than that and I will inevitably distract myself with email or other such distractions.

   Starting Monday morning, I assign priority 1 to my first time block, eventually moving to a block for 1 or 2. Then just priority 2. Then 2 or 3, always allowing an extra “shared” block of time for work that spills over. This keeps me accomplishing the most valuable tasks first.

How to Become a 1% Better Version of You

   What separates the elite from the rest of society?

   While the list of results speaks for themselves, the real question is what are those top performers doing that the rest of society isn’t?

   No matter who you look at, the best of the best all hold a similar set of characteristics. And thankfully for everyone else, these are learned skills. There’s no advantage for introverts over extroverts. No nature vs. nurture. Even genetics rarely plays a role. No matter where you look, you can find people embodying a wide array of personality traits, each sitting at the top of their chosen fields.

   What’s the secret then?

   The most successful, those who achieve the most with their lives, all share 2 critical skills.

They know what to do.

   The top achievers in our society understand what they do to add value to others. Whether that’s setting corporate vision, building new products, or throwing touchdowns. A top performer understands what they do to drive success for their organization, family, or team. And then they double down on fulfilling those key objectives and critical activities.

   Look at what you are currently doing that adds value. Everyone does something of value. Whether that’s in your day job or at home with your family, everyone has the opportunity to improve the world around them. 

   After you identify the key actions and activities that you participate in that drive value, increase your personal worth by spending more time doing them. For example, the top performing sales people know that their value is increased exponentially by talking to potential clients. The more time spent speaking to clients, the better your results. That means less time spent on emails. Less time cold calling prospects. Less time attending internal meetings.

   By refocusing those time savings into the true value-add conversations, a top performer can dramatically increase their results.

   We all have tasks that need to be done, but really aren’t that valuable. Identifying those tasks, and either doing them faster, or delegating those tasks (if possible), frees up your time to really focus on the rain-making activities.

They have a relentless drive to improve.

   The other universal trait of the uber-successful is their relentless drive to improve. Not just improve the world around them, but most importantly, to improve themselves. Reading books, taking courses, attending seminars. Anything that they can do to improve, even marginally, a top performer will do. And this is important. The improvements might not be dramatic, but the results certainly are. 

   The difference between #1 and # 100 in almost any activity is less than 1%. 1% slower, and you start at the back of the race-track line up. 1% slower and you might not even qualify to compete.

   But the flip is also true. If you improve yourself by just 1%, you will make huge strides over and above the competition.

What does 1% look like?

   There are 24 hours a day. That’s 1,440 minutes. You have them. I have them. The best in your chosen field has those same 1,440 minutes. 

   If you want to approach the top in your field, start with using just 1% of those minutes to improve yourself.

   The most common objection to self improvement is the lack of time. So what is 1% of those 1,440 minutes each day?

   14.4 minutes.

   For 15 minutes each day, you can become 1% better. 

   For 15 minutes each day, you can move from the middle of the pack to leading the pack. 15 minutes, 1% of your day, to change your life.

   This month, spend 15 minutes a day, only 1% of your time, doing something to move the needle forward. I can guarantee that after just 1 month you’ll already see the results.

   What is that 1% for you? 15 minutes a day playing an instrument? Reading a book? Jogging around the block? Learning a language? Settle on something that will make you better. A better contributor at work, a better spouse, or just better to the person you see in the mirror.

What are Index Funds

   Index funds and mutual funds have surged in popularity over the past decade, and for good reason. These types of investments can provide many benefits for investors. 

   One of the most important benefits, and the reason why I recommend these types of funds, is their simplicity. Simple to use, and simple to understand.

   Of course, when it comes to personal finance, the entire finance industry is built on taking something simple, and twisting it into something impossible to understand.

   The same treatment has been performed on our beloved ETF’s and mutual funds, all wrapped up beneath the mathematical concept of indexing.

What is an Index?

   In its simplest form, an index is a way to measure something.

   It’s actually a concept we’re all very familiar with.

   The average test score from your class in a certain subject is an index. The win % of your favorite team is an index. The gas mileage (mpg) on your car is an index.

   You are measuring something, taking a list of data, and using a mathematical formula to draw inferences from that data. How well you performed compared to class average, for example. But, you could look at a different index, and come up with a different result. How you compared to the class median, for example. Comparing your scores to the mean versus the median, may give you a very different outcome.

   And that’s just cutting the surface of indexes. A different index could look at test scores by birth month, weighting heavier those born in the summer months, and lighter those born in the spring.

   This of course, is just scratching the surface, because we’re still only looking at our class test scores. The machinations of finance can take those scores and chart them against neighboring schools, states and even nations.

Indexes in Finance

   As a way to measure something, that definition is incredibly vague. That leads to all sorts of different numbers, able to be used in different ways. 

   Take the S&P 500 for example. This index of 500 of the largest publicly traded companies looks at an average based on market capitalization. It’s actually fairly logical, that a company like Apple or Amazon, with enormous market capitalization (Share Price times Shares Outstanding) should be more heavily reflected than a much smaller company like Molson Coors.

   Compare this to another well known index, the Dow Jones Industrial Average (DJIA). DJIA is indexed based on a modified market price weighting. This places the weighting based on share price, and not on market capitalization as we saw with the S&P 500. 

   For example, picture Company A with a market cap of $100,000, made up of 10 shares worth $10,000 each. Compare that to Company B with a market cap of $1,000,000, or 10 times the size. But Company B has a share price of $5,000, and 200 shares outstanding. Using a price weighted index would more heavily weight the much smaller Company A, based solely on its exclusive and very expensive share price.

An Index for Everyone

   The increasing popularity of index funds for retail investors has led to an equal surge in institutions creating these funds. Just like a walk down the cereal aisle, you’ll find a fund for anything. 

   Regular flavors aren’t enough? Try frosted flakes. Or fruity puffs. Or chocolate crunch. Or anything in between.

   There are index funds for the environmentalists. For manufacturing, farming, heck, even vegan ETFs can be bought. Whatever flavour you’re looking for, you’ll be sure to find it. And if not? Someone will make it for you, for a price.

   With under 4,000 publicly traded companies in the US (3,671 in 2020), there are almost 8,000 mutual funds that package and split those stocks in every imaginable combination. 

   If that sounds like a lot of funds, you’re right! Now imagine the cost of maintaining so many complex, confusing indexes (groupings of stocks). The added complexity is staggering, and the costs are ultimately borne by you, the buyer. 

Which one(s) to Buy?

   I cannot tell you which fund will outperform the market this year. Nobody knows that. And anyone who claims they do, is trying to pull a fast one on you. But, there are a few criteria that you should follow when buying your investments.

Know the assets - if you can’t tell what the calculation is, and understand what you’re holding, you probably shouldn’t be investing in that fund. As with most things, investing is simple. It’s not easy, but it’s simple. 

Ignore past performance - this might sound counter-intuitive, afterall, you want to back the winning horse. But there’s a very good reason every marketing pamphlet carries the same disclaimer, “Past performance doesn’t guarantee future results.” That line is completely true. What was best last year isn’t guaranteed to be best again.

Control your costs - if you take only one thing away, it’s this: minimize your expense ratio. Expense ratio refers to the costs charged to create and maintain the fund. The more complex the fund (or the greedier the fund manager), the higher the expenses. Those expenses mean you not only need to pick a winner, you need to beat the average by whatever rates they charge. Consistently picking the fastest horse is almost impossible. Picking the horse, who then starts half lap behind the competition is insanity. Don’t stack the deck against yourself.

   Index funds, when done right, can pave the path to financial freedom for you. But there will always be those trying to take advantage of such opportunities. 

   If you want to find investing success, stay vigilant. Don’t put your money into something you don’t understand. And avoid handicapping yourself as much as possible. Investing doesn’t need to be complicated. Buy into a cheap fund, with good total market coverage, that you understand. And keep buying, month after month, no matter what the price is doing. Do this, and one day you’ll wake up rich.

Frames of Reference

   Have you ever seen a herd of gazelle running? (Thanks BBC's Blue Planet)

   All it takes is one gazelle to start galloping, and the rest immediately join in. This of course helps keep the gazelle safe. If one sees a lion waiting to pounce, not every gazelle needs to see the lion, they simply trust that there is danger, and that running is the safest course of action.

   Humans aren’t a whole lot different. 

   Our expectations about life are often framed by those surrounding us. The cars that our friends drive, the houses they live in, the lifestyle they lead.

   Sure, we all know that we shouldn’t compare our lot to the neighbours. But we’re only human, and we do compare.

   As we see repeatedly the types of life and lifestyle that others showcase, we quite naturally start to think of those lifestyle attributes more positively. A new car, a bigger house, a faster boat, shinier phone. These types of desires are so prevalent that we even have term coined for it, Keeping up with the Joneses.

   With the ever expanding reach of social media though, our neighbours aren’t just the house across the street. People are inundating themselves with the highlights of everyone, from Hollywood elite to instagram influencers to that gal from highschool. With those expanding social influences, people are more and more trying to live outside their means, all for the almighty ‘gram.

   This lifestyle inflation has disastrous consequences, as Canadians and Americans are borrowing more now than ever before. The average Canadian now has over $20,000 in debt excluding their mortgage.

Expanding Your Frames of Reference

   Alright, borrowing excessively is bad. Especially when it puts a strain on your financial system. But what can you do about it?

   Going cold turkey on social media is pretty unlikely. And since we’re already on the IG, it’s always a good social talking point to check out Hollywood’s who’s who.

   But rather than focusing only on the highlight reels of the rich and famous, maybe it’s time to expand your frame of reference. With billions of people living in impoverished nations, perhaps it's time for a heavy dose of reality. 

   Millions of people don’t have access to reliable electricity, are you sure you need an even bigger TV on the wall? Millions more still don’t have access to clean drinking water. Is it really an inconvenience that your fridge only makes wedge shaped ice?

   Before making that next impulse purchase to show off in your own 3-second highlight reel, take a moment to consider what you have in your very rich life. A little gratitude goes a long way. That genuine appreciation might not be captured in 140 characters or less, but it will certainly make you a whole lot richer.

Indexing for Financial Independence

   How do you plan on improving your financial life?

   No matter your financial goals, increasing your wealth is certainly on the top of that list. But striking it rich by stuffing cash under the mattress isn’t going to work.

   Where then should you be putting those hard earned dollars, to make them work just as hard for you?

   There are a myriad of ways to invest, from real estate to blockchains, commodities to collectibles. But, among the possible investments, there is one type of investment that I recommend more than anything else. Stocks. In specific, index funds.

What is an Index Fund?

   An index fund is a collection of financial instruments, stocks and bonds, that is designed to mimic a financial market. Simply put, an index fund is just a tiny piece of an entire market.

   These index funds come in the form of either mutual funds, or exchange traded funds.

   One of the most popular index funds to be mentioned is the SPY ETF. This fund is composed of all the stocks held in the S&P 500. The S&P 500, as a refresher, is an index of 500 of the largest US companies (by market capitalization). This has several implications for investing, which help with your long-term wealth accumulation. 

Diversification

   One of the keys of investing for most people is to ensure they are diversified. While there may be some rare exceptions who have picked winning companies time and again, they are precisely that, the rare exceptions. When discussing your financial health, your dreams, your future, we don’t leave that to a lucky roll of the dice. 

   Index funds solve this dilemma, by allowing you to purchase a broader section of the market. Depending on the index fund chosen, you own a small piece of all the assets. In the above example with an S&P 500 index, you would own a piece of each of the 500 companies on the index. That means you own Tesla, Apple, Microsoft, Amazon, Johnson & Johnson, etc. This one investment lets you buy into technology, consumer goods, mining, oil and gas, and many other industries. 

   Diversification of this nature helps you stay away from any one industry. If a major event hits the oil and gas industry, much of your investment is stored elsewhere.

Picking a Winning Stock

   A common rejection of the indexing idea is that picking the right stock, at the right time, and you will achieve far superior results. From a math standpoint, those people are absolutely correct. If you bought Amazon before it became the company it is today, your wealth would have grown exponentially. The same with Apple, or Netflix. 

  But, for every winner, there are a dozen other equally as spectacular failures.

   How would you know that Netflix would become what it is today, when Blockbuster was the household name 20 years ago? Blockbuster certainly had the industry connections, they had the brand recognition, and they had the financial resources to pull off a streaming service. Would you have made the bet that a mail-order DVD rental company would become one of the most prominent media companies in 2021?

   Index funds, on the other hand, hold a small piece of many assets. That means you would have been an investor in those early days. Along with holding assets in many other companies. Those wins would have been your wins. Those returns would be driving the returns in your portfolio. 

Barriers to Entry

   Index funds, particularly mutual funds, have one of the lowest barriers to entry. If you wanted to buy shares in the same 500 companies as in the S&P 500, you would need tens of thousands of dollars to invest. 

   This financial barrier has been somewhat reduced with some brokerages now offering fractional share ownership. But, the complexity of buying and managing the market weighting of 500 companies would be just as intimidating. 

   The complexity and the financial barriers are both solved by index funds. Now, anybody with a couple of dollars can invest in the entire market.

The Easiest Winner - Index Funds

   Perhaps the most important reason why I recommend index funds for every investor is their simplicity. Sure, you gain some diversification advantages. And, you own a small piece of the winners. But those aren’t the main reason people don’t get investing right. 

   The main reason people make financial mistakes is the confusion. Too little, or too much information, and people become stuck. Paralyzed by the indecision, they often make the most costly decision of all, the cost of inaction. In these situations, you need less to do more with. Less complexity in your financial plans, and more investments driving your financial goals.

   No Safety Deposit Box for your gold bricks. No warehouse for your barrels of oil. No trouble with the renting tenant. And no listing that precious painting for auction. Index funds are so easy, anyone can use them.

   Buying into an index fund is easy. It’s simple. Implementing the right system automates all of this so you invest and keep investing without even thinking about it. You too, can use index funds to automate your path to financial independence.

What’s Your Number?

   When you think about Financial Independence, does it feel like you are standing at the bottom of a seemingly insurmountable mountain? 

   Looking at financial independence as the ability to live off your own financial resources for the rest of your life sets the bar quite high. Essentially, you’re trying to come up with your “never work again” number.

   But, we need to work.

   Abraham Maslow published his thoughts in a widely taught and cited paper “A theory of Human Motivation”. Since the time of publishing, Maslow’s Hierarchy of Needs has only grown in popularity, not for scientific reasons, but as a representation of what people see in themselves.

   Maslow’s Hierarchy of Needs:

Image Credit: Wikipedia

   Work is an essential part of our identity. It provides us a way to meet our needs - belongingness, accomplishment, and fulfilling our potential. Without work, we’d be lost. 

   But work doesn’t need to be a traditional 9-5 shiftwork. Work is ultimately a purpose, a reason for acting, a reason for living.

   Of course, for many people, this view of work is an esoteric, almost mythical story. The idea of work has been corrupted by a sense of duty. You must work, because that is the only way to earn enough to fulfill the first two levels of the hierarchy; food, shelter, safety. 

   To grow beyond those first two levels, you need to know those are taken care of. To do that, you need another financial goal. A base camp partway up the mountain of financial independence.

   You need a mid-term financial goal, a number that covers your food, shelter, and safety, so that you can focus on growing into your full potential.

   Look at your monthly spending. How much do you spend each month on: 

  • Housing (rent or mortgage including property taxes)
  • Food
  • Utilities (Gas, Water, Electricity, Internet, Phone)
  • Healthcare (Medical bills, Insurance)
  • Transportation

   These are your basic financial needs. Having these covered will allow you to focus on other of life's priorities.

   This number is extremely important for two calculations, your emergency fund, and that base camp of Financial Security.

Emergency Fund

   An emergency fund is important for everyone’s financial security. To be able to cover the unexpected, so you don’t get side-tracked from your true financial goals.

   Take the cost of your basic needs, and multiply by a reasonable period of time. 6 to 12 months should be sufficient, in case of job loss or another type of emergency.

Financial Security

   Your basic needs are significantly less than the cost of your total lifestyle. Understanding what those needs are will help you plant your flag at base camp on your financial journey. With those list of costs, multiply by 12 to find your annual expenditure, and divide by 6%. This gives you a target for Financial Security. 

   Take Sally’s example. She needs $3,000 / month for her basic needs. Her calculation would be:

$3,000 * 12 / 6% = $36,000 / 0.06 = $ 600,000.

   A fund of $600,000 invested in a low cost index fund would provide Sally the financial security she needs to never worry about food, shelter, or safety ever again.

Why 6%?

   6% estimates the total market return of a low cost index fund. Financial Independence looks at lower numbers, like 4%, to determine the appropriate levels of withdrawal to ensure you won’t run out. But Financial Security comes first. The Financial Security fund still expects you to work, to earn more, to be productive as you grow towards your potential. 

   By now you should have a few financial goals in place. How much you need in an emergency fund. How much you need to experience some financial freedom. How much you need to achieve financial security. And ultimately, financial independence, how much you need to live life the way you want to, without ever needing to work again, if you so choose.

   What are your numbers? Imagine what your life will look like as you start to build these financial foundations. Imagine all you can experience, all you can do, all you can become. That is a life worth living.

Financial Freedom: How much is enough?

   How much money do you need to have financial freedom? 

   Your answer to that question will spell out the route markers on your financial journey. But so few people actually take the time to think about how much they need.

   Is it a million dollars? What about 10 million dollars? Or a hundred million?

   Depending on the lifestyle you hope to achieve, the person you hope to become, your answer might vary wildly as compared to your friends and peers. You also need to consider what financial freedom really means to you.

   Is it the freedom to quit your job? The freedom to take a well-deserved vacation? The freedom to retire?

   Freedom means different things to different people. And even throughout your life’s journey, that meaning will change drastically.

   Fortunately, financial freedom is often achieved long before financial independence. Unfortunately, for millions of people out there, financial freedom is just as much a pipe dream as financial independence.

What is Financial Freedom?

   Financial freedom can broadly be considered; the ability to make choices in spite of the economic impacts, rather than because of the economic impacts. This means you are free to choose. To take time off. To work somewhere else. To live out of the shadows of looming financial catastrophes.

   Financial freedom is being able to take command of your own life choices, and not fear the next mail delivery. 

James Clear describes this “wealth” as: 

“Real wealth is not about money. Real wealth is: not having to go to meetings, not having to spend time with jerks, not being locked into status games, not feeling like you have to say ‘yes,’ not worrying about others claiming your time and energy. Real wealth is about freedom.” - James Clear

   Financial freedom is therefore achieved when you have a financial safety net. Enough resources stockpiled that you can look out for yourself. This might be a 6-month emergency fund. Or enough to go backpacking in South America for a month. Whatever the amount is to set you free.

Financial Independence: What is it? And Why?

   If financial freedom is the ability to make a choice over your life in spite of the economics, financial independence takes that idea further. 

   Financial independence can be considered the ability to live, and continue living on the income from your investments for the rest of your life. To find out what this number is for you, you first need to understand what your annual expenses are. 

   Map out your expenses. How much do you need each year to live? Consider the lifestyle you want to live. Don’t skimp out here. Understanding the life you want to be living is essential. An underestimation might just leave you eating boiled potatoes and cat food.

   Once you know what your lifestyle costs, you’re up to the Financial Independence calculation. Unfortunately, there isn’t one clear formula for this calculation. Factors such as inflation, deflation, investment returns, etc. all play a crucial role. There are two such calculations that are usually used; the 4% rule, and 30 times.

The 4% Rule and FIRE

   The 4% rule essentially says you can withdraw 4% of your investments each year, and that fund will continue to exist for the rest of your life. A common calculation used for establishing an effective withdrawal rate for your retirement savings, this calculation also serves well for determining the size of the pot you need to achieve financial independence.

   An increasingly popular movement, the Financial Independence, Retire Early (FIRE) tells us that to safely live off the earnings from your investments, you need 30 times your annual expenses.

   The difference is essentially 3.33%, compared to 4%. 

   Depending on the measuring period, either of these values work. 90% of the time a 4% withdrawal rate has proven to be effective. But, you certainly don’t want to be in that 10% group! That’s why FIRE is slightly more conservative, to further reduce the risk of running out of funds. 

   When deciding which multiplier to use, it’s important to think about the lifestyle flexibility you’ve built in. Can you cut back a bit during economic downturns? Living on less than the 4% you planned? Or is that annual expenses number a must have? If so, airing on the side of caution is a better idea for you.

   Take a few moments and jot down what your annual expenses number is. Now set up your range. Divide that annual number by 4%, and multiply the annual number by 30. That should set your aim on a more tangible goal.

   That is what it will take for you to reach financial independence. Now all that’s left is to keep laying the bricks of your financial fortress. One brick at a time.

   How much do you need to be free? To make the choices you want to make? To break the shackles of “can’t wait until payday”, and start living life on your terms?

   And how much do you need to enjoy that level of financial independence for the rest of your life?

Lessons from Lent

Why is religion often cited as a cornerstone for some people’s success?

 

Many Christians recently embarked on their own annual pilgrimage this year, with the celebration of Lent kicking off on Ash Wednesday. While there can be many things learned from every religion, this 40-day long pilgrimage of the Christian faith holds a few keys to the vault of success. 

 

Those keys, the ones we’re all searching for, are Reflection, and Sacrifice.

Reflection

One of the powers of religion is the consistent self-evaluation. A part of the Lenten process is reflecting on your life. Putting careful consideration into how you are living helps you make the necessary adjustments to keep you on the right path.

 

Of course, this habit of reflection is more frequent than once a year. Religions are remarkably effective for reinforcing such positive behaviors. Whether that’s Sunday Communion, observing the Sabbath, or Al-Jumah, all religions have days dedicated to rest and reflection.

 

Irrespective of your attitudes towards religion, this self-evaluation process is an important one. Each week and month, make sure you check in with Number One, you, and make sure you’re on the right path.

Sacrifice

While reflection helps you re-calibrate your compass, the next essential key to success that religion can give us is through sacrifice. Certainly, in observance of lent, sacrifice is an essential element. For 40 days, Christian practitioners commonly either give up something, or make an effort to change in some positive way.

 

This is the single most important key to success. If you want to be successful, you must make sacrifices.

 

Sacrifice who you are for who you can be.

 

Success takes commitment, and endless hours of effort. It’s picking up a book rather than the TV remote. Jumping into some joggers rather than hit snooze. Investing some cash rather than spending it all.

 

Take a few moments and evaluate your day, your week, your month. What change can you make for the next 40 days that would put you back on track? What are you willing to give up to achieve more with your life?

Love or Hate? Dollar Cost Averaging

Expecting your year end bonus soon? Do you invest it all at once? Or try to capture the benefits of dollar cost averaging?

What is Dollar Cost Averaging?

Dollar cost averaging (DCA) refers to buying a piece of the investment consistently, over time. In this way, the same investment dollars, say $100 / month, will buy you the investment at the average price of that investment. When the price is higher, your $100 doesn’t buy as much, whereas when the price is lower, your $100 buys more. This averages the cost of ownership out, and mitigates the chances of you buying at the market peak.

This sounds good in theory, and I must admit, I am a big advocate of this idea. 

 

If you buy into the idea that dollar cost averaging works, then you will consistently buy into the market without worrying about what the price is at that current moment. That’s because, in the long run, you’ll average your cost of ownership out.

 

I recommend automating your investments, so that on a preset schedule, those investments are purchased into your portfolio. This automation removes your emotions from the equation, and eliminates the gambling aspect of investing where you try to time the market. You no longer need to concern yourself with whether tomorrow's prices will be higher or lower than today's.

 

If this philosophy works so well, why then would I argue against Dollar Cost Averaging when you come into a large windfall, like a bonus, commission cheque, or inheritance?

“Stonks always go up.” - /r/WSB Reddit User

A phrase coined by the popular investing subreddit sums up precisely why Dollar Cost Averaging doesn’t work in the long run. Stocks always go up.

 

This of course is not true in the short term. But the objective of long-term investing isn’t to gamble on the short term outcomes, but to make a sure bet on the progressive growth of companies over the long term. 

 

We’ve seen the truth in this statement time and time again. At the time of writing in February 2021, the NYSE and Nasdaq are sitting at all time highs. Not even 12 months after the coronavirus plunge on March 23rd, 2020. Those highs seen today are far above the 2008 highs just before the market-altering financial crisis and subsequent stock market crash.

Is today the day before the next crash?

Depending on which television station or professional economist you tune into, you’ll hear all sorts of claims. Tomorrow could be the end of the world, or it could be the day that financial markets soar ever higher. The truth is, nobody knows. Anyone who says they do know is simply making a prediction, a guess no different than who will win the next sporting event or reality tv show. The bolder the prediction? The higher the TV ratings. Those so-called experts are just clamoring for attention over all the other noise in our lives.

 

Listening to any of these programs is sure to play on your emotions. What if they know something I don’t? They are the experts afterall. Am I being played for a sucker? Why does the other expert say something different? Who is right? Can I still win this game?

 

The cost of these emotions is all too often inaction.

 

That is why, when you come into a large extra payment, it’s best to jump in with both feet. You can’t predict the future in the short term any better than these television “experts”. And you know, in the long run, stocks always go up.

 

Let’s look at this in a real example. Assume in 2008 you came into $10,000 to invest. Also assume you’re the unluckiest person around with investing. In 2008, the S&P 500 hit it’s high for the year in August, hovering around $ 1,300. The following 6 months saw a progressive decline all the way to $676 in March 2009. 

 

If you had invested all $ 10,000 in the markets in during the August 2008 highs, and left those investments alone throughout the following market meltdown and subsequent revival, today you would have tripled your investment, owning $ 30,267.92 (calculated at market close, Feb 12th, 2021). That’s a 300% return in 12 years! Not too shabby for the unluckiest investor alive.

 

To make that grow even further, you could have averaged down through dollar cost averaging throughout the following 6+ months of market decline and market recovery. Turning that 300% ROI into something even higher.

 

If on the other hand you had tried to time the market, when would you have invested those dollars? March 9th, 2009? Unlikely. That’s the absolute bottom, and investors had just had their confidence shaken. 40% losses in 6 months, a staggering number. What about the end of April 2009? Well by that time the market had already recovered 29.13%. Waiting any longer than that and your returns were even less.

 

You see, there’s no better time to invest for the long term than today. We don’t know what tomorrow will bring, and barring a world-ending event, it’s quite possible that today’s prices are the lowest we’ll ever see again.

 

Stonks always go up.

The Market Vs Stocks

One caveat is that we are looking at the market performance. Taking a gamble on any one company is exactly that, a gamble. The market, on the other hand, is a collection of all companies. Sure, some companies fail. But those companies that fail are replaced by other companies. Some do exceptionally well. Some don’t. 

 

The fact is, the best players in this game are constantly changing. 

 

General Motors dominated the market for years, before needing a government bail out. Meanwhile Tesla came in out of nowhere and captured large swaths of the market.

 

But one thing is for sure. This game will always be played.

When you come into extra money, make the guaranteed bet, that the market will continue to increase in value. With this knowledge, you will be sure to buy at today’s prices. 3 to 5 years from now, you’ll only wish you could get those investments at the prices you did just a few short years ago.

 

If those same investments ever do go on sale in the future, load up on some more. This will average down your cost of ownership, and make your returns just that much higher.

Will You Be A Winner?

   Tonight’s the night, the big game. Super Bowl LV (55). Where football fans, and non-football fans alike all crowd around watching two teams smash into each other. Fortunes are made and lost with each touchdown and fumble.

   Kansas City Chiefs star quarterback, Patrick Mahomes has a 450 million dollar, 10-year contract. While Tom Brady has a 25 million dollar payday (plus bonuses) from his Buccaneers contract.

   But these aren’t the first star athletes to be paid such incredible sums. Time and time again, the rich and famous have demonstrated that even the mighty can fall, filing for bankruptcy after they lose it all.

   What mistakes are being made that cause societies top earners cheques to bounce?

   As with most things, education plays a pivotal role in the eventual success or failure. That is why it is so perplexing that basic financial education is lackluster in its delivery, if provided at all. A few simple rules could have averted all of those financial meltdowns.

Up and Down

   Jim Rohn perhaps put it most eloquently when he said: if your outflows exceed your incomes, your upkeep becomes your downfall.

   Or more simply, if you spend more than you make, you’ll soon go broke.

   This is perhaps the cornerstone rule of achieving financial freedom - don’t spend more than you make.

   Of course, that isn’t usually the problem when we’re in our prime. Sports superstars like Mike Tyson can attest to that. Each fight was worth millions to his bottom line, and in his prime those fights were coming fast and furious.

   But all good things eventually come to an end, and when Mike Tyson retired, that income was significantly reduced. As we all witnessed though, Mike’s lifestyle didn’t scale back a few notches. His upkeep became his downfall.

   That is the single biggest reason that most people fail to achieve financial freedom.

   As you become more established in your career, you’ll start earning more. But at the same time, life is likely growing with you. That promotion at work coincides with the birth of another child, and all of a sudden you need a bigger house. And a bigger car. But not just any bigger car, you need something worthy of your new title. Something shiny, with heated leather seats and a brand name that turns heads.

   This cycle continues your entire life. Constantly up-scaling your life every time you move to a higher paying job or position. It’s normal, and it’s natural. But if your lifestyle creep keeps pace with your earnings growth, you’ll soon begin to realize something. Freedom isn’t achievable like this.

   When your outflows grow at the same rate as your income, you can’t ever scale back on your income. That means you won’t ever find the freedom that was promised. You’ll find yourself stuck in the same situation that millions of people in the richest countries in the world are in. You simply cannot afford to retire.

   The solution is to find the elusive state called balance. Balance between the needs of now, and the needs of the future

Balance the Sacrifices

   To find that elusive balance, you need to decide what sacrifices you are willing to pay. Do you sacrifice today’s comfort for freedom tomorrow? Deciding to what extent you are willing to pay that sacrifice will determine how much freedom you have in the future. 

   What percentage of today’s earnings will you put aside for tomorrow? Depending on your own unique situation, those numbers might look very different. But one thing is certain, the more you sacrifice early, the more freedom you will have years from now.

   You want to be a winner. But, what are you willing to sacrifice for that victory?

The GameStop (GME) Game

   What in the world is going on with GameStop (GME) stock prices this week? Meteoric stock price appreciation, amidst a brewing war between retail investors and billion dollar hedge funds.

   This situation has the potential to change Wall Street permanently. But that begs the question, what exactly is going on?

Investing, The Traditional Approach

   One primary way that we reach financial freedom is through investing. Putting your money to work, so that you don’t have to.

   To do this, you find someone who needs your money, loan it to them, and they pay you back over time. This could be buying real estate you plan to rent out, where someone needs your money to own the property, and they pay you for that privilege through rent. Alternatively, you could find a company, give them your money in return for an ownership stake, and you are entitled to a piece of the profits of that company. That is, in its simplest form, what investing in the stock market is.

   Over time, people have found more creative ways to make money though. Some people decide to take a different approach. Instead of investing in future profits from a company, they decide that a company is less profitable than other people think. These people sell the current interest in that company, with the plans to buy back those shares when the company under-performs.

Short Selling, The Long and Short of It

   Making a bet against a company is more like gambling than investing. But, it can be very lucrative, if your bet pays off. 

   Short selling is essentially making this bet, except with other peoples’ money. Instead of owning what they sell, they borrow the shares from someone who does own them, and sells those shares to the open market. The promise here is to buy back the shares that were sold, and return them to the original lender.

Introducing GameStop (GME) To The Game

   One such occurrence happened recently with GameStop. A large institutional investor, Melvin Capital, made an aggressively large bet against a company called GameStop (ticker code GME). They did this by short selling, or selling shares of GME that they didn’t own, with the promise to buy those shares back at a later date.

   Getting word of such a large bet against GameStop, some regular folks (retail investors) decided they’d take up Melvin Capital in the wager. Traditional investing logic was thrown out the window, as retail investors looked at the game from an economic standpoint. No longer was purchasing GME stock about price-earnings ratios. The value of the company's shares has become completely disconnected from its earnings multiple.

   Knowing that Melvin Capital needs to buy those shares back, because those shares that Melvin Capital originally sold were borrowed, retail investors correctly understood that the game was now about Supply and Demand. It doesn’t matter how well GameStop does (or doesn’t) do. There is a guaranteed demand, so the only thing left to do was to constrain the supply. With limited supply, and high demand, the sellers pushed the price equilibrium (in this case the share price) much higher.

   Changing the rules of investing, particularly on this GME stock, led to a rapid appreciation in share price. Meaning that while Melvin Capital sold shares at prices in the low teens, they now had to buy those same shares back at prices in the hundreds. Essentially, Melvin Capital stood to lose billions.

Changing The Rules of The Game

   With billions of dollars at stake, some people will do just about anything to not lose. Those people are willing to lie, cheat, and steal.

   And that’s exactly what they did.

   By Wednesday, January 27th, 2021, this GME situation was out of hand. The share price was rising exponentially, and millions were getting involved. Robinhood, a trading app, was the most downloaded app in the app store, as both news and social media stirred up a feeding frenzy. A whale (Melvin Capital) was dying, and everyone wanted their pound of flesh.

   Shortly after market open on Thursday, January 28th, 2021, there was a violent change to the game. The institutional investors flexed their muscles, and many brokerages including Robinhood and Interactive Brokers, placed buying restrictions on retail investors. These actions prevented normal people like you and I from participating in the investment markets. 

   That single act, of greed and desperation, threatens to disrupt the entire financial system as we know it.

What’s Next?

   You may be wondering, “I don’t own GME, so why would this be important to me?”

   By assaulting the retails investors ability to openly and fairly trade in specific investments, both moral and legal codes were violated. The class action lawsuits already opened against such trading platforms, coupled with SEC investigations, and the millions of eyeballs trained on this developing situation could certainly impact how brokers and institutional funds operate.

   For anyone who has investments, whether it is just your retirement accounts, or you actively trade, legal changes in the securities industry look to be just on the horizon. Being aware, and staying in the know, will help you set yourself up for success as the world continues to change and evolve.

How to Reduce Your Taxes

   You want to pay less taxes.

   While taxes might be your contribution towards the society you live in, everyone wants to pay less than they do. Fortunately, there are some excellent ways that you can legally reduce the amount of taxes that you owe.

Save for Retirement

   Whatever your country's retirement savings plans are called; RRSP (Canada), 401K (USA & Japan), Superannuation (Australia), etc. There are some serious tax breaks for contributing to your retirement.

   For Canadians, contributing to your RRSP accounts grants you a tax credit, effectively lowering your taxable income for the year. While your income is lower for tax purposes, you also have the advantage of increased investments to your name. The growth on those investments is only taxed when you withdraw the money, usually on retirement which could be many years from now. This tax-deferral is beneficial to you now, and can be important for tax planning later in life.

   The reason that saving for retirement comes with tax advantages stems from the purpose of taxes: to pay for the society that you benefit from. 

   As you increase your own financial resources, especially in funds such as the RRSP or 401K, you are reducing your reliance on government systems designed to protect you when you retire. A lower reliance on those systems means you bring about a lower societal burden, and your share of contributions can be decreased.

Claim Business Expenses

   If you are making money on a side hustle, you may be able to claim some tax credits based on your expenses. 

   While your side-gig means you earn more, and therefore pay more taxes thanks to the marginal tax rate system, there are some benefits for deducting expenses that you incur. These could include expensing part of your home if you are dedicating a certain area to these side-gig activities. 

   For example, someone making money on the side selling hand-sewn clothes and other products. They would be able to expense materials and sewing equipment, the sewing room in your home, and other costs incurred from those business activities. It’s very important if considering these types of deductions that you’ve kept the receipts and proof of expenses.

Deduct Capital Losses

   Maybe you’re more the investor type, and you make additional money in the investment markets. As with all forms of investing, there is always risk, and sometimes you end up losing some money. Those losses are also eligible to reduce your taxes.

   For the more sophisticated investors, this type of deduction is an important consideration. Sometimes it’s better to incur a loss on one investment, and use that to offset a gain somewhere else. This type of tax planning is best performed by experienced investors, or under the guidance of a certified tax or financial planner.

Claim Education Expenses

   Another way that we grow our incomes is by growing ourselves. While the tax code is behind the times in terms of what qualifies, if you are receiving education from an accredited institution your tuition costs might qualify for tax credits.

   Mostly these accredited institutions are universities and colleges delivering professional, post secondary education.

   If you are continuing your training and development by taking courses at this level, those tuition costs should be considered when preparing your taxes. 

Deduct Charitable Contributions

   One final way to reduce your taxes is to contribute to a charitable organization. If taxes are your contribution to society as a whole, charities give you the freedom to put your dollars to work on a cause that is important to you. 

   Those charitable contributions that you make help society improve, and better take care of various people and/or ideas. That has a tangible, meaningful value, and you are rewarded with tax credits for doing so.

   For example, if you contribute to the Heart and Stroke Foundation, you are promoting research and development into cardiovascular issues and remedies. The more discoveries that the foundation makes, the healthier the population can become. As people become healthier, there is less drain on the healthcare system due to cardiovascular ailments, and society as a whole experiences a lower financial burden.

   In that way, your donations not only help a cause that you believe in, but also benefits society through their advances.

   If you want to pay less taxes, look for ways to improve both yourself and the society you live in. Whether it’s a stronger financial foundation, or adding value through business and education, your growth journey benefits more than just you. And to reward you for your efforts, there are numerous tax advantages that you can reap along the road. The only question left is; how do you plan to grow?