Investing Advice from The Berkshire Hathaway 2020 Annual Meeting

   This past week saw the release of Berkshire Hathaway’s 2020 annual meeting. Along with the financial results of the company famously headed by Warren Buffett and Charlie Munger came some commentary from the widely recognized Warren Buffett.

   While the annual meeting was over 5 hours, there were a few snippets that come as timely words of wisdom from one of the world’s wealthiest people. 

Never bet against America.

   Throughout the years, America has proved its resiliency and ability to overcome tough times. This commentary can be more broadly applied with the simple yet powerful statement, bet on humanity.

   While we might be currently facing one of the most challenging periods of our lives, one thing is true. We will survive. 

   While I would caution the mentality of investing as any form of gambling, there is one hand that I would undoubtedly go all-in on. That hand is that we will not just go through this, we will grow through it. We will become better, faster, stronger from the challenges that we as a species are facing right now.

Buy America, And Forget About It.

   As with the first piece of sage advice, Buffett also makes some commentary on the ability of the average investor. Most people are better off taking that bet on human progress and investing in a total market ETF. 

   When saying this, Buffett recognizes that some people like him have careers in investing, and as such devote an above average level of time and attention into investing. These dedicated investors are the ones making individual stock picks based on years of research and experience. For most of us who are not combing through annual reports on a daily basis, taking a broad stance is better suited to our needs and our experience levels. 

   These total market ETFs allow us to place a bet that some of the best companies will survive and thrive. And that bet on human progress hasn’t been wrong, in the long run, ever.

   What can one of the world’s most successful investors teach us? Bet on humanity. Together we will not just survive, but we will thrive.

You are Here: Exploring the World Inside

   The sun was shining this week, and it seemed at least for a few hours on Saturday that spring warmth was starting to arrive in Canada. With those golden rays, thousands of people headed out to the lake, for some socializing while traversing the trails.

   But there was one issue with this otherwise picturesque scene.

Social Distancing is in effect.

   Thousands of people were risking their health in an effort to escape their boredom for a few hours. 

   In this always-on world, we have lost the art of simply being by ourselves. One of the greatest tragedies of the 21st century is the inability of man (or woman) to sit alone with their thoughts. 

   The loss of this introspection makes attaining higher levels of success difficult. Afterall, how can we aspire to greatness if we don’t acknowledge where we are? Finding our “You are Here” on the map of your success is the essential first step to charting a course to that destination. As you practice social distancing this week, think about your “You are Here” point in your life.

   Below are 5 questions to help you find that starting point. Be sure to answer these questions for all pillars of your life: Career, Financial, Physical health, Mental / Spiritual health, Relationships with family and friends, and your Romantic pursuits.

What are your greatest strengths? Your weaknesses?

   This question helps you focus on your past efforts, your past development. Self-awareness in all aspects of your life helps you put the right plans in place. Understanding your assets and liabilities will help you leverage your unique talents and abilities, multiplying the effects of your efforts.

What opportunities are present right now in your life?

   Re-framing how you look at the world helps see challenges in a new light. With so much fear and negative emotion being projected by the media, looking for those rays of sunshine in all areas of your life is a breath of fresh air. We often find what we look for, so why not look for hope and opportunity? That sounds like the world I want to live in.

What does success look like for you?

   This can be perhaps the most challenging question to answer, or the easiest. Through my work at Business Minded, I have found that people have either not taken the time to think about this, or know with definite purpose where they are headed and why. Unfortunately, the latter group is certainly the smallest. Take some time in quiet reflection this week, and think about your life, where it’s headed, and the value of reaching those goals.

Are you on the right path?

   If your previous answer was the destination you are aiming at, where do you stand now? Are you on the right path, or do you need to make some changes in direction? Are your strengths being capitalized on? Are the opportunities present in your life also on the same path? Too often we chase good ideas and opportunities that don’t lead towards that end goal. Far worse than being distracted by a bad thing, is being distracted by a good thing. 

What is the first step on that path?

   If you’re on the right path, great! What’s the next step? But if you need to make some course corrections, what is the first step that you can take? Maybe this is something as small as picking up a book, or taking a course to refine your skill sets. The idea is to identify what you can do right now to begin building that dream. Don’t try to take 100 steps, just focus on taking that first step. The rest of those 100 steps will come in time.

   Looking inside ourselves, reading our own hearts can be a daunting task. Especially if you aren’t in the regular practice of exploring your soul. Take some time this week to explore you. There is beauty in there, when you take the time to look and smell the roses.

How to Grow with Goals

   Are your goals helping you grow, or stunting your growth?

   There is an extremely intriguing sea-creature in the hermit crab. Unlike many other species of crustacean, their exoskeleton is soft in the abdominal area, leaving them vulnerable to attack from other ocean predators. To protect against these attacks, hermit crabs live their lives in a shell, carrying their protection around with them. As the crab grows, they need progressively bigger shells to grow into. Without a bigger shell to move into, the little crustacean faces a very challenging life, and sometimes even death. 

   Our goals act just like these shells that the hermit crabs move into. The right goals will provide you room to grow. But just like these hermit crabs, your goals need to grow with you over time, else they could stifle you, suffocating your future development.

Goals: The Right Size Shell (at the right time.)

   The right goal should be attainable, like a shell that you can grow into. If you select something too ambitious, that is like crawling into a shell that is too big, too heavy. When there is no chance of success, your goal will crush you beneath the enormity of the undertaking. This is why the hermit crab graduates to larger shells in stages throughout its life. If our oceanic friend tried to hop into its full-grown shell right from birth, it wouldn’t be able to move around. Suffering under the weight of its shell, the crab would surely die.

   Similarly, a shell too small would hold the hermit crab back from its full potential. Your goals do this to you as well. When your targets are too easy, the goal too small, you don’t allow yourself the room to develop further. 

   While a few of us do set lofty goals, almost everyone falls into the second trap. Goals that are too small. These “goals” that we set are designed to ensure that we hit the mark every time. Without the chance of failure, we are depriving ourselves of the opportunity to learn from mistakes.

   The purpose of a goal is to give yourself something to strive towards, but that doesn’t mean victory should be assured. Quite the opposite in fact, you should have the very real chance of failure. It is this chance of failure that pushes you to grow, to develop, to become more than you were when you first set the goal.

   It is quite common for a hermit crab to change shells several times in rapid succession, testing out the various shells until it finds the right one for the moment. Your goals should be the same. There is no shame in adjusting your goals, making them just the right amount of stretch but maintaining a reasonable chance of success. Just like the hermit crab, you need to allow yourself room to grow, so that you will be ready to move on to bigger, better pastures.

   Take a look at your list of goals. Which ones on that list are too hard? And which are too easy? How can you modify your goals to ensure you have ample room to grow as you chase success?

   Growth, becoming more than what you are now, doesn’t come by accident. By carefully selecting your next shell, you can continue growing. And with your growth comes the level of success and achievement you could only dream of before.

   With the right growth, the right goals, the world is your oyster.

5 Steps to Recession-Proof Your Life

   Recessions are a normal part of the ebbs and flows of life. With that truth, recessions present their own challenges and opportunities. If you have a recession-proof plan, you could be well positioned for the next recession, whenever that finally comes. The economic slow down spurred on by the COVID-19 pandemic could very well trigger a recession event later in 2020. With that possibility looming on the horizon, it is not too late to build your recession-proof plan.

   There are 5 areas that need to be in any recession-proof plan, primarily dealing with cash. It’s been said that cash is king, and that is especially true during a recession. With employment markets and financial markets depressed, as is usually the case during a recession, having cash available provides a protective barrier around your life.

Emergency Fund

   Much of that cash should be held in an Emergency Fund. You have no doubt heard the advice before, 3-6 months of living expenses saved in cash. This will provide a barrier in case of the unexpected, like a job loss that sometimes comes with the shrinkage of the economy. If you don’t have that money saved in cash, make that a priority. This barrier provides you some protection, and gives you more time to make tough decisions, if needed. 

   Even if you have an emergency fund, now is a good time to increase that further. Three to six months of living expenses might be recommended, but extra cash never hurt anyone during a recession. While I have my own Emergency Fund, I am continuing to grow it each month. This will keep me safe in the event that my paycheck stops coming. If I follow the rest of my Recession-Proof Life plan, that extra cash cushion would be great to reinvest in the financial markets as the economy starts to recover. 

   Where should you store that cash? While interest rates have been slashed repeatedly in the past few weeks, a high interest e-savings account is still your best bet. In North America you can still find accounts at close to 1%, which while not much, is better than the 0% many large bank chequing accounts are offering.

Reduce Debts

   Cash is king, and debt is an obligation to pay some of that cash to someone. To protect your cash while you build an emergency fund, you also need to reduce any debts that you have. This means paying down all your consumer debt, starting with the highest interest rate loans first, usually credit cards. With investment returns being unpredictable at the best of times, and even more so now, taking that guaranteed win of savings on interest is important. 

   Once you are clear of any high interest debt, focus on paying down some of the other loans that you have. These might be your Student Loans or Personal Line of Credit. While there are different methods suggested for getting out of debt, in an effort to save you cash, I am only suggesting the financially most beneficial method. Paying off the highest interest rate debt first.

Trim the Fat - Reduce Unnecessary Expenditures

   Over time we sign up for a variety of services. When we’re looking at preserving our cash, it might be time to evaluate the value of these services. Depending on the severity of your situation, you might want to completely cancel these subscriptions, or it might be worth a call to discuss lowering your rates. Many companies would rather retain you as a customer than lose you completely, and often this preference makes them more open to negotiating your rates with you.

   Take a careful look at where you spend your money. Subscriptions are an easy area that savings can be found, but we often pick up other financial habits during times of prosperity. These habits aren’t always healthy. Evaluate where you are spending your money, and make changes if necessary. 

Diversify Your Income Streams

   Recession-proofing your life also means you need to look at where your money is coming from. For many of us, our salary is the primary source of income. But that doesn’t mean that it needs to be our only source of income. There are plenty of ways to generate income outside of your 9-5 hours, and now is an excellent time to explore those opportunities. The side-hustle has received a substantial amount of attention over the years, and for good reason. Finding something that you enjoy, that you can earn money doing, if only part time? To many of us, that extra freedom of getting paid for a passion project is exhilarating. And, with the internet, getting started couldn’t be easier. 

   Of course, the side-hustle route isn’t for everyone. Maybe you would rather go all-in on your career, reaching up the rungs of that corporate ladder. You can also take control over your income, by diversifying your investments into something that pays dividends / interest on a regular basis. This way you can bring in a little more positive cash flow each month. While those investments might not replace your full time income, every little bit helps, especially when recession-proofing your life.

Grow Your Skills

   One final way to recession-proof your life is to remember your professional development. What skills do you need to develop to help take you to the next level of your career?

   Recessions are usually accompanied by a rise in unemployment, and current events in 2020 are no different. With a reduction in the Canadian labor force of over 1 million people in March 2020, jobs are becoming even more competitive. That prompts the question, how do you stand out among hundreds of candidates? The answer: by becoming more valuable. And that answer doesn’t just apply to those who are out of work. By continually developing your skills and increasing your economic value, you will stand out among your peers, and be more likely to retain your job in the event of layoffs. 

   Education has become more accessible than ever with online learning, and with world-wide social distancing measures in place, many people are finding they have more time on their hands. Directing that time at developing or enhancing your skill sets will ensure that you are ready for whatever the future holds.

   Recession-Proofing your life starts with the right plans. What are your plans to manage your finances? By building an emergency fund, you are able to withstand any financial storm. This is aided by paying off debts, and cutting back on unnecessary spending. Once you’ve taken care of the cash outflow, you should look at the sources of that cash. How can you diversify so that you have income coming from multiple streams? The final element of your recession-proof plan is in making you more valuable. What are you doing to develop your skills?

   Recessions are a normal part of life, having the right recession-proof plan will make sure you are positioned not just to survive, but to thrive.

Be Realistic With Your Risk Tolerance

How is your stomach for risk tolerance?

   At the time of this writing, the S&P 500 has a -22.97% return YTD in 2020. As we look at investing from an analytical standpoint, it is reasonable to assume this is just another market crash. Similar to the dot-com crash of early 2000’s, the mortgage backed lending financial crisis in 2008, and a collection of other dramatic financial events in the history of the stock market. In the long run, it is reasonable to predict that human progress will continue to drive long-term financial success in the markets. 

   But, that doesn’t mean that the financial events caused by the coronavirus should be ignored. The recent stock market decline has provided an excellent barometer for your risk tolerance.

What is Risk Tolerance?

   Risk tolerance is simply your ability to withstand fluctuations in the markets, which does mean the occasional loss.

   The more risk tolerance you have, the less concerned you are with short term fluctuations. The converse is also true, the less risk tolerant you are, meaning you are risk averse, the less you are willing to lose money even in the short term.

Why is this important?

   Depending on where you are in your investment life cycle, you may want to adjust your risk tolerance. For example, if you are young and just getting started investing, you likely will be more willing to take losses for the chance at higher gains. Young people typically don’t have as much to lose, and have time on their side to weather out any financial storms.

   As you get older, and that nest egg grows in size, many people become less risk tolerant. This is especially true when you are getting closer to the age of retirement, when large swings in the stock market can drastically impact your financial fortress, when you need that money most. For more information on the impact of stock returns on your retirement, check out our article on sequence risk.

Why is this important now?

   For the past decade, the stock market has been on one of the longest upward runs in history. This likely influenced people’s self-evaluation of their risk tolerance. Seeing gains day after day for 10 years increased the FOMO (fear of missing out) of those prosperous times. It is quite easy to say you are “open” to the normal fluctuations when all you see is those double digit returns in the black. 

   The early part of 2020 has been a reality check for many people. Those negative returns have opened people’s eyes to the realities of investing in the short term; sometimes you win, sometimes you lose. If you have found yourself losing sleep over the losses incurred over the first quarter of 2020, perhaps your risk tolerance was set too high. 

   This is something you need to evaluate for yourself, taking into consideration your unique situation. Are these recent losses impacting your ability to enjoy life? Are they causing an undue amount of stress? Or perhaps you were right in your assessment of your risk tolerance, and you aren’t fazed. Maybe you even recognize the tremendous opportunities that lie in the crashing markets.

What to do if you’ve misjudged your Risk Tolerance?

   Irrespective of the investing choices you may have made in the past, it is important that level heads prevail. If you think you were previously too risky, do not sell at a loss if you have any other options available. While nobody can tell how long the markets will be depressed, or even how low they will go, one thing is certain. We will survive. And, just as importantly, we will thrive again. What you can do going forward is change the asset mix that you invest in on a regular basis. By making an adjustment on your future contributions, you will over time change the asset allocation mix of your overall portfolio. This way you can learn from recent events, and avoid locking in any temporary losses.

   Investing provides a way to make your money work for you. But it isn’t a guarantee that you will always like the outcome, especially in the short term. Understanding your risk tolerance will help you invest wisely, and sleep better at night.

Investing in Stock Markets: 101

   The stock market is one of the most common areas to invest in. But what exactly is the stock market?

What is the Stock Market?

   The stock market refers to all markets and exchanges where you can buy and sell shares in public companies. In aggregate, the stock market refers to all publicly traded companies in the world. Ownership of these companies is represented by shares of ownership, or shares. Most countries have their own exchanges, though with the global nature of business, consumers can buy and sell shares across exchanges around the world.

What is a Stock Exchange?

   A stock exchange is a collection of companies deemed to be traded on that exchange. For example, the New York Stock Exchange (NYSE) and/or the NASDAQ is where many of America’s public companies can be bought and sold. Toronto has their own Exchange, through the TSX (Toronto Stock Exchange), and London has their own Exchange (LSE). Basically, a stock exchange is just a large store where you can buy and sell a variety of financial instruments, from shares to bonds, and even options. The shares on offer at each “store” may be different. For example, Enbridge is a Canadian energy company, and can only be bought or sold on the TSX.

The Stock Market and Stock Exchanges are Different. Why is that important?

   The stock market refers to the all-encompassing marketplace for buying and selling financial instruments, including shares. Each exchange operates on their own currency, for example the TSX buys and sells in Canadian dollars, the NYSE and NASDAQ operate in USD, and the London Stock Exchange operates in the British Pound. This means that buying and selling across international exchanges opens you up to foreign currency fluctuations. Also, since the exchanges are based in a specific country, that country's tax laws will also impact your investments.

Investing in Exchanges: ETFs and Index Funds

   As an extremely popular method of investing, Index funds seek to track the overall performance of stocks fitting a certain set of criteria. Some of the most popular indexes that are reported on are the S&P 500, or the 500 largest companies traded in the USA. Another index is the Dow Jones Industrial Average (DJIA), which is comprised of 30 of the largest companies in the US. By investing in ETFs, investors are able to diversify within an exchange at a relatively low cost of ownership. Rather than purchasing one share of each company in the market, an ETF allows you to purchase the general movement of the exchange as a whole.

Market Fluctuations in Today’s Economic Climate

   Understanding the difference between stock exchanges and the stock market in general is even more important during these difficult times in 2020. As the coronavirus is a global event, every country is impacted. But the impacts are not felt equally across the entire world. This means that the business disruption will be more severe in some countries than in others. As a share is simply a purchase of ownership in a company, certain companies and exchanges will be affected more severely than others.

   To illustrate this, we can look at the returns for the TSX Composite Index and the S&P 500 for the week of March 23 to March 27, 2020.

Opening and Closing Level of the TSX and S&P 500 for the week of 3/23/2020.

   In that time, the TSX saw an increase in value by 7.5%, while the S&P 500 grew 10.93%. How each government responds to the health crisis will influence how exchanges perform in the overall market. To diversify your investments, it is wise to consider investing beyond your local exchange. But, the calculations aren’t always as straight forward, depending on the accounts you are using, tax laws can impact your returns quite substantially, especially when foreign markets come into play.

US Withholding Taxes on Stocks (For Canadians)

   At the risk of diving too deep into the rabbit hole, it is worth a quick look at US withholding taxes. The two largest stock exchanges in the world (based on market cap) are located in the US, the NYSE and NASDAQ. Given the size of these exchanges, it is extremely likely that you will invest some of your financial resources on these exchanges. Canada and the US have tax treaties which allow for preferential treatment, but most investment proceeds in the form of dividends and interest are subject to withholding taxes. These additional taxes can be avoided however, if you are making these investments in a qualified account.

   The accounts that qualify for this favourable tax treatment are in general your retirement accounts, such as an RRSP. This is an important distinction to make, because the TFSA, which is another popular Canadian tax advantaged account does not receive the same special treatment for US holdings.

   If you are using an account that isn’t your RRSP to invest in the US, you will need to file a tax form with the Internal Revenue Service (IRS) to take advantage of the Canada-US tax treaties that reduces (but not eliminates) foreign withholding tax. This form is the W-8BEN.

Summary

   Investing is an important element in everyone’s financial plan. The stock market is one place where many of us will invest some of our money. Even in the stock market, there are different subsets, groups of companies in different regions, traded on different exchanges. These exchanges operate as stores, selling slightly different merchandise. Some of these stores will do better than others, as global events impact different regions at a different scale.

   Aside from investing in companies around the world, the savvy investor also needs to know how currency fluctuations and tax laws will impact their returns. With the right mix of investment accounts, you can capitalize on the benefits of diversifying into different exchanges. RRSPs receive preferential tax treatment in the form of eliminating withholding taxes on interest and dividends from US sources. When considering investing in the US, it is more beneficial from a withholding tax standpoint to use the RRSP over the TFSA, as long as your objectives for both accounts are the same, investing for retirement. For all other investments on US stock exchanges, it is important that you file a W-8BEN to take advantage of the existing tax treaties between Canada and the US. This will ensure you aren’t leaving money on the table. After all, less taxes paid means higher returns for you!

   Knowing how to use the tools available to you will help you build the right financial plan for you. Financial freedom isn’t a lofty ideal, with the right knowledge it is a realizable goal.

How to Invest during Market Volatility

Wall St Sign
Credit: Adobe Spark
Wall St Sign Credit: Adobe Spark

   Are you able to see good deals on stocks and ETFs in today’s markets? If you had asked yourself this question a month ago, likely you would have been able to provide a number where you would absolutely love to buy at. 

   Take VGRO for example. The Vanguard Growth ETF portfolio is one of the most popular ETFs to hold. It is a balanced fund, representing all sectors across major North American stock markets. 

Note: The following example is for illustrative purposes only. I am not affiliated with the Vanguard ETF’s, nor should this constitute an investment recommendation. As always, investment decisions should be made based on professional advice and proper due-diligence. 

   On February 15th, 2020, VGRO was trading for $ 27.71 CAD. Without a doubt, most investors interested in this fund would have loved to get their hands on a share for $25.00 CAD.

   Fast forward to March 13th, 2020. VGRO closed the markets at $ 23.29 CAD. Is VGRO a good buy at this price?

   If you had done the research and determined that $ 25.00 CAD was a good price based on the underlying assets, making the purchase decision at $ 23.29 CAD should be a no-brainer.

   Assuming that is the case, why are people so fearful of buying into the market during current volatility?

   The answer lies in how close people are to the decision. While $ 25.00 might be an excellent price to buy VGRO at, the concerns about where the current bear market will bottom out at has people who were rational for years now acting irrationally. The cure for this is in placing Limit Orders. 

   A limit order allows investors to set a price that they are willing to buy or sell at. In the above example, if buying VGRO was a good deal at $ 25.00, a limit could be set to make that purchase once the price reached the $25.00 mark. In a long-term buy and hold strategy, this allows the investor to make smart, forward thinking investment decisions regardless of market conditions. 

   In this way, making the choice to pay $25.00 is actually easier than the decision to pay $23.29 right now. By eliminating the short-term emotions, investors can make sound investments at good prices.

   The other benefit of this type of strategy is to reverse the emotions that you feel. Rather than being fearful as the markets are dropping, you get excited that you are closer to the bargain prices that you identified. This means you aren’t waiting and anticipating the bottom of the market, which is good because timing the market is impossible. Instead, you are doing your research ahead of time, and waiting for your chosen investments to go on sale.

   Of course, the best way to invest for almost everyone is to skip all of this. Automating your investments will let you invest on autopilot, capturing any discounts currently found in the market. But if you are looking to invest a little more play money to take advantage of deep discounts currently available, try looking into limit orders. This will help you make rational, informed investment decisions without succumbing to the emotional roller coaster of the daily market swings.

Evaluating Routines: Spring Cleaning in Your Life

   With measures taken to combat COVID-19 including social distancing, millions of people have had their daily lives radically changed. Work has been radically transformed as people are either temporarily displaced, or embracing remote working options. Coinciding with spring's arrival (in the Northern Hemisphere), this provides an unprecedented opportunity to evaluate our recently upended routines.

   As a result of this self-imposed quarantine, this year spring cleaning is taking on a whole new meaning. We are finding out what elements of our lives have changed (a huge number of things changed). And most importantly, how these changes are impacting the rest of our life.

   My regular routine, which I had thought was carefully constructed has been radically altered. The local gym has closed doors, meaning I need to find different methods for working out. While I previously had no difficulty making it to the gym every day, by moving that workout space into the kitchen, it becomes increasingly difficult to separate what is fitness time from food time, and even work time. Work has also taken on a new meaning - regular office hours are harder to enforce when my devices are within arms reach 24/7. The chaotic aftermath of losing my regular routine has left many openings in my schedule. Left to their own devices, those openings threaten to disrupt the progress that I’ve made.

   These experiences are not mine alone. With no commute time people have reported sleeping in longer, and staying signed into their work well past their previous “punch-out time”. These changes aren’t necessarily a good thing. While many of us could benefit from an extra few minutes of shut-eye, hitting the snooze button repeatedly for an hour is not the answer. Working later hours, being plugged in all the time also has negative repercussions. With no clear boundaries over work and home life, they bleed into each other. This means we’re always “on”, and never take the time to power down and recharge. As a result, despite putting in longer hours, for many people their overall productive output has decreased.

   For spring cleaning this year, we need to evaluate what our routines were, and determine what has changed in the past few weeks. Where are the areas that are no longer being served by your previous routine? Were there areas in your previous routine that weren’t driving success in your life?

   Take a look at the pillars of your life. How are your routines serving your greater success?

   Physically - is your health where it should be? What are you doing to stay active, to stay healthy? When, for how long, and how often do you workout? As many changes have impacted our lives, are you staying accountable for your own physical wellbeing? If you are finding it challenging, there are countless free and paid apps that can help you with ideas for fitness. I have found myself engaging in daily yoga practices guided on Youtube, in addition to strength training apps to keep me fit and healthy during these times.

   Mentally / Spiritually - what practices are you doing to reflect? How do you unwind? What are you working for? What are you grateful for? Proper mental practices are even more important, as isolation can be a tough burden to bear. Gratitude, exploring what you are thankful for, and counting the many blessings that you do have can help you retain your sanity through these tough times.

   Financially - are your financial systems in check? Are you investing regularly? Are you monitoring your spending? Changes in our routines don’t change the underlying principles of personal finance. Are you sticking with your plans?

   Career - what are you doing in your career? Does that excite you? What are you doing to improve yourself and your skill set? While work for most people has been changed right now, what are you doing to ensure you are better equipped for success as the world settles down?

   Relationships - how are you staying connected? Who do you miss talking to and seeing? Let those friends, family members, and colleagues know that you’re thinking about them. There are numerous ways to keep engaged, through video conferencing and online games, being social has changed in the manner of delivery, but still remains as important as ever for our social species.

   Romance - are you spending more time than normal with your spouse? How is that affecting your relationship? Many of us are now at home full time with our families. Are these changes good? Or are you having difficulty bridging your different worlds of work and home life? Setting clear boundaries, and making sure you stick to them will help keep things stable. 

   As you are spring cleaning this year, think about the things that you miss in your old routine. What was going well, and needs to be continued? And conversely, what wasn’t driving your success? We all pick up seemingly innocent habits along the way that we really don’t need. Identify these, and ensure that your new routine helps you more than your old routines did.

   Success is the accumulation of a million tiny wins. By making sure your routines are earning those points each and every day, success will be inevitable.

No Zero Days

   What separates a top achiever from everyone else?

   Top achievers know exactly what they want to do, and then spend the time working on those priorities. If you want to find more success in your life, you need to be able to answer the questions:

   How are you spending your time? What are you working on? Is what you are working on a top priority?

   While we all have endless to-do lists, super-achievers understand that it simply is not possible to get everything done. For these elite performers, they have adopted and embody a simple philosophy: No Zero Days.

   A “zero day” can be defined as a day that doesn’t drive the needle on your top priorities, your big hairy audacious goal, the life defining work we all aspire to. Zero days don’t mean that nothing gets done, quite the opposite in fact. On those zero days we work our asses off, clearing out our to-do lists and attending meetings, all working towards someone else’s agenda.

   This week, I challenge you to have No Zero Days. Start by writing down your biggest 3 priorities. Now spend time each day working on those priorities first. You don’t need to devote all your time towards those goals, that would be impossible. But make sure each day you do something to drive the needle forward. Let’s see if we all can go 5 for 5, making meaningful incremental progress each day. 

   Be sure to review your progress at the end of the week - if those small daily wins feel good, strive for two weeks of No Zero Days, then a month. Success is in your reach, one day at a time.

The 80% Rule to Retire

   How much income do you need each year to retire comfortably?

   We’ve looked at different ways of figuring out your retirement nest egg size, like the 4% Rule. But even that assumption is predicated on another assumption, that you know how much you need each year. Do you know the answer to that question for you? 

How much income do you need each year to retire?

   Estimating how much you will need each year is hard. The amount of money each person needs will relate directly to their unique situation, further complicated by their own list of goals and aspirations. Will you own or rent your living arrangements? Do you have dependents to support? Are family members helping support you? What about your lifestyle, what do you want to do? Do you want to travel? Where do you want to travel to? These are but a few questions that each person needs to answer for themselves, as the answers will greatly impact your financial plans in the future.

   Another issue with retirement planning is the time the question becomes important. Deciding and planning for your eventual retirement should start in your early 20’s, when you first start earning money for yourself. At this stage, it is easy to look at your current lifestyle and think, “I can live off KD and ramen noodles. After-all, I’ve been doing it all through college and I turned out fine.

   Unfortunately, that is certainly not the case when you are older. As you grow and develop throughout your career, your lifestyle creeps upwards too. Suddenly ramen noodles and beer aren’t the only things in your diet. And you certainly wouldn’t want to go back to living like you did in your college days, cheap food and cheap student housing included.

   If your current living arrangements aren’t how you will live when you retire, and you aren’t sure where life will take you as the decades roll by, what can you do now to prepare as best you can?

Career Planning: Income for Retirement

   While we may not have answers to the difficult questions posed earlier, many of us can look ahead in our careers. We are able to see where our careers are taking us, and plan for the roles that make up the general direction we’re facing. Whether that is a paralegal with visions of becoming a partner, or an apprentice electrician looking to become a grand master in her craft. These future roles we are aiming at, and may one-day hold ourselves have an abundance of information about them. This information includes the expected average annual salary. For bench-marking how much you will need in retirement, financial planners will often estimate 80% of your income at your highest earning level. 

   Planning for income during retirement at 80% of your peak earning potential will allow for lifestyle creep as you become more successful. If you plan on making $ 80,000 / year at your career peak, you should expect to need 80,000 * 80% = $ 64,000 each year during retirement.

   This 80% of peak earning potential estimate will help you set a target for your retirement nest-egg to work towards. As with all things of importance, your odds of success greatly increase if you have a clear target and a plan to get there. Think about your career, where you’ll be, and how much that means you should plan for in your retirement. With the right plan, financial freedom is available to everyone.

Estimated annual retirement income needed

Investing Strategies for the Coronavirus

February 23rd, 2020 - the stock markets around the world started slipping amid fears of the coronavirus (COVID-19).

   This week has been one to separate the successful investors from the unsuccessful. But the question is, amid all the panic and markets crashing, how do you become one of the successful?

   Turning on any TV channel, or scrolling through any number of online forums devoted to finance will tell you which stocks to buy, which to sell. There are countless predictions of where the “bottom” is, each saying a different thing. With all this noise, who is winning?

   To answer that question, we need to look at investor discipline.

   What was your investing strategy before the noise of the news started preaching panic? Have you changed your investing strategies as a result of the information screamed at you?

   Many of you have been reading long enough to know, the best investing strategy is to make regular contributions. This will result in the dollar-cost average of your portfolio being lowered during market downturns like this week has been. When the market recovers, you will be further ahead because you have been purchasing investments as they have been decreasing in value.

   Unfortunately, it is too easy to be caught in the sway of news media, and start abandoning your proven investment strategy by trying to time the bottom of the market. People caught in the latest Wall Street hysteria hold back regular investment contributions, thinking that they alone can perfectly predict the bottom of the market. This type of wishful dreaming gets in the way of the investing truths that we all know. None of us are smart enough to perfectly time the market.

   Your best bet? To continue investing as you always have, on whatever regular schedule you use. For me, that is the start and the middle of the month, aligned with my pay cycles. Since the crash happened after my mid-month contributions, I effectively paid full price for my investments at that time. My next regular investment (made probably around the time you are reading this), based on my own schedule will therefore be a purchase of ETF’s, stocks, and bonds that are “on sale”. This purchase of “on sale” investments will lower the average cost I have paid for all market investments in my portfolio.

The key take-away here:

Keep investing per your schedule. Don’t get caught up in the hype and try to time the market, or you might just miss out on a day of rapid recovery and all those associated gains.

   Of course, for those looking for a little extra credit, or for those who simply love a good bargain. The stock market investments are on clearance right now. Perhaps it’s worth a little extra belt-tightening over the next few weeks or months, and throwing a little extra in with your regular contributions. The extra purchases made when stocks are “on sale” will only serve to increase your financial wealth as the global economy steadies out over the coming months.

   If you can keep your calm during panic, and recognize a good financial opportunity when it presents itself, you’ll be well on your way to financial freedom! Happy, healthy, and prosperous investing to you!

How to measure success

How do you measure success?

   Most of us are completely comfortable with the idea that the most successful among us have the trophies and accolades to go with that success. Therefore, to be more successful, you need to accomplish more things. The measure of success is the number and size of goals that you have achieved.

   This measure of success, the number of trophies earned, couldn’t be further from the truth.

   We can see this when we look at one of the greatest basketball players of all time, Kobe Bryant (08-23-1978 - 01-26-2020). Kobe was known for his intense practice routines, shooting hundreds of shots each day, and for his 666 workouts. 6 hours a day, 6 days a week, 6 months of the year. In one interview with Sports Illustrated’s Jack McCallum, Kobe reportedly said the following:

Interview with Kobe Bryant where he discusses his practice routine.  

(Tony Manfred, https://www.businessinsider.com/kobe-bryant-describes-shooting-practice-routine-2013-2)

   In this simple exchange, we can learn quite a lot from one of the most successful basketball players in history. 

Leading Behaviors

   As a professional athlete, Kobe Bryant tracked his workouts, how many hours a day, how many days a week. See, Kobe had the understanding that time spent improving in the gym, on the court, reviewing game tapes, all would lead to more success during the game. These are called leading behaviors.

   Knowing that to shoot better on the court, Kobe needed to shoot more in practice. That is the power of his simple exchange with a reporter. Kobe wasn’t keeping track of his game stats, but rather how much time was spent improving in practice. 

Lagging Results

   Closely tied with the leading behaviors are lagging results. Which takes us back to where we started, the number of trophies earned. By tracking the number of achievements that we have already accomplished we risk two things. The first, is putting focus and therefore energy on the wrong activity. 

   In Kobe’s case, this would have been focusing solely on his shooting percentage. Points win games, if he can score more points each game, that would lead to more wins. But, his strength and fitness also played a huge role in both his personal, and the team’s overall success. Building a routine that tracked gym time (Kobe’s 666 routine), as well as practice shots thrown built the skills that would eventually lead to victories.

   Secondly, by focusing solely on results we risk falling back on our past successes. We can see this in another basketball player, Shaq (Shaquille O’Neal). Shaq relied heavily on his size and skill to drive his success. By focusing on what led him to the NBA, and not embracing Kobe’s relentless drive for improvement, Shaq plateaued far below his potential. As a result, Shaq arguably did not achieve as much of his potential as Kobe did.

Leading Behaviors vs. Lagging Results

   The lessons learned from professional athletes can be applied in all our lives. Determining what actions, or behaviors, drive success forward in your goals will help you achieve more. Whether that is time on the trails when training for a marathon, or time spent just thinking on projects in your career. This focus on the behaviors that lead to success will ensure that the trophies and accolades fill your shelves.

   What behaviors are you going to embrace that will lead to your spectacular results?

How much do you need to retire?

   How much do you need to retire? This question has caused countless sleepless nights for all ages. With studies released every year all yielding the same alarming result, the vast majority of people are ill-prepared for retirement. Studies by any number of financial institutions, finance blogs, or news media agencies, conducted independently yet all displaying the same results. People are unprepared. What these studies don’t usually dive into, is the question; how much do you need?

How much do you need to retire?

The 4% Rule

   First created by William Bengen, the 4% Rule tells you how much you can safely withdraw from your retirement accounts to ensure you don’t run out of money. Used by many financial planners as a rule of thumb, you can also benefit from this calculation. 

The 4% Rule Example

   Meet Sally. Sally is 65 right now, and looking forward to three decades of retirement, living to the age of 95. 

   Sally has determined, based on her lifestyle and spending goals (travel and entertainment), that she needs $ 60,000 per year to retire comfortably. Based on the 4% rule, Sally would need a retirement nest egg of $ 1,500,000 to achieve her retirement goals.

   While that number alone provides some insights, there are some key assumptions driving the 4% rule.

Assumptions of the 4% Rule:

The 4% Rule makes a few critical assumptions:

  • Retirement will only last 30 years
  • Asset Allocation is between 50/50 and 75/25 stock to bond mix
  • Withdrawals are consistent, and comprised of interest, dividends, and capital gains

   What this means is that, if you plan to retire early, or have a long life-expectancy, 4% might be too aggressive to fund your lengthened retirement. Also, a 50/50 to 75/25 asset allocation mix might be riskier than you would like. Taking on too much risk could, in negative economic times, result in your portfolio depleting too much to be able to recover in the allotted time frame. And the final key assumption made is that the withdrawals are first funded by interest and dividends, and only small amounts of your portfolio are sold to cover the difference.

   This final assumption has caused some companies like Morningstar to discount the 4% rule as “too simple”. Their assertion is that the historical data that the 4% rule was created on doesn’t take into consideration the lower bond yields. By reducing the income from interest, a retiree would need a more aggressive portfolio to make up for the weak bond yields. Put simply, 4% is too much to withdraw. As a result, other numbers have been used as a benchmark, ranging from 3% to 3.5%.

   In Sally’s example, she might need a nest egg of $ 2,000,000 to safely retire at a 3% withdrawal rate. Or alternatively, she would need to learn to get by on only $ 45,000 / year.

How much do you need to retire?

   As you can see, there is no consensus on the amount. Lifestyle choices, alternative income sources such as pensions and old age security, and even life expectancy can greatly alter the calculations on a case by case basis. 

   Considering all these aspects, you still need a financial goal to aim for. For your planning purposes, I would suggest using a middle-of-the-road benchmark. If Sally could rewind until she was 30 again, her goal would be to save $1,750,000 before retirement. This allows her a 3.5% withdrawal rate, taking $ 60,000 per year.

   As you get closer to retirement, you will have a much larger investment portfolio than you do now. At that time, more options will be available to you, and a visit to a financial planner would be advisable.

Action Items
  1. Consider what you plan to do in your retirement.
  2. How much does that lifestyle cost each year?
    • Consider: Do you own your own home? Do you rent? Are you receiving Old Age Security or Pension benefits?
  3. Take your estimated annual spend and divide by 3.5%. 

 

Your answer has given you a financial goal to aim for. Don’t be discouraged by where you stand in relation to your goal, take pride in knowing you have a clear direction.

Staying Focused on Your Goals

What goals have you set your sights on?

   It is important to remember regularly what you are trying to achieve, what your goals are, where your dreams lie. In today’s busy workplaces, it is far too easy to get lost in the busyness of someone else’s priorities. 

   With the advances of technology over the past couple of decades, communication has become instantaneous, and people are looking for answers in about the same amount of time. From the late night frantic phone calls to the early morning tidal wave of emails, it is far too easy to get caught up in the mad rush without pausing to see where you are rushing to. If you mention in a passing conversation that you are busy putting out fires, every busy professional can relate. But there is one fire we shouldn’t put out. Those kindling embers of your dreams need to be nurtured, not extinguished.

How do you stay focused?

   If you’ve ever been camping, or spent time around a campfire, you will from time to time see someone blowing on the coals. See, when a fire starts burning out, often you can revive it by blowing air on the coals. The additional oxygen helps keep the fire lit. 

   Our dreams are no different, you need constant air blowing on the coals to keep your flame lit, to keep your dream alive.

   But when we spend our days reacting to other people’s demands, other people’s priorities, we often forget to take a deep breath, and blow some life back into our own dreams.

Staying focused on what you want to achieve can be hard. Constant reminders about what is important to you helps fan the flames of success. 

   To stay focused on your own dreams, you need to take a moment every day to reflect on what it is that is truly important to you. Some of the questions I ask myself every day are: 

   What are my dreams? Why are they important to me? What can I do today to work towards those goals?

   Take some time and think about how these questions fall into your own life. Are you spending enough time focused on your dreams?

   Taking time to ask yourself questions like these is essential. But how can you take a moment in quiet self reflection when the world is burning down around you?

Finding Focus Through Your Environment

   Often it is difficult to remember to step out of our routines to think about what we are actually doing. As we run from meeting to meeting, remembering to pause and reflect on what we were planning to achieve today can be a challenge. To assist us against ourselves, we need to design our environment with little reminders of our true objectives.

   For example, I have a large whiteboard set up with my goals and plans. Seeing this whiteboard daily helps me remember what I need to achieve next. But of course, I am not always home and able to see the whiteboard. For those moments I have signed up for daily emails that prompt me to think bigger, to contemplate topics that will grow not just my business, but more importantly, will grow myself. Sprinkling reminders about my goals and dreams throughout my day helps keep me focused on my goals, allowing ideas to germinate and bloom while I am fighting other people’s fires.

   Many of us do not have the luxury to chase our goals and priorities all day, every day. Often  we find ourselves in careers and positions when we need to put someone else’s priorities ahead of our own, if only to pay the bills. While there is nothing wrong with this, it is during these days that we need to remain extra vigilant that we also allocate some focus and energy to our own goals and priorities. It is far too easy to find yourself swept up in the whirlwind and raging inferno of other people’s problems. Without reminding yourself daily as to what your goals are, and what you can do to make progress, those burning embers of your dreams will go cold.

Take-away:

Ask yourself these questions each day:

  • What are my dreams?
  • Why are they important to me?
  • What can I do today to work towards those goals?

   Answering these questions will help you remain focused, fanning the flames of your own success. But there will still be days that threaten to overwhelm your good intentions. Sprinkle little reminders about what your goals are throughout your day. These reminders can be as obvious as a 6 foot whiteboard, or as subtle as a mid-afternoon alarm that triggers you to take a moment and reflect on what you are doing, and if that is helping your goals or not.

How to Plan for the End

In this world nothing can be said to be certain, except death and taxes.” - Benjamin Franklin

   While not particularly motivating, Benjamin Franklin is indeed correct. And to that end, we should be prepared for that unavoidable permanence. But how?

How do you plan for the end of life?

  • A Will
  • A list of bank accounts, URLs, usernames, passwords.
  • Instructions for financial management of accounts

A Will

   A will is a legal document outlining what you want to happen with your estate upon your passing. Your will is used to outline your wishes, and leave assets to various individuals and groups (think spouse and children, and charities). Why you need a Will now further outlines the importance, and gives you steps to take to produce a will. 

  • Take action today: protect your family from estate taxes, and do your part to make a difficult time easier for your loved ones.

Accounts, Subscriptions, and Services

   Subscriptions are everywhere in today’s society. As we become further plugged in, and even reliant on technology, these subscriptions provide access to a wide range of services. Even services that once thrived on paper correspondence, like banks and government tax agencies, are creating online profiles and portals to conduct business. With all these online accounts in our name, navigating the list of services we’re using can become quite a chore. Indeed, I have spreadsheets with 30+ different accounts for business and personal use. With such a complex ecosystem of electronic connections, providing our loved ones a list of all accounts and login details is important.

   Providing a single, unified list of all accounts and details will help you stay organized, and make things much easier in the event that control needs to be passed on to a loved one. To help manage this, there are a few options.

   Spreadsheets are a convenient way to store account details. For my work-related logins, I store all my details on a single, password-protected file. This allows others with the password to access the files, and obtain access through my usernames and passwords to any service that I use for work. Certainly the ability to easily share the spreadsheet, especially if using a cloud based service like Google Docs, provides a measure of convenience that is hard to duplicate. One disadvantage is, while easy to use, spreadsheets do not provide high-level cyber security, and may not be best for storing sensitive information.

   On the other end of the spectrum for cyber security are password management services. Companies such as LastPass or BitWarden (I have no affiliation with either company) provide secure logins to store all passwords. These services also help you create and store high-strength passwords, to greatly reduce the chances of your accounts being compromised. Both these solutions offer both paid and free services for individuals, and provide high-strength, convenient password and account management services.

   No matter the route you take to organize your account logins, having a way to pass on the detailed list of login URL’s and account details will make life much easier for your loved ones.

Instructions for Financial Management 

   Another area of concern, especially among couples, is how to manage finances. While I would advocate that in matters of money, both parties share the knowledge and decisions, I understand that in some relationships this simply isn’t the case. If you are the one who primarily handles financial aspects, you need a way to pass on that knowledge and a “what to do next” plan to your partner and/or children. This is information that goes beyond simply what assets and liabilities exist, as those are covered in your will. Instructions for financial management should explain, at least at a high level, your investing strategies and asset allocation. Also included should be a short list of trusted financial advisers, or knowledgeable friends that would be willing to help understand the finances.

What to include:
  • Where investment accounts are held
  • Basic investing strategy, and financial goals
  • Trusted financial adviser / friends
  • List of resources to help educate your remaining loved ones
    • Books, Blogs, Courses, etc.

   Death is simply a part of life. Accepting this fact might not make the loss of a loved one, or your own mortality easier to bear, but it will certainly help you plan for the inevitable. Those plans should include a will, to outline your wishes for the distribution of your estate. This step will help you minimize estate taxes, and dispel potential conflicts between remaining family and loved ones. 

   Another helpful step is to compile a list of accounts for services that you use. Included in this list should be: service, company, a login URL (if applicable) account numbers, user names, and passwords. This will help keep things organized, and prevent service disruptions that further increase the difficulty of an already trying time. Finally, providing financial management best practices and strategies, along with education resources and trusted advisers will help ease the burden of financial management from your surviving loved ones. 

   The right plans implemented early will let you and your family / loved ones sleep peacefully at night, knowing that you have done all you can to set them up for success.

3 Excuses for Abandoning Your Goals

   What is your progress towards your New Year’s Resolutions? Are you still on track?

   After several conversations recently about people’s New Year’s Resolutions, it seems that already people are falling off track. 6 weeks into the New Year, and already for many people this year will be much like last year. And with that alarming realization, I thought it worth investigating what is derailing people from their goals.

   What I found is that the list of excuses is surprisingly short, yet alarmingly consistent. Here are the top 3 that I found during this informal survey:

  1. Not enough time
  2. Too exhausted after work
  3. Not that important to me anymore

Not Enough Time

   Perhaps the most pernicious of all excuses is the Not Enough Time excuse. This excuse is so damaging, and so widespread, because it is easy to rationalize. If only we had more time, we would easily be able to work on our goals. When we spout this excuse in a conversation, other people immediately relate, and hence we are let off the hook for our own shortcomings. Unfortunately, there is simply no more time in each day. 

   If time isn’t the answer, where does the answer lie?

   While there are many solutions, let’s look at one in particular: the way you track time, your calendar. If your goal is important, you need to allocate time in your calendar to its achievement. While you can’t find more time, you can certainly control how you spend what limited time you do have.

What time in your calendar will you block off for achieving your goals?

Too Exhausted After Work

   The next excuse has to deal with energy. After a long day at work, the amount of willpower and physical energy required to work on our goals simply isn’t there. Understanding how your body works, when you experience the most energy, is important to optimizing your routines. 

   For me, I have the energy to work on my fitness goals early in the morning. As such, I have aligned my schedule to allow time for the gym before the workday begins. This all begins with a good night’s sleep, allowing me to be rested when I wake up early, and then awake by the time I reach the gym after a light breakfast. Advancing my knowledge through reading comes over lunch and at right after dinner, allowing me ample time to process the information and wind down before bed in the evening. 

   There’s quite a lot of science and research done in the realm of energy management. Here’s a few key take-aways that you should apply to your life to find greater success:

  • It all starts with a good night’s sleep. 8 hours is recommended for almost everyone.
  • Understand your energy and stress levels, and work the gym into your schedule. You should aim to workout when you have energy, and to relieve stress.
  • Energy is a function of sleep and diet, make sure you are eating healthy foods! Eat foods that make you happy and healthy, just understand how your diet affects your energy levels.

   Being too exhausted is often a symptom of not understanding how your energy works. Designing your lifestyle and achievement around your energy will help you reach greater levels of success.

Not That Important To Me Anymore

   Another big reason I heard about why people weren’t sticking with their resolutions was that their goal simply wasn’t that important anymore. There were two main reasons for this. First, their resolution was made under the pressure, and having just heard, someone else’s resolutions. This led them to the trap of “that sounds good, I’ll do that too”. I see this all the time, people buying certain items, or trying to do or become certain things because they see someone else doing it successfully. 

   The second reason people’s resolutions end up neglected is that they have cast a wide net. Their goals are to become as ripped as Arnold Schwarznegger, as zen-like as the Dalai Lama, as rich as Warren Buffet, and as successful as Richard Branson. Becoming known for any one of those areas requires years of intense focus. Having a goal to achieve world renowned excellence in all areas means none of the areas will receive the focus it needs. 

   We all need goals in 6 key areas of our lives, physical, financial, mental, career, relationships, and romantic. But trying to achieve everything, in all of these areas, will lead us to achieving mediocre results across the board. Understanding what is important to you, and focusing on that will lead to greater success. Of all the excuses, the not that important anymore excuse is the most valid. But only if conscious thought is put in to determine where your priorities are.

   To avoid this excuse in the future, you need to become clear on what you want, and why, before you set your goals and resolutions. 

What is most important to you? What areas of your life are you okay with good, but not world-class results in?

   Knowing how to structure your routines will help you manage your time and energy. This will ensure that when you are most alive, most focused, most energetic, that you are focused on the most important thing. Deciding what is most important to you, and setting the right goals is half the battle. Organizing your day according to your energy and focus will bring execution to your best laid plans. And that, is a recipe for success.

What Is An RRSP?

   Registered Retirement Savings Plan (RRSP) accounts were designed to provide an incentive for individuals to set aside money for retirement. These accounts provide a central foundation for long-term saving goals. 

What is an RRSP?

   A Registered Retirement Savings Plan (RRSP) is a tax-deferred account. This works by deferring taxes until the money is withdrawn in the future. The purpose is to incentivize people to save for their retirement, which the government does by simply saying, save now, and don’t pay taxes on that money until you need it. 

   The way this tax-deferral works is by reducing your taxable income for the year by the amount of your contributions. For example, if you make $80,000 per year and you invest $10,000 into your RRSP, the government will only take tax as if you earned 80,000 - 10,000 = $70,000. You are therefore receiving $10,000 tax-deferred. That $10,000 will be taxed in the future when you withdraw your money.

   Your RRSP may be opened at any time, although some institutions will require you to be the age of majority. Any RRSP account that you own must be withdrawn or converted into an RRIF or annuity when you turn 71.

   RRSP’s are offered by a wide range of financial institutions, from banks to credit unions, mutual fund and investment companies, and even life insurance companies. Through these institutions, you may open an RRSP investment account. Once you have an account, you then have further options of where to invest. The below is a list of eligible investments in an RRSP.

Eligible investments for RRSP
  • Cash
  • GIC’s
  • Savings Bonds
  • Treasury Bills
  • Bonds
  • Mutual Funds
  • Exchange Traded Funds (ETFs)
  • Equities
  • Mortgage-backed Securities
  • Income Trusts
  • Gold & Silver Bars

What are the Benefits of an RRSP?

   The obvious answer here is that your contributions to an RRSP are tax-deferred, meaning you save money on taxes now, with the promise to pay that tax in the future. This works by allowing you to contribute more money to an investment account. For example, assuming your combined tax rate is 30%, and you plan on investing $10,000 pre-tax this year. If you were to invest after-tax, that $10,000 * (1-30%) = $7,000. Instead, by investing in your RRSP, the taxes are paid in the future. This means that you can invest the full $10,000 now, an extra investment of $10,000 - 7,000 = $3,000. That is $3,000 more invested now that can grow over time. 

   Using the tax-deferral of an RRSP account is especially important when you use your RRSP as an essential part of your financial strategy, allowing you to save taxes overall. For a more in depth look at how you can use different investment options to save taxes, check out our comparison between RRSP vs TFSA.

How Much Can You Contribute to Your RRSP?

   Unlike the fixed amount you can contribute to your TFSA annually, the RRSP has an individual contribution limit set as a factor of your income, up to an annual maximum. Your RRSP contribution limit is set by the lower of 18% of your annual income, or an annual maximum set by the government. In 2020, the annual maximum is $27,230.

   Any unused lifetime contribution room is carried forward each year. To see how much you can contribute, check out your account with the CRA. Most individuals who have filed in the past couple years will have been prompted to create an online account already, and since you’re reading this online, you probably are tech-savvy enough to have an online account

   Alternatively, your lifetime contribution limit will have been mailed to you (if you still have mailing selected as an option), and you can find this on your RRSP Deduction Limit Statement.

What If You Over-contribute To Your RRSP?

   There is a $2,000 safety buffer, allowing you to over-contribute by $2,000 before you will be required to start paying tax. The tax levied on excess contributions is 1% of the excess balance per month.

What if you need to Withdraw?

   Contrary to popular belief, there are no explicit penalties to withdrawing from your RRSP. If you withdraw from your RRSP, that money is taxed as income in the year that you withdraw. However, unlike the TFSA, when you withdraw from your RRSP, that contribution room is lost forever. For example, if your lifetime contribution room was $100,000 and you withdrew $15,000 for your wedding. You will pay tax on that $15,000 in the year you withdraw, plus, your lifetime contribution room will drop to 100,000 - 15,000 = $85,000. This lifetime contribution room is lost forever.

   There are 2 special cases where that is not the case, the First-time Home Buyers Plan, and Continuing Education. In those special cases, any withdrawals you make must be repaid over a set term. Essentially, you are borrowing from yourself. In these cases, the contribution room is not lost, but future contributions will be applied to the loan and hence not tax-deductible.

Advanced: Deferring Your Tax-Deferral

   You don’t need to claim your tax credit in the year that you make a contribution. In this case, you will essentially be putting after-tax dollars into your RRSP, similar to how you would a TFSA. Those “Unused RRSP Contributions previously reported and available to deduct” will show up on your RRSP Deduction Limit Statement.

   You may choose to do this if you expect to be in a higher income bracket in the future. This will mean you can still invest in your RRSP accounts now, and take advantage of investment growth, while saving the tax break for when you are earning more in a higher tax bracket.

What this all means for you

   The RRSP is an essential investment account for every Canadian. The tax-deferral properties give this type of account a big leg-up over traditional investment accounts. By saving on taxes now, you are able to contribute more, and let those investments grow over time. The taxes are then paid when you start withdrawing money. 

   If financial freedom is in your life’s plans (it should be), the RRSP is an essential tool to help you on your journey.

What is Your Next Milestone?

   What is your vision of the future? Where do you dream of being 10 years from now?

“Most people overestimate what they can do in one year and underestimate what they can do in ten years.” - Bill Gates

   Setting life changing and awe-inspiring goals often sounds very much like dreaming. The enormity of the goal is so daunting we don’t always know where to start. In these situations we also need to set milestones, smaller markers of progress that are more manageable. 

The Reason for Milestones

   Milestones serve a few essential purposes in goal setting. First, milestones provide a closer range target to aim for. This helps shrink the gap between where you are, and where you are trying to reach. Making the goal less daunting enables you to plan the action steps easier, and helps you keep motivation. As you progress towards a shorter range milestone, your progress is more easily seen, reinforcing that your efforts are making an impact.

   Milestones also provide something to celebrate. While achievement is certainly an important element for finding fulfillment, celebrating the smaller wins along the way keeps the journey light and fun. Your BHAG’s and long range vision shouldn’t feel like a chore, it should feel like you are doing exactly what you were put here to do. 

Milestones in Action

   For this example, let’s look at my BHAG. Within the next 10 years, by 2030, I am going to help 1 million people find greater success. I will help these million achievers through my speaking, writing, and online courses. Even as I write these words, I can feel the hairs on the back of my neck stand up with excitement, and the nagging thoughts in the back of my head asking, how? 1 million people is a lot of people. And that is where milestones come in.

   To reach 1 million people in the next 10 years, I need milestones to let me know that I am on track. Therefore my first milestone is to reach 100 weekly readers, then 500, then 1,000, and so forth. Each of these milestones is small enough to be attainable, yet each milestone drives the needle towards my BHAG. Of course, for a BHAG of helping 1 million people find greater achievement in their lives there will be many more milestones along the way. But starting small with a list of 100 is something that I can achieve in the short term. It’s something that I can celebrate. It’s something that will motivate me to hit my next milestone of 500 subscribers.

Where to begin with your Milestones?

   When getting started with any new goal, it is important to provide yourself a quick win. It would be entirely logical to say 1,000,000 divided by 10, is 100,000 people impacted per year. But when starting from 0, even that seems like a big goal. Since success breeds more success, the first 100 will be harder than the first 1,000, and so on. As I build momentum, recognizing what works, and what doesn’t, I’ll be able to refine my strategies.

More Milestones in Action

   Assume you set a career BHAG to become a Director of Sales in 10 years. Starting in an entry level inside sales role, your next milestone isn’t to become a Director. Your next milestone is to develop the skills that will help you succeed as a sales executive. Once you have the skills to succeed at the next level, you will be able to effectively grow into that new role. Hitting that milestone, celebrating, and setting your sights on the next set of skills that you’ll need. In that case, it might be better communication and leadership skills. Step by step, milestone by milestone, you will progress towards your BHAG, refining your process and abilities as you grow.

What is Your Next Milestone? 

   Now it’s your turn. What is your BHAG? Now what one small win can you achieve in the next 1-3 months that will help fuel that fire inside of you? That quick win is your first milestone, followed by the next win, and the next. As you grow and develop, that mountain of a goal you originally set seems to get smaller and more surmountable each step of the way.

   As you knock milestones down, you become more of who you were meant to be. And that’s certainly something worth celebrating!

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.

Chart showing credit score ratings

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.

What is holding you back from achievement?

   When we set goals, we identify a future state that we want to bring into existence. Whether that is a slimmer waistline, a healthier bank account, or a more fulfilling job. This vision for the future provides us hope, and the strength to overcome difficulties. But even knowing where we want to reach, often times we fall short of our stated goals. Why? What is holding us back from achieving our dreams?

The Achievement Problem

   When setting goals, it is important to have a clear vision of the future. But equally as important, we have to recognize where we are right now. A goal is the way to bridge the gap between your current state and your future state. The achievement problem often arises when the bridge simply isn’t long enough to span the gap, often because our current reality is distorted. In these cases, we assume we are further ahead than we actually are, and after the first few weeks or months of effort we become discouraged. Our reality catches us to where we thought we were starting from, but you don’t feel any closer to your goal.

   For example, our health is a common goal that many of us set. We plan to shed those extra 5 (or 15) pounds. And so we begin, our current state is 5 pounds heavier than our goal state. After a few weeks at the gym, sure you feel a little stronger, but the scale hasn’t moved an inch. Maybe the gym just isn’t for you? It sure is a lot of work, and for what? Where are the results?

   In reality, that gym has made you stronger. And your muscles are developing, but that doesn’t immediately move the needle on the weight scale. The true current state is more complicated than a simple number. It takes into consideration movement in your daily routine, your diet, your sleep schedule. All of these factors contribute to those extra 5. And all those factors need to be considered when looking at your current state.

The Gap Analysis

   To effectively plan for achievement, you need to consider all of the factors impacting your current state, and all of the limiting factors that need to be overcome to reach your desired state. The difference here is often a wider chasm to bridge than you first recognize. 

   Identifying where you are, where you truly are, and where you want to be is called the Gap Analysis. The objective is to list out where you are right now, and everything that is holding you back from achieving more. This won’t be easy, or comfortable, but it is necessary if you want to overcome your obstacles.

   With some deeper thought, you can conduct your own gap analysis, understanding where all the obstacles are that hold you back from achievement. Once you’ve identified the obstacles, only then are you ready to develop an action plan to bring your goals to fruition.

Overcoming Obstacles and Achieving More

   What is holding you back from achieving more? The obstacles that you don’t consider are often what trip you up. Spend some time performing a thorough Gap analysis, and you will have the list of challenges to overcome. Quite often simply recognizing these challenges exist is enough to build counter measures, to make small adjustments to succeed.

   In our gym example, this could be a more comprehensive plan that involves an extra 30 minutes of sleep a night, a couple more glasses of water during the day, and a 30-minute walk at lunch. These minor changes build up over time, and magnify the efforts that you put in at the gym. Soon enough, those pesky 5 pounds were last years’ problem.

   Where are you right now? What is the gap between your current state and your goal state? Once you know the gaps, you can more easily build the right bridge, carrying you up, over, and to the brighter world on the other side.

What is a Credit Score?

   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!

The little things

The little things matter as much as your greatest accomplishments.

   The beer was flowing at a recent company evening social, just like any other. But this evening was not like any other. We were there to say farewell to an esteemed colleague, Greg, as he parted ways with the company. Over the past half decade, Greg reshaped the sales division of the company, and led the team to double digit growth year over year. His list of accomplishments was long, between bringing in some of the largest deals the company had ever sold, to entering new markets internationally. But this evening, as those who worked closest with him gathered to say thanks, none of those accomplishments were mentioned.

   Instead it was the little things that people reflected upon. 

   His cheerful demeanor, always quick with a smile. The way every situation was a learning experience, even when a prospective customer slipped away. Or the best practices and recent wins shared each weekly meeting. The way each team member felt valued and respected, regardless of their experience.

   Greg’s influence could be felt throughout the team, and that team, his team, had grown and prospered because of it. All because of the little things.

What are your little things?

   Much as Greg was remembered for the way he showed up for his team each day, you too will leave your mark not just through your grand accomplishments, but also through how you show up. These daily behaviours, the little things are what people cherish about you.

How are you showing up?

   Just as we cherish the little things that makes others who they are, they cherish the little things you do that make you who you are. Take some time to reflect on who you want to be, how you want to be remembered. Now, how are you embodying those values and virtues that you have identified? What little things are you performing each day?

2020 TFSA Update

   For Canadians, the Tax Free Savings Account is an incredibly valuable investment tool. As the allowable contribution room that increases each year, anyone using this investment tool needs to be aware of the latest contribution limits. 

For 2020, the annual contribution increased by $ 6,000.00.

   If you have been over the age of 18 since the year 2009, your total lifetime contribution limit is $ 69,500. The chart below shows the annual contribution limits, and a cumulative total. To find your lifetime contribution limit if you were younger than 18 in 2009 (born after 1991), simply add the annual limits of all subsequent years after the calendar year you turned 18.

2020 TFSA

Contributions vs. Account Balance

   There has been some confusion about allowable contributions, especially when investments have grown. Contributions are considered independently of the account balance. This is especially important after the economic boom over the past decade. If you had investments that performed well over the past few years, it is quite possible that your account value has grown to beyond $ 69,500 already. This does NOT mean that you can’t contribute this year. As long as the amount you have contributed, your invested principal, does not exceed your lifetime contribution limit.

Example: TFSA Lifetime Contribution

   To highlight this, let’s look at Dominic’s situation. Dominic is a 30 year old Canadian resident, living in Canada on a continuous basis. Born in 1990, Dominic was 19 when the TFSA was introduced, and therefore has the entire lifetime contribution limit allowed.

   In 2019, Dominic received an inheritance, and invested all of his allowed amount into his TFSA, the full $63,500. His investments were predominantly stocks, and he saw significant gains over the year. On January 1, 2020, the balance in Dominic’s TFSA account was $ 73,000 - a gain of $9,500 over the year! Dominic hasn’t withdrawn any funds, but is concerned that his account balance is over the $ 69,500 lifetime contribution limit. Fortunately, as a BusinessMinded.ca reader, he knows where to go for information before making any rash decisions.

   Looking at Dominic’s situation, we see the following:

Lifetime Contributions: $ 63,500

Investment Growth: 9,500  

   Understanding that investment growth has no impact on lifetime contributions, Dominic can still contribute $ 6,000 in 2020. This will bring his used lifetime contribution up to the 69,500 limit, while increasing his account balance to 79,000 ($ 69,500 contributions + $ 9,500 investment growth).

TFSA: A Powerful Tool

   Understanding how a TFSA works is important for achieving financial freedom. Armed with the right knowledge, a TFSA will play an important part in your financial future. With $ 69,500 in cumulative lifetime contribution room in 2020, there are plenty of ways this powerful tool can be used to drive your personal financial success.

Where can I find more information about TFSA’s?

Read What is a Tax Free Savings Account?

How does this compare to an RRSP?

Read Which is better? RRSP vs TFSA.

How much will achieving your goals cost?

How much will achieving your goals cost?

   Knowing how to avoid the common pitfalls of achieving goals increases your chance of success. But there is one other often overlooked cost of achievement, and that is the financial cost of progress. For all of our goals or resolutions, there will be an impact on our bank account. Recognizing these costs will help you build them into your financial plans, and clear one last hurdle to your achievement.

What type of costs will you see?

   For my fitness goals, the gym membership will cost several hundred for the year. And while I have some gear already, continued use will ensure that needs to be replaced. By the end of the year, I expect to have spent $ 2,500 on gym memberships, workout clothing, running shoes, equipment maintenance, etc.

   As I progress my career goals, I will need to have the wardrobe for the positions I plan to be in. For new suits and dress clothing, $ 2,000. The courses and professional development that will get me to my career goals? Another $ 8,000.

   By now this is starting to sound like a MasterCard commercial, and that’s only considering the costs for two of my pillars. Once we add in social outings, date nights, romantic get-aways, journals, guided meditation apps, etc. The financial cost of all that I plan on achieving climbs even higher.

   Of course, achieving what I have set my sights on this year? Making this year my best year ever? That, is priceless

How much will achieving your goals cost?

   Setting the right goals will put you on the path to living your best year ever. But an important part of achieving your goals is to understand the costs associated with each of those goals. Here’s how you can be better prepared:

  • Pull out your list of goals
  • Under each goal, list what you’ll need to get there
    • A coach? Courses and seminars? A weekly entertainment fund? New gear / clothing?
  • How much do each of these prerequisites cost?
  • How much more do you need to set aside now, and ongoing, to ensure you can achieve your goals without undermining your financial foundations?

   Understanding the costs of achievement helps you plan accordingly. No matter the numbers you come up with, it is essential that you create the plan, and keep your eyes fixed firmly on the achievement of your goals. Because the cost is nothing compared to the value you’ll experience when you make this year your best ever. The value of that? Priceless.

Resolute Resolutions

   Have you decided on your New Year's resolutions yet? How devoted are you to achieving your goals?

   For many of us, the start of the year brings a renewed focus on our career, health, and financial goals. “This year will be the year I get in shape. This year I will get that career promotion. This year I will take control over my finances.”

   As anyone who has been to the gym that first week of January will tell you, it is crowded. People are committed to their yearly goals. But one by one, as the days go by people lose that firm grasp on their resolutions. Perhaps you  notice something similar when you look at your previous goal performance. Soon enough, as we approach the end of that first month, that crowded gym is back to looking just as it did before the new year began. 

Why do people abandon their goals?

   There are a few reasons why people abandon their goals. The most prevalent one that affects most “New Year New Me” people is overwhelm. Overwhelm assaults our good intentions in many different ways. That top 10 list of things they want to do differently in the new year, but if they were to stick with them all they would lose sight of who they are. Or that BHAG that isn’t set 10 years into the future, but rather 10 months into the future. Progress seems almost non-existent despite working exhausting hours, and suddenly that goal looks like we just bit off more than we can chew. Or life simply gets in the way. How many good intentions have faded away after life throws us a curve-ball, an untimely illness, or a sudden vacation or work trip. Overwhelm has many weapons with which to cause us to falter in our quest for greatness. 

   Another reason is the goal is too vague. “Get healthier” doesn’t come with an action plan. Neither does “get a promotion”, or “be better with my money”. If you aren’t specific about the result you are wanting to achieve, it is impossible to put an action plan in place. And without an action plan, it becomes easy to talk ourselves out of doing anything.

   Finally, the inability to measure our progress hinders our ability to grow and develop. Without seeing if our actions are paying off, it is easy to rationalize that our efforts simply aren’t working. Certainly some things are easier to measure than others, but all of our goals should be measurable. Seeing progress will help us stay the course throughout the ups and downs of life.

How do you stick with your goals?

   Knowing about overwhelm, vagueness, and measurability is an important first step to overcoming those obstacles. But what can you do to ensure you actually achieve your goals? 

   To face overwhelm, you need to ensure you only have a few goals at a time. And these goals need to be ambitious, but achievable, in the time frame you allow. If there is no way you can achieve in that time frame, perhaps you need to allocate more resources to working on it, or shrink the goal, or extend the time frame. Keeping the goals in sight, yet achievable, will prevent some of the overwhelm. And finally, you need a contingency plan. It is easy to work at a goal when the sun is shining and you have nothing but free time. But what are you going to do when life gets busy, when things aren’t going your way? Knowing how you will adapt to life’s uncertainties greatly increases your chance at success.

   How else do you increase your chance at success? Specificity. You need to know exactly what you want to accomplish, and how you plan to get there. By getting specific in your goal, often you will also uncover the action plan that helps you get there. This action plan can be measured, and you can track and evaluate your progress even before you reach the prize. Specificity, being specific about your goal, clears up your vague intentions and provides you an action plan with which to measure progress. This clarity will set you up with the optimal chance of achieving your goals and resolutions.

   As you set your New Year’s Resolutions, or any other goal, make sure you are ready to combat overwhelm, vagueness, and measurability. By being specific in what you want to achieve, and building a contingency plan for when things go wrong, you will be well prepared to crush your next goals.