What is Asset Allocation?

   There are three fundamental principles to successful investing: asset allocation, market timing, and time in the market. To achieve optimal financial returns, while balancing an appropriate level of risk, we look at asset allocation.

What is Asset Allocation?

   Asset Allocation is an investment strategy that involves investing part of your portfolio in different investment classes; stocks, fixed income, and cash. These assets, or investments, make up a portion of each balanced portfolio. The amount of risk associated with the portfolio is determined by how much of each asset class is held. For example, a 100% stock portfolio is much more risky than a 50% stock, 50% fixed income portfolio.

   Okay, so Asset Allocation simply refers to how much of my investment portfolio is made up of stocks, bonds (fixed income), and cash. I’m with you so far, but why are you telling me this?

Why is Asset Allocation important?

   As one of the three levers that controls investing, Asset Allocation is the most easily adjusted. While we cannot invest earlier, and correctly timing the market is a statistical impossibility, asset allocation is our best bet to invest effectively.

   Asset allocation is widely considered the most important investment decision, with far greater impact than the specific stocks in your portfolio. The asset mix, between stocks, bonds, and cash determines the risk / return rating of each portfolio.

   In general, stocks are the riskiest, yet offer the highest returns. Fixed income is safer, but the returns are lower than stocks. And cash, or Certificate of Deposits (CDs), are the safest of all investments, yet yield the lowest returns. Asset allocation is important to understand, as it governs risk and expected returns. 

   Alright, Asset allocation is important. How do we use it best?

How to use Asset Allocation?

   Financial advisers will often recommend asset allocation based on your age, as a general approach to determine how much risk you are open to. The traditional formula is 100 minus Age = asset allocation weighting. For example, let’s say you are 30 years old. 100 - 30 = 70. This means that 70% of your portfolio should be invested in stocks, while fixed income (bonds) and cash make up the remaining 30%. 

   The traditional formula doesn’t take into consideration the increasing life expectancy, and I would advocate that for our younger readers, the asset allocation benchmark formula should be 115. For our 30 year old reader, that would look like 115 - 30 = 85. Therefore, 85% of a 30-year old's investment portfolio should be in stocks, with the remaining 15% invested in fixed income and cash. 

   This benchmark system makes a very important assumption, that the investments are made with a long-term focus. This long-term focus looks towards retirement, not shorter term financial goals like home-buying or weddings. If the monies will be needed within the next 5 years, a far more conservative asset allocation is recommended.

Key Learning Notes:

   Asset allocation is the single most important lever to control your financial investments. The term refers to how much you invest in a single area, between stocks, fixed income (bonds), and cash. The more heavily weighted in stocks, the riskier the portfolio, and the higher expected returns. As a general rule, a good benchmark for asset allocation can be established by using 115 (or 100) minus Age = allocation for stocks. This benchmark is effective if using a long term focus, for example saving for retirement.

Action Item: 

Perform the asset allocation benchmark calculation for your long term investment accounts. What is your benchmark score?

Now look at your investments. How much, as a percentage, do you have invested in stocks? Fixed income? Cash?

Is there any re-balancing required? Ideally, this exercise is conducted once or twice a year.

Is the Sacrifice too Great?

   Success comes as a result of sacrifices. Giving certain things up to grow allows us to achieve more in our lives. But sometimes the sacrifices that are required are too great a price to pay.

   As we decide what parts of our lives we want to change to experience more; more health, more love, more wealth, more peace, we also need to put boundaries on what we will sacrifice to achieve that. One of our Success Coaching clients recognized his boundaries and enjoys the extra accountability keeping him focused on his priorities. We joined his story as he steps into a new Director level role for a rapidly growing company, providing the promise of substantial career growth, and compensation to go with it. The allure of riches distracts many from the other pillars of their lives. 

   And this focus on career success and the pursuit of financial riches has cost many a man and woman their relationships; both family and friendships. But the cost is often higher than that. Many times we can witness those excelling to the top of their field with shaky foundations; poor exercise regimes, unhealthy eating habits, controlling stress with alcohol or tobacco. As we define success for ourselves, these crumbling pillars of success are hardly the inspiring vision we have. So where do we go wrong? Simply put, we sacrifice too much.

   Understanding what is important to you, and making those areas non-negotiable means you won’t risk building your success on shaky foundations. What does that look like? As we rejoin our coaching client, his success looks like; devoted time to his family each week, a non-negotiable dedication to his fitness, and healthy stress-management practices. These areas of his life are most important to him, and anything that would require him to sacrifice them is asking too high a price, regardless of the promised reward.

   This is why our Success Coaching program was designed to keep you accountable not only to your goals, but also to your boundaries. Knowing what you are sacrificing to enable growth will help you determine if the trade is worth making. We all need balance and boundaries; what is worth sacrificing to achieve more, and what is not. You can't walk the path of success if your health and relationships are crumbling all around you. That is why it is essential to keep track of all that you are doing, and all that you need to do to keep the boat the right way up. That chest of gold does no good in a shipwreck at the bottom of the ocean!

   As we strive for greater success, we need to make sacrifices, trade-offs that help us become more than we currently are. But before we get caught up in the pursuit of success, we also need to establish our boundaries. What are you willing to trade in, to sacrifice for more success? And what aren’t you?

 

Action Item:

Take some time this week to decide what your boundaries are. What are your non-negotiables? What are you not willing to give up, no matter what the promised reward is? Write these down. Commit to them, and as you achieve success, you’ll find yourself living that vision of your ideal future.

Giving Up to Grow Up

We can achieve more than what we have because we can become more than what we are.” Jim Rohn

   Have you ever thought about what you would give up to achieve more success? What you would be willing to not have in your life to be able to live out your dreams?

   It is often said that success comes as a result of sacrifice. That when we give up certain elements of our current life, we are able to fill those gaps with things that mean more to us. These sacrifices are present in all areas of our life. We give up on being single in order to pursue a relationship with people we love. We give up on watching TV in order to read books and learn new skills. Or the sacrifice of late nights socializing so we can get some much needed sleep and exercise. The sacrifices we are willing to make help determine how far we will be able to go.

   My girlfriend Marianne recently made a sacrifice with the vision of a better career. In her sacrifice, there are lessons we can all learn from. You see, Marianne had grown over many years to become an exemplary performer in her job. Ultimately she found herself in a place where she had earned the respect and friendship of those around her professionally. Many of us will find ourselves in similar positions in our careers, where the right now is comfortable and profitable. But right now is just that, a good place to be right now. If we want to reach our potential, we need to continually look for the next opportunity. 

   One such opportunity presented itself to Marianne, in the form of a career change into management consulting. Embracing this opportunity would mean giving up on her current successes, in order to achieve more in the future. Giving up the close working relationships she had with colleagues (who she could also consider friends), giving up the comfort of familiar where she knew she excelled. This “give-up” list was extensive, and that is frightening. To replace all that she would be giving up was an equally extensive list of new challenges, knowledge she didn’t possess yet, new professional relationships to be cultivated. 

   So how do you move forward when what you have to give up, or sacrifice, seems so daunting? Turn that fear into excitement.

   By re-framing the opportunities, not by what you are losing, but by what you are gaining helps put into perspective the sacrifices that are required. You are not giving up that TV show, but you are gaining strength and vitality from the combined time in the gym. You aren’t giving up freedom as you gain the close companionship of a relationship. And for Marianne, the sacrifice was re-framed into excitement. Excitement for the chance to learn and grow, excitement for future opportunities, excitement to achieve more for her career and herself.

   We all have to make trade-offs in our lives to become better, what do you need to give up to become better? What's holding you back? Sometimes growth is held back by our comfort and familiarity with our current situation. Turn fear of failure into excitement to achieve more and you'll see the benefits of making these trade-offs. That excitement will help you through the often difficult immediate transition, and keep you focused on your path to success.

Understanding Income Taxes

   You know, taxes are unavoidable. And if you have to encounter those taxes (free tip: you can't escape taxes), you might as well understand what the implications are for your financial well-being.

   Income taxes are one of the most common taxes we all encounter. And unfortunately, there are some serious misconceptions about how taxes are levied against us. This is brought about by the marginal tax rate system, as well as some payroll practices that feed our misconceptions. Let's take them in turn.

Marginal Tax Rates

   Much of the world uses marginal tax rates, and while the percentages may vary from country to country, and even province to province (state to state), the system is the same. Governments provide us a tax break for a certain income amount, and slowly increase rates the more we make. The increases in tax rates fall into "tax brackets". The marginal element means that the tax rates only affect income in that tax bracket. To understand how this works, let's look at the 2019 Canadian Federal tax rates. (Note: if you are reading this from another country, the process is the same but the percentages are likely different.)

2019 Marginal Tax Rates

   Taking a look at the Federal Marginal Income Tax rates we can see that if we make more than $ 47,631 in income in the 2019 calendar year, we only pay 20.5% on any earnings above the $ 47,631 mark. For the first $ 47,631 in income, we are only paying 15%. This scales as we earn more and more. Let's look at how this tax system works for someone making $ 100,000.

Marginal Taxes on 100K

   In this example, we work through the tiers and end up with a total amount of tax paid to the Federal government of $ 18,140.90. There is a common misconception that earning more money means the government takes a higher percentage of every dollar. In the above example, the misconception is that making $ 100,000 the combined tax rate is 26%, meaning $ 26,000 in tax paid. The difference from this misconception is an extra $ 7,859.10!

Taxation Myth: The more I make, the more taxes the government takes on all my money. 

   We can see that this taxation myth is dispelled! But we need to pass the word out. I have heard people working for hourly pay actually giving up shifts to not reach the next income bracket, thinking they are saving money in taxes! Let me simply sum up the math by saying, earning more money is never worse for you financially.

   But these myths did start somewhere, so let's look at why that is!

Income Taxes and Payroll

   Income Tax is usually automatically calculated each pay period by payroll software. The software makes an important assumption: that current earnings are the level of earnings you will earn all year long. Now let's say you receive a mid-year raise on July 1st, with your salary increasing from 70,000 to 85,000. Your income for the year will be $ 77,500. Unfortunately, the payroll system will be taxing the last half the year as if you are making $ 85,000 in annual income. This means for 6 months you will be paying too much in income tax. 

   This same situation can have an even more skewed result for certain types of compensation as well. This can be seen in bonuses, commissions, and overtime. These additional one-time compensation line items can inflate your earnings for the current pay period substantially, which puts you into a much higher marginal tax bracket for that pay. Explained another way, most payroll software calculates your one-time earnings as being received each pay. If you earned an extra 25% in overtime this pay, your income tax paid will be as if you make an extra 25% each pay (wouldn't that be nice?).

   The good news is, this will be refunded as soon as you file your taxes the following year. Unfortunately, the fluctuating tax payments and clear as mud explanations lead many people to jump to the wrong conclusion about how income tax works.

Key Take-Away

   Income Taxes are levied against all of us as we earn income. These taxes are based on a tiered system, called marginal tax rate system, where any income in that given tier is taxed at the same rate. If you go up an income tier, the tax rates levied against those additional dollars earned changes, but only against the extra dollars above the tier minimum! Pro tip: Knowing these tiers is vital for planning your investments!

   When calculating income taxes, most payroll software calculations annualize the earnings from the current period. That means if you make more money on one pay cheque, you will pay tax as if you make that amount each pay cheque. These extra taxes paid will be refunded to you when you file your taxes the following year. Earning more income will never be worse for you financially.

Note: Personal tax credits also have an impact on the amount of Income Taxes you owe. For simplicity, tax credits have been left out of this discussion, as not everyone is applicable for the same tax credits.

Dressing for Success

How often do you go for a haircut?

   This question sparked a pivotal learning point for Jay Abraham as he divulged in an interview with Ramit Sethi. The learning from Jay resonated deeply with me in relation to a topic one of my coaching clients asked about. The topic of dressing for success. 

   How often do people get their haircut? The answer, gave the stylist: it varies greatly between people. Some people come in every month, every 3 months, every 6 months. With such a discrepancy in the frequency of visits, one must ask the question, why? It is usually very obvious when people come in from visiting a stylist, they look fresher, cleaner, more professional. Despite the cliche, "Don't judge a book by it's cover." We do judge. And when someone takes time to dress well, we notice, and it reflects well on them. There are a few elements at play here:

Confidence

   Think of a well dressed lady or man. Their stature improves. They stand taller, smile broader. When someone knows they look good, they exude an aura of confidence that lets the world know, "Yeah, I've got this". Confidence itself leads to a wealth of benefits, all of which can be externally triggered by the simple act of dressing for success. These benefits include; openness to tackling challenges, increased professional performance, happiness, and health. Not only are we more willing, and even more capable of taking on our obstacles, our performance also increases. Without self-doubt, we end up smashing through obstacles that otherwise we would have turned back from. You can see the impact of confidence in a common martial art demonstration, punching through a plank of wood. The key to success in this maneuver is to strike through the wood, embracing the confidence that you can break through the wood. On the flip side, if you don't believe you can break the wood, you'll hesitate slightly which will reduce force, and the obstacle won't be broken. This analogy perfectly illustrates the benefits that confidence can have when facing professional challenges. And through this, confidence brings us to the other benefit of dressing for success, competence.

Competence

   We need to dress the part for success, however that looks in your profession. You would be skeptical taking fitness advice from an overweight personal trainer, you may also discount any health advice received from a sick doctor. We expect people of their own craft to look and act the part. And that starts the moment we first see them. I would be concerned if my surgeon showed up to the operating room in sneakers and gym shorts, regardless of how talented she claimed to be. That same surgeon though, dressed in scrubs, would give me confidence that she knew her business, simply from how she dressed. 

   As the world becomes more progressive in their tolerances, some things will always hold their merit. And dressing well is one of those items. Regardless of the dress code for your profession, when you show up looking good, that speaks volumes.

   So if there is one take-away here, keeping up with your appearance grants you confidence and an air of competence that immediately sets you at the front of the pack. Dressing for success is an easy way to get a leg up on your competition, and look good doing it!

The Cost of Borrowing

   Last week we looked at interest rates and their impact on our financial accounts from the perspective of an investor. Even more common in our financial lives though, we use borrowings from the perspective of a borrower. Understanding how interest works before we are charged is imperative to avoiding the slippery slope of consumer debt that plagues many individuals. As a recap, interest is a charge on borrowed funds. 

   In its most simplified terms, borrowing with interest means paying back more than you borrowed. The difference is the interest paid. The lending/borrowing arrangements are incredibly diverse, but can be evaluated based on the Annual Percentage Rate of interest. UK and North American consumers are fortunate in that respect, as interest rates must be displayed in that form. This standardizes the cost of borrowing on most consumer loans by showing the annual cost of the loan. As the interest rates indicate the cost of the loan, the higher the APR, the worse the loan terms are.

   The most common source of short term borrowing we see are credit cards. The interest rates on these cards are astronomically high, often ranging from low double digits all the way to 20% or more! At interest rates like these, failing to pay off your balance before interest is charged dramatically increases the cost of your purchases. Other common sources of debt are; vehicle loans, mortgages, lines of credit, store financing, to name a few.

How to deal with Debt

   When paying off debt, your primary goal is to pay off anything with the highest interest rates first. This will reduce the cost of interest, and ultimately save you money in the long term. This is the mathematically best solution, and goes contrary to some other strategies. When available, you should also try to consolidate your debts into one single, lower interest rate loan. This can be especially hard to do if you already have poor credit, as banks and other lending institutions will charge you a higher interest rate to account for the extra perceived risk, or they simply may not lend anything at all.

Pro Tip: If you don’t have an emergency fund, you need a line of credit.

   Getting a line of credit when you don’t need one will result in more favourable interest rates. The line of credit costs you nothing if you don’t use it, but in the event of a financial emergency, being able to pay off credit cards using a lower borrowing cost option will save you potentially tens of thousands of dollars on interest in the long run. Note: this is a last resort backup plan, and shouldn’t be utilized to finance any purchases that are not absolutely essential to living.

When to use Debt

   Debt can be used for our financial benefit. We are well aware that home ownership for most of us is only attainable if we finance through a mortgage. This use of borrowed money allows us to enjoy assets that we otherwise wouldn’t be able to afford. There is one main reason to use debt, and that is leverage for an investment. Leverage simply means borrowing to purchase something. In the case of real estate, we often expect the value of our investments to increase over time, and if the gains surpass the interest costs, we come out ahead. 

When to pay off debt

   If you have debt, there are times when it is more advantageous to not pay off the debt. Incurring interest expenses intentionally may be the right financial move if you can make more money by investing than you would save by paying off the debt. If you can invest at a 10% return, and only pay 7% in interest, you are ahead 3%. Unfortunately the future is never certain, so you should also take a risk premium into consideration. If in the above example, the investment return under performs expectations and results in a 6% return, you would have paid more in interest than you earned. 

   As a result of future uncertainty, to make the equation equal you need to assign a risk premium. To display this in a formula, we would look at the decision like this:

Expected Return = Cost of Interest + Risk Premium

   In the above example, we can use the 7% interest and a 2% Risk Premium. If our expected return exceeds 9%, we are comfortable taking the risk for the extra returns. If the expected return is less than 9%, we should pay off the debt for the guaranteed cost savings of 7% in interest charges.

Take-Aways

   Borrowing money is an important part of our personal finance journey. Understanding when and how to use debt, and how to evaluate different options will ensure we make the right choices on our path to financial freedom. Some of the key take-aways from this article are:

  1. The higher the APR, or Annual Percentage Rate, the more interest you will be paying, and by consequence, the worse the debt is.
  2. Paying off the highest interest rate debt first will save you the most money.
  3. If you don’t have an emergency fund, get a line of credit before you need one. Your terms will be better, and in case of an emergency, those better terms can help keep you from financial ruin.
  4. Use borrowings to invest in assets that will increase in value. This is called leverage.
  5. Pay off debt first unless the investment return is more than the interest rate on debt plus a Risk Premium that suits your investor type.

Pick your Poison

Pick your Poison

   Marketers describe us as consumers, and we are. We are all creatures of consumption, from what we eat and drink, to the appointments we fill ourselves with, and the information we digest. And when it comes to the things we ingest, either physically, mentally, spiritually, we need to be vigilant about what enters our bodies. 

   Of course words of wisdom like this are easily passed over as too basic or trivial to even worry about. We all know that excessive alcohol consumption is bad for our health, or smoking carries serious long term risks. And these are all true! But the pitfalls of our pervasive over consumption goes far beyond the studies mentioned on the 6 o’clock news.

   Of the list of things that we consume, food and drink certainly picks up the lion’s share of the blame tab. Every week a new study is released discussing the negative elements of too much sugar, too many carbs, fats, acids, the list goes on. These studies can be summed up rather succinctly by saying: Too much of anything is bad for you. But aside from the food plate (formerly our well known food pyramid), what other areas of consumption should we be wary of? 

   The poisons we pick fall into two categories; time, and information.

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Time:

   The alarm clock buzzes, we reach over and hit the snooze button. Wait, this isn’t the early 2000’s anymore. Our snooze button is actually a finger slide on our touchscreen. A few minutes later, the electronic rooster is at it again. Grumbling, we roll over and open our eyes, picking up that phone and sliding the screen up. First thing, let’s check social media, and probably our inbox to see what happened in the overnight hours. Great, calendar invites for today.

   Within 15 minutes of waking up, we already see 4 meeting requests, that’s half our day gone in meetings that we probably shouldn’t even be in. One of the most venomous poisons that we willingly consume is these irrelevant demands on our time. And not that we aren’t important, but a 4 line email or a 5 minute phone call would likely straighten out our issues without the need for an hour long meeting. 

   The consumption of time is incredibly poisonous for two reasons. First, it kills our productivity. As we run from meeting to meeting, we hardly have time to sit down and focus on our important tasks of the day/week/year. And secondly, consuming our time by running around being busy feels good. We love the feeling that we are important, that someone needs us, and by stepping in to be their hero, we forget about our own quest. 

   Over-consumption of time is a devastating poison to swallow. And this problem is only going to get worse as we become increasingly connected. 

It’s Time We Took Back Our Time.

   So what can we do to take this time back? The best strategy is to plan out your day the night before. Put on your calendar non-negotiable time to work on your priorities, on the tasks that are most important to your goals. Taking back your time before someone else tries to will vastly improve your success as you strive for greater and more abundant achievements. 

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Information

   Perhaps the most pervasive of all poisons is actually information. Think back to that electronic rooster crowing. As we load up our calendars with irrelevant meetings, what else do we consume? Social media captions of celebrities, news feeds full of stories of the latest tragedies around the world, and all sorts of horrific incidents. The same is portrayed on breakfast TV and 6 pm news. Sensationalist headlines all striving to out-do one another by bringing us the most corrupt and terrifying stories. Once we start down that slide of human suffering and misery, it becomes almost impossible to then take on the day’s challenges with an open, positive mindset. 

“It doesn’t matter where you get the bad stuff, it will still do it’s damage.” ~ Jim Rohn

   As we strive for achievement, we need to be conscious that negative stories and news will fill us with negative energy. This energy is not optimal for producing creative solutions to problems. In information, as much if not more than anywhere else, do we need to pick our poison well. 

What Poison Should We Take?

   As we each pursue different interests, and have different life experiences, the level and content of information we need differs greatly. If you have small children, you’d be well off to know about unsafe roads in your neighbourhood. Or the happenings overseas where a family member is vacationing. Or the government regulations that might affect your business. But none of us needs to consume all of the information we currently do. If you aren’t an aspiring Hollywood actress, knowing the habits and routines of the Kardashians is probably not helpful for our growth.

The Antidote:

   We can’t steer clear of all negativity. There will certainly be days were we eat too much, or have one too many drinks. And for almost all of us, we can’t reasonably control our entire calendar. But we do need to exercise some careful planning in all of these areas. Pick your poison. Choose what you want to consume, and what you don’t. Making these choices before they are made for you will vastly improve your rate and level of success. 

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Action Exercise:

There are two things we can do this week to start picking our poison:

  1. Block off an hour each day to work exclusively on your priorities. This is a non-negotiable calendar slot where you focus entirely on your goals.
  2. Start unsubscribing from email threads that don’t serve you any more. Start small, with only a couple this week. Do you miss getting the emails? Do you even notice not getting them?

Understanding Real Interest Rates

Understanding Interest Rates
Why Stuffing Cash in Your Mattress is a Bad Idea

   Interest rates are one of the most commonly advertised terms in the financial world. High interest savings accounts, low interest credit cards, high interest rate bond yields, low interest rate mortgages, the list goes on and on. But what does that actually mean for us? And how do interest rates fit into our personal finances?

   Interest rates fit into our finances in two ways, the cost of borrowing, and a return when investing. We'll look at the two here.

The Cost of Borrowing

   Interest is charged on the principal, the amount borrowed, and is usually expressed as an annual percentage rate (APR). If the interest is compounded, the interest is added to the previous principal, and interest is charged on the cumulative balance. This is essentially charging interest on interest, and is how many people end up drowning in vicious consumer debt.

   We’ll take a deeper dive into the debt side of personal finance next week. For this week, let’s look at the other side of the equation, lending money for interest income.

Interest as an Investment

   There are essentially 2 ways to generate interest income, lending money, and storing money. Almost all bank accounts provide a small amount of interest income. To increase that interest income, we can lock our funds into a bond or loan of some form. With innovations in FinTech, there are increasingly diverse options for lending outside the traditional realm of corporate and government bonds.

   Bank accounts provide an excellent way to hold emergency funds, and funds used for day-to-day needs. I recommend at least 2 bank accounts, one should be a high interest e-savings account for your emergency fund, and the second should provide you no fee transactions for your daily needs. Both these options provide you liquidity, the ability to quickly retrieve your money, but the trade-off is a lower interest rate. 

   To receive a higher interest rate, we can invest in bonds and loans. The money here is set aside for a pre-defined period of time, and to compensate for your loss of liquidity, the interest rate paid to you as income is higher. For example, a 5-year bond might pay you 3% interest, while a 20-year bond may pay you 5% interest. The extra interest income is paid to you to compensate you for using your money for a longer period of time.

Learning point: Interest Rates (income) increase to pay you for the use of your money for a longer time-frame.

   There exists one more consideration when looking at these interest rates. That is the difference between the Nominal Interest Rate, and the Real Interest Rate. The real interest rate takes into consideration inflation, and is more important to an investor than the nominal interest rate. They are tied to each other by inflation.

   Real Interest Rate = Nominal Interest Rate - Inflation Rate

   When evaluating your bank accounts and debt investments (bonds and loans), often the Nominal Interest Rate is stated. Your purchasing power, or your economic result will be impacted by the Real Interest Rate. 

   To see this in practice, let’s look at a few examples:

Understanding Interest Rates Examples

   As you can see, the real interest rate means you only make money when the Nominal (or Stated) Interest Rate is higher than the rate of inflation. Or put another way, the purchasing power of your dollar decreases over time. 

Learning Point: If the Nominal Interest Rate is lower than the Inflation Rate, you’re effectively losing money.

   For this reason, storing the extra cash under the mattress is a bad idea. Not to mention, mattresses these days are quite comfortable without the extra padding. 

Key Personal Finance Strategy Take-Aways

   Carrying a large balance in your regular bank account does you few favors, as Example 1 above shows, inflation is slowly eating that money up (even if it doesn’t look like it!). To ensure your emergency fund is available, and able to stretch as far in the future as it does now, I recommend a high interest account to counter some effects of inflation. And finally, when investing in debt or loans, to ensure that you have a profitable investment the Nominal (Stated) Interest Rate isn’t the right interest rate to look at. Instead, you need to calculate the estimated Real Interest Rate. 

   Don’t worry, we’ve thrown enough math at you for now. If you want speculation on what inflation rates will look like in the future, a quick google search will provide you professional estimates. 

   Equipped with this knowledge, as you engage in debt investing (bonds and loans), you’re ready to make a calculated decision!

Formula Recap:

Real Interest Rate = Nominal Interest Rate - Inflation Rate

The Coffee Cup Retirement

The Coffee Cup Retirement

   We've all heard about saving on the latte every day, and that will eventually fund our retirement. But this story has been sensationalized by media and spouted all over every personal finance blog ever written. Some in favor, some argue it's ineffectiveness. Neither are helpful at dissecting the story into actionable insights. To help us understand the reasons behind this overused example, a quote from leadership expert John Maxwell comes to mind.

"The secret to success is to do a little bit every day. Doing a little bit every day is a lot more important than doing a lot some day." Most people live in some day." ~ John Maxwell

   When looking at the coffee cup retirement example, the key is not that eliminating your morning coffee will make you rich when you retire. The numbers alone don’t support this assertion. Rather, the key is that if you make a seemingly small choice each and every day, over time that adds up to substantial wealth.

“You mentioned numbers, prove it.”

20-Years of Coffee
40-Years of Coffee

   As you can see, even after 40 years, saving $ 5.00 / day into a retirement account averaging 6% return each year won’t allow you to reach your retirement goals. Saving $ 5.00 each day is simply not sufficient to fund a comfortable and lengthy retirement, although it’s better than nothing. 

   As I’ve mentioned before, the minimum amount that should be set aside each year is 10%. The coffee cup retirement only works mathematically if your gross annual earnings are $ 18,250. If you earn more than that, the amount you need to save also increases.

“So the coffee cup retirement doesn’t work?”

   No, if you earn more than 18 thousand a year, the coffee cup retirement of saving $ 5 each day doesn’t work. But the principle of “small actions add up to big results over time” still stands. Using that as our take-away we can understand that cutting our morning mocha isn’t likely to lead us to financial freedom. But a small action, such as investing 10% of our annual salary each year, every year, will put us on a path to financial freedom. 

   Keep drinking that coffee, just as long as you save 10%. If you aren’t there yet, maybe $ 5 each day is a good place to start. Just remember, small positive choices every day will put you on a path to financial freedom.

The Painful Pursuit of Success

   The pursuit of success should be made through all reasonable efforts. I believe it would be an affront to our futures if we did not strive to become more than what we are now, at every stage of our lives. Every person who has tasted success, be it a professional athlete, a commendable home-maker, or a business professional, would all agree; success is a joy. Achieving greater successes is exciting, enjoyable, and exhilarating. But there is one thing we must all face to achieve these pleasures; and that is the painful pursuit of success.

   You see the milestones we talk about, those are the happy times, those are the signs that our efforts are paying off. But the efforts themselves, they are not fun. Those painful pursuits are the small, seemingly insignificant behaviours that most days we don’t feel like doing. Like showing up at the gym when we’re exhausted and the temptation to just hit snooze is almost overpowering. Or giving up on that much desired lazy night in to attend a networking event. Or taking the high-road because of the lessons others can learn from our restraint. These scenarios, and a hundred others like them every single day play out. And they hurt.

   Delaying instant gratification of simply doing what we want in the moment is the largest differentiating factor in achieving success. Successful people know this: what is undesirable or even painful in this moment, will be rewarded with the joys of success in the future. To borrow from our fitness fanatics:

No Pain, No Gain

   The truth in this statement cannot be overstated, not in the intentional pursuit of pain, but rather in the sacrifice needed to become great. Pushing ourselves at great lengths once or twice is not the path to success. Instead, it's the small, seemingly insignificant at the time, choices that lead us to success.

   The painful pursuit of success is thus: making the choices each day, each week, that aren’t the most enjoyable in the present moment, but pay us off with interest in the future.

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Action Item Take-Away: 

   What choices are you making unconsciously each day that could be changed to ensure a brighter future? What choices could you make today that improve your life tomorrow?

   Think on this, write down the choices that you will start making today to ensure tomorrow is brighter. And then, take action on those choices.