Where do you start to invest?
It is interesting that I get as many people asking me where should they invest as I do. Compared to other households in Canada we don't make much over an average household wage. Plus we have many expenses, yet people think we have money. Indeed, it is a constant source of amusement for my wife that people think that she is wealthy when really she makes just as much as everyone else.
However, that doesn't apply to just my wife and I. My older son came up to me one day and said "I think I've chosen the wrong profession". Now I know he is making good money so I asked him why he said that and his response was "All my co-workers are so broke, they are counting the days until their next paycheque".
Even my younger son who only had a minimum wage at the movie theater said something along the same lines. One day he comes home and says "Dad, I work with a bunch of broke people". I pressed a little further and he told me, everyone there has like ZERO savings. Everyone just gets their pay and spends it immediately.
So, my wife doesn't make more than her coworkers. My younger son makes as much as his co-workers. My older son is just an apprentice so he makes less than his co-workers. What's the secret. What do I tell people who ask me where they should start investing.
The first piece of investment advice
Now my wife and son have been listening to "Rich Dad, Poor Dad" and "The Wealthy Barber". Both of those are excellent things to read (or listen to) to get an idea of where to start investing. One says to become entrepreneurial and make money work for you. The other talks about paying yourself first and making sure you invest in mutual funds, ETF's and other investments
But my financial advice, at least for people who are just starting out is so much simpler. First piece of advice is get out of debt! Especially with Christmas time and people overspending on gifts, food, and everything else that goes with Christmas it is so easy to come out with a huge credit card bill. A bill that will charge you huge interest month after month that will just be draining away your cash and giving you nothing in return!
It is the second piece of advice that has actually proven more useful to both of my children in the last year.
The contingency fund
Now most financial planners will say that you should make a budget and stick to it. Honestly that is really good advice. It is also virtually impossible to stick with that advice. I'm also pretty sure that neither of my sons do it and I'm quite certain I don't.
I actually have a dead simple method of budgeting.
First: I take all the really big bills that I have in a year. Property tax, car insurance, malpractice insurance, strata fees on the rental properties, timeshare maintenance and so much. I add them all up and figure how much they are. In my case it is just under $25,000. So, if I have less than $25,000 in a contingency fund I know that I have big bills that I haven't adequately prepared for. Stop buying and start saving more.
I don't put the money into RRSP, RRIF, TFSA, Education Saving Plan, or anything fancy. Just cash into a High Interest Savings Account. It something that I encouraged my son's to do as well. Now they don't really have major expenses so I told them they should put away enough money so they would have enough to buy any one thing they might make an impulse buy on. Each son had an amount of about $5,000-$7,000 and it makes all the difference for them.
Three benefits from the contingency fund
Now a high interest savings account with $7,000 dollars in it doesn't really make much interest at the typical 3% interest that means you only get about $210 a year. To which both of my sons would say "I make more on a paycheque" but after this last year they both came up to tell me how useful it was.
First Benefit : The mindset of "I Can..but choose not to"
For my younger son it was for when he wanted to purchase a vehicle. With the $7,000 in the bank and a promise from Dad to match his money dollar per dollar.....it meant that he could look at a car and KNOW he wasn't going to have to take out a loan as long as he bought a regular vehicle.
It worked so well for him. Seeing the money sitting in the account let him know exactly how much he could spend on a vehicle and it kept him from going over budget. So useful. But more importantly he made an important discovery after purchasing his vehicle.
- That he felt really good about his car. He knew it was paid for and he knew that it was all his hard work that paid for it. Rather than a loan his use of funds he worked hard for made him feel connected to his car
But Also
- Soon after the purchase he made a realization. You see, when he had the money in the bank it was easy to feel "rich". He could see an advertisement for a new phone and it was easy to ignore. He knew he could afford it and he knew it was his decision to buy or not. He knew he could buy any phone at any time as the money was right there.
His words to me were "Dad, it is so much easier to say no when you have money in the bank". When you have the money you can tell yourself, I could buy it anytime I want but I choose not to because I don't need it. When his contingency fund was gone? Now that the money is gone and I see something I have more desire to buy it because "I feel like I'm missing out on something great and I can't actually buy it.
It may seem small but there is a huge difference. Deciding NOT to buy something is very different from doing without because you CAN'T buy the very same item.
So, a contingency fund can actually help you from making poor purchasing decisions.
Second Benefit : Rainy Day money
Now my older son had a pretty rough month. His vehicle had a major engine issue and a fairly major suspension issue. Then he had hefty expenses for Christmas. Then his motorcycle decided it was going to die on him as well. Now for the vast majority of people a $6,000 unexpected expense would be put on the credit card and take forever to pay off.
However for my son? The money was sitting there in the bank ready to pay off each bill as it came in. The car repairs? Paid. The motorcycle repairs? Paid. The holiday expenses? Paid. His contingency fund? Well, it is much leaner than it was and he will have to put money back in there diligently. However, he is getting 3% interest every month while he saves instead of paying 30% interest if he had used his credit card.
He decided to take a moment to tell me how happy he was that I pushed him to have a contingency fund.
Third Benefit: Peace of mind and a good nights sleep
But as I get older its the third benefit that helps me the most. Knowing the money is sitting there waiting for anything that comes my way is comforting. More than that though, knowing that if I lost my job all the major bills are paid for a year is also comforting. Or in another consideration, when I go on an extended vacation for a few months I know that there is money to cover all the bills while I'm going.
Being free from financial stress is huge! I don't have to fight with my spouse over finances (much). I don't have to lose sleep worrying about how to pay the juggle the bills. I don't have to think very hard about Christmas gift purchases. The money is just there as long as I make wise purchases. Even if I don't....well, it will likely be a year or longer until it really catches up to me.
Am I worried about the January credit card bills? I'm one of very few who won't cringe when it comes in the mail. I know I can cover whatever comes. A little advance planning and a little self constraint to set up that contingency fund makes a world of difference.
Sure there are investments that can pay higher returns or be more interesting to talk about at a gathering. However at the end of the ay, a good nights sleep, staying out of trouble in bad months, and being in a mindset where I can afford all the latest trinkets (or computers or cellphones) makes it so much easier to resist the marketing. Just knowing I could if I wanted to is such a good feeling rather than a I wish I could* feeling.
So, for anyone leaving the Christmas season with big bills? My advice, do what you can to pay them down. Then work on a contingency fund so you don't have to pay those exorbitant credit card bills.
Unfortunately not everyone is so lucky. Many people cut every corner and still are paycheque. For those people I wish them good luck and hope things get easier. But for many working Canadians...a little advance planning and self control to make a contingency plan can go a very long way.
Of perhaps you have a different thought? I always enjoy getting comments.
And thanks for making it this far. Appreciate you taking the time to read.