I’ve been doing some housekeeping. I’ve moved the website to a new host because my previous host was jacking up prices.
I’ve done my best to keep the same look and feel. It’s amazing how much time it takes to do what appears like nothing to the outside world.
To do the move, I had to import all archived posts to the new host. For the most part it worked. Except many images imploded. I’d love to source and re-upload the missing images, but am I realistically going to do that?
I’ll pick away at it over time, but I’d rather produce new content. It’s a shame, but I suppose it’s better than losing everything.
I still have to plug in the subscription feature and a few other widgets. But the core is up and running.
You’ll also notice I’ve changed the tagline to “where money meets late stage capitalism”. I’ll still write about wealth accumulation, passive income and careers, but I think I’d be doing a disservice if I didn’t dive into the intersection of money and late stage capitalism.
What is late stage capitalism?
At it’s extreme, late stage capitalism characterized by collapse. Many things are culminating that will affect our ability to build and keep wealth – climate change, resource scarcity, massive debts, slowing rate of technological progress, polarization of ideologies, wealth disparities, military overreach and so on. In such a world wealth goes far beyond just money. So expect to see articles on permaculture, urban farming, community and useful skills.
1 Holding too much cash and not investing for years. Time is on your side and the earlier you start compounding returns the less you have to save over the long run.
2 Spending too much of your money to prop up someone else’s education or lifestyle. Friendships and relationships don’t last. Especially ones formed in your twenties. I’ve seen friendships dismantled over a couple hundred dollar loan. It’s good to be generous, but you need to be investing in yourself at this stage of your life.
3 Buying daily takeout food and drinks (yes, including coffee). Waste of money. Plain and simple. A little extra meal planning and you won’t notice the difference…that is except for the extra money in your pocket.
4 Working your ass off for your employer expecting something (other than your paycheque) in return. If you get a promotion and decent pay raise, then great. But many make the mistake of overcommitting to their early employers thinking management will make them whole.
5 Paying thousands of dollars for school, before actually knowing if you’re actually interested in the subject matter and that the education leads to a desired outcome. (Education for education’s sake is for the wealthy, and much of what can be learned in a liberal arts degree can be picked up by reading a few books.)
6 Marrying too early, for the wrong reasons or to the wrong person. Being married to the wrong person is hell. Getting divorced is even worse, and it’s financially devastating.
7 Waiting too long to get married. If you think you will someday want to get married, your 20s is prime time to find a high quality, compatible mate. Added bonus: dual incomes and shared expenses (e.g. housing) makes life more affordable. Of course, divorce is super-expensive so ensure you marry the right person (stable, financially compatible, trustworthy, etc.).
8 Forgetting that you’re in your twenties. This is the decade where you have the freedom and time to do whatever you want. See the world, meet people, invest in your mind and body in multiple ways.
99% of conversations between investors are about the next hot stock or something else related to investment returns. Over the long run, the market delivers roughly 10% annualized return. Beating this is next to impossible, yet it’s something that pre-occupies much of mankind’s energy.
Here’s the thing. For most people it barely matters. Indeed, most people would make a much larger dent building wealth by spending less, saving more and simply dumping their savings into an index fund to get that 10%.
Most people don’t save 10% of their pay, and instead focus their energy trying to find the next Tesla. If successful, the % returns might be satisfying, but when it comes to wealth creation it’s dollars that matter.
So is it better to save 1% of your salary and earn a 10% return or save 10% and earn a 1% return?
The chart below compares two extremes for two individuals who earn $40,000 with an expected annual pay increase of 4%.
Person 1 saves 1% of their paycheck but manages to earn the market rate of 10%.
Person 2 saves 10% of their paycheck but dumps their money into a deposit paying 1%.
Over a 30 year career, Person 2 builds a nest egg 167% larger than Person 1. Now imagine if that person could save 10% and earn 10%?
Savings is the bedrock of wealth creation. Everything else comes second.
For many, investing sounds like a way to get rich fast. People see insane returns of FAANG stocks and bitcoin and think that’s the ticket to wealth.
For some, it is.
For those who have truly built wealth, there are many things that come before investing.
First of all, most people shouldn’t expect to earn triple-digit – or even double-digit – returns into perpetuity. Depending on how far you go back, the average return for the S&P 500 is roughly 10%. Bond returns, even less. So a well diversified investor holding a balanced portfolio might reasonably expect a 6-8% return over the long run.
For someone with $10,000 to invest, that equates to a $600-800 annual return. Hell, even if that person could accomplish 100% returns he’d only gain $10,000 in year one. Nice, but not enough to become rich unless by some miracle that feat can be repeated numerous times.
Investing is something you do with accumulated wealth. It’s a way to get your money working for you and to maintain your purchasing power. But before you can do that you must first build wealth through simple, deliberate actions.
Action 1: Spend Less Than You Earn
Seems simple. But many don’t live by this rule and rely on their credit cards to cover regular expenses.
Nobody gets rich giving all their money away. It’s so simple I feel stupid for saying it, but here we are. To accumulate wealth you first need to spend less than you earn.
Action 2: Pay Off Credit Card Debt
If you have a credit card balance you’re likely paying around 20% interest. You’ll never beat that return in the market with any consistency. So do yourself a favor and pay off that credit card debt before investing.
Action 3: Aggressively Save
Simply spending more than you earn isn’t enough. Think about it this way: every dollar you save is a dollar less you have to earn in the future. The more you can save now, the closer you will get to financial independence.
While saving 10% of your paycheck might seem daunting, it’s a standard rule of thumb. However, I suggest saving as aggressively as possible. 10% should be the bare minimum.
Action 4: Don’t Leave Free Money On The Table
Many employers have share purchase or retirement savings matching plans. I’ve known so many people who have lost this free money out of sheer laziness. People walk away from a 20, 30, 50% match – equivalent to a 20, 30, 50% instant return – yet spend their energy trying to invest in the next Tesla.
Moreover, these employee savings plans, once set up, are usually a decision-free way to build wealth since the contributions are taken off your paycheck before you even realize the money even existed.
Action 5: Earn More Money
The average age of Robinhood user is 31, and the average account size is $1000-5000. Such small account sizes suggest these people don’t have alot of wealth.
These young people are wasting their time chasing stocks when they’d get a much higher ROI investing in themselves. At age 31, most people are near the bottom of the corporate ladder. Instead of putting $1000 into Air BnB stock, spend that money on a Python course, Canadian Securities Course or CFA designation.
A little self-improvement at such a young age will pay off multiple times over a lifetime.
Have you heard people say this before? Usually it’s said by someone humble-bragging about how they manage to work 10 hours a day, raise children and run three marathons a year. Of course, they’re usually saying this to someone who can’t seem to find time to work out (or something similar that can easily be dropped off the list of daily activities).
Yeah, we all have 24 hours a day. But, unfortunately, we don’t all have the tools to make the most of those 24 hours.
Let’s look at two extremes.
Julie is a single mother that works full time as a line-worker in an automobile factory. Her two kids are in grade 3 and 6. Her day starts at 6am when she prepares breakfast, lunches and shuttles her kids to before-school care. Julie gets to work in time for a 9 hour shift. By the time the school and work day is done and everyone is back home, it’s usually around 6pm. Just in time to prepare dinner and help with homework. Of course, this assumes that Julie has already gone grocery shopping earlier in the week. By the time dinner and dishes are done, it’s easily 8 or 8:30pm. Exhausted – mentally and physically – Julie now has about 1-2 hours of free time.
Does Julie catch up on some housework? Maybe. Self care? Likely not.
That’s where Julie’s 24 hours goes.
Compare that to Eddie, who is married with two children in grades 3 and 6. Eddie’s wife – Francine – is a marketing consultant and he works as a bank executive. They have a nanny, maid and comfortably hire people to help with household maintenance, like gardening. Their nanny manages the children full time, grocery shops, makes meals and handles school pickup and dropoff. Eddie and Francine work long hours, but often squeeze in some gym time at lunch or go for a run after work. They frequently attend functions after work to network for whatever moves come next.
Notice the difference?
Julie, Eddie and Francine are all equally busy. However, one family has way more sources of help than the other.
Some might blame Julie for her predicament. “She shouldn’t have gotten divorced”, “she should have worked harder and gone to university”, etc. What people fail to grasp is that Julie made the best of her situation. She came from a working class family that didn’t have money for the extra layers of support provided to Eddie and Francine in their youth.
Julie really had no choice but to reduce the burden she placed on her family by working at McDonalds through high school to help with bills. She blasting through community college and then took whatever decent job came first. Then came the children and emotionally abusive husband.
Eddie and Francine, on the other hand, came from upper-middle class families, which themselves hired nannies and maids. Their first jobs were handed to them by their parents’ friends, and were in junior corporate positions. Their parents never needed help with bills and Eddie and Francine could both comfortably educate themselves up to the masters level. While Eddie leveraged his junior corporate jobs into full time work, Francine took a risk and started her own business. If it failed she could always move back with her parents. By the time they married, Eddie and Francine were already getting more than their 24-hour’s worth.
“We All Have 24 Hours a Day”
There are 24 hours in a day, but unfortunately that time isn’t allotted the same way across classes.
If you’re someone who can afford help, count your blessings and realize that you have a huge advantage.
If you’re someone who can’t afford help, I suggest you identify your top 3 priorities in life and allow yourself to leave lesser priorities untended.
Is there a certain point at which it no longer makes sense to pursue a greater income? Maybe.
I think you must consider the tradeoffs when contemplating a position with more responsibility and pay. Because the more you make the less you keep.
Much of the developed world has a progressive tax structure, in which people who earn more pay a greater proportion (and dollar amount) of their income in taxes. Marginal tax rates for top-earners in Canada are displayed in the table below, and are as high as 54%!
The marginal tax rate is the portion of each additional dollar earned that goes to the government. The more you earn in total, the more each incremental dollar is taken away by the tax man.
I’m not here to debate whether or not this progressive tax structure is morally right or wrong. My point is that this tax structure creates a rising disincentive for individuals to pursue ever-greater incomes.
Once a person attains a certain income level, I feel the added career risk, burden and responsibility is often not adequately compensated by the extra income from climbing the corporate ladder. For some other perks – extra vacation, corporate perks, ego boost, etc. – offset this imbalance. For many, beyond a certain point pursuing a higher income simply isn’t worth the sacrifice.
Put differently, those who do wish to climb the corporate ladder must require increasingly large dollar increases in pay to rationalize the tradeoff.
Here’s an example:
Let’s say you’re a typical employee of Big Corporation XYZ in Toronto and you’re looing at building your career. You start off at the bottom of the barrel working as a clerk in the back office making $45,000 (and probably living in your parents’ basement). You work hard and after a couple years find a better role within the company that comes with a $20,000 pay increase. To you this raise is everything – to Big Corporation XYZ it’s not a huge deal as they weren’t paying you much to begin with.
At that time, when you earned $45,000, a twenty grand pay increase was huge! Not only did you just increase your pay by 44%, you kept 71% of it because you were in a low marginal tax bracket. In other words, most of that earnings growth ended up directly in your pocket. So you were highly incentivized to increase your gross salary, as you got to keep most of it.
However, this incentive changes as salaries grow. The chart below shows how much of your gross salary (red) that you get to keep (blue) as your gross salary rises. When you earn $25,000 you keep almost everything. But as your gross salary rises the tax man benefits almost as much as you.
This next chart shows similar information, but focuses on the gap between gross and net income.
Finally, this third chart shows the effect of $25,000 pay increases on your total net income. A $25k pay increase is way more impactful to someone earning $50,000 than it is to someone earning $150,000.
Anyone making $150k has a high stress job. Taking on additional stress and responsibility isn’t financially worth it for another $25k. Of course, there’s more to the decision than just money. However, if money is a motivating factor the amount must be considered after tax, and the marginal pay raise worthy of action must rise with total income.
November is financial literacy month so here are some easy wealth-creating hacks:
Sleep on major purchases. This allows time for emotional excitement to ease, so you can rationally consider your actions. Often, either the novelty of the potential purchase wears off or you forget about it altogether.
Consider the pre-tax cost of purchases. Someone in a 30% tax bracket that pays a 13% sale tax needs to earn $161 to buy something that costs $100. (($100*1.13)/0.7)). Take this one step further and consider the number of hours you must work in order to earn that $161. You might re-consider more discretionary purchases.
Immediately allocate your pay raises. For example, if you receive a pay raise of $100 month, you could increase your automatic monthly mortgage payment by $50, investment contribution by $25 and bank the rest. You’ve invested in your future while retaining a bit more spending money.
Consider the ‘real estate’ required for each purchase. If a purchase simply adds to home clutter, perhaps it isn’t really needed.
Start investing at a young age. The longer investments have to compound, the less you need to invest over your lifetime to reach a specific goal. In fact, if feasible, parents and grandparents can provide a 20yr head-start by investing a small amount during infancy.
Avoid unnecessary expenses. Many administration fees, late fees, overdraft fees, etc. are unavoidable with good planning.
Time vs. money. Your time is finite, so it’s important to balance time with money. If a purchase earns you valuable time to spend with family or build a business it might be worth the expense.
Less investing activity is best. For most, the best investing strategy is to invest when you have the money and remain invested as long as possible. Few people – even professionals – are able to time the markets. So keep it simple and stick to a routine.
“All of my best decisions in business and in life have been made with heart, intuition, guts — not [with] analysis.” — Jeff Bezos
“When you can make a decision with analysis, you should do so, but it turns out in life that your most important decisions are always made with instinct, intuition, taste, heart.” — Jeff Bezos
“There wasn’t a single financially savvy person who supported the decision to launch Amazon Prime. Zero. Every spreadsheet showed that it was going to be a disaster. So that had to just be made with gut.” — Jeff Bezos
More from Amazon CEO and founder Jeff Bezos participates in the Milestone Celebration Dinner at the Economic Club of Washington in Washington, D.C.:
How much should you be saving? Many people have no idea.
David Bach, author of The Automatic Millionaire, provides his recommendation:
Why does it rise with age? According to Bach, “typically the older you get the more you earn and spend. And if you lose your job it can take longer to find a job that replaces that income.”
I’ve witnessed this first hand. It frequently takes a senior executive 1-2 years(!) to find comparable employment. I can only imagine how devastating this can be to the ego, savings account and family dynamic. Since senior executives tend to be in their 40s or 50s, they probably have exhausted marriages, college-aged kids and massive responsibilities. There is no worse time to stop the regular paychecks.
This is where years of socking away money into an emergency fund helps. But how many people are doing this? The reality is quite bleak – 26% of Americans have no emergency savings at all. This means they’d be dipping into their retirement funds if an emergency occurs. Unfortunately, the median retirement account savings for Americans is only $5,000.
Unfortunately, these dollar amounts leave most people far behind target. JP Morgan provides a table (below) that illustrates how much people should have saved, given their age and salary. (I’ve also provided other retirement savings target tables below.)
The problem I have with all of these tables is that they’re based off a multiple of your current salary. Not only that, but the multiple rises with income. This presumes that you plan to retire into a lifestyle that requires your full current salary.
Most people require about half their salary during retirement. In dollar terms, many retirees could live happily off $40-50k. For those of us who live frugally and plan to continue doing so during retirement, the actual dollar amount required at retirement might be much lower than the estimates provided by these tables.
If you’ve calculated your estimate and feel like you’re way behind, you’re not alone. According to GoBankingRates.com, almost 1/3 of people in the prime of their careers (aged 35-54) have ZERO retirement savings.
Why are people so unprepared?
The average person is financially illiterate. In 2011, the Investor Education Fund conducted a survey and found that only 29% of respondents could pass a basic financial literacy test. If people don’t understand basic personal finance, they sure as hell aren’t taking the right steps to secure their financial future and prepare for emergencies.
The average person must become more invested in their financial future. I’m happy to see that the Ontario government is working towards mandatory financial education in high schools. More must be done. Unfortunately, by the time a student reaches high school many bad financial habits have already formed. Parents still have the ultimate responsibility teach their children values and behaviors that support financial freedom and flexibility.
As I alluded to earlier, the risk of ignorance is financial ruin, divorce and missed opportunities for your kids.