Categories
ETFs and Funds

5 Actions to Take Before Even Considering Investing

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.

Nobody gets rich giving all their money away.

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.

Categories
Life Wealth Work

“We All Have 24 Hours a Day”

“We All Have 24 Hours a Day”.

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.

Categories
Work

The Raise You Shouldn’t Take

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.

Source: BDO

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.