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
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.

Categories
Wealth

8 Simple Wealth Hacks for Financial Literacy Month

November is financial literacy month so here are some easy wealth-creating hacks:

  1. 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.
  2. 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.
  3. 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.
  4. Consider the ‘real estate’ required for each purchase. If a purchase simply adds to home clutter, perhaps it isn’t really needed.
  5. 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.
  6. Avoid unnecessary expenses. Many administration fees, late fees, overdraft fees, etc. are unavoidable with good planning.
  7. 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.
  8. 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.
Categories
Work

There Is No Such Thing as a “Self-Made” Man

If you trace the careers and business ventures of successful men and women, many have one thing in common: they had support.

Very few people become successful entirely on their own. We all need help. Arnold Schwarzenegger emigrated to the US with $20 in his pocket. As a young, broke bodybuilder it was his friends that helped him get on his feet.

Arnold was lucky. Many people in his situation – regardless of talent – would not have experienced his success. He could have easily ended up as a personal trainer or supplements salesperson. He could have had a pretty average job and pretty average life, like most of us.

Perhaps the support from his friends made all the difference in his life. Support can help open doors for people, but the true benefit isn’t the opportunity that is created, it’s the safety net that’s provided.

    Imagine for a second that you won the lottery but decided to keep working. Assuming you retained a sense of professionalism, how would your behaviour at work change? You’d probably be a lot more bold and take more calculated risks. Money is a safety-net that enables one to push beyond the safety zone. Of course, this is exactly what’s needed to become highly successful.

    Most people I know who have led successful careers or built great businesses were not self-made. In fact, they had a lot more support than Arnold Schwarzenegger. Most of them came from middle-class families, at a minimum. Many had their educations fully-funded – thus, didn’t graduate immediately into indentured servitude. Most had early career breaks or internships opened up by family members. Alternatively, if they created a business their first clients were family and family friends.

    Starting early in life, their parents taught them how to succeed, gave their first breaks and, most importantly, if all else failed provided a financial back-stop. These people could take calculated career or entrepreneurial risks and know they would always have a bed to sleep in and table to eat at.

    Unfortunately, few of these people recognize their privilege. I have friends who think they were self-made, yet lived in apartments paid for by their parents, had access to whatever they needed (e.g. computers, working space, cars) and could ask for money whenever needed. Almost everyone I know who had that level of support is now highly successful, either at a big corporation or as a business owner.

    In contrast, I know plenty of people who were literally on their own from high school. They had minimal parental guidance, zero financial support and no fall-back. In other words, past a certain age, if they screwed up they would be homeless.

    Everyone I know who had this kind of foundation is middle-class at best. Most lack confidence and have had to struggle to overcome hurdles just to keep their heads above water. Few were brave enough (or stupid enough?) to take career or business risks, instead sticking to a working class lifestyle to quickly become self-sufficient. Some were lucky enough to become middle class professionals by following well-worn paths such as accountancy, law or medicine.

    In this sense, I agree with Arnold’s premise that there’s no such thing as a self-made man. So next time you compare yourself with someone more successful, bolder or more confident remember they probably got there because they had a lot of help dating back to a well-supported childhood.

    Categories
    Wealth

    How Jeff Bezos Made All His Best Decisions

    “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.:

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    Categories
    Wealth

    How Much Should You be Saving?

    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.)

    Source: JP Morgan
    how much money should i have saved by 25
    Source: Fidelity
    Source: T Rowe Price
    Source: T Rowe Price

    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.

    Source: GoBankingRates.com

    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.

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    Categories
    Life Wealth

    The Fisherman and the Businessman

    Are you working for ‘someday’? Are you working to save for tomorrow? We all are. But why?

    As humans we benefit from foresight, and we know that a better retirement usually requires time and effort today. But what if we’re all doing it wrong?

    These aren’t my words. I don’t know where this story originated, but I think it’s important for all to know:

    One day a fisherman was lying on a beautiful beach, with his fishing pole propped up in the sand and his solitary line cast out into the sparkling blue surf. He was enjoying the warmth of the afternoon sun and the prospect of catching a fish.

    About that time, a businessman came walking down the beach, trying to relieve some of the stress of his workday. He noticed the fisherman sitting on the beach and decided to find out why this fisherman was fishing instead of working harder to make a living for himself and his family. “You aren’t going to catch many fish that way,” said the businessman to the fisherman.

    “You should be working rather than lying on the beach!”

    The fisherman looked up at the businessman, smiled and replied, “And what will my reward be?”

    “Well, you can get bigger nets and catch more fish!” was the businessman’s answer.

    “And then what will my reward be?” asked the fisherman, still smiling. The businessman replied, “You will make money and you’ll be able to buy a boat, which will then result in larger catches of fish!”

    “And then what will my reward be?” asked the fisherman again.

    The businessman was beginning to get a little irritated with the fisherman’s questions. “You can buy a bigger boat, and hire some people to work for you!” he said.

    “And then what will my reward be?” repeated the fisherman.

    The businessman was getting angry. “Don’t you understand? You can build up a fleet of fishing boats, sail all over the world, and let all your employees catch fish for you!”

    Once again the fisherman asked, “And then what will my reward be?”

    The businessman was red with rage and shouted at the fisherman, “Don’t you understand that you can become so rich that you will never have to work for your living again! You can spend all the rest of your days sitting on this beach, looking at the sunset. You won’t have a care in the world!”

    The fisherman, still smiling, looked up and said, “And what do you think I’m doing right now?”

    Categories
    Wealth

    The Rising Income Trap

    Desire is a contract that you make with yourself to be unhappy until you get what you want.

    Naval Ravikant

    When I was finishing my undergrad (in 2001), I remember thinking a $40,000 salary was a ton of money.

    While in school, I made minimal income yet somehow went out on a regular basis. I wasn’t suffering. In fact, that was a great period of time in my life. Still, I imagined the things I could do with a massive $40,000 income.

    Soon after graduation, I was earning $42,000. I was rich! Or was I?

    Fast forward to today. I couldn’t even imagine how I’d survive on a $42,000 salary.

    Today, I earn quite a bit more than I did in 2001. Yet, I fight a constant battle to ensure I don’t fall into the rising income trap.

    What do I mean?

    Money has a way of vanishing. The more you earn, the more you spend. Expectations rise and you can easily find yourself inadvertently living paycheck to paycheck.

    Make a dollar, spend a dollar

    People are masters at rationalizing increased spending after their incomes go up:

    “I make good money now so…”

    “…why not turn the heat up a little higher.”
    “…why not move to a bigger house.”
    “…why not buy that leather jacket.”
    “…why not get that $65,000 car.”

    Quickly, all the extra money generated by a higher salary is eaten up by a new set of automatic monthly bills and discretionary expenditures. Some refer to this as ‘lifestyle inflation’.

    Don’t let the Lexus fool you!

    Despite appearances, many high earners are actually broke. In fact, many high earners live precariously close to the edge of bankruptcy because they are so dependent on their paychecks to cover their massive monthly fixed costs.

    The true cost of graduating from a Ford to a Lexus is economic security and financial freedom. Financial freedom is only available to those who have money tucked away in savings accounts, investments, real estate and other assets.

    As your pay rises you have the opportunity to use the surplus income to build lasting wealth. In contrast, by spending your surplus you are trapping yourself in a cycle of financial dependency. You are locked into a job you might hate because you need it to make your monthly mortgage payments. This is the rising income trap.

    Retail therapy is bad for your financial health

    It’s easy to get stuck in the rising income trap. Marketers exploit your primal instincts to desire more and have developed cognitive techniques to make shopping feel therapeutic.

    The pressure doesn’t just come from marketers. Your boss wants you to be up to your eyeballs in debt. The less financial freedom you have, the more he or she owns you. Your friends want you to live paycheck to paycheck because they lack self control and feel better knowing everyone else is just as irresponsible. The system is simply built so you live hand-to-mouth in one way or another.

    Stop. No matter what your income, I suggest you take a moment to look at all your expenses.

    Are you spending to fulfill some unnecessary desire? Do the things you spend money on bring you happiness that lasts beyond a couple days?

    The trappings of a consumerist society don’t lead to happiness. Keeping up with the Joneses doesn’t lead to happiness. Owning a bunch of stuff doesn’t lead to happiness.

    It’s time to cut the crap from your life and start building some financial security so you can actually do what makes you happy.

    When you get your next raise, calculate how much extra after tax dollars you’ll receive each paycheck. Allow yourself to keep 30% as money in your account and increase automatic debt repayments and investment account contributions to soak up the remaining 70%. Call your lender and financial advisor asking them to set this up. If it’s automated there’ll be less temptation to cheat because you’ll never see the money sitting in your account.

    Do this for five or ten years (I know that sounds like a long time, but it’ll fly by and future you will thank you) and you’ll get a huge head start in building wealth and attaining financial freedom.

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    Categories
    Wealth

    Visualizing the Billionaire Class

    I believe people deserve to get rich if they work hard.

    But there comes a point at which wealth is so obscenely huge that you have to wonder if it is really deserved. Can a single human really earn $150 billion without it coming at the expense of other humans?

    While history has shown that humanity’s wealth pie can be expanded over the long run through productive innovation, over the short term it’s likely that hyper competitive behaviour is a zero sum game.

    Today, Amazon is rapidly growing at the expense of small independent retailers. This has never been more clear than during the Covid-19 crisis, as lockdowns shut almost all of Amazon’s brick-and-mortar competition. While Amazon is probably creating long term wealth for society, right now it is succeeding at the expense of others.

    The chief beneficiary is Jeff Bezos, Amazon CEO and founder, who is now worth over $150 billion. Amazon has added a ton of efficiency to our lives and Jeff Bezos deserves to be rich, but $150 billion is obscene.

    At what point does genuine wealth creation transition into exploitation and hoarding? It’s not an easy question to answer, but that’s not the point. If wealth anomalies like Bezos don’t pass society’s smell test, action must be taken.

    Society makes judgment on the scale of wealth differences between ordinary people and the 1%, deserved or not.

    Ordinary people earn in the tens of thousands and can barely save for retirement. To most, millionaires are considered rich. Once you start talking about $ billions the sheer scale of wealth is baffling.

    I recently saw an article that highlights how ridiculously wealthy billionaires really are. Below is a graphic visually comparing the difference between various wealth levels. Remember, Bezos is worth 150x the largest box below.

    While ordinary people struggle to pay back their college debts, billionaires have to work hard to spend their money:

    • Elon Musk can spend a MILLION dollars EVERY DAY for 65 years
    • The Koch brothers can spend a MILLION dollars EVERY DAY for 242 years.
    • Bill Gates can spend a MILLION dollars EVERY DAY for 247 years.
    • Jeff Bezos can spend a MILLION dollars EVERY DAY for 306 years.

    Anyone arguing that billionaires are created because they help generate societal wealth, should look at the following chart. While worker productivity has risen, average wages have stagnated. Meanwhile, income going to the top 1% (aka the billionaire class) has skyrocketed. In other words, billionaires are built off the backs of the average worker.

    The top 1% has captured a growing share of societal wealth partly because the tax system has changed to favour the rich. The two charts below compare tax rates by income level in 1950 and 2018. In 1950 the top tax rate was 70%. In 2018 it was just over 20%.

    While Amazon shares hit new highs and Jeff Bezos gets richer, 40% of US renters face the risk of eviction. Those are families and children and hardworking people, many of whom will soon be homeless.

    For many the American dream has become the American tragedy. Gone are the days of collecting a paycheque and a comfortable retirement pension. Loyalty is irrelevant. You are on your own to build wealth for you and your family. For some this means building a bulletproof portfolio. For others it means constructing multiple sources of income.

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    Categories
    Wealth

    Americans are Nowhere Near Prepared for Retirement

    Americans haven’t been saving the recommended 10-20% of their incomes and simply aren’t prepared for retirement.

    The median 401k for someone aged 55-64 (i.e. pre-retirement years) is only $61,738. Even the most frugal spender could only make that last a couple years in retirement.

    In other words, for most Americans a comfortable retirement simply is out of the question. Instead they will continue to work, depend on social security and rely on family.

    The dream of sailing through the Mediterranean or hiking in the Alps will remain a dream for most, as they work double-shifts as Wal-Mart greeters.

    I get it. Life happens when you’re in your 20s, 30s and 40s.

    There are bills to pay, things to buy, life to live. At that age, many people feel like they can’t save for retirement and believe they can make up for it later. However, people need to understand that when they spend money they’re making a tradeoff. Do they want that extra vacation or do they want to retire a year earlier? Do they want to upgrade their Toyota to a Lexus or retire 5 years earlier? When compounding is considered, those are real tradeoffs.

    Most people I know don’t want to work forever. People want to stay busy and contribute to society, but they also want the freedom to pick and choose what they do. That requires money.

    Unfortunately, as you can see by the tables below (source: Vanguard) most retirements are quite underfunded.

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