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Retirement

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Put your hand up if you dislike:

If you’re waving your fingers and toes in the air now, you might find this lesson rather interesting.

Retirement may seem like a hazy dot far off on the horizon, or simply an impossibility. However, with some careful planning and laser-like focus on the goal, you can get there. Things that are not required (although they sure help): A six-figure salary; a whopping inheritance; a lucky lottery ticket.

In this lesson we’ll take a look at a couple of inspiring stories of people who managed to leave behind the rat race at stunningly early ages. We’ll also discuss how you can shape up a plan to do the same.

 

Off The Beaten Track

If you haven’t heard of Mr. Money Mustache (MMM), I am pleased to introduce you. MMM and his wife earned normal salaries, managed to save the vast majority of their paychecks through frugal living, invested wisely in index funds, and here’s the good part — they retired at the ripe old age of 30.

The MMM family can now be found stomping around Longmont, Colorado with their son in tow. They’ve left the working world for good.

If you’re ready to fall down the early retirement rabbit hole, read through:

If you’re tempted to ditch this course for an hour or two of binge reading, I won’t blame you. I’ll wait right here…

When I first stumbled onto MMM’s website, I simply couldn’t stop reading. Article after article challenged the conventional wisdom that I thought was true:

If you want to work until you’re 65, climb up to the highest rung of the corporate ladder, save up your millions, these are perfectly valid choices. These choices aren’t better or worse than others.

But, the fact is that these ARE choices.

This was the light bulb moment for me: you don’t have to follow the standard life path if you don’t want to. There are other ways to live your life. You can gain freedom before you go gray.

Not to be outdone, another incredible story comes from Justin at the blog Root of Good. He and his wife live in Raleigh, North Carolina with their three children. Justin retired at the age of 33. For a blow-by-blow account of how they made it happen (filled with great tips and nitty gritty detail), check out:

 

How Much Money Do You Need to Retire?

While you’re still many years away from retirement, there’s no use in modelling out a fine-tuned plan for how much money you need. Too many variables will change in the future for this to be a worthwhile exercise.

Pick a “north star” that you can work towards. I recommend you set your initial “retirement number” at an investment portfolio that is worth your expected annual expenses in retirement, multiplied by 25 to 30.

There are two parts to this simple equation:

For example, if you expect your expenses to be $50,000 per year in retirement, your target retirement goal should be to save up an investment portfolio worth $1.25M (25 times) to $1.5M (30 times).

To make your initial planning super simple, use this retirement date forecasting spreadsheet. After you input your assumptions, it’ll tell you how much money you need, when you’ll get there, and will show you a few what-if scenarios as well.

Go with this simple estimate for now. As you get closer to your goal, you can start to tweak the numbers. You’ll have a better idea of what your expenses in retirement actually will be. You’ll also know the amount of any pensions or social security payments that you’ll receive.

 

Conclusion

There’s nothing wrong with wanting to follow the standard path of retiring at 65. But, if that’s not for you, know that there are other ways of designing your life. Retiring in your 30s, 40s, or 50s is achievable with the right mix of planning, dedication, and patience.

To get there:

When you’re through, let’s meet up. Bring your favourite printer.

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Tying It All Together

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You’ve reached the last lesson in this course. Congratulations!

Before I leave you, here’s a list of the most important points that I hope you take away from this:

 

So Long… Partner

Thank you for sticking with me ’till the end.

Now that you’ve heard me drone on and on (and on) for 20+ lessons, I’d love to hear from you.

Was this course helpful for you? Was it too short, too long, or just right? How could I improve this guide? For any feedback, random thoughts, or just to say hi, feel free to shoot me an email at themeasureofaplan@gmail.com.

 

 

If you’d like to support what I do, you can buy me a coffee or beer by clicking the little blue button below. Any contributions are an immense aid in keeping this site up and running with fresh & free financial content!
 

 
 

P.S. — I’ve included two last posts in this series. The first has a few book recommendations, and the second has some online recommendations. These are fantastic resources to go through if you’d like to continue your personal finance education.

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Understanding Your Paycheck

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Before jumping into discussions about budgeting, saving, and investing, I want to spend some time to make sure that you know how to read your paycheck. After all, we can only save and invest money that we’ve earned in the first place.

In this lesson, we’ll dig into these key concepts:

 

Gross Salary

When people talk about their annual salary (e.g., $40,000 per year) or hourly salary ($20 per hour), they are almost always talking about “gross salary”. This is the headline number that appears on your employment contract.

This figure is only a starting point.

Unfortunately, the money that appears in our bank account after each pay day is lower than what our gross salary would suggest. Think of your gross salary as the entire pie. After taking off slices for taxes and deductions (discussed below), the remainder is of the pie is what actually gets deposited into our bank account.

 

Taxes

It’s morbid but true: ’Tis impossible to be sure of any thing but death and taxes.

When you earn money from your job, your employer will automatically subtract taxes off of your gross salary (boo). Your employer sends this money to the government on your behalf.

The main form of tax taken off from your paycheck is income tax. The amount of income taxes you pay are based on the concept of “tax brackets”. As your income gets higher, the percentage of your income that you pay in tax increases.

Here’s an overview of income tax brackets for Canadians and for Americans.

 

Side note #1: It’s a common misconception that you should try to stay below certain income levels, since shifting into a new tax bracket would reduce your overall take-home pay (i.e., higher salary but lower money coming into your bank account at the end of the day). This is absolutely NOT true.

When you move into a higher tax bracket, it’s only the money earned within that new bracket which is taxed a the higher rate, not your entire salary.

 

Side note #2: The taxes taken off your paycheck are a “withholding” tax, meaning that they are just an estimate of the amount that you should owe. At the end of the year, the actual amount of taxes that you should have paid will be calculated on your tax return. The resulting difference between what you paid and what you should have paid will be settled at that point (either through a tax refund or additional taxes owed).

Keep this in mind if you see something odd happen with your taxes on your paycheck (for example, when you receive a bonus). You will always get “trued-up” at the end of the year.

 

The bottom line: the higher your income, the more tax you pay. However, making a higher income will always increase the pay that hits your bank account.

 

Deductions

Depending on what company you work for, you may have other deductions that are taken off of your paycheck. These could include contributions to an employer stock option plan, an employer pension / retirement savings plan, or an employer health plan.

When you were first hired, HR may have given you forms to sign up for an employer retirement savings plan (often known as a “Group RRSP” account in Canada, or a “401k” account in the US). If you signed up, you’d be contributing a portion of your paycheck towards these savings plans (e.g., contributing 2% of each paycheck towards that account).

These amounts are deducted directly from your paycheck. As such, this money never arrives in your bank account. Instead, it’s held separately in a different account.

If this all sounds like mumbo-jumbo, we’ll talk about this in a future lesson on employer matching.

 

Net Salary (Take-Home Pay)

Gross salary is the full pie that we start with. After taking off a slice for taxes, and another slice for deductions, the amount of the pie remaining is what’s known as net pay or take-home pay. This is the amount of money that actually gets deposited into your bank account.

Your take-home pay is the most important number for you to know, since ultimately this is the money that you have control over. This is the money that pays the bills or gets saved for the future.

Knowing the amount of money that you take home each month will serve as a key input for the financial plan that you’ll build throughout this course.

 

An Illustrative Example

Let’s take an example from a hypothetical Canadian paycheck:

Moonshine Money guide to personal finance - understanding your paycheck, example paycheck

Note: The American version of CPP is known as Social Security.

 

Your Assignment

 

Resources

To get a quick and dirty estimate of what your take-home pay would be at different gross salary levels, try out these tools below. These can come in handy for estimating what your take-home pay would be after a raise, when moving to a new job, or just to perform what-if analyses.

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Insurance

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Unfortunate events happen. They’re not fun to talk about, think about, or imagine; but they happen. Burying your head in the sand won’t change that reality. Having the appropriate insurance can help you and your family stay afloat during these tough times.

Insurance plays an important role in your “financial armor”. Your emergency fund will help you to weather relatively small or short-term issues, but insurance is the thick inner layer of defense against more serious or long-term events.

For those who have others depending on your income — children, elderly parents, or a spouse who doesn’t work, insurance becomes all the more critical.

Even if your income is solely used to support yourself, if injury forces you to leave the workforce, the impact on your savings could be significant.

 

Find Out What Insurance Coverage You Need

Here are a few steps you can take today to assess your insurance needs:

 

It’s far too easy to push the topic of insurance down to the very bottom of your priorities list, but keep in mind — the time to repair a roof is when the sun is shining.

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Protecting Yourself Against Financial Fraud

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Once you get a hang of the core personal finance skills (budgeting, reducing debt, investing), your net worth will start to tick up higher and higher with each passing month. Learning to identify financial fraud, tricks, and scams is an important part of protecting the nest egg that you’ve built up.

According to CNBC, 15.4 million consumers in the U.S. were victims of financial fraud in 2016. In total, these victims lost $16 billion.

With great wealth comes great responsibility.

 

Be Prepared

Scammers are constantly dreaming up new ways to defraud unsuspecting victims, but there are several common threads that you should be aware of:

The more you understand the fraudster’s standard playbook, the better prepared you’ll be to avoid falling into their trap.

 

Stay Skeptical

Whenever you’re presented with a financial opportunity such as an investment in a new business or a unique way for you to invest your money, ask yourself: How will the other party in this transaction make money?

People who give things away for free tend to not stay in business very long. If it’s not clear how they make money, they’re probably making money off of you.

A healthy dose of skepticism goes a long way.

If you get a suspicious phone call, letter, or email, keep these tips in mind:

 

Scammers will often try to drum up a false sense of urgency in order to trick you into making a snap decision. Don’t fall for this.

If you find yourself in an unusual situation involving money, ask for a few minutes to think through the situation. Ask questions, and don’t be shy to tell them to call back later.

Stay safe!

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Online Resources

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This course stands on the shoulders of giants. The online resources listed below have been instrumental in my own journey to learn about money management. Each of these resources is a seemingly never-ending source of informational golden nuggets.

You can learn whatever you wish if you’re willing to read, read some more, and absorb. This is as good a place as any to start…

 

General Personal Finance

 

Investing

 

Frugality

 

Financial Independence / Early Retirement

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Books

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What follows is a list of books which heavily shaped my views on personal finance. While I’ve tried to distill the ideas from these books into this course, reading these classics first hand would be an investment that pays off time and time again.

In the spirit of good money management, I’d encourage you to borrow these books from your local library. If you’d like to purchase a copy instead, I’ve included links from Indigo (for Canadians) and Amazon where you can do so.
 

Your Money or Your Life – Vicki Robin and Joe Dominguez

Vicki Robin and Joe Dominguez were the originators of the Financial Independence movement.

This groundbreaking book is guaranteed to change your stance on all things money. It’s a marvelous testament to frugality and aligning your spending to your life’s values.

If you want to spend less money, spend more time with friends & family, diminish your reliance on your day job, and get off the treadmill that always leaves us wanting more — this is the book for you.

There’s more to life than “nine to five till you’re sixty-five”.

Your Money or Your Life – Indigo (Canada)

Your Money or Your Life – Amazon
 

The Little Book of Common Sense Investing – John Bogle

A guide to everything you need to know about investing. A short, sweet, and impactful read.

The book’s author John Bogle – the founder of Vanguard and creator of the first index fund – is considered to be one of the most important contributors to modern finance. In 2017, Warren Buffett wrote:

If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be John Bogle. For decades, John has urged investors to invest in ultra-low-cost index funds. In his early years, John was frequently mocked by the investment-management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.

If you’re currently invested in actively-managed mutual funds, or are considering doing so, please read this book. The case for investing in low-cost index funds cannot be made better.

The Little Book of Common Sense Investing – Indigo (Canada)

The Little Book of Common Sense Investing – Amazon
 

The Millionaire Next Door – Thomas Stanley & William Danko

The authors of this book interviewed and studied over 1,000 millionaires in order to find out what it takes to become wealthy. The big takeaway? The popular perception of millionaires doesn’t match the actual behaviours of typical millionaires.

This book shatters the urban myth that millionaires live flashy lifestyles (high fashion, luxury cars, mansions, etc.). In fact, the typical millionaire is more likely to resemble your next door neighbour.

Wealth isn’t driven by how much money you make or how much you spend. Wealth comes from the amount of money that you accumulate (i.e., save).

This book will give you a “light bulb” moment on the mindset side of building wealth. You don’t need to spend money to make money. You don’t need to flaunt your money by buying high-priced status symbols. The more you earn, the more you should save each year.

The Millionaire Next Door – Indigo (Canada)

The Millionaire Next Door – Amazon
 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Starting A Family

Moonshine Money guide to personal finance - starting a family

Starting a family — it’s a roller coaster of new experiences, proud moments, and obstacles to overcome. So much will change; your priorities, sleep schedule (oh how it will change), and daily thoughts.

And, it just might be the most rewarding challenge that you ever undertake.

Before you start on the journey, it’s important that you also take time to consider the financial angle of starting a family.

 

The Cost of Raising Children

I’ll dispense with the scary bits first: raising children is an expensive proposition. The U.S. Department of Agriculture estimates that a middle-income family will spend an average of $12,980 per year to raise one child, not including any savings for college. Up to the child’s 18th birthday, this is a total cost of $233,610 (per kid).

Let’s pause here so you can take a few deep breaths.

To be honest, big bold headline numbers like that aren’t particularly helpful. The cost of raising children will be different for each and every family.

For example, if the home you live in has enough space to accommodate your expanding family, your costs would decrease considerably. Note that 29% of the total cost estimate from the USDA comes from additional housing costs.

Try out this easy-to-use calculator for estimating the cost of raising YOUR children.

First, you’ll plug in estimates for ongoing costs for housing, food, transportation, childcare, education, foregone income, and so on.

Then you’ll input estimates for one-off costs like a crib, stroller, car seats, and baby proofing.

Once you’re through with that, you’ll have built up a custom-fit estimate of the cost of raising your children.

 

More Resources for Getting Prepared

If you’re considering starting a family, here a few resources to help you get ready:

 

For a glimpse into the day-to-day life of families raising children, check out:

 

Each and every family’s situation will be unique, but you owe it to yourself (and your little one) to get prepared for the exciting changes to come. Good luck 🙂

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Buying A Home

Moonshine Money guide to personal finance - buying a home

For many people, homeownership ranks near the top of their financial goals. Buying a home is seen as a major milestone in life. You get a job, buy a home, start a family, then your kids go out and do it all over again.

Unfortunately, in many cities around the world the prices of homes have been rising at an unsustainable rate, far outpacing increases in income. Buying a home has become an incredibly expensive proposition. It’s a financial decision that should be considered carefully.

For those who plan on buying a home in the near future, I’d suggest the following:

 

The Rent Versus Buy Debate

The debate over renting or buying a home is a classic argument in the personal finance world.

Jim Collins’ article, Why Your House is a Terrible Investment, is a good starting point.

Common wisdom holds that “buying is always better than renting”, or “renting is just flushing money down the drain”. It’s simply not that simple.

The truth is that in some scenarios, buying a home is better than renting, and in some other scenarios, renting a home is better than buying. I know it’s not a satisfying answer, but it’s the reality. Depending on the some assumptions (home purchase price, home price appreciation rate, mortgage interest rate, rent price, opportunity cost of your down payment), the answer can swing either way.

As a result, it’s very important that you run the math on whether buying is a home is better than renting a comparable home. You can use this calculator which I’ve built to run that Rent vs Buy math. You should try out a few different scenarios so that you get a good sense of how much the answer can change even after making small tweaks to the assumptions.

Once you realize that either renting or buying can be the better long-term financial decision, it becomes clear that this decision is mostly a lifestyle choice. I’ve written further on this in my article, The Soft Side of the Rent versus Buy Equation.

The point being — give the option of renting a fair shake. Don’t blindly assume that buying a home is always a better financial decision.

 

The “All-In” Costs of Homeownership

While the cost of a mortgage may be the biggest cost when buying a home, it’s far from the only cost that you’ll incur. Before making the decision to buy, be prepared for the other “hidden” costs of homeownership:

Over and above your mortgage, this can add up to thousands of dollars when you first buy your home, thousands of dollars per year in ongoing costs while you own your home, and tens of thousands of dollars when you eventually sell your home. These costs are definitely not a rounding error that you can sweep under the rug.

Make sure that you do your research so that you can reasonably estimate what these costs might be. It would be worthwhile to talk to other homeowners in your area to get a sense of what these costs might be.

Check out Zillow’s estimate of the “Hidden Homeownership and Maintenance Costs” by U.S. metro region.

 

Creating Your Savings Plan

Now that understand what the “real” costs of buying a home are, its time to put a savings plan in action.

I firmly believe that you should target to save up a down payment of at least 20% of the purchase price. By doing so, you’ll avoid paying for mortgage insurance (called “CMHC” in Canada; “PMI” in the U.S.). If you don’t have a 20% down payment, you’ll need to delay your purchase so that you can continue saving up, or adjust your expectations downwards and opt for a cheaper home.

In addition to the down payment amount, you’ll need to save a few thousand dollars extra for your closing costs (legal fees, home inspection, land transfer tax, etc.). Before jumping in and making an offer on a home, talk to a local real estate lawyer to get a sense of the typical range of closing costs in your area.

To summarize: your target savings goal should be 20% of the purchase price of the home plus a few thousand dollars for closing costs. To meet your savings goal, consider setting up regular automatic deposits and bear down until you get there.

While you’re saving up for your home downpayment and closing costs, this money should be held in low-risk investments such as a high-interest savings account. Your home purchase fund should not be invested in the stock market.

As discussed previously in this course, stocks can be extremely volatile in the short term. If you invest your house fund into the market, you risk losing 40%+ of your money when it comes time for you to buy a home. Not a great idea. Since you need this money in the short term (<5 years), the prudent move is to forfeit the potential investment gains, and keep your money invested in something offering low risk and low reward.

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Build The Life You Want, Then Save For It

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Build the life you want, then save for it. It’s a simple phrase that I loved from the moment I read it, and it’s something I find myself re-visiting often.

Read through this post on Reddit’s Financial Independence forum, which popularized the phrase. It’s a cautionary tale for those of us chasing financial freedom.

Now that you’ve come so far, I think it’s important to take a step back and critically evaluate your relationship with money. Having gone down the path of learning about, controlling, and ultimately amassing money, you might find that saving more and more money becomes a goal onto itself — an obsession even.

It seems ludicrous to caution someone against saving too much money, but it can and does happen (the post linked above is just one of many examples).

When you seek money as an end goal rather than a tool to achieve something else, it can lead to unhealthy habits. Checking investment account balances daily; declining invitations from friends and family to avoid spending on food & drink; cutting out hobbies that you deem “too expensive”; making yourself unhappy to pad your bank balance.

To guard against this, I recommend adopting a “conscious living” mindset. At its core, this means living a life where all of your choices have been made deliberately.

 

Build The Life You Want

Try to imagine what a happy and satisfied life would look like for you, taking money entirely out of the equation.

Where do you live? What type of food do you eat? What clothes do you wear? What hobbies and passions do you have? How often do you travel and to where? In essence — if you didn’t have to work for money, what would you do with your time?

Some people might want to spend their days jetting from one continent to the next, others may want to stay at home reading and playing video games. Neither of those lifestyles is more virtuous or “better” than the other. They are both valid choices,

Keep an open and conscious mind and decide for yourself. If it’s what you want, it’s want you want. What anybody else thinks doesn’t matter one bit.

As much as possible, try to start building that life now. Take small steps towards the goal, starting today. Devote an hour or two each week to trying out a hobby you think you might be interested in. Plan a weekend hiking trip at your local mountain.

Perhaps you’ll find a passion that brings you real joy. And what if it’s expensive? So be it. Weigh the benefits to your happiness against the financial costs, then make a deliberate choice.

Spending money on things or experiences that make you happy is absolutely OK. Frugality is not an inherent virtue.

Don’t wait for a distant future to start building the life that you want. If you wait too long, you might find yourself rich, lonely, and bored.

Start to sketch it out now — you can fill in the details later.

 

Save For It

Before you buy a boat and sail off into the sunset, keep in mind the second half of the mantra — build the life you want, then save for it.

In the spirit of conscious living, we also need to be mindful of the financial impact of the decisions we make. The life that you’ve chosen for yourself has a price tag attached to it.

Saving up for the life you want might require a higher income, a delayed retirement, or cutting back on other expenses that don’t fit into your long-term plan.

Don’t kid yourself, if luxury vacations are a part of the life you want, you need to include that in your budget and save for it.

Once again, spending $20,000 a year isn’t necessarily “better” than spending $100,000 a year (or vice versa). The more expensive your lifestyle, the more money you’ll need to save up to sustain that lifestyle. And that’s fine.

Everyone is different — find out where you’d like to position yourself on the spectrum, and plan accordingly.

 

Say it with me one last time: build the life you want, then save for it.

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Developing a Positive Money Mindset

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Why You Need A Positive Money Mindset

Numbers are only half the battle. In some senses, getting a grip on the numbers side of personal finance is the easy part. Once you learn the mechanics, you’ll need to work to develop a positive money mindset. This will help you to stay motivated through the journey and allow you to have a healthy relationship with your money.

As your financial literacy increases, you might get drawn into the rabbit hole of learning about minor financial optimizations or trying to squeeze every last drop out of your dollars.

If that’s what you want, all the power to you. However, for others, this can lead to stress, obsession, and burn out.

Below, I’ve listed a few core principles that have helped me to build a positive money mindset. I hope that they’ll be of good service to you as well.

 

Don’t Let the Perfect Be the Enemy of the Good

Or put differently:

“Better a diamond with a flaw than a pebble without.”

The sooner you realize that your financial plan doesn’t need to be perfect, the better. Follow the 80-20 rule: chase after the big wins first, and don’t get hung up on the little things that remain.

Focus on:

(jump back to the course agenda if you need a refresher on any of these points)

Once you’ve mastered these core skills, the rest is small potatoes. Perhaps you should be investing in your RRSP instead of your TFSA (Traditional vs Roth for Americans), perhaps your allocation to international stocks should be slightly higher than it is today, maybe!

These are complicated topics that you don’t need to understand fully at this point. You can figure that out later. Master the core pillars first, and then worry about everything else later (or never).

 

Keep It Simple

You don’t need to own 12 different investments funds so that you can get exposed to every niche investment asset class (gold, real estate, German tech stocks).

Don’t over-complicate your financial process. Set a regular schedule of sitting down for a couple hours every month to tackle all of your financial to-do’s. Obsessing over the tiny details might bring about a small improvement, but it has a greater chance of making you burn out and lose your positive momentum.

Get a hang of the basics of budgeting. Make some efforts to cut back on the major expense items of housing, transportation, and food. After this, diminishing returns start to kick in — don’t fret about the coffee you bought yesterday or the $5 discount that you missed on your gym membership.

 

Make Gradual Improvements

Rome wasn’t built in a day. Likewise, it’ll take quite a bit of time for you to go from being underneath credit card debt to having maxed-out retirement accounts.

Trying to make too many changes all at once will leave you stressed and unmotivated.

Take your time — learning the mechanics of money management and changing your attitude towards money can take months or even years.

Sketch out a rough plan with your target milestones, and take it one step at a time. This isn’t a race, go at your own pace.

Break down your plan into bite-sized chunks (understanding your paycheck, opening a savings account, tracking your spending for one month, opening an investment brokerage account, making your first trade, etc.).

As you start to rack up small wins, you’ll find the motivation to keep checking items off of your list.

 

Comparison Is The Thief of Joy

No matter where you are on the spectrum of financial literacy, you’ll always be able to find someone who has accomplished more.

I promise you that there’s someone out who’s younger than you, earns more than you, spends less than you, and still manages to jet off on instagram perfect vacations — all at the same time.

Comparing yourself to these people is simply unproductive. You’ll only be hindered by starting to question your decisions and your progress to date.

Everyone was born with different advantages, had a different upbringing, and has benefited from lady luck in a different way. “Some people are born on third base and go through life thinking they hit a triple”. It’s impossible to adjust for all of these factors to make an apples-to-apples comparison.

Comparison is the thief of joy. At worst, it can lead to a vicious cycle of low self-esteem and a desire to stop thinking about money at all.

Focus on your own journey. Take it slow. Focus on putting one foot ahead of the other, over and over again, and I promise that you’ll reach the summit.

 

Conclusion

Yes, the dollars and cents aspect of personal finance is important. You won’t be able to meet your goals without a solid grasp on budgeting and investing. But the mental aspect is just as important.

Spend the time and effort needed to develop a positive money mindset. You’ll feel happier about your money, and will retain the spark you need to follow your plan through to the end.

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Increasing Your Income

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Increasing your income can have a huge impact on the time it takes to reach your financial goals.

Most people will find it incredibly difficult to cut out $5k or $10k of annual expenses from their budget (there are only so many lattes that you can stop drinking).

However, some people will be able to negotiate a raise or find a new job that would bump up up their income by many thousands or even tens of thousands of dollars.

To be clear, this is not for everyone. There are many industries or careers where your salary is based on a pre-determined grid. Jumping to a new employer or negotiating harder won’t yield any results in some cases. If it’s not possible to increase your income, you’ll still get to where you want to go by focusing on the core personal finance skills — budgeting, spending less than you earn, and investing wisely.

With that said, let’s discuss the steps you can take to jump on the rocket ship to financial freedom by increasing your income.

 

Know Your Market Value

We need to walk before we run. Before you can make any radical changes to increase your income, you’ll need to understand how your current income compares against people working in similar companies / departments / jobs.

To get a sense of the market salary range for your job, try out these resources:

For Americans: Check out this fantastic interactive map from the Hamilton Project, which allows you to see salary data with filters for job titles, age, and location. A pretty amazing data set.

Try searching for a few variations of your job title (companies tend to use slightly different terminology to describe the same job). Your goal should be to find out what the typical salary range is for your type of job (low, average, high).

Where do you fit in the salary range?

 

Figure Out What You Want

Spend some time to figure out what you want next in your career. Are you happy with your current path, but want to move up the ladder? Do you want to jump ship to do the same job at a better company? Do you want to try out something entirely new?

What would your dream role would look like? What are the key areas where your current job is lacking in (pay, type of work, seniority, work-life balance, team, purpose, autonomy, etc.)? Which companies would offer a better overall role?

Try to sketch out an outline of what you want.

Use those same salary research tools above to get a grasp on what the pay range is for a few of the jobs you’d be interested in.

Don’t skimp out on the effort here. The decision of where you’ll work for 40+ hours a week, week after week for years (or decades), is not one to be taken lightly.

 

Informational Interviews 101

To get in in deeper than what’s available on the internet, and to increase your job switching prospects, I highly recommend setting up a few informational interviews.

An informational interview is a quick chat with somebody (over the phone, in person over a coffee) where you’re trying to learn about their industry, what their day-to-day job is like, good ways to break into their company, etc.

The goal of an informational interview is well, information. You’re not trying to immediately leverage this into a job offer. Instead, this is a great opportunity to expand your network, learn about a new industry, and ask some basic questions.

A quick primer:

By the end of this informational interview process, you’ll have met plenty of people actually doing the job you want, and you’ll be ready for interviews. You will be miles ahead of the competition if you decide to switch.

 

Keep Your Options Open

Be open to new opportunities even if you’re happy today with your company / salary.

The best time to look for a new job is when you already have one. This allows you to be patient and picky with new opportunities, instead of being forced into accepting the first offer that pops up.

Keep in mind that your work situation can change on a moment’s notice. The boss that you get along with could get replaced by someone who drives you insane. Your company could get acquired, making your job redundant. Colleagues change, company budgets change, you just never know.

Increasing your income - office space gif

You can even go as far as interviewing for jobs that you don’t really intend on taking. You’ll keep your interviewing skills sharp, get to know your market value, and will have the opportunity to make a change when it suits you.

 

Negotiate Raises At Your Current Job

Negotiating salary at your current job is tough, but is definitely well worth it. A 15-minute conversation could be worth thousands of dollars a year.

Some tips for getting a raise during your next annual review:

As always, know your market value before you walk into any negotiation.

 

Negotiating Salary At a New Job

If you’re moving to a new job, this the absolute best time to negotiate. They have a role that they’re trying to fill, providing you with quite a bit of leverage.

Pay is undoubtedly important, but be creative. You can also score wins on vacation time, work from home privileges, remote work, expense reimbursements (moving expenses, cell phone, car).

For some great tips on negotiating when you move to a new job, read through:

 

Consider Going Back to School

Getting an advanced degree in your current field, or studying something entirely new can be a great way to increase your income. Taking time to go back to school can be incredibly rewarding on an intellectual level, and a healthy reward for your paycheck as well. People with grad degrees are typically paid more and are likelier candidates for promotions.

But, just hang on for a little before you trade in your briefcase for a backpack. Going back to school can be incredibly expensive. Starting with tuition, and lumping on foregone income and student loan interest turns this into a sizeable check.

To weigh the pros and cons of going back to school, use this interactive grad school calculator.

 

Your Assignment

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Reducing Your Expenses

Moonshine Money guide to personal finance - reduce expenses header image

If you want to accelerate your progress towards your financial goals, reducing your expenses is the best place to start. The amount that you spend is fully within your control. Implement a change in your lifestyle and you’ll see the results immediately.

I think it’s well worth it for everyone to make an honest assessment of their spending habits. I’d wager that most people are spending money on things that don’t improve their quality of life.

Cutting back on your expenses (even just for a few months) can bring about some major benefits:

Down below, we’ll look at the major expense categories for most people (home, transportation, food) and discuss how you can reduce those expenses.

 

Downsize Your Home

Ask yourself: does the home that I live in right now really need to be this big?

Society’s perception of a “normal” house size has shifted considerably in the past few decades. From 1973 to 2013, the average size of a new single-family house in the US has increased from ~1,600 square feet to ~2,600 square feet.

This huge increase has come at the same time as the average number of people in each household has decreased from ~3 to ~2.5 per home.

Reduce expenses - average home size

If you choose to live in a large home, just remember that you’ve made a deliberate choice to live in such a way, and that your choice has a price tag on it.

 

Lose the Car

Cut back to one car, or no cars if possible. If you can manage it, biking to work is great way to reduce expenses, stay fit, and protect the environment — all in one stroke.

Taking public transit is another great option. Bring your favourite music and/or podcast along for the ride, and forget the stress of having to navigate through rush hour traffic.

Use a trial period to see if you’re willing to make this lifestyle change. Switch out your car commute for a bike / public transit commute for a few weeks, and see how you feel.

At worst, you’ll save on gas costs for a bit, and you’ll have given the alternatives a fair shake.

 

Meal prepping

Meal prepping (making a large batch of food in one sitting) is a great way to reduce your spending on eating out at restaurants.

It took some time getting used to it, but it’s now part of my regular routine to make 6-10 meal portions on Sunday night. It’s become extremely rare for me to buy lunch at work. A couple of great resources for meal prepping:

 

Before You Make a Big Purchase

Before you make a big purchase (new TV, car, couch, clothing, etc.), force yourself to wait for 2 or 3 days before you go ahead and actually buy it. You might be really excited in the moment at the store, but find that you don’t actually want that thing once you’ve had the chance to sleep on it.

This will help to limit impulse purchases that you’ll regret down the road. Take some time to think about if that thing will make you happy, if a cheaper option would also tick the boxes you’re looking for, and if you think you’ll get good use of that thing.

Then ask yourself: do I actually want to buy this, or am I tempted to do so because everyone else is doing it (friends, colleagues, family, etc.)?

Remember that most people are terrible with their money. The average person lives paycheck to paycheck, doesn’t have an emergency fund, is entirely reliant on their job, and doesn’t have any real plan to meet their future financial goals. Don’t spend like everyone else.

Finally, is there any way of buying this second hand? If you do some searching around online (Craigslist, Kijiji, Facebook Marketplace) and in your local thrift store you can often find some great secondhand deals on:

 

Hobbies, Activities, & Entertainment

Finding a hobby that you look forward to doing everyday is something I’d encourage everyone to do. Carve out some time during the week or weekend to try new things, pick up new skills, or learn about something that interests you. You just might find a passion that you can carry forward for the rest of your life.

What follows is an entirely non-exhaustive list of activities that are fun and frugal…

It is free to:

 

With low start-up and ongoing costs, you can:

 

Source for average house size data: AEI.org

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Setting Financial Goals

Moonshine Money guide to personal finance - goal setting header image

You’ve flipped the switch on your financial auto-pilot; you see a steady stream of money building up each month; you’re probably itching for the next step. Now what? In this lesson, we’ll discuss setting financial goals.

Having clear goals in mind will keep you accountable to your plan and will help you to figure out how much (and why) you need to save.

 

What Are You Saving For?

By setting financial goals, you can turn your savings & investment account balances away from just being abstract numbers on a screen into something much more tangible. Each of your dollars will have a purpose:

Spend some thinking about what your personal financial goals are. Think immediate (this month), short term (1-12 months), medium term (1-5 years), and long term (5+ years).

Totally fine if your goals are vague rough outlines at this stage. The point is to give yourself something to work towards.

There are worse things in life than saving up a few thousand bucks for one purpose and then changing your mind once you get there.

 

What If I Don’t Know What My Goals Are?

What if you still find it difficult to sketch out long term plans and goals? Perhaps you’re comfortable with your life now, but have too many uncertainties on the horizon — will I move to a new city? Do I want to have kids down the road? Will I eventually buy a home?

If the view is too hazy to lock down on concrete goals at the moment, I’d suggest setting your sights on attaining “financial independence” — also known as “F-you” money.

A financially independent person is someone who can choose to:

To put it more bluntly: once you’ve got enough money you can say “F-you” when, where, and to whom you want. Having more money makes you less dependent on others. More money = more freedom.

 

The bottom line: Spend some time thinking about why you are saving your money. Set your sights on the goal and make it happen.

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Auto-Pilot Engaged (Pay Yourself First)

Moonshine money - auto pilot header image

Auto-Pilot Engaged

I don’t know about you, but I can think of at least a few things I’d like to do rather than checking bank account balances, budgeting, and making trades in my brokerage account.

Fortunately, it’s possible to automate some aspects of the financial process. Think about this as flipping the “auto-pilot” switch on, so that you can spend less time and mental energy thinking about your money.

For me, I’ve settled into a rhythm of checking my account balances every couple of weeks (more out of curiosity than anything), and spending about a couple hours every 2-3 months to update my budgeting spreadsheet and make trades in my investment account.

I don’t feel stressed or burdened at all by this process. If you follow the steps below, I’m confident that it’ll be the same for you as well.

 

Pay Yourself First

“Paying yourself first” is an extremely simple and effective strategy that can help you meet your savings goals. The idea is that you spend what is left after saving, and not the other way around.

For example, let’s say your bi-weekly paycheck comes out to $1,500, and your goal is to save $300 out of each and every paycheck.

If you follow the pay yourself first methodology, you’d set up an auto-deposit for $300 on the day that your pay check comes in. This money could be directed to your emergency fund account, to your student loans, or to your investment brokerage account (whatever your goal is). In any case, this money is out of sight, out of mind.

With the $1,200 of your paycheck that remains after the auto-deposit, you’re free to spend that money however you choose. You don’t need to feel guilty if you order take-out or buy a new pair of shoes — as long as you manage to stay within your $1,200 budget, you’re good to go.

Save first, and spend what is left after saving.

The real power of this simple strategy is that you’ve managed to meet your savings goal without having to lift a finger or make any decisions. By automating your financial processes as much as possible, you give yourself the best chance of sticking with your plan in the long-run.

The alternative is to save what is left after spending. In that case, you’ll need to constantly monitor your purchases to make sure you’re not going off track. A night out with friends here and an impulse purchase there, and you might find that you’re short of your savings goal at the end of the month. Not fun, and not a recipe for success.

Pay yourself first, and you’ll make your life much easier.

 

Pre-Authorized Payments

Most companies that send you a bill on a regular basis will offer a “pre-authorized payment” option. By signing up for this, your bill will be paid automatically, without the need for you to manually log in and send your payment.

By doing this, you can stop worrying about missing a payment and being charged late penalties.

Personally, I’ve set up pre-authorized payments for my:

If you go down this route, make sure that you regularly review your credit and debit card statements. Watch out for any unusual charges on your statement.

 

Your Assignment

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

A Step-by-Step Guide to Investing Online

Moonshine Money - how to trade online header image

A Step-by-Step Guide to Investing Online

Now that you’ve settled on the index funds (a.k.a. ETFs) that you’d like to invest in, we’ll go through a step-by-step tutorial on the mechanics of how to trade online, so that you can start putting your money to work.

To illustrate, I’ll be making a trade in my Questrade brokerage account, so you’ll see some visuals from that trading platform. If you’re using a different investment broker, it will look slightly different, but the broad concepts are the same.

Side note: If you’d like to open a Questrade DIY (Do it Yourself) account for low-cost index investing, please feel free to add my referral code of 336413903418268 when you open the account. We will both receive $50 in that case!

After logging into my brokerage account, first I see a summary of my portfolio. I’ve got $5,000 of cash in the account, and would like to use that money to purchase some investments. Click the “Trade” button at the top right to start.

How to trade online - account summary

 

Step 1 – Look Up the Correct Investment Symbol

Index funds are typically identified by a three to five capital letters (VCN, XAW, VAB, VOO, VTSAX, etc.). Based on your chosen asset allocation, you need to identify which index fund you want to purchase. Based on my investment plan, I’d like to use my $5,000 to buy shares in the index fund XAW, a fund holding shares of companies from all around the world, but excluding Canada.

How to trade online - investment symbol lookup

In the order entry section on the right side of the page, I type in “XAW”. Questrade actually identifies this fund as XAW.TO since it trades on the Toronto Stock Exchange. Beside the investment symbol (also known as a “ticker”), you’ll see a description of what this fund is. Verify that this is correct. I’ve done a quick google search on “XAW” and have verified that the “iShares MSCI All Country Index” is the fund I’m looking to buy.

 

Step 2 – Finding The Market Price of the Investment We Want to Buy (the “Ask” Price)

How to trade online - bid ask spread

Click the refresh symbol to the right of the symbol lookup box. This will update the market price data for you.

Underneath the investment symbol information, you will see a few numbers. The only relevant figures are the “Bid” number, and the “Ask” number.

The “Bid” ($26.17 in this example), is the price at which traders currently want to buy this investment. The “Ask” ($26.19 in this example) is the price at which traders want to sell this investment. This is the market pricing for purchasing one share of this index fund.

Since we want to buy this investment now, we need to make an offer which is equal to or greater than the Ask in order for our trade to go through (a.k.a. for our trade to be “filled”).

 

Step 3 – Entering Your Order Details

Now that we know what investment we want to buy and the current market price of that investment, it’s time to submit your trade.

How to trade online - order entry details

After that, click the “Buy” button. Don’t worry! The trade won’t execute now — you’ll have the opportunity to review and finalize your trade in the next step.

 

Step 4 – Confirm and Submit Your Trade

After clicking the Buy button, the order confirmation window will pop up.

How to trade online - order confirmation

In the green header bar in the top, you’ll see a summary of the trade that you are making. I am buying 190 shares of XAW, at a limit at $26.20 per share. I do a quick double check — this is correct.

Next, verify that the account info is correct, and that your trade value ($4,978 in this example) is lower than the amount of money that you plan on investing ($5,000 for me, so I am good).

Take a deep breath, read it over one more time, and click “Send Order”.

Congratulations! You’ve submitted your first trade :). I know that this might be stressful and/or might set your heart racing. I promise that it’ll get easier after the second or third time that you go through with making a trade. Just make sure you follow each step, take your time, and verify things before you move on to the next step.

 

Step 5 – Verify That Your Order Has Been Completed

Last step; all of the heavy lifting is behind you. Now we just need to validate that the order has gone through. Navigate to the “Executions” tab of the page.

How to trade online - order confirmation

In the picture above, you can see that my order for 190 shares of XAW has been executed. Note that my order was completed (filled) at a price of $26.19. This is consistent with the ask price of $26.19 that we saw. Even though I submitted a limit order at $26.20, I still got the best price available. Hurray!

Note: If you don’t see any confirmation here, your trade has likely not been completed yet.

Try navigating to the “orders” tab, where your pending order should be displayed there. It will likely mention that your order has been “submitted”. If so, it is likely that the market price has increased above your limit price, therefore making it possible that your order will not execute today (in which case your order would cancel itself).

If this is the case, try checking back in an hour or two to see if your trade gets filled. You could also cancel your order, refresh the market pricing and try submitting a new trade based on the the refreshed market data.

 

Why Use a “Limit” Order Type?

In the steps above, I recommended that you submit a “limit” order type.

As some background on this, there are two main order types – “limit” and “market”.

With a limit order, you’re able to specify the maximum price that you’re willing to buy at (or the minimum price that you are willing to sell at, if you are selling shares). This provides protection to ensure that you don’t end up buying shares at a significantly different price than you were expecting. In the example above, I specified that I did not want to buy at a price exceeding $26.20 per share.

On the other hand, a market order means that you are willing to buy at the best available price currently. Essentially, you agree to take the lowest price at that moment, regardless of what it is. Share prices can be volatile, so I don’t recommend using a market order because this can lead to some bad surprises. For example, while you are submitting your trade, the fund’s market price could increase by $1 per share, and you’d be committing to buy at that elevated price.

Keep it simple and use a “limit” order.

 

Why Set a Limit Price that is Higher than the Ask Price?

Now you might be asking: shouldn’t I input a limit price that is lower than the ask price, as opposed to a price higher than the ask price?

This may seem logical given that you’d “save” a cent or two on the price that you buy your shares at, but this actually creates a new risk. If the current ask price is $26.19, and you say to the market that you don’t want to purchase shares unless the price falls to $26.17 (two cents lower), your order may never go through. You are effectively saying that you won’t buy unless the market price goes down.

This is “penny wise, pound foolish”. For the opportunity to score a minuscule win (a discount of a couple cents per share), you risk that your trade doesn’t go through, meaning that you’ll miss out on investment gains. Since the market tends to go up in the long run, delaying your entry into the market only hurts you.

 

What Time Should You Trade At?

The main stock exchanges in Canada & the US are open between 9:30AM until 4PM on Monday to Friday (except for holidays).

As much as possible, you should submit trades during market hours. This means that you’ll need to submit your trades during the work day.

While it is possible to submit trades outside of market hours (known as pre-market trading or after-hours trading), you increase the chance that your order doesn’t go through if you do this.

Companies tend to release big news outside of market hours (before or after the trading day). As such, when this happens the prices can open at a much different value than what the previous day’s closing price was.

Because of this, if you submit a limit order based on the previous day’s closing price, your order might not go through and you will have to re-submit. Each day that you’re out of the market means that you miss out on potential investment gains.

The bottom line is that you should try to submit trades during market hours (9:30AM to 4PM on weekdays) if you can.

 

Takeaways: How to Trade Online

Let’s put it all together. Once you learn how to trade online and get some practice with it, purchasing investments becomes a simple recipe. Follow these five steps:

  1. Look up the correct investment symbol
  2. Find the current market price of the investment you want to buy (the ask price)
  3. Enter your order details (remember to use a limit order type at a price that is one cent above the ask price)
  4. Confirm and submit your trade
  5. Verify that your order has been completed

 

Your Assignment

 
If you’d like to open a Questrade DIY (Do it Yourself) account for low-cost index investing, please feel free to add my referral code of 336413903418268 when you open the account. We will both receive $50 in that case!
 

Disclaimer: This information is provided for illustrative and educational purposes only. Your situation is unique, and I do not guarantee the results or the applicability of this information to your situation.

None of this information should be considered investment advice or a recommendation to buy or sell individual securities.

Readers should do their own research before making any financial or investment decisions.

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

A Blueprint for Building Wealth

Moonshine Money - A blueprint for building wealth header image

Building wealth relies on a simple recipe: you need to spend less than you make, invest the difference wisely, and have a healthy dose of patience. No more and no less.

You don’t need to be a six-figure earner, have a trust fund, or be a stock-picking wizard.

At first, investing can seem like a big and scary topic. You might be tempted to rely on professional advisers (a.k.a slick salespeople in suits) to handle your money for you. If you go down that path, you’ll end up paying out a sizable chunk (10-50%) of your net worth in fees to your advisers. This means that you’ll have to work many more years to meet your financial goals, or that you’ll simply never get there.

It doesn’t have to be this way. By using a tried and true do-it-yourself investing strategy, you’ll be in full control of your money and will save hundreds of thousands of dollars in investment fees over the long term. No Ivy-league education required.

In Warren Buffett’s words:

“Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

Implementing a successful do-it-yourself investing strategy comes down to a few simple steps:

 

Invest in Stocks, With a Splash of Bonds

Think of your investment portfolio as a cocktail (however for best results, keep investing and drinking separate). Your beverage should be heavy on stocks, with a light amount of bonds mixed in.

Stocks are the fuel of your wealth building efforts. Throughout modern economic history, owning a broadly diversified basket of stocks has consistently brought about tremendous increases in wealth.

The U.S. stock market has returned an average of nearly 7% per year in inflation-adjusted investment returns. This means that on average, your money would double every 10 years.

Bonds add stability to your portfolio. The performance of stocks and bonds tend to be out of sync. When stocks do poorly, bonds often stay flat or even increase in value.

Investing in bonds allows you to smooth out the ride. Consider that the U.S. stock market has had multiple occasions in which it lost 20 to 40% of its value in a single year. As your investment horizon becomes shorter (as you near retirement or near a withdrawal from your portfolio) you should shift from stocks to bonds in order to protect your wealth.

Building wealth - stock versus bond asset allocation

Think of stocks as a wealth builder and bonds as a wealth preserver. As you increase your allocation in stocks, you increase your long term expected investment returns, but you also increase the chances that you’ll suffer big losses in the short term.

 

The gist: most people should have 60-90% of their investment portfolio in stocks, with the remainder invested in bonds. The longer your investment horizon and/or the higher your risk tolerance, the more stocks you should own.

 

Use a Low-Cost, Diversified, and Passive Investing Strategy

So, which stocks and bonds should you buy? Maybe a few shares of Apple; how about Tesla?

The short answer: you should buy ALL of the investments.

Building wealth - buy all the investments image

The longer answer: you should be investing in Exchange Traded Funds (ETFs for short).

An ETF is an investment that tracks the performance of a large number of individual investments.

For example, you may have heard of something called the S&P 500 index. This “index” tracks the performance of the 500 largest American companies (including Apple, Google, Microsoft, GE, Walmart, Proctor and Gamble, so on and so forth).

You can purchase ETFs that track the performance of the overall S&P 500 index. This means that you essentially own a small slice of every one of the 500 largest companies in the U.S.

Note: People often use the term ETF interchangeably with the term “index fund”.

There are a huge variety of ETFs that you can purchase: American stocks, Canadian stocks, emerging markets stocks, technology stocks, and all of the above but for bonds instead.

Why invest in ETFs?

The goal is to use a low-cost, diversified, and passive investing strategy. This is often known as a “couch potato” strategy. With some work upfront and a bit of tracking and maintenance each year, you’ll be able to lean back and watch your investments grow.

In contrast with the recommended couch potato strategy, the vast majority of people are using an “actively-managed mutual fund” strategy for their investing.

Even if you’re never heard the term actively-managed mutual fund, there’s a good chance that you are already using this strategy.

The reason is that every major bank pushes their customers towards this path. It usually goes like this: you ask someone at your bank for help with making an investment plan, you meet with a financial adviser at the bank, and then you’re persuaded to invest in mutual funds.

What exactly is an actively-managed mutual fund?

This refers to investment funds which are run by a manger who is trying to pick hot stocks and time the market, with the end goal of outperforming the average market return.

It sounds pretty great in theory.

However, time and time again this has been shown to be a losing strategy. Over long periods of time (10+ years), more than 90% of actively managed mutual funds have lower investment returns compared to a simple couch potato strategy. See these S&P reports by country for more detail if you wish.

How is this possible? How can Ivy-league educated fund managers do worse than a simple strategy that you and I can implement? The answer lies in the extremely expensive fees that these managers charge.

Before fees are taken into account, these managers tend to have performance which matches the overall market. However, after their fees are taken out, the returns for actively-managed mutual funds significantly lag behind the overall market.

Think of these fees as being what the manager pockets, and the return after fees as being what you keep. By minimizing your fees, you end up with higher returns.

Steady path to building wealth - returns after fees

The impact of minimizing management fees can be massive when this occurs over a long period of time.

Take the example of a 25 year old who saves $5,000 per year for 40 years. By using a couch potato strategy and earning a return of 7% per year, they’d end up with ~$1M by age 65. If instead they invest their money in actively-managed mutual funds and only earn 5% per year after fees, they’d have ~$600k (see the result visualized here). $400k (four hundred thousand dollars!!) has been eaten up by fees.

I repeat — using a low-cost, diversified, and passive investing strategy (a.k.a. couch potato strategy) can save you hundreds of thousands of dollars. Spending a few hours learning how to implement this strategy will be well worth it.

Let’s take a look at some real examples.

The picture below is showing the Vanguard VOO ETF which we discussed before. This ETF tracks the S&P 500 index. The “expense ratio” is only 0.04% per year ($4 per year on an investment of $10,000).

Steady path to building wealth - VOO MER

Now compare this against some actively managed mutual funds from BMO (a major Canadian bank). The management fees for these funds are over 2% per year — more than 50 times higher than the S&P 500 ETF.

Steady path to building wealth - BMO MER

And below, the management fees for mutual funds from T. Rowe Price (a large American investment manager). Better than BMO, but still terrible when compared against a low-cost ETF.

Steady path to building wealth - T Rowe Price MER

If you still aren’t convinced that you should avoid actively-managed mutual funds like the plague, read through this article from the Financial Times. A few telling excerpts:

Half of the 15,000 mutual funds in the US are run by portfolio managers who do not invest a single dollar of their own money in their products, raising concerns about whether fund managers’ interests are properly aligned with those of their investors.

If the managers themselves doesn’t trust in their ability to beat the market, should you?

Fund managers are savvy investors, so they are less likely to invest in gimmicky, high-cost funds. I remember one firm telling us that they didn’t invest much [in their own funds] because they would rather invest in something cheaper.

You can say “conflict of interest” and “hypocrisy” one more time.

 

What about robo advisors? For those who haven’t come across them, robo advisors are companies that typically implement a couch potato investing strategy on your behalf (similar to what is discussed here), and charge you for their services — typically a fee of 0.5% on top of the management fees charged by the underlying ETFs.

If you’ve gotten this far, I see no reason to invest your money with a robo advisor or similar type of service. By retirement age, over 10% of your portfolio would be eaten up by these additional and unnecessary fees.

 

The gist: Forget about actively-managed mutual funds and robo advisors. Follow a couch potato investing strategy using ETFs (low-cost, diversified, and passive investing strategy).

 

Take Advantage of Tax-Sheltered Accounts

As shown above, you can maximize your investment returns by minimizing your investment fees. The same goes for taxes on your investment portfolio — the less taxes you pay on your investments, the larger your investments will grow.

Before discussing the details of the “tax-sheltered” accounts that we can use to reduce taxes, it’s a good time to talk about the concept of what we’re trying to do here.

The standard cycle of investing money goes like this: you save a portion of your paycheck, invest that money, let it grow over time, and then sell your investments to fund your lifestyle once you stop working. If you follow this cycle, you will pay two types of taxes — income taxes owed on your initial paycheck, and the capital gains taxes owed on the profits that you’ve made on your investments when you sell them.

Income taxes are the taxes that are automatically deducted from your regular paycheck (as discussed in a previous lesson).

Capital gains taxes are amounts that you owe on the profits made on your investments. For example, if you invest $1,000, let it grow for 20 years until it reaches $3,000, and then sell your investment (i.e., turn it back into cash), you would have made a profit (a.k.a. capital gain) of $2,000. You will need to report your $2,000 capital gain on your tax return and pay taxes on that amount.

Even though you paid income taxes on your initial paycheck, you still owe a second round of taxes when you make investment returns with money. Not super fun.

When all hope seems lost… have no fear, tax-sheltered accounts are here!

Tax-sheltered accounts are available to all Canadians and Americans (and citizens of many other countries not discussed here). By moving your money into these accounts, and then purchasing your investments within these accounts, effectively you’ll no longer pay capital gain taxes on your investments.

 

Canadian Tax-Sheltered Accounts

The main tax-sheltered investment accounts for Canadians are the Tax-Free Savings Account (TFSA) and the Registered Retirement Saving Plan (RRSP).

For a good overview of what these accounts are and how they differ, read through these articles:

My over-simplified take on this: if you are unsure of what to do, as a default you should start with putting your money in a TFSA. It is the more flexible option, and the money can be transferred into an RRSP at a later date (but not vice versa).

 

American Tax-Sheltered Accounts

The major tax-sheltered investment accounts that Americans have access to are Roth accounts and Traditional accounts.

To understand what these are, read through:

 

If you’re in the fortunate position to be able to max out all of your tax-sheltered accounts, please do so. If you still have money left over, you should invest your money in a regular taxable account (a.k.a cash account / non-registered account). Keep in mind that you’ll have to pay capital gains taxes on your investment profits in this account.

However, most people will need to make a choice between investing in one account or the other. Do not get stuck in analysis paralysis. Investing in a tax-sheltered account is always better than investing in a regular taxable account, and is infinitely better than choosing to not invest at all.

As a final note, make sure you understand that a tax-sheltered account is not an investment in and of itself. You can’t just move your money into the account and expect it to grow over time. A tax-sheltered investment account is just the container in which you hold your investments. After you contribute money into the account, make sure that you use that money to purchase the ETFs / index funds that you want.

 

The gist: Take advantage of tax-sheltered accounts as much as possible. Move your savings into these accounts, and then purchase your ETFs with the money that you’ve contributed. This allows you to reduce your taxes owed on your investments, thereby increasing your investment returns. Don’t get too hung up on making the “perfect” choice of account to use — not taking any action will always be the more costly choice.

 

Stay Invested

So-called financial “experts” like economists, traders, and fund managers are famously poor at predicting when a recession will happen. A popular dig at these gurus goes:

“Economists have predicted 9 out of the last 5 recessions”.

The next time you hear some famous and well-credentialed individual going on about how the market is likely to crash in the next year, keep in mind that reputable people are ALWAYS going on about how a crash is right around the corner.

Take a look at this great chart on the S&P 500 versus market pundits. If you would have listened to these experts and sold your investments, you’d have missed out on the stock market more than doubling in value from 2012 to 2018.

Market experts are constantly crying wolf.

Instead of being afraid of short-term volatility in the market, you should be concerned about pulling out of the market and missing out on investment returns. An analysis from JP Morgan / Business Insider shows how your annual returns are significantly impacted if you miss the best trading days.

From 1994 to 2013, the overall return of the S&P 500 was ~9.2% per year. If you would have missed just the best 10 trading days (out of 5000 total days — or 0.2% of the total days), your return would drop to 5.4%. Missing just a tiny fraction of the overall trading period would have tanked your investment returns.

The point being: if you try to jump in and out of the market you are very likely to miss out on the small amount of days that make up most of your returns. I repeat — time in the market is more important than timing the market.

Don’t listen to CNBC, don’t follow the predictions of the latest “stock market guru”, just don’t.

Frankly, no one knows what the stock market will do in the short term. These types are predictions are just noise that aren’t worth the paper they’re printed on.

Moonshine money building wealth - buy sell cartoon

As always, Warren Buffett puts it best:

“The stock market is a device for transferring money from the impatient to the patient.”

As a testament to the power of patience, check out the amazing story of Leonard Gigowski, a former cook in the navy, meat cutter, and eventual owner of a corner grocery store, who quietly amassed a fortune through his life. When he passed away, he donated $13M to his alma mater.

 

The gist: Think of your investment portfolio as a bar of soap; the more you touch it, the less you have. Set it and forget it.

 

Re-Balancing Your Portfolio

When you make your first round of investments, your asset allocation will be done in clean & round percentages — for example, 80% of your money in stocks and 20% in bonds.

As time passes, your asset allocation may get a bit out of whack if the performance of your stock and bond investments haven’t been the same. You might find that your stock allocation has dropped to 73% or increased to 86%.

When your allocation drifts far away from what you’d like it to be, this is the time to re-balance your portfolio.

There are two ways of doing this:

  1. Sell some of one investment, and use the proceeds to buy some of the other investment. If your stocks have done much better than your bonds, this would mean selling some shares of your stock fund and using the money to invest in your bond fund
  2. Use new money that you are investing to re-balance your portfolio back to your target weightings. This is the method that I always use. Since I’m in the midst of my career and am able to invest a good chunk of new money into the markets each year, I just use that new money to re-balance as appropriate

How often should you re-balance?

There’s no hard science to guide us here. To find the optimal re-balancing frequency, you’d need to know how markets will perform in the future (not doable without a crystal ball).

I review my investment weightings once or twice a year, and re-balance if my weightings are significantly out of step. I’m currently invested in 90% stocks and 10% bonds, and will re-balance if my bond percentage gets below 7% or above 13%. Again, no magic here.

 

The gist: Your asset allocation can and will get out of whack from time to time. When that happens, re-balance your portfolio with new money or by selling one investment and buying another. Don’t get too fussed about this, an annual check up is absolutely fine.

 

Assignment #1 – Open An Investment Brokerage Account

Open an account with your investment brokerage of choice. Make sure that you apply to open tax-sheltered accounts.

Canadian brokerages: Questrade is the best option out there. There are no fees to open an account, and it’s free to buy ETFs through Questrade (versus $10 per trade at the major banks). Selling ETFs will cost you $5 to $10 per trade.

Open a “self-directed” account (not a “managed investing” account). When applying, you can open up a margin account (a.k.a regular taxable account), a TFSA, and an RRSP account all at the same time.

Steady path to building wealth - questrade sign up

 

American brokerages: Vanguard is simply the best out there. Schwab and Fidelity are also good options.

 

Assignment #2 – Decide On Which Investment Funds You’ll Own

Decide on the index funds that you want to buy in your portfolio. Keep it simple! For the vast majority of people, just one, two, or three funds at most will do the job.

 

Portfolio guides for Canadians: I recommend that you follow the approach from Canadian Couch Potato. I’ve been managing my own investments according to this guide for several years now.

 

Portfolio guides for Americans: The Boglehead Lazy Portfolio guide has some good recommendations.

 

Take your time to get acquainted with the potential options. I know that the sheer volume of acronyms can be intimidating in this part. Please don’t let this hold you back.

Keep it simple: a portfolio that is mainly weighted towards stocks (60 to 90%) with the remainder being invested in bonds will serve you well for decades to come.

For some guidelines on how to pick your asset allocation (% in stocks and % in bonds), read through this article from CCP. The key factors to keep in mind are your investment horizon, risk tolerance, and your need to take risk.

Remember that a higher allocation towards stocks will yield both higher returns (upside) and higher risk (downside). As you get older, your asset allocation should change to become more conservative (i.e., more bonds).

 

Next steps

Now that you’ve opened up your investment accounts, and have decided on your portfolio asset allocation (what funds you will buy and in what %), the last step is to actually log in to your online brokerage account to purchase your investments.

In the next lesson, we’ll go through a detailed how-to guide on everything you need to do to make your first trades online.

 

Disclaimer: This information is provided for illustrative and educational purposes only. Your situation is unique, and I do not guarantee the results or the applicability of this information to your situation.

None of this information should be considered investment advice or a recommendation to buy or sell individual securities.

Readers should do their own research before making any financial or investment decisions.

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Let Your Money Work While You Sleep (Compound Interest)

Moonshine Money - Let your money work while you sleep header image

The Magic of Compound Interest

Fact: money grows on trees. Well, not quite, but new money does grow on other money.

In this lesson I’ll introduce the marvelous concept of compound interest.

Say we have $1 today, and we’re able to invest our money at annual return of 10% per year. After one year, we’d have $1.10 (+10 cents). After two years, we’d have $1.21 (+11 cents). Notice that in the second year we’d earn 11 cents as opposed to 10. This is due to compound interest — our 10% return is applied to the new total at the end of each year.

This means that our money will grow exponentially. In year 3, we’d earn 12 cents, 13 cents the next, and 15 cents the year after that.

If you look back at the overall U.S. stock market from 1871 to 2018, you’ll find that stocks have generated a real return of roughly 7% per year through that entire time period (real return means that it is adjusted for inflation).

Even with the great depression, the dot-com bubble, and the financial crisis factored into that time period, the trend of the overall stock market has been up and up, growing exponentially.

Returns in any single year can be incredibly volatile — losing 40% of your money or gaining 50%. However, over long enough time periods, stocks have always continued to increase in value.

In the graphic below, you can see how an initial investment of $1,000 would grow over time, using that average 7% return per year.

Compound interest - growth of $1,000 over time

After 50 years, the initial $1,000 would have become nearly $30,000!

Also notice that the amount of money we have roughly doubles every 10 years. This shows the massive power of compound interest.

Going from a net worth of $1,000 to $2,000 (doubling your money) takes 10 years of compounding.

Going from $500,000 to a million dollars (doubling your money) also takes 10 years.

In the first case, that 10 years of growth buys you a new iPhone. In the second case, you could have fully funded your retirement.

As a side note, you can do quick mental math using the “rule of 72”: if you divide 72 by the annual return rate, that will give you the number of years it would take for your money to double. A 4% annual return doubles every ~18 years, a 6% return doubles in 12 years, and an 8% returns doubles in 9 years.

 

Build Your Own Money Printing Press

Once you start saving money — even very small amounts, your savings start to create new money through the compounding process.

Then, your new money starts to create new-new money.

And what does that new-new money do? You got it: new-new-new money.

Once you get the ball rolling, you’ll have built your own money printing press.

Let your money work while you sleep - money printing press image

This goes on and on into infinity.

While you sleep, while you browse the Internet, or while you sip on an umbrella drink on the beach — your money will be working away.

Let’s take an example: Instead of looking at how an initial investment of $1,000 would grow over time, let’s assume that you’re able to save $1,000 each year.

If you can keep that up that for 50 years, and earn a real return of 7% per year on your investments , you’d have a total of over $400,000 at the end of the 50 years.

Compound interest - growth in net worth over time

In the chart above, the purple bars represent your “contributions” — amounts that you yourself saved and added to your investments. Notice how those purple bars grow in a straight line pattern; each year you are adding an additional $1,000 to the pot.

The blue bars show your “investment returns” — the new money that was created from your contributions, thanks to the power of compound interest. Here you can see an exponential growth curve.

By the end of the 50 years, the vast majority of your total net worth comes from investment returns, as opposed to money that you contributed.

After 50 years, you’d have a total net worth of ~$406k. $50k of that money came from you contributions ($1k saved per year for 50 years), while the remaining $356k comes from investment returns. 88% of your net worth has been generated from investment returns!

 

The Early Bird Gets the Worm

Time heals everything. If you can get time on your side by starting the compounding process early, you can breeze through to your financial goals.

To illustrate how powerful starting early can be, let’s take the example of the Early Bird versus the Late Starter:

The Early Bird managed to kick off the compound interest process early in their life. As a result, while they contributed much less than the Late Starter throughout their career, they ended up with the same amount of money in the end.

Click here to visualize the Early Bird vs Late Starter example. Try using this interactive tool to sketch out your own projections on how your net worth would grow over time.

Starting earlier means that your money will work harder for you. Starting earlier compensates against having a lower salary or a lower annual savings amount.

What are you waiting for?

 

Up Next

In the next two lessons we’ll get down into the nitty gritty on exactly how you can start investing your money so that it can work for you while you sleep.

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

How to Become Debt-Free

Moonshine Money - how to become debt-free header image

With a bit of knowledge, a solid plan, and a heavy dose of hard work, you can become debt-free.

Read on for a tried and true method for getting your money to work for you instead of against you.

 

Get Organized

Earlier in this course, you made a list of all your financial accounts and their current balances. Let’s refer back to that list, taking a look specifically at the debts section. We’ll need to add in a bit more information.

For each of your debts (credit card, student loans, car loans, mortgage, personal loans, etc.), make note of the current balance, the interest rate, and the minimum payment. Feel free to add in this information in a new tab of your spreadsheet, or stick with a pen and paper if you prefer.

To illustrate, let’s assume that I owe $45,000 in total debt split between a credit card, a student loan, and a car loan. I’ve also listed out the interest rate and minimum payments for each of these debts.

Getting out of debt - summary

 

Minimum Payments

No matter what, you need to find a way to make the minimum payments on ALL of your debts.

If you start to miss the minimum payments on any of your debts, there will be significant negative consequences. Depending on the type of debt and the provider, you could face late fees, increased interest rates, and/or repossession of your belongings.

Before thinking about making any non-essential purchases or doing any kind of investing, make sure that you have the cash to pay all of your monthly minimum payments first.

For my example, between my three types of debt I’ll need to make minimum payments of $350 per month.

 

Your Current Trajectory

Let’s take a step back and assess the situation.

You’ve gotten organized with a list of your debts and the relevant info for each. You might be asking — So what does this all mean? How quickly will I be able to get out of debt? How much interest will I pay?

I’ve built a Debt Payoff Planner to help answer these very questions. Open it up, and input each of your debts into the tool. The list that we made previously contains all of the inputs you’ll need for the tool.

 

Once you’ve added in all of your loans, the tool will show you the date at which you’ll be debt free, and the total amount of interest that you’ll pay.

 

In my hypothetical example, if I only make the minimum payments on my debts ($350 per month), I’ll be debt-free in 254 months (over twenty years from now!), and will have paid over $43,000 in interest on that debt. Ouch.

Make note of what these numbers are for your own scenario. It’s not pretty, but it is what it is. Ignoring the truth won’t make it go away. By crafting a plan and seeing it through to the end, you can and will become debt-free faster.

 

Finding Extra Room Within Your Budget

The minimum payments on your debts should absolutely be treated as MINIMUM payments. The only way to beat the timeline that we saw above is to put more money towards your debts.

In the previous lesson on budgeting, you gathered information on your historical spending habits. Take another look at that, and try to split up your spending between “essential items” (such as rent, groceries, utilities, transportation) and “discretionary items” (eating out, travel, entertainment, gifts, etc.).

Which of the discretionary items can you cut back on to make more room for paying off your debts?

What would a “bare bones” budget look like? Can you try to live on that reduced budget for a few months?

I won’t pretend that this is a simple task, but doing this will significantly accelerate your progress towards a debt-free future.

 

Designing a Debt Reduction Plan

Once you’ve freed up some extra cash flow to put towards your debts, you’ll need a plan for how you allocate that money. Should it go towards credit cards first, or how about my student loans?

There are two schools of thought about how to approach this problem: the avalanche method and the snowball method.

The avalanche method tells us to put all the extra cash flow towards the debt which has the highest interest rate. In my case that would be the credit card at 20% interest. I would increase my monthly payment on my credit card, while only making the minimum payments on my other debts.

The avalanche method is the optimal solution from a mathematical perspective. This method allows you to pay the least amount of interest, and makes you debt-free as fast as possible.

If that’s the case, shouldn’t everyone use the avalanche method? Not so fast.

While the avalanche method is best from a pure numbers perspective, it ignores the emotional and mental challenges of becoming debt-free. This is where the snowball method comes in.

The snowball method tells you to ignore the interest rates on your debt. Instead, you funnel all of your extra cash flow towards the loan with the lowest balance remaining. This means that I would put my extra cash towards my car loan (with a balance of $5,000 remaining). After the car loan is paid off, I’ll move to the credit card (second smallest debt), and then finally the student loans (my largest debt outstanding).

This method is not optimal from a pure financial perspective. However, for many people this is the best way to proceed. By focusing on the smallest debt that you have, you rack up quick wins, which helps to keep you motivated to get on with the next challenge.

Research from the Harvard Business Review suggests that the snowball method (paying the smallest debts first) is the most effective strategy, even though it is not mathematically optimal.

If you’re worried about losing momentum midway through your plan, consider using the snowball method.

 

Enough talk, how does this apply to your situation?

Head back to the Debt Payoff tool that we were just using. It allows you to set your monthly payments at whatever level you choose, and lets you use either the avalanche or snowball methods to allocate any extra money you’re throwing towards your debt (in excess of the minimum payments).

Let’s see what it looks like if I increase my monthly payments by $150 (from $350 to $500), and use the avalanche method.

 

I’d be debt free in 121 months (instead of 254 months), and would pay total interest of $15,000 (instead of $43,000). As you can see, even small lifestyle changes can make a HUGE difference.

And for comparison’s sake, here are the results for the snowball method.

 

I’d be debt free in 131 months (10 months later versus the avalanche method), and would pay $20,500 in interest (~$5,500 more interest versus the avalanche method).

Personal finance is just that — personal. Choose the path that makes you feel more comfortable. In the end, as long as you’ve put in the effort to free up extra cash to pay back your debts, you’re well on your way to being debt-free :).

 

Good Debts and Bad Debts

Becoming debt-free is a huge milestone that will provide you with peace of mind.

However, in some situations it may be a better financial decision to put your extra cash flow towards making investments, rather than continuing to pay off your debts.

For example, if you have debt at a 3% interest rate, but would be able to invest your money and earn a 7% return, from a financial perspective you’d be better off investing your money rather than using it to pay off debt.

For some context, investments in the overall stock market tend to earn a return of 5% to 10% per year. If you’re new to investing, don’t worry — in the next chapter we’ll cover everything you need to know about the topic of investing.

As a general rule of thumb, you may want to consider taking your time in paying off debts that have an interest rate of ~5% or less. Debt which has a relatively low interest rate can be considered “good debt”. For many people, their mortgage may fall into the “good debt” category.

There are two very important caveats if you are considering this strategy: (1) any money that you don’t use for paying back this debt needs to be put towards making investments, and (2) you still need to make the minimum payments on that debt.

If you are looking to maximize your net worth, you may want to consider paying off all of your “bad debts” (debt with an interest rate of 5%+) as soon as possible, but take your time to pay off your good debts. This way, your cash would be invested at a higher return, making you wealthier in the long-run.

If being debt-free as soon as possible will help you to sleep at night, feel free to disregard this discussion entirely. Personally, I try to avoid debt as much as possible. I’ll gladly give up some potential investment returns in order to eliminate my debts entirely.

Again, this is a choice for you to make.

 

Staying Debt-Free

Now that you’ve dug yourself out of a hole, whatever you do, don’t get back in.

Always pay off your credit card balance in full, each and every month. If you can’t do that, you simply shouldn’t have spent the money that you did. If having a credit card tempts you to make purchases you can’t afford, consider getting rid of your credit cards altogether. Stick to cash and debit cards.

Stop financing your purchases. Don’t finance your new couch. Don’t finance your next car. And forget about the new iPhone.

Stay within your budget. In the previous lesson you created a budget and were tasked with reviewing and updating that budget on a monthly basis. If you want to stay out of debt, there can’t be any cheat months. Each month needs to be planned so that your cash inflows are greater than your cash outflows. Budget regularly, and stick to that plan.

 

Conclusion

Follow these steps to become debt-free:

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Everyone Needs A Budget (Yes, Even You)

Moonshine Money - budgeting header image

While a journey of a thousand miles begins with a single step, the path to wealth begins with a budget.

Your budget will serve as the foundation for the rest of your financial plan — reducing debt, saving money, and investing to build wealth.

Before we get too far, what exactly is a budget? While there are many ways of looking at it, I define a budget as a document that shows:

Having a budget doesn’t mean that you need to penny-pinch, cut back on all of your expenses, or stop buying coffee in the morning. It just means that you know your current financial trajectory, and whether that trajectory will lead you to where you’d like to be in the future.

Everyone needs a budget. Those living paycheck-to-paycheck can use a budget to identify places where spending can be cut back. Those who already manage to save money each month can use a budget to plan for goals such as buying a house, saving for a child’s education, or retirement.

Before we decide on where we want to go and how to get there, we need to know where we’re standing first.

Pause for a moment here and try to estimate how much money you spent last month.

If you don’t track your budget regularly, this question is probably quite difficult to answer without relying on a wild guess.

Most people have a good idea of how much they spend on recurring bills (rent, utilities, gym, internet, etc.) but are surprised when they see the actual numbers on their total, all-inclusive spending. It adds up fast — the lunches out, weekend trips, drinks with friends, small purchases here and there…

I find that most people (myself included) tend to have “recurring one-time expenses” (which may seem like an oxymoron). The new shirts you bought last month or the weekend trip you took the month before might be “one-time” expenses that won’t come up again for a while, but for most people a new type of “one-time” expense seems to always pop up to take its place (celebratory dinner? replacing your laptop? a new couch?).

If you want to have an accurate view of your typical spending habits, it’s important that you track your spending in detail on a regular basis.

All that to say: to make progress in your financial life, you need to have a strong grasp on your cash inflows and your cash outflows.

Let’s stop beating around the bush. How do you actually go about creating a budget?

 

A Tool for Tracking Your Budget

I’ve built a spreadsheet which allows you to record your earning & spending data, set future budgeting goals, and visualize your cash inflows / outflows in a dashboard. Grab a copy of that budgeting spreadsheet here, and read through the post for a tutorial on how to use the tool.

 

Step 1 – Download Your Historical Data

It’s time to go back in your personal history so that you can piece together a picture of your earning and spending habits.

Log in to each of your bank accounts / credit card accounts, and export your transaction data into spreadsheet form. Every bank is different, but they’ll all offer some kind of excel, spreadsheet, or “CSV” download option (CSV stands for “Comma Separated Values”, and these files can be opened in any spreadsheet program).

As an example, my checking account at TD bank allows me to export my transactions in “CSV” format.

Budget guide - CSV spreadsheet export

I recommend going back in time by at least 3 months. 6 months would be better, and 12+ months would be best. The goal is to cover a time period that will reflect your normal spending habits.

Once you have everything downloaded, put these transactions into the “expenses” and “income” tabs of the budget tracking spreadsheet linked above, as appropriate.

Afterwards, you’ll need to add a category label (e.g., groceries, rent, utilities, public transportation, etc.) beside each of your transactions.

Although this can be a time consuming exercise (especially when you’re just starting out and entering in multiple months), putting in the effort to understand your current financial habits will pay off again and again. I can’t stress how important this is to do — grab your drink of choice, settle in, and make it happen!

Personally, I update my spreadsheet once every couple of months, and it takes me 20-30 minutes each time — including the time spent reviewing (geeking out over) the outputs.

 

Step 2 – Review Your Results

Switch over to the “Dashboard” tab of the spreadsheet. You’ll see your results visualized in a few different ways: total income / spending / saving over the entire time period, your numbers broken down by individual category, and your monthly results over time.

Ask yourself these questions:

Take your time to get acquainted with the results. Maybe some of this is unexpected. If so, just keep in mind that being aware of your habits has already put you in a much stronger position to deal with this in the future.

You’ve just taken a huge step towards being conscious and in control of your money.

 

Step 3 – Set Your Future Budget Targets

Now that you know what your current trajectory looks like, you can set goals for the future.

Navigate to the “Budget Targets” tab of the spreadsheet. Here, you can enter in targeted goals for each of your income and expense categories. If you’re comfortable with where you’re at, feel free to set your targets at a similar level to where you are today. If you’d like to cut back on some spending categories, you’ll be able to set those goals here.

There are many different budgeting styles, and as time goes on you’ll likely settle into a preferred setup.

Some people use an “envelope” budgeting method. To do this, you set aside specific dollars for each spending category (e.g., $300 for groceries, $100 for eating out, $50 for clothing), and you commit to spending no more than that amount of money for each category. If you run out of money mid-month, you stop spending on that category — no ifs, ands, or buts. This method is quite strict, but can be helpful for those who have trouble controlling their spending. Check out Dave Ramsey’s guide to the envelope method.

Others are much more flexible with their budgeting system, and allow themselves to spend on anything they want, as long as they meet an overall savings goal. Let’s say your take-home pay is $3,000 per month, and your goal is to save 15% of your salary — $450 per month. This means that you can spend at most $2,550 during the month. How you spend that $2,550 is totally up to you.

It’s entirely up to you how you go about it. Choose the envelope method, choose the overall savings goal method, or go with something in between. As long as you have a goal to work towards, you’re good to go.

 

Make it a Routine

Once you have your budget goals worked out, make sure that you stick with the process by making budgeting a part of your routine. Your budget should be a living document that you update and re-visit on a regular basis.

By committing to a regular budgeting routine, you’ll motivate yourself to make improvements and meet your goals. It will also force you to face up to your bad habits — the data won’t lie.

Decide on the frequency at which you’ll update and review your budget. I suggest that you do it once a month (or more frequently) until you get a hang of it.

Each time you sit down to budget, just follow those same steps listed above:

Budget once, budget twice, budget ’till your money’s nice. Then budget once more…

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Taking Advantage of Employer Matching

Moonshine Money - employer matching header image

Economists are fond of saying that “there’s no such thing as a free lunch”. In this lesson, we’ll get as close as we can to chomping down on that free lunch. The term “employer matching” sounds unwieldy and rather boring, but the bottom line is: if you aren’t taking advantage of your employer matching program, you are missing out on free money. It’s as simple as that.

 

What is Employer Matching?

An employer matching program is a benefit that companies offer to their employees. Typically, it involves the employee (you) contributing a portion of their paycheck to some kind of retirement savings or profit sharing program, and the employer then matching part or all of what the employee puts in.

As an example: my employer offers a “share ownership program”, where I can contribute some of my paycheck towards buying shares in my company. My employer will then match 33 cents of each dollar that I put in, up to a total benefit equal to 2% of my gross salary.

If my gross salary is $50,000 per year, my employer will provide me with a maximum benefit of $1,000 per year (2% of my gross salary). To get this full benefit, I need to:

In this case, my employer has given me “extra” pay of $1,000 (as long as I contribute the maximum needed). This is free money — I’ve invested $3,000 and have been given back $4,000. This is a guaranteed and instant return of 33% on my invested money. You simply won’t find a better investment opportunity than that.

 

How Do I Sign Up For Employer Matching?

Most employees will need to take some action to get enrolled in their employer’s matching program. This means that unless you are signed up, you are missing out on free money.

If you aren’t sure if your company has a matching program, try reading through your company’s internal website. Specifically, the “HR” or “benefits” section. The general umbrella term to look for is “employer matching”, and the specific types of programs that may be offered are “defined contribution pension plan”, “share ownership program”, “company RRSP” (in Canada), or “401(k)” (in the US).

To get more info on the specific details and how to sign up, get in touch with your company’s HR department. Ask them about employer matching and they should be able to answer your questions and guide you through the sign-up process.

As part of signing up, you may be asked to choose your investment options (e.g., stocks, fixed income, money market cash fund, etc.). If so, you may encounter a whole bunch of jargon and complicated terms. We’ll discuss how all of this works in the investing chapter of this course. Stay tuned.

Once you sign up for the program, your take-home pay on your paychecks will decrease (as discussed in the previous lesson, this will now be a “deduction” item on your paycheck).

Don’t panic — this is because the portion that you are contributing is taken directly off from your paycheck. This money (and the employer contributed portion) does not arrive directly in your bank account, but is being held in a new account on your behalf. The money is still yours, it just isn’t being stored in your main bank account.

This may seem like a chore, but it’s the easiest few hundred or few thousand bucks you’ll ever make!

 

How Much Should I Contribute?

The short answer is that you should contribute just enough to the matching program to receive the maximum benefit that your company offers, and not a dollar more.

For my share ownership program, I am allowed to contribute up to a maximum of 12% of my paycheck towards buying shares in my company. However, my company’s matching contribution will never exceed 2% based on the rules of the program. Therefore, my contributions up to 6% are matched one-third by my employer, but any contributions beyond 6% of my paycheck are no longer matched.

In this case, contributing more than 6% of my paycheck doesn’t make sense. Instead of buying more shares in my employer, it’s better for me to save that money in other ways.

In fact, it’s smarter to diversify my investments away from my employer. Investing all of your savings in company stock can end badly. Employees of Enron, Nortel, and numerous dot-com failures can attest those risks.

 

A Note on Debt

Almost everyone who can take advantage of employer matching should do so. The main exception to this rule is for people who have high interest rate debt.

If you have debt at a very high interest rate, you may want to direct your cash towards paying down that debt instead of contributing towards an employer matching program.

Take note that the return you get on employer matching is often very high (typically 25% or higher, even up to 100%). If the interest rate on your debt is lower than the return you’d get through employer matching, it is mathematically more optimal to put your money towards employer matching (for example, it’s better to earn a return of 50% on your money instead of paying down debt at a 10% interest rate).

If the return you get on employer matching is lower than the interest rate on your debt, you should pay off those debts first before anything else.

No matter what, you should always make the minimum payments required on your debt. Don’t pass go; don’t collect $200; don’t put your money in an employer matching program until you pay the minimum payments on your debt.

With your leftover cash, I would recommend putting that money in an employer matching program if the return you get on your money is at least two times higher than the interest rate on your debt. There is no fancy math or magic behind this decision — it’s up to your own preference and risk appetite for carrying debt.

 

Your Assignment

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Building An Emergency Fund

Moonshine Money guide to personal finance - emergency fund header image

Bad luck always seems to strike at just the wrong times — life doesn’t have a habit of waiting for us. Having an emergency fund will help you get through these tough times, and to sleep more soundly at night.

In this lesson, we’ll learn about the ins and outs of what an emergency fund is, why you need it, where you should store it, and how much you money you should have saved up. You’ll also be tasked with starting one for yourself.

 

What Is An Emergency Fund?

An emergency fund is money that you’ve saved up for unexpected costs (and well, emergencies).

A few situations when an emergency fund would come in handy:

 

Why Do I Need An Emergency Fund?

If you don’t have money on hand to pay for these costs, you’ll need to borrow the money from somewhere else. For many people this would involve taking on credit card debt or a payday loan.

The interest rates on these products are extremely expensive (often 20% – 30%+ per year) and should always be avoided if possible. One small emergency could put you in a hole that takes years to crawl out of.

Having an emergency fund will allow you to get past these hiccups without putting a serious dent in your finances.

 

Where Should This Money Be Stored?

Your emergency fund should be stored in an account where your money is easily accessible — ideally within a couple of days. It should not be invested in any kind of risky investment, such as in the stock market.

You shouldn’t be trying to earn high returns on this money. These savings are your safety blanket; you should always know where it is, how much is there, and that you can easily get access to it.

Having a credit card or line of credit does NOT count as having an emergency fund. Your bank could take away your access to these at any time, and the money that you draw from these sources needs to be repaid with interest.

I recommend storing your emergency fund in a high-interest savings account (sometimes known as a high-yield savings accounts). These accounts will typically pay between 1% to 2% in interest per year, and the return is guaranteed (i.e., there is no risk of the account going down in value). This small return will help to offset the effects of inflation. Again, your goal shouldn’t be to earn high returns with your emergency fund.

You should make sure that any account you open allows you to withdraw the money quickly, and doesn’t require you to pay any monthly service fees.

 

How Much Should I Keep In My Emergency Fund?

There isn’t any hard and fast rule for how much you should keep in your emergency fund.

Most people should target to have an emergency fund big enough to cover 3 to 6 months of living expenses. For example, if you typically spend $2,000 per month, a reasonable emergency fund size would range from $6,000 to $12,000.

If you have others depending on your income, or if you don’t have much job stability, you could consider an emergency fund of up to 12 months of living expenses.

Before thinking at all about investing money, your first priority should be to get at least 1 month of living expenses saved up in your emergency fund.

 

Your Assignment

Step 1: Open up a high-interest savings account with your bank of choice. Make sure that this account allows you to access the money quickly and without paying any fees / penalties.

For Canadian readers: see here for a comparison of providers.

For US readers: see here for a comparison of providers

Step 2: Decide on the amount of money that you want to keep in your emergency fund. At a minimum, you should target to hold 3 months of living expenses.

Step 3: Start making regular contributions from your take-home pay into your savings account, until you reach your goal.

If you take money out of your emergency fund for any reason, remember to replenish it back to your target amount afterwards.

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

Getting Your Ducks in a Row: tracking net worth

Moonshine Money guide to personal finance - net worth spreadsheet page

Download the net worth tracking spreadsheet:

Net worth tracking template
 

Getting Organized

We’re going to take it slow in these first few lessons. Before we start busting out some fancy moves, I just want to make sure that you’re on solid footing.

Managing your own money can seem overwhelming at first, but being organized, creating a plan, and then having the discipline to follow through on that plan is all it takes.

Housekeeping item #1: let’s get organized. Start a folder on your computer for all things personal finance. I’ve got mine in Documents –> Personal Finance.

Throughout this course, I’ll be introducing you to numerous spreadsheets to automate the number crunching part of things. Keeping everything in one master folder will help you to stay on top of everything.

In my own folder, I’ve also create sub-folders for bank statements, investment trade confirmations, tax returns, and all of the other random financial documents that always seem to pop up. If it relates to my money, it’s saved there.

It’s a boring first step, but will come very much in handy later on. Come tax time, you don’t want to be digging through old computers, paper files, and calling the bank. Trust me, it’s not fun…

 

Calculating Your Net Worth

Housekeeping item #2: find out what your financial picture looks like today by calculating your net worth.

The goal is to create something similar to the example shown below…

Getting your ducks in a row - account tracking template

If you’d like to use this spreadsheet template:

Net worth tracking template

Feel free to adjust the dates at the top as you wish (e.g., to put in today’s date), add rows for new accounts, and add columns for new time periods.

This spreadsheet template will also automatically generate a chart so that you can visualize your net worth progress.

Moonshine money - getting your ducks in a row - net worth tracking chart

If you’d rather use pen and paper for this, that works too.

 

Walking Through the Steps

Start by making a list of all of the bank accounts and investment accounts that you have. Anywhere that you receive money, hold money, have money invested, etc.

Jot down that list, together with the current balance of each of the accounts.

Next, add a section for the estimated value of your major possessions. Don’t go overboard with this — you don’t need to include your tupperware and gym shoes. Your home (if you own it), your car, and other valuables will do.

The sum of your bank accounts, investment accounts, and your possessions is known as your total assets.

Now for the more painful part. Make a list of all of your debts. Credit card, student loan, mortgage, car loan, medical bills, money you owe to your parents, lay it all out there. The sum of these numbers is your total debt.

Finally, your net worth is calculated as your total assets minus your total debt. In the example above, this person has total assets of $18,700, total debts of $14,200, and a net worth of $4,500 (as of September 30th, 2018).

What you’ve got in front of you is a snapshot of your financial health as of today. At a glance you can see what you own, what you owe, and the net result.

If what you see is slightly shocking, don’t panic! As you work through this course you’ll learn how to get your budget under control, reduce your debt, and invest to create wealth. Onward and upwards.

 

Your Assignment

Once you get into the habit, this becomes quick and painless. At the end of every month, I take about 10 minutes to log in and out of various accounts and record the current balances.

Make a habit of tracking your net worth regularly. In time this’ll become like clockwork, and dare I say fun(!?) when you see yourself chugging along in the right direction.

What gets measured gets done.

 

Additional Resources (Optional)

We’re going to use spreadsheets quite a bit in this course. Spreadsheets are hands down the best way to keep track of your money.

You can customize things just as you need them, your financial data won’t be shared with 3rd parties, and you can centralize everything in one place. Creating pretty charts is another nice upside.

If you don’t have much experience using spreadsheets, or just want to brush up, check out this beginner’s guide to excel, and guide to Google sheets (whichever you prefer).

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance

An Introduction to the Course

Moonshine money DIY guide to personal finance. Introduction article header image

The best time to plant a tree — or learn about personal finance — was 20 years ago. The second best time is now.

Personal finance education is so important, yet so ignored. We tell ourselves that we’ll get to it eventually, but we also said that last time (and the time before that as well).

To help break that cycle, I’ve put together this comprehensive guide to personal finance for beginners. Moonshine Money is an entirely free online course that will help you to take control of your finances.

No prior knowledge is needed — this course has been designed with beginners in mind. Anyone can get started on this today.

You’ll learn how to brew up a financial plan that’s custom-fit to your circumstances, and will be equipped with the tools you need to turn that plan into a reality.

The foundational principle of this course is that we should all learn how to manage our own finances. Hence the name — Moonshine Money: A Do-It-Yourself Guide to Personal Finance.

Your financial health is far too important to leave under the care of someone else, however expensive their suit. It’s been shown time and time again that most financial advisors don’t have our best interests at heart.

With this course under your belt, I guarantee that you’ll have the confidence and know-how to manage your own money and say goodbye to the never-ending stream of slick financial salespeople.

Lose the money stress, ditch your financial anxiety, and start working your way towards a healthy and wealthy life.

Hundreds of people have read through this course, leaving comments like the ones shown below. I hope you’ll feel the same way 🙂

“Thank you so, so much for this guide! I was pretty much clueless about money. Then, I binge-read this series and I’ve learned so much! Thinking about money and my financial future no longer gives me anxiety. I still have plenty of work to do, but now at least I know what the steps are!”

“Thank you SO MUCH for all your work! I went through the Moonshine Money steps until 2AM yesterday and it just seems that my life is so much more in order. Not that I was in a bad place before but the whole picture of my finances and goals is so much clearer thanks to your amazing spreadsheets (by far the best I have found on the Internet).”

“You have radically changed the way I manage my finances. I am now able to track my monthly income and expenses and manage a L.T. portfolio. I had good knowledge on the subject but I wasn’t focused on the long run… I really appreciated the quality of the content and your expertise!”

 

This Course Will Teach You How To:

 

How This Course Will Work

Content: Each lesson will include information and explanations that I’ve written myself, and will also include links to great pieces of content from other sites. This course will guide you step-by-step through everything you need to know about personal finance. You won’t need to spend hours and hours googling around to fill in knowledge gaps. You’ll go from zero to money management hero.

Assignments: To make it all stick, you’ll be responsible for completing practical tasks (reading your paycheck, tracking your spending, building a budget, opening an investment brokerage account, purchasing investments online). I’ll guide you through each step. This will provide you with hands-on experience managing your own money.

Tools: You’ll be provided with a variety of tools (spreadsheets, web apps, etc.) to organize your finances and automate the heavy number crunching. Learn how to use these tools now and they’ll serve you well for years to come.

 

This course spans 20+ lessons and more than 20,000 words. There will also be assignments for you to complete.

With that in mind, this isn’t a journey of one or two days.

I’d suggest taking the time to read through slowly, applying these lessons to your life as you go, and pausing & re-visiting when necessary. By taking it slow and letting it all sink in, you’ll be crafting positive long-term money habits.

 

Things This Course Will Not Do:

 

Let’s Get Started

Once you’re finished, you’ll have the knowledge and experience to reach your financial goals. No looking back.

A minor housekeeping item before we jump in: at the bottom of each lesson, you’ll find buttons to “Go to course agenda” or to move to the “Next lesson“. Use these buttons to navigate through the course as you progress.

See you on the flip side…

 

Moonshine Money: A Do-It-Yourself Guide to Personal Finance