As a Canadian investor, how to buy US dollars the right way

2018-05-22 - US investing as a Canadian

If you started looking around for the right place to invest your money, you probably noticed that the Canadian market is far from being the best egg nest. According to Morningstar, the Canadian benchmark index (TSX Composite), we are ranking ourselves at the 25th position when competing for the best 5 year returns from 2013 to 2018 with a disappointing 5.08% return.

If you had to guess from any country, which one do you think has the best returns? Yup, you guessed it, the US! You could pick any of the 5 main indexes available and you would still beat the Canadian market with 5 years returns ranging from 11.79% up to a whopping 16.12% return on your money.

I know what you are thinking: “Awesome, I’ll go ahead and move my money to a US index and make so much money!”. Well hold on, I have a pro tip for you that will save you from doing a costly mistake.

Where’s the caveat?

If you are getting payed in USD, you’re fine. Go ahead and start investing to make millions. This post doesn’t concern you. If you are like me and getting payed in pretty Canadian loonies, you’ll want to pay close attention to the following info I got for you.

If you want to exchange Canadian dollars to US dollars, we all know about the exchange rate. As of writing this, 1 USD = 1.28 CAD. This rate changes everyday based on tons of everyday events. Most people are familiar with this concept, although, if you try to exchange let’s say 5000$ CAD to USD via most banks or brokers, in theory, you should end up with about $3899 USD – around 1.5% to 2% of something called “exchange fees”. Those fees can add up quickly, and they apply both ways: CAD to USD, then USD to CAD. That means you would pay about 200$ in fees for a roundtrip of exchanges. Overtime, these fees can become annoying, reducing even more your buying power when investing to the US.

What can we do about it? I’m glad you asked.

Norbert’s Gambit

Norbert Schlenker, a smart guy created a strategy that became popular in 2001 to exchange Canadian dollars for a very cheap flat fee, therefore helping to exchange larger transactions without having to give up on a percentage of the amount. This strategy got commonly known as Norbert’s Gambit.

The concept is simple. He created two ETFs. The first one is DLR.TO, exchanged in Canadian dollars and the second one is DLR.U.TO, exchanged in US dollars. Their value movements reflect the exchange rate between the USD and CAD. When you want to exchange your money, using a brokerage account, you would buy the amount needed of DLR.TO in CAD, then you would ask the brokerage company to do a journal process, which is typically free. In this process you would request them to journal your purchased DLR.TO into DLR.U.TO. This will take a couple of days to be processed. Then you would sell all your DLR.U.TO shares, which will be sold in USD. The only fees you will encounter will be the standard buying and selling transaction fees of your brokerage account. Certain types of online brokerage account services even offer free ETF purchases. In which case, you would only have to pay the selling transaction fees. To exchange USD back to CAD, you would simply do the same process, but in the opposite direction, buying DLR.U.TO, journaling them to DLR.TO, then selling them in CAD. A roundtrip for this would cost around 10$ instead of 200$ for an exchange of 5000$ CAD to USD, then back to CAD.

There is a very useful website I found that helps calculate the exact steps you will need to do in order to exchange between CAD and USD using the Norbert’s Gambit strategy:

https://norbertsgambit.com/

 

Index returns source:

http://news.morningstar.com/index/indexreturn.html

 

Why would a market correction or crash be great for me?

2018-02-10 - Market crash is good for me

Since last week, we saw the S&P 500 drop by 7.5% from top to bottom. This caused a lot of panics from what I saw in the news. Weirdly, I am in the few that was pleasantly surprised. Let me explain why.

Part of my investing strategy relies on two golden rules that do all the magic:

Rule 1:  Always invest for the long-term

This is one of the fundamentals of investing. When I say long-term, I mean 20-30 years from now. Simply by knowing that, I expect the market to correct itself or crash a couple of times during my life. I never know when it could happen, and we have no control over that. That is why you got to prepare intelligently by diversifying to avoid losing it all. I know it is easy to start panicking when you see your hard-earned money invested and going down, but remember, you won’t lose anything if you don’t sell. Simply keep it cool, ride the market wave and relax, you will thank yourself for not having sold everything at the bottom when it bounced back as it did for every single major crash in our history. I know this doesn’t explain why the correction from last week is great for me. Let me show you the rule number 2 and you will understand.

Rule 2: Pay yourself first

This is the core of my investing strategy. It involves a lot of discipline to apply properly, but it will be all worth it later. Paying yourself first is basically to commit yourself to invest the same percentage of your income at the same interval of time. That percentage is taken from your income before anything else, even taxes. Just think of it as a tax you force yourself to pay for the future, and you pay it to no-one else than you. Remember that it is a percentage of your income. This means, if your income goes up, you put up more towards investing. By doing this over a long period of time, I will benefit from the magic of compounding (the secret sauce of investing). It is also important to note that you should decide the percentage as it would be money you could afford to live without for a long time. Don’t invest money you need to live.

Conclusion

In my case, I am doing this every month as part of my strategy. No matter the state of the market. By using this strategy over the long-term, whenever the market goes down, I can buy more assets at a cheaper price every month that I invest. The sooner it crashes, the more the compounding will pay because the re-invested interests/dividends will be able to buy more assets.

No matter where the market is going, it’s a win-win scenario for my strategy. If it goes down, it means I can buy for cheap, if it goes up, I can rebalance my portfolio to secure the gains that the market offers me before the next correction or crash, or as I call it, the wall street Black Friday.

If you want to know more about how rebalancing works, check out my other post, I’ve explained how the mechanics work:

Ray Dalio’s All-Weather portfolio’s secret

 

Stay cool, relax and enjoy!

How do stocks work?

2018-01-17 How do stocks work

When investing in the stock market, if you decide to buy stocks from a company, there are multiple key statistics and concepts you should know beforehand. You should always understand them before throwing any money to the company, otherwise I wouldn’t call that investing, but speculating or gambling.

I’ve prepared a list of some really important ones you should always look into. Knowing them should give you a rough idea if the company is worth digging more before investing or if you should run away from it.

Lets start by the first obvious thing you should know, then we’ll go deeper on how to read those numbers.

What is a stock?

The stock of a company represents the ownership of its entity. The ownership can be divided into shares to allow multiple entities to own a part of the company.

When a company decides to go public to raise capital through the stock market, anyone can buy shares of the company up to a certain limit available on the stock market. Each share sold are the result of a transaction. Someone offered to buy X amount of shares and another person agreed to sell the X shares he owned, resulting in a successful transaction.

Buying a stock isn’t really hard. The difficulty is to valuate that stock.

What price should I pay for a share?

The price of a share moves up and down constantly. So many things can affect the value of a stock. This is why it important to understand the fundamentals of a stock to be able to know if a stock is overvalued or undervalued.

Here are the key statistics I lookup to know if a company is on track or if it is going downhill:

Stock price

This one is pretty obvious, but you can check for growth trend of the stock price over the past years. That is probably the first thing I look for when searching. It can give me a rough idea of where the company has been and where it is heading at a quick glance.

Volatility

Has stock price been doing a lot of roller coaster? If the price moves by a lot, you should try to find out why. This could indicate that there is an issue with this company.

 

There is a measure called beta used to calculate volatility of a stock compared to the market.

A beta of 1 means the stock has the same movement as the market. A beta of 1.5 means it would move 50% more, and with a beta of 0.5, the stock would move 50% less than the market. The greater the beta, the greater risk/rewards.

Market cap

This number shows the public value of the company, how it is worth.

Dividend yield

A dividend is the redistribution of profits made from the company to the shareholders. It’s up to the company to decide if they want to pay dividend, how much and how frequent. Most stocks pay a quarterly dividends, meaning every 3 months. Some other pays monthly dividends.

The dividend yield is the percentage yearly dividend redistributed for the stock price at the time of purchase.

For instance, if you buy a 100$ stock that pays 5$ of dividends per year, the dividend yield is 5%. If the next year, the company decides to boost the yearly dividends to 5.50$, the dividend yield has grown to 5.5% for the share you bought previously. Companies can decide to increase, but they can also cut down dividends.

Dividend stability and history

If you want to focus on dividend investment from a company. You should look at the dividend stability and history.

Here are some questions I ask myself:

  • How many years, has the company been paying dividends?
  • How frequent do they pay dividends?
  • Did the company ever cut down dividends?
  • What is the average dividend growth?

Here is a pro-tip I have for you:

For dividend focused companies, there are lists of companies grouped by their dividend track record. You can lookup for companies part of these categories. Companies in these lists have increased their dividends every year consecutively without ever skipping one:

 

Dividend Challengers

5 to 9 years consecutively

Dividend Contenders

10 to 24 years consecutively

Dividend Champions

> 24 years consecutively

Dividend Aristocrats

> 25 years consecutively

 

This does not guarantee that they will keep increasing, but if they skip 1 year, the need to start over to be part of the list.

To give you an example, Coca-Cola (KO) has increased their dividends for more than 50 years now. I have a good feeling that they would want to change that streak now.

A good website I found to lookup the dividend history is this one: https://dividata.com/

Ex-Dividend Date

This is the date where the company records the share counts of each shareholders to prepare themselves for the dividend payment. You could technically own the shares to get recorded for the dividends and sell your shares the next day. You would still receive your dividends pay-out later. We often see a stock price hike around those dates because many investors lookup for stocks by ex-dividend dates so they can do a quick dividend grab and go.

DRIP Eligible

DRIP stands for “dividend re-investment plan”. Some companies offers this. If you agree to this and the company allows it, when you receive dividends from the company, they would be reinvested in the company, with a preferred price most of the time. This is really cool because some investing platforms charges you fees every time you buy or sell stocks. The DRIP eliminates this fee because it is done automatically.

Pay-out Ratio

This number is the percentage of profits redistributed in dividends to the shareholders. It can help us get an idea if the company is paying too much in dividends, eating up all of their profits. When I see this number close to 100% (even more than 100% sometimes), it tells me that the dividends they pay is not sustainable. Unless they find a way to make more profits, there is a high probability that the company will cut their dividends in the future.

Revenue

The income of a company from any income source. (sales, investments, interests, royalties…)

Net Income

This is the revenue – the expenses and taxes. This helps us know if the company handles well the income/expenses to operate.

EPS

EPS stands for “Earnings per share”. This number represents how much money does a company make per share of common stock.

This is how we calculate the EPS:

EPS = (profit – preferred dividends) / weighted average common shares

P/E ratio

This stands for “Price-Earning ratio”. It is an algorithm to help us determine if the share price is over or under valued.

Here is how we calculate it:

Market price of a share / earning per share = P/E ratio

In other words, this is the price you pay for a share compared to the annual profit earnings of the company. The lower the better.

Example:

If you buy a share 10$ and it earns 1$ to the company, you are paying 10 times the annual earnings for that share.

If the P/E ratio of company A is 15 and company B is 20, then the first one is cheaper in terms of what you’re paying relative to what it earns.

Here are the stats for S&P 500. The average 5 years from 2013-2017 is 20.194

Year

P/E Ratio

2017

23.59

2016

22.18

2015

20.02

2014

18.15

2013

17.03

Return on equity (ROE)

This is to determine how efficient the company is with our money. What profit did the company do only using the money from investors.

Profit / Equity = ROE

Here are the stats for S&P 500. The average 5 years from 2013-2017 is 14.06%

Year

Year ROE

Q3

Q2

Q1

2017

24.89%

11.23%

11.67%

11.10%

2016

10.97%

9.42%

4.63%

5.29%

2015

6.46%

9.68%

10.43%

11.08%

2014

13.24%

14.51%

14.45%

14.48%

2013

14.72%

14.10%

13.70%

13.46%

Conclusion

There are a lot more than this, but if you take time to understand these one, you should get a rough idea of how the company is doing. If the numbers shows great values, it does not mean you should automatically invest in the company. You have to understand what the company has to offer as well and use judgement to find out if this investment make sense for the long term.

Those statistics help me filter companies that shows a lot of red flags. Also keep in mind, those values change all the time, if a company is worth investing now, it doesn’t mean it will offer the same deal in the future.

 

Another pro-tip I will give you:

I often compare those values to the S&P 500 index and ask myself, would these numbers beat the market? If not, you should simply invest in the whole market and get the average results instead of taking a risk by putting more money in the same basket.

What is dollar-cost averaging?

2018-01-14 - What is dollar cost averaging

Investing can seem too complex or impossible for the average investor. People think it is too risky. They are afraid to make mistakes and lose money.

Well, I  can tell you that those beliefs are simply not true. If you have the willingness to learn and you put the efforts to do so and understand, those efforts will pay off. You’ve already taken a big step simply by being here and reading this.

I’ll share with you a simple tip that I’ve learned that can reduce the stress of making mistakes and help you grow your wealth securely in the world of investing.

In today’s digital world, we got used to getting what we want in a matter of minutes. You want to know the temperature outside? Just ask Google. You don’t know what a word means? Just ask Google. You want to get the directions to get somewhere? You know what to do.

We have been trained for many years to chase our goal through the fast lane. This habit can be very expensive when applied in the world of finance.

An example of error many people do is trying to time the market. This can result in a lot of pain and cost people to tumble back to the starting point.

 

With the stock market going up and down all the time, when we want to invest in it, our brain is wired to chase the best result possible. What would be the first idea we would think of? Most people would say, wait for the market to drop significantly and buy when it’s cheap. This seems logical, who wouldn’t want to buy low and sell high?

This technique has a name, it is called lump sum investing. Which consists of waiting for the right opportunity to put a lot of money at once. Looks like a good idea? If you are the luckiest person in the world, maybe, but I’ll save you some trouble and give you the answer: if you want to grow your money on the long-term, that is not the way you’ll want to do it.

What is the best technique for long-term investing?

You’ve probably guessed it by the title of this post. If you want to grow your wealth over time by reducing the risk of losing money in the market’s ups and downs, you should invest using a technique called dollar-cost averaging.

Instead of waiting for the right moment to put a big sum of money, you would invest the same amount of money at the same interval of time, every weeks or month by example. By doing this, you reduce the impact of the market’s volatility on your money. In simple words, sometimes at the time you buy an asset, the price will be high, sometimes it will be low. In doing so, you will benefit from the average of the highs and lows of the market. We can never predict when the market is at its lowest, so just keep it simple. Buy the same amount at the same interval, simply by being “in” the market and not waiting for a good deal, your money works hard to make you more money.

There is an important thing to keep in mind here. If you already have an amount that you are ready to invest, Vanguard made a study comparing the lump sum investing vs dollar-cost averaging available here:

https://personal.vanguard.com/pdf/s315.pdf

In that scenario, two times out of three, you will get better results by investing it in a one-shot deal over using dollar-cost averaging on the same period.

This is not the same as for long-term investing using dollar-cost averaging. The key difference between what I am talking about and the study made by Vanguard, is that you start out without money to invest. Over a longer period, if you want to invest $1,200 a year you will get better results by using dollar-cost averaging and investing $100 every month than waiting to have bigger chunks of money and trying to time the market for the lows.

I’ve been doing that personally and I got to say, it is pretty cool not having to stress before every investment I make. I know sometimes, the market will go up, sometimes it will go down. I am expecting that. I enjoy a lot more being able to have a good cup of wine without having to worry if I had a bad timing with my previous investing decision.

 

I hope you’ve learned something you can apply to your life and enjoy.

What is a dividend withholding tax?

2018-01-11 - What is a dividend withholding tax

One of the core rules of investing is to diversify as much as we can. Never put all of your eggs in the same basket. Most people know that.

There is something I learned that not many knows. If you are not careful, you may pay a price you can avoid.

A key recommendation for diversification is to buy assets from different investment class, industries, and even countries to try to protect your wealth. When buying an asset that pays dividends or interests from outside of your resident country, you may be subject to something we call withholding tax.

In the case of dividends between Canada and the US, as a Canadian, if I buy a stock that pays dividends from the United-States, they will keep a 15% withholding tax from it because the money is exiting the country. This is not just for the US, every country has their own different rules. The same thing is applied to Americans buying dividend-paying stocks from Canada.

What can we do about it?

That is a good question, with a bit of knowledge, there is something we can do to help ourselves. The United States and Canada signed an agreement called the income tax treaty, which you can find here: https://www.irs.gov/pub/irs-trty/canada.pdf

The benefit of this treaty for us, the investors, is that the 15% withholding tax on dividends and interests is not applied when the assets are held in a registered retirement saving plan account (RSP). This means we must be careful where to hold specific types of assets. If you have a TFSA and an RSP account, and you have the choice to hold two stocks, a growth-focused stock, and a dividend-paying stock, by holding the dividend-paying stocks in your RSP you would avoid the withholding tax on those dividends. You can then hold your growth stock allocation in your TFSA and not worry about taxes on this asset.

I would encourage you to look into your taxes with a tax expert, every personal finance situations are different. Taxation may be very complex depending on our situations.

 

I hope this post helped you understand a bit more on the subject, potentially helping you to avoid paying withholding taxes when you can. 🙂

Enjoy!

Ray Dalio’s All-Weather portfolio’s secret

If you have read Tonny Robbins’ book, MONEY Master the Game, you probably have learned one of the core principles of building wealth, which is to NOT lose money. Most people tend to forget about that rule by chasing high returns instead, which can be disastrous if a market crash would occur without preparation.

In his book, Tony dedicates a whole chapter explaining Ray Dalio’s strategy to do apply this core rule by teaching us about the All-Weather Portfolio. This brilliant portfolio prefers protecting us from losing money by using specific risk allocation per asset type.

Having the exact asset allocation given by Ray is great, but there is a secret key element that you must use: Portfolio rebalancing.

 

I’ve decided to dig in the mechanic using real numbers that happened in the worst market crash in history: The 2008-2009 market crash, where the S&P 500 crashed by ~53% from peek to bottom. We are talking worst case scenario here.

I’ve created a spreadsheet with an investment of $100,000 before the crash. By looking at historical data, I have extracted the peak, bottom and recovery date of the S&P 500 to test out the rebalancing mechanic. I got to say, it is impressive.

  • Peak date, where the stock price was at it’s top: October 12, 2007
  • Bottom date, where the stock price was at it’s lowest: February 27, 2009
  • Recovery date, where the stock price got back to the previous peak before crash: March 28, 2013

In this scenario, I’ve applied a portfolio rebalance at the optimal moments, so at the bottom of the crash, then after recovery, which won’t happen exactly like that in real life, since during a crash, we can’t know when we hit the bottom exactly. The more often we rebalance, the better. In the book, Tonny recommends at least once a year.

Important to note here, I’ve used some ultra low-cost vanguard index funds to match the asset allocation suggestions in the book. You can change these funds with any other funds you prefer, as long as they are stocks, long term bonds, intermediate bonds, commodities/gold.

I did this to keep the logic simple for better understanding of the mechanic.

Here are the steps results:

1 – Here we have the initial $100,000 investment using the suggested asset allocation.
2 – After the crash, our portfolio dropped from $100,000 to $74,787.82. All assets have been affected differently. This is where most people do the worst possible error. They get scared and sell stocks to try to keep the remaining. Since stocks are more volatile than bonds, our stock portion is now only 19% of our portfolio. For a smart investor, this is where the magic happens, we need to rebalance the portfolio.
3 – We sold a big chunk of our bonds to buy back stocks and commodities at a discount price, so we get back to our recommended allocations.
4 – The storm is over, the market has recovered, as it always did historically after a crash. Our stock portion is now worth too much! We got to rebalance again to get ready for the next financial winter.
5 – After our final rebalance, here are the numbers. Our portfolio is up and ready for the next storm to come. In this scenario, we started with a $100,000 investment, without putting any new money in there, we went up to $124,463.65, a 19.66% gain, where as most average investor lost almost everything because they either sold the wrong asset at the wrong time or they were too stock heavy and had no liquidity ready for a quick discount swap.

Conclusion

Rebalancing is the key here. Keep in mind, we did not put any new money in the portfolio during that time, just imagine if you kept using the discipline to keep investing every month, with the stock discount, the portfolio could be worth double or even triple that in some cases. Also, one more thing, THIS USE CASE DOES NOT EVEN INCLUDE DIVIDENDS, which you can take as a bonus!

 

I hope this crash cycle study helped you or someone you know to avoid the painful feeling of getting caught unprepared when a crash comes.

Just remember the golden rules I learned from Warren Buffet:

Rule #1: Don’t lose money

Rule #2: Don’t forget Rule #1

 

Here is the Excel file if you want to play around with it.

Crash cycle rebalancing

Enjoy.

CES 2018 Intel comeback?

Messy cables

One of my favorite tech event of the year is the consumer electronic show. Every year, many companies show us the hard work their team did over the past years.

I gotta say, Intel really surprised me this year. Especially after the recent event of CPU Meltdown and Specter mess. The Verge made a great recap of their event in 15 minutes that you can see here:

One thing that always has impressed me with Intel is that they put so much efforts into research and development. As a developer, I know how hard it can be sometimes. I was expecting a few key points this year, mostly around VR, but they went a lot further than I thought they would.

Here are a few creative highlights they showed us:

The voxel from intel true VR

What is a voxel? It is essentially the data representing a pixel in 3D. This data can be used to be visualized from any point of view after being recorded.

With their new camera technology, they capture data from all angles possible at once, than we can replay the captured scene from any point of view we want.

Neuromorphic computing

They have designed a new chip called loihi, that mimics as much as possible the way our brain learn. From what they mention in the video, from a single week of training, it can already recognize simple objects in the lab.

Quantum computing

Intel showed us a new fully functional 49 qubit quantum chip. They brought on stage a self-driving car driven by the chip. You’ll probably say, “so what, Intel just made another chip”. That is not how I see it. There are not many large consumer chip maker in this world. If Intel feels confident enough to reveal this piece of tech, it means we are closer than we think to real quantum computing, which is a great thing. Mixing that new hardware with Microsoft’s recent announcement of Q# quantum computing language, the software development will be a lot smoother than running on heavy emulation from a 64 bit processor. All of that will accelerate the development process.

The volocopter

That one, I gotta say, I was not expecting at all! A self-flying-copter designed to be easy to fly and affordable for consumer to be taxied in cities. That’s just awesome. You know what is more awesome than that? They flew it live, on stage, with no one inside! Of course we always have to take what we see at CES with a grain of salt. Most of what we usually see are prototypes, but… THEY FLEW IT ON STAGE!

 

Thanks for stepping by, I hope you enjoyed me sharing this content. 🙂

Amazon Kindle vs anything else

Amazon Kindle vs anything else - 1

As a developer, I love tech probably as much as I love learning new stuff. One way of learning that I use a lot is to read.

Weather I learn by reading online or simply by reading a good old book. There are just some situations where the good old book wins.

I recently decided to make the jump from traditional paper books to its more modern little brother: the e-reader. I spent some time trying to decide which one I would get. I found multiple reviews comparing mainly some of the amazon kindle products to other popular e-readers. After a few researches, most of what was suggested was the Kindle Paperwhite vs the Kobo Aura One. They are both great products with their pros and cons.

I ended up picking up the Kindle Paperwhite instead of the Kobo for a few reasons and here they are:

1.    Commitment

Whenever I decide to buy a piece of tech, I try to look at how long am I going to keep it before it becomes obsolete. As we all know, Amazon is one big of a beast in our world. From a 2011 article, the Kindle ecosystem generates about 10% of the company’s revenue. This information tells me that Amazon must care about this division of the company and not handle it lightly, allowing better future support, efforts and content from the company to us, the consumers.

2.    Content

The amazon kindle store is the biggest e-book store in the world, with over 5.7 million e-books available and growing every year. That alone could be the reason for me to choose a kindle device.

3.    Hardware

I had a few points in my checklist before considering any device. The hardware needed to be minimalist, non-distracting, lightweight and portable. The kindle paperwhite checked all of those and even more. I found out that I use the integrated backlight 75% of the time, when reading at night or on the plane where I don’t want to bother others with other source of light. The weight and size were important to me as well. They were the reasons why I wanted to switch from paper books to e-books in the first place. With the small 6-inch small form factor and slim design, I can throw it in my laptop bag and not even feel it. You can simply carry that one device and have a thousand books with you at all time.

Amazon-Kindle-vs-anything-else-2

This is especially useful when going to vacation somewhere around the world. You do not want to carry 3-4 huge 700 pages bricks with you taking half of the space in your luggage and costing you 50$ in extra weight at the airport.

The battery is also excellent. Depending on the WIFI usage and light level, you can easily reach 1 month of battery without charging it. I keep it on airplane mode and around 50% backlit level most of the time.

4.    Price

This is where Amazon convinced me. From my experience with the device, I found out that I always have something on my list to read next. Simply because there are sooo many kindle store sales. I get at least one to two sales notifications on my phone where I can lookup if it contains any of the books I want to read. The discount can range from 50% to 80%. I think this is the reason why Amazon is the big winner here. Simply because it can.

 

Links:
Kindle Paperwhite, 6″ High-Resolution Display (300 ppi) with Built-in Light, Wi-Fi

Amazon Kindle Paperwhite Leather Cover, Onyx Black

Don’t upgrade your lifestyle… yet.

Don't upgrade your lifestyle yet

If you read my previous post about the rule of thumb to become wealthy, you probably know the simple pattern to follow to avoid getting stuck in the expense and liability trap.

Here is another obvious tip I wanted to share that most people seem to completely ignore. I see that human behavior all the time:

The most common mistake we do:

It is the end of the year and time to file our income taxes for the year. John realizes he didn’t put any money in his registered account throughout the whole year because his money was busy handling the tons of bills coming in every month. He decides to get a loan to have some money to put into his RSP or 401k to get an income tax deduction. He then has a brand new shiny loan to repay throughout the next year. Things get even worse from here.  John gets up one morning and open the mailbox or bank account and sees that big fat stack of cash sent to him as a tax return from the government because he has put that loan into his registered account. Then he starts thinking about that new iPhone or laptop he could buy with that money! John decides: Man I’ve worked so hard this year, I deserve this!

 

When reading this, we all know what’s gonna happen the next year. The same scenario happens whenever we get a bonus, a raise or any unexpected income. Just think for a second, do you know anyone who is doing this every year?

What’s wrong with this scenario, can you guess it?

There is actually two major problem with this. First, is our mentality to upgrade our lifestyle as soon as we see the income coming in. We have to think long-term on this. Don’t get me wrong, in some cases, it is totally ok to upgrade your lifestyle, I would even recommend it, but you got to always make sure that you keep your wealth balanced (income/expenses/assets/liabilities).

What’s the second major problem with this scenario? Did you guess it?

John missed an opportunity. He waited a whole year before putting money aside. This costs him a year of interests he could have made if he had invested a small chunk every week or month throughout the year. He could have made hundreds or thousands of dollars.

When reading that, it seems so obvious, but even I went through these situations. Educating ourselves is our best bet to avoid this kind of trap.

I’ve put up a great guideline for you to study if you want to learn more about ways to manage your personal finance:

The ultimate personal finance learning guide