Budget is for losers

Every personal finance guru suggest the best thing for your bank account is a budget, I think not. Let me explain why.

It takes, in my opinion, a lot of willpower and effort to adhere to the budget, it takes up mental real estate. Consult the budget each time something needs to buy, did we go over the budget for weekly grocery? Do we have budget for that nice jacket? Any money left in entertainment budget for us to go to the movies? Questions like these becomes constant nagging, perhaps drive you to less consumption or, I think, more likely to rocket you away from even pretending to care about the budget.

Build a habit of responsible spending instead of a budget. It will not be as easy to having a budget, but will result in a much healthier financial future, and reduce the stress and anxiety associated with strict budgets, and the best part is it can be done one step at a time.DSCF0198_1280

Knowing how much money coming in and fixed cost is important for what I am proposing, that is all the “budgeting” you will do.

What is responsible spending? It is a spending behaviour that will create the most amount of good for us and the people we care about in the long run. An extreme example would be spending money on illegal drugs would be very high on the detrimental scale while the same money spent on a MBA course would be very beneficial.

We can take a few steps to help us along.

First “Did I do my best to make sure this purchase is necessary?”, evaluate the necessity of an expenditure. For example paying electricity bill is high up on the necessary list. If you are not sure then it’s not essential. Once the bills, mortgages, maybe student loans has been paid most of our purchases are in the “want” category, and these bears a little bit more consideration.

Next “Did I do my best to make sure this is the best use of my money?”. This is a tough question because it is often hard to know what is the best decision. We make decisions based on the information we have, take time to research, explore as many options as we possibly could. We often spend time to find the best deal but rarely pause to figure out if this is what we should spend money on. For example buying a new TV, many hours spent reading about 4K, HDR, 120fps or curved. Little or no time thinking if the money would be better spent invested in retirement fund, save up for that vacation, or spent it on gas for road trips during the weekend, or perhaps the money could go to build a family library. You decide how best to use your money, sometimes we are so set in spending money a certain way we fail to see better alternatives. We have limited funds, explore all the options.

Then “Did I do my best to make sure this purchase will make a positive impact?”. That new car you’ve always wanted will surely make a positive impact in life right? Perhaps not, it will definitely increase monthly car payment, more expensive insurance, maybe more on gas, a huge cost in depreciation, not to mention jealous coworkers asking “You got a raise or something?”. What about that 4500 sqft house? Perhaps you can afford it but how much of a strain would that put on your finances? Other costs like home insurance, possible renovations, heating and cooling bills and property taxes could become unbearable in the long run. Think beyond just the purchase cost, many major expenditures come with many strings attached.

Lastly “Did I make the best decision for the long run?”. When we buy a house we consider all sorts of things, thinking about all decision in terms of longer time helps us avoid decisions that only generate short term or immediate gratification. Like buying a piece of clothing that will be worn once then stashed away never to see daylight again, not the best decision, but if we spend money on high quality clothing and with good care will last us many years and will make us feel great each time we wear it, it may end up saving us money by reducing future purchases. Being cheap usually doesn’t save money, it might end up costing more in the long run. Buy for what it is worth to you, not the number on the price tag.

Did I do my best to make sure the purchase is necessary? Did I do my best to make sure this is the best use of my money? Did I do my best to make sure this purchase will have a positive impact? Did I do my best to make the best decision for the long run? These questions are designed not only to help with spending habits but also to tell us a bit more about ourselves. If we don’t know ourselves how could we be expected to now how to best use our limited wealth.

These are just a few things I find useful and helpful in my life, try them out for yourself see if it helps you. Remember also we are not our own slaves and nothing good comes from forcing ourselves to do things we do not want. We strive for balance for spending habits just like everywhere else in life.

Nickle and Dime

I asked my coworker today, who makes decent wage, pays little mortgage and doesn’t have car payments how much money he’s saving he said almost none.

It’s not uncommon, despite making a good wage very few of us end up with a steadily increasing saving. Why is it so hard to save?DSC00213_1280

“I would rather make more money than save more money!”

You have probably thought about that many raises ago and yet still have not find the money to save despite making twice as much or more than when you started. It is hard to save because our spending keeps up with our earning.

The hardest part is keep spending low even while earning increases, that is the only way to save. Surely we need some material goods to reward ourselves for a job well done, that is no problem on it’s own but becomes one when we make a habit of it.

Eating out once in awhile is a fantastic way to spend time with family or friends, but eating out three or four days a week it comes a huge drain on the good old wallet. Each meal averages out to about $60, three times a week is $200 per week and $800 a month, $9600 a year, almost $10,000 a year just by eating out three times a week.

Entertain at home is such a great way to have a fantastic time with friends and family without breaking the bank. While it does take more time and effort, but for me it is better. Not only does it cost much less, in my experience we always have a better time because we are in complete control of the environment, no noisy customers, no music that is too loud for you to hear yourself talk, and no waiting for the waiters to ask “would you like another round?”

The other thing is pack lunches, it seems like a bit of a hassle, but if you ever make dinner just make some extra and you have a packed lunch. Or try meal prep, I personally don’t do it. My wife and I make food for lunch about twice week, once on Sunday and once on Wednesday. If you can pack lunch 4 days a week, that’s anywhere from $40 to $80 saved, that’s $2000 to $4000 a year.

I like to buy whatever is on sale at the grocery store and build my meals based on that. For some people it’s hard, I think you can buy whatever you want from the grocery store as long as there is no eating out, cutting out restaurant would save a lot more than saving a dollar or two at the grocery store. At my local supermarket they clear out the unsold prepared foods by the end of the day around 8pm, that is usually when I go to the supermarket, lucky me. Sometimes I find meals with rice, vegetable and chicken for $3, that is pretty hard to beat.

Buy second hand stuff. Not everything is good for buying second hand, don’t buy underwear, or toothbrushes second hand. However just about everything else you can buy second hand. I won’t mention cars for now because I think that is a huge topic all on it’s own.

Books are the best thing you can buy second hand, not only do you get a deal, you can feel good about recycling, and sometimes there might even be a nice note on the first page or a bookmark. Another thing I love to buy second hand is electronics such as cameras, monitors, TVs, or even lights. it won’t be the latest and greatest but the hefty discount is totally worth it. Home decor and furniture are great to buy from your local thrift store or craigslist/kijiji.

I’m not suggesting not to spend money, just a bit of attention and care before spending will result in a much more responsible buying behaviour, saving money and reduce financial woes.


Armed with these few tips you will sure to keep money in your bank account working for you and not working for someone else, you can also read about how to get your money working here: https://covertzebra.com/2018/02/17/116/

Have a written plan

Why bother writing this down, it’s not like we would forget about our financial assets.

From going through the process myself not only have I learned more about myself, what do I want with my future, about different funds and investment option, but the most important is how much more I have still to learn.

DSCF4681_1280The reason we need an IPS (Investment Policy Statement) is to have directions, thinkings and ideas on paper where it’s plain to see and easy to revisit and/or revise. When the ideas are just floating in our heads it’s impossible to scrutinize in detail because there is nothing solid. Once written down we can refer back to it when we need guidance and never have to run into any “I think that sounds about right.” or “I can’t recall but it might be part of the plan.”.

Directions and Targets

The first we should do is set up short term, medium term and long term directions, and set some realistic goals without which we would be lost.

I decided for me short term is 1-2 years, medium term is 5-8 years and long term is 10-15 years, this is entirely up to you, only you can decide the ranges that work best for you.

For my short term I want to buy another cheaper car, currently we have a lease (bad) that is coming to an end this year, it’s time to switch to a much more reliable and cheaper car. Medium term would be to have a kid or kids, maybe move, but that’s merely just a thought. The long term of course is to save enough money work becomes optional.

Financial Information

Once we know where we are going it’s time to decide what are we willing to do, by that I mean how much and how often are we going to contribute. I personally have decided to put aside $500 per pay towards investing, something you need to think about is of course the more you save, the more it grows the better it is for the nest but also it would limit your ability to have a disposable income. It is up to you to decide what is the number you are comfortable with. The idea is: invest early, and invest often.

Asset Allocation

Once we have decided where we are going and speed, we have to pick the vehicle that will help us get there and ones to avoid. It is also important to know the best investment you could make is to pay off high interest loans, such as credit cards, payday loans or any short term loans that have exceedingly high interests. Most investment “gurus” would tell us use low fee index funds and hold.

Also we have to decide what is our risk tolerance and what are we willing to be exposed to. With lower risk tolerance we would favor more bonds and money markets rather than equity. Exposure means are we looking for US market or global market? Do we want to invest in oil and gas, tech, manufacturing, consumer staples or financial services, there are many many areas to choose from, it is up to to us to decide what we are most comfortable with. I have chosen for myself a 100% equity portfolio including total market of US, Canada, europe and emerging markets, with an emphasis on US and Canada.

I picked 100% equity because I don’t have short term need for this money, I can afford to be a bit more risky. With total market funds I get diversity. Geographical diversity was considered as well, although Canada and the US is closely linked together, I might chose in the future markets that are not so closed linked.

Canadians it’s also important to consider RRSP, TFSA or taxable accounts. I have decided it is paramount to max out TFSA and then RRSP, you on the other hand might be in different situations and would adjust accordingly.

Review and Rebalance

For the average home gamer investor there is no need to pay attention to the market, make changes yearly or every six months, do not try to time the market or predict the market, many have tried, many have failed.

I have gone for a six month review and yearly rebalance regiment. It seems to make the most sense to me, reviewing every six month would give me a good idea of how my investments are doing and catch it fairly early if i made a bad call. Yearly rebalance would give me enough time to let the investments settle down a bit before i make any changes.

Final Thoughts

I am certain the document will be modified as I learn more.

We are all different, with different situations, it is up to us to add and subtract things as we see fit. The important thing is to have a written document with clear plan for our financial future so we have something solid to fall back on when the going gets tough. If the first iteration wasn’t as successful as we had hoped we can modify and change instead of starting again from nothing, keeping what works and throw away what didn’t.

This is the guide I followed (and general good resources): https://www.bogleheads.org/wiki/Investment_policy_statement

Savings are brewing

I’ve been making my own coffee for a few years now, because my coffee is better and I assumed it would be cheaper than buying.

I’ve never done the math of how much it cost for a home brewed cup of joe, under a dollar for sure thus saving me around a dollar each time without versus paying for slightly coffee flavoured hot water.

Not contempt with guessing, I did some numbers over the past few weeks to facilitate me with a better estimate of how much it cost to make my mor

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ning drink. I personally use 18% cream which increases the cost substantially, you, a more sensible person would just go with 10% saving a few cents too.

Consumables:

For each 1 litre carton of cream makes 17 coffees, at $4.59 each carton (no tax on those, yay!) it comes to $0.27 per coffee. 16 grams of coffee beans is used ( grind just before brewing, for best flavour of course). Each 454 gram bag of beans costs $9.99 plus tax which come to $11.29. For each 454 grams 28 coffees can be made gives us $0.40 in beans per coffee. According to this site: https://www.canstarblue.com.au/energy/electricity/boiling-kettle-costs-think/ because I am way too lazy to actually see how much energy my kettle sucks out of the wall and time it for to boil, I would take their number of $0.05 (round up) to boil my 1.7 litre of water.
Consumable cost: $0.27 + $0.40, + $0.05 = $0.72

Hardwares:

Great! Now we have the number of consumables for each coffee, we should also factor in the cost for the french press, coffee grinder and the thermos mug. For some reason I tend to destroy my french press about once a year, costing me a good $20. Coffee grinder, about $150 when I bought it 4 years ago. Thermos mug with paint chipping off but still good costs $15 from walmart. I make coffee just about everyday, 365 coffees a year, a french press costs about $0.05. The coffee grinder costs about $0.10 and my thermos I’ve had for 2 years now costs about $0.02 (these two costs gets lower the longer it gets used, I’m doing the calculation at current date).
Hardware cost: $0.05 + $0.10 + $0.02 = $0.17
All together: $0.72 + $0.17 = $0.89

Interesting number, a large coffee from tim hortons costs exactly $1.89 plus tax which means I am saving somewhere around $1.00 per coffee. This saving does not include: decreased misery due to not waiting in line for watery coffee, increased responsibilty due to no one else to blame and a sense of accomplishment first thing in the morning.

Growing money

DSC01785_1280We’ve heard it all too many times to count, “money don’t grow on trees”. It’s true, money certainly don’t grow on trees, there is somewhere money does grow: money.

I was reading an article about someone who amassed a million dollars before he was 30 not through some lottery or inheritance, or stroke of good fortune on the stock market. One of the key he said was to remember you make money to invest, not to spend. The idea is to “plant” that money so it can grow instead of spending the money. The money you spend becomes a leaf in the wind—lost forever, you don’t want that, you want to keep the leaf on the tree, and it will feed more nutrients to the tree, help grow the tree even bigger.

No tree ever start out with a full plume, they all grow from a tiny seed. Your tree also need sunlight that is investing. Only saving is like growing a tree in the dark, sure it will grow but slower than with the help of sunlight, but make sure you have emergency fund set aside, and NEVER invest money you are not willing to lose.

let’s say you invest $1000 a month (about $30 a day, not that much money) into a investment with 6% return, by the end of first year, starting from 0, you would end up with $12,326. Your money made $326 for you while you do nothing! Doing the same over 10 years your money would make you close to $42,500!

What have I done? I’ve put some money in my RRSP (for non-Canadians it’s a tax-deferred savings account designed to encourage Canadians to save up for retirement, basically, it reduced taxable income.) account with an investment firm. Currently it’s returning a 0.7% yield but I’ve only had it for about 2 weeks. How much? $6500.

“It takes too long!”

Sure it takes time, Rome wasn’t built in one day, I’m sure you have heard of that one too. Usually, at least with the people I talked to, it means “I’m worried about a decrease in quality of life.” perhaps the problem is living way above your means, that is unsustainable (of course if you got 2 kids, 2 elderlies and a single income it should be expected to have little left over, but I’m talking about the pretty well off, young professionals with no dependents). It would take a whole other article on how to keep lifestyle in check.

If you want to see how much money you could make with investing and saving, you try this calculator to see for yourself: http://www.calculator.net/investment-calculator.html

Save saving

Everyone knows one way to become rich is business, or special skills. Since I started reading the Mr money mustache blog I realized having a lot of money can be achieved another way, one we all can do without needing any special skills, luck, or starting capital, is saving.

Recently I had a talk with a co-worker, who is fairly young, a year my junior, about “getting rich”. He’s thinking about buying a condo in the near future, and was wondering about ways to get enough for a downpayment. The obvious thing, to me anyway, would be to save up, it is what I did to purchase my first home. However it’s not something my colleague has even considered, he said something along the lines of “sure I can save, but I’m talking about making a shitload of money fast”.

I was always brought up not spending every cent I made and try to save as much as possible. Spending all of my income seems like building a financial prison for myself, living paycheque to paycheque despite having the ability not to. I’ve always budgeted my life to use about 50% to 70% of what I make, build an emergency fund, save to purchase a home and for retirement.

A bit surprised by my co-worker’s reluctance to save I asked him why was saving not something he feel like would be the best way to reach his goals. “It takes too long, I want to make a lot of money right now”. Short of winning the lottery and some “spend a while in jail” type of things not many paths lead to “make a lot of money right now”.

It got me thinking, how slow is saving? I know saving isn’t fast, but over time it builds up, like a snowball, the more it builds up the fast it builds. Also maybe he wasn’t thinking about investing the saved up money instead of just letting the money sit and gather 0.2% interest from the bank.

Assuming a modest deposit of $500 a month with initial money of $1,000, easily doable on a middle class income, and assuming a modest investment return of 6% a year, in 5 years, our saving would have gone from $1,000 to around $37,000 dollars. A sizable amount but we can do better. Instead of saving $500 per month let’s do $250 bi-weekly, all of the sudden, everything being the same you’d end up with around $40,000 by the end of the same 5 years. Decent change for almost no perceivable difference to us. We can do even better, increase $250 bi-weekly to $500 would result in almost $80,000 dollars, now we are talking. This a very very simplistic representation to investing savings, a increase of 4% on the return would net you another $10,000 dollars. All of these things add up.

I started saving up soon as I started making money, thanks to my upbringing and a constant nagging from my parents “don’t spend everything you got!”. After building up a decent emergency fund (around $5,000) I give the rest of my money to my parents to help them pay down their mortgage and in turn they would give me the interest they would have paid to the bank ( about 2.25%, much better than savings accounts). I would also buy RRSP to reduce my income and get some money back from the government. After working away from home for two years,I moved back home, paying $600 a month in rent and very little other than that since I ate at home and took the bus to work. 3 years of doing that I saved up around $70,000 to $80,000 dollars (if I had invested my savings according to the above paragraph i’d end up something close to $136,000(10%) or $120,000(6%)), with that and some help from my parents I purchased my first home. After living in the home for about a year and half I got married and purchased another home with my wife, renting out my old home.

This brings me to where i am currently, with almost all the big expenses behind me i have decided to get serious about investing and enriching my future. I think i did well financially with my life, not the best i could have done but i’m happy with what i was able to achieve, now that i’ve gotten more serious about what i want and learning much about investing i hope to snowball what i have.

A few things helpful to me in saving is ALWAYS pay your credit or any debt that is not a house as soon as possible. Credit card debts will bankrupt you, 20% a year is not something you want to ignore, if our investment grew at that rate, $500 bi-weekly would become $125,000 in 5 years. Your interest could easily have gone that high as well.

Assume what you make is the money left over after you saved, don’t even think about spending the part designated for saving. Say $1,000 per month is what you want to save, and you make $3,500 a month, then $2,500 is what you have to budget everything for. It’s not an option or “if I go over I still have some”, don’t even think about it. Make a habit out of it. First thing you do when you get paid is put the money in a saving account or investment account, do not touch it. It’s a very addictive thing once you start seeing the number grow.

Another thing is simply for every dollar spent, save a dollar. You want that nice camera? Sure, you can buy it, as long as same amount go to saving/investing. All of a sudden a lot more thought is required to buy something, that $1,500 camera just became a $3,000 one.

I base my grocery shopping on what is on sale. From what I gather it would be at least $150 to $250 reduction on your grocery bill. Not only do you save money from this, it’s a great habit building exercise, it gets you in the mindset of thinking how you can optimize your money, it could take some work in the beginning but it’s hugely beneficial to build a more financially responsible thinking. I am however in the process of trying to buy less but “better” hoping to reduce the amount of food I eat but keep cost the same.

I hope to also use this blog to document my journey and collect my thoughts, ideas and knowledge about achieving financial snowball.

Cheap Thrill

“Cheap thrill” is such a bad name for something so sinister, maybe it should really be called something-that-won’t-last-so-i-can-keep-buying-and-feel-happy-for-a-fleeting-moment.

I’m not saying you shouldn’t buy things, but consider instead of constantly buying cheap things you may only use once or twice then be discarded or stashed away never to see the light of day again, take a serious look at your needs and buy something that fits your need and will be as useful to you in 15 years as it would today.

To me, cheap thrill is a terrible slop to slide on, it’s not just about buying things you don’t actually need, it’s about buying things you don’t need and won’t last and probably won’t have much of a purpose beyond a few minutes of “well that’s interesting”, and making a habit out of it.

“Is it such a bad thing? I mean it is only 20 dollars!”

Perhaps if you got more money than you know what to do with. That’s not the case for most of us regular folks who work for a living. Have you ever wonder after checking out at costco what could possibly have costed you 200 dollars? All you got some some chocolate bars, a roast chicken and some frozen food. Upon closer inspection of the receipt you have came to realized all it took was a few double digit items and probably nothing too far north of 25 dollars for a single item.

How quickly it adds up! Imagine each one of those is one of the “cheap thrills”. 20 dollars here, 50 dollars there, by the end of the month it could be 300 or more dollars. The money also isn’t the worst problem here, it’s reinforcing a habit. You’ve already spent 50 bucks on some stuff, might as well throw in a few more things. Few days later, thinking another 20 or 30 dollars wouldn’t hurt much because you’ve already went over the budget for this week/month anyway.

If it’s so bad what could be done about it? I can’t tell you what you should do but here are a few things I did to help me.

Let the idea of purchase sit for a while, at least a couple of hours, leave your computer or store, go for a walk or eat something. It gives you time to reflect and think, usually I end up realizing I have no use for it, and the dire need to buy subsides. Personally I do this all the time with watches, I enjoy looking at the watches around 100 to 250 dollar range (cheap enough to make my brain go “let’s buy it now!”), but I have virtually no use for any of them other than when I attend weddings or something fancy, but those occasions doesn’t happen often enough to justify the purchase of such items.

I also try to research similar items that are much more expensive (not overly so, but just something you’d expect from a higher quality product, watches I tend to go around one to three thousand dollar range) than the cheap thrill but would be of much higher quality and would last me forever, or at least many years to come. Usually so doing would result in a huge decline in willingness to purchase the cheap thrill, either realizing perhaps it’s not what I wanted or now I want to buy the more expensive thing, not the ideal outcome, but usually the price is enough to stop me.

Another thing is I would send the cheap thrill to a friend who is knowledgeable, if I lack a friend with the required expertise I would run it by my wife or any friend. The maven friend would usually recommend something else and overload you with information, at which point it becomes too much trouble so the purchase is off. The normal friends and my wife would usually say “sure, but do you really need it?” most of the time if I answered yes I’d be lying, that would normally stop me.

After a while of doing this it has become easier and easier not to buy something, it literally requires less things to be done, and less things to do in life makes for a better life. Next time the credit card bill comes you’d be delighted at how small the number is.