10 Things I’ve Learned About Personal Finances in 10 Years

1) Winning the game isn’t about willpower.  It’s hard as hell saving more out of brute force.  Cutting down on going out with your friends, not ordering dessert or appetizers, making sure you don’t go over on your data plan, all this is taxing as hell, decisions that you have to make multiple times a day while society is jabbing at you to buy more while you are trying to spend less, you’re set up to fail.  No amount of willpower can win the forces of social pressures and subliminal advertising.  You wage a battle on it, you’re screwed.

Instead, set up systems so that the money is automatically saved.  Set up a tangerine account (in fact, if you really want to, let me know, so I can send you a code and we can both make $50).  Set it up so that you’re automatically putting money away.  You will then start adjusting your lifestyle to fit in the budget that you do keep automatically.  You might screw yourself in the first month, but you’ll learn to adjust.

2) Don’t spend more than you make.  If you do, that by definition makes you in debt.  Or you’re dipping into savings (which unless it’s an investment, whether soft or hard, don’t do it).  If you make $2000/mo, and spend $2100/mo, that means you’re in $1200 in debt.   That seems like a pretty stupid place to be in, and with that mentality, you’re likely always going to be in debt unless you change.

3) Pay yourself first.  Related setting up a system, make sure money goes to savings/investments before you spend it.  Force yourself to live within your means.  You’ll find ways of cutting out expenses.  It’s a lot easier to cut down when you have to, versus when you want to.

4) Focus on big wins.  Don’t try and cut down on food here or there, coffee here or there, the cheaper toothpaste.  Those are decisions you make everyday, multiple times a day.  You’ll get decision fatigue.  Instead, call your internet provider and ask them for a deal or you’ll cancel.  Look up other internet companies and say you are switching cause X company is cheaper.  Every internet company always has a 6 month promotional deal, take it.  Now you saved $20/mo for 12 months, $240/yr, in 20 minutes, and move on with your life, now call your cell phone provider and do the same thing.

5) Spending begets spending. A few months ago, I finally got some extra money and bought a Crossfit membership that I’ve wanted to do for about 5 years now.  It costs $180/mo.  Except then I needed a new pair of shorts, cause my newest pair are 6 years old.  Then I needed a new workout top, cause my newest one was older than my shorts.  Then a couple weeks later, I saw another top on sale, so I bought that one.  I want to so badly buy a pair of hand grippers at $40 each.  My Nike Free’s weren’t good enough for squats, cause they have an elevated heel, so I bought a pair of Reebok trainers that have a flat heel.  I have a list of other things that I want to buy now too.

The more you buy, the even more you buy (does that even make sense?).  You need the matching counterpart.  You need the accessory.  You need something to match it.  Spending almost always begets spending.  Anytime you buy something nice, just remember, you’re not only going to be buying that one thing, you’re buying everything around it to upkeep it as well.

6) Spend money on what matters, and cut out the rest.  Having things is nice.  I like nice things, I really do.  You probably can’t afford to have everything nice in life.  It’s unrealistic for us at this point in our lives to have everything nice.  So spend money on what makes you most happy.  And cut out the rest of your expenses.  If spending time with your friends is what you love doing most, then go out and eat and drink all you want.  If clothes don’t matter, then don’t spend on it, or on a nice car, or nice furniture, or a nice phone, a new bag, whatever.  Learn to focus your money on what brings you the most happiness, and cut out the rest!

7) Own less.

  • “It is preoccupation with possessions, more than anything else, that prevents us from living freely and nobly. – Bertrand Russell
  • These individuals have riches just as we say that we have a fever, when really the fever has us. — Seneca
  • The things you own, end up owning you.  — Tyler Durden

8) Houses.  A few notes on purchasing a home.

  • “Property” are not good investments.  Property CAN be a good investment.
  • Do your research.  This purchase is 10-30x the price of the other biggest purchase in your life (car).  10-20 hours of research is NOT ENOUGH for such a large decision.  Realize how big of a purchase this is.
  • Know the fees.  Strata, property taxes, maintenance, new furniture, these are all regular costs of your home.  Don’t forget about the fees!  If you don’t create a spreadsheet before you figure out what you can afford, I’m just gonna say it, that’s stupid.
  • Homes require leverage. That basically means in the beginning, IF your property increases in value, your investment increases a lot!  IF your property decreases in value, your investment decreases, A LOT!
  • Know the opportunity cost (what you give up).  You could’ve taken the money and invested it elsewhere, where it’s diversified (less risky), and in a TFSA/RRSP/RothIRA/401k, you aren’t being taxed.
  • Everyone thought property was a great deal in 2007 … ask them what they thought in 2008.

9) Don’t pay for (high) fees.   Fees is Wall Street’s scheme to tell you to put money in their pocket for nothing.  “You should invest in our mutual fund, because it out performs the market”.  That doesn’t take into account the 2.5% fees they charge.  Which, if the fund goes up 7% (average year for the stock market), they just took 36% of your profits.  Except they didn’t even have to put up any money for risk.  And they don’t even need to do well to collect it, they just do.

Trading fees – get a Questrade account, trades are $10.  At most financial institutions, they are $30.  If you made a $1000 trade, you just lost 3% automatically.  Make it 1%.

Management fees – buy a ETF (exchange traded fund), Vanguard charges 0.2% fees (a tenth of mutual funds).  Questrade has $0 transaction fees for ETF’s.

10) Follow a smart investing strategy.  I would say, if you don’t have an information advantage, don’t buy stocks.  If you don’t know how to value a company, don’t buy a stock.  Don’t buy a stock by looking at historical prices (don’t buy a Sega Genesis for $10 because it was once $150).  Don’t buy a stock if you look at the daily prices.  Don’t buy a stock if you plan on selling it in the next few years.

Just don’t buy stocks in companies (with few exceptions).  Cause you and I probably aren’t smart enough to win the game.

If you do decide to trade, you inherently are saying that “I’m better than the average investor, and can get better gains myself”.  Because that’s who you are playing against, all the other investors.  Considering 90% (I guesstimate) of the people actually buying stocks are people who do it for a living, you are essentially saying you are better than those people, even though you don’t work on Wall Street.

So now that I’ve convinced you, now find a strategy that works.  I’ll share with you what Warren Buffet prescribes:

My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.

If all that’s too complicated for you, and you still want to invest quickly, “hire” someone here.  You basically have a person that invests ETFs for you.  Just give them the money and pay low fees.  Much better than any financial institution will offer you, and will outperform them too.

Get In the Game – Article Review

You may know Tony Robbins as a motivational speaker, self help coach, late night informercial guy, or from Personal Power.  I personally remember always teasing my dad about how boring his 13 set cassette tape program on Personal Power.  However, not knowing what a powerful guy he is.  I haven’t really listened to any of his material much but recently I’ve listened to several interviews he’s done to promote his new book, Money, Master the Game, I’ve gotta say I’m a convert and a huge fan.  The energy this guy brings whenever he talks really does just get you buzzing and gets you pumped up to take the world.  In addition, hearing what he has to say about personal finance and money, I’m a big supporter of what he’s doing in getting the message out there about how to get out of the pitfalls of the system and keep more dollars in your pocket.

I read through a short blog that he probably didn’t even write on his website, but that follow some of the things he’s trying to teach people in his new book, and I thought it had some good points and wanted to get a bit deeper into it.

1 and 2. Know the Timeline and Gain the Advantage Through the Power of Compounding

You’ve gotta learn the power of compounding.   Just look at the below example:

Image from: http://www.businessinsider.com/amazing-power-of-compound-interest-2014-7

You see that the Susan invests 1/3 of the amount of Bill, but because she starts 10 years earlier, ends up ahead.  You also see the power of the longer length of time to invest that Chris has, he gets exponential output.

3. Make Your First Move

What it means for us young people is that you need to start NOW.  Don’t think “hey I can start saving when I make more”, because by then you’ll have already regretted it.  The other thing is that saving is actually a skill that you need to develop.  A practice of paying the cost now to benefit later. A practice of self control. A practice of making good decisions consistently. A practice of saving for a purpose.

The earlier you start, the exponentially better off you are later.

4. Automate It

This has got to be one of the best life hacks I learned from Ramit Sethi’s I Will Teach You to be Rich, which I highly recommend as my #1 pick for personal finance.  Don’t force yourself to make bad decisions.  It’s like wanting to eat healthier, but keeping the chocolate, candy, and chips on the counter or in the cupboard.  If you give yourself the choice, you’re inevitably going to make poor decisions.  It’s not a matter of self control, just have systems so you will never have to make a bad decision.

My work matches a portion of my RRSP contributions and puts it in a retirement account.  Once in awhile I transfer those funds to a personal account where I have already decided exactly what I will buy (which is Berkshire Hathaway shares).  I don’t need to set aside money from my pay cheque and have to physically do it, it’s already done and never even lands in my bank account.  What ends up in my bank account I consider mine, and spend as I so please, because I already know my retirement savings is already covered.

If you don’t have this option, set up a Tangerine account.  Link it to your chequing account.  Set up an automated transfer.  Once in awhile, buy shares of stock picker TSE:VFV as prescribed by Warren Buffet.

Start a sub-account called “Europe”.   Set up a automatic transfer there once a month.  Boom, just helped you book your dream trip.

5. Make the Impossible Shot

Actually I don’t know what this has to do with anything.  But basically, if you don’t think you can do it, start with 5%.  Just do it even if you don’t think you can afford it.  You would surprise yourself what cuts you can make to get that 5%.  Then once you do that for awhile and realize you don’t even notice it getting taken off the top, increase it more.  And more, and more …

I’m generally not a big fan of lists, so this is in no way comprehensive. Just reviewing 5 points that Tony shared.

I’d love to hear what you think or if you have any feedback or criticism.  Also if you need clarification, or don’t feel you understand it, let me know.

You have the power right now to change the course of your golden years, and the course of your financial future with your family.  Do you dare try now?

Links:

Tim Ferris Podcast with Tony Robbins was phenomenal and was what turned me on to him in the first place.  I would definitely recommend it.

The Start-Up of You – Book Review

As an introduction, Reid Hoffman is often heralded as Silicon Valley’s Grandmaster.  He was an original executive at PayPal (Paypal Mafia), co-founder of LinkedIn, and a partner at Greylock Partners group.  I have not heard too much about him until reading this book and I must say I now will probably forever revere his thoughts on any subject.  His ability to put together the material in this book has completely re-wrote what a career path in my mind looks like has given me great respect for his mind and ideas.

Ben Casnocha is an interesting co-author to this book.  I remember Ben Casnocha from years ago, he was writing really popular blogs for young people / college students about really going out and gaining experience with cool internships, doing really cool and interesting projects, learning new things, and travelling abroad.  I remember his writing had great impact on me for a period of time as a student.  Since then I hadn’t heard about him in years, but have come to find out now that he worked under Hoffman for a couple of years, to help him strategize all the projects that he works on.  

Intro

There is a new reality for those of us who want a meaningful and thriving career.  Gone are the days of lifetime employment with the behemoths (ie. General Electric, Ford).  The new reality is that feeling stability in a job is not about job security, because those that felt the safest are the ones that were impacted the most (ie. Wall Street 2008, and everyone else in 2008).  Job security is no longer about the company you work for, but it is in your human capital, your ability to be entrepreneurial, create opportunities, take risks, and accomplish great tasks.  

“The gap is growing between those who know the new career rules and have the new skills of a global economy, and those who clutch to old ways of thinking and rely on commoditized skills.”

“What’s required now is an entrepreneurial mind-set.” 

Just like your product, your career should be in constant beta.  You need to be iterating, gathering feedback, “adding features”, and always have a pulse on the market so you know where it’s going.  In the product world, if you aren’t moving forward, you are moving backward, and you become irrelevant.

Competitive Advantage

You need to develop a competitive edge.  What separates you from the market?  When an organization is hiring, why should they hire you over the 30, or 100 other applicants?  What’s going to make you stand out?  Realizing this was a big shock for me and began to make me feel like I was not very special at all.  But remember that often what is a competitive is having a combination of skills.  Maybe you’re not the best programmer, but maybe your family background is running a landscaping business, so maybe you can work for some sort of landscape management software company.  Maybe you can start one.  Every one of us are unique in our backgrounds, experiences, interests, and skills.  It is our responsibility to communicate that to the world and make others understand the value that we have to offer.  It is even more important to realize what our value is ourselves, before we can even communicate that with others.

Plan to Adapt

ABZ Planning is a concept introduced by Hoffman and Casnocha.  Point A is where you’re at now, point B is where you are sort of interested and you’re keeping your eye on, and plan Z is your fallback plan.  Where you’re at now, you should have a clear idea about what to do and where the market is at.  Point B is just a rough idea, you don’t need to make specific plans for it because it’ll always change.  Plan Z is your fallback (bar tending, starbucks, etc).  Plan Z should be a viable option so that you are able to take care of your basic needs if all else goes wrong.

It Takes a Network

I^We is the concept that your individual skills matter, but your ability to connect with others is just as important.  When you have great skills and a strong network, your individual skills are exponentially magnified to the market.  

In order to develop a network,  you need to be completely natural at developing strong relationships, where the focal point is not “what can I get from you” but “how can I help you and understand your perspective.”  

An interesting note about your network, is that in a survey, 16% of respondents had referrals from close friends that they had regular contact.  55% from weak ties that they irregularly talked with and 27% were from acquaintances that they barely talked to. 

On reaching your extended network they suggest to really do your research before reaching out to your extended network.  Your extended network can be powerful resource for you to tap into if you really know how to draw from it.  Do your research and make some sort of common connection.  

Pursue Breakout Opportunities

“Entrepreneurs don’t start businesses just anywhere; they channel the mind-set and skills we’ve been discussing into finding the great business opportunities. Likewise, in order to accomplish something significant in your career, you need to focus on finding and capitalizing on those great career opportunities: the opportunities that will extend your competitive advantage and accelerate your Plan A or Plan B.”

Breakout opportunities are keys to everyone’s careers, it might even be conceivable that the people with the most success either have the biggest breakout opportunities and/or the most breakout opportunities.  Breakout opportunities are normally big projects or big clients that end up giving you a huge boost in experience and self confidence.  

In order to catch these opportunities the authors suggest to court good randomness and serendipity.  When you court serendipity and good randomness, you are simply opening yourself up to more opportunities that might come by as potential breakout opportunities for you!  You can do this by simply joining clubs, networks, meet ups, connecting with your alumni, or even simple things like going to dinner parties where you don’t know anyone.  The point is, is that when you open yourself to opportunities, they will land.  Many of our past opportunities that we have experienced already came from favours from people or random chance.  If you’re able to make yourself available and accessible and keep your eyes open and open yourself up to opportunities, you will be bound to catch breaks.

Take Intelligent Risks

There is a common misconception that entrepreneurs are massive risk takers.  Which in a sense is true, many entrepreneurs are like cowboys in a rodeo and swinging for the fences.  However the best entrepreneurs do not necessarily have a huge tolerance for risk, but they are able to manage it well.  They can assess the upside and decide whether it is worth the downside risk.  For example, Richard Branson when he started Virgin Atlantic, was able to negotiate an unbelievable return policy with Boeing which ended up rendering his downside risk minimally.  This gave him the confidence to be able to really go after such a big venture. 

As humans, we are generally quite poor at managing and assessing risk.  That is because biologically we are wired to worry about our survival and our self preservation a lot more than looking for opportunities to grow.  However, armed with this knowledge, we can do better to assess risk.  Really look at it and decide what is the worst thing that could happen.  If the worst that you could happen is you lose your job, or lose some money, if you have a plan Z in place, you should be able to handle intelligent risks.

Opportunities that others might find risky but aren’t as risky, can be found in situations such as jobs with lower pay but tremendous learning opportunity, taking up contract jobs since they are less stable, or in any position that is highly publicized as high risk.  Usually those jobs are not as high risk as the public makes it to be.

Another great recommendation by Hoffman and Casnocha on risk is to introduce small volatility throughout your career to put yourself in uncomfortable positions.  This is actually the smartest for those who are the most risk averse, because you begin to build up your defences to volatility.  It is almost a certainty that we will go through another recession or difficult time in our lifetime.  When you are not used to volatility or risk or failure at all, when catastrophic events occur, you will be caught completely off guard and will be affected most by these events.  However, those who experience regular volatility are equipped best to maneuver and react any time doors close or unfortunate circumstances occur.

“For the start-up of you, the only long-term answer to risk is resilience.
Remember: If you don’t find risk, risk will find you.”

Who You Know is What You Know

Speaking further about your network, I^We is re-emphasized.  This chapter is about being able to call on help or advice when it’s needed.  Not necessarily looking for opportunities as much, but to gain information.  There is invaluable information with people when you are able to tap into their experiences and knowledge.  People are the first to know what’s on the ground and what’s happening with an industry.  Other people will have knowledge and experience and can cater information specifically to your context.  Smart people are able to give you valuable advice from outside perspectives.  By being able to tap into your network during specific situations, you are able to draw a wealth of information from different sources and then synthesize the information in order to form actionable steps.  This is especially helpful when it occurs when you have a large decision.

Additional Notes:

In the concluding chapter I thought there was a interesting note speaking to the society that you live in.  The health of a society can play a large factor when you compare a fearful and society in poverty, the opportunities and the environment does not make it conducive to healthy networks that are willing to give and share.  Whereas in areas with healthy societies, there are great groups, industries, meet ups in order to join in and share knowledge and connections and introductions with one another.