All posts by Financial Independence Hub

4 easy ways to Build Wealth: at any Age

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By Emily Roberts

For the Financial Independence Hub

Whether you’re just starting out or planning for retirement, there are ways to build wealth at any age. There is no golden age when building wealth; the wealth gap is reducing. If you want to grow your savings and assets, you must take action regardless of your life stage. Here are five easy tips for increasing your assets at any stage of life.

Start Saving early

If you start saving early, you’ll have plenty of time to compound your interest and grow your savings. Even small amounts of money can make a big difference over time. The earlier you start saving, the less you have to save each month from reaching your goal. If you start saving at 25, you’ll have to save $100 each month to have the same amount saved at 65. If you start saving at 35, you’ll have to save $300 each month to reach the same amount saved at 65. While it’s never too late to start, the earlier you start saving, the less you have to save each month from reaching your goal.

Pay off High-interest Debt ASAP

Credit cards can be dangerous because they’re easy to use for small purchases, and you may not notice the interest growing. If you don’t pay off your credit card in full each month, you’ll pay the credit card company more than the original purchase price. You can pay off your debts with a debt consolidation plan, and you can speak with a specialist like Harris & Partners to learn more about how debt consolation works. Debt consolidation helps you achieve a balanced and focused loan payment that is adjusted to your financial situation. In this way, you can free up more funds for investments and get out of debt faster. Continue Reading…

Opportunity Cost Impact of Daily Financial Decisions on Retirement Plans

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Via Steve Lowrie, CFA

Special to the Financial Independence Hub

Editor’s Note:

Editor’s Note: The following is a guest blog by Maureen Thorne, a Small Business Owner. It is republished on the Hub with their joint permission.

A Personal Journey on how Today’s Choices can spoil your Retirement (or Early Retirement) Dreams

By Maureen Thorne, Small Business Owner/Guest Author

As my husband and I approached our late 40s/early 50s, we decided it was time to solidify our previous hastily sketched plans for early retirement. We had worked hard for many years and skimped in places (never purchased a brand-new car) and were confident that we had done everything right to retire early and live our best early retirement lives.

However …

When we sat down with the numbers, we realized our dreams of an early retirement with travel and adventure were farther from reach than we thought. We both had well-paying careers and didn’t feel that we had splurged so much that we should be this far behind.

What happened?

And, more importantly …

How do we get back on track?

We read a great article from Lowrie Financial, Retirement Planning for Gen Xers: Build Wealth and Retire Happy, which gave us some great insights and seemed to speak directly to our financial situation. Another topic area that Lowrie Financial introduced us to was behavioural finance / holistic financial planning for savings. We felt these were areas we should explore more to help us achieve our long-term financial goals.

Once panic-mode subsided, we sat down with some spreadsheets to see what had gone awry and figure out how (and if?) we could still retire early and be able to comfortably afford the things we wanted from retirement.

Here’s what we did to right the (sinking?) ship:

Real Talk from an Independent Financial Advisor

We booked a meeting with an independent financial advisor who had lots of questions for us about what we wanted to achieve. We explored behavioural finance which allowed us to really look at the impact on our spending habits and investing history. One of the most helpful tough-love comments from him:

“You make a lot of money. Where is it all going?”

Good question.

This led us to one of the steps we took to financially recover our early retirement plans: Family Spending Forensics.

We also realized we had missed opportunities to pack away excess cash in the past. Every time we stopped shelling out for something, we simply cheered and lived it up to that higher level of cash flow. We finished paying our mortgage, so we took the entire family to Europe. We stopped paying into our kids’ RESP, so we re-renovated the house. This identified another area that was a stumbling block for us to achieve that long-dreamed-of early retirement: Retain (and Make the Most of) “Found Money.”

Our financial advisor also pointed out something we begrudgingly already knew. We had really hurt ourselves with DIY investing. Although there were times we won big, there were many times we lost, both small and big. Although, it was fun for us to see how well we could do on our own and we reveled in keeping up with the financial and investing insights online to help guide us, always seemed to be behind the eight ball and not getting ahead like we should have been. We were driven by emotions. In hindsight, our DIY investment strategy seemed to be: 1 step forward, 2 steps back. There were so many things we didn’t focus on: tax ramifications, behavioural investing, opportunity costs, chasing returns, FOMO (Fear of Missing Out) investing … We knew we needed to: Stop Emotion-Driven DIY Investing.

How we got back on track for our Early Retirement Financial Goals

1. Family Spending Forensics

“You make a lot of money. Where is it all going?”

Our independent financial advisor’s words kept ringing in our heads. So, as advised, we tracked our spending and instituted a realistic budget.

There were areas that immediately jumped out as places we could restrain our big over-spending: clothing, dining out, vacationing, etc. That didn’t mean that we stayed at home wearing rags and eating Kraft Dinner. It simply translated to setting aside a reasonable budget for the year or month for that particular spending category and sticking to it. We still vacationed, we still shopped, we still ate out – but all with the budget in mind.

We also found that we could pull back in multiple smaller areas – putting a budget figure in place helped us shave small amounts in many areas, and it added up.

It’s also important to note that our “scrimping” went virtually unnoticed in our every day lives. We didn’t feel deprived at all.

A great article we discovered, Spending Decisions That End Up Costing a Million Dollars by Andrew Hallam, talks about an often overlooked impact of spending decisions: opportunity costs.

“Those massages also cost far more money than initially meets the eye. ‘Opportunity cost’ is the difference in cost between making one decision over another. An opportunity cost isn’t always financial. But in my case, those massages might have cost us more than $770,000.

Confused? Check this out:

We spent about $150 a week on massages during an 11-year period (2003–2014).

That’s $85,800 over 11 years.

Over that time, our investment portfolio averaged 8.34% per year.

If we had invested the money we spent on massages, we would have had an extra $143,239 in our investment account by 2014.

That’s a lot of money. But I’m not done yet. We left Singapore in 2014 (when I was 44). Assume we let that $143,239 grow in a portfolio that continued to average 8.34% per year. Without adding another penny to it, that money would grow to $770,241 by the time I am 65 years old.

That’s the long-term opportunity cost of spending $150 a week on massages for just 11 years.”

We realized very quickly how much a little restraint in our spending habits impacted our bottom line. Within just 1 year, we could see the light back to our early-retirement goal. Just 2 years later and we are well ahead of plan.

2. Retain (and Make the Most of) “Found Money”

“Found Money” – sounds great! So, what is it. In my mind, it is excess cash flow that was not expected or presents a sudden or continuous influx of cash to the household. This can be: Continue Reading…

Bank of Mom and Dad: Without cash to give, it’s wise to consider lending good financial lessons and habits

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Simplii Financial

 

By Grant Rasmussen

Special to the Financial Independence Hub

When the going gets tough and your bank account gets lighter, for many young people, having your parents on speed dial is a go-to solution. But with inflation rates not seen since the 1980s, and interest rates reaching their highest point since 2008, Canadians – including parents – are facing unprecedented financial realities, and may not be in a position to pick up the call. The impact of this for many younger adults and students is that borrowing from the ‘Bank of Mom and Dad’ isn’t the option it once was.

The numbers show that parental support has been significant for their children: a recent study last year found that parents gave over $10B in down-payment help over the past year to younger Canadians in the housing market. With the average cost of a down payment climbing from $52,000 in 2015 to $82,000 in 2021, that help is needed more than ever.

While down payments represent one big ticket item on the spending list, there’s also tuition, rent and other living expenses, etc. all to help young people make ends meet. And in a year that marks a major financial plot twist, those same parents are facing their own challenges to do just that.

According to a new study, four-in-five (80 percent) Canadians have begun cutting back on spending—some ways include trimming discretionary spending, delaying major purchases, or deferring saving for the future. This is up from 74 percent in February, showing that more Canadians are feeling pressure financially.

With less cash to support their kids, sound advice from Mom and Dad may be the next best thing. Below are a few places to start.

Keep ALL your money

Fees are a slippery slope. Whether it’s subscription fees for things you’re not using or day-to-day avoidable fees on things like banking, it’s important to look at the cumulative effect of small, ongoing fees. At Simplii, we offer a no-fee chequing account, with no monthly fee, unlimited bill payments, e-transfers and more. Additionally, you have free access to over 3,400 CIBC ATMs throughout Canada, saving people from paying service fees. When times are tighter, it’s worth looking at every spending category to see where efficiencies can be found. Continue Reading…

Living off the Dividends?

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It is the most popular rallying cry for self-directed investors in Canada and the U.S. – I plan to “live off of the dividends.” Or in retirement – “I am living off of the dividends.” The notion leaves money on the table in the accumulation stage and living off of the dividends leaves a lot of money on the table in retirement. Don’t get me wrong, I love the big juicy (and growing) dividend as a part of our retirement plan. But as an exclusive strategy, the income approach simply comes up short.

It’s not a popular Tweet, but I have suggested that no investor with a viable and sensible financial plan would live off the dividends. Add this to the points made in the opening paragraph; it might not be tax-efficient. Also, the dividend would have no idea of what is a financial plan and what is the most optimal order of account type spending. Check in with the our friends at Cashflows&Portfolios and they can show you a very efficient order of asset harvesting.

On Seeking Alpha, I recently offered this post:

Living off dividends in retirement; don’t sell yourself short.

Thanks to Mark at My Own Advisor for including that post in the well-read Weekend Reads.

Financial Planner: It may be a bad idea

From financial planner Jason Heath, in the Financial Post.

Why living off your dividends in retirement may be a mistake.

Retirement planning is a personal decision, but you might be making a big mistake if you go out of your way to ensure you can live off your dividends, since you will be leaving a great deal of money when you die. In the process, you may have worked too hard at the expense of family time or spent too little at the expense of treating yourself.

In that Seeking Alpha post, I used BlackRock as the poster child for a lower-yielding dividend growth stock. The yield is lower but the dividend growth is impressive. That can often be a sign of underlying earnings growth and financial health.

2022 update: BlackRock is falling with the market (and then some); the yield is now above 3%.

Making homemade dividends

In that Seeking Alpha post, I demonstrated the benefit of selling a few shares to boost the total retirement take from BlackRock. The retiree gets an impressive income boost, and only had to sell 2.8% of the initial share count. The risk is managed.

Starting with a hypothetical $1 million portfolio, $50,000 in annual income represents an initial 5% spend rate. That is, we are spending 5% of the total portfolio value. Without share sales the retiree would have been spending at an initial 3.3%.

Share Sales (in the table) represents the income available thanks to the selling of shares: creating that homemade dividend.

The retiree who has the ability to press that sell button to create income enjoyed much higher income. In fact, the retiree would have been able to sell significantly more shares (compared to the example above) to create even more additional income.

Plus the dividend growth is so strong, it quickly eliminated the need to sell shares.

BlackRock Dividend Growth – Seeking Alpha

In fact, the BlackRock dividend quickly surpasses the income level of the Canadian bank index. It can be a win, win, win. Even for the dividend-loving Canadian accumulator, BlackRock is superior on the dividend flow.

But of course, the aware retiree will keep selling shares and making hay when the sun shines. They might cut back any share sales in a market correction: also known as a variable withdrawal strategy.

It’s a simple truth. Don’t let the income drive the bus. It doesn’t know where you need to go. This is not advice, but consider growth and total return and share harvesting.

Don’t sell yourself short.

In the Seeking Alpha post, I also offered:

The optimal mix of income and growth for retirement Continue Reading…

Planning in uncertain times: How inflation is pressuring Canadian businesses to meet employee expectations

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By Elizabeth English, Mercer Canada 

Special to the Financial Independence Hub

The squeeze inflation is putting on businesses and their employees alike is being felt around the globe. As employees and their families deal with the increasing cost of living, employers are under pressure as they manage compensation budgets and salary expectations for the next year and beyond. Employees have heightened expectations of a commensurate pay increase with lower purchasing power. Employers must respond or risk losing talent.

As businesses grapple with the best ways to retain existing employees and attract new hires, Mercer released its 2023 Compensation Planning Survey, compiling data from more than 550 organizations of varying sizes across 15 industries. The survey reveals a number of insights for employers and employees alike.

Most companies are just beginning to think about increase budgets

With the price of everything from gas to groceries on the rise, there is an expectation from employees that their compensation should keep up with rising costs. Many organizations are in the early stages of deciding how to respond; the Survey shows that as of August, only 5 per cent of organizations had approved increased budgets, 11 per cent had proposed increases, and 84 per cent were still in preliminary stages.

Budgets continue to rise

Inflation is causing Canadian employers to increase their compensation budgets. Heading into the upcoming year, employers surveyed are budgeting an average of 3.4 percent for merit increases and 3.9 per cent for total increase budgets in 2023. This puts merit and total budget increases up from 3.1 per cent and 3.4 per cent, respectively, from 2022. However, even with these raises, merit and total increases fall short of year-over-year inflation, which hit a 40-year high of 8.1 per cent in June, moderating to 7.6 per cent in July and 7.0 per cent in August.

Across Canada, the highest increases in total budgets are in Montreal (4.5 per cent), Greater Edmonton (4.3 per cent), Saskatchewan (4.2 per cent) and Greater Calgary (4.1 per cent). With compensation budget increases falling well short of inflation, organizations across Canada will need to focus on managing employee expectations. This can be done through their internal communications, planning for multiple scenarios, as well as adopting a more comprehensive and broader total rewards perspective to attract and retain talent.

Off-cycle increases are being used for a variety of reasons

Historically, inflation isn’t the top metric for shaping compensation strategies. Still, in this high inflation environment, 34 per cent of organizations are considering ad-hoc, off-cycle wage reviews or adjustments to combat turnover. This is a significant hike from 19 percent considering the same in March of 2022. Continue Reading…