From zero assets in 1989, to $79 billion in 2000, to $2.7 trillion into 2015, it has been quite a ride for global exchange-traded funds (ETFs). Few financial sectors have approached the over 25% compounded annual growth that ETFs have enjoyed. Yet many industry observers are disappointed.
ETFs’ value proposition is well known: diversification, professional management, shared expenses, all the benefits of mutual funds at a fraction of the price plus better transparency and continuous intraday trading. Yet ETFs represent only 12% of US and 6% of Canadian mutual fund assets (10% if US-traded ETFs owned by Canadians are included). If ETFs are so much better than mutual funds, why haven’t they replaced them by now?
In many ways, Elizabeth Warren’s 2005 bestseller All Your Worth was ahead of its time. Warren, a relentless consumer advocate, eschews mindless frugality and focuses instead on finding the right balance so you always have enough to pay your bills, have some fun, and save for the future.
The author suggests a simple formula for spending your after-tax dollars on needs, wants, and savings:
Allocate 50 per cent to needs: These must-haves include housing, transportation, groceries, insurance, and clothes that you really need.
Spend 30 per cent on wants: Wants include cable television, clothing beyond the basics, restaurant meals, concert tickets, hobbies, etc.
Set aside 20 per cent for savings: This includes both short- and-long term savings, as well as debt repayment.
Warren encourages saving AND having fun rather than scrimping and pinching pennies on the things that make you happy. That means saving money on big-ticket items like housing and transportation – effectively reducing the amount you spend on needs to free up money to save for the future and spend on wants.
“If you can’t afford to have fun, you can’t afford your life.”
When I applied this formula to my own spending I found the following breakdown:
Needs took up 53.5 per cent of our monthly budget, including the mortgage payment, property taxes, car payment, insurance (life, home, car), groceries, gas, utilities, cell phone, hair cuts, prescriptions, and clothing.
Wants made up just 18 per cent of our monthly spending, including cable and internet, restaurants, alcohol, children’s activities, hired cleaners (bi-weekly), credit card annual fees, subscriptions and memberships, gifts, summer vacation, and discretionary spending.
Our car will be paid off late next year, which will free up $10,000 per year and reduce our “needs” allocation from 53.5 per cent down to about 44 per cent. Ideally, I’d prefer to shuffle that money over to savings and build up our TFSAs; however, I’ll keep the idea of balance in mind and consider adding a few thousand dollars into our “wants” allocation.
Final thoughts
A balanced financial plan will ultimately lead to a happier and more fulfilling life.
Too many of us are living close to the edge financially because they’ve over-extended themselves on house and car payments and can’t afford to live.
One day as I was perusing the world wide web, I came across a posting about DRIP investments, which ran in the new blog by PWL Capital’s Justin Bender.
What caught my eye had nothing to do with DRIP investments but more about a comment made at the end of article that really got me thinking. It said:
“…Investors should be focusing their attention to more important investment decisions that are likely to have a bigger impact on overall success (such as savings rate, expenses, risk, fees, taxes, and behaviour)…”
Make no mistake, these are important factors in developing your investment ideology or strategy. However, these elements just get you into the game of investing; on their own they are not going to guarantee you will be successful. Continue Reading…
Savers almost everywhere have nearly been beaten into submission by seemingly perpetual Zero Interest Rate Policies (ZIRP) imposed by central banks around the world.
The simple connection is that when interest rates are low, there is no incentive to save money. The flip side is that low interest rates make borrowing cheap, so people raise their debt load. So, is it still worthwhile to save when interest rates are low?
The dean of personal finance writers in the United States, if not the world, is the Wall Street Journal’s Jason Zweig. In a recent instalment of his personal blog, Zweig presents many of the financial books that have influenced him and that he recommends. They include both financial books and non-financial books, which is quite consistent with the philosophy underlying this site (the Financial Independence Hub).
Several of the titles, but not all, are also in my own library. Below I list some of Zweig’s picks. All titles in red are live links to their respective listings at Amazon.com:
By the way, my own recently published Kindle e-book, A Novel Approach to Financial Independence (U.S. edition), contains a long list of many of the books in my own library. At the end is a bibliography called A Peek into Theo’s Kindle (Theo is one of the financial advisor characters in the novel). It lists roughly 75 books I recommend, ranging from Inspirational to Investing, Retirement and Entrepreneurship. As above, most of the titles include live links to the actual Kindle titles at Amazon.
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