Why Pay Yourself First Is So Valuable?

         The last think we thought about when we kids was saving moving.  For the majority of us, that was the farthest thing from our mind.  Why was that?  The most of us learned money from our parents as money is not taught in school. Like most parents, my parents never talked about money at the dinner table.  In fact, my parents never invested a single cent in their lives.  When I was growing up, my father worked in the coal mines and my mother was a stay at home mom.  Both of my parents struggle with money nowadays.
         I think parents who do not teach their kids about money at an early age these days are putting their kids at a huge disadvantage in the future. With the cost of tuition these days increasing greater than the rate of inflation, the cost of tuition in going to be astronomical by the time a kid turns 18.  Tuition is not going up that high?  Well, the tuition is going up for a variety of reasons.  Faculty strikes at universities use to be rare.  I remember being at Dalhousie University in Halifax, and the teachers went on strikes like 3 weeks before final exams.  So all classes were cancelled in most cases.  One of my professors actually taught during the strike. This prof told us, "You guys are paying for this course, so I do think it is right that you miss out on material". The strike ended a few days before end of classes and prior to the start of final exams.
         A lot of parents these days have given allowances to their kids growing up.  Almost all kids would spend this on junkfood and on entertainment in their teens.  A lot of teenagers try to find jobs while in secordary school or high school.  Most of the time the teenagers blow their money on having fun.  A parent needs to show their kids that there are more ways to make money than a job.  My parents generation consisted of the father working and the mother staying home to take care of the kids and the house.  Nowadays, almost 99% if the time involve both parents NEEDING to work for the family to make ends meet.
       Parents need to lead by example.  A lot of people have heard of the book called "The Richest Man in Babylon" by George Clason.  One of the lessons in this book is to pay yourself first at minimum 10% whatever income you earn.  This payment should occur before your pay your mortgage or rent, buy groceries, etc.  Often pay try to pay themselves last. The thing with paying yourself last, is more often than not, there is no money left at the end of the month.  Also, people are under the impression that if they buy a coffee or eat out, that they are treating themselves.  When you do these activities you are actually paying the coffee shop or the restaurant and not yourself.
         A person's reaction is a phrase such as, " I have bills that must be paid!!" . Paying bills is important.  If you do not pay yourself first, then you will never get ahead.  It is often noted that 70% of americans are living paycheck to paycheck.  When you start of paying yourself at minimum 10%, the money will not grow by much at the beginning.  But your money will start to work for you.  Then you can use this money along with the money you deposit to make more money.  Albert Einstein has stated, "The eighth wonder of the world is compound interest"
         Some people have said that you do not make any money when you do not pay yourself first.  Think of it this way.  What percentage of income per hour to you think you are worth when working at your job?

How Does This Work For Kids

       Kids are not allowed to work at jobs in Canada unless they fall under the exceptions. Kids can work in a family owned business or they can start a business at any age.  If the kids received money on their birthdays or special occasions, then the parents should help them decide what to with that money.  A portion of the money should go to savings, investing and charity or tithing.  This will instill good habits in their kids.
       For our generation and all future generations, the days of job security are over.  No matter what type of work that you do, the job "at the factory from age 18 to age 65" does not exist anymore.
        See, a person can increase their income by other means besides a job.  Paying Yourself First allows for building an emergency fund, start a business, or investing account.  Your income is the main wealth builder in your life.  Not only does job security not exist anymore, but an individual is almost 99% guaranteed to be responsible for their own retirement.  Years ago, companies had defined benefit pensions for their employees.  The companies, for the most part, have done away with the defined benefit pensions at is cost them so much money.  The employee would receive a pension check until they die. Nowadays, a person needs to think about retirement at a very young age.  You have to make better choices on how and who you spend your time with while going through life.
          If you have money coming besides the money from working at a job, you will be better able to navigate the storm due to a job loss.  A lot of people will not even touch the money generated through a side hustle or investing. This allows the money to compound faster and possibly become financially independent well before the normal age of retirement.
             
More Reasons To Pay Yourself First?

        There are tonnes of benefits of paying yourself first.  One of the major benefits is the ability to sleep better a night.  You will be able to sleep better at night as your are more financially stable.  Just think about a time when you were flat broke and had no choice to go to a job that you hate. 
        Money is actually the major reason for divorces and fights in marriages and relationships.  People often say money is not important to them and they are not interested in money.  Every thing in life has money involved in it somehow.  Having less money leads to stress.  If a couple has a well funded emergency plan and live within there means, they are often less stressed and happy in the relationship.  An emergency is going to happen when you least expect it. A emergency could be car breaking down, furnace breaking down, a sudden job loss or an illness.

Conclusion:

         Paying yourself first is essential to you own financial well being. Losing a job can be tough and there is  a lot more people competing with you for the exact same new job you are looking forward.  Our parents generation had it rather easy compared to our generation.  In Canada, we have people with a degree or two, that are struggling to find  a job.
         Money is not the most important thing in life.  Money is a tool that will help you in all areas of your life.  You can not put a price on having piece of mind. Some people are so stressed out that they HAVE to go away on vacation.  Would the vacation be more enjoyable and relaxing if you did not put in a credit card that can not be paided in full prior to interest changes being applied?
          While paying yourself first and you still come up short, take it as a sign.  The sign would to do something to increase your income and/or reduce your expenses.  This might be a side hustle, a second job, another job or working overtime.

DISCLAIMER

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.

How Do You Help Yourself?

   Living in Canada, everyone knows how important the oil industry is not only for Western Canada but for the entire country.  As the jobs in the oil industry are high paying, people travel from all parts of Canada to work in the oil patch in western Canada.  Canada has conventional oil, which is the involves the drilling rigs. It is said that one rig operating is 135 jobs.  These jobs involve working long hours, which is a completely different life from a person who works 8 hours a day and goes home everyday. 

Fig 1

    Currently with the price of the barrel of crude oil, there has been a lot of layoffs in the oilfield.  As the oil field workers maker a lot of money, and at times are paid expenses  such as hotels and meals by their employers when they are working. The typical shift is usually 2 weeks on and 6 days off. When the oilfield service workers are traveling to various rigs they often stay in hotels and eat in restaurants regardless if it is a city, a town, or small rural area.

Fig 2.

      As you can see from the above chart the drilling rig utilization is way down year over year. The average utilization of 25% has drastic effects on the economies of western Canada.  With the massive amount of layoffs comes less traffic on the roads going to and from rigs.  This also means other sectors are being effected including hotels and restaurants.
       The other type of oil exploration in Canada is the oil sands.  This involves no rigs but huge machines digging.  The extraction of oil  comes through separation the oil from the ground that is dug up. This is done though things such as processing plants.
    

 Events of Last 15 years

   Their has been major things that happened in the last 15 years.  We had the dot com bubble, the global financial crisis in 2007-2009 and now the low oil prices. These have caused major problems in the financial industry.  The financial crisis is the worst recession since the great depression.  Currently, we are in living with the low price for a barrel of crude oil.  The fall of crude oil prices started in September 2014. We are currently testing the $40.00 a barrel threshold for WTI prices. We have no idea how long this low price environment is going to last.  Some analysts predict the price will go down lower while others predict it will be 2020 before we see $80.00 a barrel oil. 

     

What Can A Person Due To Help Themselves?

    When a person works at a job they do not have many tax advantages that they can take advantage of.  A person needs to save a percentage of their after-tax income by paying themselves first.  This pay yourself first concept was popularized in the book called The Richest Man in Babylon. The goal is to grow this money by putting it to work.  As the amount grows, a person can buy income producing assets such as stocks that pay dividends, rental properties, bonds etc.  The income from these assets are "children" of your investments.  Then you put these "children" to work along with new money from paying yourself first to grow your passive income.  This will allow your assets and their income to compound exponentially.  As first the going is slow, but over time the compounding becomes more noticeable.
     By creating passive income, a person helps to reduce stress in their life as they have more income from just one source, which is usually from a job.  A job is no longer secure.  If a person is building their war chest and receives a layoff or gets fired from a job, then they have income to fall back on .  The ultimate goal is to have more money coming in from investments than going out to pay expenses.  Once the passive income coming in is greater than expenses, then the person is financially free.  
    Imagine, being able to go on vacation whenever you want.  While you are on vacation, you do not have to worry about money as your investments are providing you with NEW money.  Going on vacation like this is only possible with receiving money from other sources rather than from a job.   

Fig. 3

 Photo Credits:  Fig.1 - www.precisiondrilling.com
                          Fig.2 - www.caodc.com
                          Fig.3 - www.weknowyourdreams.com 

DISCLAIMER
I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.
 

Where To Put Your Money?

     A coworker of mine recently stated that the put money into RRSPs. I asked here why? She said to reduce her taxes. Where am I going with this?
   
Looking At Things Different

     A few years back, I came across a book at the book store in the financial  section. When I noticed the title I remember I saw the author on the Oprah Winfrey Show.  The book in question is Rich Dad Poor Dad by Robert Kiyosaki.  The book challenges your beliefs about money and gets you to look at money in a different mind set.  So I bought the book and took it home. I read it but never took action. My biggest lesson I took from this experience is that you can read all the books or attend seminars on investing, trading, rental real estate and entrepreneurship that  you can get your hands on, but nothing will happen unless your take ACTION!!!!. So after reading the book, I did not take action out of fear.
      A few years after this book reading, I heard about Canada's Youngest Retiree Derek Foster. Derek Foster is just an average guy who escaped the rat race at the age of 34.  Derek didn't invest in RRSPs as it didn't make sense to him as he was in the lower tax bracket. Derek also wanted to retire early as he did not like working.  He invested in stocks that paid dividends and income trusts and REITs that paid distributions.  A couple of things helped him a long the way. Derek purchased a huge amount of shares on margin in a cigarette company after the stock tanked due to a lawsuit. These shares increased in value and he sold.  Another thing Derek did was take out a loan at 8.5% interest to buy RioCan REIT which was paying a 11.5 % yield and was a monthly payer. So the distribution paid the payment each month. With the distributions increasing over time the loan was paid  off quick. The latter to things helped him to escape the rat race a lot sooner then just buying the stocks without any debt what so ever.
       Derek became an author and started speaking about dividend investing. I think he now has 5 or 6 kids.  He is still out of the rat race and him and his wife home school there children.

So What Did I Finally Decide to Do?

     In the early months of 2010, I decided to take action after waking up one morning and saying to myself that I didn't want to live like this anymore. So I decided to start paying myself 30% of my income regardless of where it came from. So two thirds of the 30% went into savings and one third to investing. The money left over at the end of the month went all into the investing account.
     As the savings grew and the interest rate on my bank account decreased, I paid myself first 30% of my income to the investing accounts. At the end of the month, I would pay myself first 30% of the investing accounts and 30% of the savings account. If I was cash flow positive at the end of a month, the entire interest from savings account and entire dividend amount paid for the month would stay in their respective accounts.
        In an RRSP or 401k, the money is locked in. Therefore if you take it out you are penalized and have to pay tax at your marginal rate as it taxed the same as interest. So I put my money into a margin account and a TFSA account. Although a TFSA is a registered account, you deposit money with after tax dollars so the gains and income within a TFSA are tax free.  For disclosure, I have put money into RRSPs in the past, but do not do it anymore.

Conclusion

       After deciding to pay myself first, I found life getting less stressful as I was building passive income. The passive income has growth to about $300 a month. I get paid this money regardless of what I am doing and where I am at in the world.  These companies tend to grow their earnings and therefore increase dividends to their shareholders.
        I am have since moved up paying myself 35% and then recently started 37%.  

For those who are interested,  there is a company called Sharpe Trade LLC.  This is a website that has 2 well known known people writing posts , doing podcasts and videos.  There is people behind the scenes also.  The two well know people also have a premium portfolios, in which they discuss why the enter a trade and exit a trade before it happens.  The website is www.sharpetrade.com.  On of the 2 well known people also has a portfolio in which he calls Sharpe Income.  This started with $500 and $25 dollar contributions each week. This person also goes on the show his results through a PDF and a spreadsheet.

Disclosure:  I have no affiliation with Sharpe Trade LLC.

DISCLAIMER
I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.   

Why invest money? Part 2

This is post in a continuation a recent article called Why Invest Money ? Part 1.

The traditional way to save  money was to put your money in  a bank account. This bank account will then pay you interest on the balance of the account calculated over usually over a calendar month. This interest rate is very small as interest rates are at historic lows right now. Also, the interest received is taxed at marginal rate. Therefore, when saving money in a bank account right now, an individual is actually losing money because of inflation.  Having a bit of savings is important though, such as for an emergency fund.  Savings can be used to help pay for a down payment on a house or wedding for example.
   I invest money in companies that pay me to own them. I am mostly invested in corporations and REITs at the money.  These companies pay me once a month or once a quarter. This money in the form of dividends or distributions is more tax efficient than interest from a bank. When a company makes more money they often reward their shareholders with increased payouts. The increase in payouts is, in most cases, greater than the rate of inflation.

        Yield on Cost  (YoC) = annual dividend rate / purchase price
    
         Current Yield = annual dividend rate / current price

 Example : If stock ABC pays a annual dividend of $1.00 per share and I paid $20.00 per share, then
                  yield on cost is 5%.   In 5 months time, the price of the stock goes to $25.00, then the                   current yield is 4%. If company ABC raises the dividend by $0.05 to $1.05 per share,                    YOC increases to 5.25% meaning your initial investment is working harder for you.

The interest rate on a savings account will not have increases that are greater than the rate of inflation.


With the dividends and distributions being more tax efficient, that means I get to keep more of my money. As the amounts of dividends and distributions I receive on an annual basis increases, I am able to have more options. This money can be used to enjoy a better lifestyle, to save for retirement of financial independence at a quicker rate, or to leave a job if it is not a good fit for me.

 If a person is living paycheck to paycheck, they have to keep working there to they are able to find a different job. The job they hate currently have a negative effect on their mood which can have negative effects in a interview setting.

Increasing passive income allows a person to have more options. They are able to sleep better as they are less stress. Financial independence is when there is enough passive income to exceed expenses. When this occurs, an individual can CHOOSE to do what they want with their time.

DISCLAIMER:

     I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.  Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk

Why invest money ? Part 1

     We all have been around the people who say "you only live once". These same people can't wait to get paid from there jobs so they can spend the money.  These people have the best video game console, big screen tvs, a good car. When the end of the month comes,  they are completely out of money and saved nothing. I have been around people who say things like " I am too old to start investing" and "I will have to work until I die". These same people seem to be stressed out a lot more than people who spend less.

       I decided I didn't want to be like these people. So I decided to read more and more financial books.  I read Rich Dad Poor Dad by Robert Kiyosaki.  Robert and Kim Kiyosaki started out paying themselves first 30% of their money regardless of where it came from.  With this money that they paid themselves first which was used to buy cash flowing assets. So I basically started with the 30%  as a number  to pay myself first. The 30% was divided 2/3 to savings and 1/3 to investing. I want to make it clear that I do not agree with everything Robert Kiyosaki does.
        What has this done to by life? I found I have been able to sleep better as I am less stressed. I have been raised in a household were money was not mentioned. My parents didn't invest or know anything about investing. I have built up a portfolio that generates approximately $3000 in annual passive income. This is money that I don't have to physically work for. Everything single month my passive income grows through DRIPs and on occasional an investment purchase.

        The investments decisions I make today, will help in dealing with inflation. Their are companies to invest in that increase there dividend annually and it if often greater than the increase in inflation.

DISCLAIMER:

     I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.  Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk

Sacrifice

        Where do you find the money to invest and save? You reduce your expenses by doing things such as driving less, cutting cable and/ cable packages, cheaper cell phone plan etc. An individual needs to set save a percentage of their income. This has to be a priority before paying rent, paying mortgage, buying groceries or anything else that you spend money on. You will see your savings grow and when you have enough saved it is time to make your money work harder for you. If you are short money before the end of the month, a person should look at additional forms of income such as a second job or part time home business. NO ONE is going to be in your face to pay yourself first so its take a lot of discipline.


        Starting out, buying shares in established companies that pay dividends can be advantageous. When Canadians invest in dividend paying stocks from Canadian corporations, the dividend income is taxed favorably over ordinary income (marginal tax rate). Interest from savings accounts and bonds and dividends from foreign companies are taxed at your marginal rate. The dividends from foreign companies can be offset by the foreign tax credit as there is a 15% withholding tax when buying US stocks in a non-registered account. Companies that pay dividends also increase their dividends on a yearly basis.

        You can use your dividend income to help pay bills or you can reinvest the dividends to help compound your money. You can use the dividends along with fresh capital to invest in the stock market or use DRIPs. You have to leave money alone to see the benefits of compounding.


DISCLAIMER:

     I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.  Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk

How do you spend your money?

When you receive money what is the first thing you do?

       The  average person spends money and tries to save what is left at the end of the month. The problem is when the end of the money comes there is usually no money left or little money left at the end of the month.

What did I decide to do?

        I pay myself first  before spending money on rent, bills, food, entertainment. Paying yourself first means you are making yourself most important in your life. This allowed me to build an emergency fund and start saving and investing. This has definitely made it easier to sleep at night. After paying myself first, I try to live off what is left for the month.
        A couple of books that talk about the pay yourself first concept is The Richest Man in Babylon and The Wealthy Barber.
       
DISCLAIMER:

     I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.  Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk

    

Why Trade, Invest or Save Your Money?

        As the days pass one by one, the cost of goods and services rise with inflation. I see people buying in the next new cell phone although there current one works excellent and stills over a year left on their cell plan. I see people buy a new car every 3-4 years just because they want a new car.  The cost of living will rise quicker than raises you MIGHT receive from your employer.
      
       What is a person to do to live a less stressful life. A person needs to live below their means and pay themselves first. You can do this in 2 ways:

1. Save/invest/trade this money. The income that is generated stays in these accounts and gets reinvested by using DRIPs or reinvested along with fresh capital in new assets. This income can be either capital gains, dividends, distributions, option premiums, or interest.
2. Pay yourself first a giving percentage of every dollar no matter where it comes from. You will be increase your means this way in a more tax efficient manner.

The First Way  

      This is the most common way people live below their means. No money is taken out until you have enough income to be financially independent or want to retire. The exception is taking money out of an emergency fund it an emergency occurs.  In order to avoid debt, you will have to save extra money to buy the things you want.

The Second Way

     This way allows you to increase your means as your income increases through the cash flow or capital gains of your assets.


Which way is better? Only you can decide that?

DISCLAIMER:

     I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.  Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk