Saturday, May 25, 2013

The money rant

Every now and then I think about money. If there is one thing I've heard over the years, it's people complaining they don't make enough money. Is that you?

There are two parts to the issue, money in, and money out. MI/MO. Back when I read the Globe and Mail there was a feature where some money people analyzed a families finances. Eventually I stopped reading because I got sick of reading about these people with a huge income, who were all "woe is me, I have no money", and then reading about the stupid shit they spend money on. They had the first part nailed, but blew the second.

So I'm going to go all rantity rant rant rant on you all about money. And time. I know for a fact that one reader and her husband are very wealthy by Canadian standards, and not just in real estate. None of this will be new to her. Go have a nice cup of tea, unless you want to read on and be amused the way I re-say some of the things you've said. A few of my readers are probably millionaires in net worth, but a big chunk of that is their home or other real estate. Little of this will be new to them, though they might not be able to articulate it. Many of my readers are young, some with children at home, and they don't realize that the financial world is actively out to screw them. You need to read every word. Twice. Then, like they say for training, get off your ass and do it.

Money is a tool. For the purposes of our discussion it is used as a way of exchanging value. Most of us give some of our time to an employer in exchange for money, and we use that money to buy things we want. Those things might be a week's groceries for your family, or someone to come and fix your roof. This is much more convenient than Penn West giving me several barrels of oil every day.

The seductive thing about money is that it is somewhat imaginary. I remember a world where people paid cash or wrote cheques for every purchase. They knew how much money they had at all times, sometimes to the dollar. Credit cards were only for the very wealthy. Some of the very first commercials I saw on (black and white) television were for Chargex cards. Now, many people pay for a purchase by sliding a card into a reader and tapping in a few numbers. A minute later they are on their way with their new stuff. They do not know how much money they have.

Then they wonder why the MI/MO thing isn't working. It is, just not in your favour, and that my friend, is the way the world is built. It's built to keep you somewhat on the negative side of that equation, so you have to borrow the money to make it balance. The banks are happy to lend you the difference, and charge you interest.

INTEREST. The word of doom and the word of freedom. It all depends which way that equation is pointed. The first step towards getting that equation balanced is to reduce the interest you pay to the absolute minimum, and to maximize the interest that is paid to you.

What do you pay interest on? Debt. Most debt is bad, and some is worse than others. The only debt that is good is on an appreciating asset, IF AND ONLY IF, it isn't driving you into other debt. The classic example of good debt is a mortgage to buy a house. It appreciates in value over time, or did. Recently this is a considerably trickier calculation. Houses don't always appreciate in value now. More later.

You may have heard the expression "house poor". This applies to people who max out their mortgage to buy the biggest house possible. In the mean time they are nibbled to death by ducks because they don't have enough money for other stuff, leading to other debt, which gradually starts the slippery slope. It might be ok in the very short term. Note that owning more money than the house is worth is not necessarily a show stopper. As long as you can afford the mortgage, and the market turns around, you'll be fine. If you lose your job or even have to take a pay cut, you are screwed.

Just about anything else is bad debt. A car is not an appreciating asset. It's transportation. If you are this close to the edge you shouldn't be buying or leasing a car. More on this later. So called consumer debt is the kiss of death. Did you ever see that bad science fiction movie where the alien in the cute girl disguise kisses the guy and the tentacle comes out her mouth and down his throat to kill him? That is consumer debt in action. Credit cards are brutally bad; pay them off even if you have to miss a meal or two. Payday loans. Ordinary bank loans. Overdraft fees. Home equity loans. Service charges. This is where those oh so clever people are working hardest to suck you in.

You want to move heaven and earth to get rid of bad debt. Whatever it takes. I'm serious. You need to be a ruthless predator, hunting down debt and things that cost you money, and eliminate them. Otherwise you'll be the one getting eaten alive.

What do you get paid interest on? Theoretically, money you have in a bank account, except the interest rate is so low it's below inflation. More practically, monetary investments, such as stocks, bonds, mutual funds, and other such things. You won't be there for a while yet, but that's the goal. To have money you can set aside to earn more money for you.

In short, especially when you are young, you need to put a fair bit of effort into reducing the interest you pay. At first it hardly seems to matter. What's a few dollars, you ask? That's what they want you to think. They add up over time. Those few dollars you saved by renegotiating your mortgage rate down a quarter percent will add up very quickly if you apply it to the principle. You need to take the long view when it comes to money matters.

For almost all Canadian readers, an RSP is a must. That is what started me from being behind, to getting ahead. I was being careful with money, and suddenly noticed I had a couple thousand dollars I didn't have an immediate need for. I was making pretty good money, so putting it into an RSP got me about one third of it back as an income tax refund. Now, read this carefully. That refund went into the next year's RSP contribution, and I got a further one third back. That continued several years, always putting in more money, plus my refund from the previous tax year. I had lots of RSP contribution room to use up. Once you get the feedback loop going it's amazing. One year my refund was over $10K!

So in a practical sense, how do you get interest out of your life?


Go back and read that again. I am assuming that you are on the wrong side of that MI/MO equation. Go back and read it again. Remember what I said about being a predator, looking for debt?

You are not lifestyles of the rich and famous. They have their own problems. Your problem is to ignore the messaging from the rich, who want you to spend your money in their shops, and for a fee lend you the money to do it. Their rules are not yours. You are not going to be one of them any time soon, and will never be unless you change. The bank and the credit card company are not your friend.

The first step is to start cutting your spending. Much of what you think is essential is not. Cable TV is the first thing to go. (But keep the internet!) It's often the medium the world uses to implant the "BUY" message in your brain. Turn it off. Cancel your cable subscription. This does two things, saves you a small pile of money, and frees up a big chunk of time. More on that later too. If you really must watch your show, get it from the library. Wait a year or two. Yeah, life is hard all over. Suck it up. You are on a mission here.

This is going to be harsh. Stop giving a shit about what your neighbours think, or what image you are presenting to the world. Those little treats, as you think of it? A coffee, a snack, that cute top, those boots, whatever? Stop. You can't afford them. There are a million little traps the world sets to separate you from your money. It's a lot of work to not fall into them. Some very, very clever people have designed them, and made it easier to fall in, than to go around. You need to be THAT GUY. That jerk that says no. Because that's what you have to do to get on the right side of that equation. Say no. A lot. To yourself. To your spouse. To your deadbeat relative. To your kids. Especially to your kids, maybe.

Every time you think about buying something, your first question is, "Must I?" Not want, must. In the case of your debts, current bills, and groceries and other essentials, the answer is yes. Even then, you try to make this amount as small as possible, except paying debts, make that as big as possible. If it's not a must, it's a want, and then the question is "Can I afford it?" If you are trying to get the equation going the other way, you probably can't.

You are in make do territory. You must be all about deferred gratification. Make the hard calls to get stuff sorted out. No matter that you are a whiney spoiled brat who has never had to defer gratification. If you cannot defer gratification, you will never be well off, let alone rich; you will always be owned by the rich. Your choice.

Much later the question for the wants gets harder. It becomes "Do I want to afford it?" This is where you want to be. No, you are not there yet, reading this. You will be there when you have 6 months gross income in various near cash investments, and your only debt is a mortgage. It might take years. Start today. It will go quicker than you think.

The second step is the income side. Now that you've stopped watching cable TV (You have stopped, right? If you haven't, this part isn't going to work.) you have some time freed up. The average viewer watches 4 hours of TV a day. You are going to do a few specific things with that time. One is get some exercise, preferably with your family, even if it's a brisk walk. This will help get your brain going, and get you into better health.

Another is to make yourself more valuable in the short term to the people that pay you money. There are many ways to learn things that will make you more valuable. Aimless internet cruising won't cut it, but it can be a valuable tool for learning. The public libraries are free, or nearly so, and have the advantage of being staffed with people that LOVE it when people ask questions. A question like "I want to know more about x" where x is something you are interested in, will make their day. They will help you set up a course of study if only you ask and will be happy to do it. That's why they became librarians. Go ahead, make their day.

Another is learn to cook and get "fast food" out of your life. We have to eat. Much of what's in the supermarket is bad for us. Learn about nutrition. Learn how to cook if you don't know. You may have to invest in some cooking tools, and spend more in the short term buying groceries. Compare that to buying lunch every day at work. If you get a sandwich and a drink for $10 you're doing well. Times 250 working days a year is $2500, times a 30 year working career is $75,000! That goes a long way to buying groceries.

We've done this for years. We make dinner for 4 or more. Then take it to work the next day. People say "leftovers" as if it's a bad thing. It should be a point of pride. I've had people smelling what I take out of the microwave at work, and offering to trade. Linda is a good cook, and people say they don't have time to cook. Bullshit. Factor that into the time you used to watch TV. Never buy fast food again. It's bad for you, and expensive for what you get.

Books are probably the single greatest invention of our civilization. For the effort of opening a book and reading, you can find out what some of the smartest people who have ever lived thought about various subjects. Once you get a bit of money, you could do much worse than read about Warren Buffet thinks about investing. It's all there on paper.

This can start off by learning how to use software more efficiently. This will save time at work, meaning you can get the same work done more quickly, which ought to be good for your performance reviews. I'd suggest it's time well spent learning some details about how our financial system is designed to screw you over, if only to make it easier to understand why you are saying no a lot.

But the real payoff is learning more about what interests you, that with any luck leads to things that people will pay you to do. There are many high priced courses that purport to give you some certification. That information is often available for free with a bit of digging. You may be able to challenge certification exams without having taken the courses.

I guarantee this investment in yourself will pay off. Knowledge always pays off, but you can't predict where or when. At worst it will let you do your day job with less effort, meaning you can put more into other activities. Better, it will pay more money and lead to promotion. Best, it gets you into a situation where you get well paid to do the things you love to do.

Cars are one of the biggest financial traps if you do them badly. To be honest I don't know a lot about this. My goal is to mitigate the damage. Our strategy is to buy a good quality car that meeds our needs (not wants) maintain it carefully, and drive it till the wheels fall off. Our current car is a 2004 Honda Accord with almost 236,000 K (146,600 miles) on it. A previous Accord went 340,000 K.

We have only one car, which many of our friends find baffling. When we think that a car costs roughly $8K a year to buy and maintain, it's worth a bit of planning and using alternative transportation. Do you really need 2 or more cars? Really? Are you sure? Do you need a car at all? I hear you talking about driving kids to activities. Uhuh. There are two parts to that. Drive, and activities. Think it through. Are you doing what you want to do, or doing what society has sold you into thinking you should do?

Buying a good used car is also a viable strategy, if you do your research. There used to be a class of guys that bought near junkers because they could fix them up and nurse them along. That doesn't happen so much anymore, what with all the computers in modern cars.

If you are scrambling to get on the right side of that equation, you may well want to sell your car to use public transportation, or a bicycle, or your own feet. A car can save you time, and be convenient, at a price. If you can't afford it, you are better spending the time. After all, one can read a book on the bus, and that book could be about improving yourself.

Which gets me to the time and money trade off. One of the things you need to know is how long you have to work to put a dollar in your pocket to spend as you please. That's how you have to think. Figure out how long you have to work to earn each net dollar off your paycheque. Then figure out what  your mandatory spend is, and figure out how long you have to work for each discretionary dollar that's left. I'm pretty sure the number will shock you. Now, when you think about buying some "treat", you do a bit of math and think time, not money. That coffee and snack isn't $10, it might be an hour on the job, or it might be 200 hours. Is it worth it?

It used to be buying a house was a good deal, and worth going into debt for. It might take 25 years to pay off, but it would go up in value. That was then. When we bought this house nearly 30 years ago, it cost about 1.3 or 1.4 times our annual income. Our incomes have gone up, but house values have gone up faster. Now that same house is somewhere between 2.2 and 2.5 times our income. Good for us, not so good for the people trying to buy now.

Buying a house isn't always the right thing to do. It's good if you can afford it, and plan to stay there for a while. It's not good if you're just starting your career and may have to move often. The financial people can manipulate the numbers to make it look like buying is cheaper than renting. All I can say is this is one place where it's nearly impossible to do too much research. You need to know the math about mortgage interest, and all the other financial costs of a house or condo. It's very difficult to determine what the actual value of a house is, both monetary and emotional. Right now, in many markets, homes are over valued. I would advise extreme caution about buying a house or condo.

In another rant I talked about the price of a bargain. I won't go into it here, but if you're looking to get onto the right side of the MI/MO equation you have to be careful what you buy. Often the "cheapest" product is not the best deal. There is an S shaped graph that equates quality and cost. Cheap shit is cheap quality and it will break soon. Guaranteed. As you spend a bit more money, you get more features and usually the quality goes up as well. The quality goes up quicker than the cost. At some point you reach the end of the major increases in quality, and the price starts going up much more than the quality does. I think the trick is to buy near the top of that S shaped curve starts flattening out. The aim is to get the best bang for the buck. Whatever it is will last much longer.

All this presupposes you know what you actually need and want. Not what the advertisers are trying to sell you. Oh no. You turned that off, remember? One major rule is that all advertising is a trick to separate you from your money. That's one thing you will do with the time freed up by not watching TV, is think about what you actually need to live life in the way that makes you and your family happy.

We don't have children. When I listen to people talking about their children, all too often it's about buying stuff. But children don't want stuff till they've been brainwashed by advertisers. They want you. Your time. Not the stuff you buy.

Lots of people have found they don't need possessions to be happy. They don't need a lot of money. That it's more important to have time to spend with family and friends, doing the things you enjoy. Going through the effort (and it will be effort, no doubt about it) is probably one of the most important things you can do for yourself. Do it. Start today.

Where did all this come from? A particular blogger a little while ago asked "Do you guys have any good money-saving tips?" There are some points below that I didn't mention in my rant above, particularly coupons.

My first comment was:

Yeah. Don't shop. Ignore advertising. Get books, movies from the library. Making wine from a kit is $3-4 a bottle, and is better than commercial wine. Don't ever, ever buy wine from a restaurant. You don't mention credit cards - pay them off in full every month, without exception. Do without wine if you must. Never eat fast food, it's expensive for being cheap. Buy real food instead. Learn how to cook, which I admit is a two edged sword. You'll save on prepared stuff, but kitchen toys can be expensive. Still, better for you in the long run.
When you buy stuff, if you really must, buy good quality and take care of it. The bonus of this approach is that you need never darken Walmart's door again. All they have is cheap.
And coupons. Bah! I say it again, BAH! The whole point of coupons is to make you buy shit you wouldn't normally buy. Stuff you don't like even, you buy saying to yourself, what a deal. Bah! The only deal is not spending money unless you must. On stuff you really need, and that you happen to like.
Unfortunately for you, the world is designed to set you up for failure. Right now it pays you shite while you look at paying back student loans and buying stuff. They are trying to get you hooked into paying interest, and you'll go on paying interest the rest of your life unless you take control now. This means moving heaven and earth to stop paying interest. Ever. And get yourself into a state where they pay you interest. It won't happen overnight. It won't happen from couponing.
Stop thinking that the life on TV is what you should aspire to. You might think you know it's all fake, but the brain sucking aliens that are running the TV industry want you to think that, while they subliminally program you to spend money.
That list, booze, Amazon, coffee. Stop. Just stop, or cut down dramatically. Internet I say keep, for two reasons. Infinite entertainment there, but more importantly, it's a tool to increase the amount of money coming in. Part of your life should be making yourself more valuable, so that people with money want to pay you to do stuff for them. The better you are at this, the more money you will make. After a while, you won't need to work so much to make an acceptable amount of money, and you can spent the time doing things you like.
With any luck, internet use will find you things you like doing, that people will pay you to do. Which is a bonus, but it won't happen if you prepare by sipping wine and shopping at amazon. So BITCH UP! Take control. At your age you are in a rat race and you need every edge. Debt and interest you pay are millstones around your neck, holding you down. You asked.

My second comment a bit later was:

Me again. Another saving money tool. Stop thinking about money. Think about time instead.
One thing you should absolutely know is how long it takes you to earn money. Not your gross. How long do you have to work to put a particular amount of money in your pocket? That way when the stupidly overpriced, over-flavoured, sugary beverage that ostensibly contains coffee is on your mind, you can say, I have to work x many minutes to buy that coffee. Is it worth it?
An example. Lets say you get paid $25 an hour, and you work 40 hours a week, 50 weeks of the year. That's $50K, a nice round number. Let's further say you pay 30% of that in various taxes and other deductions. Income is down to $35K. Divide by 2000 working hours a year is $17.50 an hour. Or 34 minutes to earn $10.
Now for the graduate course. Start stripping out your mandatory payments to find your disposable income, that is, income you can choose how you dispose of it. Now do those same calculations again, based on your full years working time, and you will suddenly discover that $10 in your pocket you can spend as you please, might take 2 or 3 or more hours to earn. Excel is your friend for these sorts of calculations.
Lastly, do you now know what you actually spend money on? To the nickel? Start tracking it. Write down everything you spend in a month. Every nickel. What you spent it on, and how, (cash, debit, credit). Sometimes just the act of having to write it down will stop you from spending.


  1. Nothing new to me. I'm actually on the "right" side of the equation (have been for just over a year - no debt not even a mortgage and got rid of cable LOL). But one challenge for us after so many years of not giving in to very many of our "wants" (though we still at out way too much and buy too many things for our children), is figuring out how to give ourselves permission to spend at least some of the time. Overall, a good problem to have. Just don't want to die on a pile of money wishing I had spent more of it living my life.

    1. One of the things I did for that was to hire a financial advisor to get a better picture of how much was enough for retirement. Once I knew I was on track for that, I opened up a lot about spending. I still think about if something is truly something I want and will use.

  2. A late comment via Facebook from my buddy Kelly, who is in the financial advisor world. "Finally a moment to comment on this blog post. Very well said! I spend a good chunk of my work days crushing retirement dreams, because people are on the wrong side of the MI/MO equation. One thing to add to your blog, that can sidetrack a retirement income plan...are FEES!! Please ask what you are paying, who you are paying to, what ARE those fees? Very soon, in less than a year, what you are paying in the way of management fees for owning a mutual fund, will be reported on your statement. This will be a shock to many investors...that their advisor is getting paid a wack of money and giving no service. If you want to do the quick math, most advisors are getting paid about 1.0% of the assets you own through their firm. Are you getting comparable service for that amount of money? Are they helping with your financial, estate, succession, insurance planning? Because they are getting paid to."


Looking forward to reading your comment!