Tuesday, April 25, 2017

Neighbour Joe - Books for new investor



Before starting this journey, I read a number of books and blogs that provided me with good insight on how to be financially free. I'd recommend checking out these materials if you are thinking about starting your own journey.
  1. Rich Dad Poor Dad This simply written book teaches readers to have money work for them. I am going to highlight a few key points that I have learned from the book. The author, Robert Kiyosaki, also has his own blog that further highlights some of his philosophy.
    1. When investing your money, your aim should be to increase your monthly income and not focus on capital growth. The idea is that if you keep investing to increase your monthly income, you'll eventually have enough monthly income from your investment to never have to work again. 
    2. The author categorizes people into four separate categories. The first are people that make money for others; these are your everyday workers and where a majority of people fall into. The next are people that make money for themselves; these are your self-employed individuals, doctors and lawyers. Then, there are the people who have others making money for them; these are people that run their own company. Finally, you have people who have their money work for them; these are your typical investors, owners or landlords. People in the last category don't have to spend any of their own time and still earn an income.
    3. Traditional education has produced a society of competent, intelligent workers but hardly any owners. Kids grow up learning that if they get a good education, they'll get a high paying job and once they get a high paying job, they'll live a good life. They end up chasing jobs with higher salaries by being better workers but continue to help others make money.
    4. If you want to be financially free, then you need to get out of the "rat race". The author uses the term "rat race" to highlight how a lot of people get trapped in a vicious cycle of working hard for a salary, realizing they need more money, working harder for a higher salary, spending more money because they earn more, and the cycle repeats itself. 
    5. The last point I learned are the definitions of assets and liabilities. The author gives a very simple definition. Assets are something that produces cash for you while liabilities are things that take cash from you. Therefore, if you have more assets than liabilities, then your money is working for you. It was the first time I was introduced to the idea that your house is not an asset because it does not produce cash for you, but instead it takes cash from you in the form of property taxes and up-keeps. Using this relatively simple concept, the author argues that a house is a liability and not an asset.
  2. Unshakable: Your Financial Freedom Playbook This book is written by a famous motivational speaker, Tony Robbins. It teaches people to stay calm and patient when dealing with your finances along with a few other useful tips.
    1. Tony tells people that the best strategy for investing your money is to invest in the long term. This is what people refer to as a buy and hold strategy. He argues that if you consistently invest into the stock market in the form of an index fund, regardless of how the market is actually doing, you'll end up with a decent return over the span of 20-30 years. So even if the market is performing poorly, you should keep investing because that's when prices are low. Then, when the market rebounds, you'll enjoy a significant gain.
    2. When investing into the market, you have to be prepared to ride out when the market is doing bad, hence the title "Unshakable." He states a lot of people lost money during the 2008 recession because they became fearful and sold all their investments when the price was at an all-time low. If they had stayed in the market and kept investing, they would have recovered by now and actually came out on top.  
    3. Asset allocation is important to protect your investments from market volatility. This is just another word for diversification. Tony emphasizes that by keeping your assets diversified, even when the market goes through its cycle, you'll still maintain a decent annual growth in your investment.
    4. The last big point that I learned from the book are the fees and hidden fees that are associated with a lot of financial products. People are often too lazy or too overwhelmed when managing their own investments. This leads them to hire fund managers to do it for them. However, most fund managers fail to outperform the market while charging a hefty percentage. Tony recommends that instead of putting your money into actively managed funds, you should look at passive index funds where the annual fee is much less with a proven better performance. 
  3. Predictably Irrational I read this book during my last year of university because it was recommended by my entrepreneurship professor who was a successful business owner. Unlike the previous two books, this book explores the irrational decisions we make in our everyday lives when it comes to spending. A good example is how consumers are hesitant to buy a $10 product because they know it is selling for $8 across town. However, when deciding rather or not to get a $1000 audio package on their $30,000 new car, they are far less hesitant to spend the $1000. This book helped me identify my own irrational habits and allowed me to approach these situations logically. I definitely recommend giving this book a read as it might help you cut back on some irrational spending. 
By constantly reading materials related to finance or wealth-building, I was able to learn the different perspectives and philosophies of other people. It helped me to greatly develop my own wealth-building philosophy and gave me the confidence to start my own journey. The book I'm currently reading is "The Millionaire Next Door."

Sunday, April 23, 2017

Step 2: Know Your Total Annual and other One-time Expense

After compiling a list of monthly expense. Now it’s time to figure out my annual expense or other one-time expense that’s not included on my list of monthly expenses.


Auto Insurance: $1,380


My first annual expense is automobile insurance. Auto insurance can be a monthly charge or an annual charge depending on the payment plan you chose. I choose the annual payment because it is usually a bit cheaper and I can use my credit card to pay for it. Using credit card to pay for major expense is a great way to collect reward point or cash back. I’ll write another post on reward point and cash back letter.


Auto License: $120


Credit Card Annual Fee: $120


I signed up for the American Express SPG credit card last year because of the sign-up bonus. If you are a collector of travel reward point, you’ll know how valuable SPG points are. I tried but couldn’t get the annual fee waived so my plan is to cancel it before annual renewal. SPG point can be transferred to Aeroplan and a lot of other frequent flyer program. Even if you chose to transfer them to Aeroplan (not the greatest in my opinion), you’ll get an average of 2 cents per point. However, if you can redeem them for long haul business-class travel, those points can be worth as high as 8 cents each. This is what I did last year for my honeymoon and I’ll write another post about that later.


I am very sure there are other annual expense but I just can’t think about them right now. Once those other expenses come up, I’ll add them onto the list.


So to sum up, my annual total of monthly expense is $39,000 + $1,620 of annual expense = $40,620 in expense per year. Comparing this number to the 2015 Ontario provincial average household expense of $62,719 (current consumption) according to Statistic Canada, I am 35% below the average but my wife and I have no children at the moment.

http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil130g-eng.htm

Friday, April 21, 2017

What I have learned finacially from moving around!





What I didn't mention in the About Us was that right after I graduated from University in 2011, I immediately left Toronto and moved to Eastern Canada. After spending a year in Eastern Canada, I moved to Alberta for a few years before moving back to Eastern Canada. After moving around a few times across Canada, I had come to realize a few things.

  1. Cost of Living Across Canada Having lived in different cities across Canada, I have realized that the cost of living in Canada is actually quite manageable for a millennial like myself. People complain how they can't afford to move out to Toronto or Vancouver but if they look across the country, there are a lot of places to work and live a very comfortable life. This site shows the average house price in all major cities across Canada. As you can see, the difference between some cities are $100,000 plus. That's quite of bit of money for young people trying to make it in this country. If you are curious about what kind of house you can get in different cities across Canada, just go to www.realtor.ca.
  2. Premium for living in a certain geographical location Everywhere you go, there are areas that cost more and areas that cost less. This has nothing to do with the size of the house, but merely the location of the house. People pay a large premium to live closer to amenities or pay for a more expensive house just to save 10 minutes every morning. You can see it in Toronto right now where people are willing to pay lots of money just to live closer to the city. These overpriced geographical premiums prevent a lot of people from being financially free. Sometimes, a simple change in location might be the key to being wealthy.
  3. Geography and Wealth Building Expanding on my previous point, where you choose to live can greatly affect your ability to build wealth. Premiums on Geographical location work twice as hard against you. You pay more for the actual house and you also pay more for costs associated with living (i.e taxes, utilities and transportation). Here is a simple example. By living in Eastern Canada, I paid less for my house, property tax, insurance and utilities compared to what my parents paid living in Toronto. You might argue that you can earn more money in a larger city, but not according to Stats Canada. I remember when I was living in Alberta, my wife was able to find a higher paying job and our house cost significantly less when compared to Toronto. Where you live can significantly affect the rate your wealth can grow.
  4. Your Surroundings and Spending Habits  Your surroundings can greatly affect your spending habits. I remember when I moved away from Toronto, I felt less pressured to buy the most expensive car I could afford or the latest technological gadgets. A lot of people are easily influenced by their surroundings or the people they interact with. I have learned that by changing my surroundings, I became less susceptible to such influences. I am not saying that you have to move around like me, but changing your surroundings either by getting a new job, making some new friends or volunteering in an area you are not familiar with can be helpful. Go experience different surroundings and I guarantee it'll make you smarter financially as well.
I am very passionate about not living in an overpriced city like Toronto or Vancouver because it puts you in a huge disadvantage for building wealth. It's like running a marathon and choosing to do it while carrying a 30lb weight. I recently read an article where the author explains in detail about how living in a low cost city can benefit you greatly. I grew up in Toronto and I love the city, but having lived and seen different cities across Canada, I can tell you there are options out there. I hope that people realize a simple decision can set you ahead 5 to 10 years financially. This can mean that instead of retiring at 65, you can now retire at 55. Or instead of spending your time working, you can spend more time doing the things you want (i.e spending time with friends or pursuing your hobbies). When I committed to this journey, I made a conscious decision to always live in an area with affordable housing. Take my advice and start being wealthy today.

Tuesday, April 18, 2017

Becoming wealthy in one simple sentence.

I recently read this post on www.esimoney.com and figured I share it here. I personally embrace this simple philosophy along with a lot of other wealthy people. I love how to author kept it simple and straight to the point.
"Earn, save, and invest as much as you can for as long as you can."
Then he shared this picture along with his post.


Monday, April 17, 2017

Borrowing to invest? Everyone is doing it.

A lot of people will consider this once or twice in their life: 'Should I borrow money to invest into an opportunity?' The answer will depend on your own risk tolerance and what you are investing into. I know...what a disappointing answer. But at the end of the day, if you did your research, then the strategy is a viable. You'll need to understand all the risks and figure out how to mitigate it.

However, what I wanted to express in this post is that a lot of people are already doing it without realizing it. MORTGAGE! That's right, when you get a mortgage, you are basically borrowing money and investing into the housing market. The "dividend" from your investment is having a place to live.

I remember the first time someone said that to me... My mind was blown. Imagine if I told you I have a $200,000 mortgage, you will think I am a normal sane person like everyone else. But what if I told you I borrowed $200,000 and invested into Bell (TSX: BCE), you'll probably think I am a crazy adrenaline junky with a serious gambling problem. Why the drastic difference? Because a lot of people believe that real estate is low risk and the stock market is pretty risky. The truth is all investments are low risk if you know what you are doing and high risk if you don't. If you already have a mortgage then you are already investing. The next step is to start diversifying your investments, don't put all your investment into your house.

Friday, April 14, 2017

Step 1: Know Your Monthly Expense

I define financial freedom as not having to wake up for work and still be able to afford my basic daily expense. If I have extra money left over, I can go travel but that’s not included in my basic daily expense.

So step 1 of achieving financial freedom is figuring out what is my basic daily expense. For that, I can either calculate it as a weekly amount of a monthly amount. A monthly amount makes more sense because majority of the bills we pay are monthly.

To estimate your monthly expense, you can use the Budget Calculator from the Canada Mortgage and Housing Corporation, any similar budget calculator you can found online, or just use a spreadsheet (that’s what I used because its easier to work with the numbers afterward).

So from my calculation, between me and my wife, our monthly expense is $3520:

Housing: $2000
Grocery: $500

Transportation: $430
Telephone: $90
Dining: $500

Total:$3520

Housing: $2000
We currently don’t own a property and have no plan to do so in the near future. This is not because we don’t want to own one but because of the pure Seller’s market in the GTA. The housing price is not supporting the fundamental of the GTA economy so we’ve decided to wait and see. I’ll go more deeply into my analysis in a future post. As a result, we are currently renting for about $2000 all-in (utilities, internet, etc.) per month.

Grocery: $500
My wife and I usually cook at home to save on dining. We spend about $100 on grocery at our weekly grocery run and so far that’s enough for dinner and packing our lunch for work. I also do quite a bit of volunteering and often get complimentary dinner which really helped my expense on food. “Will Volunteer for Food!”
 

Transportation: $430
We have one car and that’s my primary mode of commuting to work. My wife commute by public transit (TTC) because our start time doesn’t match. On average, I spend about $300 on gas and she spend about $130 on fare (we calculated it is still a bit cheaper to not use the TTC Monthly Pass even after the available tax credit, I’ll write another post on that analysis).

Telephone: $90
I am very glad I still have a government phone plan with a major carrier from 7+ years ago. It might not be the best in the market but very good compare to current plan offered. $60 tax-in for 6GB of data but only 125 SMS (who still use text nowadays anyway, everything is on data now). I could get my wife onto that plan so she is just using a text-talk only plan and I hotspot her data when needed. She have wifi at work anyway.

Dining: $500
We budget about $500 for outside dining and buying lunch at work every month but actually never used half of that amount. I’ll keep this in for now.

Note: There are other annual or one-time expense (such as insurance, vehicle maintenance, clothing, etc.) that I’ll share in the next post. At first I was going to include them in the list above as an evenly distributed amount throughout the 12 months but that’s not financially correct because the actual money going in and out of my bank account will be wrong if I account it this way.

Wednesday, April 12, 2017

Neigbour Joe - Monthly Budget

Today, I am going to share my monthly budget. Hopefully it will help you with new ideas to reduce your monthly expenses.

HOUSEHOLD INCOME (ME +_WIFE) Approx. $6,500 after Tax and Work Pensions

EXPENSES Approx. $3,240
Mortgage + Property Tax: ~$1,075
I recently reduced my mortgage payment from $950 bi-weekly to $1,075 monthly, so I can have more cash on hand for miscellaneous expenses with the baby. Yes, I was super aggressive with my mortgage payments because I really wanted to pay it off quickly. My property tax was $2,450 last year which is about $204 a month.

Utility: ~$150-$200 Depending on the season
A lot of houses in Eastern Canada uses electricity for both space heating and water boiling. Depending on the season, electricity prices can be quite high, but still nothing compared to the prices in Ontario. Our house is set to 19 Degrees Celsius when we are at home, and goes down to 14 Degrees Celsius while we are at work. Our basement is kept at around 11 Degrees and our bedroom is set to around 17 Degrees when we are sleeping. Besides space heating, water heating is the next big consumption of electricity. The last biggest item is obviously the fridge and our mini fridge. One last note to remember is that a lot of provinces give rebates or tax credits for products and home improvements that can help reduce your monthly utility bills, so be sure to do some research.

Cell Phone: ~$120 for 3 Month
My wife is obsessed with finding deals, especially for cell phone plans. I’ve changed my plan 3 times in the last 3 years. My current plan is with Public Mobile which costs me $120 for 3 months and I get 12 GB of data along with unlimited calling and text, plus a $2/month deduction for auto pay (comes to $116 for 3 months). To save even more, we’ll use our points from various grocery stores to buy Public Mobile vouchers to pay our cell phone bills. Maybe I’ll get her to do a post later to talk about all the little savings and deals that she keeps finding. Her favorite website is RedFlagDeals. 


Internet: ~$55
We don’t have the best plan but it’s enough for Netflix, online gaming and binge surfing 9GAG. 

Food: ~ $600 - $800
This is buying standard groceries and does not include eating out. We do have a Costco membership that pays for itself since we do a lot of shopping there. Groceries in Eastern Canada are slightly more expensive for whatever reason, which is why our spending seems high. I can assure you we are not buying steaks or lobsters on a regular basis. 

Gas: ~$300 -~$400
We have two cars and we fill up at Costco Gas about once a week.

Insurance: ~$270
This is insurance for both cars and home insurance on the house. If you didn’t know this, you must have home insurance as a condition for the bank to give you a loan for your house.

Entertainment (Eating out + other stuff): ~$100-~$200

My wife and I probably eat out once a week, usually on the weekends. We don’t eat anything fancy, and it might be as simple as eating lunch a McDonald's. We prefer staying home on the weekends if we didn’t have to do a grocery run.

Misc Expenses: ~ $200
This includes expenses for our dog, donation to World Vision, and other random items. Instead of buying pet insurance for our dog, we put $100/month aside in a savings account for our little pup. So, if our dog lives a long healthy life, then we’ll have some extra money saved up for other items if the money remains untouched.

Things to note: both of our cars are completely paid off, so we don’t have any monthly payments on our vehicles. We don’t have Cable TV or a house phone since Netflix and cellphones are more than enough. I personally think that Cable TV, cell phone plans and utilities, are the easiest areas where people can reduce spending without much sacrifice. Minor things like cooking at home or making your own coffee/tea in the morning will also start adding up in terms of savings. Something my parents always said to me, is that “as soon as you leave your house you are spending money”.

LEFT OVER Approx. $3,260
The amount left over is for our savings, which is used to invest or used to pay off debt, such as my Line of Credit. My wife does the saving and I do the other two.

Saturday, April 8, 2017

Your house is not an asset.


If you are like me and many other Canadian homeowners, your house is probably one of your biggest asset. This is what most people believe, but I am going to explain to you why it's not.

OK... before you get all upset and financial on me, yes, from an accounting perspective, your house is considered to be an asset. I even put my house down as an asset when I calculated my own net worth. However, hear me out. Your house is not an asset, but more of a liability. Here is why:
  • When you take out a mortgage to buy a house, you already incur a huge liability from the mortgage itself with accumulated interest. In case you didn't know, a $200,000 mortgage, with a 25 years amortization period at 2.35%, will cost you $65,689 in interest. That's assuming the interest rate stays low. That's why it's always a good idea to make extra payments or increase your payments whenever possible.
  • You property tax usually costs around 1% of your property value.
  • Over the life time of your house, you'll need to perform various repairs and maintenance that will cost you $$$ out of the blue.
  • The most important point is that your house will NEVER generate value, unless you rent out the basement or sell it when the market is doing well. Even if you sell your property, you'll still need a place to live.
Why does it matter? If you accept this concept, you'll realize that spending a fortune on your house and over leveraging your mortgage is not a good wealth building strategy. I am not suggesting to not purchase a house, but to always purchase a property within your means. If you are in a hot housing market like Toronto, then maybe getting a small condo unit, or to rent a place is a good strategy until the market cools. Instead, invest your extra income and let the power of compound interest work for you. At the end of the day, what you want to achieve is to diversify your assets. Here are two examples. These breakdowns are just for argument sake:

Joe 1 ($1 Million)
House - 25%
Stock - 25%
Bond - 25%
Other Investment - 25%

Joe 2 ($1 Million)
House - 80%
Stock/Bond/Other Investment - 20%

Joe 1 has 75% of his assets providing an annual return, while Joe 2 has only 20%. Lets say that they all give a 10% return just for simplicity. Joe 1 will get $75,000/year and Joe 2 will only get $20,000/year. Keep in mind that these assets will continue to provide annual return even after retirement. Also, Joe 2 probably paid way more than Joe 1 on interest for his mortgage just because he purchased a beautiful $800,000 house.

Just because you can afford a bigger house doesn't mean you should. Putting all your eggs in one basket is never a good idea. If you are still not convince then go search "house is not an asset" on Google.

Monday, April 3, 2017

How to start getting wealthy?




When it comes to growing your savings, a lot of people do not know where to start and are often intimidated by the idea of investing. What they end up doing is leaving all their savings in a normal savings account or a Tax Free Savings Account, which gives them about 0.5%-1% return per year. It really hurts to hear that people are just leaving their money in a savings account, and letting inflation slowly eat it away. I am not saying to take all the money out of your savings account and invest, but be realistic about what you need for emergencies and to put the rest somewhere else. 

Here are two simple accounts that you can easily setup at your current bank, by going to your local branch or doing it online. I'll recommend going to a branch, since there's usually paperwork that needs to be completed, which will be easier to do in person.

  1. Mutual Funds - It's pretty much getting someone to manage your money and to grow it for you. Your return will most likely be better than a savings accounts. To start off, I'll recommend that you go to a TD branch and open a TFSA Mutual Fund e-series account. Once you are setup, I'd recommend investing into one of the TD e-series index funds, which in my opinion is far superior than other mutual funds that are offered. The key thing about mutual funds are the cost for managing the fund, known as the MER (Management Expense Ratio), which are often given in a percentage. MER tells you the percentage of the funds it requires every year to manage it. If you invest $1000 into a mutual fund with 1% MER, it means that $10 from your investment will be used to pay the fund manager and other expenses. If the mutual fund didn't make or lose any money that year, you'll end up with $990 next year. When a mutual fund posts a return of 10% last year, but has a MER of 2%, you essentially only get 8% growth in your investments.
  2. Discount Brokerage - Most banks will provide this service. This will allow you to purchase stocks and bonds while charging you a commission fee per transaction. Some brokerage accounts are now charging a yearly administration fee if you don't meet certain criteria. Once it's setup, you can start trading Stocks, Bonds, ETF (Exchange-Trade Fund), and much more. To start off, I would recommend that you setup an account with your bank, purchase an index ETF, then setup a DRIP(Dividend Reinvestment Plan) for your account. The DRIP will take any dividend and reinvest it into the ETF so it can grow. Usually, DRIP does not charge a commission fee when it is reinvested. An ETF (Exchange-Trade Fund) is sort of like investing into a company that invests into a broad range of other companies depending on the ETF. Index ETF usually follows an index fund like the S&P/TSX; they'll invest into all the companies that the index is tracking. The S&P/TSX tracks the top 250 companies currently listed on the Toronto Stock Exchange, so when you buy an ETF that follows the S&P/TSX, you are essentially invested into all 250 companies. How's that for diversification?
The main difference between a mutual fund and a brokerage account is that Mutual funds usually allow for monthly contributions without any additional charges. Whereas the brokerage account will usually charge commission for every purchase. Therefore, if you are starting small and planning to make monthly contributions, then start with the mutual fund option. If you want to make a one-time purchase and leaving that money alone, then go with the brokerage option. Both options will be better than a normal savings account.

This should get you started in the right direction. But after that, you'll have to do more research on what else you can do with your money. Start small and slow so you don't get overwhelmed and become discouraged.

Saturday, April 1, 2017

About Thrifty Salaryman

Hi everyone, I am the Thrifty Salaryman. I am married, currently have no children, and live in the biggest city in Canada. With an Engineering background, I enjoy analyzing numbers and eventually developed an interest in analyzing financial data related to the stock market. Upon graduation from University a few years ago, I had my shot at the startup arena, but never got as successful as some of the big tech startup companies. My attempt in being my own boss put me into a very bad financial position, so I decided to go back to working for a multinational corporation, and maybe trying again later in my life.

The goal of this blog is to track my journey into financial freedom from having a net worth of just $27,000 in year 2017. $27,000 is only my net worth without including my wife's.


I believe achieving financial freedom within 10 years can be done because it is all about smart financial decision making. (I haven't verified the calculation yet so we might have to revisit this goal at a later time.) The main objective of this blog is to show my reader the impact and outcome of every financial decision I’ll make. If it’s a good decision, I hope I’ll help you do the same. If its a bad decision, I hope I'l help you make a better one.

Neighbour Joe - Starting Net Worth

My journey actually began when I was first employed at my very first job. But that was a while ago, and no one wants to hear how I swept garbage off the floor. Therefore, I am going to mark today, April 1st, 2017, as the official start to my journey. I am going to show you my balance sheet and use this as a base line for measuring progress. Please don't let my wife know how much money I've been saving up.

Asset
Cash: $400
Savings: $5
TFSA Investment: $24,000
TFSA Mutual Fund: $3,500
Real Estate: $260,000

Liabilities
Mortgage: $163,000
LOC: $12,000 


Net Worth
: ~$113,300

My net worth is probably lower since I didn't account for the cost of debt servicing (i.e interest on debt) in my liabilities. I am going to leave it out for now just to simplify things, but remember that debt servicing is a huge liability that you need to be mindful of. I have also left out my vehicle as an asset because it depreciates really fast, so it will become irrelevant down the road.

As you can see, all of my savings is currently invested. Some might argue that it is not a good idea, but I have a stable job with a very low risk of lay-offs. In my situation, I am comfortable investing all of my savings, but you'll need to decide on your personal comfort level.