The title of this article is a play on a working paper from the National Bureau of Economic Research called The Power of Working Longer . This paper languishes behind a paywall, but the Wall Street Journal interviewed one of the authors, Professor Sita Nataraj Slavov, and this interview is at least temporarily accessible. One quote from Slavov: “We found that a 56-year-old would only need to work about a month longer to earn the equivalent of saving an additional 1% of their salary for 10 years.” I find it funny that it takes a “study” to draw this conclusion. If you save 1% for 10 years, that’s like saving 10% of a year’s pay, or about 1.2 months’ pay. If you invest the money for a return that exceeds the growth in your pay, your savings will grow to a little more than 1.2 month’s pay. So, it shouldn’t be at all surprising that you can get the same benefit by working a little over a month longer. I guess the message is that we shouldn’t stress too much about not saving enou...

“Pay yourself first” is some great advice to help people save money. If you have any trouble with money, as most people do, there are a number of ways to improve your finances including paying yourself first, tracking your spending, and budgeting. Even though I think these things are important, I don’t do them myself. The idea of paying yourself first was popularized by David Chilton in his first Wealthy Barber book. When your pay hits your bank account, the idea is to set aside some chosen percentage for savings before you begin paying the month’s bills and start spending any money on wants. Most people who wait until the end of the month to save whatever is left end up saving nothing. However, my wife and I have saved over 50% of our take-home pay for several years now by using the dangerous save-whatever-is-left method. We don’t bother to smooth out our expenses with equal billing plans and paying monthly for insurance and other things. We don’t spread out big expenses li...

I recently saw a tweet with a chart showing how much money you need to save each day to become a millionaire at age 65. This was one of those motivational things designed to get young people to start saving. For just two bucks a day, supposedly a 20-year old could become a millionaire in 45 years. I applaud the part of this that tries to get millennials to save money, but two bucks a day won’t make anyone a millionaire. The implicit assumption in the chart was that we can get a 12% annual return from investments. This is just a dream. With a balanced portfolio and slightly lower than average investment fees, the typical investor could reasonably hope for a 5% annual return. But this is ignoring inflation. In 45 years, cash might have only one-quarter of its current spending power. When people imagine becoming millionaires, do they really mean to have only the spending power of a quarter million dollars today? To become a millionaire in today’s dollars, we need to focus on...

A question that I think people should ask themselves, particularly early in their working careers is “What do you have to show from all the money you’ve earned so far?” It’s not too hard to add up all the money you’ve been paid over the months or years. For anyone who has worked for a least a few years, the total will look impressive. So, where is it? Obviously, we need to spend some of it to for food, clothing, and other necessities, and there’s nothing wrong with a few indulgences, but surely there is something left of all that money. Or maybe not. One good answer to this question is savings. If you can say, “I’ve been saving for 5 years now, I’ve got no debts, and I have a portfolio worth nearly $50,000,” I’d say you’re in good shape. Another good answer is equity in your home. But don’t mistake mortgage payments for saving. The interest is gone. Principal is what matters. And if you’ve re-advanced your mortgage or taken on a line of credit for a new kitchen, you may...

I encounter people who have saved very little money, if any, over many years in some cases and decades in others. When we look back over long periods of time, it seems inexplicable that a seemingly intelligent person could fail to save any meaningful amount for the future. But there is a simple explanation. When we look to past failures to save for a long time, we look like fools. But when we look to the future, we see the rest of today, along with a magical time in the future when “I’m not so busy and everything isn’t crazy.” This makes it easy to not save today. After all, what difference can a single day make? The problem is that the last decade is made up of a few thousand single days. Of course, this magical time in the future when things are calmer will never arrive. So, it’s easy to keep putting off things like saving money, improving your diet, and exercising. In the end, the answer to the question “how can people fail to save any money for years?” is “they do it o...

Just poke around the internet for a while looking for answers to how much money you need to save before you retire and you’ll get answers ranging from next to nothing up to $3 million or more. It looks like some of them must be wrong, but it all comes down to your spending and pensions. Let’s take an example. A Canadian couple, Mary and Bill, are both 65, have no debts, have no workplace pension, and are about to retire. They both worked enough to get maximum CPP benefits. Together they can expect CPP plus OAS of $3200 per month rising with inflation. Suppose that $3200 is enough to cover their spending. Then the total savings they need is zero. Nada. Zilch. It can be dangerous to count on being able to work until age 65, to count on maximum CPP benefits, and to assume you can live on $3200 per month, but now that Mary and Bill have made it to 65, they need no savings beyond a modest emergency fund. What happens if Mary and Bill have a more expensive lifestyle? Let’s say...

Most of us have heard the advice to pay yourself first. Having your savings come off your pay before you see it is a painless way to save consistently. I have an idea to take this a step further to automate the saving of pay increases and bonuses. Consider the example of a single 30-year old, Jen, who earns $65,000 per year. Every two weeks, Jen’s take-home pay is $1830 until October when CPP and EI contributions end, and then she takes home $2000. She hasn’t been saving any money and wants to start. Jen could get her employer to split her paycheque so that a fixed percentage of her take-home pay goes to savings. Another possibility would be for Jen to have $1700 directed to her chequing account, and the balance directed to savings. This has the advantage that her spending is constant all year and the savings level changes when CPP and EI deductions end for her in October. Another effect of this approach is that her raise next year will get diverted entirely into savings; s...

My wife and I have various assets such as our home and our savings. The question of who owns what can be surprisingly complex. The reason for this complexity is that there are three different points of view on answering this question. Here I look at our assets from each of these points of view. How We See Ownership Our view of ownership is quite simple: 50/50 for everything. I know that some couples choose to have his and hers money, but that’s not how we do it. When it comes to paying for things, we decide who will pay based on convenience. If my wife needs some cash, I hand her some without bothering to do any kind of accounting. I think this works well for us because we are both quite frugal. Control of Assets Just because the ownership of our assets is 50/50 doesn’t mean that we each exercise 50% control of all assets. To pick a trivial example, I don’t touch her toothbrush. It might be 50% mine in an ownership sense, but in terms of control it’s 100% hers. This ...

If you save $1000 per month and earn no interest, you’ll have $12,000 at the end of one year. What if this goes on for two years? You might naively think you’d have $24,000 saved, but an authoritative source says this isn’t right. According to the Globe and Mail’s Pay Yourself First calculator, you’d only have $23,000 saved after two years of saving $1000 per month.  (As of 2016 Nov. 2, the Globe and Mail finally dropped this calculator from its web site.) To see this, punch in an annual salary of $100,000 with 0% for the salary increases and 0% rate of return, and set the “pay yourself” rate at 12%, with one year of saving. The result is a retirement fund of $12,000 as you would expect. Now bump it up to 2 years of saving. The retirement fund jumps to $23,000. I’m not sure where the missing month goes, but apparently every year after your first year of saving you lose a month. After 3 years of saving you have $34,000, and after 10 years you have $111,000. I first wrot...

People with cash savings and GICs often complain about the low interest rates available today. A Yahoo Finance article (no longer available online) goes so far as to ask what’s the use of saving money? However, the higher interest rates of the past are nowhere near as good as they look. In 1981, the average short-term government bond rates were about 16%. This looks pretty good compared to a 2% GIC today. However, we should take into account taxes. Assuming a 40% tax rate, these returns drop to 9.6% and 1.2%. The past still looks good. But, what happens if we take into account inflation? The inflation rate in 1981 was 12.5% and the current inflation rate is about 3%. So, savings lost about 3% in 1981 and lose about 2% today. Comparatively speaking, interest rates on savings today don’t look so bad compared to the past. Savers in 1981 thought they were making money, but they weren’t; they were effectively spending their principal. Perhaps the larger lesson is that short-t...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. Part of my motivation for writing this blog is to pass on what I know to my children before they are on their own making financial decisions. Even though I make my choices carefully and put time into understanding how things work, I have made some financial mistakes and other people have taken advantage of me financially from time to time. People like to say that money isn’t everything, and this is true. Relationships, fun, interesting activities, and challenging pursuits lead to a full life. Money can’t give you these things, but it can give you more freedom to pursue them. Most of us trade our time for money by taking jobs. The jobs we have vary in how fulfilling they are, but very few of us can honestly say that we would do our jobs for nothing. Even the best jobs have unpleasant parts, and almost all of us do some fraction of our jobs only...

Many commentators tell us that we each have a certain level of tolerance for investing risk and that we should make choices that work for us. As long as we are all true to our feelings about risk, we can all be right, even if we make different choices. This is bunk. Betting next week’s grocery money on a horse is dumb whether you have a risk-taking personality or not. Buying stocks with the house down payment that you’ll need in 6 months doesn’t make sense even if you’re comfortable with it. The appropriate way to invest money depends mainly on when you’ll need it and for what purpose. How much of a risk-taker you are may determine what choice you make, but it shouldn’t. The larger the sum of money, the more important it is to be driven by rationality rather than feelings. The examples involving crazy risks are easy to agree with, but the mistakes of being too conservative can be harder to accept. Investing retirement money you won’t need for many years in bonds just doesn’t make...

Patrick at A Loonie Saved did an experiment with historical stock data to determine the value of dollar-cost averaging . His results were that spreading investments out over short periods of time seems to make no difference. This is because the usual way of explaining dollar-cost averaging is based on a myth. Here is the usual way of explaining dollar-cost averaging. Suppose that you spread the investment of $1800 in a stock over three months ($600 per month): Month 1: Share price $30, 20 shares bought. Month 2: Share price $60, 10 shares bought. Month 3: Share price $30, 20 shares bought. In the end you have 50 shares at an average price of $1800/50=$36. But the average share price over the three months has been (30+60+30)/3=$40. Through the miracle of dollar-cost averaging you have saved $4 per share. The problem with this reasoning is that the average share price calculation is simply not relevant to anything. If you had spent the $1800 all at once, you would have got eith...

In yesterday’s post on the economics of windfalls , I showed how difficult it can be to maintain wealth once you have it. We tend to think that the best way to get rich is to win the money somehow such as in a lottery. But, lottery winners usually burn through their money quickly. So, this raises the question, how do people get rich, then? This is the question that was tackled by Thomas Stanley and William Danko and led to their excellent book, “The Millionaire Next Door”. These marketing guys wanted to find rich people and figure out how to sell them stuff. They started by looking in upscale neighbourhoods, but soon found that the people living there weren’t rich. When they did find wealthy people, they tended not to live in upscale neighbourhoods. Wealthy people tend to live more modestly than most people would guess. The path to wealth is hard work and the self-discipline to spend less than you make for a long time. The book gives a profile of typical millionaires as a ...

Among the many benefits of amassing savings, one of them is lower-stress moves. The last time I moved, my wife and I deliberately chose closing dates to create an overlap period where we owned both houses. This was only possible because we had enough savings that we didn’t need the proceeds from the old house as a down payment on the new house. An overlap period gives time for cleaning, painting, changing carpets, etc., at a leisurely pace. Other benefits are directly related to the problems Larry MacDonald described. On same-day closings, if the delivery of keys for the new house is delayed by a few hours, you might be paying professional movers $100 per hour while they wait. With an overlap period, any delay in getting the keys may be a little disappointing, but it won’t affect a move of belongings, because the move is still a few weeks away. If you choose to move yourself (with the help of friends and family), delays in getting moving vans can be accommodated more easily i...

The Big Cajun Man over at Canadian Personal Finance has been calling for tax relief for single-income families for some time now. One way the government could do this would be to permit income splitting. Consider a hypothetical couple, Carol and Dan. Carol earns $80,000 per year as a software developer, and Dan stays home with the kids earning no income. Most people publicly praise Dan for taking on a non-traditional nurturing role while privately wondering what’s wrong with him. It takes a long time for attitudes to change, but that’s another story. Carol gets some tax breaks for supporting a spouse, but she still pays a lot in income taxes. If the Canadian government permitted income splitting, she and Dan could each declare $40,000 per year in income, and their overall tax bill would be quite a bit lower. We’ve heard that the Canadian government’s new tax-free savings accounts (TFSAs) provide income splitting opportunities. However, you will not get the same immediate benef...

Part of my motivation for writing this blog is to pass on what I know to my children before they are on their own making financial decisions. Even though I make my choices carefully and put time into understanding how things work, I have made some financial mistakes and other people have taken advantage of me financially from time to time. People like to say that money isn’t everything, and this is true. Relationships, fun, interesting activities, and challenging pursuits lead to a full life. Money can’t give you these things, but it can give you more freedom to pursue them. Most of us trade our time for money by taking jobs. The jobs we have vary in how fulfilling they are, but very few of us can honestly say that we would do our jobs for nothing. Even the best jobs have unpleasant parts, and almost all of us do some fraction of our jobs only for the money. So, for most of us, to say that money isn’t important is to say that our time isn’t important, and this is wrong. Money represent...

People can be split into two groups: 1) those who spend carefully, save money, and invest wisely, and 2) those who, to varying degrees, do not do these things well. For convenience, let’s call these two groups savers and spenders. Some of the spenders’ wages get transferred to the savers, primarily in the form of interest on debts. Most interest paid by spenders becomes the profits of banks and other companies, which then gets distributed to shareholders who happen to be savers. Of course, people don’t really fit into just two groups. Most people fall somewhere between the best of savers and the worst of spenders. You can think of people being lined up the side of a mountain based on how well they handle money with the worst spender at the top of the mountain. Now imagine money rolling downhill from the spenders to the savers. Although I have called the two groups savers and spenders, limiting spending is not enough to make someone a saver. A saver must invest wisely as well. Imagine s...

Many people have investments in the form of retirement savings. For Americans, this might be a 401(K) or IRA, and for Canadians, an RRSP. Often these investments have been set up by a financial advisor. I have dealt with many financial advisors over the years and have learned a few things. 1. Competence. Most financial advisors seem to be well-meaning people who don’t know as much as you might hope about investing. I’m sure that there are exceptions to both the well-meaning part and the competence part. 2. Main focus of the job. Their job is more of a mutual fund salesperson than what most people would think of as a financial advisor. 3. Individual Customer Attention. The comprehensive personal financial assessment that they perform with each client seems mostly geared toward figuring out how much they can get you to invest in mutual funds. 4. Conflict of Interest. The amount that financial advisors get paid varies from one mutual fund to the next. The funds they choose should be b...