Rule #32 Take Full Advantage of Employer Matches.

"Take free money." -Suze Orman

"Free is better than cheap." -me

There are two kinds of matches that Kim and I take full advantage of when available: 1. Company Share Purchase Matching and 2. Pension/RRSP Contribution Matching.  They are a different from each other, but both involve your employer paying you more than you are already getting paid.  Sounds like a deal, doesn't it!

1. Company Share Purchase Matching: When I worked for Super-Major Oil and Gas company, they had a program that encouraged employees to become shareholders by buying company shares, with the company encouraging this through a share match program.  For every dollar I put in, up to a certain amount, the company would match twenty five cents. This meant I was essentially only paying 80% of the value of the shares that I was buying each month.  The only condition was that I had to hold the shares for 1 year, and after that I could sell them if I wanted to.  Usually I didn't sell.  I like incentives like this. I liked (and still like) the prospects of the company long-term and anytime I can get free company shares with essentially no or few strings attached, then I can't think of a good reason not to participate.  The incentive for the company to offer such a plan is two-fold.  Its part of the Employee Value Proposition... which is what attracts and keep employees working at the company.  The other reason is that it aligns the employee interests with the interests of the company.  If the company does well, the employee also does well due to share ownership.  Strangely, only about half my employee colleagues that I discussed the topic with took advantage of this plan, and many who did, didn't max-out the plan like I did.  To me, I view this as free-ish money and unless a person really has no confidence in the company (where I'd question why they were at the company in the first place), I cant think of a good reason not to participate to the maximum amount.  You essentially have a 20% hedge against the company going down in any given year before you lose money.  Even borrowing money at say 6% interest in order to get the 25% top-up would be a no-brainer.  Part of my existing portfolio is still made up of shares from this previous employer, and most of those shares were purchased initially at a "discount" by taking advantage of the Company Share Purchase Plan.

2. Pension/RRSP Contribution Matching: Both Kim and I take full advantage of this matching program, but we're baffled at the amount of people who don't.  Many employers will offer a matching program for either a Locked-in RRSP type product such as a DC Pension, or will match personal contributions to your own RRSP.  These obviously have some strings attached such as if you remove money from your RRSPs, it will be taxed at your marginal rate, and if the money is "Locked-in" such as in a pension, you will have to wait 'til you are eligible to take it out.  Either way it is a good deal.  An example would be where an employer would match dollar for dollar, up to say 4% of your salary.  So if you contributed 1% of your employment income, your employer would match it with another 1%. If you contributed 4%, your employer would kick in another 4%.  The logistics don't get much easier than this.  The contributions go straight from your paycheque to your Pension/RRSP each pay period.  Its essentially paying your future-self first.  Its a very quick way to double your contributions for only a small contribution, and as we know those contributions pile up, they can make a big difference later on.    Both Kim and I have talked to numerous co-workers who don't take advantage of this employer matching, but say they will take advantage of it in the future when they can afford to part with up to 4% of their salary.  What? 4%? Really?  If your employer offers to match your DC pension or RRSP contributions to any amount, I think you are out of your mind not to take advantage of it.  Cut back on a few dinners out each month and that 4% shouldn't be too hard to come up with.  In 25-35 years from now, you will thank yourself.

Whether it be a a share matching program through work or a pension contribution matching plan, if your employer offers these employee incentives, taking advantage of these plans as soon as possible is relatively easy and will work to pad your investment/retirement account for your future.

Rule #31 Out of Chaos comes Big Opportunities. Be Ready!

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” - Warren Buffett

Remember the Financial Crisis in 2008-9?  The financial world was going in the crapper, housing values were collapsing in the US, mortgage defaults were on the rise and bond markets were shakey because of sub-prime loans bundled together and sold to investors.  Lending institutions were reluctant to lend to anybody, essentially paralyzing businesses that needed access to capital or individuals who wanted to buy necessities.  It seemed pretty gloomy at the time.  But companies were still paying their rent, people were still keeping their money in banks and the vast majority of Canadians were still making their mortgage payments.  On a relative basis, all was pretty okay in Canada and at Canadian companies in certain sectors.  

But the fear in the US had spread globally... to Europe, to Asia... and to Canada.  This lead to a correction in Canadian stocks that we felt was overdone.  A Commercial Real Estate company, $FCR that was trading at $16 were now trading at $10 after the drop. Canadian banks that were trading around $60 pre-drop, such as $BNS and $RY, were trading for $30 or below.  Upon checking these companies' balance sheets during Quarterly Earnings announcements, we didn't see a markedly big drop in earnings and the companies had enough cash to handily pay out their quarterly dividends.  Since the dividends remained the same but the stock prices were depressed, this meant the yields on these stocks had risen significantly.  Both the dividends on the RE company and the banks were about 7-8%.  Pre-financial crisis, these stocks were yielding about 3-4%. We saw this as a huge opportunity that complimented our dividend-investing style and decided to act.  Since we had a good credit rating and had access to investment loans, we borrowed at 3% interest rate and bought big into the Commercial Real Estate company and the two Canadian Banks.  Since the dividend yield to interest rate spread was 5%, this was the amount of income we were making on the leveraged investment.  This also doesn't consider the capital appreciation we expected to see when people cam to their senses on the value of these companies.  We weren't fussed about whether the stocks went up or down in the short term because over the long term, the cash-flow essentially paid for the investment.  We used the 5% positive cash-flow spread to help pay down the loan over the next 5 years and we recently paid the investment loan off.  Since making the purchase, the stocks have essentially doubled and we turned borrowed money into a fair-sized position within our portfolio.  

Imagine going back in time and loading up on quality stocks while they were on sale! Well, thats exactly what we did.  We didn't have the funds lying around, but we had access to the capital to make it happen and had the guts to pull the trigger when the stocks were undervalued.  We set up this investment loan arrangement with our bank before we needed the money.  This one financial move has probably had the biggest financial impact on our cash-flow and net worth.  We've told this story to a number of people and they think we took an enormous risk in making this move.  We, however, saw the health of the 3 companies, plus their commitment and stability of the dividend as the determining factors in our decision. 

Out of chaos comes big opportunities, but you need to be ready when the opportunity presents itself.  People often say they'd like to buy investments when they are on sale, but when things actually do go on sale, they aren't fiscally ready to execute or clam up and can't follow through fearing the investment will go even lower.  The "clam up" part can be difficult to be ready for, but getting your fiscal house in order so you are ready to act on a deal is certainly within most peoples control.  Since we have de-leveraged the borrowed funds from 2009, we are now ready for the next big opportunity that comes our way. 

Here is how we are ready to act on the future Big Opportunities: 

1. We keep our credit rating spotless.  If people want access to credit, they need to show they are responsible in paying back lenders, so make sure we pay our debts on time, and decrease the debt balance over time.  Having a lousy credit rating makes borrowing expensive and expensive borrowing can put the kaibosh on an opportunity.

2. Having some money on the side. I'm not necessarily suggesting people keep money in a bank account earning nothing for years and years waiting for an opportunity, but we set up a line of credit well before we needed it and then didnt use it.  Ours sits idle with a large unused balance in case we need it or see an opportunity.  If a small to medium opportunity came up tomorrow, we'd be able act on it.

3. We do our homework before the chaos starts. There are particular investments that I would like to make, but typically not at current prices.  I like a deal as much as the next guy.  I generally know that I want to buy certain investments at a particular yield or investment return. If I can't get the rate of return or yield that I want, I wait.  If the conditions are never right to make the investment, at least I have done the work to know what price I think would be reasonable, and what would be a smokin' deal.  

Some examples of opportunities that we would act on if they happened today:

1. If certain stocks drop based on fear and not based on financial metrics, then we would look to do exactly what we did in 2009.  

2. Housing Real Estate crash in certain cities. We would like to live on the West Coast some day.... Possibly within the next 5-10 years.  We will not be buying at current prices, but if we saw a 30%+ correction in housing costs, we would find a way to make it happen.  We're ready if a crash occurs. 

3. Commercial Real Estate in our current city.  I like commercial real estate in prime locations.  If a particular type of building came up in a prime location, we have the money for the downpayment.

What do I invest in?

I've had a few people ask what specifically do I invest in.  Here is my portfolio make up in a nutshell (you can click on the pictures to enlarge them).  The pie charts are a combination of Unregistered, Registered and TFSA accounts.  My US holdings are all in registered accounts to avoid the withholding tax and higher dividend taxation rates and my CDN holdings are mostly in my TFSA and Unregistered accounts to take advantage of efficient dividend taxation in Canada on qualified dividends.

The first chart is my raw holdings. I'll let you do the look-ups of the individual holdings.

The second chart is a pie chart showing the sectors for all my holdings. You can see by the size of the pie pieces which sector "buckets" I favour and the ones that I rarely or never invest in...  Note the absence of high tech, commodities and bonds and really small positions in consumer discretionary and mining.  Mostly those sectors just aren't my thing.

While I am quite fond of my portfolio mix, do not construe this as a recommendation to buy any of these names. You need to do your own look-up and research before investing in anything.

Let's Review... Ryan's First 30 Money Rules

"Nobody is more vested in my family's financial future than me" - me

So I've managed to get the first 30 of our money "Rules" written and posted. These rules have helped us build our wealth, eliminate bad debt and take control over our finances as we move toward financial independence.  I have a bunch more that are in the chutes that I will post in good time.  Until then have another look at the rules linked below.

Rule #1: The Power of Compounding - Earlier is Waaaay Better!
Rule #2: "Lotteries are taxes on the stupid"
Rule #3: Defining Assets and Liabilities
Rule #4: Never Carry a Credit Card Balance... Ever!
Rule #5: Know your Monthly Expenses!
Rule #6: Forget the Latte, Its the Car/Vacation/Renovation Factor
Rule #7: Maximize income in AFTER TAX money

Rule #8: Your Home is not an Asset
Rule #9: Spousal Financial Compatibility is VERY important
Rule #10: Thumb your nose at the Joneses

Rule #11: Dividends - Buy Stocks for the Cash Flow
Rule #12: Use Leverage for MORE positive cash-flow!
Rule #13 Take Accountability. Stop Whining! Go Read a Book already
Rule #14 Live on one salary
Rule #15 Don't try to "Beat the Market"
Rule #16 Plan on Financial Independence without CPP
Rule #17 Save/Invest ALL windfalls or bonuses
Rule #18 Don't Diversity... too much
Rule #19 No Fixed Income
Rule #20 Set Financial Goals

Rule #21 Chart your Progress!
Rule #22 Pay your bills on time.. Every Time!
Rule #23 Automate all Monthly Payments
Rule #24 Borrow money for things that appreciate, pay cash on things that depreciate
Rule #25 Live like a student as long as you can
Rule #26 Create/Develop Multiple Income Streams
Rule #27 No Financial Advisor
Rule #28 Pay No Bank Fees
Rule #29 Talk about money. Ask about money.
Rule #30 Live where you Work, Shop and Play

Rule #30 Live where you Work, Shop and Play

There is a conventional wisdom these days that says "Buy a house in the suburbs of a city because you get more house, sometimes more yard, and the taxes are lower.  The nice neighbourhoods in the inner city tend to be more expensive and people practically live on top of each other."  When it came time for us to buy a house, we only looked in the inner city with the main (but not only) reason being...

I hate paying for parking.

I also generally don't like driving at all if I can get about by some other means.  When we lived in Calgary, I asked one of my work colleagues how much they paid for parking.  At that time, she was paying about $425 per month for a personal, reserved parking spot.  I couldn't believe people would pay that much for parking, but people love their cars I guess.  She lived in McKenzie Towne, which is a suburb of the city, and is about a 20 minute drive, if there is no traffic, from downtown Calgary.  During rush hour it can easily take twice that time to commute that distance.  I can't imagine spending 45 minutes commuting to work by car one way, only to then have to go through the hassle of either finding a parking spot or paying hundreds of dollars to reserve one.  Add in the cost of gas, car wear and tear, road rage, not be able to go for a few beers after work etc and all those negatives look pretty bad in my mind.  No thanks. The cost must be in the 5-figures annually.  Pretty expensive no matter what your paycheque is.

Since I've been a driver, I've never been a fan of long driving commutes.  It started in University where I lived within a few blocks of classes and could walk to everything such as pubs, groceries and other friends places.  For about 9 of my adult years, I either couldn't afford or chose not to own a car, so living close to where I worked, shopped and played was pretty important..  As time passed and I began to make more money, I continued to live inner city and not relocate to the 'burbs, choosing a bike as my main mode of transport.  It is a lifestyle choice that is not without sacrifice.  We pay more in property taxes, have a smaller home and yard, and live pretty close to our neighbours, but none of these have been dealbreakers for us.  We enjoy meeting a socializing with other people so the more opportunity to meet people the better.

The financial and social benefits of living inner city have been significant.  We both work downtown, so we can both walk to work.  We have significantly more time than our friends and most likely less stress.  On the walk/bike home, we are able to stop off at the pub to meet with friends or pick up dinner ingredients at the local grocer.  We are close enough to one of the shopping districts that we rarely need to get in the car to go shopping.  What we have noticed is that this way of living can save you lots and lots of money.  We've only ever had one car which we barely drive in the city. We pay nothing for parking other than what we paid for our house driveway.  If we ever fell on hard times and had to get rid of our car altogether, it would be no problemo because our lifestyle doesn't require or rely on personal motorized transport.  Public transit is always way better in the inner city and there is usually more to do there.  Walking to work gives me a half hour walk in the morning and another in the afternoon.  When does anybody make time to go on two half hour walks per day these days?

When it came time to sell our first house, it had appreciated quite a bit because it was in a desirable walkable neighbourhood.  As energy prices go up, people who live in the suburbs further and further away from where they work, shop and play will pay more and more for car costs that will leave less and less for saving and investing.   Not exactly a road to riches.

What we have done is chosen a lifestyle that on the surface looks more expensive because of higher housing costs (taxes, more upkeep for older housing, higher mortgage), but makes up for it in savings on the transportation costs.... and I have found people tend to underestimate how much transportation actually costs.  I would estimate that we save at least $10k per year and have a less stressful lifestyle but choosing to live inner city where we can walk to everything that we need.  While not for everyone, this lifestyle choice has allowed us to cheaply maintain our existing car and avoid buying a second vehicle, and the savings we've experienced has allowed us to save and invest significantly more that other families in our age and income cohort.

Rule #29 Talk about money. Ask about money.

"Money, like emotions, is something you must control to keep your life on the right track."

- Natasha Munson

Its funny how people refuse to talk about money.  I never really understood why money got grouped in with religion and politics as things NOT to talk about when at a dinner party.  And by talking about money I don't mean comparing paycheques, bank account balances, or hourly consulting rates.  When I say "talk about money", I mean discussing strategy, risk tolerance, debt management, negotiating tactics and so on.  I believe not talking about money is one of the reasons a lot of people are clueless about money management.  I suspect people are reluctant to talk about money because they don't want to talk about all the stupid things they have done or are doing with their money.   Or, it could be that they feel they're being compared to someone who makes way more or less than them and that makes them uncomfortable.  Maybe its because they don't want to find out they could be doing something better or that they are behind all their peers, as if there is some sort of competition going on.  The fact that few people talk about money is probably one of the reasons many families, singles, seniors, kids and governments all have such poor money management practices.

I for one have always been curious about money strategies, and I've never been afraid of asking questions however basic they may be.  I'm also a big fan of the sharing of ideas and problem-solving techniques, usually over a couple of beer.  When I was in University, I remember learning the most important and practical things about life through discussions at the student pub over cheap beer and poutine dinners.  The interactive discussion is where the magic happens, not the book learnin... and I think that still holds true today in the digital age.  I've managed to connect with a lot of like-minded money-talkers over the years and we have become a sort of financial network that I tap into quite regularly.  If you want to become well versed in a particular topic, it is beneficial to surround yourself with people who are smarter than you or have varying opinions on a subject, and the topic of money is no exception, and don't forget to ask lots and lots of questions.  I always like to talk about the mistakes I have made because I am a big believer in the sharing of ideas, both good and bad, and working through problems with different perspectives.  Making mistakes, or being unhappy with your decisions, is part of the process.  For me, it is not something to hide.

The Last Defence Lounge at the University of Calgary for Poutine and Beer nights.

With regards to finances, I am fairly opinionated on those strategies that work for us and those that do not.   However, I have had some great discussions with other people who have completely different strategies, and who are very happy to learn about what we do, and are keen to share their strategies with me.    Knowing and understanding the various routes to financial independence is the first step to actually getting there.  I try and learn from anyone who will talk with me about money.  One priority of mine is to talk money with our two boys when the time is right.  A lot of kids dont get "the (money) talk" with anybody until they find themselves up to their eyeballs in debt.  And while its never too late to learn about money management, it does sting less if you learn good money management earlier in life.

Some topics that might be worth discussing with other people when the topic of money comes up: Investment styles, debt reduction strategies, how to get the right mortgage and whether to pay it down or not, how to define and limit risk, alternative and multiple income streams.  It may also make sense to contact persons you know who have good money practices or have done well for themselves financially, and ask them for some advice.  My experience has been that if you are serious and genuine in your questions, most people are pretty open about talking about their money strategies.

Rule #28 Pay No Bank Fees.

Nickel and Dime: verb. To drain or destroy bit by bit, especially financially

People complain about banks and their fees ad nauseam.  You know what I mean.. "The greedy banks are being greedy."  "I'm getting screwed by the banks in fees."  Blah blah blah.  But these folks do very little to change the fact that they're paying all these fees.... You know what I call these people?  Whiners.  Don't be a whiner.  If you don't like paying bank fees then stop paying bank fees.  

Here are some strategies we use to avoid paying any bank fees or make it so the benefits of membership outweigh the fees (as is the case in a Credit Union).

1. Use/Join a Credit Union.  Simple eh?  Well some people have been with the same bank forever and yet there are Credit Unions all over the place that you can join and get reduced rates on fees and quite often they offer profit sharing that returns some of the profits to members/shareholders.  We've been members/shareholders of a Credit Union for about 11 years and we've gotten back more in profit-sharing annually than we've ever paid out in fees.

2. Don't use Bank Machines that are not owned by your bank.  I bank at TD and I will always travel the extra distance to save on the transaction fees.  Never in a bazillion years should would I use a "While Label" machine.  White label machines are the worst! They can take a buck or two from each transaction and then YOUR bank will also charge you a buck or two on the other end.... So if you take out $20, you could pay $2-$4 in fees.  There is nothing like a 20% fee taken out with your withdrawal to erode your bank balance.  I occasionally get caught a couple times a year (usually in a pub) without any money and the bar will have a white machine instead of taking debit payments.  The pub is getting a cut of every transaction so they can squeeze you a bit more.  In this case I will pay with a credit card and then pay the bill off when I get home later that night.  Those Bank Machine fees are easy to avoid if you just make the effort.

3. Maintain the minimum balance to waive the monthly account fee.  As mentioned above I bank at TD. We have an Infinity Account with them that allows infinite TD bank machine transactions along with some other fancy perks all for the monthly fee of $14.95.  Thats about $180 a year.  They will waive the monthly fee if we maintain a balance of $3500 or more.  So that's exactly what we do.  To save $180 on a $3500 balance is about a 5% return on your money.  This is a guaranteed saving... much better than the crappy 1-2% you get on GICs these days... Before you start putting money into GIC and other pay-nothing "investments", why not play by the rules and reduce the amount of fees you're already paying.  Of course it takes some discipline to maintain that bank account at or above the right balance, but thats what managing your finances is all about... Discipline.

4. Use Pay As You Go Overdraft Protection instead of a monthly fee.  I used to pay a monthly fee of $2-$4 (the price rose over time) for the protection in case I wrote a cheque that I didn't have the money for.  Since we now maintain a balance of over $3500, we never use the overdraft anymore and if we do get ourselves in a situation where we are overdrawn, we pay a one-time fee of $5.  It's certainly a better deal than paying for something we're not using.  Add this $2-$4 we're saving on overdraft fees to the $15 we're saving from maintaining a $3500 balance and the savings are beginning to become material.

So there you have it.  Last month we paid absolutely nothing in bank fees so it definitely is possible to use a big bank and yet not pay any fees and it was actually pretty easy to do.  So while other people are moaning about paying their banks what are essentially voluntary fees, I'm financing an extra 12-pack of premium beer from the monthly savings.  Here's mud in your eye!

Rule #27 No Financial Advisor.

”Everyone has the power to follow the stock market. If you made it through fifth grade math, you can do it.” – Peter Lynch

We had a financial advisor that came highly recommended from a fairly high-net-worth friend of ours.  We gave him a try for a couple years and it didn't work out. We lost significantly more money than we made, and then on top of that paid this person 1.5% of our portfolio value each year to manage our money.  I'm not a fan of paying someone to lose me money.  I can do that myself for free.  We've since moved on to an investment style that's a better fit for us and doesn't require a lot of "management" on either our side or a "professional's" side.  I'm not philosophically against Financial Advisors in general and it would be wrong of me to say anything bad about them based on our experience because we have only had one in our lifetime and it was at a time when the economy was moving into a recession.  With that said, for our investment style, paying for an FA for portfolio management is not a good deal.  Our style is to buy solid blue-chip stocks that pay safe and growing dividends and then hold them forever.  Because our plan is to buy the stock once and hold forever the only cost we incur is the commission price to buy the stocks in the first place.

If you have the confidence to go it alone, and I am not making any recommendation here that you do that, there is a lot of information on the web to help you build a solid portfolio on your own.  A basic "couch potato" style portfolio can be constructed fairly simply and get you similar returns to one a FA will build for you with minimal Management Fees.  Many FA offices are however great for offering one-stop shopping for many other types of financial instruments such as life insurance, estate planning, tax planning, purchasing annuities etc.  We got our life insurance from our FA and we feel we got it at a reasonable price, but thats not enough reason to woo us back to letting them manage my investment money going forward.

Here are the main reasons we dont use a financial planner:

1. I need to know where my money is and what its doing at all times - this is more about me and not about the advisor.  I generally don't trust others to look out for my best interest... I believe that is my job.
2. I don't believe in across the board diversification in our portfolio... so that rules out many mutual funds or ETFs.  I like to invest in what I understand. Investing in big diversifed funds makes it difficult for me to understand whats going on.
3. Most Financial Advisors do not outperform the market.  There have been lots of studies done out there that suggests that upwards of 70-80% of advisors either match the market or do WORSE.  (as stated before beating the market is not my goal anyhow but I threw this in because it matters to most people)
4. Management fees slowly erode your portfolio value.  Many Advisors charge 1-2% management fees over and above any fees the mutual funds themselves charge you.  Compounded over time this melts down your profits.
5. Most Advisors dont get paid based on the performance of your portfolio.  If your portfolio loses 10% in one year, they still get their management fee.  
6. Many advisors work for a company that restricts the products they can sell you.  You could argue that they are essentially salespeople for the products they sell.  Try going to an advisor who works for Company X and ask to buy mutual funds from Company Y.  Most won't or can't do it.
7. I know what I want to be invested in and what investment vehicles I want to stay clear of.  It makes no sense for me to go to an advisor and tell them what to buy for me.  The feeling is probably mutual.  I would think people like me would probably drive Financial Advisors nuts!
8. Our investment style doesnt' require 'management' or annual 'rebalancing' so why pay someone else to do it? 

In short, I don't think hiring a Financial Advisor is good value for us.

There are other reasons to be cautious about when giving your money to FAs but those would involve discussing things like "fiduciary" responsibilities etc, which I would prefer not to discuss here.... but I would add this: Some Financial Advisors do not put your interests first, and some do.  Stay away from the ones that do not.

Now these are the main reasons I prefer not to use a Financial Advisor.  I'm also a bit of an anomaly because I have the time, energy and keen-ness to do my own research and the confidence to buy and sell my own stocks.  If you don't have the time, energy or keen-ness to do all the work on your own, or to pull the trigger when it comes time to buy or sell stocks, or you need some hand-holding when the market is correcting, then a Financial Advisor might be in order.  I know a few who do a good job and will be upfront with you about how they get paid, what you can expect from them by dealing with them, and are quite open to challenge.  If you do go to a Financial Advisor, make sure you ask lots of questions around how they get paid.

The biggest challenge I have for others is: Is the cost of an FA worth it to you once you know: how they operate, how they get paid, what products they can and can't sell you, what incentives they themselves have to recommend you buy/sell a product, and how much time / desire you have to work on these things if you were to do it yourself?  If after you've addressed these points and you still prefer a professional to manage your money, make sure you get a good advisor - one who looks out for you interests.  If you do go it alone, make sure you are comfortable with your own abilities, understand your risk tolerance and have the ability to manage that risk.  We have found it to be quite financially rewarding. 

Rule #26 Create/Develop Multiple Income Streams

"It is better to have a permanent income than to be fascinating." - Oscar Wilde.

What would you do if you lost your job?  Do you have any additional monies coming in from other types of income that could help you get by until you get a new job?  I used to work in the resource sector, and if you know anyone who works in that sector, you've probably heard that it goes through violent boom and bust cycles.  A job and career this year does not guarantee a job and career the following year, so it became a high priority for us to create multiple income streams in case I found myself without employment.  You've also probably heard the phrase "Don't put your eggs in one basket" right?  Well, in my mind if you only have one type of income, you essentially have your income eggs in only one basket.  For example, if your employment income is discontinued for some reason such as an injury or a layoff, you may have nothing to fall back on.

I would think single people, or couples who both work in the same industry, are particularly at risk to this scenario.  If their jobs disappear and the household income is so concentrated in one sector, it can have significant impact on your savings if employment income is your only source of income and it goes away.  Having a second or third income stream is the akin to building up addition skill-sets that you can use when the need comes, or separate income you can use to fund your retirement when you stop working.  Some examples of second income streams are: investment income, a second job, trading income, a home or personal business, freelancing, royalties from music or a book that you produce, blogging income, income-producing real estate, pensions or annuities that you buy and so on.

Developing multiple income streams is typically not something you can do overnight.  People who take on this strategy often go to work during the day, and then come home at night after toiling away in teh salt mines and then do further work or research in their time off.  There is no shortcut or get-rich-quick strategy that works, so don't expect the payoff to occur until well into the future.  Any extra money you generate could help you fund your current lifestyle, your retirement savings, or can be reinvested to make even more income in the future.  If your secondary sources of income become great enough, you can choose to work part-time instead of full-time.... or possibly not at all.

There are lots of online sources giving you advice on how to start new income streams, but before diving into any of them, I would advise you to choose something that you are already keen on.  If you are into sports perhaps try refereeing high-school games.  If you like to write, try writing an ebook on a topic you enjoy.  For me, I chose to build passive dividend investment income and then juice that up with some conservative income-producing options-trading strategies.  Money management and financial strategy is something I've been pretty keen on since I was in high school, so these types of income were right up my alley.  Learning these strategies involved study, study and more study early on, but eventually they became like a second language.

Over time our second and third income streams have increased significantly and have contributed to our financial confidence and security.  We've been working on these streams of income for some time now, to the point where we can see ourselves being able to live a spartan lifestyle solely on them within the next 5-10 years if we needed to.  Our trek to financial independence has certainly gotten a boost from having these additional incomes.  Having multiple income streams has given us significant flexibility and control over our finances as the income continues to grow.

Rule #25 Live like a student as long as you can.

"The essentials of life are cheap. Only the luxuries are expensive." - Ron Muhlenkamp

Remember when you were a student at college or university? Remember how much fun it was and yet how broke you were? You didn't have a luxurious place to live in, or a car, and you walked to everything, or maybe skateboarded everywhere?  The TV you had was the TV the previous tenants left behind because it was too bloody heavy to move... you know.. the Radiation King with the wooden case, and you certainly couldn't afford cable TV.  You stayed in and hung out with friends, choosing potlucks instead of going to fancy restaurants.  You made coffee at home, and brought sandwiches for lunch instead of buying it.  Cheap Poutine and Pitcher of Beer night at the local pub was the best night of the week because you and your friends could nurse your drink and wax poetic all night long at discount prices.  Life was simple.  You had few financial liabilities and it was fun living this way.

But then something happened.  There was this temptation that with a new career must also come a car, new furniture, fancy clothes, an expensive watch or phone, a big flat-screen TV,  and instead of frequenting the local watering hole, you feel compelled to hang out in the more expensive places with the foreign or micro-brews on tap instead of the cheap domestics.   Your big adult paycheque deserved a big adult lifestyle.   That big TV meant a cable-TV plan, and high-speed internet and a phone with a big data-plan.  Whoa! This is starting to sound expensive.

I always tell young people I meet to resist this temptation as much as possible, for as long as possible.  It is extremely difficult to save, pay down debt, and generally get ahead if you jump into a higher standard of living without the financial base to make it happen first, and that is just what many recent grads do.  Once people get used to a high-status high-consumption lifestyle, it is often very difficult for people to reign in that spending if needed, so the longer you can prolong your student lifestyle, the better.  I can not emphasize enough how much financial sacrifice plays in to financial well-being and resisting many of these adult lifestyle trappings can be a boon to your bottom line and mental well-being.  In my opinion, spending money on luxuries in life such as cars, expensive clothes, and expensive monthly liabilities such as Cable-TV should only be done once the basics are covered such as eliminating bad debt and having some savings.  Another thing I've noticed is that people with high standards of lifestyle without a financial base often worry a lot about maintaining that lifestyle...  and I generally like to sleep at night, so a simple carefree lifestyle suits me just fine.

When I was in grad school, we lived just like in the first paragraph.  My wife and I lived in a very modest apartment, we didn't own a car, and we didn't have have a TV let alone cable TV.   When I got my first employment position as a technical professional, there was a temptation to buy all the fancy things people come to expect with such a position.  But we resisted.  We did however buy a house after  I had been working for 3 months only because we were going to be evicted from our apartment due to a coming renovation.  While we did own a house, it would be another 4 years before we would buy a car.  It wasn't that we couldn't arrange for a car-loan to get one, it was that cars are money pits, and we weren't interested in digging new financial holes while we were trying to pay off our student loans.

With two adult salaries, but without many of the liabilities many adults take on, we were able to slay both our student loans ($58 thousand worth) in just over 3 years, save up enough to pay for a used car four years after I started working, begin to max out our RRSPs, and give to worthwhile charities.  We were essentially saving 50% of our take home pay.... By comparison to many in our field and experience level, our standard of living was modest, but we were very happy because we maintained that interactive social face-to-face lifestyle by continuing pot-luck get-togethers and Cheap Beer and Poutine nights.  We still lived with "student" quality furniture because it still met our needs.  It was still functional, though certainly not fashionable.  We only bought stuff out of necessity, not because of some feeling or self-imposed obligation around keeping up with others.    We never focused on what status items we were missing out on, but rather focused on relationships and building a solid financial base to give us more flexibility and freedom as we got older.  Once the essentials of living have been taken care of, then we focus on adding the luxuries.

At our current stage in life, which is late-thirties with young kids, we have adopted many of the liabilities that come with adulthood: A nice car, high-speed internet, club memberships etc, but we only added these lifestyle choices when we could afford them.  To this day we still walk or bike everywhere we can, we do not have Cable-TV, dont frequent fancy restaurants more than once a year, and Cheap Beer and Poutine are still our favourite nights out.

Rule #24 Borrow money for things that appreciate, pay cash on things that depreciate.

"The price of borrowing money is interest—and worry. Keep all borrowing below the worry point and don’t borrow to buy things that depreciate; you will lose on both ends." - Ron Muhlenkamp from his Basic Maxims I Want My Kids to Know.

Cars, vacations, iphones, new bicycles, dinners out at restaurants etc... all lose their intrinsic value the second they are purchased.  Yet people put them on credit cards or take out loans to buy them and carry the balance for months or even years.  So not only is that meal you spent $100 on long gone, but you are now going to pay an additional 10-20% (or possibly more) because you didnt pay it off right away.  Bad idea, Genius.  One of our rules is that we don't buy anything on credit or loan if it depreciates over time.  We view paying more to buy something by spreading the payments over time for something that goes down in value as a silly thing to do.  I know people who buy stuff on credit cards because an item is on sale and then don't pay it off for up to a year or more, essentially negating the sale price.

But the biggest sting is on big ticket items... so let's look at a big ticket example.  One that most people can relate to would be a car purchase. Suppose you bought a car for $25000 and you financed 100% of it for 5 years at an interest rate of 5%. You'd pay about $471 a month in payments.  The car will depreciate 10-15% per year depending on make and model.  For this example, lets assume 15% depreciation.  After 5 years you are still paying the $471 per month, but your car is now only worth a little over $11000.  When you finish paying for it, you will have paid about $28306 once you add in all the interest.  By paying for the car in full at least you would avoid paying the extra $3306 in interest.  A big part of my apprehension is psychological. I recognise this, but I still think its worth thinking about,  You will pay $5600 in the final year in monthly payments, and your car will only be worth the equivalent of 2 years worth of payments...  yeah, that stings.

What if you did without a car for a few years and saved $471 up front each month, how long would it take to save up the 25000 in cash?  Lets also assume you can get a 5% return on your savings. According to this handy online calculator, it would take 48 months to save up 25000 to pay for the car in cash.  You would actually only have to put up $22600 of you own money, and the compounding at 5% per year would do the rest.  You've saved yourself $5700 dollars and you own the car outright.  You can keep saving $471 in your account for your next car that you will pay for in cash.  Since we know you can probably replace your current car for $25000, you will be able to save up the money for your next car in 4 years!  This is generally how we operate.  Save and then buy.  Not borrow, buy and then pay down.

But I'm not against borrowing.... I just dont like to borrow on things that depreciate.   I do however like to borrow money for safer investments or assets that provide some cashflow.

Lets look at borrowing to invest in something that appreciates in value, rather than depreciates.  (NOTE: you should know by now that I don't usually fuss too much over capital appreciation in the short term, but for this example lets assume that capital appreciation is the goal.  We will also not consider taxes for this example even though I know taxes will take some in the end if you sell the investment)   We will borrow at 5% and buy a $25000 investment that appreciates (and therefore compounds) at 5% a year instead of depreciating like the car.  After 5 years, you will have paid the same as the car, $28306, but now the investment is worth $31,907.   So in the case of borrowing to buy a car vs investing, I could borrow to buy a car that will cost me 28k over 5 years and then its only worth about 11k when I pay it off, OR I can borrow and pay the same amount over those 5 years on something that appreciates over time and it would be worth about $3600 more than what I paid for.  So to compare both scenarios with their bottom lines, the depreciating car has lost about $17300 of what you've put into it, and the investment is up $3600.  That's a difference of nearly $21000.  Well, when you put it that way Ryan, that IS a huge difference.

This is the way we've set up a portion of our finances. We only borrow for things that increase in value such as investments, and we save up to buy all things that depreciate.