Tuesday, November 4, 2014

#39 Adopt an Entrepreneur/Investor mindset

Having worked in the oil patch for a decade, I know quite a few wealthy people.  My father asked me the other day how most of my wealthy friends made most of their money.  My response was that the overwhelming majority of the wealthy people that I know, became wealthy by either starting a business or by taking a financial interest in a company by buying or owning company shares.  I struggled to name anyone I know who is wealthy who got that way from being an employee.  I believe this is a important learning and it reminds me of a few books I read by Robert Kiyosaki.

I first tried reading Rich Dad, Poor Dad by Robert Kiyosaki in 2002.  Tim, a co-worker of mine, had leant the book to me after reading it himself.  He was excited about what he had learned and suggested I should read it to learn how to become wealthy.  I got about halfway through the book and thought "Where is this recipe to building wealth that Tim talked about?".  The book doesn't specifically lay out what kind of investments to go into, it just went on talking about owning real estate and building businesses.  "Hell, I don't need this, I have a good job making good money... I don't have the time to do shit like buy rental properties.  This books sucks!"  I didn't finish the book.

The next time someone recommended I get into Kiyosaki's stuff was in 2007. By then Kim and I were well into into aggressively saving and investing our money so I was looking to maximize our investment dollars.  Another co-worker, another Tim oddly enough, was listening to self-help books and podcasts on his MP3 player and he recommended I try out Kiyosaki's book "Rich Dad's Cashflow Quadrant".  I listened to it. Then listened to it again.  This time I 'got' what Kiyosaki was saying.  The Rich Dad series is really about mindset and how you look at, and earn, money.  There is no recipe.  You create the recipe.  The focus of the book is in how somebody earns money, with emphasis on financial risk and reward.  In Cashflow Quadrant, there are 4 main earner mindsets.  They are summed up as:

Employee - You earn an income by working for someone else. You have no financial interest or risk in the success of the business.  If you stop working the money stops coming in.

Self Employed - You earn an income by working for yourself.  You take on the financial risk of your business but you also do ALL the work.  If you stop working, the money stops coming in.

Entrepreneur (Business Owner) - You earn an income by building and (possibly) operating a business.  You take on the financial risk of the business but you do some work and pay other people to do work to make the business a success.  At some point, your business may run on its own.

Investor - You earn income by investing your money in other people's business or in publicly traded businesses, such as those listed on the stock market.  You take on the financial risk of the business, but have no active role in running it.

Cashflow Quadrant from Kiyosaki.

Many people fit in to multiple earner mindsets or quadrants as Kiyosaki calls them.  The biggest learning I got out of Kiyosaki's Cashflow Quadrant book was that in order to become Financially Independent, you need to move towards the Entrepreneur/Investor side of the spectrum.  Being an employee or being self employed earns you a paycheque but often gives you nothing more once you stop working.  It is when you get your money working FOR YOU in the form of a business or investments that you are able to step back from working.  By moving to the E/I side of earning income, you begin to detach yourself from being dependent on other people to look after you, whether that be an employer or the government.

We were naturally moving towards that mindset on our own in the early 00's but after reading Kiyosaki's Cashflow Quadrant book, we ratcheted it up and were ready during the 08-09 financial meltdown to take advantage of investment opportunities and use leverage to buy quality stocks in the same way real estate investors/landlords buy rental properties.  We went directly to the Investor quadrant early while still in the Employee Quadrant, investing in dividend income and growth stocks.  By using our employee income to build our Investor income, we have gradually moved from one side of the quadrant plot to the other.  At present, about half our income comes from the Employee quadrant, and half come from the Investor quadrant.  At some point our investor income will be all we need to meet our monthly liabilities.  At that point we will be financially free.

By taking on an Entrepreneur/Investor mindset I believe a person takes on more risk, but acquires more freedom.  They are more in control of their life and less dependent on others.  It takes more discipline and motivation to take that path, but I believe it has been very worthwhile for us. While I do not suggest everyone go out and start a business, stocks are available to everyone once you have some savings to put to use.

Thursday, October 30, 2014

Dividend income growth... 16 months in review.

If you follow any of my previous posts, you know I am a believer in dividend growth investing.  We've consistently been able to achieve an increase of our portfolio's annual dividend income since we started using this strategy with the lowest annual portfolio dividend income increase of approximately 5%.  We grow our dividend income through dividend reinvestment, new monies added to the pot, and from dividend increases.  This year and a half has been a bit of a special case from past years because we have added NO NEW MONIES to our investment pot.  Therefor the increases over the past 16 months are solely from the pooling of dividends and then reinvesting them, and from dividend increases which have been plentiful this year.   I've also incorporated some covered call writing in our RRSPs to add a little extra cash-flow but those are really small potatoes compared to effect of the reinvestment and increases of the existing dividends.  From July1 2013 to October 30 of 2014 we have increased our dividend income by a compounded rate of 17.5% over those 16 months.. or just over 1% per month.  Our portfolio currently yields about 4.5%, so over the 16 months about 6% of the growth came from reinvestment and the remaining 11.5% is from dividend increases.  This represents an annual dividend growth rate of about 8.6%. Not too shabby.

The following chart shows the increase to our annual dividend income for each month, which includes both reinvestment and dividend increases.



Note that every month there was an increase in our total dividend income.  Every month had some form of increase and there were no decreases.  In order to give this chart a bit more meaning, lets assume that July 1st 2013, we made $10000 a year in dividend income.  The monthly increases to that amount would look like this:



... to the point where $10000 in dividend income turns into $11749, 16 months later.

If you've been watching the stock market over any period of time, you know that we always see increases and decreases in stock prices, usually by the second during market hours sometimes with big swings to the upside and the downside.  This watching of the market go up an down can rattle some people as they watch their portfolio value increase or decrease by up to double digit swings within short periods of time.  The above chart is the kind of chart I like.  Our dividend income continues to rise month after month.  Some months we had dividend increases and other months we deployed some of the dividend monies that had built up and bought some more stock.. usually ones that we thought were depressed. on sale, or were due for a sustainable dividend hike in the future.

Tuesday, October 28, 2014

#38 Use good debt wisely, get rid of bad debt completely.



Most people have some form of debt.  Credit card debt, student debt, mortgage debt, car loan, family loans, investment loans, payday loans, rotating lines of credit, and consolidation loans are probably the most common types of debt.  People typically use debt to buy something when they don't have the money for it at that given moment in time.  We as a society don't often save up for things before we buy them, but rather buy them and then pay back the loan over time... that's just the way most people do it these days, particularly younger people just starting out who have no savings to begin with.  The problem with debt is that if taken on for the wrong reasons, or if handled irresponsibly, it can make your life more difficult rather than easier.

But not all debt is bad.  We are quite comfortable taking on large amounts of debt but we only take on what we consider to be "good debt" and that brings us to defining good debt vs bad debt.  We use a fairly simple definition but it has some room for subjectivity.  Good Debt results in a better longer-term fiscal situation for our family as a whole.  Bad Debt results in a worse fiscal situation.

Another way of looking at it would be asking the question:  Does the cost of paying the interest plus the principle make up for it FINANCIALLY in the long run?

Here are my thoughts on what are good types of debt and what are bad.

Credit Card Debt - Bad Debt.  Interest rates are too high and most people use credit cards to buy things that depreciate over time.  If you don't pay your credit card off quickly, the interest will eat up a lot of your money.

Student Debt - Generally Good.  Assuming you are using the the associated education to make more money than you would without the education, then yes Student Debt can be Good.  Once you're done your education, I advise to pay off student debt quickly.  I would however challenge people taking "basket weaving" classes whether those types of diplomas/degrees are worthwhile for the money and interest that they are required to pay back, often for years and years. 

Mortgage Debt - Generally Good Debt.  It allows you to choose where you live and how long you live there by owning property.  Its debatable whether a home is an investment, but the benefit of being in control of where you live and knowing that rent wont be going up every year can help you budget your money more easily.

Family Loans - Generally Bad Debt.  Owing a family member may make sense in some cases, but I'm not a fan of owing family simply because its awkward and usually one side feels they're not getting the treatment they'd like. 

Investment Loans - Good Debt.  If you can make more money on the investment than you are paying for in interest costs, this is definitely good debt in my books.  We regularly use investment loans as part of our investment portfolio.

PayDay Loans - Definitely Bad Debt.  Essentially legal loan sharking. 

Rotating Lines of Credit - Depends on the usage, but I would bet most people are using it for consumer spending.  If you use it for investing purposes, then a Line of Credit can be good debt.

Car Loan - Bad Debt.  New Cars depreciate like crazy the first few years.  Buying a car may be a necessity, but we prefer to pay off car loans very quickly or don't have a loan at all.

Consolidation Loans - Bad Debt.  Usually the lesser of the evils of loans in that consolidation loans usually have lower interest rates than other high interest loans such as credit cards or some car loans. The downside is that this often still consumer debt, just at a different rate.  Pay it off.

Kim and I both had student loans in the 10s of thousands of dollars, which we paid off within a few years once I started working. At present, we have an investment loan and we will be buying a house next Spring which will mean we will have a mortgage again.   Both of these loan-types will help better our financial situation and so we are quite comfortable having them and generally not in a hurry to pay them down.  We have no other types of debt at the moment and we intend to keep it that way.  Whenever we've had other types of debt, we've work very hard to pay it down as soon as possible.  By only having debt that helps our financial situation and doesn't hurt it, it means we don't fuss over our debt as much as other people, and we know that by paying the debt off, we aren't merely pouring our money down the drain, or lining the pockets of others.  We obviously need to make sure that the amount of good debt we have remains at a manageable level that we can be expected to be able to cover with our monthly income.  That is where budgeting comes in.  

Tuesday, June 17, 2014

Buy vs Rent. Why we're okay with renting today.

Conventional Wisdom: "Renting is pouring money down the drain" 

We've rented a number of places, we've owned a few homes and we've speculated on a few property flips.  In two weeks from now we will be back to renting a home rather than owning one.  Now many people may assume that we rent because we don't have the money for the downpayment or that we can't afford the monthly payments that come with owning.  But with us thats not the case.  Since we don't view our home as an asset, we look at home ownership differently than most people.  We generally do not feel the need to own a house.  We do not buy a house believing it is an investment but rather a lifestyle choice.  Sometimes owning makes sense for us and other times it does not.  At present, we have chosen to rent because for our lifestyle, renting makes the most sense for us right now.  It also makes sense for us from an economic sense at this point in time, specifically around month to month costs.  In the future this may change and we fully expect that we will own a home again within the next few years.  But not now.

But what about all that money we're throwing away?  Well, I've done some number crunching on the specific house we are renting and I can tell you we are not coming out poorly by renting.  For other homes it may make sense to buy, but we would calculate these numbers on a case by case basis.  I'm only going to focus on the basic math around the rent/buy choice on a monthly cost basis and not around full life-cycle costs (which would include buying and/selling costs of a Real Estate transaction, capital appreciation, land transfer taxes etc) because many people have psychological reasons to either buy or rent and the metrics also change depending on how long you intend to live somewhere, whether prices go up or not, and how emotionally attached you  are to where yo live... so I will leave that up to you to decide whether those types of reasons and parameters affect you.

The House:
The house we will be renting is a 3 bedroom house in a very desirable neighbourhood within a half hour walk to the heart of downtown Kingston Ontario.  It is about a 5 minute walk to the nearest public school, and within a 20 minute walk to Kim's work.   We really like the area and we are prepared to pay a premium to live in this neighbourhood.  The property taxes on the house are $6750 a year.  Based on the property tax mill rate of about 1% of house value, and surrounding sales which are close to a million dollars, I would estimate the house has a market value of about $675,000 or more, which in Kingston is well above average.  We have agreed to rent this house for $2300 per month plus utilities.

So how much are we flushing down the drain each month by renting this house in this desirable neighbourhood?  Lets do a little comparison math:

To buy this house we would need to have a 5% downpayment which would be about $34000.  The remaining $641,000 would be mortgaged.  Since I would only have 5% equity in the house I would need to get CMHC mortgage insurance.  That would cost 3.15% of the mortgage price which would add an additional $20,000 to the mortgaged amount.  So the fully mortgaged amount would be $661,000.  If I had a larger downpayment set aside,  I could put the money into the house but I am not a fan of putting more money than needed into a downpayment... simply because I like my money to be in liquid form and bricks and mortar real estate is very illiquid.  If I get a 25 year amortized mortgage at the lowest 5 year mortgage rate today of 3%, I can pay a monthly mortgage payment of $3128 per month.   In the first year, about $1500 is going towards paying down the principle and the remaining $1628 is going towards interest payment.  As mentioned above the property taxes for the year are $6750 which translates to $562 per month.  If we bought the house, we'd need to have home insurance or we wouldn't be able to get the mortgage.  For a house of this size and value, I'd estimate it would be about $150 through our current insurance company although I may be able to get a lower rate elsewhere.. but I'll go with what my insurance company would pay.   A rule of thumb for general upkeep (painting, repairs, fix-ups, new shingles etc) of a house is usually around 1% of the value of the property... which in this case would be about $6000 per year or about $500 per month.  This number seems a bit high to me, but there are always things that a house needs that we forget to account for so I am going to leave it at $500 per month even though I think it may be more than what I'd likely pay.   This number is also dependent on the age of the house... older houses sometimes just need more upkeep... and this house is 70+ years old.  So to summarize, the total monthly cost to us after buying this house would be $4340:


During the first few years, about $1628 of the mortgage payment each month goes towards the interest cost, so one could make the argument that each month, the remaining $1500 is going back into your pocket in the form of home equity.  You would get that $1500 back if and when you sell the house assuming the house doesn't go down in value.  So if we subtract the $1500 from the Total cost, we get approximately $2840 that is NOT going to your/our bottom line but to either interest, insurance, property taxes or upkeep costs.  

Now of course there are other monthly costs such as utilities, but I have to pay them each month whether I own or rent so I didn't include those.   Don't forget that if we bought we also would have had to front a $34000 downpayment... so there's also that cost and time that we'd have to consider.  Thats $34000 that isn't in my pocket or investment account.  

So contrast the $4340 (or $2840 if you prefer) with the monthly $2300 rental cost of the exact same home, without having to come up with $34000 downpayment up front and I think we're doing well to rent.  As an aside, if I had a potential $34000 downpayment and wanted rather to invest in Real Estate, I could put it into Killam Properties (KMP on the TSX).  They own and operate apartment buildings and manufactured home communities and the stock currently pays a handsome dividend of about 5.75% per year.  The stock is very liquid and I could sell it at virtually any time which is very different than owning a physical building.  If I bought $34000 in KMP stock, I would collect $1955 annually in dividends or about $162 a month that I could apply to my rent cost if I chose to do so.  If I did apply the $162 monthly dividend to the rent cost, it would lower my rent cost to $2138.

So on a month to month basis, the rent of $2300 comes out better than the $4340 (or $2840) monthly costs involved in buying/owning by about $2040 (or $540) per month.  The winning option, with respect to monthly costs in this comparison is renting, yet it is not so cut and dried in there grander scheme of things.   For our current needs we think we're coming out ahead by keeping the deposit in our pocket and renting this attractive house in this sought after neighbourhood.




Tuesday, May 27, 2014

#37 "Hedge" against price inflation by investing in staples you use.

From Investopedia: Definition of 'Hedge'

"Making an investment to reduce the risk of adverse price movements in an asset..."

People like to complain about gasoline prices. They also like to complain about bank fees.  And how about cell phone fees?  Yep, people keep complaining about phone fees.  Energy costs such as electricity generation and delivery, natural gas costs etcetera are generally going up over time... and yep, people sure do complain about them.  Every year all of these products and services increase their cost to consumers like clockwork, sometimes around the rate of inflation and sometimes higher such as in the case of finite resources such as oil and gas.  If the cost of these items is expected to go up over time, and its reasonable to expect that businesses will pass on the cost of these items to customers so that companies can preserve profits, is there a way to either hedge against their price increase or to participate in the increasing value of these consumables?  There sure is!  Buying good companies that produce products or services that people use everyday is a good way to participate in the market.  It is also a way to hedge against rising prices of the products and services they sell.  A good example of this is participating in increasing gasoline prices by investing in Oil and Gas stocks.  We like to focus on companies that pay and increase their dividends over time.  This way when the price of gasoline goes up, we are able to participate in the increase through the accompanying dividend increases.  As the price of gasoline goes up, it costs me more money to fill up the tank of my car... but I also profit from the rising price of the oil and gas stocks that I own.  This is my hedge against price inflation.



The everyday costs/staples that we consume are gasoline, mortgage payments, insurance, phone plan, internet plan, electricity, heating fuel etc... so to hedge these costs we own shares in Oil and Gas companies, Banks, Insurance companies, A Phone and Internet company, Electricity Generation and Delivery companies.  All of the companies pay me a dividend and they all have raised them at or above the rate that they increase prices on their products or services that I buy.

So while some people have a tendency to do nothing but complain about higher prices year after year, we've taken a different approach.  We participate in the higher prices and higher profits through stock ownership.  Since we've been doing this for nearly 15 years now - and the dividend increases have outpaced inflation - many of our bills are now paid for by the cash-flow of the stocks we hold in their specific sectors.... such as our oil stocks now actually pay for our gasoline purchases, our phone company stock pays for our monthly cell phone costs and so on.

Monday, May 26, 2014

#36 Owning a good company is better than working for one.

"Investors should be rewarded for actually owning companies and gaining returns on their investments." - Mark Cuban

My father and I were discussing wealth creation the other day and he asked whether I knew any multi-millionaires.  Having studied and worked in the Oil Patch in Calgary, I've come to know personally a number of wealthy people with very high net worths, some well into the 10's of millions.  Calgary is a vibrant city with lots of opportunity, and a lot of money moving around within it.  If there is anywhere that rewards calculated risk-taking, it is Calgary.  The overwhelming majority of folks I know who are wealthy did not become wealthy from earning a paycheque.  They became wealthy from either starting and operating businesses or by investing in, or acquiring shares of, companies that go on to be very successful.  I asked one of my high net-worth friends what they their best piece of advice was to generate wealth.  He said it was simple: "Owning a good company is better than working for one"...  i.e. Their key to wealth creation was owning businesses, not working for them.  This flies in the face in what the majority of the school system teaches... to become an employee and rely on a government pension.

The rationale for business (or stock) ownership is this: A paycheque is temporary and you are compensated only in exchange for your labour.  You get paid for the work you do once, but if you stop you get nothing in perpetuity.  Owning a well-run business, or shares of a one, can result in passive cash-flow in the form of dividends and tax-deferred capital appreciation as the business grows for as long as you own your share of the business.  This is one of the reasons I don't understand why people don't take advantage of work-sponsored share matching programs.  Getting shares in a successful company at a discount sounds like a great thing to me....then to benefit from that company ownership for a long time, perhaps long after you've left the company, just seems like a solid way to build wealth to me.  Buying shares privately in an RRSP, TFSA or Taxable account also make sense if you take a long term approach and pick solid companies that will still be around in 10-20 years.  Its not as hard as it sounds.. really.



Taking on the risk of business or company share ownership can lead to sizeable rates of both capital and cash-flow growth.  Growth rates of good companies tend to outpace inflation, and dividends can grow well above the rates of paycheque raises.  Rather than start a business, we chose to invest in companies that had a track record of growing their earnings and increasing their dividends AND ones we think will continue to deliver raises above the rate of inflation.  We regularly get dividend income raises far greater percentage-wise than employment income raises these days.. which means our investments are now bringing us closer to Financial Independence than our paycheques.   Since the rate of growth of our portfolio's dividends alone outpaces our employee paycheques growth, we have put as much as we can into them as early as we can.  This allows the compounding to work in our favour early.

Thursday, February 27, 2014

Rule #35 The Main Goal is Financial Independence, Not Retirement

"Let your money work for you. You don't work for money. That is exactly what Financial Freedom is..."
-Manoj Arora, From the Rat Race to Financial Freedom



My father asked me last month if I was retired for good.  Recently I started using the term 'retired' when people ask me what it is that I 'do".  I find it hard to answer the question to most people as I am not employed and I am not looking for work.  I have extended family members who, every time we meet, ask me if I've found work yet.  When I remind them that I'm not looking for work I get the feeling that they feel sorry me.  They shouldn't.  I quit my Professional Geologist career almost 3 years ago, at first to take a break from working as I was feeling a little burnt out, and then while off I decided I wanted to try something else... something with a slower pace.  I've taken up part-time Stay-at-Home-Dad and part-time Options Trader as my new vocations.  One doesn't pay well (at all!) and the other is an "Eat what you kill" type of income generation.  Both are certainly not as well paying or as predictable in their pay-out as my previous career.  While I do not have traditional work or income, I do have some growing dividend income and I can generate a modest return on my Options Trading account.  That coupled with Kim's paycheque provides a pretty good living for our family as it still allows us to save and grow our "save for later" investments.  With that said, we've never been focused on retiring in the traditional sense. We have no intention of working at the same job or career for 30-40 years and then stop working forever and spend our days golfing.  Thats just not what we want.  We've both taken mini-retirements to be home with our boys and we wouldn't have been able to do that if we socked all our money away for retirement at age 60.

Our focus rather, has always been on Financial Independence.  We define Financial Independence as having enough passive income now to cover a lifestyle that we are happy with without having to go to work for someone else.  We actually don't plan to stop "working" once we reach Financial Independence, but rather we will work when when want, where we want, and if we want as opposed to having to work to sustain a certain lifestyle.  Our plan is to have our investments pay our way.  This is in contrast to the typical pension most people strive for.  In order to get a standard retiree pension, employees are generally required to work for decades, in sometimes soul-crushing work, in order to get a pension for the last third of their lives.  By focusing on cash-flow producing assets such as dividend paying stocks in place of a pension, we do not need to wait til age 55-65 to turn a lump sum investment into a pension.  We've been building our non-employment cash-flow each year by buying what we sometimes refer to as "mini pensions" that we can turn on right now.   Since we've been aggressively saving and investing for over a decade now, we're well on our way to our goal and we hope to meet that goal at or ahead of schedule even as I pare back my employment income.  By aggressively saving and investing early, along with living on only one salary for over a decade, it has allowed us to transition from working for a living to working when we like.








Saturday, February 8, 2014

Rule #34 Find Yourself a Money Mentor.

"Try never to be the smartest person in the room. 
And if you are, I suggest you invite smarter people … 
or find a different room." - Michael Dell.

I never had a Money Mentor.  I've had a handful of technical and career mentors throughout my working career, some of whom have given me financial advice, but I've never had a formal mentor specifically for money.  By Money Mentor I mean someone who has been through the trials and tribulations of money management, specifically saving and investing, who can give a biased opinion of what to do with your money.  Unbiased opinions are nice, but biased opinions usually indicate experience and perhaps some specialization.  Their specialization usually comes from experience, training and real world dedication to a specific topic.  These people are the ones I want to learn from.  I wish I had had a Money Mentor early in my investing phase, about 15 years ago, to avoid the smacking I took during the "Dot Com Meltdown".  Someone who focused on slow steady cash-flow growth and not the buying and selling of in-fashion stocks or mutual funds.  It probably would have helped me not lose two thirds of our money in the 2000 big tech meltdown, assuming I would have listened of course.  While I feel like I've learned a ton by personal experience, someone there to point me in the right direction and help me cut through the bullshit would have been a huge asset.  I have mentored a couple of people in the last 7 years on the topic of money, pointing them towards specific investing styles and regularly discussing stocks, sectors and ways to invest their money efficiently.  Ultimately though, they have to own their own financial decisions.

My experience has been that most people like to talk about what they do.  Money may be a bit of a taboo subject at dinner parties, but I've found that one-on-one, people who understand money principles are usually generous in sharing what they know, especially if they know you are serious and you have done a bit of homework before approaching them.  Good mentors of any sort won't hold your hand or give you solid "must-do" recommendations.  They will help you sift through good and bad options but they wont tell you what to do.  Taking personal ownership over your finances is very important and a good mentor will emphasize this.  The mentor is there to bounce ideas off and he or she will lay out the pros and cons of such decisions, but ultimately you need to own the financial decisions you make.

My advice to young adults, or even older ones starting to invest, is to look around your network (both friends and professional) and even your parents network and identify people who have their shit together with regards to money.  Are they a savvy Real Estate investor? Stock investor? Trader? An Entrepreneur? Do any of those appeal to your interests?  Have they been doing it for awhile and have they experienced a downturn in the market?  The Downturn in the market thing is huge.  This is where the Experience is a very big asset.  Its relatively easy to make money in an upwardly trending market, but its what we do in downturns that make the difference in the long run.  Its where the opportunities are and where people tend either lose the most or make the most.  A sober second opinion can really make the difference.

Find yourself a mentor.  You'll be glad you did.

Friday, January 10, 2014

Rule #33 Don't spend all of that salary increase

One thing that people entering the workforce often do is adjust their lifestyle upward to match their paycheque.  They live at a level they can sustain with their income and as they receive pay raises they typically adjust their lifestyle incrementally further upward.  This presents itself, often unnoticeably, in the form of bigger houses, newer/fancier cars, eating/drinking out more, gym memberships, more vacation trips South, more electronic doo-dads, more/bigger gift giving etc.  It is also commonly associated with higher personal debt levels as banks will loan more to people as they make more.  This gradual incremental edging up of lifestyle expenses is often referred to as Lifestyle Creep.   There is typically an increase in the cost of living due to inflation, but usually "lifestyle creep" is a result of voluntary spending more than the inflation amount.  People then become trapped in a higher cost lifestyle that is difficult to pull back from once they get to that spending level.  It is very difficult to save and invest for the future if all of your pay increase is going towards Lifestyle Creep.  The other concern is what happens in the case of someone losing their job, getting a demotion, or changing to a lower paying job?  How about if you allocate some of that salary increases to saving/investing/debt reduction each year?  If you never let your lifestyle creep up with your salary, it will be easier to put that money to good use now.

Early in my career, the on-the-job learning curve was fairly steep, and so were the salary increases.   My base salary increased about 30% within the first 3-4 years as my value to the company went up.  Because I had gone from student living to full-time professional employment, the initial bump from TA wage to Professional salary was huge.  We began living on my salary alone and investing Kim's.  Our lifestyle had already skyrocketed from starving (but happy) students to full-on mature adults and we were living a very comfortable lifestyle.  We decided that any salary increases that were over and above the general cost-of-living would further go towards savings, investing and paying down any bad debt (debt that doesn't result in fiscal betterment).   So when I began receiving pay raises in the 5-8% per year the first few years that I was working, we were able to max out RRSPs, pay down debt, and save enough money to buy a used car with cash.  Once we were saving the amount we wanted to, we then started living on some of the salary increase but we have always used some of the pay increase to increase savings.  We have rejected lifestyle creep as best as we can.  We've done our best to reject spending money just because we have more of it.  If we had spent more of the money each year as we made it, it would leave very little wiggle room if, for some reason, our pay had decreased.

The way we ensured that the incremental raise on my paycheque went towards savings was to have automatic withdrawals set up on our account that would come out the exact same day as my paycheque would get deposited into it.  That way the additional money was not just sitting there waiting to be spent.  The money had already been allocated to our goal of saving, investing or debt reduction.  As pay raises came over the first 5-6 years of my professional career, so did our contributions to our investments.  At present, we've hit a happy medium where we're very happy with the amount we're contributing to our savings and investing accounts, so now when we get a raise, we are a bit more free to spend the money since our financial goals are being met, but we've been able to live well below our means for some time now and this financial manoeuvre has helped us set up a base that will help us reach Financial Independence without "doing without" in our later years.