Categories
Saving

How to Build Wealth and Get Rich Slowly

Sometimes, I feel poor.

My bank account has a low balance and I use credit cards for all my purchases.

 

This might be the hard reality of many people living paycheck to paycheck. However, I choose to live like this to optimize my savings and live a better, happier, life. ūüôā

 

Optimize your accounts

For example, I do not keep a large balance in my bank account since it pays a whopping 0% in interest. Instead,  I try to optimize my returns by keeping any extra money into a high-yield savings account. I highly suggest you do too, you could be making a few extra hundred dollars simply by keeping your money there instead of your checking account.

I only keep a small buffer in my checking account (roughly $1000) and then use my savings account to pay my monthly credit card bill, mortgage payments, and keep my emergency fund. In terms of emergency fund, I suggest keeping at least 3 months of expenses saved in a savings account.

Some go up to 6 months or a year but this is more of a personal preference and depends greatly on your job stability. The important thing is to keep your money at work and have enough put aside in case of an unplanned event such as a job loss or an unforeseen major car repair.

 

Keep it simple

You can even open different accounts for different goals if you prefer to separate your finances. One account for emergencies, one account for the month-to-month expenses and one for your medium-term goals such as a new purchase you are planning or a vacation fund.

Once your basics are covered and you have a healthy emergency fund saved up, you can invest in low-cost, highly diversified, index funds and let your money grow to achieve your long-term goals. You can see exactly how I invest in my Open Book series.

I sometimes feel poor because my paychecks are very low once they get to my bank account. On top of taxes, I also automatically deduct from my paycheck to fund multiple investment accounts. I start by maxing out my company match plan (10% of my salary) to maximize the 50% match I get. Then I also max out my registered accounts and automatically invest in my preset asset allocation.

 

travel credit card churning

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Use credit card travel rewards

For my day to day purchases, I always use credit cards to reap the rewards. I optimize my travel rewards by applying to generous¬†“Welcome Bonuses” offered by most banks online or in the branch. Most banks will offer bonuses worth anywhere from a few hundred to thousands of dollars simply to signup to their cards.

You can easily accumulate thousands of dollars worth of travel just by applying. We used our points for our honeymoon and could not be happier.

Flying inside the country can be practically free with points. However, it will not give you the best value for your points compared to international flights.

 

We saved over $800 on our latest trip

For example, flying coast to coast, from Toronto to Vancouver, would save you about $800. This offers a¬†point value of 3.22¬Ę per Aeroplan. For this¬†example, I am using Aeroplan rewards but the same calculations can be done with any reward program in the US or internationally. (All figures are as of the date of publication¬†and the¬†cheapest flight option was selected)

 

Flight Cost Taxes & Fees Total Cost
AirCanada.com $798 $169 $967
Aeroplan.com 25,000 miles $160 $160
Value Of 1 Mile: 3.22 cents Savings: $807

 

To maximize my return on points, I search for the best flights and try to fly business class when available. Here is an example of the costs to fly across the globe, from Canada to Hong Kong and the savings I can achieve by paying with reward points:

 

Flight Cost Taxes & Fees Total Cost
AirCanada.com $6856 $132 $6988
Aeroplan.com 150,000 miles $315 $315
Value Of 1 Mile: 4.44 cents Savings: $6673

 

This is an example of using Aeroplan, which is the main reward program I use here in Canada. If you are in the U.S., there is more flexibility in the programs offered. A quick search into the airlines and hotels reward programs can show you the full potential of using credit cards for your everyday purchases.

Of course, you need to be responsible and always pay the full balance owed each month! You should not spend money you do not have and you should never have to pay credit card interest.

 

Find your card today and start earning those SWEET miles!

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Know where do you stand?

Using those three main techniques:

  • Keeping your money in an interest-bearing account,
  • Investing automatically in low-cost index funds, and
  • Earning rewards on everyday purchases with credit cards,

you can maximize your money and get ahead in your financial independence journey.  If you start following these and start tracking your net worth then you can clearly see your progress and achievements.

CNN Money has a fun net worth comparison tool you could use to see how you compare to the average American but remember, it is not a race. It is not a matter of being ahead or behind but rather about your personal progress and the concrete steps you are taking to better your financial state.

Under 25 years old have an average net worth of $1,475. 25 to 34 hold $8,525. 35 to 44 stand at $51,575 of net worth. 45 to 54 at $98,350 of net worth. 55 to 64 at $180,125. Finally, 65 and over hold on average $232,000.

 

How to save

 

Comparing to these figures, you can see¬†how you compare to the general population. Obviously, if your goal is to retire early (35 in my case) these¬†figures would need to be greatly accelerated. I aim to retire in 10 years or less with a million dollars. My net worth would then stand 19 times higher than the average for the 35 to 44 years old age group. I’m on the right track!

I wish you the best of luck in your journey and hope I can help along the way. Please ask any questions in the comment section below and I will be more than happy to help. Xyz.

 

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Categories
Investing

Automating our Finances Saved our Sanity

A key part of our financial success is automation. By having our finances on auto-pilot, it took out the emotional, irrational, decisions we could make while investing. Automating our finances took the stress and time commitment out of our personal finances. It allows us to stay on course regardless of our motivation and bring a lot of convenience to our everyday life.

The first step to this is to set up direct deposit with your employer. Most employers offer this as a default given its simplicity and efficiency. With your money automatically depositing in your checking account, you will be ready to automate the rest.

 

Automate your bills

You can automate any recurring expense. This will ease your tracking and make it easier for you to cut down on costs. You might see that you have multiple monthly payments for similar product categories. For example, if you see that you are spending on Netflix, Hulu Plus, and Amazon Prime every month, you can slim down your entertainment budget by just choosing one.

The same can be analyzed for any spending category. I suggest you take the time to go down your list of bills and ask yourself if there is any way you could cut, replace, or reduce that bill. There are so many alternatives out there. I am sure you can lower the cost of just about any service (except maybe electricity but your usage could be reduced).

When you do reduce your expenses, you need to make sure to invest those savings. If you leave that extra money in your checking account, you will probably spend it on little unnecessary things without even noticing it. At first, I suggest you keep an eye on your monthly spending with Personal Capital multiple times a month to stay on track. Then, you can stop tracking so closely once you get the hang of it. I pay all my monthly bills through my credit card for the rewards and easier tracking but the same automation can be achieved through your checking account if you wish.

 

Invest first, live off the rest

Setting up an automatic investment plan is the easiest way to avoid the emotional side of investing. It is also a great way to force yourself to save. Take out a percentage of your pay and automatically invest it, then live off whatever is left.

The first account your need¬†automate is your 401k. Have money deducted from your paycheck and placed into your company’s retirement plan¬†401k to optimize the company match and tax advantages. This money is deducted pre-tax, which greatly increases the total growth of your savings.

Then, you need to invest in any stock option plan that your employer might have but only if they offer a match. I, for example, get a 50¬Ę match for every dollar I invest. Therefore, I am automatically up 50% from day one. Once you have maxed out those accounts, contribute into other tax-advantageous accounts¬†then¬†invest into taxable accounts if you still have extra capital.

Keep in mind that if you have high-interest debt (anything over 5% or 6%) you should pay off that first since you will get a guaranteed return of that said rate.

 

Investment accounts you should prioritize, in order:

  1. Contribute to your company’s plan (401k, 403b) to get the full employer match (Free money and Tax advantageous)
  2. Participate in your employer’s stock option plan but only if they offer a match. (Free money)
  3. Pay off high-interest debt (Guaranteed high return of that said rate)
  4. Contribute to a Health Savings Account (HSA) if available
  5. Max out your IRA, traditional or Roth
  6. Contribute to the maximum limit of your work-based plan for tax advantages
  7. Invest any extras in a taxable investing accounts

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For Canadians, it is a bit simpler:

  1. Contribute the maximum to your RSP (Tax advantageous)
  2. Participate in your employer’s stock option plan but only if they offer a match. (Free money)
  3. Pay off high-interest debt (Guaranteed high return of that said rate)
  4. Max out your TFSA
  5. Contribute to taxable investing accounts

 

If all of this sounds too complicated, we suggest Wealthsimple.

Start your automatic investment account today!

 

Emotional investing can cost you much more than you think. The best way to avoid this is to have everything on auto-pilot.¬†The average investor will fall short of the market’s return. Simply because he thinks he can time the market or know more than anyone else about a particular stock.

You might think you found the bottom of a market dip or you might sell too soon, thinking it was the top. Active trading is hard. Even the mutual fund portfolio managers cannot beat the market net of fees.

To fully automate your investing, you can set up an purchase plan with your broker to buy mutual funds for free. TD e-series is the cheapest option or you can buy ETF for free with Questrade. If all of this sounds too complicated, our favorite investing platform on autopilot is Wealthsimple. They automate everything while still providing a human touch to financial planning.

By investing at every paycheck, you are effectively investing as soon as the money is available to you. You are therefore maximizing your total return by investing in a lump sum.

Looking back in history, the markets have had much more growth periods than downtrends (about 7 to 1). Therefore, investing today is statistically better than holding on to your cash.

On top of optimizing your investments, this strategy will get you used to live on less without necessarily decreasing your standard of living. I, for example, save and invest half my income and can still live a plentiful, fulfilling, life.

With my savings fully automated, I can relax and stop watching over my investments so much.

In addition, this will save you from mood investing. Similar to a diet, you might be really motivated some days, or maybe for a few months, but your mood might affect your motivation. With automated savings, you cannot choose to skip saving for a week because you just feel like spending or save less one payday because you are not in the mood that day. This forces me to stay on track with my goals.

I hope this will help you relax and spend less time thinking about your finances. Life is about happiness, maximize it! Xyz.