Budget Sense

If you got a refund on your income tax filing this year, congratulations, but now the important work begins: what to do with this money and how to budget it? Obviously, different people will have different ways of using and allocating this money, but generally speaking, there are better ways to use it than to just spend it all on a vacation or purchasing big ticket item etc. Also, the amount of your refund is also a big factor in what you do with the money; if your refund just around one hundred dollars, then save yourself the budgeting and all the thinking and just spend it any way you like, since it is an insignificant amount. On the other hand, and this article is based on the assumption that your refund is couple hundred dollars or more, then read on to help you get ideas on what to do with the refund:

Roll it over to your RRSP to get another refund next year
This would be the first and best use of any refund money. Depending on your situation and the amount of refund you got, you may redirect some or all of the money to your RRSP, and that in turn will generate another – or bigger – refund next year. This also accelerates your retirement nestegg, especially if you started saving a bit late.

Pay down debt
For some, this may be the bigger priority over their RRSP savings and that is totally understandable. If you have a big debt and got a big refund, then it makes sense to dedicate most if not all of your refund towards paying it down. On the other hand, if you only have a small debt left (say $1000) and your refund could cover all of that, then it is easy to figure out that you should use your refund to get rid of this balance.

Save it towards a big purchase or goal
Again, depending on what you are saving towards, whether there is something specific or just general savings – including building an emergency fund – rather than spending the money, best to save it and feel good about yourself. This is a way to help you look back in the future and have something to show for your hard work. In fact, assuming you get refunds that are $1K or more, and assuming you save even $250 of those each year, in couple of years, you have saved over $1K without much effort

Donate to a charity
This is something not a lot of people think about, but you should contribute a portion of your refund to help a charity: you get to help and feel good, while also getting a tax deduction: two in one!

Last, and certainly least: spend and enjoy it?
If, and this is a big if, you happen to be a lucky person who has no debt, has enough money saved and has maximized their RRSP contributions, then by all means go ahead and enjoy the money, be it to buy something new, book a vacation, or other ways that are specific to you and your lifestyle.

As mentioned, while some may prioritize their RRSP savings or paying down debt, at the end of the day, some combination of the above is the best way to go. Once you know what your refund amount is, sit down and spend some time going over what the money will be used for, and write it all down. Then come back to it a few days later and review the list again, to avoid the chance of forgetting any important item. Once you have confirmed how the refund will be divided, go ahead and take action by distributing the money accordingly.

Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it” . If something has the backing of arguably one of the smartest people in history, you can surely trust it!

Compounding is the process whereby interest is addedto an existing principal amount as well as to interest already paid. We have heard of something called ‘tax on top of tax’ which governments may annoyingly do at times. Compounding is similar to that but in our favour: it is effectively interest on interest.

Compound interest is when you add the earned interest back into your principal balance, which then earns you even more interest, compounding your returns. For example, Let’s assume you have $5000 in a savings account that earns 5% in annual interest. In year one, you’d earn $250, giving you a new balance of $5250: by next year, you will earn interest on this new amount of $5250 and so on. Before you know it, your money has magically gotten much bigger than what you started with, especially if you give it enough time to grow exponentially.

You may have read the example of a penny that doubles every day to become worth over $5,000,000 by day 30. While that is an extreme example, the lessons here are applicable: that compounding + time , ends up doing wonders to your money.

Compounding can also be thought of in terms of dividend reinvestment plans (DRIP) where money earned from dividend income is reinvested to buy more shares which in turn end up buying more shares and so on.

At the timing of writing this article, savings interest rate are at an almost decades high, with some banks paying 5% or more for certain savings or GIC accounts. So putting $10K in a savings account with such a rate will give you $500 in one year and you can then reinvest that amount and in one year from then (assuming the same 5% rate) you would get $525 on that $10500 for a new total of $11,025. So using compounding, you turned $10K into $11K and change in just two years! Now imagine if you had more money and have more years to leave it there. For example, if you leave your money in the bank for 5 years, and earning the same 5% interest rate, you would get close to $3K extra or $12,762.82 to be exact.

Compounding is a great tool to use on your road to wealth and financial freedom. It is effortless and it helps that we are now at decades long historical highs for interest rate paid by the banks. So put it all to use and reap the benefits in just a few years.

Money is something we should enjoy and use for good. It is not something we should stress about or cling to at all costs, otherwise, what is the point really? The idea is to feel good and express gratitude about your ability to spend on things you enjoy and brings you and those around you joy, great experience and utility. So how do you achieve this? It starts with being financially efficient.

Financial efficiency is a simple concept that is lost on many: it is basically your ability to stretch your money, where you are spending it on things that matter the most and bring you the biggest value, while reducing wasting it on useless things.

Peak financial efficiency is to maximize the gap between the two: spending money on things that give you the greatest value – be it joy, utility or other measures- while being ruthless with wasteful spending , be it fast food, unnecessary monthly subscriptions etc.

But problems arise when you are not even sure what is useful and what is considered wasteful and in fact may even mix the two, thus completely ruining the definition of what it means to be efficient with your money and finances. In that case, you need to do an audit of your weekly and monthly spending and decide on each item: whether it is something that you are using and can’t live without. Is it something that makes you happier? Does it make your life better and more convenient? How much does it cost compared to the utility you are getting back? For example, let us take a hypothetical monthly GYM membership that costs $60. On the surface, having a GYM membership is money well spent given the huge health and mental wellness benefits. But that is only if you are actively using your membership and going at least 2-3 times a week, on a consistent basis. Otherwise, if you hardly ever go – say once a month – then this otherwise great use of money turns into waste and you are better off eliminating it by cancelling the membership. Just walk outdoors instead.

On the other hand, if time with family means the most to you, then spending money on a Netflix subscription wouldn’t be such a bad idea, as you can watch and socialize together. At the end of the day, what is considered useful or wasteful is subjective and may vary from one person to the next. I may value having a car even if total mostly expenses is in excess of $500 while someone else may view that as total waste and would rather just take public transportation.

It is said – backed by research- that most millionaires achieved their status by being extremely efficient with their money. They reduced wasteful spending almost to a science, while turning the act of spending their money on useful things into a work of art. In other words, being financially efficient with your money will translate into financial stability and security in the long term.

In the beginning of last year, I wrote about a new resolution or ideas for 2022, where it would help me to both lose weight and save money. Win Win. Can’t beat that. For those who didn’t get a chance to read the post last year, the idea behind ‘Junk to Health to Wealth‘ is to cut down on junk food spending and save that money instead. Although I didn’t spend a lot of money on junk food and dinning out in general, I still did it couple of times a week, easily adding up to $25-30 if not more, depending on whether we dined out with the entire family. And that was even before the current inflation which would add an extra 10-15% to the total.

So how did my resolution hold up and how did I do in 2022 and did I carry this into 2023?

Glad to report that I did great! Let us go through some numbers and figures.

With some minor exceptions here and there, I stuck to my intention to only buy fast food once a week, maybe twice if it involves family outings. In other words, I cut junk food purchase to half or less. Meaning half the money and calories saved.

How much is that in terms of health impact?

In terms of calories saved and how that translates into better weight management, the math is rather simple and clear: assuming I cut 1.5 fast food purchases a week, each having an average of 1100 calories (for a combo) , that works out to 1650 calories a week , multiplied by 52 weeks in a year, and we get just over 85k calories saved a year. With each pound having 3500 calories, that means I saved myself close to 24.5 lbs.!

What about the financial gains?

Using the numbers above and assuming the average combo meal is $8, and with 1.5 combos eliminated a week, multiplied by 52 weeks a year, comes up to about $625 saved! That is pretty significant savings, especially when you couple it with the above health gains. And I rolled this saved money into a saving account and from there I used it to purchase dividend paying stocks.

Making one effective decision can have a positive ripple effect on multiple aspects of your life. I have found this to be true through my own kexperience in 2022, and have continued to apply this principle in 2023. Through 3 weeks of January, I have made two fast food purchases so far, which is in line with my goal and even better.

PYF: the greatest and most underrated acronym on your road to financial riches and freedom.

Pay Yourself First, darn it!

If you pay yourself first , you don’t feel the pain. You get it out of the way and you can then focus on spending, enjoying and using your money to helping others. No guilt. The reverse could lead to guilt and ‘what ifs’.

First, you need to automate it so that the money is being redirected to a saving or investment account before you even see it. This removes friction and any pain points. It takes minutes to set up , but the future rewards will be massive and may help you live on passive income way before your official retirement age.

How much should you contribute? This will vary from person to person, but the more the better, assuming you have room to cover your living expenses and other needs. And while 10-25% is ideal, anything is better than nothing. For example, if you make $1250 bi-weekly and can only afford to set aside $50 a paycheck, that is still better than not putting anything at all. Overtime, as you cut expenses, increase your income or both, you need to increase this amount.

Imagine if you you pay yourself last. First, there will likely be no money left and will feel like a burden to save. Furthermore, if you have to rely on manually saving money, you are adding friction to the whole process which just complicates things. When it comes to wealth accumulation, automating things and reducing friction goes a long way. On the other hand, adding friction to negative habits you want to break is a the right way to go. For example, make it harder to spend money. That is adding friction to the process.

Think about it: we already automate bill payments , why not automate PYF? there are consequences (interest penalty) to not paying your bills on time but no visible or immediate consequence to you not paying yourself by saving money. We need to mentally change that so that paying yourself first and automating it is just as important as automating your bills to avoid interest charges. Set it and forget! Before you know it, and after compounding has done its magic, you will look at your savings and all the investments statements and you will not only be happy you paid yourself first, you will be amazed at how magically the money grew. As Einstein remarked, compounding is the eighth wonder of the world. If Einstein can fetch for it, then you can surely trust it.

And if that is not enough, I will leave you with one last quote, from none other than our generation’s foremost financial genius, the one and only Warren Buffet: “Do not save what is left after spending; instead spend what is left after saving.”

We have all heard of an emergency fund, where you set a set amount money on the side to use for a rainy day and the unexpected, be it expensive car repairs, medical bills, home issues or anything else that you couldn’t have foreseen and would cost money to tackle. And while most probably have something saved on the side in their emergency fund, they likely hardly ever have to use it (fortunately) and this may lead to a situation where you question whether you even need it or dip into it to pay for other non-emergency items (for example, paying your credit card balance is not considered an emergency and shouldn’t be taken from an emergency fund. 

Luckily (or maybe un-luckily) for me, this year forced me to dip into my emergency fund more than once and most of these were real emergencies. Here are some of what I faced and required me dipping into my emergency fund: 

-various car repairs to a used car that was recently handed to us as a gift from another family member, after our previous one died on us (money used: $3000) 

-various furnace repairs (money used: $1150)

-other home repairs including faucet leaks (money used: $150)

As you can see, through 6 months, we had to dip into our emergency fund some 10 times, totaling over $4000! Imagine if we didn’t have an emergency fund, we would have used our credit card instead and you know what that means in terms of the interest charges that start to accumulate if not paid. 

But there is a better reason to have that emergency fund: you feel good, empowered and proud to have saved for such unforeseen emergencies! That is exactly how I felt. While I wasn’t happy about all these back to back and unexpected home and car emergencies, I felt good when I knew I had money to cover these unanticipated popups without breaking the bank or having to use plastic! 

With these issues now fixed and in the rear view mirror, I have already started to rebuild my emergency fund, to ensure it is back to its previous amount. 

If you don’t yet have an emergency fund, be sure to start saving one right away. Not only will you be happy you did should the unexpected happen, you will also feel good and financially empowered . While it is recommended to have 3-6 months’ worth of expenses saved in your emergency fund, each person and family are different and good start would be to have $2-4K saved.

One of my goals for 2022 is to get active with push-ups. To be more specific, I set to do 10 push-ups a day and increase that by 1 extra push-up per month. So for January, I started with 10 a day and I have since increased that to 11 a day for February. For March I will raise that to 12 a day and so on. The idea is to increase things while not shocking the system. I couldn’t just go from 10 push-ups a day in January to 20 in February. For those familiar with the ‘boiling frog syndrome’ , this should make sense.

You can apply the same ‘ladder’ approach to your finances, be it to save money or pay down debt.

Saving money

You can apply this in many different ways. You can start by saving a specific amount of your net pay and increase it by a specific amount or percentage each paycheque thereafter. Or, you can set it so that you are increasing it by 25% per quarter. So if you are starting with $100 saving bi-weekly in Jan, by April 1st, you increase that to $125, then $156 by July and so on. If this proves complicated , you can stick to the easier method of increasing it by a set amount. Alternatively, you can try out a more interesting method, where you increase your contributions based on the month. So starting in Jan with $100, you increase it to $120 in Feb (since Feb is the second month) and by the time you get to December, you will be saving $220.

Paying debt

Paying debt is similar to saving money, but instead of keeping it to yourself, you are paying it back to banks for borrowing their money. Here, too, it is key to set financial goals and fine-tune them as you go. Depending on your debt level, start off by dedicating a certain amount to pay off toward your balance and aim to increase that periodically. This could be done as aggressively as every paycheck , every quarter of however you want to set it. The key is to increase it periodically. Every increase will go a long way towards paying off your balance quicker, while saving on the interest.

Depending on what your financial goals are, start off by writing it down and being clear about what your current situation is and where you want to be. Next, set a timeline. And finally, decided how much you will set aside and how much to increase it by, and how often. It is magical what happens when you are specific, have a specific timeline, and add the power of compounding to it.

On October 31, 2015, I celebrated my 35th birthday. That was also the year I had became a father for the first time. Needless to say, it was a year full of milestones, changes and things to reflect on.

That evening, after having taken my 6 month old son to visit relatives for his first trick-or-treating, I was driving back home from an errand and literally parked my car for a brief moment and thought to myself: I just turned 35, what do I have to show for it? While I meant this in terms of personal development in general, it was more specifically from a financial prospective. Though I had already been pretty good with my money, I thought I could do more. For example, while myself and my wife had personal savings and something we always did, I thought I needed something on my own. Something that allowed me to try somewhat riskier investments than I would otherwise be able to do with family savings.

An idea flashed into my head, the result of having read a lot about investing, stocks trading, and dividend income the last few years. The idea was that I would start saving small chunks of money and within 10 years (by age 45) I would hopefully have enough money to generate $12K in annual ($1K a month) side income from dividends alone! That would be a start but would scale it through dividend reinvestment the first few years.

And I literally started that same night, and for the next 7 years, I never stopped. In fact, at one time, I had some side gigs and saved most of that money for this new 10 year goal.

Through 7 years and with 3 more to go, while I am not 100% on target, I am consistent with my savings and stock investments. In fact, I took advantage of the March 2020 lockdown and the current economic downturn, to be stock at a big discount. In the next 3 years, I will continue to reinvest my dividends to buy more stocks where possible, and stay consistent with saving and investing in good dividend paying equities.

There you have it. A decision literally made from thin air, all while driving and having decided to park to review my personal development after making it to my mid 30s. This has already changed my life and will do even more as I start reaping the rewards of this decade of sound and consistent investing in dividends paying stocks, in the form of a stable passive income.

I am no slave to junk food. I may eat it once or twice a week, sometimes with the family. But despite it not being a daily habit, it still goes a long way towards causing damage to both my pocket and health, especially with the rising prices for food of late.

So for 2022, I have a new saving goal in mind, which will help improve two hugely important areas of my life: my pocket and my heart, both in an almost literal sense.

Junk to Health to Wealth

The idea is simple: on the days I know I would go out and eat junk (usually over the weekend) I will withhold those purchases and instead save that money. At first, I thought I would just keep the money and spend it on something else, since it was part of my ‘personal spending money’ anyway. But I thought it is more effective if I diverted this saved money to a new saving program or even into a piggy bank. Why? To be able to physically see the result of this diversion initiative. In other words, in 6 months or 1 year from now, I will not only be able to go on the scale and see a difference in my weight , I should also realize some nice financial savings from this junk food boycott or reduction.

Putting it in OKR terminology

If you are thinking this in terms of ‘Objectives and Key Results’ , it could read something like this:

Objective: (based on historical data of how often I ate at junk food places and how much I spend) : To save $500 a year and reduce my weight by 7 lbs for the year by reducing how often I frequent these places.

Key results:

• Visit max of once a week (from two)
• Spend a max of $7.50 a visit
• Skip at least once a month from the remaining regular visits.

If I eliminate my visits from 2 to 1 visit a week , this alone would result into savings of $375 per year, based on 50 weeks. If I can also eliminate one extra visit per month, that is another $90, putting me close to my goal of saving $500 from this ‘Junk to Health to Wealth‘ initiative.

While the numbers look clear and the advantages are numerous, this will not be without challenges and distractions. There will be those random days and weeks where you are out with the family and are too far from home or can’t wait , so you just do the easy thing and buy junk. That is fine. We should almost build those in and try to make up by skipping the next visit to eat junk.

Good luck if you decide to do this and let us in the comments below how it goes.

If you get a significant pay raise, what do you do with the extra money? Say you get a 10% raise or $5K, assuming that works out to $175-200 per pay.

Do you just spend it? Do you allocate to a category in your budget? Or do you pretend like you never got it and simply roll it over to your savings?

I don’t know about you and we are all different but I personally did a mix of 2 and 3: assigning some to existing categories in the budget (bills, charity) but the majority went to savings.

The idea is simple and this concept is not my creation by any means: I never had this money , so the idea is to shift it to something else , this way I am not getting used to it. Otherwise, if I started using it for leisure and entertainment, then force to shift it to saving, it will feel more like a pay cut than raise.

If you do put it towards saving, best to automate the process. If you have a saving program through your employer-or better yet one where your dollars are matched- that makes things easier. If not, sign up for a high saving program or an index fund ETF where the long term appreciation could be in the 5-10% range, depending on which one you choose.

Another idea would be to redirect it all to a new long term savings goal, such as saving for a new car, home renovation, a grand vacation plan. That is, the goal is for something that is 3-5 years out, allowing you enough time to build a good chunk. For example, if your 10th wedding anniversary is three years away, and you would like to take the family on a European tour that will cost over $10K, then the new pay raise can be fully shifted to that goal. Automate the process, forget about it and when it is time to book the vacation, the money will be waiting for you, with no need to dip into debt.

As long as your meets and wants are met, there is no reason to keep spending any new pay raise you get. It will almost be like a waste. Instead, save it and you will be happy you did when there is a bigger calling for it. Otherwise you will need to use a credit card and go into debt.

One small decision about what to do with your pay raise can mean huge difference for your future.