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.

In your journey to financial success and wealth accumulation, you will eventually come to realize that saving money alone is not enough. To take your money to the next level, you need to start investing. Investing is simply the act of putting your money into a business or asset for some time, in hopes of getting a bigger return in the future. While it is similar to keeping your money in a savings account, there are two major differences: the returns with investments are potentially bigger, but there is also risk involved, where you can make significantly more money than in a savings account, but could potentially lose money. With a savings account, while the returns may be smaller, your money is guaranteed and there is no risk of losing it.

If you want to take the next step towards financial independence and want to start investing, here are a few things to consider and keep in mind:

Decide on your goal from investing: is it to make more money? is it to diversify your sources of income? or is simply take you to the next step towards better wealth accumulation.

How much to invest : as a beginner, best to start with a smaller amount, until you feel more comfortable and have better understanding of how things work

Where to invest : another consideration is which bank or discount brokerage to use. There are various websites and tools online that compare various discount brokerages, and while transaction fees should be a priority to consider, there may be other factors to play when deciding on where to do your investments (and maybe trading)

What to invest in: last but not least, you need to consider the type of investments you will be purchasing. While stocks (also known as equities) are probably the first thing that comes to mind, there are other assets to think about such as REITs, ETFs, commodities, FOREX, Crypto, bonds, mutual funds and more.

It is safe to say, no billionaire – and most millionaires – would have reached their level of financial success, without some form of investment. Investment doesn’t have to be about stocks or mutual funds, and may include buying land, investing in a business, real estate etc. But as a beginner, and to get your feet wet, best to start with a small amount that you are comfortable with and one that you wouldn’t mind lose some or most, and buying into one or two stocks and mutual funds.

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.

We have all heard of popular sayings and expressions like “Win Win”, “Two birds with one Stone” and other similar ones. The idea here being that we should be more efficient in life, careers, finances, by doing more with less. In other words, use one hand to do two different things and 2 hands to do 4 things and so on.

From a financial and personal growth prospective, this is about doing more in less time, thus stretching one valuable and finite resource that we all want more of: time! If we are time-stretched and since we can’t create more of it, why not do more in the same time it would take you to do one thing? In fact, we can go even further and do multiple things at once, thus making it a win-win-win proposition. Compounded over time, you are effectively freezing or even creating your own time, since the alternative would have cost you a lot more in terms of how long it will take. Some of the personal examples below may not seem as obvious as they seem simple and obvious enough, but they are powerful and add up over time. In fact, as you go over them, you will realize you may already be doing some of these.

Staying home is a win-win-win proposition for me. I save on gas. Save on eating out. Get to study or read. The alternative is driving my car, where I am not only wasting gas, but also putting my mileage on car. Of course, there are these times when you want to go out to change scenery and that is fine once in a while.

Another example is when I go out for a walk, I am also learning by listening to podcasts or audiobooks. That is, I am doing personal development and learning, while improving my health by walking. This is something millions do on a daily basis, but may not have thought about the win-win benefits they are reaping.

Multiple incomes: In his book “The 10 Pillars of Wealth” ,Alex Becker argues that we need to separate our time from income if we are to become wealthy and have a lot more money than our 9-5 job can provide us with. In other words, just because we only have 24 hours in a day (2/3 of which is spent sleeping and socializing) doesn’t mean we are limited to making money in only those 9-5 hours. We have to have our own ‘Entrepreneurial hours’ where we have to pursue secondary side income, regardless of time of the day. This can come in the form of passive income that doesn’t require a lot of our time (dividend income, rental properties, online gigs, book sales, Youtube ads etc) .

When I did Uber as a side gig a few years ago, I would use the time between rides to listen to podcasts and audiobooks. In fact, I used the the idle time to study on my E-Reader for a technology-related certificate I was working on. This is an example of exploiting the time to do one profitable endeavor in order to do something else: perfect win-win example. The alternative would have been to sit idle between rides or listen to the news, and gain nothing in the end. And in fact, I ended up obtaining that certificate and that helped me with my career development and advancement.

To some of us, when we think of win-win, we think more along the lines of business. For example, a fairly negotiated deal may create a win-win for both parties. And by the same token, win-win may work between individuals, directly or indirectly. For example, if I make a charitable donation – with the first and true intention being to help others – only will I help others, I may also get a tax deduction as a result. The tax deduction is a by-product of the act of kindness and not the main intention, but it still creates a win-win situation.

While creating these win-win situations is great, there may be some limitations we need to manage or overcome. For example, for most, it is the inability to multi-task and the need to focus on one thing at a time. In fact, I am one of those strong proponents of focusing on one task at a time to ensure it is performed to perfection and no distractions. But most of the examples above involve one active task with another passive one in the background. While one task requires our full attention (e.g listening to an audiobook) , the other task may only require passive or subconscious attention (e.g walking) .

If you always think in terms of win-win – or triple win – you will exponentially improve your life and in a lot less time than the alternative. When doing an activity or task, think about whether you can make it a win-win proposition.

As it should be clear by now, our personal budget is a way of controlling our unlimited wants to match our limited incomes. We only have so much money to spend, save and enjoy.

But what if your budget just can’t accommodate your excessive spending? So much so that your paycheck doesn’t cover your spending, so you are forced to use your credit cards or borrow from others. Let us face it, this situation can’t last forever. Sooner or later, you will find yourself in deep debt, or worse yet, bankrupt.

What is the solution? How to force yourself to spend less and reconcile your spending with your budget? We need to be sure that we are only spending 100% of what we make or less, and not even 1% more than that. Let us go over a few proven and effective therapies for those who like-or are spending sick- to spend like there is no tomorrow:

1-Realize this is simply not sustainable: first, you have to admit and aknowledge that you can’t keep doing this forever and that you have to bring your spending under control and within your budget limit.

2-Budget for big and necessary purchases: if there is something that you absolutely have to buy, start budgeting for it well in advance

3-Avoid the trip to the mall: if the mall is where you spend your money the most, then stopping your spending is as simple as not going to the mall in the first place. And If this is easier said than done, then maybe go less? While the mall is here is a metaphor for any place where you spend with ease, the idea here is to be mindful of any place – including online shopping – where you can’t control your spending.

4– Track your spending: Keeping a record of your daily, weekly or monthly spending can help you identify areas where you are overspending and make adjustments accordingly. In other words, by finding hidden trends, you are able to correct them.

5– Find alternative ways to fulfill your wants, needs and desires: Instead of spending money on entertainment, try finding low-cost or free alternatives that can bring you joy and satisfaction. For example, instead of spending money on movies, you can do it at home using Netflix or other streaming service, and even make your own popcorn and foods. It will save you a significant amount of money.

To effectively reconcile spending with a personal budget, it is important to admit unsustainable spending habits, budget for necessary purchases, avoid overspending triggers, track spending, and find alternative ways to fulfill wants and needs. By following these steps, individuals can bring their spending under control and within budget limits, reducing the risk of debt or bankruptcy.

When reading a financial tip or advise, we sometimes shrug it off and think that we already know about it. But knowing is different from applying.

This is the case with spare change and how they can help us save money, but it is still not obvious enough to make people keep them handy.

Having coins handy can go a long way in reducing your spending and in turn maximizing your savings. When you break a bill, no matter how big, chances are you will spend the leftover money faster than if the bill was never used. Having spare change on the other hand will help you avoid breaking up big bills. This trick is more psychological in nature but it works.

The thing we buy most often while at work or driving is probably coffee. And this is pretty much an everyday occurrence. If you save enough change, you could go days without having to break any of your big bills. Which means more money in your pocket.

If on the other hand, you need to buy something that will cost you a a dollar or two, and you have no change, you will have to break a big bill, like a $20. What will happen next, you are left with some change and smaller bills. Once the big bill has been broken, a psychological barrier has also been broken. Now that the bill is smaller, you are more likely to spend it. And as it gets smaller, you will be even more and more likely to spend it all, and so on.

Therefore, and to keep your bills intact, and not have to break a $50 for a $2 coffee, be sure to have as much change handy as possible. It is a paradox to think that having spare change can act as defense against spending your bigger bill and it is. Try it, and it won’t be too long before you get into a habit of not wanting to break your big bills and only use spare change for smaller purchases. 

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.

Traveling is a lot of fun but finding the right deals and finally booking it can be time-consuming and even stressful at times.

There are now literally hundreds of places you can visit, both online and offline, to find a good deal on your next vacation, flight or cruise. So with all these choice at your fingertips, how can you ensure you can find the best deal without losing your sanity? Here are some easy tips that will ensure you are getting the best deal as well as having the perfect vacation.

Start looking at least 3-6 months out

If you have a good idea of what your timeline for travel will be, start searching for your vacation at least 3-6 months before your expected travel dates. For example, if you know you will be off work for 2 weeks in July and would like to visit Europe at that time, you can start searching for flights or vacation packages from as early as January. Some may think that is way too early, but from personal experience, you get better deals and be the first to a lot of things. For example, you may be the first to find out about early schedules, the choice of your seat on a plane, early promotions specials and more. But just because you start 6 months out doesn’t mean you have to book then. Only if you find a deal that is too good to be true should you go ahead and book it. Otherwise, you only have to check the prices for now and keep comparing them every week.  For my latest Vegas trip this past summer , I actually started looking at deals from January. This helped give me an idea of what prices were like and where they would likely be heading as we entered spring. After checking prices on multiple websites on a daily and weekly basis, I finally booked a vacation at a price that beat everything else I had seen.

If in Canada, watch CAD$ fluctuations

With the recent and constant decline of the Canadian dollar came an increase in travel prices, from flights, to hotels and everything else in between. Some vacation companies even announced that they would be increasing their rates due to the declining Canadian dollar. This was like the last warning sign for me before booking. Three days after I booked my vacation, I checked the price for the same package and it had gone up by about 10%, thanks to the declining Canadian dollar. This wouldn’t matter much if you were traveling within the same country (i.e within Canada or within the US). And vise versa, if you were coming traveling from the US to Canada, a strong US dollar will go a long way.

Look at 5 different websites at least and check them at least 2 times a week

There are a ton of travel booking and comparison websites out there and you should check at least couple of these as prices could vary from one to the next

Sign up for price alerts through email

I do this, especially with different cruise lines, and I always get good deals and promotions through emails. Be sure to sign up for these and never miss a deal. Instead of looking for the deals, they will come to you.

Ask local travel agents to match the best price you found

And just because most travel related activities has moved online doesn’t mean there is no room for traditional travel agents, who still have the knowledge and expertise to search, customize and package the best travel deals.

To conclude, finding good deals on vacation packages, flights and cruises can be time-consuming and stressful, but by following some easy tips, it’s possible to have the perfect vacation at the most affordable price possible. As vacations as a whole are not cheap – especially when booking for a full family – it is worth spending the time to find the best deal possible. The effort and time could save you hundreds, even thousands.

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.”