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Registered Education Savings Plan (“RESP”)

A Registered Education Savings Plan, or “RESP” since people love using acronyms when talking about personal finance, is a savings account that can be used to save for a child’s post-secondary education.

How does it work, and what is the benefit?

  • Money going in (contributions) do NOT generate a tax deduction (similar to a TFSA).  Contributions are subject to a lifetime limit of $50,000 per beneficiary (over contributions are taxed heavily)
    • Canada Education Savings Grant (“CESG”): One of the most attractive features of an RESP is that the Canadian government will match 20% of annual contributions you make (up to an annual maximum of $500 and a lifetime limit of $7,200)
      • This means that if you contribute $2,500 in a year, the government will match $500!
      • To maximize the 20% match, you have to contribute at least $36,000 in total over the years.  Every child under the age of 18 who is a Canadian resident will accumulate $500 of CESG contribution room annually.  Unused CESG contribution room is carried forward and used when RESP contributions are made in future years.
        • If the beneficiary is 16 or 17 years old at the time of the contribution, they can only receive the CESG if one of the following conditions is met
          • a minimum of $2,000 was contributed to (and not withdrawn from) the RESP of the child before the end of the calendar year they turned 15
          • a minimum annual contribution of $100 was made (and not withdrawn from) the RESP in at least four of the years before the end of the calendar year the child turned 15
    • There is an additional CESG available for lower income families (that can increase the annual match to $550 or $600, however, the lifetime maximum for the match is still $7,200)
  • Money from the CESG and investment earnings within the RESP are not taxed until money is taken out to pay for education
    • Money that was contributed initially is not taxed when it was withdrawn (since it was already after-tax money going in)
    • Money taken out of the RESP as an Educational Assistance Payment (money coming from the CESG and investment earnings) is taxed in the hands of the student – and since most students have little or no income, this usually results in withdrawals being tax-free.  Initial contributions can be withdrawn tax-free. 

What can the funds be used for?

  • Qualifying educational program – an educational program at a post-secondary school level, that lasts at least three consecutive weeks, and that requires a student to spend no less than 10 hours per week on courses or work in the program
  • Specified education program (if the student is at least 16 years old) – a program at post-secondary school level that lasts at least three consecutive weeks, and requires a student to spend no less than 12 hours per month on courses in the program
  • A post-secondary educational institution includes
    • a university, college, or other designated educational institution in Canada;
    • an educational institution in Canada certified by Employment and Social Development Canada (ESDC) as offering non-credit courses that develop or improve skills in an occupation;
    • a university outside Canada that has courses at the post-secondary school level at which the beneficiary was enrolled on a full-time basis in a course of not less than three consecutive weeks; and
    • a university, college or other educational institution outside Canada that has courses at post-secondary school level at which a beneficiary was enrolled in a course of not less than 13 consecutive weeks.

What if your child / beneficiary doesn’t end up pursuing post-secondary education?

  • If your child does not end up using the funds within their RESP, the money can be refunded to the contributor
    • Initial contributions can be returned tax free
    • CESG grants will be forfeited and returned to the government
    • Remaining cash within the plan can be
      • Withdrawn as an “Accumulated Income Payment” – these funds will be taxed at marginal tax rates and penalties may apply
      • Transferred to an RRSP, subject to government maximums

For more information on RESPs, visit the Government of Canada Website: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/registered-education-savings-plans-resps.html

How much does raising a child cost? Year 1

It’s hard to believe but my son is now 16 months old!  I thought now would be a good time to look back and see how much we spent in the first year of parenthood (from just before he was born until his first birthday).

Before we get going, I’ll set the stage by being up front that we have not tried to fully optimize our child related expenses.  Since we are further along in our financial independence journey, in most cases we have chosen the easy path as we put a very high value on our time and value convenience at this point in our lives, especially now with our little guy.  There are other financial bloggers out there who have done a much better job of optimizing.  Modern FImily for one, reported a total year 1 spend of $3,891 (with $2500 of that being for education) – https://modernfimily.com/heres-how-much-babys-first-year-cost/

Although I do track my income and expenses and review on a monthly basis, even I was a bit surprised of the aggregate cost of the first year.  It really adds up!  Let’s check it out:

The grand total: $16,600  

  • Household ($5,004)
    • This is the catch all category that covers all types of household expenses 
    • Individual items >$100
      • Car seat #1 and stroller $419.97 – initially we bought a bucket car seat which clicked in to the car base and a stroller
      • Car seat #2 $455.16 – once Parker was 10 or 11 months old, we upgraded to a much larger fixed car seat that stays in the car.
      • Giant play pen $192.91
      • Baby carrier $119.70
    • Other material items:
      • Diapers – I wasn’t organized enough to categorize diapers on their own but they are definitely a big part of the overall household category
      • Baby wipes
      • Disposable changing pad liners – we used these to decrease the amount of time washing the fabric change pad cover
      • Breast pump
      • Blender for to puree baby food 
    • Other: fabric change pad covers, waterproof change pad cover, washcloths, face towels, baby towels, swaddle blankets, diaper caddy organizer, wipes warmer/holder, pacifier clips for stroller, rain cover for stroller, play mat, haakaa pump, baby lounger, boppy pillow (since recalled due to safety reasons), toothbrush, body wash, back seat mirror for car, diaper genie and multiple refills, sippy cups, car seat head support, baby dish soap, baby laundry detergent, crib sheet, baby gate, splash mat for under high chair, nasal drops, baby k’tan, passport fee, camping chair, diaper bag, storage bowls for food, baby proofing cabinet locks, car window shades, night light, ice cube trays for pureed food, bottle drying rack, bibs, bottle brushes, spoon set, baby safe all purpose cleaner spray, bottles and corresponding nipples for various flow levels, 
  • Education ($2,301)
    • We contribute $208.34 ($2,500 ÷ 12) to our son’s Registered Education Savings Plan 
    • Our son was born in November, but I set up his RESP in January so only reflected 11 months of contributions in 2021 (up to Parker’s first birthday)
  • Childcare ($1,699)
    • Our child care expenses were very minor for the year since my wife was on maternity leave for 12 months (so we didn’t require child care).  This amount reflects the first month of child care plus 1 week given we put him in a week before my wife went back to work so he could get used to the new routine.
    • We also placed deposits at two other day cares as back up options just in case.
    • Fortunately for new parents in Alberta, it looks like the cost of child care is expected to decrease substantially: https://www.alberta.ca/federal-provincial-child-care-agreement.aspx
  • Food ($1,646)
    • Most of this cost (~$1,400) relates to infant formula
    • We only broke out our son’s food expense from our grocery bill if it was a specialty item for him.  That said, this number is probably understated a bit given he now eats what we eat.
  • Furniture ($1,450)
    • Crib $628.95 – we were able to use my crib initially (yes my crib from 30 years ago), however, had to upgrade to something shorter once our son was a bit older so that my wife could reach down in to the crib safely
    • Nursing chair $545.99
    • Dresser / change table $129.99
  • Healthcare ($1,287)
    • Since we live in Canada, most of our healthcare costs were included in our public health coverage (I’m definitely not going to say “free” as some people say given my marginal tax rate is close to 50%)
    • We had a few doctors appointments and tests that were not covered since my wife did not become a permanent resident of Canada until part-way through her pregnancy.
    • We engaged a lactation consultant to help my wife with breast feeding
    • As far as equipment, we bought
      • A breast pump for my wife
      • Breast pads
      • A thermometer to test baby’s temperature
    • As far as medication and vitamins, we ended up purchasing:
      • For our son
        • Vitamins for our son (vitamin D drops, etc)
        • Baby gas relief drops
        • Nasal drops
        • Tylenol infant
        • Eczema cream
        • Diaper rash cream
        • Vasaline
      • For my wife
        • Probiotic supplements for my wife during her pregnancy
        • Fish oil / Prenatal DHA
        • Milk Aplenty for increased milk production
  • Clothing ($1,113)
    • If it wasn’t for my mom, this category would definitely be much higher.  She has bought most of our son’s clothes since birth.  Thanks Mom!
    • We saved money buy buying some used clothing initially and using hand me downs from friends and family.
  • During Pregnancy ($843)
    • Lactation consultant pre-birth
    • Iron pills
    • Prenatal / child birthing classes 
    • Private birthing session 
    • Etc
  • Pre-Pregnancy ($650)
    • Fertility lessons
    • Ovulation kit
    • Fish oil
    • Pregnancy tests
  • Entertainment ($363)
    • We enrolled our boy in swimming lessons for four months.  Initially he hated it, but after a few sessions he grew to love it and significantly increased his comfort in the water.  We decided to take a bit of a break from this for now (during the winter given it is so cold here) and pick it back up in the spring/summer).  We paid for premium lessons with smaller class sizes at a swim facility that is close to our house.
  • Toys ($243)
    • I feel a bit bad that the lowest expense category is toys!  Fortunately our boy is not deprived from nice toys.  Funny enough, my mom saved several of my toys from when I was a kid 30+ years ago.  This saved us quite a bit of money and it was nice to see our son playing with the same toys that I played with as a kid.  Our little guy also received a lot of toys as gifts during the first year of his life.  

The hidden costs of raising a child / children:

  • Although I have tried to be comprehensive in stating our cash expenses related to our new addition, there are two major key costs that are not reflected here:
    • 1. Opportunity cost of my wife not working for one-year during her maternity leave
    • 2. The cost of needing more space
      • Wanting to grow our family, we ended up moving from an apartment to a house.  This move materially increased our overall cost of living, however, was not entirely related to having kids as it was always the plan to eventually move to a house to have more indoor living space and a yard.

How we could have done better:

  • Comparing our grand total for year 1 of $16,600 to Modern FImily’s grand total of $3,741, it is clear that we could have spent a lot less than we did.  That said, as mentioned, we were intentional in our decisions and valued convenience over being 100% financially optimal

Recommendations for new parents:

  • Get a water boiler!
    • Having readily available pre-boiled water saved us hours (likely days!) along our journey as new parents
  • Hopefully you can use this list as a reference of what you may or may not need as a new parent.  Each family is different and expenses will vary widely depending on approach (financial optimization vs. higher cost / convenience) 

Assigning a value to your time

As they say, “time is money”.  In fact, time is arguably worth more than money since it is finite for each and every one of us.  If you spend or lose some money you can always earn more. With time, once it’s gone – it’s gone forever.  The other key difference is with money, you always know exactly how much you have.  With time, you never know how much time you may have left!

This post is somewhat related to another post that I wrote on the time for money tradeoff, however, that post was geared towards thinking about your purchases in terms of time that you have to trade for money to buy things.  Through this post, I encourage you to think about the value of your time in an attempt to be more intentional about how you spend it.

I’m turning 35 this year and for the first time in my life I feel like I am finally starting to truly recognize the value of my time.  For years I have heard people say that you have to value your time.  Now that I fully understand the concept, assigning a dollar value to my time is hugely important to make sure that I am being intentional about how I spend my time.  I started seeing the value of time a whole lot more since becoming a father.  If I have to spend time away from my son, I better really enjoy it and/or be paid well for it.

A few things change as you age.  When you are young, you have plenty of time and not a lot of responsibility.  At the same time, you may not be too concerned about how you spend your time since you still have your whole life ahead of you!  Further, from a financial standpoint, the opportunity cost is lower when you are young (e.g. me at 15 years old flipping burgers at Dairy Queen for $5.91 / hour).

As you get older, things change!  You start working full time, you may start a family, and life starts to get busy with competing priorities.  Free time decreases with increasing life priorities, and supply of remaining time decreases as you age.  From a financial perspective, your opportunity cost is likely much higher than when you were young as you develop skills and become more valuable and senior in your career (when you trade your time for money, you are most likely getting a lot more than $5.91 / hour).

The other thing I notice is that as you get closer to financial independence, you start to stand up more for your time and what you value.

Examples of changes that I have made to place more value on my time:
  • Having things delivered and paying a delivery fee!
    • I used to be horrible at this – $4 delivery fee on Amazon for a $20 book, no way!  Instead I would buy another $15 worth of stuff I didn’t need just to avoid the shipping cost.  Jeff Bezos tricked me!
    • Another example was food delivery – I would always choose to go pick up the food than to pay a delivery fee.  Now that I’m thinking about the value of my time, I’ll happily pay $10 to get my takeout delivered rather than spend the time on the road
  • Shopping at the local convenience or grocery store even though I know that I am paying a premium to a big box store
    • I think a lot of people in the financial independence community are over-optimizers, myself included.  There is nothing wrong with this.  I think a big part of where I am today is due to my frugal ways in the first decade of my career.  I used to keep track of prices at different grocery stores and make sure that I bought certain items at certain stores to save a few extra bucks.  Now that I’m actually intentional about how I spend my time, I have come to accept paying a premium to get my time back – e.g. going to 1 store instead of 3 stores and taking back an hour or two of my life.  I still end up doing a big Costco run about once a month to load up on essentials – the savings from that can generally justify the time spent.  Plus, it’s a good excuse to get a $1.49 hot dog and pop!  For larger items (e.g. cars), I still spend some time comparing prices and researching deals as the potential saving is much higher and justifies my time investment
    • During COVID, this has included grocery delivery which is wonderful!  $5 or $10 to save an hour or more of your life and have the groceries picked and delivered to your doorstep – glorious! Even post-COVID I think we will be having our groceries delivered.  I had a few funny user errors since we started this – one time ordering 6 bunches of bananas instead of 6 bananas (the delivery guy probably thought I was housing a Gorilla) and the other time ordering the smallest bunch of grapes you can imagine.  That said, I’m learning!
  • Hiring help with home repairs and maintenance rather than try to figure it out myself
    • Being frugal, I’ve always had a DIY mindset.  That said, I’ve also realized that when you don’t have a clue what you are doing, it can easily become a time suck trying to do something yourself.  Furthermore, you likely won’t do it as well as somebody who knows what they are doing; and if you do it wrong, you may have to call the expert in anyway to fix your mess.  Since purchasing our home last year, we’ve hired help on a variety of home improvement work, down to mounting a baby gate! (thanks Allen!).
  • Thinking twice before running errands
    • The old me would drive 40 minutes to Home Depot to return an item – high or low value.  Now, there is no way I’m making that trip – I’ll tag it on to the next time I am in the area
  • I am no longer lining up for 15 minutes at Costco to save an incremental $0.05 / litre on gas
    • I’ve always tried to fill up the car at Costco as I realize the prices are usually $0.05 to $0.10 better per litre than other gas stations.  Recently I have found that there have been long lines and this hasn’t been worthwhile from a time saving perspective
Where I don’t think about the value of my time:
  • I don’t worry about the value of my time when I’m doing things that are aligned with my values.  Once you ascribe a dollar value to your time, you might be tempted to work more to maximize the productivity of your time.  This is a slippery slope.  You want to make sure you don’t work too much, otherwise, what is it all for?  It is important that you spend time on what you actually want to do and value – guilt free – to maintain happiness and balance in your life.  For me this is:
    • spending time with family and friends
    • getting outside – cycling, walking, etc.
    • playing piano
  • I worry less about time spent on trying to salvage something if it means less wastage.  It’s unfortunate but it is often the case in our convenience-focused society today where many choose to replace rather than fix something that is broken.  I find this to be rather wasteful.  That said, even though valuing my time would generally dictate to just replace something that is broken, I usually try to take the time to fix something before dumping it.  I also try to buy high quality / reliable items so I don’t have to worry about this as much
Things I could be doing better in valuing my time:
  • Cutting the grass / shoveling
    • I still like to mow the lawn or shovel the snow as I enjoy the time outside and the exercise.  That said, I’m not against hiring somebody if I am going through a busy period (it would beat last summer when I was jammed at work and my neighbour offered to lend me their lawnmower as a subtle hint that I hadn’t cut my grass in 3 weeks!)
  • Cleaning the house
    • We have a good division of duties in the house – my wife does the laundry and I do the vacuuming.  So far, I’ve not considered hiring help on housework, although I’m not completely opposed to the idea.  It takes me less than an hour to vacuum every couple of weeks and I usually enjoy a podcast or some music at the same time.  That said, I probably drive my family nuts as I usually vacuum early on Saturday morning when everyone is still sleeping (like to get this chore out of the way before really kicking off the weekend)
  • Layovers
    • I haven’t been on a plane for almost two years now – hard to believe.  When travelling solo in the past, I would choose multiple stopover options (adding hours to my total flight time) just to save a few bucks.  This one I’m definitely rethinking going forward – not to mention other implications of doing so with a toddler in tow!
Key takeaway:

My key takeaway for this article – assign a $ / hour value to your time and think about that dollar value when you are allocating your time.  For example:

  • If your time is worth $100 / hour, is it really worth lining up at Costco for 15 minutes to save $2.50 on gas? No!

How should you calculate that $ / hour?  There are a few options:

  • Calculate your real hourly wage as referenced in this post
    • This is a good starting point as it measures how much you get paid when you trade your time for money from a job.  However, it may not necessarily represent a true tradeoff – if you are a salaried worker, you can’t necessarily work more hours and get paid more
  • If you have a side-business, you may want to use your expected hourly wage working on the side business
    • This is a good way to think about the value of your time since you always have the option of putting another hour into your business and have to weigh that option against other activities
  • Choose an arbitrary number
    • Ask yourself, what is the value of your free time?  If somebody is willing to pay you $1,000 for an hour of your free time, would you accept?  It might be a no-brainer at $1,000, but what about $30?  Use trial and error to ask yourself what your free time is worth to you

I hope that you found this post helpful in thinking about how you might become more intentional with your time.

Getting Organized for an Emergency

Let’s face it – bad things happen.

  • Car accidents
  • Natural disasters
  • Break-ins
  • Sickness
  • Death
  • etc.

There is only so much that we can do to prevent bad things from happening.  That said, one thing that we can do is to be prepared for when bad things happen.  During an emergency, life can be complicated.  It can be hard just to get by day-to-day, let alone having to dig through critical and urgent documents for your spouse – for example,  medical history, insurance, bank account details, and such.  One thing that I recommend to all of my clients is to have a Family Emergency Folder.  This can be a physical or digital folder that stores important information and documents that may be needed during an emergency.  I prefer a secure digital folder given it can be accessed from anywhere and cannot be destroyed in a disaster scenario.

Here are a few ideas of what you may want to put in your Family Emergency Folder for quick access:

  • Location of official estate planning documents (Will, Personal Directive, Enduring Power of Attorney), and copies
  • Emergency contacts
    • Friends nearby
    • Family (parents, grandparents, aunts and uncles)
    • School or day care contacts
    • Employer contacts
    • Doctors
    • Dentists
    • Veterinarians
    • Other medical specialists 
    • Local emergency contacts
    • Non-emergency phone numbers
  • Housing documents
    • Lease (if you rent)
    • Title documents (if you own)
    • Current homeowner or tenant insurance policy
    • Utility information (e.g. power / gas / water / sewage / garbage bills, etc.)
    • Home inventory – it is a good idea to have an inventory of items in your home (at a minimum, walk around your house and take a video of your possessions with some commentary)
      • In the event of a disaster, this list will be helpful when submitting an insurance claim
      • If you want to be a big geek (like me), include receipts of major purchases
  • Automobile documents
    • Proof of registration
    • Proof of insurance (Pink Card)
    • Current insurance policy
    • Car title / bill of sale
  • Financial information
    • Account details for all bank accounts, credit cards, investment accounts (I find the easiest way is to attach a current statement)
    • VOID cheque
  • Life insurance
    • Current insurance policy(ies)
  • Business information
    • Location of corporate documents (if you own a business)
      • Certificate of incorporation
  • Medical information
    • Medical history
    • List of immunizations / vaccinations
    • List of allergies
    • List of current prescription medications
    • Organ donation preferences
    • Medical insurance details / proof of coverage
    • Provincial health card
    • Blood type
  • Copies of personal documents
    • Drivers license
    • Social insurance number
    • Birth certificate
    • Marriage certificate
    • Passport
    • Immigration documents (e.g. visa, permanent resident card)
  • Usernames and passwords for various online accounts (e.g. banking, e-mail)
  • Spare keys for car, house, etc.

My wife and I created a secure virtual space where we put all of our important information and documents after we got married.  Thankfully we have not had an emergency, however, we have comfort that the information and documents are there if and when we need them.  So far, we have both realized that it can be handy to have a centralized place to grab documents as needed, even if there isn’t an emergency (e.g. when we need a picture of our drivers license or passport, or if we forget our SIN).

Now go get organized!

My First Year of Car Ownership – How much does it really cost?

Last April, I bought my first car at the age of 32.  More on that in this post on how to buy a used car.  Before that, I tried to save money on transportation costs.

Now that a year has gone by, I thought it would be interesting to analyze how much it really cost to own the car in the first year.  Let’s roll through the various components in descending order of amount spent:

Insurance & Registration
  • Insurance: total for the year = $1,702.95 (average of $141.91 / month for my wife and I for a single car)
  • Registration: $86.00 for the year (average of $7.17 / month)  

Depreciation

  • As I wrote in my post “How to buy a used car”, we tried to buy a used car that had already passed the steepest part of the depreciation curve – so that it would maintain its value fairly well going forward
  • The all-in cost to purchase our car was $15,105.82.  This included:
    • Cost of the car: $14,000.00 (negotiated down from $15,000)
    • New summer tires (Costco): $814.71 (the car came with winter tires)
    • Pre-purchase inspection: $165.93
    • Rental car and gas to go pick up the car from Calgary: $67.48
    • Pre-purchase CARFAX report: $57.70
  • Without selling the car, it is difficult to estimate depreciation over the ownership period.  So what I did was look at comparable cars that are for sale (the exact same year / make / model / trim – 2012 Toyota Camry XLE).
    • I found 3 cars in Alberta
      • one with 155,000km listed for $14,900
      • one with 196,000km listed for $13,000
      • one with 128,214km listed for $18,888
    • Obviously this isn’t perfect since list price doesn’t always equal transacted price (due to negotiation).  That said, I feel pretty good that so far we have dodged depreciation given that our car only has 76,473 km to date (much less than the comparable cars for sale).  I am quite confident that we could sell our car for the same price we bought it for a year ago, $14,000.  Not to mention we bought new tires for it (and have both summer and winter tires)
  • If we sold the car for $14,000 today, total depreciation for the year (including the various costs listed above such as tires) would be $1,105.82 (average of $92.15 / month)
  • I am interested to see how depreciation will trend going forward.  With increasing interest in electric cars, I am curious what is going to happen to the secondary market for good old gas guzzlers.  Time will tell!

Maintenance

  • We completed the following maintenance on the car in the last year:
    • Alignment, rear brake replacement, brake fluid flush, and battery terminal service: $914.84 (this was recommended during the pre-purchase inspection)
    • Oil top-up: $14.01 (bought 2 bottles of synthetic oil – still have these)
    • Changing tires: $104.92 (switched summer tires to winter tires and then back to summer tires)
    • Car washes: $14.00 (I’m embarrassed to say that I only washed the car 3 times)
    • I tried to change the oil twice during the year, however they said that it didn’t need to be changed yet both times.  Thanks to the honest folks at Jiffy Lube on 104th Avenue!
    • Total maintenance: $1.047.77 (average of $87.31 / month)

Gas

  • We didn’t drive much during the year, mostly due to COVID-19.  Total kilometers  (“km”) for the first year of ownership was only 6,175km.  See the chart below:
  • As you can see, our km usage was quite linear / steady throughout the year (the two spikes in June and August were trips we took to visit family / go camping last summer)
  • Gas prices – The variability of gas prices was truly amazing.  Gas prices ranged from a low of $0.589 per litre at the beginning of the pandemic to $1.159 per litre most recently.  See the chart below:
  • Fuel economy
    • Total km: 6,175
    • Total litres used: 672.137
    • Average fuel economy (L/100km): 10.9
    • Total cost: $625.04 (average of $52.09 / month)
    • Average cost per litre: $0.93
    • Average cost per km: $0.10
  • See the chart below:
  • This chart shows the average fuel economy for each time I filled up the car with gas.  As you can see, the fuel economy for the highway trips (bringing the car home from Calgary, visiting family, going camping) is solid (less than 8.0L/100km), however it is pretty bad for city driving.  This was known when we bought the car (we chose to buy a six-cylinder rather than a four-cylinder)

Licensing and Emergency Roadside Assistance

  • My drivers license wasn’t up for renewal in the last year so I didn’t pay any licensing fees
  • Emergency Roadside Assistance: $176.40 (average of $14.70 / month) for a Premium AMA membership (in hindsight, we probably didn’t need the premium membership, but the extra towing km does give me peace of mind when we do our little road trips)

Parking

  • We paid $19.75 (average $1.65 / month) for parking during the year
  • This will likely be lower than the average year since we didn’t go out much due to COVID-19

Summing it all up:

The total cost for the first year of car ownership was $4,763.72

  • $396.98 per month
  • $13.05 per day
  • $0.77 per km

I was a bit surprised to see how high this was.  Especially given we bought a used vehicle that barely depreciated and didn’t drive much at all throughout the year.  I can’t imagine what the numbers would look like if we bought a new vehicle and drove more; not to mention if we were a two car family instead of a one car family.  May write a post on that down the road.

Pie chart breakdown of vehicle expenses:

Well, that’s it for the first year of car ownership.  I’ll report back next year to see how things have changed.

Financial Coaching the Average Canadian Household (Part 6 of 6)

Part 6: The After Picture – How the Average Canadian Household’s Finances look like after JBFI Financial Coaching

This is the sixth and last post that walks through a theoretical exercise of financial coaching the average Canadian household to see how we could improve their financial situation.

In the first post, we did a deep dive into the average Canadian household’s finances – looking at their income, expenses, and net worth.

In the second post, we did a deep dive into the average Canadian Household’s essential expenses.

In the third post, we did a deep dive into the average Canadian Household’s discretionary expenses.

In the forth post, we looked at aligning earnings with your values.

In the fifth post, we walked through how the average Canadian household could go about constructing a savings and/or debt paydown strategy.

Now we will wrap it all together and see the potential impact if the average Canadian household were able to save on essential and discretionary expenses, and earn more!

Let’s look at three hypothetical households that decided to make different levels of changes to their pursuit of financial independence:

  • Household A – Household A is quite comfortable with their current jobs and current levels of essential and discretionary spending; they decide to only focus on earning a bit more.  Let’s assume that they:
    • increase their after-tax income by 5%
  • Household B – Household B is willing to try to earn more and tweak a couple of major expenses.  Let’s assume that they:
    • increase their after-tax income by 10%
    • cut their housing expense by 10%
    • cut their transportation expense by 20%
  • Household C – Household C is sold on the concept of financial independence and is willing to make some pretty major adjustments to reach financial independence sooner.  Let’s assume that they:
    • increase their net income by 15%
    • cut their housing expense by 25% by renting out a room in their house
    • cut their transportation bill in half by deciding to only have 1 car 
  • Household D – Household D wants to take financial independence to the extreme.  They are motivated to save aggressively now to reduce the time it takes to reach financial independence as much as possible.  Let’s assume they:
    • increase their net income by 25%
    • cut their housing expense by 25%
    • cut their transportation bill by 75%
    • decrease all other expenses by 25%.

How does each household’s decision impact their finances?

  • Household A’s savings rate increases from 2.0% to 6.7%!
  • Household B’s savings rate increases from 2.0% to 16.4%!
  • Household C’s savings rate increases from 2.0% to 27.9%!
  • Household D’s savings rate increases from 2.0% to 48.3%!

What do these increased savings rates mean for each household’s time to retirement?

  • Recall from my article on savings rates (the most important factor when pursuing financial independence), if you only save 2% of your net income you will have to work 85 years to reach financial independence (ignoring government benefits such as Canada Pension Plan and Old Age Security)
    • Obviously nobody is going to work 85 years but this is a good exercise to see how long it would take to build a portfolio that would allow you to be fully financially independent
  • Household A’s time to retirement decreased from 85 years to 60 years
    • They shaved 25 years off of their working years by earning 5% more!
  • Household B’s time to retirement decreased from 85 years to 41 years
    • They shaved 44 years off their working years by earning a bit more and optimizing a couple of key expense categories 
  • Household C’s time to retirement decreased from 85 years to 30 years
    • They shaved a whopping 55 years off of the time it takes to be financially independent by earning more and making some short term sacrifices to reach financial independence sooner 
  • Household D’s time to retirement decreased from 85 years to 18 years
    • They shaved 67 years off the time it takes to be financially independent by earning more and making some aggressive short term sacrifices. 

A few key points to summarize:

  • The speed at which you approach financial independence is completely up to you.  If you love your job and are happy at your current level of expenses, then maybe no need to make dramatic changes
  • Increasing your savings rate can dramatically decrease the number of years that you need to work to reach financial independence
    • The sooner you get compound interest working for you (compounding your savings and investments), the sooner you will reach financial independence
    • Avoid consumer debt where compound interest works against you (often at a higher interest rate than what you will earn on your investments) 
  • Even small changes to big expense categories like housing and transportation can make a massive difference.  Big changes to big expense categories can shave off years of working / trading time for money (even decades!).   
  • If you don’t want to cut your spending, you can still significantly increase your savings rate and cut down the time it takes to reach financial independence by earning more!  The best part about earning more is that there is unlimited upside (whereas on the expense side, you can only cut so much before you start to feel that you are depriving yourself).

If you liked what you read in my six-part series and are interested in taking my Financial Coaching program for a test ride, get more information on the program here and sign up for your free consultation.  Remember, my program is 100% risk free – client value is one of my core values so I will not charge you unless it is clear that you received value over and above the cost of the program.  The program will go through a personalized version of what was discussed in this six-part series, including:

Financial Coaching the Average Canadian Household (Part 5 of 6)

Part 5: Constructing a Savings and/or Debt Paydown Strategy

This is the fifth post in a series of six that walks through a theoretical exercise of me financially coaching the Average Canadian Household (as defined by Statistics Canada data) to see how we could improve their financial situation.

In the first post, we did a deep dive into the Average Canadian Household’s finances, looking at their income, expenses, and net worth.

In the second post, we did a deep dive into the Average Canadian Household’s essential expenses.

In the third post, we did a deep dive into the Average Canadian Household’s discretionary expenses.

In the forth post, we looked at aligning earnings with your values.

In this post, we will talk about how the average Canadian could go about constructing a savings and/or debt paydown strategy.  If you have high-interest consumer debt (let’s put aside mortgage debt for now since we will talk about it later in the post), you should look to pay that off before saving.  Whether you have debt or not, a good first step is to establish an emergency fund.

Emergency Fund
  • An emergency fund can be used to cover expected and/or unexpected expenses if for some reason your income sources are temporarily halted (e.g. laid off, injured and unable to work, etc.).  It is generally recommended that you keep 3 to 6 months of expenses saved in this fund.  I would look toward the upper end of that range (or even more than 6 months of expenses) if you have a job where income is significantly variable (e.g. self-employed, entrepreneur, etc.)
  • I recommend to my clients that an emergency fund is kept in cash in a high interest savings account or money market fund
  • It’s best to keep this cash cushion separate from your day-to-day chequing / operating account – the idea is to create a “barrier” to access (only to be used when in dire need).  I recommend that my clients place their emergency fund in an online savings account that is not with their primary financial institution.  This usually means that you can still access the funds in 1 to 2 business days if you need them (but it’s not as easy as just transferring from one account to another at your primary bank)
  • An emergency fund is particularly important if you don’t have low-interest credit (e.g. a home equity line of credit, “HELOC”) at your disposal.  If you do, you can choose to use that as your backup plan if you prefer to keep the majority of your portfolio invested.  Although I have low-interest credit available, I still prefer to keep some cash on the side to cover unexpected expenses if they were to come up.  The last thing I want to do is to be forced to sell investments to cover day-to-day expenses (and potentially trigger capital gains)
  • Ideally your emergency fund is in a non-registered account or a tax-free savings account.  I don’t recommend using a Registered Savings Plan (RSP) since you will be subject to tax when you withdraw the money and will lose your RSP contribution room forever
Employer Match
  • As you are funding your emergency fund, it is a good idea to look into whether your employer offers an employee savings fund.  It is quite common for employers to match employee contributions to a savings plan up to a certain percentage of their income (e.g. 5%).  An employee savings plan can also be used as an emergency fund if need be (as long as it is a non-registered account or a tax-free savings account).  I know I said above that it is probably best to pay off debt before saving, however, this can be the one exception given an employee match can often have a benefit that exceeds the carrying cost of debt (e.g. a 1-for-1 employer match is an instant 100% return on your money).  Often times, if you miss out on your employee match, you lose it forever (if you aren’t signed up one month, it won’t carry forward to future months)
Debt paydown
  • Next is debt paydown.  There are two main strategies – which one you choose is up to you:
    • The debt snowball – make the minimum payments on all of your debts each month.  Use any money left over to pay down the debt with the smallest balance.  This is good for people who are motivated by momentum.  The idea here is that once you extinguish a couple of smaller debts, it will motivate you to keep paying off debt aggressively
    • The debt avalanche – make the minimum payments on all of your debts each month.  Use any money left over to pay down the debt with the highest interest rate.  This is more suited for mathematical optimizers who want to make sure that they are paying the least amount of interest as possible 
Savings strategy
  • After you have set up your emergency fund and paid down your debt, the next step is to look at contributing to a tax-advantaged account, e.g. a Registered Savings Plan (RSP), or a Tax-Free Savings Account (TFSA).  Which account to use ultimately depends on your personal tax situation and when you will likely draw down the money
    • Given the complexity of RSP’s and TFSA’s, I’ve written a separate post specifically on these two tax-advantaged vehicles.  Read more here 
  • Once your tax-advantaged accounts are funded, the next step is to invest in a non-registered / taxable account
Pay Yourself First and Automation
  • Pay Yourself First – whether you are paying down debt or saving, it is best to “Pay Yourself First” (i.e. pay down your debt, or contribute to your savings account BEFORE you spend on discretionary items).  This concept is so important that I wrote a separate post on “Pay Yourself First” 
  • Automation – I am a huge fan of automation.  Nowadays, most companies allow you to automate your bill payments (e.g. utilities, cell phone, internet, etc.), debt payments (credit cards, line of credit, mortgage, loans, etc.), and savings (automatic contribution to savings accounts, etc.).  Automating saves you time monthly on “life admin,” in addition to making it easier to “Pay Yourself First”
Pay down mortgage, or save/invest?
  • Those of you who have mortgage(s) will have to make a decision to either allocate your extra cash to paying down the mortgage or saving.  There is no right or wrong, so I suggest that you do what feels best for yourself and based on your risk/return preferences
    • Pay down your mortgage
      • Pros
        • Pay off your mortgage faster
        • Peace of mind from having less debt
        • Pay less interest
      • Cons
        • If the expected rate of return (after tax) on investments is higher than your mortgage interest rate, this is not the financially optimal option
    • Invest
      • Pro
        • Potential to earn more from investing (after tax) vs. your mortgage interest rate 
      • Cons
        • There is no guarantee that your investments will outperform your mortgage interest rate on an after-tax basis
        • Takes longer to pay down your mortgage
        • May be less comfortable having more debt
        • Pay more interest

In the next post, I will wrap up this six-part series on Coaching the Average Canadian Household.  We will tie it all together by taking a look at how the Average Canadian Household could improve their financial situation by tracking their finances like a business, aligning their essential expenses, discretionary expenses, and earnings with their values, and constructing a debt paydown and/or savings plan.

If you are interested in my Financial Coaching Program, get more information on the program here and sign up for your free consultation.

Your Largest Expense: Taxes – RSP’s and TFSA’s for Canadians

When the average person is asked what their three largest expenses are, they probably say Housing, Transportation, and Food.  What a lot of people miss is the fact that their single largest expense may be tax.  Especially when you add it all up – federal income tax, provincial income tax, sales tax, capital gain tax, dividend tax, etc.  When I look back on 2020, my personal income tax (not including other taxes) exceeded my total expenses (essential and discretionary) by 2x.  That’s right, my tax bill was twice as much as ALL OF MY EXPENSES COMBINED!   I know I am not alone here.  As has been said before, the only sure things in life are death and taxes.  You aren’t able to avoid paying taxes, however there are numerous legal ways to pay less.  The government of Canada has created tax-advantaged savings vehicles that Canadians can use to reduce their overall tax bill.  You can tell that most of these vehicles are worthwhile since the government has capped the maximum amount that you can put into each of these.  If they didn’t save you tax dollars (decreasing dollars going to the Canada Revenue Agency), they wouldn’t have maximum contribution limits.  I have outlined the two key plans that Canadians can use to reduce their tax bill below:

Registered Savings Plan (RSP)
  • How much can you contribute?
    • 18% of your earned income in the previous year up to an annual limit (for 2021, the annual limit is $27,830 – note that the limit changes every year)
      • Unused RSP contribution room can be carried forward indefinitely
    • Your personal RSP contribution room can be found on CRA online, on your notice of assessment, or on Form T1028
      • It is best to check your personal contribution room since it can be different from the contribution limit noted above due to Past Service Pension Adjustments and Pension Adjustments (complicated adjustments that go beyond the scope of this post)
  • What is the benefit of an RSP?
    • Deferred tax! – Contributions within the limit are tax deductible (i.e. reduces your taxable income in the year of the contribution).  Tax will eventually have to be paid upon withdrawal, however between contribution and withdrawal, the investments can grow tax-free
    • Some employers offer RSP contribution matching – Check with your employer if you aren’t already signed up!
    • Home buyers plan – You can take up to $35,000 out of your RSP to put towards the down payment on your first home and you won’t be taxed on it.  However, you do have to pay it back into your RSP over the next 15 years (keep in mind that if you do this, you will miss out on the growth during this period of time)
    • Lifelong learning plan – you can take up to $10,000 in a calendar year (up to $20,000 in total) from your RSP to finance full-time training or education for you or your spouse or common-law partner.  However, you do have to pay it back into your RSP over the next 10 years (as above, keep in mind that if you do this you will miss out on the growth during this period of time)
  • What can I invest in?
    • An RSP is an account (not an investment).  You can hold various investments within an RSP account
    • According to the Canada.ca website, RSP is “an investment in properties (except real property), including money, guaranteed investment certificates, government and corporate bonds, mutual funds, and securities listed on a designated stock exchange”
    • An RSP can be self-directed (you can manage it yourself) or professionally managed (using a professional money manager)
  • What to watch out for?
    • This is a LONG TERM savings vehicle – don’t contribute to an RSP unless you are sure you will not need the money until you plan to take it out (e.g. don’t use an RSP as an emergency fund)
      • If you have to withdraw your RSP early, your withdrawal will be subject to tax – the withdrawal will be added to your taxable income for the year
      • If you withdraw, you lose that contribution room permanently
    • Optimize your contribution by thinking about what tax bracket you are in and how a tax-deductible RSP contribution may reduce your income and put you in a lower bracket
      • Example (using made up numbers for simplicity)
        • Assume
          • Taxable income of $52,000
          • You have unused RSP contribution room of $9,000
          • Tax rates (Canada has progressive tax rates whereby your tax rate increases as your income increases).  The below are illustrative only
            • 25% up to $50,000
            • 30% above $50,000
        • If you contribute the full $9,000, your taxable income will reduce to $43,000
          • Your total tax savings will be $2,350 (calculation below)
            • 30% x $2,000 = $600 (you get 30% benefit until your taxable income drops to the bracket threshold of $50,000)
            • 25% x $7,000 = $1,750 (once your taxable income drops below $50,000, you only get a 25% benefit since you have dropped a tax bracket.  In this case you may be better off making a partial contribution this year, e.g. only contributing enough to get you to the $50,000 threshold where your tax rate increases from 25% to 30% and then carrying forward the rest if you expect to be in a higher tax bracket in the future)
      • This is a bit more complex so please reach out to me if you need help
    • The deadline for RSP contribution is always 60 days after the end of the previous year (to be eligible for a deduction for the 2020 tax year, you would have had to contribute to your RSP by March 1, 2021
    • Don’t overcontribute – steep penalties apply
    • When you withdraw money from your RSP, the amount that you withdraw is added to your taxable income that year.  The idea is that you contribute when you are working and are in a higher tax bracket, the money grows all throughout your career tax-free, and then you get taxed when you withdraw it during your retirement – when your income is lower and you will likely be in a lower tax bracket
    • When you turn 71, you have to convert your RSP into a Registered Retirement Income Fund (RRIF) and are required to make minimum withdrawals each year
  • More here
Tax Free Savings Account (“TFSA”)
  • How much can you contribute?
    • You start accumulating TFSA room the year you turn 18 years old, and you continue to accumulate contribution room until you die
    • The annual TFSA dollar limits by calendar year are as follow:
      • 2009 to 2012: $5,000
      • 2013 to 2014: $5,500
      • 2015: $10,000
      • 2016 to 2018: $5,500
      • 2019 to 2020: $6,000
    • Unused contributions can be carried forward to future years
    • You will not accumulate contribution room if you are a non-resident
  • What is the benefit of a TFSA?
    • Investments within a TFSA grow tax-free, and are not taxed when you withdraw them (however a TFSA contribution is made with after-tax dollars)
    • Suitable for short term savings – withdrawals from TFSA’s are not subject to tax and you don’t lose your contribution room permanently (your withdrawal in a given year is added back to the following year’s contribution room)
  • What can I invest in?
    • Similar to RSP, TFSA is an account (not an investment).  You can hold investments within a TFSA account.  The “Savings Account” part of the name is quite misleading
    • You can invest in the same types of investments that are permitted for an RSP
    • Also similar to RSP, TFSA can be self-directed or professionally managed
  • What to watch out for?
    • TFSA contributions are made with after-tax dollars (you do not get a tax deduction for contributing to your TFSA)
    • Don’t overcontribute to your TFSA as penalties for overcontribution can be very steep
  • More here
RSP or TFSA?
  • You may wonder whether it is more advantageous to contribute to an RSP or a TFSA
  • Optimally, I say do both!  I max both my RSP and TFSA every year.  That said, this may not be feasible for everyone.  Whether to contribute to your RSP or TFSA first depends a lot on your individual circumstance
    • If you are a high income earner now and paying tax at a higher marginal tax rate now than what you expect to pay in retirement, contributing to your RSP first probably makes more sense
    • If you are a low income earner now and are likely to pay tax at the same or lower marginal tax rate in retirement, contributing to your TFSA might make more sense
  • Liquidity
    • Don’t fund your RSP unless you are absolutely sure you won’t be needing the money for a very long time.  If there is any doubt, contribute to your TFSA instead – where withdrawals and deposits are flexible
      • With the RSP, you get hit with tax when you withdraw.  In addition, you can’t put money back in – you lose the contribution room forever

Disclaimer: Please note that I am NOT an accountant / tax professional and all of the above are only my opinions, NOT tax advice.  Please make sure you consult with a qualified tax accountant / professional before executing any tax strategies. 

Financial Coaching the Average Canadian Household (Part 4 of 6)

Part 4: Aligning Earnings with Values

This is the fourth post in a series of six that walks through a theoretical exercise of me financially coaching the Average Canadian Household (as defined by Statistics Canada data) to see how we could improve their financial situation.

In the first post, we did a deep dive into the Average Canadian Household’s finances, looking at their income, expenses, and net worth.

In the second post, we did a deep dive into the Average Canadian Household’s essential expenses.

In the third post, we did a deep dive in to the Average Canadian Household’s discretionary expenses.

This post we will talk about aligning earnings with your values.  What do I mean by this?  I want everyone to understand that they are in control of how much they earn and they should adjust how much they earn based on what kind of life they want to live, how fast they want to reach financial independence, and what kind of balance they want to have along the way.  It’s also important to point out that there are several ways to increase your employment income and/or earn money outside of traditional paid employment.

If after going through the first three posts of this series, you feel that you can’t cut expenses anymore without depriving yourself or decreasing your quality of life, you may not have a spending problem.  Rather, you may have an earning problem.  If this is the case, you may want to spend some time thinking about how you can increase your income to create a larger gap between income and expenses, thus saving more.  As mentioned at the end of the last post, I view cutting expenses as “playing defense” and earning more as “playing offence”.  Unlike expenses where you can only cut so much without decreasing your quality of life and/or being deprived, there is no upper limit on the amount of money you can earn.  Let’s talk about a few ways that you can earn more.

Eliminate limiting beliefs!
  • This is extremely important.  I feel that a lot of people limit the amount of money that they earn by having limiting beliefs (they don’t believe that they are capable of earning more).  Examples of limiting beliefs are:
    • I’m not smart enough to do that
    • I’m not cut out to be a manager
    • I could never earn more than $100,000 a year
  • If you have limiting beliefs, it is important to work on disproving limiting beliefs and replacing them with empowering beliefs
Take ownership of your current situation
  • I love this quote:

“You are where you are and what you are because of yourself.  Everything you are today -or ever will be in the future – is up to you.  Your life today is the sum total of your choices, decisions and actions up to this point.  You can create your own future by changing your behaviors.  You can make new choices and decisions that are more consistent with the person you want to be and the things you want to accomplish with your life” – Brian Tracy

  • It’s so easy to shift the blame to others when you are not where you want to be (either financially, or in other parts of your life).  Maybe you think your boss is a horrible person and it’s their fault you don’t make more money.  The reality is that you decide where you work and if you’re not happy, you can leave
  • If you aren’t where you want to be, invest time and money to improve your situation.  This may mean making some personal sacrifices.  For example, maybe you spend time studying or researching new jobs or ways to earn more money rather than watching TV at night (don’t worry, you can add the TV back when you are where you want to be!)
Traditional employment
  • How can you earn more in traditional employment?  Make yourself more valuable to your company.  There is a good book called the “Go-Giver” that illustrates two principles that apply here:
    • The law of value – your true worth is determined by how much more you give in value than you take in payment
      • You are in control of the value that you produce for your company – you can make yourself more valuable to the company you work for by increasing your skills that are relevant to your job (e.g. take continuing education courses that can make you a more valuable employee, or find a mentor in your company that is in a position where you want to be so they can help you get there).  The more valuable you become, the harder it is to replace you and the more an employer will be willing to pay you
    •  The law of compensation – your income is determined by how many people you serve and how well you serve them 
  •  If you really feel stuck (with limited upside to compensation) and/or don’t enjoy working in your current company / team / field / industry, consider whether changing companies or taking a career pivot makes sense.  Maybe take some night classes on the side to try to switch to something else? 
Earning money outside traditional paid employment
  • Side hustle – there are various levels of “side hustles” that anyone can do to make money aside from traditional employment (or instead of traditional employment)
    • Entrepreneurship – start your own business!
      • This can either be a full-time endeavor or “on the side”.  It’s not for everyone since starting a business from scratch takes a lot of hard work and dedication
      • My advice to somebody who wants to start a business is to find their
        “Ikigai”.  This is what led me to start this website and a financial coaching / guest speaking business
      • What the heck is Ikigai?
        • Ikigai is a Japanese concept that means “a reason for being”.  The word refers to having a direction or purpose in life, that which makes one’s life worthwhile, and towards which an individual takes spontaneous and willing actions giving them satisfaction and a sense of meaning to life.  This colourful diagram sums it up quite nicely:
      • If you find a business idea that aligns with your Ikigai (something you love doing, something that you are good at, something the world needs, and something that you can be paid for), it won’t feel like work at all
    • Work on the side – if being an entrepreneur doesn’t run in your veins, you can always do some work on the side, trading your time for money alongside or instead of traditional employment.  Generally the easiest place to start is where you already have experience.  Examples of this would be an accountant who does tax returns on the side, a mechanic who works on cars on the side, or a roofer that does some other roofing work outside of work hours
    • Gig economy – there are all sorts of “gig economy” jobs (“gigs”) where you can make money from the comfort of your home or your car and have an extremely flexible work schedule.  Examples of this:
      • Driving, or delivering food (e.g. Uber, Lyft, Uber Eats, Skip the Dishes, etc.)
      • Turo – renting out your car
      • Airbnb – renting out part or all of your home
      • Freelancing – check out Fiverr or Upwork
      • Rover – dog sitting / walking
  • Investment income – once your start to accumulate an investment portfolio, your portfolio can start to work for you, each dollar acting as one of your “employees”.  The great thing about these dollar employees is that they will work round the clock to earn money for their keeper.  As you portfolio matures, these dollar employees gradually take over, allowing you to work less and eventually not at all (the point at which your portfolio is sufficient to cover all of your expenses, i.e. financial independence)
    • Public investments – traditional asset classes such as stocks, bonds, guaranteed investment certificates (including products that aggregate these investments such as exchange traded funds and mutual funds)
    • Private investments – other asset classes such as real estate, private businesses, private lending, timberland, farmland, etc.
Working too much?
  • Although most people are probably in the “not enough money and want more” camp, there are others that have plenty of money but may be working so much that work has completely taken over their lives and they don’t have balance in their life
  • I’ve personally heard many stories of people who are paid very well (e.g. investment bankers, lawyers) but fail to be happy.  If you feel this might be you, I encourage you to read the story below about a Mexican fisherman.  Take time to step back and think about why you are working so hard and what you are ultimately trying to achieve.  The key message here is that sometimes you can achieve a very good quality of life with less

The Mexican Fisherman:

An American investment banker was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked.  Inside the small boat were several large yellowfin tuna.  The American complimented the Mexican on the quality of his fish and asked how long it took to catch them.

The Mexican replied, “only a little while”.  The American then asked why didn’t he stay out longer and catch more fish?  The Mexican said he had enough to support his family’s immediate needs.  The American then asked, “but what do you do with the rest of your time?”

The Mexican fisherman said, “I sleep late, fish a little, play with my children, take siestas with my wife, Maria, stroll into the village each evening where I sip wine, and play guitar with my amigos.  I have a full and busy life.”  The American scoffed, “I am a Harvard MBA and could help you.  You should spend more time fishing and with the proceeds, buy a bigger boat.  With the proceeds from the bigger boat, you could buy several boats, eventually you would have a fleet of fishing boats.  Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery.  You would control the product, processing, and distribution.  You would need to leave this small coastal fishing village and move to Mexico City, then L.A. and eventually New York City, where you will run your expanding enterprise.”

The Mexican fisherman asked, “But, how long will this all take?”

To which the American replied, “15 to 20 years.”

“But what then?” asked the Mexican.

The American laughed and said, “That’s the best part.  When the time is right you would announce an IPO and sell your company stock to the public and become very rich, you would make millions!”

“Millions – then what?”

The American said, “Then you would retire.  Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siestas with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.”

Source: https://bemorewithless.com/the-story-of-the-mexican-fisherman/

I hope you all found this post encouraging.  For those of you who are already able to save a significant portion of your earnings or are close to financial independence, maybe you don’t need to focus so much on earning more.  Most people can benefit from the offensive strategy of earning more, whether that is from additional employment income, something on the side, or an entrepreneurial venture.  This can allow you to increase your spending and/or increase your savings and decrease the amount of time to reach financial independence.  I think everyone can benefit from taking a step back and evaluating your overall situation to ensure that you are happy where you are, and doing what you like doing.  If not, you all have the power to change your situation for the better.  Find your Ikigai!

Now that we have covered an overview of the Average Canadian Household finances, aligning essential expenses with values, aligning discretionary expenses with values, and earning more, in the next post, we will discuss constructing a debt-paydown and/or savings strategy.

If you are interested in my Financial Coaching Program, get more information on the program here and sign up for your free consultation.

Financial Coaching the Average Canadian Household (Part 3 of 6)

Part 3: Aligning Discretionary Expenses with Values

This is the third post in a series of six that walks through a theoretical exercise of me financially coaching the Average Canadian Household (as defined by Statistics Canada data) to see how we could improve their financial situation.

In the first post, we did a deep dive into the Average Canadian Household’s finances, looking at their income, expenses, and net worth.

In the second post, we did a deep dive into the Average Canadian Household’s essential expenses.  Now on to discretionary expenses.

What do I mean by discretionary expenses?  If essential expenses are the “needs” (recognizing that our essential expenses often go way beyond our basic needs), discretionary expenses are the “wants”.  These are things that (hopefully) add value to our lives beyond the basic needs.  Everyone has very different views on where they should spend their money in discretionary categories and everyone is different.  I’m not here to judge anyone, more just to make sure that their spending is aligned with their values.  People need to understand that they are ultimately trading their time to buy stuff or experiences, so the stuff or experience better be worth it!.

It’s not about deprivation!  But being in debt can be a unique circumstance

I’m not the kind of financial coach that is going to tell you to stop buying your $5 coffee every day.  I’m all for it it as long as you get value from it.  That said, I believe that if you have outstanding high interest consumer debt (e.g. credit cards, payday loans, etc.), it may warrant cutting back on discretionary expenses temporarily in order to disentangle yourself from that vicious web as soon as possible.  Every extra dollar that you can put towards your debt load counts and small amounts add up over time.  The financial independence blogger, Mr. Money Moustache wrote a great post about referring to debt as an “emergency”.  Here it is: https://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/.

Here’s the breakdown of discretionary expenses for the Average Canadian Household (based on Statistics Canada data):

Travel

  • I am actually happy to see that travel is the #1 discretionary expense category for the Average Canadian Household.  I love to travel and think that travel expense is closely aligned with the values of many Canadians.
  • General savings tips on travel:
    • For flights, I use google flights
      • This allows you to find the lowest prices across various airlines
      • Generally, I find you can save a lot of money if you can be flexible with your dates (e.g. for a vacation, sometimes you can save significantly on flights if you depart and arrive mid-week rather than on a Saturday or Sunday when everyone else is travelling)
    •  Accommodation
      • I look for the best hotel deals on an aggregator site like Expedia or Booking.com
      • I have had great success staying in Airbnb places as well.  It is often similar or cheaper than staying in a hotel.  In my experience, you get a lot more space (relative to a hotel room) plus the added benefit of meeting other people.  Every host that I have stayed with using Airbnb was fantastic and really gave me a sense of how it is like to live in different areas throughout the world
      • These aren’t for everyone but can be very budget-friendly alternatives:
        • Hostels – I love staying at hostels because I find I meet so many new people.  This isn’t for everyone, but that’s okay.  There are hostels everywhere, particularly in expensive cities
        • Camping – I’m a big fan of the outdoors and will often choose sleeping outdoors over inside
    • Package trips
      • Sometimes you can save a bundle buying a package trip that includes flights and accommodation.  I did a few of these during university and my early working years for a quick and easy getaway to a sun destination.  It’s sometimes nice to book everything as a package to avoid the analysis paralysis associated with booking flights and accommodations separately
    • Travel rewards
      • I’m a big fan of using credit cards that give me reward points or cash back for travel purchases.  This isn’t for everyone and I would only recommend doing this if you can pay your credit card off in full every month.  If you can’t pay off your credit card in full every month, I don’t recommend using it as the interest charges will likely outweigh any benefit that you will get from points.  My travel expenses have been significantly reduced from using travel reward dollars
    • Loyalty programs
      • Most airlines and hotel chains have loyalty programs.  If you travel a lot, it really makes sense to sign up for the loyalty programs as the benefits can accrue quite quickly.  Sometimes loyalty points and travel rewards from credit cards are also interchangeable / exchangeable
Entertainment

  • Recreation services
    • TV & satellite radio
      • Consider switching from more expensive cable TV package to less expensive streaming services like Netflix / Prime Video / Disney Plus
      • I don’t watch a huge amount of TV but a good show or movie can be a great way to unwind!
    • Recreational facilities
      • I know a lot of people love going to the gym and other recreational facilities (for the exercise benefit and social interaction with others).  I prefer to do most of my workouts outdoors (hiking, walking, cycling), but occasionally enjoy the gym, especially in the middle of winter!  Some people are guilty of signing up for gym memberships and hardly using them – if you are one of them, use it or cancel it!
    • Live events
      • Concerts and sporting events can be a great way to spend money and something that can provide lasting memories
  • Electronics
    • With most electronics, rather than buy the latest and greatest, I usually consistently stay a couple years behind the newest technology.  This can save you big bucks.  For example, the newest cellphones right now are around $1,500, however you can get a brand new older model for less than half of that price.  Same goes for TV’s, computers, etc.  I absolutely don’t feel deprived or like I’m missing out by using an older model
  • Recreational vehicles
    • I’m not a huge fan of RV’s (more of a tent guy myself) and various toys (e.g. boats, ATV’s) but I know many Canadians get tremendous value from these purchases.  The only thing that I would say here is to make sure that you consider rent vs. buy (whether you will get enough use out of these items every year to justify the capital required and additional work associated with owning these items – e.g. maintenance, storage, etc.)
    • I would love to get a motorbike but unfortunately both my mom and my wife are against it.  I know better to mess with these two women!
  • Reading materials
    • I’m personally a big fan of the library – a good way to save money on reading material and avoid cluttering your home with hundreds of books
Food – Fine Dining
  • The average Canadian Household spends just over $200 a month eating out at restaurants.  I don’t think that average sounds bad at all.  I quite like eating out occasionally.  My general principles are:
    • If I can do it better at home for less – do it!  For me, this applies to most things barbecued.  It pains me to pay $40 for steak at a restaurant if it isn’t cooked to my liking.  For other things that I don’t know how to make, or would take too much time to prepare, or would have to spend a lot to buy the ingredients (e.g. sushi), I am always happy to go out and pay for these meals
    • Don’t eat out alone (unless you enjoy it) – part of eating out for me is the company / social aspect, so I generally don’t eat out alone
    • Only eat out occasionally – I find that I enjoy eating out more if I only do it once or twice a month.  That’s just me since I find that if I eat out too regularly, it just becomes the new normal
Communications
  • Canadian’s pay WAY to much for communication (cell phones, home phones, internet) due to the oligopoly that exists with the big players (sometimes I really think they collude and raise their rates in tandem), the geographic sprawl of the country, and the low population density relative to other countries.  There have been studies done that show that Canada has one of the most expensive rates for wireless voice and data rates
  • The Average Canadian Household pay over $100 per month for cell phone alone
    • I have heard of many people that pay over $200 per month for a single cell phone plan!  I definitely recommend looking at cheaper alternatives.  There are certain companies (e.g. Public Mobile, Fido, Koodo) that offer much cheaper plans than the big players (Telus, Rogers, Bell).  These alternatives often provide the exact same service as the big players for a lower cost (mostly because they are owned by the big players)
  • Same goes for internet – there are cheaper plans available from smaller companies that use the same networks that the big players use.  I recently switched my internet service to Lightspeed from Telus.  Doing this, I was able to save more than 40% and get a faster service compared to what I had with Telus.
Gifts
  • I personally get a lot of value in gift-giving.  This is probably one of those categories where you can spend relatively guilt-free.  That said, you have to make sure you are keeping within your means – for example, maybe don’t buy your kid a car if you have significant consumer debt that is dragging on your own financial situation.  If your strapped for cash, less-expensive sentimental gifts can go a long way and can sometimes mean more to the recipient than something material or expensive.
Alcohol
  • In my younger years, I spent a significant amount of money on drinking especially at bars and restaurants.  In hindsight, I wish I had poured that cash into index funds instead!  That said, live and learn – was fun while it lasted.  The mark up on alcohol at restaurants is among the most ridiculous (e.g. paying $10 for a beer, or $13 for a glass of wine when you know you can buy the bottle for less than $10 at a retail store).  When you do drink out with your buddies, watch out for deals, e.g. 1/2 price wine Wednesdays, happy hour, etc.
Financial Services
  • There is no need to pay for financial services.  I’ve never paid a bank fee or interest charge in my life.  There are a couple options here for low-cost / free banking:
    • Go with a no-fee chequing / savings account like Tangerine or Simplii
    • Go with a full service bank that will waive the monthly fee for a chequing account if you maintain a certain minimum balance.  This is what I chose to do – I have TD’s best chequing account and don’t pay the ~$30 monthly fee since I maintain a minimum balance of $5,000 at all times.  I realize that there is an opportunity cost to having that $5,000 tied up, however, I do feel that the other benefits that I get outweigh the costs (e.g. annual fee waived on my TD First Class Travel Visa card, free safety deposit box, free bank draft and cheques whenever I need them, unlimited transactions, etc.)
Donations
  • I think donation is a very important discretionary expense that most people should try to increase over time as their wealth accumulates.  Don’t forget to keep the receipt if the donation is tax deductible since it can save you some money during tax season
Pets
  • This is expense category that I’m not going to mess with.  I know of many people who love their pets like children.  I think pets can be a very worthwhile discretionary expense as far as bringing happiness to lives
Gambling
  • I would advise that you only gamble occasionally for entertainment and only in small amounts that you are 100% okay with losing if things don’t go your way.  I personally enjoy playing a little bit of Blackjack when I’m in Vegas (at least there you get the benefit of free drinks!)
Tobacco
  • I don’t smoke, so don’t have too much to say here.  I do have family members and friends who quit smoking and noticed significant financial and health benefits by doing so.  That said, some people truly get enjoyment from smoking and choose to do so regardless of health and financial implications.  To each their own

At this point, we have analyzed the Average Canadian Household’s financial situation and talked about potential ways to decrease essential and discretionary expenses.  I view decreasing expenses as playing defense.  There is only so much you can cut without depriving yourself.  To have a happy life, you need to figure out what level of expenses are right for you (not so high that they will impair your ability to save for financial independence, but not so low that you feel deprived and not enjoy the journey).  Next post, we will talk about playing offence by earning more money.  Whereas the amount of expenses you can save is limited, there is no cap on the amount of money you can make!

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