Monthly Archives: June 2015

Getting out of the rat race with passive income

250 year old bonsai tree. This represents sound investment principles.
250 year old bonsai tree. This represents sound investment principles.

Ever since I was 19 years old, I wanted to retire. I wanted to have a luxurious lifestyle without working. It didn’t happen that way… My youth was full of failures until one day I decided to stop failing.

I came to Canada  in 1998 to study.  Canada offered me the highest educational value for my dollar. Already when I arrived I wanted to learn about investments. My first step was to buy mutual funds, but I was doing it all wrong. I was picking the funds with the best performance for the current year which happened to have a poor performance the following year.

The one lucky thing that I was doing was that I was investing small quantities ($25 per month) so my disappointing results never amounted to big losses.

After three years of savings in mutual funds, I decided to become rich by buying stocks. I would listen to experts on TV who would recommend stocks and I would buy them right away. I had some great successes and some dramatic failures. After a while I realized that I had to do my own research and base my trades on my own opinions.

Today I have become a passive investor. I invest in low cost ETFs (Electronic Traded Funds). Instead of buying one stock, I buy hundreds of them through ETFs. This investment style offers instant diversification at an extremely low cost. For example, I own an ETF called QQQ. This ETF is composed of 100 large companies in the U.S., mostly in the technology sector. I also own several ETFs which represent  big Canadian companies, medium sized Canadian companies, and small sized Canadian companies. For a list of all my ETF holdings and those which I want to buy please visit my investment page.

I also invest in real estate. Three years ago I made my first investment and now I am upset that I didn’t start at least 10 years ago. Real estate is full of amazing opportunities. My goal is to buy one more property by 2016.

My advice to anyone who is interested in building wealth is to look for passive income, income which will come in without the investor having to be there to manage it. My passive income comes in the form of stock appreciation, dividend payments and rent payments from tenants. Sure, I do have to do some work, but there is no longer a direct relationship between the work I do and the money I get paid. My dividend payments come in every quarter and I get regular rent payments.

To build wealth, we have to get out of the rat race. We have to stop selling our time for money. Instead of getting paid per hour of work, we should get paid for results achieved.

Tips on saving money

Meet up at the Uber headquarters in Montreal
Meet up at the Uber headquarters in Montreal

The formula for success is “Spend less than you earn and invest the rest.” The easiest part of this formula is to spend less. This is easy because we can put it into practice right away and and see immediate results.

People have different savings habits. Today I’d like to share some of my saving habits. I’m extreme in some areas and quite liberal in others. I’m sure that when it comes to savings, everybody has their weak points and their strong points.

    1. Movie vs. Cable vs. Netflix. I go to the movies about once every 4 months. Many times I go on a date, when I feel persuaded by Hollywood’s fantastic advertising campaign or when I want a break from my regular routine. I feel that if someone wants to see a movie for the sake of the movie itself, then a better choice would be to watch it on Cable or better yet, watch it on Netflix. You would have to wait a few weeks and then you can see it from the comfort of your living room, with your friends and family, without transportation cost and without all the junk food that you’ll feel tempted to buy at the movies. Using Netflix costs 8$ per month. If you are conscious about your spending, Netflix is the obvious choice.
    2. Restaurant food vs. Home food. It is obvious that home food is less expensive than restaurant food. There are thousands of quick recipes that you can do at very little cost. I go to restaurants mostly when I want to spend time with friends, but it is extremely rare that I go into a restaurant just to feed myself. Lately, I have discovered a restaurant in my neighborhood, in the basement of a church, which was created for people of little means.  For $4 I get a salad, a dessert, a soup, a main dish and a drink, or for $2.5 I can get the main dish only. This is incredible. In addition, I can buy a frozen meal to-go for only $2.5. The restaurant is called Resto Plateau. For me, this is even cheaper than cooking at home.
    3. Coffee. For many people, when they buy a coffee, they’re actually paying for the experience of being out of their home or office in a friendly environment. But if your sole purpose of going to a coffee shop is to get your daily dose of caffeine, you are better off getting your fix at home or at the office cafeteria. You can save a significant amount of money and time by fixing your own. I drink about 3 coffees per day. Each cup takes me about 2 minutes to prepare and 30 seconds to clean. My coffee costs me about $0.05 per cup. There you go, a significant savings of time and money. However, when my main purpose is to meet a friend, a coffee shop is a fantastic choice.
    4. Cigarettes. I only smoked when I was a teenager, out of curiosity, but my wrestling coach found out and gave me shit and my team members kicked my butt at the wrestling mat. I stopped smoking right away. Smoking is an expensive habit which can become even more expensive if you get lung cancer or any smoking related sickness. If you smoke about a pack per day, you are wasting about $300 per month. My suggestion is to quit. But if you cannot quit, then buy cigarettes at an Indian reservation. You can find a carton there for about $10. That’s a deal since a pack of cigarettes can cost about $10 in the city. Since I live in Montreal, the closest Indian reservation is Kahnawake, which is only a few minutes driving distance from Montreal.
    5. Partying, Going out. We are social animals. We like to congregate with other people, share a few beers or glasses of wine and share stories. The price for these activities can vary from having a $1 beer at the park to going to a chic club and having $10 martinis. Obviously, if your purpose is to save money, you will look for inexpensive ways to party without breaking the bank. I celebrated my birthday at a public park and my total cost was about $20. I am sure you can find similar ways to have fun and save money.
    6. My 2007 Chevrolet Maliby which I use for Uber rides. Only $6000 (cash) and it is running great.
      My 2007 Chevrolet Malibu which I use for Uber rides. Only $6000 (cash) and it is running great.

      Transportation. If you need a vehicle, my advice is never to buy a new car. I like to buy automobiles which are older than 5 years but no more than 10. Vehicles depreciate quite fast but their useful life can last more than a decade. My latest vehicle was 7 years old when I bought it and so far is running great. But even better than purchasing a used vehicle, is not to own a vehicle at all. Between bicycles, public transportation, and cars sharing communities, many of us can survive or even enjoy not being a car owner.

    7. Gadgets. Many of us have become dependent on our gadgets. But if you use a computer to do emails, Facebook and YouTube videos, do you need to pay $2,000+ for a Mac Pro when you can get the same done with a $250 Chromebook ? It is the same story with iPhones versus other smart phones. Most people use their phone for texting, taking photos and checking Facebook. Why pay top dollars for an iPhone when you can do the same with many other smartphones which cost way less. Sure, if you identify yourself with the Apple brand, that is what you have to do, but if your objective is to save money, then save money.
    8. Clothing. Most people have their closets overstuffed with clothes, yet it is a habit to go and buy more clothes. We could save so much just by not buying clothes unless it’s absolutely necessary. You can save so much by buying at second hand stores and/or big discount outlets. You can pay $20 for a pair of jeans at Walmart instead of $200 at some boutique. Here once again, if you get your sense of self-worth from the clothes you wear, then buy expensive designer clothes. But if your objective is to save money, then save the money.

This is my rant. I hope to be able to help you on your journey of being more frugal with your day to day expenditures and help you achieve financial success.

If you have any more ideas on how to be frugal please write it in the comments and I will add it to the blog.

Book review: The Millionaire Mind by Thomas J. Stanley.

milAnother great book found at the second hand store at the great price of only $3CAN. Retail price $39.95CAN.

This book is considered to be a follow up of “The Millionaire Next Door,” which I haven’t read yet. Dr. Stanley tries to dispel the illusion that most of us have about the life of a millionaire. It is easy to imagine that most millionaires live extravagant lives as portrayed in Hollywood movies, but Dr. Stanley shows a different picture. He shows us how many of today’s first generation millionaires built their wealth by working hard, saving diligently and living below their means.

The book is the fruit of approximately 1,300 interviews with millionaires from selected areas in the United States. In some of the interviews Dr. Stanley goes deep into the origins, motivations, mentality, attitude, and beliefs of many of the  millionaires and he tries to figure out  why they have become so successful.

Here is what his research explored:

  1. What factors made them successful in one generation?
  2. How much of their success was due to luck and how much due to work?
  3. Were they good students or were they average students?
  4. How did they build the courage to take financial risk?
  5. How did they choose their field of expertise?
  6. What kind of spouse did they choose?
  7. How do they manage their house?
  8. What kind of house did they buy?
  9. What are their favorite off work activities?

The research of Dr. Stanley leads us to believe that most millionaires are not beautiful people with high IQs, good grades and a clear career path. Instead, they are  hard working individuals, average students, who had a hard time finding good jobs and so they had no other alternative than to go into business for themselves. After a few career failures, they built the courage to open their own businesses, and with time they fell in love with their professions. They are considered cheap dates, because for many of them, their favorite activity is to stay at home with their families. Generally, they choose supportive spouses who help them build their wealth.

My impression:

I believe that Dr. Stanley, in his effort to dismantle the Hollywood version of a millionaire, created a different fictitious millionaire. The religious, hard working millionaire who lives below his means and who is totally devoted to his family. In the book I didn’t find any information about the lifestyle of the Wall Street millionaire, nor the technology savvy Silicon Valley millionaire, nor the thousands of millionaire farmers who have become rich from government subsidies, nor the Hollywood actor or super athlete. Instead, he profiled almost exclusively the blue collar millionaire and some doctors, lawyers and physicians.

The book was informative and inspirational to people, like myself, who want to believe that America is abundant with opportunities. According to Dr. Stanley, all we have to do is to create good habits, continue learning, be enthusiastic about our profession, live below our means, find a supportive spouse and follow some kind of religious belief and we will have as much opportunity as anyone else to become a millionaire.

How to invest your money

My mother and some dear friends
My mother and some dear friends

The formula for financial success is: “Spend less than you earn and invest the rest.” But how do we invest the rest? What do we do with the money we have saved?

We have heard many times that, in investments, the higher the risk, the higher the potential reward. Let’s consider the risk and return of the most popular investment vehicles: savings accounts, bonds and stocks.

Savings accounts.

The common belief is that savings accounts are the safest investment. When you deposit money in the back, the bank and the government guarantees your money and your earnings. But this safety comes at a high price. Savings accounts, Certificates of Deposit (CDs) and Guaranteed Investment Certificates (GICs) pay little interest for your money.

In my opinion, depositing money into a savings account is a guaranteed way to lose money. The reason is that the interest offered is lower than the rate of inflation. Inflation is the cancer which eats away your savings and if your bank account is not keeping up with it, you are becoming poorer by the day.

I keep enough money in my bank account to cover my monthly expenses, anything extra is invested in stocks and real estate.

Bonds.

Bonds are loans made to either governments or corporations. As with investment, the higher the risk the higher the potential return.

The safest bonds (lowest risk) are those which are sold by the government. In Canada the current (June 2015) treasury bill rate is 0.7% while the current inflation rate is 0.8%. As you can see, the rate of return is not enough to cover for inflation.

The next bonds on the scale of risk/return are provincial bonds and then corporate bonds.

Corporate bonds are rated according to the financial health of the corporation issuing the bond. They are rated from AAA to junk status.

Another factor to consider when purchasing bonds is the duration of the bond. The longer the term of the loan, the higher the risk. The risk for lending your money for 30 days is lower than the risk of lending your money for 30 years.

I don’t invest in bonds. Many experts recommend owning bonds because they are supposed to provide stability in a portfolio, but in my opinion the stability provided by bonds is dead weight in a portfolio since their return is two or three times inferior to the return of stocks.

Stocks.

Stocks represent partial ownership of a company. When you buy one share of a company, you become part owner of that company.

The biggest factor which determines the price of a stock is the earnings of the company. If the company increases earnings, the stock price will increase. Conversely, if the company decreases its earnings, the stock price will decrease.

Investing in stocks can be considered risky. Companies can go bankrupt from one year to the other or they can go up in value many times. Companies with stocks valued at $100 can go to zero in a few months, or companies with stocks valued at $1 can go to $100 in a few years. Apple was worth $2 in July 2004 and by July 2014 it was worth $128.

Since investors feel that having just one company in their portfolio is too risky, they spread the risk by having a basket of companies. That way, if one of them loses its value, hopefully others ones will increase in value and their risk will be spread.

Mutual funds

A portfolio of 15 companies in different industries is considered a diversified portfolio. An easy way to have instant diversification is by purchasing mutual funds. For example, if you invest $1,000 in a mutual fund, your money is pooled together with the money of thousands of other investors and the mutual fund manager invests it in hundreds of different companies.

Giving your money to a professional mutual fund manager seems to be a fantastic idea, except for the fact that most mutual fund managers don’t have great performance records. In fact, a regular novice investor can do as well as any professional mutual fund manager. This is because mutual fund companies have many high expenses such as the high salaries of many research analysts, many overhead expenses and the commissions paid to financial advisers.

Index funds

So how can you diversify without the high expenses of regular mutual fund companies? By investing in Index funds.

Index funds are mutual funds run by computers. They are less expensive because they don’t have the high salaries of many analysts, they don’t have high overhead, and they don’t pay commission to financial advisers. Unfortunately, since index funds don’t pay commission to advisers, advisers tend not to recommend them, to the detriment of their clients.

Conclusion.

In the long run (over 5 years), stocks have outperformed all other investments. Mutual funds offer instant diversification and index funds offer the best return for your money.

My strategy is to have some cash in my regular bank account to cover my monthly expenses and invest everything else. I don’t invest in bonds because my investment horizon is longer than 5 years. I invest in index funds, because their expense ratio is lower than actively managed mutual.