Monthly Archives: August 2015

Why I don’t have an emergency fund

dogI have read many personal finance books and I have listened to hundreds of personal finance podcasts and almost all of them give a great priority to building an emergency fund.

What is an emergency fund? It is an amount of money set aside for emergencies. Such emergencies could be a job loss, a sudden illness or an unexpected expense.  Most experts recommend to put aside three to six months of living expenses in a highly liquid account such a savings or checking account. Emergency funds are supposed to save you from having to use a credit card or selling some of your investment assets.

My case: My living expenses are $2,000 per month. If I put aside six months of living expenses, that would be $12,000. That is $12,000 earning less than 1% per year at the local bank (about $100). If I invest that money and my average return is 8% ($960), my opportunity cost is $860. Over a period of many years, this could be a lot of money.

Your debt is your emergency: From what I understand, one of the reasons why you should have an emergency fund, is to save you from using your credit card. In other words, if you have credit card debt, you are already in emergency status. The credit card is your emergency. It makes no sense to have money in a savings account, earning 1% (taxable) while you are paying 18% – 25% in credit card debt. Your first financial priority (after food and shelter) is to pay down this debt as fast as possible. If you have an emergency and you have to use your credit card, you will not be worse off.

Opportunity cost of emergency funds: Another reason why we are encouraged to keep an emergency fund is so that we won’t have to take money out from our investment account to cover the emergency. The market goes up and down, but it mostly goes up. That’s why people invest in the market. Chances are that if you have to sell some of your assets, you will sell at a gain, not at a loss. Even if the market is down, for that particular year, chances are that over a period of several years you will still be selling at a gain. So if you have an emergency, take it out of your investment account. At least your money will have been growing until you need it.

Alternatives to an emergency fund: Believe it or not, your credit card is a wonderful alternative to an emergency fund. Usually emergencies are short term. Well, if you pay for your emergency with your credit card, you have 30 days of interest free money. Within 30 days you should be able to find a better way to finance your emergency.

Another alternative is your line of credit. Keep your money in your investment account, earning about 8% per year and borrow from the bank at a lower interest rate. If you have equity in your house, you can get a line of credit at an attractive rate.

True emergencies don’t happen too often: There are recurring expenses for which you have to plan, such as changing the hot water tank every 10 years, changing the roof every 15 years. These are not emergencies. These should be pre-planned expenses. Deciding to go on a trip to Europe is not an emergency. Make sure you have a budget for infrequent but recurring expenses.

Don’t confuse emergency fund with a reserve fund. I am self employed. Some months I earn more than others. However, my expenses are always the same, so I keep a reserve fund of about $5,000. If my earnings fall short one month, I have enough reserves until the next month. Fortunately, I continue earning a bit more than what I need, so I continue transferring money from my reserve fund to my investment fund.

Do you have an emergency fund? a reserve fund? How do you deal with emergencies? Share your situation with us.

Update, March 4th, 2017. I had an emergency. I was caught without cash at the time that many expenses came about.

I had two choices:

  1. To sell stocks at a significant gain (people who promote emergency funds always talk about selling at a loss)
  2. To borrow money from my line of credit at 5%

I decided to borrow money at 5%.  I get to pay back that money at my own pace and I still own stocks which have continued going up.

By putting aside a significant amount of money for an emergency fund, you are giving up all the potential gains you could have by having invested.

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My hustling journey and how you can hustle too

hiThe formula for success is “Spend less than you earn and invest the rest.” In a previous article I wrote about how to save money. In another article I wrote about how to invest your money. Now I want to focus on how to make that money.

Since I arrived in Canada, I have been hustling. I had to do some work under the table because my student visa didn’t allow me to have a regular job. After graduating from university, I finally had a work visa. I found a job as a financial adviser but after one year I quit because I didn’t like my job and I went back to hustling.

I’d like to talk about my hustling experience and to suggest alternatives for anyone looking for a side hustle.

During my first few years here I worked at different part time jobs until I learned to create my own job. Being my own boss is crucial to my financial growth. I was forced to learn about all aspects of running a business as opposed to just knowing how to do one task.

Here are some of the jobs I’ve held and some of the jobs I created for myself.

Janitor: I worked as a janitor for a few months. My job was to vacuum office buildings after hours.

Dance escort. I used to work at a salsa club as a dance escort. My job was to ask girls to dance whenever they were not dancing. My goal was to make sure that the clients had a wonderful experience at the club. You might think, “what a nice job, to get pay for dancing at a club.” I assure you, it was fun only the first couple of weeks, after that it wasn’t as fun anymore.

Preparing sandwiches: I used to prepare sandwiches and natural juices in a shopping center. One thing that bothered me about this job was that I was not allowed to give the leftovers to charity. My boss ordered me to throw the food in the garbage instead of allowing me to give it away.

Busboy: I worked for the restaurant 3 Amigos as a busboy for about 3 months.

Spanish tutor: This was the first job that I created for myself. I placed advertisements all over the university offering Spanish tutoring services. I was surprised when I found out that most students just wanted me to do their homework. In retrospect, I should have offered my service to Montrealers who had a true intention of learning Spanish instead of passing a class.

Tax preparer: Shortly after my arrival in Canada I found out that even international students were supposed to do their own taxes. I went to a tax clinic at the University and someone did my taxes for $20. The following year I bought a tax software which allowed me to do 12 income taxes. I did my own income taxes and 11 other income taxes for $20 each. The following year I did over 100 income taxes and I have been doing income taxes ever since. By doing income taxes, I am up to date with the latest tax strategies and I build long term relationships with some of my clients.

Dance Teacher: One day I walked into a salsa club while a salsa class was taking place. After the class was finished, I saw the students approaching the teacher to pay him for the class. I said to myself, “Wow, that teacher had so much fun teaching all those wonderful students and he got paid for it. One day I want to do that.” I took some salsa classes, I started giving free salsa classes at a social club and before long, some students started asking for private salsa classes. Teaching dance has become my main career. I have been doing it for over 10 years. I get great pleasure when I teach and I have built many friendships in the process.

Airbnb host. I became an Airbnb host about three years ago. It has been a wonderful experience. The money has been good and the experience of hosting tourists has been rewarding. I highly recommend Airbnb hosting to anyone who is looking for some extra cash. If you are interested in becoming an Airbnb host, please let me know. I will send you an invitation and I will get a small referral fee for introducing you to the platform.

Uber driver: This is a wonderful side hustle. I became an Uber driver in January 2015. I work whenever I want to, if I want to. There is no boss, no supervision. If I do a great job the passengers give me a good rating and if I do a bad job, I get a bad rating. On rainy days, I get paid twice or three times as much. Best of all, I get to chat with all the passengers and I have pleasant short conversations. I recommend this job to anyone who has a clean driving and criminal record. If you are interested in becoming an Uber driver, please let me know, I will give you my code and you will get a $50 sign-on bonus by using my code qzq3p. If you are interested in becoming an Uber user, here is a $20 gift certificate by using this code qzq3p.

Money coach: I love personal finance and I help people with all aspects of personal finance. The most common issues I deal with are: How to get out of debt. How to plan for retirement. How to pay less taxes. How to do estate planning. How to plan for the kid’s college expenses. This is my dream job. I get to talk to people about one of the most important aspects of their lives, their money. And when I see positive changes in their lives I feel in heaven.

One thing that I love about Canada is that it is so full of opportunities. If a person wants to work, there are so many alternatives available. With a good plan, anyone can go from rags to riches. Here are some side hustle ideas which can provide nice income with little responsibility.

  1. Babysitter. A babysitter can earn up to $20/hour cash. Good babysitters are in high demand.
  2. Dog walker. This is another great job you can do right in your neighborhood. I have seen dog walkers walking up to six dogs together to the park.
  3. House sitter. I have seen people getting paid to stay in someone’s house while the owners are on vacation.
  4. English tutor. English students would pay you for helping them do their homework.
  5. Editor: Are you good in your language? People would pay you to proofread their written material.
  6. Do you have a special skill or interest? Why not post your own ad on Craiglist as a hair stylist, makeup artist, manicurist, bartender, etc.

As long as someone is willing to take initiative, there is no shortage of job opportunities. Do you do any of these side hustles? Is there one you want to share with us? Share your experience with in the comments.

Book review: The Wealthy Barber by David Chilton

20150809_163225This book is a fictitious conversation between Roy (the wealthy barber) and his friends: David, Sue, Tom and Cathy.

Roy became wealthy while working as a barber. He was able to become wealthy because he had ambition, he sought help from a mentor, he read many personal finance books and he invested his money wisely in mutual funds and real estate. Now as a barber, he gives financial advice to his clients while cutting their hair.

David, Sue, Tom, and Cathy decided to go to Roy’s once a month to get a haircut and to learn about personal finance. The book is the summary of several months of conversation between Roy and his friends.

The advice is easy to understand and it can be put into practice by practically anyone. I agreed with 99% of it.

Roy’s first piece of advice is to pay yourself first. You should put 10% of your income into managed mutual funds. He goes on to explain what mutual funds are and how they work.

I believe that the first step you should do to improve your financial health is to pay your high interest, unsecured debt. A regular credit card interest rate is about 12 to 18% while an average return of a mutual fund is about 6 to 8%. I believe that before putting a single dollar into any kind of investment, all high interest debt should be paid.

Let’s imagine that you have a 6% debt and you also have an investment opportunity where you can earn 6%. On the surface, it seems to be about the same, but it is not. You should put all your effort in paying down your debt instead of investing any money. The reason is that if you get a return of 6% on your investment, you have to pay taxes on that earning; while you don’t have to pay taxes on the savings you get from paying your debt.

Roy advises you to find a good mutual fund manager and invest your money into an actively managed mutual fund. However, research has shown that most actively managed mutual funds underperform the market. I advice my clients to purchase index funds instead. The reason is that index funds are cheaper to manage (they are managed by computers) and they have minimal marketing expenses (they don’t pay commission  to financial advisers); whereas actively managed funds pay the high salaries of many researchers and managers, high marketing fees in the form of generous commissions to financial advisers, and high overhead such as fancy offices in expensive neighborhoods. The end result is that index funds generally outperform actively managed funds by 1 to 2% per year. Over many years, that small percentage difference could represent an enormous amount of money.  A side note: Whenever you see a financial adviser, ask them how they get compensated and be aware that there will be a bias towards recommending investment products which pay high commissions.

Wills, life insurance, and responsibility.  Everyone should have a will, even if the person is single.  I write my will every year and I send copies to the people mentioned in my will. I have several debts and assets and I want my executor to know how to dispose of my assets, pay my debt and distribute the remainder to family and friends. I have sent copies of my will to my family and friends and if ever they have a question, they can ask me now instead of trying to guess my intentions after my death.

Roy recommends as well to write a living will. Shame on me, I have not written one, but if I ever become incapacitated, I don’t want to be a living vegetable. I don’t wish to be kept alive by artificial means.

As far as life insurance is concerned, Roy recommends to get term insurance which would produce enough financial support for your dependents if you die. Everyone is different, have different desires and needs, but in my opinion the goal is to provide support. You don’t want to make it seem as if your family won the lottery. Also, as your wealth increases, you could also consider self insurance. Let’s say you have one million dollars in assets, in this case you probably don’t need life insurance. Your dependents would inherit the one million dollars if you die.

I have always been a big believer in self insurance. There are so many inefficiencies when you buy a term insurance. First of all, insurance companies are there to make a profit, they are not there to protect you. Their team of actuaries and lawyers will write the contracts so that the company will always be the winner.  Secondly, when you pay insurance, you also pay taxes to the government. That is money that neither the insurer nor the individual gets to see. Taxes is a leakage created by the government.

The next section is Saving for Retirement. According to Roy, saving for retirement should be in addition to saving 10% of your income. Here Roy talks about RRSP accounts. This part seemed confusing to me. Already saving 10% is difficult, but if you contribute the maximum to your RRSP, that would be an additional 18%. This means that a person should save a total of 28% plus the insurance expenses. I believe most people would find it difficult to save that big a percentage. This is where the help of a money coach could become useful. (Contact me if you need help)

To buy or to rent a house? The answer is: “It depends.” It depends on so many variables. Roy discusses several scenarios in which it would be better to buy a house and a few more scenarios in which it would be best to rent a house. Hopefully, one of these scenarios applies to your situation or if not, that the conversation helps you determine whether you would be better off owning or renting.

How to be frugal. Roy didn’t put too much emphasis on being frugal, as long as all the other objectives are being met. Nevertheless Roy encourages penny pinching, looking for specials, discounts and other techniques to spend less. He tells us that one dollar saved is two dollars earned. The reason is that when you earn money, your money has to go through so many deductions before it gets to your pocket, deductions such as income tax, Social Security, Pension plans, union dues, and so on. But, when you save a dollar, the savings is all yours. You are not taxed when you find great deals.

Saving money on taxes. In addition to having your retirement money in RRSPs, Roy suggests seeking the help of a professional accountant to educate you. At the same time, Roy suggests to trying to buy tax related books so that you can always be aware of the latest tax deduction and credits. He claims that you will be well compensated for the time invested reading about the tax system.  It is my belief that anyone who is interested in personal finance, should try to do their own income taxes. When you do your own income taxes, you get a better understanding of your tax situation, and every year you can make improvement which will optimize your tax situation.

Registered Education Savings Plan (RESP). Roy did not speak about RESPs for the education of children. The reason is that the book was written in 1989 and RESPs was created in 1998. I find RESPs to be an important part of personal finance. One of the people he was advising (David) was planning to have a family. The scene was propitious to talk about RESPs. RESPs are registered savings plans for education. The major advantage of an RESP is that the savings grow exempt from taxes, and in addition, the government of Canada contributes to the account up to $500 per year through the Canada Education Savings Grant.

Tax Free Savings Account. Another important tool for saving and reducing taxes are TFSA. As the name says it, it is a savings account (or investment account) where the interest, dividends or capital gains are 100% tax free. The TFSA  came into effect January 2009.

This book was easy to read. The language was straightforward and the dialogue was easy to follow. My only reservation is that the book was first published in 1989 ( 26 years ago ) and some of the material seems outdated. Nevertheless, I recommend reading this book. Your time will be well spent and if you apply most of the lessons you will be as wealthy as the wealthy barber.

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