Learn to be uncomfortable, because it doesn’t get easier

Ok, so the title isn’t super optimistic, but if you’re a regular reader you know I sometimes like to venture onto darker topics, like that time I shared that planning is somewhat futile because something will inevitably go wrong. Now I need to make a similar confession about my tendency to catastrophize life: I worry about people that think they will be able to save “later”.

I think this might be most people, it’s certainly most university students. They’re going to save after they graduate, after they find a job, after they get promoted, whatever. They make a lot of excuses — but they’re perfectly valid excuses because money IS tight! Also, I think when you’re a student and you have no income, you think about money differently. It’s time for me to share a secret:

I saved my student loans.

I did. When I received my student loan money, I divided it up over the months of the academic year, and then I saved a portion just like I was earning an income. It’s not a coincidence that my first mutual fund was purchased the first year I received financial aid. I’ve been dropping $100/mo into mutual funds since 2009 — even though I was living on student loans.

I actually think I read somewhere that it’s illegal to invest your student loan income, but I was also tutoring or babysitting part-time so technically I would say I was living off my student loans and saving & investing my side income. I don’t break the law, you know.

By the time I graduated, I had both my student loan debt and line of credit debt — but I also had around $10,000 in the bank. I don’t think many people do it the way I did. They just spend their entire student loan cheque, and they don’t put any aside for emergencies or wealth building. You don’t have to do that, you can do it differently like I did. But people always claim they’re going to save later because now is just a bad time.

First they can’t save during university, because all their money goes to tuition and living expenses.

Then they can’t save after, because they have to pay their student loans and make their car payment.

When their 30′s arrive, they can’t save because there are children to take care of.

In their 40′s, they have to send those children to university.

In their 50′s, maybe they’re wishing they had planned it a little better because retirement is getting awfully close. Maybe they would have even liked to retire now but can’t because they just started to save!

Fact: it’s always a bad time, it will never be “easy”. You will always have financial demands, and money will always feel tight. Saving takes so much discipline, it’s important to make it a habit sooner rather than later. Putting $100 a month in savings during my last years of undergrad was excruciating, but because I did it, $100 just feels normal now. It let me push myself to save more because I eventually got used to $200, then $300, etc. Right now it’s still hard to save — I have a huge student loan debt and the only thing that outpaces it is my want list. It’s uncomfortable, money is tight, and I definitely think it will be “easier” later. But then I remember how being uncomfortable made me $10,000 richer and I suck it up.

I love ING because I love money

I’ve been banking with ING for nearly 3 years now. It’s a romance that I think has the strength to last a lifetime. Why? Because it has all the strengths of any successful relationship:

mutual love & respect, great communication, room to grow, and no qualms about money.

I signed up to be an Orange Ambassador on ING’s Facebook page a few months ago. The week I got back from my work trip, I found a pleasant surprise in my mailbox: free swag! Not only am I an Orange Ambassador, but I’m one with a nifty orange travel mug and a lunch bag. I love these things because like any smart saver, I know that bringing in your own mug to Starbucks gets you a discount on your beverage and packing your lunch for work is way better for your wallet than buying from the food court every day.

Now I think I even have a bag of coffee in the mail, thanks to a kind exchange with @SuperStarSaver.

But truthfully I sung the praises of ING long before they started giving me free stuff. This is because long before ING sent me tools for my lunch kit, they gave me something I like even more: free money.

When I first opened a savings account with ING, the interest rate was 4% (I miss those days!). Even now that the markets have taken a beating and my interest rate is only 1.5%, it’s still way higher than what traditional banks offer. After saving up $1000 in it, I took my first baby steps into investing and bought some StreetSaver mutual funds and have been contributing monthly ever since. Not long after opening these accounts, the Tax-Free Savings Account was introduced in Canada, so I also opened one of those with ING. As faithful readers know, this is where I keep my Emergency Fund (which even sporadic readers know is the savings I insist upon the most), my DayZero Fund. It’s also where I save for vacations and put a few dollars in towards the future purchase of a car or a downpayment on a home. Last year, I even started an RRSP with ING. My future is in this banks hands! (because I trust them with it). A few GICs along the way, and I’ve basically taken advantage of every service ING offers except a mortgage — and frankly, that’s just a matter of time!

How much has ING paid me in interest and dividends on my investments? Over $300. I’ve also earned $100 for referring others. Which, by the way brings me to an important point: if you would like to bank with ING, use my referral code when you open an account with at least $100, and we’ll both get $25…

How much has my other bank paid me? Maybe fifteen cents.

When ING introduced the THRiVE checking account, I naturally signed up for that as well. And who wouldn’t? With no fees, interest earned on your balance, online bill pay, and your first set of cheques free, I’m surprised anyone with grade school math abilities can say no. Furthermore, an agreement with HSBC means I can withdraw and deposit money from my ING accounts at local HSBC branches and lucky me, there’s one very close to my house!

ING, I love you — and I never expected to say that about a bank.

Confession: I don’t really budget

Maybe some people will find this to be a surprise, since I shared my 2011 Spending Plan last month, but I actually don’t budget my income in any semblance of a detailed fashion.

I pay my rent, my cellphone bill, my automated savings, whatever is on the credit card, and that’s it. If there’s money left over, I make a decision to spend it or to save it, but without any real loyalty to either. I usually hover somewhere in the middle — which I why almost every spending recap shows equal spending & saving.

I do not set limits on food, clothes, or entertainment. Nearly everything on that Spending Plan was a total stab in the dark. I merely took guesses for what “felt” right and put that in, but I don’t actually know if my income is enough or too much for that plan because I never did the math. I have no idea what I’ll earn this year, and I never subtracted those totals I made from so much as an intelligent guess of my annual income. In short, I was just making shit up that sounded good to me, but I have no idea if it will actually work.

Does that make me a bad PF blogger?

Sometimes I read people’s blogs and they do zero-based budgeting where they account for every single penny — they have a plan for how every dollar they earn is going to be spent, even before their paycheque is deposited in their bank account. While I think this is a good practice, I have no interest in doing it for myself. Why? To tell you the truth, planning that way makes my spending feel really restricted.

Yeah, I said it: budgeting makes me feel deprived.

When I start itemizing everything and attaching costs, I start to think that I don’t earn enough. A concrete figure looks small and inadequate, absolutely impossible to work with — whereas seeing a few hundred dollars sitting in my chequing account after all my bills are cleared makes me feel free to buy whatever I want. To be honest, I wouldn’t even know where all my cash was going if I didn’t feel semi-obligated to make those pie charts for my monthly spending recap. Even those are merely an account of where the money was spent, they are never a plan or the rule (which might be why they’re all so different).

I don’t think you need to plan or account for every single cent to be financially healthy.

I think tracking your spending, setting financial goals, and committing to being debt free are important, but I can’t plan every penny I’m going to spend in advance — I just do too much on a whim! So while I think everyone needs to live within their means, I remain sympathetic to those that hate to budget.

Budgeting kind of sucks!

How to buy big

I was talking about credit cards with some friends, when one of them remarked that he agreed it was important to never spend more on credit than you could afford to pay off — except for big purchases, like a vacation or a computer. I asked why those were the exception and his reply was:

“What else am I going to do? Just save up $1800?”

Well.. yeah.

I really don’t think it’s a different process to buy an $1800 object than it is to buy an $18 one, the former just requires you work longer. I think the problem with credit is that it’s made instant gratification so accessible, we justify using it to buy things that we’d otherwise have to wait for. This is really bad because things are more expensive when you buy them in credit. They’re actually more expensive twice over: first, because of the interest on the purchase you have to pay to the credit card company, but also because of the interest you lose by not saving the money first. The difference can be almost negligible but the loss gets humongous as you buy bigger things.

For example, I also want a computer so let’s say my friend & I each decide to buy the same one, except he puts it on his credit card pays it off for 8 months, whereas I save up for the same amount of time. In addition to paying $100 less than him for not racking up any interest, my savings earns $14 in my TFSA. This is the end result:

Not a huge difference, but one nonetheless. In the savings example, if I had been willing to spring an extra $40, I could have bought the computer a month earlier, whereas paying off the debt a month early would require an extra $170. Even on small-big purchases saving up for it can make a huge difference.

Now imagine we went ahead and bought really cool Mini Coopers at $25,000 each, except friend needs to have his right now and I’m cool with waiting until age 30 five years from now, because I’m really loyal to public transit. He signs up for a 5 year car loan and pays $492 per month, I sock away the same amount for only four years. Here are the results:


Look at that! Not only am I done paying off my car in FOUR years to friend’s five, I paid over $4000 less than him!

I highlighted the monthly payment and total cost in each of those four tables because I think it’s really important to see that we are paying identical amounts each month, but the route we take produces radically different end products. The amounts aside, I think the really important result here is the time you gain by saving instead of borrowing. Friend is stuck with a $492/mo payment for a whole other year, whereas I have freed up $492/mo in the same year #5 that I can now use towards something else like a vacation — or even the computer in the example above ;)

Whenever I bring up these figures, many people accuse me of being unrealistic. I think it’s sad that it’s become normal to carry a car loan for 5 years, but weird to save up to buy a car for 4 years. The latter is obviously much more financially sound. I understand why it can be inconvenient to save up for a car for years, but I know it’s not impossible.

I’m currently without a vehicle, but I don’t think I always will be. I recognize that car ownership might be a necessity in a few years, and I’m preparing accordingly. This is why I distinctly label my largest savings as my “Car/House Fund”. I really want to be able to buy BOTH a car and put a large down-payment on a home, but I also know that’s asking a lot of my little income so I let my two big goals share the balance. This way, if I need a car in one or two or five years, there’s a hefty sum ready to use. Likewise, though I hope to never touch my retirement savings until retirement, the Home Buyer’s Plan will let me withdraw from my RRSP for a down-payment on a home. This helps motivate me to contribute to the account, even though it feels like I have eons to grow old.

If you know you’re going to need a computer, a vacation, a car, a house, a comfortable retirement, etc., then go out of your way to save for it. Simple planning and the discipline to put the money aside instead of buying on credit will net you tens of thousands over your lifetime.

Net Worth

I really love NetWorthIQ.com. I started using it in May 2010 to track my net worth, and I’ve found it a useful tool to track my progress and compare myself to others. Sadly, comparing myself to others sometimes sucks. Here’s a screen shot of where I stand compared to the rest of the site, as well as my peers that have the same education (Bachelor’s degree), income, occupation (student) and age (25-29):

FML!

Stupid student loans, they kill me.

Firstly, ignore that big “All” column — it’s for the whole site, which has a decent sized population of old rich millionaires and probably some fakers wanting to feel rich, even if it is only on their computer screen.

Anyway, actually the biggest problem here is my age, which I think is the most relevant factor (the comparison for income and education again is against all members of the website). I’m lumped into the 25-29 year old group, and some of those bastards are seriously skewing the average. Just kidding.. sort of. I am expecting that four years from now when I’m on the upper end of the age bracket, I’ll boast more impressive stats — ideally well above average!

So exploring this comparison further, I learned…

I’m really good at: saving cash! I have larger cash assets than many of my peers in my income range & occupation.

I’m really bad at: saving for retirement! Believe or not, many of my peers are on the ball and have way more retirement assets than I do.

I wanted to post this entry so I have something to look back at to see how far I’ve come in a year or two or more from now. NetworthIQ always gives you a nice little line graph to track your progress monthly, but I am interested to see what I improve compared to my peers. Seeing the comparison helps me focus: should I be saving more for retirement? Should I stop ignoring those student loans?

I think it’s very important to track your net worth. It’s really the only indicator of financial health. Some people think they are well off because they have a large home or expensive cars, but if you’re carrying more debt than assets (ahem), you shouldn’t get too comfortable. It’s very important to me to achieve a high net worth, particularly at a young age. It might seem crazy right now, but I do expect to see myself near or above the six-figure mark in personal wealth by age 30 — and you’ll have my blog to watch me do it ;)