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12 Money Hacks You Must Learn Now To Avoid Regret In 20 Years

12 Money Hacks You Must Learn Now To Avoid Regret In 20 Years

If you’re a young professional, the lifestyle of your 40s will be dictated by your choices in the coming years, and even in the coming months. They say 40 is the new 30, but for that to happen, you need to plan financially first.

Whether you want to build up passive income, get your dream job, or become immortal, you can’t miss the money hacks below.

1. Consider Moving While You’re Young

When you’re young, moving is much easier than once you’re older and have a family or elderly parents to take care of. If you limit yourself to jobs nearby, even if you’re in a big city, you’ll likely be missing out on your best career opportunities. Your first few jobs lay the groundwork for your long-term earning potential. When you are single, always remember that you have the power of flexibility. If you try out a high-paying job elsewhere, you can always move back if you can’t stand it.

2. If You Buy Stocks, Then Buy Ones That Pay A Dividend

According to The Motley Fool, stocks that pay dividends have historically outperformed other similar investments, with less instability. In addition, they pay out real cash. This makes them easier to keep during rough economic times. In addition, the dividend payouts of a good stock can increase as years go by.

If you put $3,000 into a stock with a 4% dividend yield, you’ll get $10 every month, in cash. That’s a free meal every month, by doing absolutely nothing! To encourage saving, try to go from earning 1 free meal a month to 2 meals per month, and keep going from there.

You can also look into preferred stock, which is more complex but can pay out much higher returns relatively safely.

Quick tips in regards to dividend paying stocks:

  1. Dividend payments can be cut, so look for big-name stocks that have a history of reliable dividend payments, and of increasing those payments as years go by. Ensure that they were paying dividends during the 2008 Financial Crisis.
  2. Do not look for high yields as a beginner. Between 2-4.5% is typical for major stocks. Because dividends pay “X cents per share,” if a company was mismanaged and it’s share price has dropped, the dividend “yield” or % return will look high. Avoid this rookie mistake.
  3. If love tech stocks, then 2 examples of companies that pay dividends include Intel (INTC) and Microsoft (MSFT). However, in my experience, investing in tech stocks is pretty risky.
  4. This recent article in MarketWatch showcases some interesting dividend stock ideas.
  5. Remember, I’m not a professional financial advisor. So, always do your research before you invest, and talk to a financial adviser first.

3. Wait For A Financial Downturn, Then Buy Stocks

We all know the mantra: “Buy low, sell high.” When Wall Street falls, it’s the perfect time to consider buying stocks. So, keep some cash ready for the next downturn. You can keep it in flexible investments like GICs, that can be taken out at any time.

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4. Do Not Rely On Stocks To Save For Emergencies

The most likely time for you to get laid off is when the economy is down. This will also be when your stocks are worth the least.

When the economy is down, family and friends may be in need. You may need extra cash, but there will be few side jobs available. Banks will be hesitant to loan people money. On top of this, your stocks will be worth much, much less at this time. If your emergency savings are in stocks, you will be forced to sell them at this low point.

In my opinion, this is one reason why the average person tends to make less money in the stock market than we are led to believe: they buy when they have savings and stocks are high. When the economy falls, they are forced to sell at a low point.

5. Buy The Place You Live In

Real estate is usually the best investment you can make. In my opinion, it’s a much better option than buying stock. While purchasing real estate for investment purposes is hard, buying your own home or condo is much safer, and often has tax advantages.

When paying off a mortgage, a significant amount of the monthly payment goes toward paying down your own loan each month (the “principle”). This increases your net worth by hundreds of dollars every month. (Rather than burning your money by paying rent.)

Keep this in mind: While there are fluctuations in the real estate market, the cost of rent goes up steadily.

When you buy a place for yourself, typically it will be a bit more expensive than renting, at first. However, over the next 3-15 years, the rent will go up, and if you don’t own a property, you’ll be finding it harder to make your rent payment. This is especially true in a big city like Toronto.

Home ownership has other benefits as well. For example, you can get a line of credit backed by the equity in your house, which has a very low rate. Be extremely careful with these since major banks love to offer new homeowners low-interest lines of credit in hopes that they accumulate debt that’s easy to collect because you have a hard asset. With such a low interest rate, it’s better to keep your line of credit as small as possible, since it’s tempting to dip in.

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Still have doubts about buying real estate versus stocks? A retired saleperson once told me, “All of my friends who invested in the stock market instead of buying real estate are in serious trouble.” I think that sums it up.

6. Stay In School Longer

After every graduation, there’s a temptation to finally enter the workforce. However, those who stay in school longer by taking a practical post-graduate degree end up with higher starting salaries. They are also more likely to be chosen for promotions in the long run. While they may be racking up student loans for a few more years, the long-term cumulative effect puts them ahead.

If you’ve dreamed of a career that requires a graduate degree and you’ve tried all other options for low-cost loans and tuition subsidies, find a bank that will lend you a student loan. Also, make sure the college program offers a co-op or internship. Graduating with lots of debt and no industry experience is a recipe for disaster.

Loans are awful, but leading a life in a career that you don’t want is even worse.

7. Negotiate Your Initial Salary

Most young professionals who get an initial offer don’t negotiate because they are excited or scared. It’s important to do your research by checking with friends, recruiters, and PayScale.com to see what you should realistically get as a starting salary.

Here’s a more detailed guide from The Muse which has some good tips. In my experience, the best bet is to find the salary that you think is reasonable and stick to your guns. If you get a much lower offer, I’d recommend using a printout of PayScale.com to demonstrate the expected market rate. However, be prepared for the possibility that they may reject you.

If you get an acceptable offer, typically there’s still room to negotiate. Asking for a huge increase for your first job may be unwise, but asking for an additional $1,000-$3,000 is pretty reasonable. The accumulating effects of that small increase over 20 years adds up a lot. It could be a big part of your down payment on a family home.

More importantly, future raises, pension benefits, and bonuses are often based on a percentage of your current pay. Even a small difference at the start of your career can snowball over time into a big change in lifestyle.

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8. Get Insurance

Insurance is extremely cheap when you’re young, but extremely expensive once you get older. Young people feel invincible. However, the instant they get a bad diagnosis it becomes too late to lock in a good price for things like life insurance and health insurance. Life insurance for a young and healthy person is extremely cheap.

Want immortality? You can even use life insurance to cryogenically “freeze” yourself until they find a cure for your disease (and freezing).

9. Eliminate Or Reduce Expensive Habits

Your daily cup of java or a smoking habit can have a huge consequence on your long-term finances, as well as your health. Make a list of all the expensive habits you have and try to eliminate those that are unnecessary, one at time.

Think of the free money you’d get by putting it into a stock with a monthly dividend instead.

10. Be Careful With How Much You Spend On A Car

60 seconds after you buy a new car, it loses 9% of it’s value, according to Edmunds.com. After just one year, it loses 19% of it’s value. However, the value drops only 12% by the next year. Furthermore, the drop is 9% between years 4 and 5. In other words, used cars maintain their market value better.

Dealers try to tempt buyers with low monthly lease rates on new vehicles. Avoid this at all costs. Even after years of payments, you’ll need to return the leased car unless you pay the remaining balance, which will seem insane 4 years later. If you do not have the cash, it’s better to get a loan or lease for a lower-cost used car. Aim to pay it off in a year or two. Later in life, you’ll have no monthly payments at all and you can sell that car for a significant portion of its value.

Financial Samurai recommends that the purchase price of your car should be 10% of your salary. That could mean you’re buying a car that will require a lot of maintenance. I personally think that 10%-20% is more realistic. From what I’ve seen, used Toyotas and Hondas can last over ten years with little maintenance.

In terms of buying a luxury vehicle, the costs are often a lot higher than anticipated. Here are some unseen costs of luxury cars:

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  • The maintenance and repairs costs on a luxury vehicle are much higher.
  • They often require premium fuel rather than standard fuel.
  • The engines themselves are typically more powerful and may get less mileage.
  • Once the car is old and loses it’s appeal, you’ll still be paying these overhead costs.

It could be wiser to use that money for something else, like real estate, which may appreciate in value rather than lose value.

If you hold off from spending $10,000 on your car, and put it into an investment that generates 6% compounded per year, you’ll have $32,071.35 in 20 years, or a $22,071.35 profit. Still worse will be the extra costs for maintenance, gas and repairs, which will average out to hundreds of dollars per month.

11. Maximize “Matching” Programs

Read the details of your employer’s benefits package. Often, there are offers where an employer will match contributions to things such as a pension. Do your best to max these out, since you’re immediately doubling your money.

In many cases, you can get low-interest loans to maximize the contributions. Because you’re doubling your money, this is one case where taking a small loan can be beneficial.

12. Contribute To IRAs And RRSPs

IRAs and RRSPs (the Canadian version) are tax-deductible accounts. Here’s an example of how it works:

  • Suppose you make $40,000 per year.
  • Suppose taxes are 25%.
  • Therefore, your after-tax income would normally be $30,0000.
  • However, suppose you contribute $10,000 into your IRA or RRSP.
  • That $10,000 contribution is deducted from your taxable salary amount of $40,000.
  • Your new “taxable” salary is $30,000. At a 25% tax rate, $30,000 x 25% = $7,500 in taxes.
  • So, by contributing to your tax-deductible account, you get back $2,500 in taxes ($10,000-$7,500).

Once money is in that retirement account, there’s no taxes on any investments you make. Any dividends inside that account, or capital gains from stocks going up, are completely tax free for decades, until you retire. Once you retire, you can withdraw the money from the retirement account. You’ll pay income tax on any money you use from those accounts.Because the money isn’t accessible until 65, it’s okay to start small (assuming there’s no employer matching program). Small monthly automated deposits are a great way to save.

However, assuming your employer’s contribution plan allows it, you can withdraw $10,000 of your IRA (or $25,000 of your RRSP) to buy your first home. For this reason, it actually makes a lot of sense to use these accounts to save for your first home. Canadians should also look into opening up a TFSA, which allows significant tax-free savings each year.

Final Thoughts

When you’re young, it’s hard to make decisions that you know will affect your life later on. It;s important to remember that this decision making process is a privilege of the society we live in. There’s no perfect answer or approach. The important thing is that you make a formal plan soon, based on the best facts you’ve got and with a little bit of gut instinct.

Featured photo credit: Frankie Leon via flickr.com

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Last Updated on August 20, 2019

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

Finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. And that’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

In this article, we will explore ways on how to set financial goals and then actually meet them with ease.

5 Steps to Set Financial Goals

Though setting financial goals might seem to be a daunting task but if one has the will and clarity of thought, it is rather easy. Try using these steps:

1. Be Clear About the Objectives

Any goal (let alone financial) without a clear objective is nothing more than a pipe dream. And this couldn’t be more true for financial matters.

It is often said that savings is nothing but deferred consumption. Therefore if you are saving today, then you should be crystal clear about what it is for. It could be anything like kid’s education, retirement, marriage, that dream vacation, fancy car etc.

Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives, however small they may be, that you foresee in the future and put a value to it.

2. Keep Them Realistic

It’s good to be an optimistic person but being a pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going out of the line will definitely hurt your chances of achieving them.

It’s important that you keep your goals realistic in nature for it will help you stay the course and keep you motivated throughout the journey.

3. Account for Inflation

Ronald Reagan once said – “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman”. And this quote sums up the best what inflation could do your financial goals.

Therefore account for inflation whenever you are putting a monetary value to a financial objective that is far away in the future.

For example, if one of your financial goal is your son’s college education, which is 15 years hence, then inflation would increase the monetary burden by more than 50% if inflation is mere 3%. So always account for inflation.

4. Short Term vs Long Term

Just like every calorie is not the same, the approach towards achieving every financial goal will not be the same. It is important to bifurcate goals in short term and long term.

As a rule of thumb, any financial goal, which is due in next 3 years should be termed as short term goal. Any longer duration goals are to be classified as long term goals. This bifurcation of goals into short term vs long term will help in choosing the right investment instrument to achieve them.

More on this later when we talk about how to achieve financial goals.

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5. To Each to His Own

The journey of setting financial goals is an individualistic affair i.e. your goals are your own goals and are determined by your want to achieve them. A lot of times we get on the bandwagon of goal setting only to realize later on that it was not meant for us.

It is important that your goals are actually your goals and not inspired by someone else. Take a hard look at this step at all the goals you’ve set for after this step, you will be on the way to achieve them.

By now, you would be ready with your financial goals, now it’s time to go all out and achieve them.

11 Ways to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a 2 step process –

  • Ensuring healthy savings
  • Making smart investments

You will need to save enough; and invest those savings wisely so that they grow over a period of time to help you achieve goals. So let’s get down to ensuring healthy savings.

Ensuring Healthy Savings

Self realization is the best form of realisation and unless you decide what your current financial position is, you aren’t heading anywhere.

This is the focal point from where you start your journey of achieving financial goals.

1. Track Expenses

The first and the foremost thing to be done is to track your monthly expenses. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you would be surprised to see how small expenses add up to a sizeable amount.

Also categorize those expenses into different bucket so that you know which bucket is eating the most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pump up your savings rate.

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classical mistake which almost everyone of us do. We pay ourselves last!

Ideally, this should be planned upside down. We should be paying ourselves first and then to the world i.e. we should be taking out the planned saving amount first and then manage all the expenses from the rest.

The best way to actually implement is to put the savings on automatic mode i.e. money flowing automatically into different financial instruments (for example – mutual funds, retirement corpus etc) every month.

Taking the automatic route will make us lose control of our money and hence will compel us to manage in what’s left with us thereby increasing the savings rate.

3. Make a Plan and Vow to Stick with It

Budgeting is the best to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be made.

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Nowadays, several money management apps and wallets can help you do this automatically. It’s easy and who knows, you may just end up doing what people fail to do.

At first, you may not be able to stick to your plans completely but don’t let that become a reason why you stop budgeting entirely.

Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

4. Rise Again Even If You Fall

Let’s be realistic. It’s not like the world will come to an end if you made one mistake. This isn’t called leniency but discipline.

If you fail to meet your budget for a month, don’t give up the entire effort just like that. Instead, start again.

Remember that flexible plans are the most realistic plans. So go forward and try to follow your financial goals as planned but if for some reason, the plan gets out of hand for you, do not give up on it just yet. This has a lot to do with your psychology rather than any material commitment.

All you have to do is to stay on the road and vow to stay on it, no matter how much you fall down.

5. Make Savings a Habit and Not a Goal

In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

Make Savings a habit rather than a goal. While it might seem to be counter intuitive to many but there are some deft ways of doing it. For example:

Always eat out (if at all) during weekdays rather than weekends. Usually weekends are expensive. Make it a habit and you would in turn be saving a great deal.

If you are travelling buff, try to travel during off season. Your outlay will be much less.

If you go out for shopping, always look out for coupons and see where can you get the best deal.

So the key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice which will be harder to sustain over a period of time.

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6. Talk About It

Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission. And it would be rather easy to lose the grip over your discipline.

Therefore in order to stay the course, it is advisable that you keep yourself surrounded with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

7. Maintain a Journal

For some people, writing helps a great deal in making sure that they achieve what they plan.

So if you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

Use this journal to write down all essential points such as your short term, mid term and long term goals, your current sources of income, your regular expenses which you are aware of and any committed expenses which are of recurring nature.

When you have a written commitment on paper, you are going to feel more energised to follow the plan and stick to it. Moreover, it is going to be a lot more easier for you to follow you and track your progress.

At this point, you should be ready with your financial goals and would be doing brilliantly with savings; now it’s time to talk about the big daddy – Investments.

Making Smart Investments

Savings by themselves don’t take anyone too far. However savings when invested wisely can do wonders and we are at that stage where we will talk about making smart investments.

8. Consult a Financial Advisor

Investments doesn’t come naturally to most of us therefore rather than dabbling with it ourselves, it is wise to consult a financial advisor.

Talk to him/her about your financial goals and savings and then seek advice for the best investment instruments to achieve your goals.

9. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about them.

Just like “no one is born a criminal”, no investment instrument is bad or good. It is the application of that instrument that makes all the difference.

Do you remember we talked about bifurcating financial goals in short term and long term?

It is here where that classification will help.

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So as a general rule, for all your short term financial goals, choose an investment instrument that has debt nature for example fixed deposits, debt mutual funds etc. The reason for going for debt instruments is that chances of capital loss is less as compared to equity instruments.

10. Compounding Is the Eighth Wonder

Einstein once remarked about compounding,

Compound Interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.

So make friends with this wonder kid. And sooner you become friends with it, quicker you will reach closer to your financial goals.

Start investing early so that time is on your side to help you bear the fruits of compounding.

11. Measure, Measure, Measure

All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments; taking stock of how our investments are doing.

If there is one single step where everything (so far) can go wrong, it is at this step – Measuring the Progress.

If we don’t measure the progress timely, then we would be shooting in the dark. We wouldn’t know if our saving rate is appropriate or not; whether financial advisor is doing a decent job; whether we are moving closer to our target or not.

Do measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

The Bottom Line

This completes the list of tips for you to set financial goals and actually achieve them with not so great difficulty.

As you can see, all it requires is discipline. But guess that’s the most difficult part!

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Featured photo credit: rawpixel via unsplash.com

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