Over the course of the pandemic I became obsessive over areas of my life that I could control. It is not a stretch of the imagination to realize that the very lack of control I had with the chaos around me drove me to find meaning in previously unexplored hideaways. After some false starts, I found my focus: my finances. I was amazed by the amount of money I was saving on things like takeout, commuting, and frivolous spending that happened during a night out with friends — perhaps the one upside of our current quarantine times.
After my realization of my growing nest egg, I decided to deep-dive and learn about what I could be doing with my money. I watched videos, and read books and articles from financial giants, like Stephan Graham, Dave Ramsey, Mr. Money Moustache, to name a few (trust me, there were many more).
Once I parsed through the initial data dump, I became laser-focused in a few key areas of finance that I had not known about before.
For context, I had an educational background in business, so I assumed that my own financial knowledge was a bit higher than perhaps the average person. Frankly, I realized that I was incredibly lacking in my understanding of alternative strategic approaches and methodologies, which was a mindset I never thought to apply to my bank account
As a disclaimer, what I’d like to share with you in this article is just the tip of the iceberg: a brief list of highlighted financial strategies I learned during lockdown. To be clear, I am not masquerading as your online financial advisor, but I’d like to hopefully encourage you to develop a different mindset when you take a look at your savings, and maybe even kick-start your own financial learning.
Learning #1: The Reality of “Hoarding” Money in a Savings Account
In Canada, the rate of inflation is 2.27% per year, and in the US, it’s roughly 3.15%. In contrast, the average savings bank account pays you only 0.05% for having your money sit. This means year-over-year you’re losing at least 2.2% per year by having your money just sit there, not working for you. Now, many of us are taught the value of saving, and saving is important, but experts say that you shouldn’t have more than $10,000 cash lying dormant in your savings account.
Well, Marcelle, what am I supposed to do with all that extra cash I have?
What is the bare minimum you can do to keep from losing this cash? Three-words: High-interest Savings Account. High-interest savings accounts are a great way to get paid by banks to keep your money in their institution. You might be wondering “Why don’t banks set you up with a high-savings interest account by default?” I continue to wonder the same.
Typically, you need to call the bank or dig a little bit to find the high-interest savings account that they offer. I used to be able to get a 3–5% return from my bank, but those days have since passed and I’ll be lucky to get a 2.5% return, beating that inflation amount by only .23%.
Some of the best high-interest savings accounts that I’ve seen are:
If you’re willing to be a little bit riskier (with higher yields), you can look to robo-advisors like Questrade, and Wealthsimple in Canada, or RobinHood, EarlyBird (for your kids) and Acorns in the US. By choosing a conservative portfolio, you can expect to see average returns of anywhere from 2–4% with a lower amount of risk. The benefit of a robo-advisor is that it’s a “set it and forget it” approach. The system will automatically invest, pay out dividends and reinvest those dividends for you, making it incredibly simple to grow your wealth slowly over time.
Regardless of what you decide, unless you’re about to make a large purchase and need the liquid cash, make moves to make sure your money isn’t deteriorating because of inflation.
Learning #2: You Can Retire Early and Live off Your Investments with the [F.I.R.E] Movement; Financial Independence, Retire Early
You’ve seen those 30-year-old YouTubers that claim they’ve found the secret to retiring at the age of 30, right? No, just me? Frankly, I always thought this was a scam and they were just trying to sell me their get-rich-quick course that was of no interest to me. It wasn’t until I saw the video by Ryan Scriber called HOW TO RETIRE AT AGE 30 (& Live Off Your Investments). He essentially lays out the simple mathematics that make retiring within 10 years achievable. Picture this: if you could save roughly 60–70% of your income and invest that money into the stock market with an expected yield of 7% year over year, in 10 years you’d be able to retire and live off a 4% withdrawal of your returns every year.
How do we do this? Here are the steps:
Step 1: Figure out how much you need to live off of per month.
Say I need $2000 to live off per month. This is my net amount. Assuming the average Canadian tax rate of 33%, to figure out what you need to actually save:
2000 / .66 = 3,030.30 < — — what I need to live off each month
Step 2: Define what this means annually
3,030.30 X 12 = 36363.64
Step 3: Define how much I need at the end of 10 years to live off the interest (4%)
36363.64 / .04 = $909090.9
Step 4: Back out how much you need to be saving each year to achieve this.
This means solving for the recurring payments of the future value of a 10-year annuity. Here is the formula for the future value of investing $1 per year over 10-years. Keep in mind we’re assuming 7% interest and a 10-year horizon, but this formula works with whatever combination you wish to test.
(1-(1.07)¹⁰)/(1–1.07) = 13.81645
Now all we need to do is take our total amount from step 3 and divide it by this result and this is how much we need to invest per year.
909090.9 / 13.82 = 65797.76
This means I need to be saving 65797.76 per year in order to achieve F.I.R.E.
Pretty cool huh?
Note from the writer; I think this is a really cool framework, and there’s a pretty nifty calculator. I would say be wary of this framework as it doesn’t account for accidentals or if the market took massive dips.
Learning #3: Investing and Savings is a Time-Game, So Start Early
When I graduated from university, I had managed to save up a significant chunk of money by working full-time, while also attending classes. My parents taught me to put my money into safe investments like GICs. I was so excited to start investing my money and make that sweet, sweet interest. Boy, was I upset when I saw my return: a measly $252 for putting my hard-earned cash into a locked-in investment. This got me thinking about how long I’d have to put my money into this safe investment to see those big bucks that I was told I’d receive if I only invested my money.
Fast-forward to the present, I work at a fin-tech start-up that focuses on building slow, sustainable, wealth for kids. The app is meant to be a vehicle for millennial parents to learn and really understand the value of long-term compounding interest. Why am I shamelessly plugging the company I work for? Because it made me realize the power of compounding interest in the long term, and how important it is to start as early as you can.
Let’s break this down using the formula we outlined in F.I.R.E above to really show the value of compounding:
Scenario: You’re a parent, you know that you will need $20,000 to send your child off to college/university. You want to know how much you’ll need to save per month in order to reach your goal.
(1-(1.07)¹⁸)/(1–1.07) = 33.99, ~ 34
33.99 is the value of $1 invested each year over the course of 18-years at assumed 7% interest. We know that we need $20,000 at the end of 18 years, so to back out the amount that we should be saving each year:
20,000 / 34 = 588.252
Now if we convert that into a monthly amount:
588.252 / 12 = 49.021
This means that we would have to deposit approximately $50 a month to achieve our $20,000 goal in 18 years.
But what does that $50 a month actually equate to? Let’s check:
49.021 * 12 * 18 = 10588.54
Congratulations, university will now only cost $10,588.54 instead of $20,000. That’s the value of compounding interest and starting to invest early. Starting early can also make it easier to weather the storm in times of stock market dip. In order to set yourself up for financial freedom, start early.
I might be a bit biased, but EarlyBird is a great way to start investing for your children early and create meaningful video memories that your kids can watch and enjoy when they’re older.
Learning #4: Investment Properties, another stream of income
One of the biggest areas of learning for me was surrounding investment properties and the benefits of having a portfolio that holds real estate that will yield a high return.
This section will be broken down into 3 parts:
- How to calculate if an investment property is worth it or not.
- Things you can write off on an Investment Property.
- Leveraging your home equity to purchase more properties.
How to Easily Vet if an Investment Property is Worth It
My favorite book for rental property investing is The Book on Property Investing by Brandon Turner. He lays out different strategies you can take when looking to be a property investor. One of the biggest takeaways was this basic equation he lays out to help you spot a good deal or a lemon.
Calculate Expected Cash Flow
Rental Income minus Monthly Expenses (ie. Taxes, Insurance, Utilities, Condo Fees, Lawn/Snow, Vacancy, Repairs, Capital Expenditures, Property Management, Mortgage) = Cash Flow Amount
Brandon lays out that you should be looking to get at the very least a $200 cash flow each month. If you can manage to get that $200 cash flow per month using this high-level equation, it means that this is a deal to look at more closely.
I do want to emphasize that this equation is not the holy grail, but it can help you when you’re trying to assess many properties at once.
Things you can write off on an Investment Property
I was very surprised by just how much you can write off on an investment property which might influence the equation outlined in the last section.
Here are a few of the things you can write off as business expenses at the end of the year:
- Property Taxes
- Condo Fees
- The portion of your mortgage that is interest
- Property Management
and on and on..
Now, one thing that I want to clearly outline is that this does not mean your inputs to that previous equation go to zero. This simply means that at the end of the year, you write these off as a business expense on your income, and it will be subtracted from your capital gains — meaning you’re still paying taxes on that remaining amount.
Leveraging your home equity to purchase more properties
You know sometimes when people tell you something and you think “that can’t be true, that’s too obvious, and I would have heard about it.” That is this point to me. I’m unsure how I didn’t know this.
If you currently have a property that you’ve been slowly paying off, that cash that you’ve put into the property is your equity. This means, when it comes time to sell your house, this is the chunk of change that you’re going to receive back from that sale. To get an idea of what your home could be worth, check out Properly.
But what if I told you that you didn’t have to wait to sell your home to utilize the equity you’ve accumulated? You can actually walk into the bank and ask to use that equity and put it towards another place. In fact, this is what many experienced property investors do. The benefit of this approach is that you spend little to no liquid cash to purchase an additional property, and you’re utilizing your immobile assets to make your equity work for you. The downside is that this will increase your monthly payments on the original property, and might even jack up your interest rate because of the additional risk that the lender is taking on. As long as we are maintaining that suggested $200 cash flow, this could be a great alternative source of funding!
I’m not suggesting that this is a route that everyone should take. To be frank, the thought of doing this stresses me out and doesn’t align with the level of risk I’m mentally prepared for. However, it is a shift in your mindset to think of equity as a tool, rather than just a paycheque down the road.
To Wrap it Up…
I hope you enjoyed this article in the way that it was intended: to open your mind to different ways that you can make your money work. I am by no means a financial expert, but I am constantly looking into new, alternative ways to make my money earn for me, rather than just sit and look pretty.
If you’re interested in this topic, I will be starting a series on my financial journey and will be sharing my thoughts and opinions on different articles.
If this is something you find interesting, I suggest you follow me on my Medium account. You can always send me an email with your questions, thoughts, suggestions or arguments to firstname.lastname@example.org or leave a comment on this article.