Category Archives: Investing

Windfall

It’s it wonderful when you get money you were not expecting?  A windfall where money almost seems to fall out of the sky into your hand.  It almost doesn’t seem the matter on how much it is or how you get it.  You still get that burst of excitement when you pick up that $5 bill on the ground or get a big bonus from your work.

Yet regardless of how you get the extra money just about everyone seems to have the same thought right after getting it: how do I spend this?  Oh, should I get a coffee with this money or perhaps some donuts (mmm, donuts so sweet and…what was I talking about? Oh right).  Which I do understand the reaction, but I should point out it isn’t a particularly healthy habit to have.

Why? Because you really should set some reasonable limits about investing some of your windfalls in life.  This isn’t to say you should always invest all of your windfalls, but rather consider investing most of them.  While I don’t have any particularly hard and fast rules about mine I do have some general rules of thumb regarding money that fall into my lap.

Rule #1 – If it is less than $20, do what ever you want with it.  This rule then allows me to not bother tracking small amounts of extra money.  Of course I could still invest the money, but I usually don’t for very small amounts.  I generally just put it in my wallet and send it on something that catches my eye later on.  I’m usually not in a rush to spend small amounts of found money.

Rule #2 – Celebrate your big windfalls (greater than $100).  I don’t know about you but I once won a colour contest and got like $75 as a prize and that was a BIG deal to a little kid.  So while I’ve adjusted the amount slightly upwards I still tend to celebrate windfalls.  Now the term celebrate usually means I either buy something small or do something fun to note the occasion.  My most recent one I picked up some beer ($14) on the way home and enjoyed a glass with my wife that evening.  That’s it.  Why? Because this allows me to get the buy something with unexpected money out of system and to note the occasion.

Rule #3 – Invest the vast majority of the money into your priorities in life.  Now your priorities change in life but windfalls can provide a nice boost to what ever you happen to be working for in life.  So if you are focusing on paying off the mortgage, then you make a lump sum payment.  Or if you are going back to school, then you put the money towards your tuition.  Or if you are saving for an early retirement, then you put that extra money in an investing account.  The point here is to move things along a bit faster than you expected and then you really do appreciate the extra help of the windfall.

Rule #4 – Do NOT depend on windfalls.  I used to have a job that I would get huge bonuses (I mean like in the range of $5000 to $12,000) ever quarter (if we met our targets). Yet I never lived off that bonus money.  The mortgage was paid and our groceries bought with our tiny base salary, because I never spent or investment a cent of my quarterly bonus until it was in my bank account.  Why?  Because you can’t depend on variable money…what happens when things beyond your control take that money away?  You end up borrowing money to keep  going and you are breaking one of the core rules of money: don’t spend more than you have.

So those are my guidelines for windfalls, how you handle bonuses, tax refunds or 50/50 draws winnings?

The Money Machine

“Have I got a deal for you?” He said with a glint in his eye. “This little machine will change your life.”  It was a small machine just bigger than his hand covered in gold paint with lots of gears.

“What is it?”

“Why it’s s money machine? It will produce a new dollar every three months forever.”

“Oh, that sound cool.  How much?”

“It’s only $100.”

“Pardon?  You want me to pay $100 for something that makes only $4 a year.  Why that would take like 25 years for me to get my money back.  Are you crazy?”

He frowns, “No, but with enough of these machines you won’t have to work.”

I frown and do the math in my head “Ya, if I buy like 10,000 of them. That would take like forever. No thanks.”

While the above story is a complete fabrication, it does point out something very key about people: they don’t like to wait.  Of course the real irony of it all is the money machine is real.  It just goes by another name called “investing.”

I suppose that is why so few people actively try to reach an early retirement, they aren’t willing to put in the effort into buying their money machines and keep them running.  Or they do buy one and then freak out when it fails for some reason and assume all other money machines are bad and should be avoided.  Goodness knows that I’ve had a few failures myself, but I keep buying.  Actually, most of them run just fine with little work required by yourself.

My personal money machines comes in two types: index funds and dividend paying stocks.  Neither takes that much time after I got them up and running.   The index funds are in our RRSP accounts in index exchange traded funds (ETF) take 15 minutes a year of work to keep up.

The dividend paying stocks are mostly in our TFSA accounts and after the initial research to buy the stock it really only takes me a few hours a year to skim the annual reports and do the occasionally adjustment (like sell one of my bad picks and buy something else).

Yet in the end, our investing has paid off.  It does take a LONG time and it will feel like you are going no where until you break the $100,000 barrier in investments but then it all gets better.  The compounding starts to work for you and you realize that after you have 100 money machines, it will buy the next one for you with no further money required from you.  So hence my point early, if you can wait a bit and get the ball rolling with compounding buying money machines (or investing) can pay off.

So what’s your favorite type of money machine?  Real estate, stocks, bonds….really they do come in a rainbow of colour options? 😉

Taking Money Out – The Breakdown

Well I think it is finally time for me to walk you all through my plan to take money out of our investing accounts.  After building them up for years, reversing the flow is going to feel very odd but at the same time I do have to get used to it.

Now in passing I mentioned that I’m using a mixed approach to funding our lifestyle with our investments.  We aren’t going to depending on just part-time work, government benefits, dividends  or capital gains but rather all of them.  I want a diverse flows of money coming in to provide some buffer in the event the stock or bond markets tank in a given year or if a given company stops paying their dividend.  The other somewhat complicating factor to this is the amounts we take out from each of those accounts will vary through time as I have previously discussed.

Overall our annual goal is to have $30,000/year for spending. Of that I expect my wife’s work will cover $7200/year of the target. Then our current TFSA and taxable portfolio is producing around $9100/year in dividends.  Both of those I expect to be stable inputs for the next five years which gives us $16,300/year in total or 54% of our spending target.

Next up is the Canada Child Benefit (CCP), which for the first 24 months or so won’t be a big deal since that money will be invested in the the family RESP account (as per what happens right now).  Our target is to hit around $80,000 in the RESP and so far it is currently at $68,000, so that 24 month estimate might even be shorter than that.  For the first 20 months or so after I leave my job that won’t be a big deal since the amount will be just around our RESP investing amount, but after our first full year of low income our CCP will increase dramatically the following July.  Combined with GST/PST rebate it will jump to around $12,000/year.  Yes THAT high, so after finishing topping up the RESP account that money will flow into the general income for the household and another 40% of our spending target for a few years when the kids are around.

So for you keeping score you might realize that between the CCP, the dividends and my wife’s work that accounts for $28,300/year of our target or 94.3%.  Yet that period of time won’t last that long as our oldest son will hit 17 and that income will drop off, but that does give us a nice two or three year window for the investments to keep growing which should help us bridge to my wife being able to quit (when she is ready).

Now anything not funded from the above will be taken out of capital gains from our RRSP accounts.  And due to the basic tax deduction, if I don’t use it for work in a given year or even if we don’t need the money, we still plan to take the money out.  Why?  Because it will end up being a tax free withdrawal from our RRSP and if we don’t need the money it will just get flipped over to the TFSA account if there is room.  The amount we need to take from here will shift up and down depending on the other items above.

Then finally on top of all of this is our slush fund which is money put aside for vacations, home renos and car replacement.  We plan to start with $20,000 in that account and then any work I end up doing will fill it back up.  In the event the slush fund starts getting too big we may just make a lump sum contribution to our TFSA accounts and boost our dividend payout.  Yet somehow I don’t think that will happen, but who knows what I end up doing to earn money.

So in summary that $30,000 spending target comes from:

  • Dividend income $9,100
  • Wife’s job $7,200
  • CCP benefit varies from $0 to $12,000
  • RRSPs varies from $1,700 to $13,700

And the above doesn’t include vacations, house renos or car replacement which I will fund via my work and our $20,000 slush fund.  Then of course all of the above doesn’t include the $12,000 I’m putting aside to pay for the first six months so I can have a completely guilt free detox period after leaving work.  And long term as the CCP payments increase we will let the investments grow to replace my wife’s income and allow us to bridge into full retirement (if we want to).  Oh and we will adjust our spending to our actual inflation rather than the CPI (as long as it doesn’t exceed my 4.5% withdrawal from our investments overall target). And we still have that $15,000 emergency fund beyond all of the above.

To help you visualize all of this here is my projected investment net worth for the next few years based on 4.5% real return on investments (click to make bigger).  That little dip early on is me taking out the $12,000 detox money all at once.

Investment Projection Nov 2016