subscribe to the RSS Feed

Thursday, October 27, 2016

How Compounding Really Works

Posted by Tim Stobbs on June 30, 2016

It is interesting to me that while people sort of understand how compounding works with their investments.  They have been told they should start early and by reinvesting it will grow all by itself. Yet they really don’t get it on some level.  The reality is your first $100,000 in investments will feel like a climbing the biggest mountain in existence and then after that it gets significantly easier to build up your investments.  But rather than discuss this in a broad point of view, I thought it might be useful to go over my investment net worth and point out the time it took to grow between each $100,000 mark.

In the beginning, we have nothing.  Actually with student debt we have less than nothing.  After leaving university and getting married at age 22, my wife and I had debts around the $60,000 mark.  Yet we managed to get some jobs and start paying down our debt and also when I had the option of getting some free money at work via a RRSP matching program I took it.

Now guess how long it took us to save a house down payment, pay off our student loans and save our first $100,000 in investments?  Five years? Nope. Eight years? Nope, keep going.  In fact, I was 32 years old when we managed to hit that threshold.  It took us 10 years  (or 120 months) to save that much money and the thing was we were trying a big harder than the average person.  Now if that sounds like a prison sentence because in some ways it was.  THAT is the difficulty with saving your first $100,000. So when people talk about starting early, this is exactly what they mean.

Depressed yet?  Good, because now we get into the good news.  It gets easier after that first hurdle.  I mean a LOT easier and it just keeps getting easier from there.  Case in point it only took 3 years (or 36 months) to reach $200,000.  Or putting that in context it took 70% less time than the first $100,000.

Then it just kept getting easier.  Hitting $300,000 only took 16 months, so that would be 86% less time than the first $100,000.  Basically that one happened so fast it was like getting investing whiplash as compared to the glacial slow pace of the first $100,000.

Ironically getting to $400,000 took even longer at 19 months, but that did include the collapse of oil prices so somewhat understandable that it would take a bit longer, but still roughly about a 1.5 years.

Finally, while I’m not there yet, my current projection would be to hit $500,000 around Feb of 2017, so that would be only 13 months long, which if correct would be about 90% less time than the first $100,000.  And of course if you keep going it just keeps getting more and more easier to add wealth (no wonder the idea of working just one more year is so popular for people that are almost retired).

The point of all of this is when people give you some well meaning advice to start earlier even with a little bit of savings: PLEASE FOLLOW IT! You will be further ahead in the end and guess what, you don’t even need to consider retiring early when you start out.  Oddly enough you will have lots of time to make the decision in the future and guess what, the worse thing that happens is you have a large amount of savings to make other choices in life.  Some flexibility isn’t a bad thing, after all you never know where you are going to end up so some extra cash to consider starting a business, buying a cottage or taking a unpaid leave from work.  Do what ever you want, just please consider saving something to start climbing that mountain now.  Good luck on your climb.

Stop Blaming the Rich

Posted by Tim Stobbs on September 22, 2015

Okay, are you sick of this never ending federal election campaign in Canada?  Goodness knows I am already.  Yet perhaps the single thing that is pissing me off the most during this campaign is the idea of ‘let’s blame the rich’ theme. Or really more actually I’m not terribly impressed that a few of the proposals out there are to roll back the latest TFSA limit increase since ‘only the rich can use them’.

I okay with general idea of fairness.  After all no one likes to be screwed over in life and it does make entirely sense to me to have progress tax brackets that increase as income goes up.  After all if I am earning more I can easily pay a bit more to help out those that don’t earn much.  I don’t consider that unfair, but rather practical.

Yet rolling back the TFSA limit increase because only the rich can use is a damn crappy reason.  Um, news flash people…those how have built business, got high paying jobs and actually save some money to get rich…the system wasn’t fair to begin with.

For example, RRSP contributions are based on last years income up to 18% (to a given maximum), so the reality is that is actually worse for lower income people.  Since the more you earn beyond perhaps $40,000 a year it gets easier to save that amount.  Meanwhile the TFSA limit is equally to everyone over 18.  Even when it means the lower income people can potentially save a MUCH higher percentage of their income as compared to a person making $100,000/year.  Case in point the $10,000 limit of $40,000 is 25% of their income, which is WAY higher than the RRSP percentage.  Yet for the $100,000 income person the $10,000 TFSA limit is only 10%.

Then when we get to investment gains those that save also get some extra breaks, capital gains are only taxed at half of your marginal tax rate and Canadian dividends also benefit from a significant tax break.  The dividends are such a good break that if you earn less than $44,000/year they actually end up being tax free.

The system is built around encouraging people to save and invest, so those that do are rewarded by paying less tax.  Fairly simple right?  Yet it amazes me that people want to blame the rich.  Did you ever consider the fact the ‘rich’ may have started off just like you but rather than spend their money they decided to save it instead.  They learned a bit about investing and made ever more money.  It was often a hard long road, but after a number of years and the miracle of compound interest they are doing well.

Compared to those at my age and savings I’m likely considered rich or top 20% at least.  Yet the money just didn’t appear in my accounts in a puff of smoke…I got a degree and then a good job.  Then I saved for a decade straight likely spending less money than you did last year…that is why I have a net worth of over $750,000.  So go ahead and take away the TFSA limit increase for all I care…just stop blaming me for your problems and perhaps start to save something yourself.

Saving Is Not Future Spending

Posted by Tim Stobbs on July 3, 2014

People don’t save enough.  At least that seems to be the theme of multiple studies and opinion pieces around the internet.  We often blame poor education, or consider using forced saving programs, but ignore the underlying reason people don’t save anything: the motivation is damn poor to save anything.

After all the majority of people out there consider saving equal to future spending.  So they think:  “I’m saving today to spend this money later”.  With that in mind it is fairly easy to see why saving for 40 years to fund some distant vague ‘retirement’ is as appealing as paying to watch paint dry.  The daily demands are so much more obviously appealing like a trip to somewhere warm in the middle of the next winter.

So perhaps the issue is people need to change how we view saving, instead of thinking of savings as future spending perhaps we consider it buying freedom instead.  At least on the motivation side of the battle this is a bit more appealing to say, I’m not spending this $100 on more crap for my house instead I’m buying freedom. Yes I know $100 isn’t much, but if you keep doing that on a frequent basis in a decent investment it does start to buy your future freedom.

The part of increasing your motivation is to give something specific to visualize to help out with the motivation.  Imagine each monthly savings is giving you an extra week out of the office forever…what would you do with your extra week?  Go hiking, spend it with family, start your business, or anything else you always wanted to do.  It helps to have an idea of what you are saving for.

The other way I personally find to make saving easier is to automate as much as the process as possible, you want to make the act of saving easy.  Why?  Well when you motivation is fairly thin to begin with it doesn’t take much to get side tracked by something silly.  For example, if you were trying to get into a habit of running you shouldn’t let the first small chance of rain cancel a run..otherwise you are making it easier to fail.  The same idea of saving, so I setup automatic payments to our savings account each month to move the money over the day after payday.  That way there is as little resistance to it as possible to the act of saving.

So how do you motivate yourself to save?  What tricks have helped you build a good saving habit?