This is a guest post from Dan Kent he is a writer and co founder of Stocktrades.ca. A DIY investor for 8 years now, Dan has a combination of dividend, growth and real estate investments in to his portfolio and is looking to continually grow his net worth. You can check his website out at stocktrades.ca or follow him on Twitter at @Stocktrades_CA. Please let me know if you would like to guest post on RFI!
I’ve never been much of a penny pincher. You’ll never see me driving across town to a different grocery store to save a buck or two on a product I need. I don’t really feel this is the best way to achieve financial independence and I don’t think you should have this mindset either.
Can you save more money this way? Absolutely. Pinching pennies and trying to save as much as you can has it’s rightful place in the personal finance world. But people often stop at this. They save and they save and they save some more. Well guess what?
You can’t, and never will, save your way to retirement
I knew this at a young age, and it has paid off handsomely. Before I was even in my twenties, I was putting my money to work. I didn’t have it stashed in a savings account, I had it stashed in my brokerage account, invested in companies that are still paying me dividends nearly 10 years later.
Millennials are struggling when it comes to investments and savings -h2
Statistically, I am the exception and not the norm. Over 80 percent of millenials do not have money invested in the stock market, and over 60% have absolutely nothing saved for retirement at all.
We can place the blame on a large number of things really. Poor economic conditions, skyrocketing housing prices, a incorrect assumption of the stock market’s risks. Either way, we must learn to live with the hand we are dealt and push through it.
I never had the benefit of being born into a wealthy family. In fact, and we will get to this later, I purchased my first home when the market was close to its peak and I was making the lowest wage in my career.
I decided to write a story of how I have succeeded up to this current point and how I plan to succeed in the future. This will be a different piece than you are used to reading. Why?
Well, mainly for the reasons listed above. I’m not going to teach you how to save money. You can figure that stuff out fairly easily on your own. I’m going to tell you how to put your money to work.
My investment philosophy between the ages of 18-21 -h2
I’ve read quite a few investing books in my day. A large number of them by one of the best investors of all time, Peter Lynch. In most all of his books, he claims, and rightfully so, that owning your home is the best investment you will ever make,
Now, this statement doesn’t ring as true as it did in the past. Prior to the housing market being as bloated as it is now, you could simply purchase a home, live in it for 5-10 years, and sell it for a handsome profit. Today it isn’t quite the same, but it is still very important to own your home.
I started saving for a home here in Canada using a very specific method. My RRSPs. In the United States you may have a similar account called the 401k.
The best part about these accounts? Both can be used to withdraw money tax free if it is for a mortgage.
I started taking advantage of my companies option to match my RRSPs. Whatever I put in, they matched up to 4 percent.
With home ownership being my number one goal, and the maximum yearly limit I could allocate to my RRSP account being 18%, I decided to place 14% of my income into the account and let my company fund the difference of 4%.
I wasn’t making much, I started out as an apprentice electrician at 16.50 an hour. This ends up being around $33 000 a year. By years end I would have around $6000 and I figured by the end of year 2 I would have enough in that account to place a down payment on my first home.
The one key factor that allowed me to place so much of my income into my RRSPs was the fact that I kept my expenses to a bare minimum. I rented a house with numerous roommates to keep my rent down, and I didn’t purchase a vehicle.
Remember the part about pinching pennies? Well, I definitely didn’t do much of that in my late teens and early twenties. I went out to bars, I purchased a nice flat screen T.V. I generally lived the kind of life anybody at that age likes to.
The difference is, I didn’t overdo it. Even to this day, I have never been in any sort of consumer debt. My credit cards were always paid off, I never had a balance on my line of credit. It’s so easy to spend spend spend in the society we live in today and it’s a dangerous mentality to get into, especially with banks handing out credit cards like they are going out of style.
My biggest piece of advice at this age? Focus on placing the absolute maximum you can away every single paycheque. Money saved in your early years compounds to extraordinary amounts by the time you retire.
You don’t have to be making a ton of money to save a solid amount in your younger years. It just requires discipline and a few little tricks like I mentioned above. Maybe you don’t like living with other people and would much rather live on your own?
To that, I would say you can’t have your cake and eat it too.
My investment philosophy between the ages of 21-25 -h2
My twenty first birthday rolled around on January 4th, and by March of that year I had enough saved up in my RRSPs and my investment account that I finally had enough to place my first down payment on a home.
Lots of people envision their first home being everything that they have ever wanted. I definitely didn’t. I knew the profitability in real estate and I thought about two things, and two things only.
- Does the value of this home align with the current market?
- Are rooms in the house easily rent-able?
If you know nothing about real estate, the first question can seem pretty intimidating, but it’s not. Find a good real estate agent and they will be able to tell you within a matter of minutes.
Remember the part about having your cake and eating it too? I could afford the home on my own, but it would drastically reduce the amount I could save. So, I decided to find a home in my price range that had 3 bedrooms. One where I would lay my head, and two that I could rent out for half the amount of my mortgage.
The best part of this strategy is the fact that there is absolutely no shortage of young adults between the ages of 20-25 who are looking for a cheap room to rent.
I put $20 000 down on a 3 bedroom 1300 square foot condo in March, and moved in in September. My mortgage payment was then covered by two rooms I almost immediately rented out thereafter.
I was paying absolutely nothing to invest in the most important piece that most people own today, their homes.
Until I was 25 years old, I had both rooms rented and paid absolutely nothing. What did this allow me to do?
I stashed every dollar I was comfortable storing away into my TFSA, or Tax Free Savings Account. For those south of the border, this would be your Roth IRA account.
I was maximizing my contributions to my TFSA every year all while still placing money into my RRSPs which now funded my goal of an early retirement, not a home.
This would be around the time where I literally turned my brain into an investment sponge so to speak. I soaked up every single piece of investment knowledge I could and learned the intricacies of the stock market. I had been investing prior to this, but I really wasn’t that good at it.
There is one thing I knew though, I knew the stock market wasn’t as risky as most people think.
My investment philosophy between the ages of 25-28 -h2
When I turned 25, I had a very comfortable nest egg saved up from years of investing and savings. Instead of simply carrying on at the pace I was going, which would have been satisfactory to most, I decided to make a much bigger investment.
I purchased my second home
Breaking even on my first mortgage was nice and all, but I decided to take it even further and rent the whole house out. I was now paying the mortgage on my first property and then some.
In fact, the money I made from my rental paid for about 30 percent of my mortgage payment on my new home. You can probably guess where I am going with this, but I will say it again anyways.
This allowed me to put away much more money, all while paying down equity in two massively leveraged investments.
This time frame essentially leads me to where I am at today. In terms of investments, I now focus on a combination of dividend paying stocks and high potential growth stocks.
No, I’m not purchasing some crazy hyped pink sheet penny stock. I’m purchasing solid, established companies that are already paying handsome rewards.
What lays ahead for me in the future? There is really only one thing I can tell you for certain. A whole lot of learning.
Financial independence doesn’t have to be as hardcore as some make it out to be -h2
I’ve seen a ton of websites these days that detail stories of investors who literally spent nothing and saved every dime they had so they could retire at the age of 40.
There is absolutely nothing wrong with this, it’s just not the way I have gone about things. I probably won’t retire at 40. In fact, I’m not even sure I would want to.
Financial independence can come from living a normal lifestyle. The difference between someone at the age of 35 who has nothing saved and someone who has a ton, is knowledge, patience, and the discipline to only buy things they can afford.
You can’t save when you are in debt. Well, you can, but you’re making a terrible mistake. The ability to only spend money on things you can afford and not stretching your income to it’s absolute maximum will pay off handsomely down the road, you just need to let it happen.
All in all, I hope this article will help you not only increase your net worth, but guide you down the path of living a better life financially. You don’t need to buy property. You don’t need to take massive risks such as I did by owning two mortgages and relying on rental income. That isn’t the point.
The point is, money spent is never coming back. That brand new vehicle you purchased is worth 20% less than the sticker price the moment you drive it off the lot. That television you purchased on your Visa is going to end up costing you more than double the original price if you make the minimums.
Buy what you can afford, stay out of debt, and learn how to invest your money.