Personal Finance

Cash Flow Measurement

One of the financial activities that my wife and I decided to start doing this year was to measure our cash flow on a monthly basis in order to determine if we were spending more or less than our income. I believe the ideal way to monitor your finances is to keep track of every single financial transaction you make during the month. At month end you should be able to reconcile all your money coming in with money going out and then you can analyze where all your money has gone.

The only problem with that method is that it’s a lot of work to keep track of every single dollar you spend and we decided not to bother with that kind of detail.

What we decided to do instead is just do a much simpler calculation to figure out our net cash flow for the month. From this we can calculate the total amount we spent during the month and how much we saved.

The calculation is as follows:

1. Cash saved during the month = Cash Position at beginning of month minus cash position at beginning of last month.

2. Total money spent = total income during the month minus cash saved (from calc 1)

Note that the Cash Position is the net total of all your bank accounts, credit cards, and line-of-credits. It’s not important to do this at the beginning of the month but you should pick a time in the month that is consistent month to month. The first of the month works for me because I get paid at the end of the month and no withdrawals are made before the first of the month. It’s important to try to do this type of analysis over at least three months because of the normal variation in monthly spending.

This calculation tells you how much you saved and spent but no details on what the money was spent on. To try to fill in the gaps a bit, the next step I do is to look at our bill payments in our checking account as well as all charges on the visa statement and enter those entries into a spreadsheet which allows us to quickly see where about 80%+ of our money is spent.

I like this modified calculation because it’s fairly easy to do and gives us a lot of important information about our finances. We can always keep track of every detail if we feel the need to cut back a bit and need to know what can be cut, but until that time, this method will do.

An example calculation:

On April 1, Sue has $1000.00 in her bank account and owes visa $80.00.

On Mayl 1, Sue has $1250.00 in her bank account and owes visa $160.00.

Sue has a net income of $3500.00 per month.

We’ll calculate for the month of April.

1. Cash saved during April = ($1250 – $160) – ($1000 – $80) = $170

2. Total spending during April
= $3500 – $170 = $3330.00

Now this method is only a measurement of your cash flow and the resulting information needs to be further analyzed to determine if you are on track for your financial plans.

If you are looking for another budgeting program then check out my You Need A Budget Review.

Personal Finance

Retiring Overseas

I’ve toyed with the idea of retiring outside of Canada as a way to get more “bang for my retirement buck” or to retire sooner then I’d be able to here in Canada. I’ve met and read about people who really seem to be able to be able to do well by setting up camp in places where a modest Canadian passive income goes a long ways.

A friend of mine has an uncle who retired to Thailand. He’s living the good life with a 35 year old girlfriend (he’s in his late 60’s). According to him he’s able to live like a king on his Canadian pension. Most people would worry about health care in developing countries, but apparently the care is exceptional in Thailand, and its always possible to get evacuation protection where they’ll bring you back to Canada in case of serious emergency complications.

My brother some time ago talked about going to Buenos Aires for 6 months to study Spanish and learn how to surf. They call it the “Paris of South America” and apparently it has gorgeous architecture and cafes with very low prices. I’m tempted to steal his dream vacation and go set up camp there for a while, how sweet would that be?

Apparently some American plan to move to Nova Scotia, buy ocean-front property, and live the good life on the cheap. Being able to sell a condo in Toronto and use the proceeds to buy ocean-front property sounds like a pretty good deal to me!

Some people talk about retiring to Mexico, and I think that could be a retirement (as long as you weren’t in an area where they like to kill Canadians 😉 ).

My “requirements” for where I live are fairly basic. I’d need air conditioning if it gets hot at all (I won’t even live in Toronto without AC during the summer). I’d need high speed internet. And I’d like to be able to eat sushi occasionally.

In Tim Ferriss’ “The 4-hour Workweek” he recommends Buenos Aires, Madrid, and Berlin as places that you can have a really nice lifestyle for a comparatively low price.

Anyone have other ideas for places where you get a great lifestyle for a low price?

Personal Finance

Retire at Sea

Quite a while ago I came across what seemed to be a clever/strange idea. With the price of nursing homes constantly going up, a more cost-effective retirement would be to become a long-term “guest” of a cruise line.

Barbara Mikkelson gives an excellent overview of the pros and cons of this lifestyle, but to summarize:

Instead of being ignored in a corner and only having other deaf old people to socialize with, you’d get to travel through the world, have attentive staff helping you, enjoy a wider variety of special activities, eat better food and have access to all the necessities (doctor on board, etc).

The trade off is you couldn’t have a pet, visits from family and friends would be harder to arrange, and the social group around you would always be in flux (as customers and employees were added and left the ship you were on). Some people would view this as a negative, but some would view it as a positive.

Either way, its chilling to think about getting to a point in life where it’ll cost $200 a day to live ($73K / year would eat into most people’s savings in hurry).

Personal Finance

Financial Advice for the Young

While digging through Larry MacDonald’s archives, I came across a post where he talks a bit about young investors. He eloquently articulates what I am trying to do right now to accomplish an early retirement.

His advice is to live WELL below your means (he suggests 40-75% of income) instead of the typical 5-15% for a few years when starting out. You won’t miss the lifestyle (since you’ll keep living the way you were before), and by delaying starting a high-consumption lifestyle, you’ll build a nest-egg that will give you many options down the road.

I’ve basically been living this way since I graduated from university. Instead of rapidly building up a nest-egg, I’ve used the low-cost lifestyle to have periods of travel, school and not working (and not working on my own steam, not by using welfare or social assistance or anything like that – I’ve always stood on my own two feet).

I’m hopeful that I might be able to spend a few years, build up the nest egg, then do whatever I want with the rest of my life.

Its always nice to come across someone who seems thoughtful and intelligent who thinks the same way you do :-).

Personal Finance

A Mountaineer’s Approach to Risk

Years ago I did the cliche “backpacking around Europe” for a summer at university. While chilling out in a hostel in Moscow I got drinking with some Englishmen (and an Englishwoman) who were heading out to climb a mountain.

Besides downing the half-vodka, half-coke drinks (mixer was more expensive then booze) I was quite interested in picking the brains of these people who were quite enthusiastic about something bizarre (you’d have to pay me lots of money to climb a mountain of any height).

The one comment that I found most interesting, is that mountain climbers try to minimize the risk by climbing up and down the mountain quickly (in case the weather changes on them). Basically they’ve decided to do something that they supposedly enjoy, then they rush through it in case things turn bad. Weird.

I recently read “Succeeding” by John T. Reed, and in it he made a similar comment. Basically when he was young he decided he wanted to have a net worth of $5 million. While working towards this he had to get quite aggressive, and got hit very badly by a real-estate market correction in Texas. He has a similar idea to the mountain climbers: Make a conservative goal, then accomplish it as quickly as you can to minimize your exposure to risk. The more money you want to be worth (the higher mountain you want to climb), the more risk you’re going to have to take because it’ll take you longer to get to the top. So he advocates only targeting a networth goal that you’d really need, not just a big number for the sake of a big number.

It seems to me that there’d have to be “risk mitigation” approaches, where you’re aggressive for short bursts with only part of your savings in order to get to a goal, then you ratchet back the aggression and try to fortify your position. When you’re ready to push towards the next “base camp” of wealth, you put money and time aside for the attempt, talk to people who have done it before, then try to push up to it as quickly as you can.

I assume the very first base camp is income being greater then expenses. This is kind of like digging yourself out of a pit before you start climbing the mountain, and luckily this wasn’t ever a position I was in.

A Everest summit attempt would be getting onto the Forbes 400 I guess.

I’m not sure if this is a reasonable metaphor for accumulating wealth or not. My currently goal is the second base camp of passive income being equal to expenses. My “hustle” over the next 2 years could be to keep working contracts, even if they aren’t terribly interesting, keeping my cost-of-living down, buying blue-chip dividends, and trying to get a couple more investment properties similar to my current one in order to reach the first base camp of wealth accumulation (retirement basically).

At that point I can decide if going further up the mountain is interesting to me or not.

Personal Finance

Passive Income

In addition to my networth statement, I thought I’d do some more details calculations on my passive income. As always, I realize my condo isn’t really passive (since I have to manage it), but the work is infrequent enough (hopefully) that I’m going to classify it as passive instead of treating it like a second job.

I’m calculating (and trying to decrease) my cost of living as well. When my after-tax passive income exceeds my cost-of-living I’ll be able to retire (on the assumptions that my passive income will increase at least as much as inflation and my lifestyle costs will stay the same or decrease).

BMO (136) – current dividend 2.72 – income: $369.92 / a, $30.83 / m ($25.90 after taxes)
ROC (471) – current dividend 1.20 – income: $565.20 / a, $47.10 / m ($39.56 after taxes)
E-trade margin debt – 9,188.30 – interest $648.18 / a, $53.60 / m ($35.38 after taxes)
Net: $24.33 / m (before taxes) $30.08 (after taxes)

Condo – $3000 / a, $250 / m – should be many deductions, including depreciation, such that I can get this tax free (hopefully, we’ll see how it works out when I’m doing my taxes).

Total passive income: $280.08 / m

Personal Finance

Historic Networth

?????? At site

I filled out my networth at NetworthIQ for the past half-year (right back to before I purchased my condo). The shoot-up in value then drop resulted from me using my estimated after-renovation value of the condo I bought. If I wanted to be exactly correct, I should have valued it based on work COMPLETED month-to-month through the renos (but I’m happy with the drop as I understand its not really a drop).

Personal Finance

Using a Line of Credit as Emergency Cash

People used to say that you should always have 3 months living expenses in your “emergency savings”. When reading “The Intelligent Investor” they claim that you can increase you position to 100% stocks (risky) if you meet a number of criteria, one of which is liquid assets to pay for living expenses for 1 year.

I’m the last person on earth to say “live for today, don’t bother saving”, but the idea of an emergency money pool of cash strikes me as a fallacy. Obviously you need to be able to weather the storm of not earning income for a reasonable period of time (I’m working towards getting this period of time to be the rest of my life, and that’s a big project), but like anything there’s more then one way to accomplish this.

Given my estimated monthly costs of $2,140 in order to survive without earning money for 3 months someone might suggest I keep $6420 ($2,140 x 3) in my checking account.

Since I wouldn’t need the entire amount immediately (just one month’s expenses per month), a slight improvement would be to have this money in a safe, liquid investment (perhaps a cashable GIC, money market account or high-yield savings account). While I’m waiting for the emergency to strike, I would be earning a small yield on this money (say 3% after tax, maybe 1% after taxes and inflations). If the emergency never hits and I keep this fund around for the next 35 years until I retire, I’ve paid a HUGE price to have this “insurance” (considering some use 5.5% as returns after tax and inflation on conservative dividend paying blue chips).

$6,420 compounded at 1% annually over 35 years would be $9,094.59, whereas $6,420 compounded at 5.5% annually over 35 years would be $41,818.76.

So what’s the alternative you ask? Simple. Go into your local bank, and set up an unsecured line-of-credit (LOC). If you have a decent credit rating and income, they should happily give you a pretty large balance at a few percent over prime (I got an offer out of the blue from TD for $10,000 at Prime + 2.75%, they recently offered to increase this to $20,000). Obviously at this rate you wouldn’t want to borrow from this account unless it was a VERY good investment, but it is well suited to use as an emergency source of funds. If I have 3 months without income, I simply withdraw what I need to survive from the LOC every month. A LOC works just like a cash advance on a credit card (you get the money immediately, and immediately start paying interest on it until its re-paid), except that its a FAR more reasonable interest rate.

Then once money starts coming in again, I pay off the LOC before anything else (paying it down will likely be the best investment available to me). With a $20,000 limit, and spending $2,140 / month I can go 9 months without earning income, even with interest factored in. For full disclosure, there’s usually a small monthly minimum payment (3% or $50 whichever is more), but you can juggle money between accounts, or pay this from passive investments or whatever.

This allows me to put all my cash into long term savings, get it working as hard as possible for me, and at the same time have a cushion to deal with unexpected emergencies. If I can see a period of unemployment coming up (currently my contract is over at the end of September, so I can expect to not get paid for a while if I don’t renew it and don’t look for another job), I can keep money available to pay my living expenses (and avoid the LOC interest charges), but this is different then saving money for UNEXPECTED periods without income.

If I ever encountered a longer period of not earning money (say I became disabled or suffered major depression), I’m in trouble regardless of however I’ve structured my finances (unless maybe if I’d bought disability insurance), so a pot of “emergency funds” isn’t going to help all that much (it just puts off things getting bad for a couple of months longer than it would have otherwise). I’d probably just start liquidating long term assets as needed (sell my condo, sell my stocks) and when everything ran out, throw myself on the mercy/charity of friends/family/government (not a fun idea).

This would work the same way for other unexpected costs (such as needing a new appliance, roof repairs, vet bills or a new car).

Any other ideas for the best way to deal with short term financial emergencies?