Category: Personal Finance

I previously wrote about my experiences paying a lot of extra money because I wanted to save money. I’ve been recently reminded, as potential employers try to figure out how to grind me down to the lowest possible salary, how salary negotiations VERY OFTEN play out in the same way.

When I was a fresh-faced undergrad, about to get my undergrad degree in computer science, I got talking to the CEO of a startup down in San Francisco (this was at the tail end of the dot-com boom). While I was talking on the phone to the CEO, he asked me my salary requirements. I told him what my classmates were getting in their offers, and said I’d like to get something at least around that level. I wasn’t sure what to make of it when he started sputtering and said “Well, we can definitely pay that, if someone offers you more though, talk to us first, don’t just accept their offer… we’re able to negotiate…”. I got the offer from him shortly after our call and it was for double what I’d mentioned. Shocked, I happily accepted and headed to SF.

After I’d been down there, I got to know quite a few of my co-workers quite well. One of them, named Simon, was actually involved in the hiring decision and I mentioned how I was shocked to get an offer so much higher then my expectation. He told me that after the interview, the CEO was gloating about how they were going to pick me up dirt cheap from Canada and that he was getting a half-price developer. Simon told me he’d said to the CEO “yes, we can get him cheap, but once he comes down to the Bay area and realizes how much more everyone else is earning, a competitor is going to steal him away and we’ll have relocated him for nothing”. Simon then made me buy him a beer :-), however in my opinion his perspective was absolutely in the best interest of the company (and I worked very hard and loyally while I was there).

Employee retention and negotiating hard on salary are inherently at odds with each other. You can get a good deal on staff expenses, and deal with higher turn-over, or you can pay a competitive salary that will keep staff around as long as you want them. Even if someone makes a commitment for a certain length of time to a company, if a red hot job market hits us and they see friends getting huge raises by moving to a new company, the reality is commitment or no, things might get sour in a hurry (slavery and indentured servitude aren’t legal in Canada, so if they want to leave a company there isn’t much the law can do to keep them there). Heck, at the end of a rough day having a friend say “I can get you a job at my company for $5K more then you’re making” will tempt some people.

I think a lot of business owners are used to negotiating, and it only seems natural to get the best deal possible on labour costs. The thing that’s different with employees, as opposed to other expenses, is that you have to work with and rely on them to actually operate the business. If you hire someone and pat yourself on the back for getting a good deal, they’re probably starting their employment thinking they got a bad deal, which isn’t really the best attitude for them to have. The only exception to this is if someone isn’t bright enough to realize they’re being underpaid, but unfortunately I haven’t ever met a good developer who was stupid.

My plan has been, if I’m ever in a position to hire technical staff, to get the best people and pay them fairly. If I deviated away from fair, I’d move in the generous direction and expect that they’d know they’re being paid well and would put that much more into their job.

Does anyone have experience negotiating the salaries of the people you then manage? What has your experience been like?

This article was written by Rachelle: a real estate guru who works as a property manager and helps investors find rental properties in Toronto and surrounding areas. She has recently started a very interesting blog called Landlord Rescue. You can subscribe to the RSS feed here.

In the wake of Mike pulling the controversial post because of other bloggers like Canadian Capitalist taking offence to the strategy in a post called A Scheme to save 100% of Income Tax – No Thanks. Larry Macdonald of Canadian Business Online also had a word in his post Tax Schemes and Financial Tune-Ups. Preet Banejree of Where Does All My Money Go did an interview with Martin Horvath called Interview With a Marked Man.

Holy Moly!

It’s our very own tempest in a teacup! Awesome. I was blissfully unaware of the controversy surrounding the post until this morning when I got Preet’s email subscription. You can’t know everything… In any case you can’t rely on financial planners to come up with solutions to tax problems. You need a genius like me!

My tax reduction strategy outlined

First of all nothing in life worth doing is easy. I don’t want to hear any whining about how you can’t make this solution work. It’s 100% legal. You’ll need an accomplice to help you. Your wife or husband is probably the best candidate. Other women or men may be willing to assist, but this increases the complexity of the scheme exponentially and is NOT recommended. I have actually implemented this strategy myself once and will one day (hopefully) expand my use further.

You’ll also need some free time to devote to your project. Like any other venture, initial forays are exciting and pleasurable. Consequent implementations are more challenging because of the initial product. There will be challenges en route, stay the course and be strong.

My method relies on the production of numerous children each of which comes with a considerable tax deduction which lasts for at least 18 years. With today’s modern technology, tax deductions can be acquired in litters. For example this ambitious tax avoider had 6 and 8 children at once.  This is very beneficial if you get a large raise or bonus or are in a hurry to avoid paying taxes. Tax deductions are great and more is obviously better, like vitamins.

Wealthy Canadians may be reluctant to embrace my strategy. There is a often-perpetuated myth that children may be expensive. This idea totally ignores economy of scale and additional opportunities provided by hordes of tax deductions. For instance, during the first year of life, the children can be breastfed, which is free. If you have multiple children: don’t worry, small children take up less space. Storage may become an issue. If this occurs just start sending them out on “sleep overs” You may even find this an ideal time to work on next year’s crop.

Once you have a substantial amount of CRA exemptions you may begin to think that you need to expand your living quarters. As usual every problem has already been solved and thanks to the wonders of the internet, the solution is readily accessible. I am so magnanimous that I will share the solution. I would like to add that charging your underage children rent is not really ethical… you have my permission to employ the fix without requiring payment.  Ignore negative thinkers.

There are actually considerable savings available to the creative parent who seeks to use their powers for good. For example, children enjoy bike riding. You can set up a electricity generating bike “farm” of your very own and help save the planet!

You will no longer require expensive tickets to sporting events, you can have your own personal hockey, football or soccer team ready to entertain you on demand. I can almost certainly guarantee you ringside attendance to numerous boxing matches. Entrepreneurial parents could even sell tickets.

Summary

As you can see there is no reason to employ dubious tax reduction strategies. There are perfectly legal methods allowed to reduce your taxation. These deductions are unlikely to be retroactively revoked. You don’t want to fall for any half baked and expensive schemes.

If you liked this article sign up for a free RSS subscription to Money Smarts Blog. Whenever I write, I offer additional promotions to entice people into joining great blogs like this one. Today’s special is unlimited fertility. What are you still reading for? Go get busy!

I’ve been reading a couple of articles lately about TFSA over-contribution penalties which are being levied against some Canadians by the CRA.  These penalties have resulted from people over-contributing to their TFSA (Tax Free Savings Account).  It appears there are two main causes for these over-contributions, which will be discussed here.

[update June 17]

Rob Carrick wrote an article on the Globe with quotes from a CRA spokesperson who appears to be saying that the TFSA contributions will be forgiven, if the error is genuine

In practice, CRA is saying that relief may be available for people who mistakenly overcontributed to a TFSA.

“Because we are reviewing each and every [situation] on a case-by-case basis, it’s correct to say that relief may be provided,” CRA spokeswoman Caitlin Workman said Wednesday. “Each case will be looked at with the facts at hand, so I’m a little wary of issuing a blanket statement. If it was truly an error – that’s what we tend to look at.”

[end of update]

Here is a TFSA rules refresher which contains all the pertinent rules.

What is the rule for TFSA contribution limits?

• Every Canadian who is 18 years of age or older, gets $5,000 of contribution room per year for the years 2009 to 2012 and $5,500 for year 2013 and beyond.
• If you make a contribution, then the amount of available contribution room is reduced by the amount of the contribution.
• If you make a withdrawal, then that withdrawal amount will be added to your available contribution room, starting January 1 of the following calendar year.

What is the TFSA over-contribution penalty?

The TFSA over-contribution penalty is 1% per month, levied on the amount of excess TFSA contributions.  If you have over-contributed to your TFSA by $1,000, then the penalty will be $10 per month until you have removed the excess amount,  or more contribution room becomes available.

TFSA over-contribution penalty because of lack of knowledge of TFSA rules

It appears, that some Canadians have inadvertently created an over-contribution to their TFSA, because they didn’t know that withdrawals from a TFSA account only get added to their available contribution room on January 1 of the next calendar year.  If you contributed $5,000 to your TFSA account in 2009, withdrew money in 2009, and then contributed more money to your TFSA in 2009, then you will be over the contribution limit.

If you are in this group, then I suggest you pay the penalty, remove the excess contribution if it still exists, and learn the rules better, so it doesn’t happen again.  The government was very clear about this withdrawal rule when the TFSA was introduced, and I think it is the responsibility of the individual investor to know the rules.  The TFSA is by far and away the simplest investing account available to Canadians, so getting tripped up by the one rule which is even remotely complicated, is not reason enough to expect relief from the government.

• To pay the TFSA over-contribution penalty – Fill out CRA form RC 243 by June 30, 2010 (or the year after you are assessed the penalty).
• To remove excess amounts from your TFSA account – Contact your financial institution and ask them to withdraw the amount of over-contribution.

If you wish to complain about this penalty, then write a letter to Jim Flaherty.

If you still want to try to get relief from this penalty, despite my stern lecture then I’ll suggest the following:

• Appeal to the CRA – Plead ignorance, poverty, drunkenness – whatever it takes.  They might give you a break.
• If you contributed more than $5,000 to any one financial institution in 2009, then send them the tax bill and demand they pay it.  Tell them that since it is their job to know the rules, they should have known that you were over-contributing for that year and should have warned you.
• If you have a financial adviser and still got nailed with this penalty, then send the adviser the bill.  If they were in charge of all your TFSA transactions then they are definitely responsible.

TFSA over-contribution penalty because of incorrect reporting of institutional transfer to the CRA

Another situation, is someone who did a transfer of their TFSA from one financial institution to another, didn’t contribute more than $5,000 in 2009, and still received a notice of over-contribution from the CRA.  In this case, because you were transferring the TFSA money, there is no contribution or withdrawal.  The TFSA money should just move from one institution to another one, without any withdrawal or contribution taking place.  This move is allowed and is called a qualifying transfer.

If you withdrew the money, had the cash in your bank account and then “transferred” it to a new financial institution then you completed a withdrawal and contribution – not a transfer.

It is possible however, that one or both of the financial institutions you had the TFSA at, incorrectly reported the transfer as a contribution or a withdrawal.

For example if you transferred your RBC TFSA to an ING TFSA, then if there was an error made, RBC might have reported the transfer-out as a withdrawal, and ING might have reported the transfer-in as a contribution.

To fix this situation

1. Contact the financial institutions involved with your TFSA transfer and ask if the transfer was incorrectly reported as a contribution or withdrawal.
2. If the answer from #1 is yes – then ask the financial institution to fix the transaction so it is a transfer, and then ask them to file an amendment with the CRA.  Once this amendment is accepted by the CRA, then your over-contribution should disappear.
3. If the answer is no – then call the CRA and try to clarify with them how they are determining you are over-contributed.

Over-contribution penalty is still being charged after withdrawal of excess amount

Michael James mentions yet another situation (see link at bottom of page where a person had over-contributed to their TFSA, fixed the problem by withdrawing the excess amount and yet was charged an over-contribution penalty for the remainder of the year.  In fact the penalty should have only been applied for the time period when they were over the contribution amount.

The CRA is in charge of adding up all your TFSA transactions in your various TFSA accounts and determining if you are staying within the rules.  The CRA relies on the reporting from the financial institutions to collect this data.

In this case, that person needs to contact their financial institution to verify that all their withdrawals were reported properly.  If for some reason, a person’s “removal of excess” withdrawal (which in fact, is just a regular withdrawal) was not reported to the CRA, then the CRA would think the person was continuing to be over-contributed.

To fix this situation

1. Contact the financial institution(s) that hold your TFSA and verify all your transactions with them.  They need to be able to tell you if any transaction was reported as a withdrawal or a contribution.
2. If you determine that the financial institution made an error, ask the financial institution to fix the transaction, and then ask them to file an amendment with the CRA.  Once this amendment is accepted by the CRA, then your over-contribution should disappear.
3. If your financial institution appears to have reported your transactions correctly to the CRA, then call the CRA and try to clarify with them how they are determining you are over-contributed.

TFSA transfer to new financial institutions are expensive.  To avoid transfer fees, please read TFSA Institutional Transfer Strategies.

The cheapest TFSA is available at Questrade Discount Brokerage.  No annual accounts fee and $5 trades.

Other articles about TFSA over-contribution penalties

TFSA Over Contributions at the Canadian Tax Resource blog.

Taxpayers hit with penalties at the Toronto Star – written by Ellen Roseman.

TFSA Over-Contributions May Be Over-Penalized at Michael James on Money.

TFSA Excess Contribution Penalties Ensare Taxpayers at the Canadian Capitalist.

Qualifying Transfer definition at the CRA.  This explains that transfers of TFSA money between financial institutions will not affect your contribution or withdrawal amounts for the year.

This post is part of our scam category. With scams the best defense is often to discuss them and let people who haven’t run into them know how they work. Unfortunately, talking about scams can seem like a “how to” for scam artists, which IS NOT my intention here. I always love reading about scams and cons, in part to protect myself, and in part out of amazement at how devious people can be when they’re trying to part us from our cash.

I’ve often wondered if there’s a way to profit from a business destined for failure.  While I haven’t come up with any legitimate way to do so, there are well explored way to do so if you’re willing to defraud investors.  I’ve heard about this in fictional settings, but have never personally encountered it in the real world.

The core idea is you set up a business destine for failure (guaranteed to lose money), but in some way sounds good.  You go around looking for investors, the same way you usually do, but instead of selling some portion of the business to one person, you massively oversell it.  For example, you could started up a restaurants, and sell 49% repeatedly to 10 people (so, collectively, they’d own 490% of the restaurant).  You don’t tell any of the investors about the others (you pretend it’s just the two of you), and you show them the books every month as you lose “their” money.  In reality, you’re only losing a portion of the money you raised (when the restaurant goes bankrupt, you lose 100% of the value of the restaurant, and keep the remaining 390%).

For example: Say I’m opening a restaurant with $100,000 of seed money.  I collect $49,000 from you and 9 other people.  Each month we lose money (which I show to each investor), and once $100,000 is lost I shut the place down.  Since I raised $490,000, losing $100,000 leaves me with $390,000.

It’s obviously key that each of the investors not find out about the others.  Forged paperwork probably won’t be looked at too closely (since people are more eager to assert ownership over something of value, not a bankrupt company).  The biggest weakness would probably be taxes (if all the investors claimed a lose on the same venture it might raise red flags at the CRA).  The investors would have to be kept quiet, perhaps with some story why it’s important that you present yourself as the full owner of the restaurant.  The worst case would be if two investors got talking to each other and both bragged about being half owners!

This was the scam at the heart of “The Producers“.  Basically a terrible Broadway producer (who made one flop after another) and an accountant cook up this scheme and it blows up in their face when the production is a surprise hit.  This was also a small side-plot in Ayn Rand’s “The Fountainhead“:  a group of investors hire Howard Roark to design a resort, Monadnock Valley, when they think his idea sounds crazy, but it also blows up in their face when it turns out to be a good design.  Some real world variants on this are detailed at Crimes of Persuasion.

Part of the beauty of this scam is that the perpetrator doesn’t even have to leave town.  Investors may be upset with him, but if they accept that business entails risk, they might even be willing to invest in future projects.  A truly morally-bankrupt promoter could offer a number of investment opportunities, some profitable, some deliberately sabotaged and perhaps stay a respected member of the community while repeatedly defrauding investors.

If the scammer is prepared to leave town…

If you’re not worried about keeping your good name, it’s even easier to execute this sort of scam.  It’s possible to sell investments in a business that doesn’t, or won’t, exist.

When I taught English in Taiwan a man I met claimed that many locals started up computer companies, sucked up a bunch of investments by making the company look like it was doing well, then drained the company bank accounts and fled the country.

Even promoters selling rotten investment “opportunities” like timeshares or condo hotels could be considered performing a variant on this.

Protecting Yourself

This is a high pay off type of scam targeting wealthy individuals, so avoiding it is very different from some of the small scale scams we’ve posted about.  First and foremost, this will target people with money, so being poor (and not able to invest) is the easiest defense.  Being cautious around any investment that requires secrecy is probably another good policy.  I’d avoid these generally, unless there is a VERY good reason for the secrecy.  I talked to a man once about doing a rent-to-own deal with him on my condo, and he told me about 5 times that he didn’t trust lawyers and wanted to work the agreement out between the two of us without involving one.  Definitely creeped me out and I’m sure he was up to something (obviously I didn’t do business with him).

By the time the venture has failed, I’m not sure how much good it would be digging into the paperwork and finding out you’d be scammed.  It would be worthwhile to try to prove the scammer’s wrongdoing, but the chances of recovering money at that point would probably be pretty slim…

Have you heard of anyone being taken in by a scam like this (local investors, friends or family)? Do you think this is happening often in the real world, or is this a scam that sounds better on paper rather than something that would be common?

Reader Jazzmin26 recently e-mailed me after reading my Mint review and shared my security concerns.  She asked for suggestions to “make my financial life simpler and not spent my weekends logging and tracking“.  I’ve repeatedly wrote about how valuable I find measurement to be, but I agree with Jazzmin26 that it can sometimes be tough to determine the best way to go about it.

Not as Hard as it Seems

In life we often make things seem harder than they really are.  Every year I agonize about my taxes, then they end up only taking me an hour or two and I’m happy to have a snapshot of my finances from the year before.  Similarly, logging and tracking isn’t something that will take up entire weekends.  I usually do a financial overview once a month (around the 1st) and I can capture all the info I need in 10 or 15 minutes.

Pen and Paper

I’m currently reading “Your Money or Your Life” and will post a review when I’ve finished it.  A large part of the book is spent detailing how to record your spending.  The authors suggest that the exact format isn’t as important as finding something that works for you.  Come up with a sheet with the numbers you find important, then printing it out (or make photocopies) and fill it in once a month.

I’ve recorded my spending this way, but carrying a small notepad and a pen in my pocket.  Every time I make a purchase, I pull it out and record it (on page per day).  If filling in the amount wasn’t convenient, I’d just get a receipt and put it into the notepad at the proper place (like a bookmark) and transcribe them at the end of the day.

Spreadsheet

I like to use spreadsheets (Excel or OpenOffice Calc) to keep permanent financial records.  I tend to agree with “Your Money or Your Life” that developing your own categories and measurements is probably the best way to go.  My spending tracking looks something like:

	Food	Travel	Entertainment	Necessities	Gifts	Total
May 4th	$12.43	$2	$0	$0	$0	$14.43
May 5th	$7.28	$0	$12	$6	$0	$25.28
May 6th
May 7th

How to categorize things (is alcohol food or entertainment?  if you buy a round of beers, is that a gift?) is entirely flexible.  If you eat out regularly, perhaps it is worthwhile to separate food into groceries and meals out.  I keep my fixed, constant expenses (like rent, internet charges, etc) separate and just track my variable spending with this.

When I was tracking my spending, I’d also maintain an average of each category (typically for the last 30 days) as well as the total and could view where my money was going and whether my spending was increasing or decreasing.

In terms of my finances overall, I also use a spreadsheet and track the various accounts like so:

	Mortgage	iTrade	Checking account	TFSA	Cash	Assets	Networth
May 1st, 2010	-$87,012	$23,732	$1,201	$2,022	$3,223	$159,000	$98,943
April 1st, 2010	-$87,203	$21,157	$1,257	$2,014	$3,271	$159,000	$96,225
March 1st, 2010	-$87,345	$20,121	$1,072	$2,007	$3,079	$159,000	$94,855
February 1st, 2010	-$87,501	$21,353	$1,413	$2,000	$3,413	$159,000	$96,265

The Cash and Networth columns are calculated by summing the other columns (the checking account and the TFSA is the case of cash, all the columns in the case of the networth).  Again, this only takes me 10 or 15 minutes to figure out each month (spreadsheets can easily do all the calculations for you – you just look up each account and enter the numbers) and I can see immediately a snapshot of my financial health.

I don’t bother tracking credit cards, since I always pay them off in full, anything I owe to the credit card companies will be reflected in the amount of money in my checking account the next month so I don’t think it’s worth the time to do the extra look ups.  If I was carrying a balance on a credit card or a line of credit, I’d certainly track it monthly.

Networth IQ

A number of bloggers, including Meg at World of Wealth, track their finances on Networth IQ.  Much like a spreadsheet, it’s very fast and easy to update entries (just look up the account online and fill in the number).  The site automatically creates a graph showing your networth over time, and shows how each category has changed (as a percent) since the last month.

As much as this does contain a lot of your financial info, I don’t think it has the same security concerns as Mint, since you’re manually transcribing information to it (not giving the site your usernames and passwords to look things up).

How do you track your finances?

Jay recently asked me about getting started as a freelance writer.  Kind of ironic since he is now part of the paid staff here at 4P.  While I’ve never done freelancing myself, I have hired quite a few of them so I have a pretty good idea what is involved.

There isn’t any one obvious path to become a successful freelance writer.  Here are some of the things that I would try:

Current expertise

Try to identify what type of writing you would like to do (or are willing to do).  Can you do research on topics you aren’t familiar with and then write about them?  Are you an expert in anything?

Freelance sites

There are a number of freelance sites where you can go and bid on projects.  Elance.com and oDesk.com are two example.  I haven’t used oDesk myself but I know others who were happy with it.  I have used Elance quite extensively and it is pretty good.

In order to get started you have to register and then start looking through the various job offerings and make bids to get the contract.

Those sites are worth checking out.  If nothing else you can see what types of jobs are being offered in the areas you are interested in and what kind of $$ they are offering.  It doesn’t hurt to sign up and try to get a small job or two.  You have to start somewhere.

Copy writing companies

Textbrokers.com and ReliableWriters.com are two examples of copy writing companies.  These companies hire writers so they would be a possibility for a job.  The money would be a bit less than doing it on your own but of course they would probably have more work for you.  This might be a tough gig to get for a new, inexperienced writer.

Blogs

In the personal finance blogosphere there are quite a few blogs which hire writers for various reasons. I do this quite extensively.  If you are going to apply for a position then you should try to get a few posts written so that you can show the blogger what kind of product you will be delivering.

The two main blog options are:

1) Regular writer.  A lot of bloggers get tired of writing a certain number of days per week but still want the same amount of new content.  Sometimes they will hire someone to “be their own voice” for 1 or 2 days a week.  Mr. Cheap and I have had this exact arrangement since I bought him out in the fall of 2008 and I’ve just hired Jay (ironically enough) to a similar arrangement for one day per week.

2)  Specific paid content.  In this format a blogger will do the research to determine what type of content is likely to make some money and then will order it from either a freelance writer or a copy writing service.  The main difference between this option and option #1 (regular writer) is that the blogger will completely determine the topic, length, style etc of the post. This type of post will often require some research.

Once you have gotten some work experience at the suggested areas then I would try to break into the corporate world to get higher paying jobs.  Things like technical documentation etc pay a lot higher than a weekly gig at a two-bit blog like Four Pillars.

Do you have any other suggestions for someone looking to break into freelance writing?  Writing course? Other ideas?

Financial Blogger posted a link to a great article in his monthly round up for August. While I respect what the original poster is getting at, I’m not sure I totally agree with her.

She talks about how being “thrifty” when you’re at a fast-food restaurant and sharing a drink (with free refills) between the whole family is more likely to teach your children that stealing is ok, rather than the value of saving a dollar. Thankfully she follows this up by admissions of similar situations where she does the same thing (sneaking in food or getting in free as her daughter is an employee). I don’t buy her justification that her actions are “thrifty” while the actions of others are thievery.

My guiding principle in situations like this is that “bending the rules” is morally permissible when you’re not causing a business or individual a measurable lose. I don’t buy the argument that its theft when you deny them potential sales. Shoplifting is clearly wrong, as the Roots store has one less leather handbag to sell if you take it, and you’ve clearly hurt them. At a fast food restaurant, the fountain drinks cost them next to nothing (probably about the same amount as napkins and condiments which they give away free), therefore how you’re really hurting them by sharing is that you aren’t buying multiple drinks. You might have come in and just bought food (and no drinks), in which case they’d be in the same situation, so how have they really lost out on anything other than POTENTIAL revenue? I never feel I owe a business the amount of sales they figure I should buy.

Downloading music is similar. Sure, the artist doesn’t get paid (or, more importantly, the distribution company), when you download “Hit me baby one more time”. Britney doesn’t lose a thing (except the hope that you may have bought her CD).

The movie theatre seat that Grace sits in would have sat empty during the movie, so her being there without paying an admission doesn’t hurt them in any measurable way.

I can understand why businesses WANT to be able to collect more money, and I certainly support them in trying to limit cheap-o activities (like people sharing drinks, sneaking into the theatre and pirating movies). I think in each situation, the business is already policing it as much as its worth to them to prevent customer “abuses”, and if the odd person spends a day “theatre hopping”, good for them in the opinion of Mr. Cheap.

Years ago, during my undergrad, I attended a lecture about grad school. One of my profs talked about his experience being a grad student, and how he’d worked between his undergrad and starting grad school. He made the point that if you save a little bit of money and bring it into your grad studies, life can become a lot more pleasant (with the ability to take a pretty undergrad out to a movie or to purchase the odd pitcher of beer).

At the time, I thought this was the most blatantly obvious thing I’d ever heard (I’ve always been a saver and had a bit of extra cash available, even through my undergrad). The funny thing though is, 1) most people don’t realize this and 2) it’s not just true about grad school – it’s true about life.

Say someone is working paycheck-to-paycheck, maybe supporting a family or maybe just themselves and a deluxe apartment in the sky. Every two weeks, his pay is eagerly devoured by all his life expenses, with anything extra he can afford disappearing into a credit card debt (that never seems to get smaller). Say on a Wednesday before payday the boss comes in and rips the guy a new hole for something that isn’t his fault. How is he feeling?

Take another guy, similar situation but no debt and 3 months of savings in the bank. Maybe his daughter only goes to 1 dance lesson per week, maybe his deluxe apartment is actually a shared 2 bedroom in a 30 year old building. His boss comes in and rips him a new hole for something that isn’t fair. How is he feeling? Pretty willing to tell the guy off and head home to enjoy a long weekend before starting his new job search, eh?

The joke of it is, the employer would probably pick up on the first person’s desperation and would be less likely to chew the second guy out (because he’s probably stood up for himself in past situations). I suspect employers and managers often get a feel for the people who really need the next paycheck. In “The Millionaire Next Door” it talks about the two daughters of a rich guy. A man marries one daughter and accepts a cushy job at his company. The old bugger treats him like a servant in the house and after a couple cocktails starts calling him bozo. The other son-in-law politely refused a similar position and had refused monetary handouts, and every time he visited was treated as a honoured guest.

Your dignity shouldn’t be for sale. Especially for the consumer trinkets they offer these days. Having someone sense your desperation and run you down will make you feel far worse then the $300 running shoes or the trip to the all-inclusive made you feel good.

Being debt-free with 3 months of living expenses (either in the bank, in the stock market or in property) is half-way to freedom. Until then you’re just a slave.