SMS 174 – Open Ended Debt Solution

The Open Ended Debt Solution

We should avoid debt at all cost, but in life things don’t always go as planned and debt becomes unavoidable. Also for things like buying a house and sometimes getting an education require debt based on the timing in life and the natures of their significant cost.

Whenever you enter and agreement to borrow money and repay it you need to be strategic

Borrowing money for education:

This one is hard as you don’t know how much you will make so it becomes hard to access how long it will take to repay. The terms of the loan state when interest will be charged and when you need to begin repayment, but for the average person this is an open ended debt that you hope to repay some day in the future.

Borrowing money for a car:

When you borrow money for a car at first glance it appears to have an end date, but in the big picture of owning cars for most it is not. Once you own a car there is generally no going back to not owning a car, you become a car owner for life.

How car buying usually happens:

  • You buy a car based on the monthly payments you can afford and this is based on interest rate and term
  • Assume this car payment was the most you could afford and the term was over 8 years
  • Assume this dramatically reduced your savings rate to which you were only able to save the down payment for your next car at the end of 8 years

How car buying should happen:

  • You buy a car based on your ability to repay the loan over 3 years
  • You drive the car for 8 years
  • At the end of 3 years you continue to save your car payment the 5 yeas you don’t have a payment
  • At the end of 8 years you buy a better car that will last 10 years but still repay over 3 years
  • At the end of 3 years you continue to save your car payment for 8 years
  • At the end of 10 years you pay cash for your next car

Borrowing money for a house:

Based on the significant cost of a house borrowing money is a reality for most, if we saved up and paid cash two things would happen. First we would be chancing the housing market in that for most people the house would increase in cost faster than your savings rate and you would never reach your goal. Second, by the time you saved up enough for a house your hosing need would have changed.

The open nature of a mortgage is kind of sneaky:

  • Approved based on monthly carrying costs, assume 25 year amortization
  • Agree on a term for interest rate, assume 5 years
  • At the end of the 5 years you can renew your interest rate and amortization
  • Based on interest rates people generally adjust the amortization to get the monthly payment that they are comfortable with, this could be another 25 years.

How a mortgage should be repaid:

  • You should be approved based on your ability to repay the mortgage in the year you plan to be mortgage free
  • The year you plan to be mortgage free should be based on all of the other life events such as educating your children and when you plan to retire.

The problem with open ended debt:

  1. You spend your time solving your past rather than focusing on your future
  2. You become okay with debt 
  3. You have no sense of urgency

SMS 173 – Budgeting Q&A

Budgeting Q&A

  • Is there one best way for everyone?
  • How has budgeting changed and evolved for you as you’ve progressed through your life stages?
  • When did you first start using a budgeting tool and was it out of necessity or desire or because you “thought you should”?
  • Can you speak to bringing a partner in on your budgeting process? 
  • How budgeting practically look like for you and your wife? What roles do you both play in the process?
  • Did you get your children involved in the budgeting process as a family and as their own individuals with their personal budgets?
  • Has your background as a CPA or working within corporate finance benefited you in terms of budgeting at the personal finance level?

Methods of Budgeting

1. 50/30/20 Budget 

Break down your expenses into three categories: needs, wants, and savings – 50 percent of your take-home pay should go towards needs, 30 percent should be devoted to wants, and 20 percent should get put into savings) –  the balance.com | Paula Pant

2. Predictable vs. Unpredictable –  Shannon Lee Simmons

3. Mandatory vs. Discretionary – the method Trevor uses 

Tools

App vs. Spreadsheet

Setting up Your Budgeting Tool – what does it actually look like?

  • Expense tracking vs. Budgeting
  • Describe the layers and categorization rationale 
  • How do you build in or account for savings?
  • How to maintain the diligence or self-discipline to maintain your budget (i.e. day-to-day expense tracking) and what does your process look like?

**Moving from expense tracking to budgeting

  • When to move from expense tracking to budgeting
  • How to actually set realistic budgeting figures
  • How to stick with your budgeting figures or when to make adjustments 
  • How do you go about setting that goal for savings and how do you stay motivated to keep that momentum going?
  • How to use your budget as a tool (i.e. ramp up your savings or repay debt versus simply using it to maintain a balanced budget where you ensure you are spending less then you earn)

Do’s and Don’ts

  • Do: Updating your budget close to when you spend the money for a cause and effect
  • Do: Collaborate – it has to be a partnership in any relationship, not one person’s responsibility 
  • Do: realize that budget planning is not math its actions
  • Don’t: Get too granular
  • Don’t: Think you get a pass – no amount of wealth/lack of wealth determines if you do or don’t need a budget
  • Don’t: Think budgeting is temporary 

SMS 172 – Debt is the Symptom not the Problem

In life debt can be either a temporary situation or a permanent situation, and how you view debt will determine your perspective. If debt is the problem you will spend your lifetime trying to solve it, if you treat it as a symptom you will peel back the layers and find the cause.

You have to be willing to accept the lifestyle your income delivers, everything else is just a hobby. The real challenge is when income and lifestyle are not aligned is to access the temporary vs permeance of the situation. The risk of getting this wrong can be the difference between success and failure.

When you focus on debt as the problem your solution always appears to be deprivation which we all know is unsustainable.

The five why method is a very effective tool in getting past the symptoms and find the cause:

  1. Why is my credit card maxed out – we had no money to fix the furnace
  2. Why did we have not money to fix the furnace – we had no savings
  3. Why did we have no savings – all of our income is needed for our monthly expenses
  4. Why is all of our income need for our monthly expenses – car payments are 40% of total expenses
  5. Why are our car payments 40% of our total expenses – because I need to drive a $65k truck

Side note: the car you can afford can be paid for in 3 years or less and does not exceed 50% of your household income.

The transition of not seeing the symptoms:

  1. Debt symptoms happen gradually
  2. You are in denial that anything has gone wrong
  3. You believe your situation is temporary
  4. You never had a disaster plan
  5. Your ego becomes your enemy

Problems that look like symptoms (these require lifestyle changes):

  1. Lifestyle inflation
  2. Car poor
  3. House poor
  4. Job loss
  5. Divorce
  6. Illness
  7. Death

The problem with solving symptoms:

  1. All solutions are temporary
  2. You never get to the root cause
  3. You never get ahead financially – you keep trying to solving the same problem
  4. Symptoms don’t have solutions – you can’t fix wanting a car you can’t afford

SMS 171 – Amazon Prime

Amazon Prime

Amazon prime is a membership service that for most people provides expedited shipping, but there are some additional benefits that are commonly known and even more benefits not so commonly known.

The cost of Prime is $7.99/month which includes one free month for new members or $79.00/year which works out to $6.58 on a monthly basis.

More importantly is Prime a good idea from a behavioral economics standpoint?

Prime commonly know benefits:

  1. Free same day shipping (32 cities & towns across Canada)
  2. Free 2 day shipping – no minimum dollar amount
  3. Prime Video – downloadable
  4. Prime Music – ad free, downloadable
  5. Prime Reading – kindle

Prime not so commonly known benefits:

  1. Early access to lightning deals
  2. Amazon Photo storage – 5GB
  3. Prime Days – like black Friday
  4. Prime Channels (live & on-demand) – STARZ, Hayu, MGM
  5. Amazon family subscriptions – save up to 20% on diapers and baby food
  6. Three months free Audible membership
  7. Twitch Prime – includes bonus games & exclusive in-game content

The problem with Prime:

  1. The video service is not very good
  2. The music app is not great
  3. Promotes consumerism
  4. You have pre-paid your shipping costs
  5. Reduced transaction friction

When does Prime make sense:

  1. Consumable products
  2. Products you can only get on Amazon
  3. Utilized with a large family
  4. Use of video and music services exclusively

Re-Broadcast: SMS 100 – Your Path to Financial Independence

  1. Budgeting is a way of life
  2. Never buy a new car under any circumstance
  3. Always buy or rent for your current housing needs
  4. Never be a victim to lifestyle inflation
  5. Always be frugal never be cheap
  6. Only borrow money for things that go up in value
  7. Learn your financial weaknesses early in life, everyone has at least one
  8. Plan to live on half your income by the time you are 50
  9. Surround yourself with like minded people
  10. Learn to enjoy the simple things in life

SMS 170 – How I Consume Books

How I Consume Books

Why Books are Important:

  1. Timeless format of knowledge 
  2. Tested formula
  3. Cost effective knowledge
  4. Consumed at your schedule
  5. Creates community

Types of Literature:

  1. Fiction
  2. Self-improvement
  3. Non-fiction

Selection Process:

  1. Fiction is important
  2. Challenge your beliefs
  3. Self-improvement over self-help
  4. Read the reviews

Books should be:

  • Entertaining
  • Informational
  • Inspirational

How I Consume Books:

  1. Audiobook
  2. E-book
  3. Physical book
  4. Connect with the author (podcast, website, YouTube etc.)

Advice for individuals who’s like to consume books?

SMS 169 – Looking Forward and Back

Looking Forward and Back.

When you turn 50 you have a very unique view of life if you choose to see it. You can look back by observing your children and reflecting then things in life that your found challenging. You also have the opportunity to observe your parents and see the things in life they find challenging.

If you can relate to your children’s challenges and remember yourself in their positions then you have to believe the challenges your parents are struggling with will be your future unless you change your current trajectory to chart a new course.

Questions to ask yourself:

  1. Did you follow your parents path and are your children following your path?
  2. What are their concerns – did or do those things concern you?
  3. Will it matter in 20 years – were your concerns worthy?

Things to observe:

  1. Time
  2. Stuff
  3. Health
  4. Money
  5. Relationships

My observations:

  1. My children are concerned about their financial futures
  2. My parents are concerned about their financial futures
  3. My children are not concerned about their use of time
  4. My parents are not concerned about their use of time
  5. My children are not concerned about their health
  6. My parents are concerned about their health

Final thoughts:

  • Open growth mindset
  • Trust the process

SMS 168 – I’m Just Not a Saver, is that OK?

I’m just not a saver, is that ok?

A long time ago I was visiting a relative and was admiring the comforts of life they had accumulated and commented that they appeared to have done well and “had it figured out”. Their response was that all this comes at a cost. They said “I am not a saver, but I am great at paying back”. At the time I thought, well that’s great, you have the skill to pay things back.

Recently I had a very similar conversation with an acquaintance and they proclaimed they were “a terrible saver, but a great payer backer”. Twenty years later I have a very different perspective on this.

The problem with not becoming a saver? This is a skill and discipline that needs to be developed.

How do so many people end up going down this road?

  1. We often start out life in the hole
  2. We need to acquire things to create a comfortable life
  3. Societies expectations and timelines are unrealistic

The problem with using debt to advance though life:

  1. Debt requires income
  2. Debt has a ceiling, savings does not
  3. Debt adds risk to everything
  4. There is no wealth building opportunity

The solution:

  1. Get to a place where you spend less than you earn
  2. Always spend money that is at least one month old
  3. Become in love with a process that will lead you to saving

SMS 167 – The Problem with Abundance

The Problem with Abundance

The opposite of abundance is scarcity – you think we want abundance but we actually are seeking scarcity.

  • One of kind, hand made
  • Collections edition
  • Antique, retro, vintage
  • Latest edition, just released

The problem with scarcity – the biggest problem with scarcity is worry for the future, fear and anxiety, and all or nothing mindset

The problem with abundance – there is not off switch, no ceiling, no limitations, no fear or concern for the future, “it will always be there” mindset.

Email is the best example of the destructive power of abundance

Are we are living in a world where too much is becoming a problem? Too many choice can cause us to become careless and directionless.

Is scarcity better than abundance? If you had to choose one over the other scarcity has the benefit of fewer self-inflicting consequences.

Why I never sign up for open ended offers or opportunities –  there is no opportunity for resourcefulness or optimization.

Automation.com: white paper The problems of abundance

Example: Back in the pre-internet era, It used to be there was nothing to watch on TV at a given moment in time. Two benefits of this were you watched less TV and when you did watch TV you were fully engaged and entertained.

More humans, in the history of the human race, have died from too much nutrition than not enough. The human body was designed to survive periods of scarcity, we do not do so well with abundance.

Revolutionary promises:

The Agricultural revolution was supposed to solve hunger and make our lives better

The Industrial revolution was supposed to make our lives physically easier

The Technology revolution was supposed to make our lives more efficient

The Artificial Intelligence revolution is promising to……

Tech.com: Society Doesn’t Know How To Deal With Abundance – if you look at all of human history, probably 99.999999% of it has been about dealing with the issues of scarcity. In fact, our entire original economic philosophy (which is really just two and a half centuries old) was based on “resource allocation in the presence of scarcity.” Historically, abundance just hasn’t been an issue that we’ve had to deal with very much. And the problem is that people try to apply the mental rules of scarcity to abundance and they basically kick out an error message. It’s a “divide by zero” sort of problem. You get infinity as a result, and you think it’s wrong. So the response is almost always the same. Rather than actually trying to deal with what abundance enables, people try to force abundance back into a feeling of scarcity — which they’re comfortable with. That is, they try to apply artificial rules and restrictions to make the abundance feel like it’s scarce, so that they can understand it again.

Examples of abundance:

  • Technology – the internet, tele commuting, TV & music streaming
  • Communication – email
  • Global Markets – Amazon
  • Consumption – low cost consumer goods, single use plastics
  • Food – weight gain

The problem with abundance:

  1. No opportunity for resourcefulness
  2. Instant gratification
  3. Requires artificial restraint
  4. The paradox of choice
  5. Without a limit the answer is always more

How to solve the abundance problem:

  1. Self-imposed limitation – minimalism
  2. Narrow focus – ten feet deep instead of ten feet wide
  3. Value System – pre-made decisions
  4. View abundance as an opportunity to share

In The Seven Habits of Highly Effective People, Stephen Covey writes:

The abundance mentality…is the paradigm that there is plenty out there and enough to spare for everybody. It results in sharing of prestige, of recognition, of profits, of decision making. It opens possibilities, options, alternatives, and creativity.

SMS 166 – Is Being Too Busy a Problem?

Is Being Too Busy a Problem?

We often over estimate what we can accomplish is a day and under estimate what we can accomplish in a year.

Money is the lubricant of life, not enough and life is a grind, too much and your life has no direction. Too much disposable money can be a cause of being too busy.

Many people view those that are not busy as being lazy or self-absorbed when really they are just trying to enjoy life on their own terms.

Is there a problem…

The problem with being too busy is it could jeopardize our goals in life and we often think we have a great reason or at least we think we do, when really we are just consumed with busy work rather than important work.

How does being too busy relate to people in your life?

We often say we are too busy for a particular activity or action, what we really mean is that something is not important enough for me to consider it a priority.

Ask about the law of diminishing returns

The law of diminishing returns – a point at which the level of profits or benefits gained is less than the amount of money or energy invested

Hiring a service to do your home chores. Such as house cleaning or year work, might be a sign that you are too busy.

15 Signs You Are Too Busy And Should Stop – LifeHack.org

There are 3 thing at play here:

  1. Having too many required actions for a given day that exceed 24 hours
  2. Allowing your required tasks to completely fill a 24 hour period
  3. Wanting the image or illusion of have required actions that exceed 24 hours

Causes of being busy:

  1. Procrastination
  2. Poor planning
  3. Poorly designed life

Reason to not want to be busy:

  1. When your busy your judgement is comprised
  2. When your busy you don’t have time to collect your thoughts
  3. When your busy you put your health at risk
  4. When you’re busy, you make busy excuses for actual problems
  5. When you’re busy, you unconsciously sacrifice consistency

How to Slow down:

  1. Plan to do less – if you are a parent then that is your job, hobby, sport, and general interest
  2. Work life balance – this does not exist with a high paying career, you have to make a choice
  3. Prioritize – will this matter in one year, five years, ten years, on my death bed
  4. Enjoy the simple things in life – don’t just do them learn to enjoy them