Friday, September 23, 2022 / by Mario Daniel Sconza
Financial Friday #128: Is it Time to Hit the Financial Panic Button?
It's easy to hit the financial panic button these days as rising interest rates, skyrocketing inflation, and the same old salary make it harder and harder to make end meets. There are a lot of tips and advice flying around on how to fight back, but they often focus on short-term solutions. While these hacks may help you keep your head above water for the time being, you really need to look at your finances from a long-term perspective and ask yourself, "What changes do I need to make today that will have a lasting effect on my financial situation?"
The first change is to adjust your mindset until you are convinced that hanging on to money is easier than going out and making more money. Your ability to earn is limited by the time, abilities and skills you have. We can improve our earning power by investing in ourselves with education, accumulating work experience, or by learning news skills. We can also just work more hours. However, earning more is a losing battle if you never learn to spend within your means and start to put something (anything!) away in savings.
Working more and spending more is an endless hamster wheel that you will never be able to escape from. It's painful, but you must prioritize living within your means and saving and investing over spending. Even if you can only manage to save 5% of your current income that is a great start — you can always up the percentage down the road.
The second change you need to make is to know when assets turn into liabilities.
Objects like cars or buildings owned by a business are assets, they help the business earn money. Cars or houses held by an individual are not really an asset because they take cash away from other income-generating opportunities.
Many Canadians spend up to 20% of their salary on a vehicle and the related costs. While a car is a necessity in many circumstances, you need to focus on getting from A to B safely with reasonable comfort and park your desires for style, speed, or an orchestra-quality sound system. Warren Buffet's annual income is estimated at around $4.5 billion and he drives a 2014 Cadillac STS he purchased new for $45,000... that's about 0.001% of his annual income! That's an extreme example, but there is no $450,000 Maybach Mercedes parked in Warren's driveway.
Houses are another asset that requires more in-depth analysis. Despite?the rapid appreciation we have seen in housing markets, houses have a ton of costs we don't always add up. Mortgage interest, property taxes, repairs and maintenance, and utilities all work together to dramatically lessen the return on your investment over the long run. You also have to sell it in order to realize any income and rapid or even "normal" appreciation is not guaranteed as we have seen over the last few months.
While having a mortgage is a type of forced savings that can help people who may have otherwise spent that money, it is also very easy strip out equity these days with an equity-backed loan or line of credit. There are lots of intangibles and uncertainties in the rent versus buy debate, but if you have been shut out of the housing market by prices that would eat up 40% or more of your monthly income, you may not be missing out. Our $100 billion friend Mr. Buffett has lived in the same house for over 60 years and it is worth about $650,000.
The last change that you need to make is to get over the fear, self-doubt and plain old laziness that stops you from getting started on building your wealth. The ideas and principles needed to become a successful investor are not overly difficult and anyone can learn them.
Yes, there is risk to investing, and even though financial knowledge will help you understand and rationalize risk, some of us are still hesitant to take that first step for fear of failure. If you have ever caught a webinar with Enriched Academy founder Jay Seabrook, you may have heard him say that he is actually very risk averse. It's not a leap of faith and knowledge will certainly help you justify your decisions, but you may need to adjust your comfort zone and add a little "calculated boldness" to get you over that initial hump.
Paycheque-to-paycheque living up 26%
"Many Canadians feel stretched thin, and that the ability to change their financial position remains out of their control" says a new survey from the National Payroll Institute and the Financial Wellness Lab of Canada.
Grocery prices continue meteoric ascent
It seems there is nowhere to hide when it comes to avoiding inflation at the grocery store and Canadians are having to make tough decisions about food — even traditional budget-friendly items like frozen vegetables are up 14%!
Loonie hits 2-year low: What does it mean for inflation?
A Hawaiian holiday is definitely getting more expensive by the day, but how is the loonie holding against the US dollar compared to other currencies and more importantly, what does that mean for prices of other goods going forward?
Home prices post record monthly decline in August
House prices continue to fall month-on-month but remain much higher on a year-on-year basis. This article has some great stats on which markets remain hot, and which ones are sliding fastest.
ETFs vs. mutual funds: What’s the difference?
Exchange-traded funds and mutual funds are similar, but not the same — here are some key things any beginner investor should know about these popular investments.