Out of all the ‘best practices’ in personal finance, emergency funds are probably the simplest and most effective. There is nothing easier to set up and nothing that provides more peace of mind than an emergency fund.
Emergency funds are boring, they are simple, and they hopefully never get used.
The purpose behind an emergency fund is simple. An emergency fund should provide quick access to cash in the event of an emergency. An emergency should be something truly unexpected like a job loss, a health emergency, an unexpected repair, an accident etc. Using an emergency fund for an expected expense is NOT the right way to use an emergency fund (more on that later).
Emergency funds can also be called an ‘e-funds’, ‘rainy day’ funds, or ‘oh $h!t’ funds. Whatever you call it, the purpose is the same, to help ease the financial burden during an emergency.
Yet, as simple as emergency funds are, they sometimes get used incorrectly. In this post we explore what an emergency fund is, how to set one up, how large it should be, and what NOT to do with an emergency fund.
Children are expensive. That’s something we can all appreciate. But just how expensive are they? What is the cost of raising a child? What is the cost of raising 2, 3, 4+ children?
For new parents, or soon-to-be parents, the cost of raising a child can be a real guessing game. As parents to two young children, my wife and I felt the same uncertainty when we started our family. We had to guess about how much it would cost and what kind of expenses we needed to anticipate.
We anticipated some costs, especially in the first few years, but we never took the time to look at the total cost of raising a child, we just didn’t know where to begin.
As many parents can attest to, raising a child is expensive. There are many costs when raising a child. From diapers to daycare, food to formula, the total cost of raising a child is shockingly large.
The estimated cost of raising a child in Canada is $203,550! Wow!
Plus, this estimate doesn’t even include educations savings like RESP contributions. Add in enough RESP contributions to max out the $7,200 government grant and you’re at a total cost of $239,550 to raise a child in Canada!!!
With each child costing nearly a quarter million dollars, anticipating these costs becomes a very important part of a financial plan. It’s also important to realize this this quarter million is very front loaded, with a lot of the cost coming in the early years. For new families this is important.
When building a plan, we want to anticipate these costs on a year-by-year basis, we want to understand when these expenses will occur, and we want to plan for possible cash flow issues down the road.
We also want to help new parents understand that there is a light at the end of the tunnel, because for parents with 1, 2, or 3+ young children, the cost of daycare and diapers can feel pretty overwhelming.
Lastly, we also want to anticipate government benefits and tax credits, both can help offset a large percentage of the cost of raising a child. This is an important part of a family plan and can be worth thousands of dollars per year, so we don’t want to ignore them.
There are lots of easy ways to save money each month but these four are probably the easiest.
Saving and investing on a regular basis is a key way to achieve financial goals. Creating a strong habit is important to accumulating a significant amount of wealth. Without a regular habit of saving and investing it can be quite difficult to make significant progress.
Even a small change can have a significant impact if it’s done consistently over a long period of time. There isn’t a big difference between financial success and financial stress. Even as little as $10/day can have an enormous impact over the course of a few years. Extrapolated over decades the difference is staggering.
Thankfully with technology this can be made quite easy. There are a few simple ways to save money each month. And accounts like the TFSA and RRSP make that even easier. They allow contributions to compound tax free, providing a significant boost to savings and investments.
There are a few easy ways to save money each month. The four ways we’ll focus on in this post all use automation. They take advantage of programs or systems that already exist. This helps make it easier to setup and maintain a healthy savings habit.
Automation is great, it helps maintain a good habit, and it makes it easy to “set it and forget it”. Best of all, automation means that we typically don’t even see this happening each month. By automating contributions to savings and investments we hardly miss the money being funneled away for future goals.
Spending is one of the most important factors in someone’s personal finances. Even a small amount of extra spending, over a long period of time, can have a very large impact on someone’s financial situation.
In this post we’re going to explore how large this impact can be. To do that we’re going to follow two people through their financial lives, from starting university all the way through to late retirement. Year-by-year we’re going to see how spending impacts their finances.
Spending is an interesting topic. It’s such an important factor in everyone’s finances and yet everyone spends money differently. We all value things differently, which means we choose to spend extra money on different things. This makes it very hard to figure out what “the right amount of spending” actually is. Spending is very subjective.
What makes it even more complicated is that we all have learned habits and behaviors that impact our spending. These habits are learned over time and can be very difficult to break.
Plus, we’re all impacted by our past spending decisions (ie locking into an expensive car lease, buying ‘too much’ house, putting a vacation on credit). Even if we have the best intentions going forward, these past spending decisions can be an anchor.
Spending also has a large impact. A small amount of extra spending can have a large impact over time. Compounding means that just a little bit of extra spending, over a long period of time, has an enormous impact on our financial lives.
As an example, spending an extra $10 per day seems small. It’s pretty easy to spend $10 per day. This is a coffee every day plus a purchased lunch every other day. This is a nice meal at a restaurant once per week. It’s an extra piece of clothing every week or two. Or it could be a slightly larger home costing an extra $100,000, which comes with extra interest expenses, extra property tax, and extra heating and maintenance costs. It could be driving to work instead of walking, biking or using public transit. Or it could be a combination of these things.
Even though an extra $10/day in spending seems small and is easy to do if you’re not paying attention, over time it has a huge impact on a person’s financial life.
This post will follow two people through their financial lives, with one person spending $10/day more than the other. It may seem small, after all it’s only $10, but that adds up $3,650 per year, or $36,500 every 10-years, and that doesn’t even account for compounding.
By following two people through their financial lives we’ll see how spending an extra $10/day causes their financial lives to diverge dramatically.
For our example we’ll use two friends from high school, Katie and Kyle, they’re both 18 years old and about to enter university. They’re both entering an engineering program and have very little saved for university. They’ll use student loans plus summer jobs earning $12,000 per summer to help pay for their education.
Most important however is that Kyle is the more spendthrift friend out of the two, spending an extra $10/day than Katie. This habit of spending vs saving will continue throughout their lives with Kyle always spending $10 more per day and Katie saving that $10.
Let’s follow Kyle and Katie through a few periods of their life. We’ll see how a seemingly insignificant $10/day can cause their financial lives to diverge dramatically over time.
They say the best time to plant a tree was 20-years ago but the second best time is now.
The same goes for financial planning. The best time to build a plan is before a crisis/recession/depression but the second best time is today. A good financial plan will help ensure that you’re prepared for a recession or financial emergency.
Having a financial plan provides an incredible amount of peace of mind. A good financial plan will already have anticipated a scenario like this and will ensure you’re still successful. It will highlight how to prepare for a recession and what changes you need to make to ensure you are successful over the long-term.
There are a few best practices that can help improve the ‘robustness’ of a financial plan. These are practices you can start using right away, even if they weren’t previously part of your plan.
Some of these best practices focus on behavior. They help manage your financial routine during emotional periods like this. Some focus on flexibility. They ensure that you have room in your plan to absorb the unexpected, whether that be changes in income, changes in expenses, or changes in investment returns.
It doesn’t matter if you’re in retirement, starting a family, or just starting to save and invest, there are a number of ways that you can prepare for a recession that will help you feel better about your finances and your long-term plan.
This post will touch on many of these best practices. These are best practices that we’ve covered in previous posts, so we’ll cover the basics here and link to past posts for more detail.
Low risk investments are an important part of every financial plan. There are certain reasons we want to use low risk investments in a plan and there are different types of low risk investments that we may want to consider.
Often we can become too focused on increasing investment return to appreciate the usefulness of a low risk investment. When used appropriately, a low risk investment provides an important source of funds in an emergency, or provides less volatility in our investment portfolio, or provides a psychological advantage that may help us avoid making a behavioural mistake during a downturn.
There are a few places that low risk investments will show up in a typical financial plan. If you haven’t considered these uses for low risk investments then it might be time to get a second opinion on your financial plan…
1. Emergency fund
2. Saving for infrequent expenses
3. Saving for a down payment (Or other short term financial goal)
4. Fixed income portion of an investment portfolio
These are some of the typical uses for low risk investments but what are some good low risk investments to use and which of these uses would they be appropriate for?