Monday 25 September 2017

Financial Success – Pay-Yourself-First

Don’t save what is left after spending, spend what is left after saving. - Warren Buffet

Bruce Fights TTP doesn’t sound like a place to discuss financial success, but I thought I would give it a try. During my third episode with the rare blood disease Thrombotic Thrombocytopenic Purpura (TTP), I was wondering if my family would be secured with our finances.

The good news is we are in good shape due to three reasons:

I’ll discuss pay-yourself-first in this posting.

Pay-Yourself-First
Pay-yourself-first has always been my position, even before I read The Wealthy Barber back in the 90’s, where Chilton states "save 10 per cent of all that you earn and invest it for long-term growth." In fact, I have put the maximum into my RRSP every year since university with one exception. I can’t get that year back.

The idea is the first debt you have every year is the one you owe to yourself. You owe the maximum contribution to your RRSP. You also owe the maximum contribution to your TFSA. This debt can be paid on a monthly basis through direct deposit. You won’t even miss the money.

Why?  If you pay-yourself-first, invest in a reasonable way and do not take back, then the sum will grow to a size which will allow you to retire successfully at a reasonable age. The deposit sum can be adjusted if you have a pension, but who gets a pension anymore? We don’t in high-tech.

The first argument is I can’t afford it! Really? Well you need to make yourself afford it. This is just a life choice. Buy a home or rent? Stay-home vacation or a cruise in the Caribbean? GS version of the car or GT? These are just easy decisions which you can make.

What is a reasonable way to invest? Balance of index funds and full global diversification.

Index funds track the various markets at a low cost. Maybe you say index funds are boring, can’t we get something more exciting? No, let’s just stop there.

Quick baseball analogy, wouldn’t it be nice to staff your baseball team with players like Ted Williams, the last player to hit over .400 in major league baseball? It would be great, but Ted hit .400 in 1941 and it hasn’t been done since. Instead, let’s get more modern and try Moneyball, which used an analytical approach to meet major league baseball’s hitting average. (A great movie starring Brad Pitt and the baseball version of index funds.)

You are probably best to discuss these concepts with your financial planner, but the index funds should be balanced for your risk tolerance:
  • Income funds versus equity funds
  • Global balance between Canada, US and International funds
  • Large capital versus small capital
I also wouldn’t worry about equity and how it will perform in the short-term. Equity has many variations, but in the end, it goes up. Here is the Dow Jones Index of my investing term. I have had to live through 1987, 2002 and 2008, but in 2017 the index is now as high as ever. Obviously 2008 was not a good time to retire. Life choice, keep on working. The goal of some individuals was 'freedom 55', but they had to work until age 60. You will also have to make this choice.

In my review with my planner, our pay-yourself-first plan is working well and we are on track to retire as planned.

Pay-yourself-first! You should be your most important debtor.

Thanks, Bruce.
@BruceFightsTTP

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