#38 Use good debt wisely, get rid of bad debt completely.

Most people have some form of debt.  Credit card debt, student debt, mortgage debt, car loan, family loans, investment loans, payday loans, rotating lines of credit, and consolidation loans are probably the most common types of debt.  People typically use debt to buy something when they don't have the money for it at that given moment in time.  We as a society don't often save up for things before we buy them, but rather buy them and then pay back the loan over time... that's just the way most people do it these days, particularly younger people just starting out who have no savings to begin with.  The problem with debt is that if taken on for the wrong reasons, or if handled irresponsibly, it can make your life more difficult rather than easier.

But not all debt is bad.  We are quite comfortable taking on large amounts of debt but we only take on what we consider to be "good debt" and that brings us to defining good debt vs bad debt.  We use a fairly simple definition but it has some room for subjectivity.  Good Debt results in a better longer-term fiscal situation for our family as a whole.  Bad Debt results in a worse fiscal situation.

Another way of looking at it would be asking the question:  Does the cost of paying the interest plus the principle make up for it FINANCIALLY in the long run?

Here are my thoughts on what are good types of debt and what are bad.

Credit Card Debt - Bad Debt.  Interest rates are too high and most people use credit cards to buy things that depreciate over time.  If you don't pay your credit card off quickly, the interest will eat up a lot of your money.

Student Debt - Generally Good.  Assuming you are using the the associated education to make more money than you would without the education, then yes Student Debt can be Good.  Once you're done your education, I advise to pay off student debt quickly.  I would however challenge people taking "basket weaving" classes whether those types of diplomas/degrees are worthwhile for the money and interest that they are required to pay back, often for years and years. 

Mortgage Debt - Generally Good Debt.  It allows you to choose where you live and how long you live there by owning property.  Its debatable whether a home is an investment, but the benefit of being in control of where you live and knowing that rent wont be going up every year can help you budget your money more easily.

Family Loans - Generally Bad Debt.  Owing a family member may make sense in some cases, but I'm not a fan of owing family simply because its awkward and usually one side feels they're not getting the treatment they'd like. 

Investment Loans - Good Debt.  If you can make more money on the investment than you are paying for in interest costs, this is definitely good debt in my books.  We regularly use investment loans as part of our investment portfolio.

PayDay Loans - Definitely Bad Debt.  Essentially legal loan sharking. 

Rotating Lines of Credit - Depends on the usage, but I would bet most people are using it for consumer spending.  If you use it for investing purposes, then a Line of Credit can be good debt.

Car Loan - Bad Debt.  New Cars depreciate like crazy the first few years.  Buying a car may be a necessity, but we prefer to pay off car loans very quickly or don't have a loan at all.

Consolidation Loans - Bad Debt.  Usually the lesser of the evils of loans in that consolidation loans usually have lower interest rates than other high interest loans such as credit cards or some car loans. The downside is that this often still consumer debt, just at a different rate.  Pay it off.

Kim and I both had student loans in the 10s of thousands of dollars, which we paid off within a few years once I started working. At present, we have an investment loan and we will be buying a house next Spring which will mean we will have a mortgage again.   Both of these loan-types will help better our financial situation and so we are quite comfortable having them and generally not in a hurry to pay them down.  We have no other types of debt at the moment and we intend to keep it that way.  Whenever we've had other types of debt, we've work very hard to pay it down as soon as possible.  By only having debt that helps our financial situation and doesn't hurt it, it means we don't fuss over our debt as much as other people, and we know that by paying the debt off, we aren't merely pouring our money down the drain, or lining the pockets of others.  We obviously need to make sure that the amount of good debt we have remains at a manageable level that we can be expected to be able to cover with our monthly income.  That is where budgeting comes in.  

Rule #29 Talk about money. Ask about money.

"Money, like emotions, is something you must control to keep your life on the right track."

- Natasha Munson

Its funny how people refuse to talk about money.  I never really understood why money got grouped in with religion and politics as things NOT to talk about when at a dinner party.  And by talking about money I don't mean comparing paycheques, bank account balances, or hourly consulting rates.  When I say "talk about money", I mean discussing strategy, risk tolerance, debt management, negotiating tactics and so on.  I believe not talking about money is one of the reasons a lot of people are clueless about money management.  I suspect people are reluctant to talk about money because they don't want to talk about all the stupid things they have done or are doing with their money.   Or, it could be that they feel they're being compared to someone who makes way more or less than them and that makes them uncomfortable.  Maybe its because they don't want to find out they could be doing something better or that they are behind all their peers, as if there is some sort of competition going on.  The fact that few people talk about money is probably one of the reasons many families, singles, seniors, kids and governments all have such poor money management practices.

I for one have always been curious about money strategies, and I've never been afraid of asking questions however basic they may be.  I'm also a big fan of the sharing of ideas and problem-solving techniques, usually over a couple of beer.  When I was in University, I remember learning the most important and practical things about life through discussions at the student pub over cheap beer and poutine dinners.  The interactive discussion is where the magic happens, not the book learnin... and I think that still holds true today in the digital age.  I've managed to connect with a lot of like-minded money-talkers over the years and we have become a sort of financial network that I tap into quite regularly.  If you want to become well versed in a particular topic, it is beneficial to surround yourself with people who are smarter than you or have varying opinions on a subject, and the topic of money is no exception, and don't forget to ask lots and lots of questions.  I always like to talk about the mistakes I have made because I am a big believer in the sharing of ideas, both good and bad, and working through problems with different perspectives.  Making mistakes, or being unhappy with your decisions, is part of the process.  For me, it is not something to hide.

The Last Defence Lounge at the University of Calgary for Poutine and Beer nights.

With regards to finances, I am fairly opinionated on those strategies that work for us and those that do not.   However, I have had some great discussions with other people who have completely different strategies, and who are very happy to learn about what we do, and are keen to share their strategies with me.    Knowing and understanding the various routes to financial independence is the first step to actually getting there.  I try and learn from anyone who will talk with me about money.  One priority of mine is to talk money with our two boys when the time is right.  A lot of kids dont get "the (money) talk" with anybody until they find themselves up to their eyeballs in debt.  And while its never too late to learn about money management, it does sting less if you learn good money management earlier in life.

Some topics that might be worth discussing with other people when the topic of money comes up: Investment styles, debt reduction strategies, how to get the right mortgage and whether to pay it down or not, how to define and limit risk, alternative and multiple income streams.  It may also make sense to contact persons you know who have good money practices or have done well for themselves financially, and ask them for some advice.  My experience has been that if you are serious and genuine in your questions, most people are pretty open about talking about their money strategies.

Rule #27 No Financial Advisor.

”Everyone has the power to follow the stock market. If you made it through fifth grade math, you can do it.” – Peter Lynch

We had a financial advisor that came highly recommended from a fairly high-net-worth friend of ours.  We gave him a try for a couple years and it didn't work out. We lost significantly more money than we made, and then on top of that paid this person 1.5% of our portfolio value each year to manage our money.  I'm not a fan of paying someone to lose me money.  I can do that myself for free.  We've since moved on to an investment style that's a better fit for us and doesn't require a lot of "management" on either our side or a "professional's" side.  I'm not philosophically against Financial Advisors in general and it would be wrong of me to say anything bad about them based on our experience because we have only had one in our lifetime and it was at a time when the economy was moving into a recession.  With that said, for our investment style, paying for an FA for portfolio management is not a good deal.  Our style is to buy solid blue-chip stocks that pay safe and growing dividends and then hold them forever.  Because our plan is to buy the stock once and hold forever the only cost we incur is the commission price to buy the stocks in the first place.

If you have the confidence to go it alone, and I am not making any recommendation here that you do that, there is a lot of information on the web to help you build a solid portfolio on your own.  A basic "couch potato" style portfolio can be constructed fairly simply and get you similar returns to one a FA will build for you with minimal Management Fees.  Many FA offices are however great for offering one-stop shopping for many other types of financial instruments such as life insurance, estate planning, tax planning, purchasing annuities etc.  We got our life insurance from our FA and we feel we got it at a reasonable price, but thats not enough reason to woo us back to letting them manage my investment money going forward.

Here are the main reasons we dont use a financial planner:

1. I need to know where my money is and what its doing at all times - this is more about me and not about the advisor.  I generally don't trust others to look out for my best interest... I believe that is my job.
2. I don't believe in across the board diversification in our portfolio... so that rules out many mutual funds or ETFs.  I like to invest in what I understand. Investing in big diversifed funds makes it difficult for me to understand whats going on.
3. Most Financial Advisors do not outperform the market.  There have been lots of studies done out there that suggests that upwards of 70-80% of advisors either match the market or do WORSE.  (as stated before beating the market is not my goal anyhow but I threw this in because it matters to most people)
4. Management fees slowly erode your portfolio value.  Many Advisors charge 1-2% management fees over and above any fees the mutual funds themselves charge you.  Compounded over time this melts down your profits.
5. Most Advisors dont get paid based on the performance of your portfolio.  If your portfolio loses 10% in one year, they still get their management fee.  
6. Many advisors work for a company that restricts the products they can sell you.  You could argue that they are essentially salespeople for the products they sell.  Try going to an advisor who works for Company X and ask to buy mutual funds from Company Y.  Most won't or can't do it.
7. I know what I want to be invested in and what investment vehicles I want to stay clear of.  It makes no sense for me to go to an advisor and tell them what to buy for me.  The feeling is probably mutual.  I would think people like me would probably drive Financial Advisors nuts!
8. Our investment style doesnt' require 'management' or annual 'rebalancing' so why pay someone else to do it? 

In short, I don't think hiring a Financial Advisor is good value for us.

There are other reasons to be cautious about when giving your money to FAs but those would involve discussing things like "fiduciary" responsibilities etc, which I would prefer not to discuss here.... but I would add this: Some Financial Advisors do not put your interests first, and some do.  Stay away from the ones that do not.

Now these are the main reasons I prefer not to use a Financial Advisor.  I'm also a bit of an anomaly because I have the time, energy and keen-ness to do my own research and the confidence to buy and sell my own stocks.  If you don't have the time, energy or keen-ness to do all the work on your own, or to pull the trigger when it comes time to buy or sell stocks, or you need some hand-holding when the market is correcting, then a Financial Advisor might be in order.  I know a few who do a good job and will be upfront with you about how they get paid, what you can expect from them by dealing with them, and are quite open to challenge.  If you do go to a Financial Advisor, make sure you ask lots of questions around how they get paid.

The biggest challenge I have for others is: Is the cost of an FA worth it to you once you know: how they operate, how they get paid, what products they can and can't sell you, what incentives they themselves have to recommend you buy/sell a product, and how much time / desire you have to work on these things if you were to do it yourself?  If after you've addressed these points and you still prefer a professional to manage your money, make sure you get a good advisor - one who looks out for you interests.  If you do go it alone, make sure you are comfortable with your own abilities, understand your risk tolerance and have the ability to manage that risk.  We have found it to be quite financially rewarding. 

Rule #26 Create/Develop Multiple Income Streams

"It is better to have a permanent income than to be fascinating." - Oscar Wilde.

What would you do if you lost your job?  Do you have any additional monies coming in from other types of income that could help you get by until you get a new job?  I used to work in the resource sector, and if you know anyone who works in that sector, you've probably heard that it goes through violent boom and bust cycles.  A job and career this year does not guarantee a job and career the following year, so it became a high priority for us to create multiple income streams in case I found myself without employment.  You've also probably heard the phrase "Don't put your eggs in one basket" right?  Well, in my mind if you only have one type of income, you essentially have your income eggs in only one basket.  For example, if your employment income is discontinued for some reason such as an injury or a layoff, you may have nothing to fall back on.

I would think single people, or couples who both work in the same industry, are particularly at risk to this scenario.  If their jobs disappear and the household income is so concentrated in one sector, it can have significant impact on your savings if employment income is your only source of income and it goes away.  Having a second or third income stream is the akin to building up addition skill-sets that you can use when the need comes, or separate income you can use to fund your retirement when you stop working.  Some examples of second income streams are: investment income, a second job, trading income, a home or personal business, freelancing, royalties from music or a book that you produce, blogging income, income-producing real estate, pensions or annuities that you buy and so on.

Developing multiple income streams is typically not something you can do overnight.  People who take on this strategy often go to work during the day, and then come home at night after toiling away in teh salt mines and then do further work or research in their time off.  There is no shortcut or get-rich-quick strategy that works, so don't expect the payoff to occur until well into the future.  Any extra money you generate could help you fund your current lifestyle, your retirement savings, or can be reinvested to make even more income in the future.  If your secondary sources of income become great enough, you can choose to work part-time instead of full-time.... or possibly not at all.

There are lots of online sources giving you advice on how to start new income streams, but before diving into any of them, I would advise you to choose something that you are already keen on.  If you are into sports perhaps try refereeing high-school games.  If you like to write, try writing an ebook on a topic you enjoy.  For me, I chose to build passive dividend investment income and then juice that up with some conservative income-producing options-trading strategies.  Money management and financial strategy is something I've been pretty keen on since I was in high school, so these types of income were right up my alley.  Learning these strategies involved study, study and more study early on, but eventually they became like a second language.

Over time our second and third income streams have increased significantly and have contributed to our financial confidence and security.  We've been working on these streams of income for some time now, to the point where we can see ourselves being able to live a spartan lifestyle solely on them within the next 5-10 years if we needed to.  Our trek to financial independence has certainly gotten a boost from having these additional incomes.  Having multiple income streams has given us significant flexibility and control over our finances as the income continues to grow.

Rule #25 Live like a student as long as you can.

"The essentials of life are cheap. Only the luxuries are expensive." - Ron Muhlenkamp

Remember when you were a student at college or university? Remember how much fun it was and yet how broke you were? You didn't have a luxurious place to live in, or a car, and you walked to everything, or maybe skateboarded everywhere?  The TV you had was the TV the previous tenants left behind because it was too bloody heavy to move... you know.. the Radiation King with the wooden case, and you certainly couldn't afford cable TV.  You stayed in and hung out with friends, choosing potlucks instead of going to fancy restaurants.  You made coffee at home, and brought sandwiches for lunch instead of buying it.  Cheap Poutine and Pitcher of Beer night at the local pub was the best night of the week because you and your friends could nurse your drink and wax poetic all night long at discount prices.  Life was simple.  You had few financial liabilities and it was fun living this way.

But then something happened.  There was this temptation that with a new career must also come a car, new furniture, fancy clothes, an expensive watch or phone, a big flat-screen TV,  and instead of frequenting the local watering hole, you feel compelled to hang out in the more expensive places with the foreign or micro-brews on tap instead of the cheap domestics.   Your big adult paycheque deserved a big adult lifestyle.   That big TV meant a cable-TV plan, and high-speed internet and a phone with a big data-plan.  Whoa! This is starting to sound expensive.

I always tell young people I meet to resist this temptation as much as possible, for as long as possible.  It is extremely difficult to save, pay down debt, and generally get ahead if you jump into a higher standard of living without the financial base to make it happen first, and that is just what many recent grads do.  Once people get used to a high-status high-consumption lifestyle, it is often very difficult for people to reign in that spending if needed, so the longer you can prolong your student lifestyle, the better.  I can not emphasize enough how much financial sacrifice plays in to financial well-being and resisting many of these adult lifestyle trappings can be a boon to your bottom line and mental well-being.  In my opinion, spending money on luxuries in life such as cars, expensive clothes, and expensive monthly liabilities such as Cable-TV should only be done once the basics are covered such as eliminating bad debt and having some savings.  Another thing I've noticed is that people with high standards of lifestyle without a financial base often worry a lot about maintaining that lifestyle...  and I generally like to sleep at night, so a simple carefree lifestyle suits me just fine.

When I was in grad school, we lived just like in the first paragraph.  My wife and I lived in a very modest apartment, we didn't own a car, and we didn't have have a TV let alone cable TV.   When I got my first employment position as a technical professional, there was a temptation to buy all the fancy things people come to expect with such a position.  But we resisted.  We did however buy a house after  I had been working for 3 months only because we were going to be evicted from our apartment due to a coming renovation.  While we did own a house, it would be another 4 years before we would buy a car.  It wasn't that we couldn't arrange for a car-loan to get one, it was that cars are money pits, and we weren't interested in digging new financial holes while we were trying to pay off our student loans.

With two adult salaries, but without many of the liabilities many adults take on, we were able to slay both our student loans ($58 thousand worth) in just over 3 years, save up enough to pay for a used car four years after I started working, begin to max out our RRSPs, and give to worthwhile charities.  We were essentially saving 50% of our take home pay.... By comparison to many in our field and experience level, our standard of living was modest, but we were very happy because we maintained that interactive social face-to-face lifestyle by continuing pot-luck get-togethers and Cheap Beer and Poutine nights.  We still lived with "student" quality furniture because it still met our needs.  It was still functional, though certainly not fashionable.  We only bought stuff out of necessity, not because of some feeling or self-imposed obligation around keeping up with others.    We never focused on what status items we were missing out on, but rather focused on relationships and building a solid financial base to give us more flexibility and freedom as we got older.  Once the essentials of living have been taken care of, then we focus on adding the luxuries.

At our current stage in life, which is late-thirties with young kids, we have adopted many of the liabilities that come with adulthood: A nice car, high-speed internet, club memberships etc, but we only added these lifestyle choices when we could afford them.  To this day we still walk or bike everywhere we can, we do not have Cable-TV, dont frequent fancy restaurants more than once a year, and Cheap Beer and Poutine are still our favourite nights out.

Rule #22 Pay your bills on time.. Every Time!

Want to know how to sabotage your finances in the foreseeable future? How's about screwing up your credit rating, while at the same time building up a deadbeat image of yourself?  Yeah, thats one of the worst things you can do.

It's funny how people do silly things that sabotage their financial wellbeing ... and by funny I mean strange.  An example of this is voluntarily harming their credit rating.  When I was in University, one of my roommates didnt have enough money to pay his cable TV bill but that didn't stop him from going out for a few brewskis with the boys.  Here's how one particular discussion went:

Ryan: "Hey man, your bill has been sitting there for a month... you gonna pay that? It was due last week."
Roommate: "I am getting my next instalment of my student loan in 6 weeks and I will pay it off then."
Ryan: "Dude, you cant just miss a payment.  Maybe you shouldn't be goin' out to the pub til you pay your bills."
Roommate: "They'll get their money, as soon as I get mine. I've done it before, no problemo."
Ryan: "That's gonna bite you in the ass someday"

Integrity is one of the traits that was ingrained into me as a kid, and it is one of my most valued traits in other people today.  Integrity to me means you do what you say you are going to do.  Its as simple as that.  And when you borrow money, you pay it back on the terms that you agreed to, or even earlier!  Growing up in my parents house the rule was: You only borrow money you know you can pay back and you ALWAYS pay your bills on time.  You always sacrifice discretionaries before missing a payment.  Always!  That was a given in my childhood household growing up and it is a given in our adult household today.  That includes bills, mortgage payments, loans, credit card payments, handshake loans with family etc...

Beyond having integrity, there is another good reason to pay your bills on time... maintaining a good credit rating!  When I was a teenager my parents taught me about a person's credit rating.  I've known about it and have been maintaining a good one all my life.  A credit rating is a metric used to evaluate your credit worthiness, or your ability and reliability to pay back debt.  Banks and other lending-related organizations share your income and debt history with each other in order to determine how much to lend you, what rate to lend it to you at, and the duration of these terms when and if you can borrow money at all.  The part you can control the most is how much you borrow and how you pay it off.

Let's focus specifically on the paying it back part and why you should care.  Your credit rating will suffer if you dont pay your bills on time... no matter what the reason, and in the end that hurts you more than anyone else the next time you go looking for a mortgage or a new car loan.  If you were buying a car on credit and you could only get the loan's interest rate at 7% while your brother-in-law was getting the same deal only at 5%, simply because you didnt pay your bills on time, you'd be kicking yourself.... or at least you SHOULD be kicking yourself.   Thats money you are leaving on the table.  If you have any money sitting in the bank and you are missing bill payments, you are likely ruining you future finances by acting so irresponsibly.  If your credit rating is the pits, it means higher interest rates that you are required to pay, or it may result in you getting turned down for a loan altogether.  Paying extra at a later month doesn't make up for missing a payment either, as some people I've talked to seem to believe.  If you ever want to borrow money in the near or distant future, the lender will absolutely be checking your credit rating first, so always keep that in mind when those current loan statements and bills come in the mail.

Come Hell or high water, we never miss a bill payment, we always pay our bills on time. Always.  As a result, we've never been turned down for credit when we've asked for it. and we get good interest rates on the loans that we do have.

Rule #14 Live on one salary.

I'd like to live as a poor man with lots of money.  ~ Pablo Picasso

This post is mainly relevant for couples working towards saving or paying down debt. We live on only one salary when we have two coming in. If you are not part of a couple, I would still recommend living well below your means if you can.

So if you are following along, you've probably guessed that we are very aggressive savers. When we started our careers 14 years ago, we were living in a small one bedroom apartment. I was in Grad School TAing Undergraduate classes and Kim was working an entry level front line position at a Social Services Agency.  We werent making very much money but we were very happy.  Our lives were simple and we didn't define happiness by how much stuff we had.  Pretty much all of my TA income was going to servicing and paying down our Student debt, and we were living on Kim's small salary.  We have always believed in NOT living beyond our means, and believe certain types of debt are anchors that weigh you down, so becoming debt free was a priority for us.  By the time I was done Graduate School in 2002 and had only worked about 3 years, we had tackled $58000 in joint student debt and were debt free.  I had entered my "adult" career phase and began making a fairly decent salary in 2002.  After out debt was paid off, we began saving every dollar of my take home pay.  Its amazing how much you can save if you don't let the cost of your lifestyle creep up as your income goes up.  We were still living a lifestyle that was paid for with only one salary.

We were informed that our apartment was being turned into condos so we were required to move, so we bought a house in 2002.  It was a very modest house on a very walkable inner city neighbourhood.  It seemed expensive at the time, but today it would be a screaming bargain.  Even though we could have "afforded" to take on a car loan, we chose to do without a car for another 4 years until we had saved enough to pay for it in cash.  My employer paid well so we began living solely on my salary and banked Kim's.  I worked in a boom-bust industry so while I was employed at the time, there was no guarantee that I would always have work, so we established a general rule that when both of us were working, we lived on only one salary and we saved the other, just in case one of us found ourselves without work or income.  We've done that every year since about 2002 unless Kim or I were taking some time off from working either for a Parental Leave or a personal Leave of Absense.  There was never a need to change our lifestyle since we were accumstomed to living on only one salary.  Easy Peasy.  The other great thing that happened is that as we saved and bought cash-flow producing assets, those assets began providing us income as well.  That investment income started small, but over time has compounded to a meaningful amount of income.  Its not easy to live this way if you are accustomed to a high consumption lifestyle, so it wont work if you aren't prepared to make sacrifices now.  If you haven't began keeping up with the Joneses, don't start.  

This "Live on one salary" strategy obviously works when you, as a couple, have two good sources of income.  If you don't have two good sources of pay, then getting two good source of pay is probably a bigger priority.  Once you are at that point, imagine how quickly you could amass a large nest egg if you as a couple saved half of what you brought home. To this day, we bank/invest about 40% of our joint net take-home income. We do not live lavish lifestyles so there is no shock to the system when either Kim or I, or both, are not employed. Since we've been living this way for about a decade, we have built up a substantial financial base as a cushion and we maintain a lifestyle that is somewhat modest compared to others in our age and income cohorts.

I've heard a lot of people say that they couldn't live on just one salary.   I believe most people can do whatever they set out to do, and that most couples choose to live on both salaries.  They have adjusted their consumption and lifestyle level to their joint income level which leaves very little wiggle room if one of the earners loses a job or wants to do something else like go back to school, or start up a business.  You are now trapped in the "I must work to sustain my lifestyle" vortex.  This is fine if it works for you, but don't use it as a crutch for why you can't save.

Rule #13 Take Accountability. Stop Whining! Go Read a Book already.

"You will get what you want, when you stop making

excuses on why you don’t have it."  - Unknown

Rule 13 is part rant, part rule.

A lot of people are lazy about money. They'd rather watch The Simpsons or Mad Men than figure out a way to make their lives better.  Thats fine with me but there is one nagging thing that I can't stand about many of these folks.... I've had it with their whining!  "My life is lousy, I can't get ahead, The Man is keeping me down, There is no way out!"  This is pure bullshit.  There are many things most people can do, but will they actually do it?  In many cases, no.

Jim Rohn is credited with saying "Poor people have big TVs, Rich people have big Libraries." I love this saying. I think it epitomizes a major problem in society these days.  Its not that people don't know what to do with their money to make their lives better, its that the don't want to know, and that they would rather spend their free time doing things that rot their brain instead of making their life better through gaining knowledge.  There are plenty of free resources on the web or at the library to educate ones self in basic money management or investing, but the it seems people don't seek them out.  My iPod is full of e-books and audiobooks on economics, time management, and finances.  Its also full of more light-hearted stuff just so you know.  I think part of this attitude is due to the fact that many people do not want to make the sacrifices needed to get ahead, so the bury their head or make excuses for not opening a book or asking for help.  Financial Success does not come quickly and generally does not come easily.  It also doesn't happen if you lack the knowledge and rely on dumb luck to help you make it through life.  80% of North American millionaires are self-made, and they got there because of knowledge, and hard work, not because they are any more special than you or I, or because they had rich parents.  They didn't buy into the mantra that someone else should make their life better.  They had the ambition to learn what it took and then went for it.

I'm not suggesting you need to manage your investments yourself or go start a business, or that you shouldnt get help to set up a proper portfolio or debt management plan, just that you need to be engaged with your own money and take steps to make your life better financially.  There is loads and loads of free knowledge out there waiting for you to learn it.  If you need help learning something, ask for help.  If you don't understand what company stock is, Google it.  Don't just sit there saying "My financial IQ sucks so I am screwed!"

Here are some books I recommend if you are looking to get acquainted with saving and investing money, or understanding how the economy works:
Stop Working by Derek Foster
The Cashflow Quadrant by Robert Kiyosaki
The Millionaire Next Door by Thomas Stanley and William Danko
Naked Economics by Charles Wheelan and Burton Malkiel

None of the books are a financial silver bullet, but they will get you thinking about money, if you aren't already doing that, its a good start.  I like all of these books because they are easy to read and they take the jargon out of finances, economics and investing.  I have either found them at the library or borrowed them from friends for free.  I'd start with Stanley and Danko first if you are just starting to think about money.  Happy reading.

Rule #11 Dividends - Buy Stocks for the Cash Flow

A major part of our financial independence plan is to build a portfolio of income producing assets.  These assets will be our income into the future and will replace our need for other types of income such as employment.  Our preferred type of income is Dividend Income from stocks that we own.  Dividends are a form of passive income that provide cash-flow with virtually no "work" on our part to maintain the asset.  The dividends are paid by the corporations to shareholders over a set period, usually quarterly, throughout the year.  The corporations take a portion of their earnings and send a cheque to shareholders as a benefit to owning the stock.  While it is a strategy that has risk - and don't forget every strategy has some risk - if you choose stable companies that provide goods and services that people use everyday, the risk is greatly reduced to almost nothing... note that I said almost.  There are many companies, with decades worth of dividend-paying history, that will continue to pay dividends well into the future.  Another great thing about dividends is that many companies make it a point to increase their dividend at or above the rate of inflation each year.  These are the companies we want.  If the company increases the annual dividend by 5%, and inflation is 3%, we've just gotten a raise that out paces inflation.  Ultimately this means we have increased your buying power that year.

The sectors that we invest in are primarily sectors in which goods and services used by people will either continue or increase in the future such as: Real Estate, Oil and Gas, Energy Delivery (Pipelines and Electricity Transmission), Banks, Insurance, Consumer Staples, Booze etc... We generally stay away from High Tech, Food Retail, Clothing Companies, and Consumer Discretionaries, because these companies are built on ever-changing innovation, thin margins, or primarily good economic times (non-recession proof).

One stock that I have owned for the last 8 years is Bank of Nova Scotia or BNS on the TSX.  It has payed a dividend for 179 years, without ever having cut it.  Most years it has increased its dividend above the rate of inflation, some years increasing the dividend by 10% or more.  ThePassiveIncomeEarner.com did a great summary of BNS last year that does a better job than I ever could could at explaining why its such a great company to own for dividends.  You can check that summary out here.

We view buying dividend stocks as akin to buying mini-pensions that will pay our way into the future.  If, at age 25, I buy $10000 of BMO stock today, with a 5% dividend, that stock will now pay me $500 a year this year and every year after that until I sell the stock.  What if I hold this stock until I am 85 years old?  Great! I get to collect that little mini-pension for as long as I hold the stock.  I can do whatever I want with that money along the way... spend it, re-invest it, earmark it for Christmas, whatever.  Sweet!  BMO has never lowered or missed a dividend payment in the past, and there is a pretty good chance that they will keep paying it into the future... and they will likely increase it inline with or above inflation under normal economic conditions.  This way of looking at dividend stocks is different than how most people have been taught to look at stocks.  They look at the price at which they buy the stock and then fret over what price they are going to sell it at.  Timing of the buy/sell trade is particularly important.  We buy the asset for the cash-flow and and then sit on it as long as the company can meet its dividend payments.  We don't fuss on when to sell it, because we have no intention of selling it.

Thats one of the great thing about owning shares specifically for their dividend is that it removes the day-to-day worrying that goes with watching a stock portfolio go up and down in volatile markets.  Because I own the company primarily for the cash-flow, if the stock goes up or down it makes little difference to me, because I don't intend on selling it any time soon  What I do keep track of is the company's ability to pay me that cheque now and in the future.  So long as the company is healthy and selling their goods, I am happy to own the stock.  During the 2008-2009 financial crisis, only 1 of the 20 or so stocks that we hold cut their dividends, the others either held their payment at the same level or a few even increased their payments.  So our dividend income actually increased overall during the financial collapse because the stocks we owned kept chugging along, regardless of the economy.  Capital appreciation will most definitely happen gradually as earnings and growth continue with the company, and if we really need the money we can liquidate some stock to free up some capital, but thats only under emergency conditions.

During our working (employment) years we roll all the dividends back into the portfolio to buy more stocks, so the dividends also act as a source of income to continue buying even more stocks... Hey, this sounds a lot like the compounding affect.  The bigger our dividend income gets, the more our portfolio grows as we plough it back in with more income.  The longer you can leave it alone, the bigger the cash-flow will be when you pull the plug on working.  When we are finished working or if we are taking a mini-reirement, we stop re-investing the money and just turn on the dividend spigot for our day-to-day cash-flow.

Rule #9 Spousal Financial Compatibility is VERY Important.

"It takes two to make a marriage a success 

and only one to make it a failure." - Herbert Samuel

There is a married couple in our circle of friends who are definitely NOT financially compatible, and their marriage has almost ended in divorce a few times. They both have reasonably good paying employment, but he is a spender and she is a saver.  It has caused a lot of friction between the two of them.  Both of their credit ratings were shot because he didn't pay the family bills on time.  She basically had to take complete control over the couple's finances to make sure they didn't end up in the poor house, and now he resents her for controlling all of the money.  It certainly is not a great situation.

It's pretty important to find a life-partner who shares the same values as you do with respect to money.  This may sound like something your Uncle Jack says to you, and then you brush him off as some old fart who doesn't know what he's talking about.... Old People... What do they know about love anyway?  The fact is, whether you like it or not, finances will play a huge part of the day-to-day operations of a household, and you better make sure that you are both on the same page or it can kill the mood (if you know what I mean).

Money issues is one of the top 5 reasons couples split up, so it's pretty important.  If one of you is a saver and the other is a spender, and there is no agreed upon financial plan in place, it can be really hard for a couple to be pointed in the same direction to achieve your financial goals.  We look at OUR relationship as being similar to jointly owning a business called Fraser Holdings.  We both do what's right for the 'business' so our family can become more financially stable and meet our long-term needs.  Most people would never enter a business relationship with someone who spends the company money like a drunken sailor, so why do people not make sure they are in alignment when getting hitched or shacking up?