Lumbergh agrees! The first 40 rules.

Hey, here's the first 40 of Ryan's Money Rules.

Rule #1: The Power of Compounding - Earlier is Waaaay Better!
Rule #2: "Lotteries are taxes on the stupid"
Rule #3: Defining Assets and Liabilities
Rule #4: Never Carry a Credit Card Balance... Ever!
Rule #5: Know your Monthly Expenses!
Rule #6: Forget the Latte, Its the Car/Vacation/Renovation Factor
Rule #7: Maximize income in AFTER TAX money

Rule #8: Your Home is not an Asset
Rule #9: Spousal Financial Compatibility is VERY important
Rule #10: Thumb your nose at the Joneses

Rule #11: Dividends - Buy Stocks for the Cash Flow
Rule #12: Use Leverage for MORE positive cash-flow!
Rule #13 Take Accountability. Stop Whining! Go Read a Book already
Rule #14 Live on one salary
Rule #15 Don't try to "Beat the Market"
Rule #16 Plan on Financial Independence without CPP
Rule #17 Save/Invest ALL windfalls or bonuses
Rule #18 Don't Diversity... too much
Rule #19 No Fixed Income
Rule #20 Set Financial Goals

Rule #21 Chart your Progress!
Rule #22 Pay your bills on time.. Every Time!
Rule #23 Automate all Monthly Payments
Rule #24 Borrow money for things that appreciate, pay cash on things that depreciate
Rule #25 Live like a student as long as you can
Rule #26 Create/Develop Multiple Income Streams
Rule #27 No Financial Advisor
Rule #28 Pay No Bank Fees
Rule #29 Talk about money. Ask about money.
Rule #30 Live where you Work, Shop and Play

Rule #31 Out of Chaos comes Big Opportunities. Be Ready!
Rule #32 Take Full Advantage of Employer Matches
Rule #33 Don't spend all of that salary increase
Rule #34 Find Yourself a Money Mentor
Rule #35 The Main Goal is Financial Independence, Not Retirement
Rule #36 Owning a good company is are better than working for one
Rule #37 "Hedge" against price inflation by investing in staples you use
Rule #38 Use good debt wisely, get rid of bad debt completely.
Rule #39 Adopt an Entrepreneur/Investor mindset
Rule #40 One week wait time for impulsive purchases over $100

Plus there's these two gems:
Dividend income growth... 16 months in review
Buy vs Rent. Why we're okay with renting today

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 #21 Chart your Progress!

I know people who procrastinate starting to save or pay down debt because they believe there is no way they will get out of debt or save enough to be financially independent.  Its like they feel like there is no way to chip away at the task because completing it seems so daunting.  The task seems so great or that saving a couple thousand dollars a year seems so difficult yet insignificant in the big scheme of things, that they simply don't get engaged with their own finances.  We have found that charting our progress is a great motivator for us as it shows progress right away.  Yep, you're going to have to learn some basic spreadsheet skills, but you wont need an engineering degree here... just a friend with entry level Excel should be enough.  If this simple Geologist can figure it out, you can too.  Charting your progress lays out in visual form where we are, and what our financial trend is. From an investment standpoint, we are mainly focused on our assets cash-flow and not its market value, so this makes it super easy to keep track of because we don't need to track our portfolio's current value, but simply the dividend income.  This eliminates the hand-wringing that happens when the market corrects and the TV talking heads are all doom and gloom.  Seeing our investment cash-flow go up and our debt go down month to month or year to year reinforces visually that we are on the right track.  It also encourages us to steepen the slope by adding additional funds and boost our progress.

I used to make projection forecasts where I would make assumptions about how much we could save etc into the future... but I stopped doing that because I almost felt like we had accomplished something when really all I was doing was just fiddling with numbers in a spreadsheet.  Plotting month to month in real time as you do it is proof of accomplishment.  It doesn't take all that much time once you get the spreadsheet set up and running.  Just open it up on the same day every month (we use the first of each month) and tally up any increases/decreases from the previous month.  Post the charts on the fridge so there is a constant reminder that you are going in the right direction.  You can also see where you fell off the wagon a month here or there...

Another nice thing about charting your progress is that after you've been doing it for 4-5 years you can see how far you've come by doing look-backs.  Assuming that you stay on track and have good financial habits, you will also see the power of compounding right before your eyes because the slope of the lines will naturally steepen as exponential growth takes effect from year to year.  You can also feel momentum building, that will act as further motivation and encouragement for you to keep on saving/investing/paying down debt.... and to us that feels pretty darn good.

So... go and embrace your inner engineer and break out the spreadsheets. Not just for nerdy math and science geeks anymore.  

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 #7 Maximize income in AFTER TAX money.

If, as a big severance package, your company offered you $60000 in any of the following income streams: pension income, capital gains income, employment income, or dividend income, what kind of income would you choose?  Did you think about the taxes?  Most people don't.

I hate paying income taxes. I wont go into it in any detail because it gets political... and I only talk politics if I have a beer in front of me, and I don't right now, so you are spared the rant.  But with that said, we all hate paying taxes, especially on income.  Doesn't it make sense then to try and minimize the amount of tax one pays on your income?  Sure it does. This is called tax avoidance and it is perfectly legal... structuring your income in such a way as to be tax efficient.  I was introduced to this way of thinking about a decade ago when I came across a blog talking about the virtues of dividends... Canadian Corporation Dividends in particular.  There is something called the Canadian Enhanced Dividend Credit, and I won't bore you with details of it, only to say that it results in a lowering of the marginal income tax rate on those dividends.  You can find out more about it here.  

For those who don't know what a dividend is, its a when a company shares a portion of its earnings with shareholders by sending them a cheque... usually quarterly throughout the year.  Those companies have already paid taxes on those earnings, so you don't have to pay as much taxes as you would if it was standard employment income.  Let's have a look at a couple scenarios, where income could be from one of these different streams...  Employment, Capital Gains, RRSP or RRIF withdrawal (remember its taxed when you take it out), Dividends from American Corporations, Dividends from Canadian Corporations (those eligible), and other income.  "Other Income" could come in the form of a pension, rental property, royalties, typical government benefits, some income from REITS, servers tips etcetera.... all of which are taxed at the same rate as employment income.  I don't include business income as I have no experience with owning my own business, nor do I know the intricacies that go with it. 

The two scenarios are $60000 and $100000 in annual income.  The income tax regime is Federal and Ontario, Canada.  The basis of the calculations is from the taxtips.ca calculator page where you can run your own scenarios.

So the Total in-pocket amount is the most important column because thats the one that tells you how much you get to keep.  Notice the big difference in taxes from the Investment rows such as Capital Gains and Canadian Dividends (eligible) in comparison to the Employment, RRSP/RIF Withdrawal, and Other Income rows.  Markedly different isn't it. If you made $60000 in Canadian Dividends you would get to keep 97.6% of it, vs the 80% you'd get to keep in employment income.  Note that as an employee you would also be required (don't get me started) to pay CPP and EI premiums which will run you another $3000 a year or so in tax obligations that you wouldn't have to pay if you made your income from dividends or capital gains.  Again with $100000 income, the investment income rows fair substantially better in tax treatment.  When I recognized this a decade ago, I started thinking that there was a type of income that I wanted more of, and other kinds of income that I wanted less of.  It was one of those "Eureka!" moments for me.

So... 

Guess what kind of income I prefer. Then guess what I look for when I'm building an investment portfolio.