



The 1%’ has adorned significant attention over the past couple years and media certainly doesn’t make it easy to ignore the rich lifestyles of others. While it is important for us to address the socio-economic implications of income inequality, it’s not all to blame for your lackluster income and wealth. Having spoken with multitudes of intellectuals, professionals, & business owners, it's still shocking as to how many people don't understand basic principles of money and wealth.

The 9 points are a selection of typical ‘poor personal practices and ignorance' that is limiting your current wealth and any future potential. More importantly though, I hope to provide some insight about how you can better educate yourself and change your financial habits to assure yourself a better lifestyle and long-term financial happiness.

Before We Jump In: Understand Taxes

Start to think of the impact of your decisions in a pre-tax mindset. In Canada we have a progressive tax system, which applies higher tax to higher income 'brackets'. The first $50,000 that you earn is taxed at a lower % than the next $25,000, which is lower than the next $20,000 etc. The total tax includes federal, provincial, and surtax. You should know what your total weighted tax rate is annually; check it here at: https://simpletax.ca/calculator

For example at $75,000 in income annually you pay a total tax of approximately 22%. Now what you have left is after-tax income. Nearly everything that you spend that money on will either have built in taxes (eg. gas), regular taxes, or other charges (eg. interest on your mortgage). You can safely assume that your after tax income is taxed another 8-11% on average. This means that roughly 33% of your total income is going to 'taxes'.

Why is this valuable? Because if you change your mind-set to think in after tax dollars you will begin to make smarter decisions.

A $35,000 car will cost you approximately $69,000 after-tax over 6 years including gas, insurance, repairs, & maintenance. If you earn $75K per year ($58K after tax), you need to work for 14 months just to pay for your car...

As you read the rest of the article, consider the PRE-TAX cost of the items below.. If somethings costs you $1,000, that's approximately $1,500 pre-tax.

1. You Don’t Understand the ‘Time Value’ of Money

This is Finance 101. Many talented minds and professionals are still ignorant to this basic principle, or at the very least don’t fully appreciate it’s implications. Not understanding 'time value' has you locking away money into low yield (% return) bonds, savings accounts, and other assets while you continue to use high interest credit cards, operating credit, and miss opportunities to pay down loans and mortgages. If you are considering locking money into some 'safe investment', 99% of the time, the more profitable investment would be paying down your mortgage instead; even if the current interest is only around 2%.

The time value of money is fairly basic: $10,000 today is worth more than $10,000 a year from now, a week from now, or even tomorrow.

In basic terms this is because:

A) Money has Investment Utility. That $10,000 today can be invested into a stock, a business, a bond, or some other opportunity to generate income.

B) Money has Saving Capacity. $10,000 today can be put against an existing loan, mortgage, or help you out in an unexpected crisis thereby reducing the interest you would otherwise need to pay.

C) Successfully Investing Money Offsets Inflation. The cost of goods is rising. You won’t be able to purchase as much in a year with $10,000 as you can today. Yes, certain commodities do fluctuate & older tech like that 60" LED TV cost way less than they did 3 years ago.. but this does not reflect the NET impact of inflation.

2. You Believe in BS 2% Savings Accounts & Bonds

Or to put it quite frankly: you understand nothing about investments. This is why the banks spend millions on marketing to convince you that their saving account or low risk mutual fund can have you riding carefree on the back of a jet ski (actual commercial) . Don’t take financial advice from actors hired by banks for commercials.

There are 2 reasons to lock your money away into 2-3% saving accounts such as T-bills, government bonds, and other low yield investments:

A) You have no credit card and no debt or mortgage, and the concept of risking your money makes you sick to your stomach.

B) You are so rich you don’t know what to do with your money and don’t care about how much it is earning you.

As an example, let’s say that you have $100,000 of cash lying around. You invest it at 2% and never withdraw any of the principal (base amount) or interest over 10 years. The total interest you earned over a DECADE… drumroll... ~$22,119. In the meantime you have likely been paying a much higher % toward your mortgage, your car, your shopping (credit card), etc. The worst part is the average person isn’t even putting away this much and in most cases the banks have criteria about a minimum balance to achieve this BS 'high' interest.

The savings accounts that offer ‘Amazing’ 2-3% interest are not valuable to the common person.

They are valuable for business and wealthy people who know they will need to use it at some point soon. This way they don’t have to incur the risk or fees of other investments and instead can leave it easily accessible in a bank account.

3. You Stopped Making Lunches After High School

You buy coffee 5-10 times a week and you ‘treat’ yourself (because you are so deserving) to lunch at fast food joints and restaurants 2-4 times a week. If this sounds like you, and you aren’t clearing over $100K a year, you’re going to have a bad time. If you spend $60 per week on coffee and take out you are burning $3000 per year at the very least.. which is approximately $5,000 before tax.

Cutting out 2 coffees and 1 fast food lunch per week can save you $20 or $1000 over a year. You would need to invest $10,000 at 10% in a tax free investment to earn that amount of money!

4. You Are Mortgage Poor & Think It's OK

Yes mortgage rates (flexible and open terms) are currently fantastic. But, if you purchase a property on the higher scale of your income boundary and setup a 30 year term, you are likely going to live and retire more poor than wealthy. Forget the yachts, you likely won’t even be able to afford going to an all-inclusive resort.

Consider a $350,000 purchase. Let’s assume the interest rate over the mortgage period will average out to 3% (that’s a dream by the way). Mistakes you are likely making:

Long Terms: If you lock into a 20 year mortgage you will pay $115,861 in interest vs. $181,221 with a 30 year mortgage.

Monthly Impact: That $350,000 property will cost you $1,475 of your after tax income on a monthly basis. This ties up your cash. Hopefully interest rates don’t spike in the first few years or you may be eating noodles for dinner every night without actually paying down the principle.

Buy Out of Your League: The worst thing that you can do is buy a property that is too expensive for you. Investing in a $210,000 starter home would only require monthly payments of $1,164 per month over 20 years and you would only pay $69,517 in interest.

Unless you have an investment that offers AT LEAST 2X your mortage %, you should make extra mortgage payments.

5. You Are Being Fooled by Published Inflation Rates

The government and media are touting a nice low 2% inflation rate which leads many to believe that costs are going up relatively slowly. So that 4% ‘merit increase’ at work should balance things out right? If you’re none the wiser, you gleefully accept and figure that at the very worst your lifestyle next year won’t diminish. Well that’s frighteningly wrong and it’s going to cost you long-term wealth too!

The Consumer Price Index (CPI) is a measure that is used to track the increasing cost of goods. Canada’s CPI is composed of 600 goods and they account for weighting so that if an item like rent costs goes up, it influences the inflation rate calculation more than if the cost of milk goes up.

CPI is a Personal Finance Trap: Reconsider Your Cost of Living Increases. If you are a professional, living in any one of Canada’s major regions, and doing some form of commuting (car, or public transport), your cost of living is increasing at a much faster pace.

The CPI inflation rate from 2009 to 2014 increased by 7.7% (compounded). I live in Ontario, Canada. The cost of housing anywhere in the GTA from York Region to Halton, Durham, Simcoe and others all increased by over 7% in 2014 from 2013 alone. That means higher cost to own and higher rent.

Gas prices in the same period in Ontario for unleaded gas increased 45%!

That computer that you bought in 1995 that lasted 5 years, is now replaced every other year

Silver Lining (joke): according to CPI, 500 other goods like plain white bread only increased by 2% or less, and a house in Gander, Newfoundland is the same price as it was last year?! Hooray!

6. You Think That Property Investment is a Golden Opportunity

Let me tell you something. Educate yourself or you are going to lose time and money on that ‘quick flip’ despite all those shows on TV (again TV is not the place for financial advice).

A property before you own it is anywhere from $4,000-12,000 in legal and closing fees, potential phantom rent (google it), land transfer tax, and more. Then once you have it, annual property taxes for a decent property can easily range from $2,000 to $4,500, and you are paying interest and utilities on top of it. If that isn’t enough, when you go to sell you are paying capital gains taxes, unless it’s your primary residence, as well as potential agent fees.

That said, even if you buy a condo in a hot spot like Toronto where prices can rise over 8% annually, you could still lose big-time. Let’s say you invest $350,000. Your cost to get into the house is $12,000 in legal fees, closing fees, etc. Your cost during the year is $8,000 in condo fees, utilities, & property tax. The condo appreciates by 10% (hooray!) over the year to $385,000. Your total cost is $20,000 plus another $19,250 in commission. That’s a loss of $4,250.

Yes, You could rent to offset some costs (which has some additional tax implications) and yes you could sell commission free, but most people don't.

The problem is that most people want to invest in property without investing time into understanding how to actually make money with it.

7. You’re Addicted to Shopping & Don't Recognize It

You use credit card points systems as an excuse to ‘shop while saving’. Friends as an excuse to ‘shop while socializing’. Stress as an excuse to ‘shop to treat yourself’. Boredom as an excuse to ‘shop for excitement’.

Stop. Make a budget. Track it with apps like mint.com/Canada. Do not look at flyers and do not go to the mall, or surf ebay or etsy because you are bored. Let’s be honest with ourselves, these behaviors really mean that we are more boring than we are bored. Find some hobbies, invest in quality purchases, and don’t bring your credit cards everywhere. If you must, bring cash.

Consider that those 5 extra shirts, pair of shoes, abstract clay thing, and new tablet are a nice way to quickly kill any investment gains you may have made. You would be better off going on a vacation to refresh your mind and take a breather from the triggers and stressors that are driving you to shop.

8. You Don’t Educate Yourself about Basic Finance

Not everyone needs to be a personal finance expert. I am thrilled that we have brilliant scientists, artists, engineers, service workers, chefs, and other fantastic people. Whatever your mastery though, money is universal and we live in a capitalist and consumerist world. Invest some time in learning the basics of taxation, interest, and investing.

Take ownership for your financial education and stop relying on top XYZ posts, mortgage specialists, and your finance friend. There are free courses on coursera.com, some well-priced courses on udemy.com and many other free resources out there.

If the person selling you the financial product is educating you about money, you’re setting yourself up for failure.

Closing Comments:

Gaining control of your personal finance will be your ticket to freedom and a comfortable retirement. Avoid continually hurting yourself by reviewing your financial health on a regular basis. Don’t avoid learning about basic finance because it’s confusing. You’re only going to make a comfortable retirement extremely difficult if not impossible.