Financial lessons can be learned in different ways

 

Just like all life lessons, you have to learn financial lessons somehow. Life lessons can be taught by your parents if you’re open to them. They can also be learned in school if the school program includes financial basics for youth. Unfortunately, in my case I had to self-teach myself financial literacy through trial and error. This usually is accompanied by great financial pain.

As I’ve explained before, I didn’t have a good starting position for myself in my life journey when it comes to financial literacy.  Being an immigrant from another country where economy and money function in a completely different fashion, it was literally like being an alien from another planet (but no lightsaber). I didn’t have basic knowledge of personal finance when I’ve arrived. I didn’t know what one is supposed to do with money. Economy as a whole was a complete mystery to me. Unfortunately, my parents were in the exact same position so they couldn’t teach me Personal Finance 101. I was also too old for high school where they teach it.

When it comes to personal finance, some of the concepts that are familiar to any average  Canadian were in fact completely foreign to me. For example, I didn’t know how credit cards work and how much they can cost you if you don’t pay attention to your balance. I had no idea bank will lend you the money for just about anything as long as you pay it back with steep interest. Saving for the future retirement seemed unnatural since my grandparents back home were enjoying government provided pensions for life. All of a sudden, I had to learn all of it - and sometimes through great financial pain.

But sometimes pain is exactly what you need. If you burn yourself on a stove once or twice, you learn to avoid touching it at all cost. Your brain will scream at you “Hold on there, sport. Last time you did that it hurt like hell!” Financial lessons for me were exactly the same. Sometimes painful, but as long as they taught me something they were be quite useful. I’m glad for all the pain they caused me; I just wish I could have learned these financial lessons sooner:

 

Live on a budget

 

As a young man of twenty something, living on my own and fresh to this beautiful country, I didn’t know how to handle money. More importantly, I didn’t know how to control what little money I had. Money was coming in, bills were coming out. It was a never ending cycle of debits and credits to my account with no rhyme or reason.

My only limitation to spending money was my bank account. If I had money in my account on Friday night, I would go on spending it. If I didn’t have any money in my bank account, I would stay home. Same principle for all purchases, really. Basically, I would make my decisions on what I had at the time. As a consequence, sometimes my expenses would be much higher than my income.

Then I discovered a new way to live financially. I’ve started to base my decisions off what I had coming in. If I had $2,000 coming on one particular month, I would map out how I would spend this money ahead of time without paying attention to my bank account. Two thousand dollars comes in, two thousand dollars get spent. Bank account money doesn’t get touched as it would mean spending more money than I have coming in - and that is unacceptable.

People usually cringe when somebody mentions “budget” because budget means limits and boundaries. But if you think about it, budget just means putting together a plan on spending your money. It’s actually quite liberating.

Once I’ve learned how to budget and changed my perspective on spending, I’ve started putting more thought into planning my everyday finances. Saving towards big purchases became a second nature to me as I’ve started automatically set saving goals for myself. Need a new laptop for school? Figure out how much you want to spend on it, how much time you need to save it, and how much you should be putting away monthly towards it. Now some of my paycheck is going towards the laptop - instead of me just checking my bank account to see if I can buy this laptop right away or even worse - borrowing money for it (more on this later).

I didn’t learn budgeting overnight. Little by little, I figured out what works for me and what makes most sense. But if I could have learned about budgeting earlier, I bet me and my family would be further ahead in life right now. But hey, as long as we’ve learned it at some point.

 

Say “NO” to acquiring stuff

 

You don’t really need a lot of stuff in your life. Some items are quite necessary such as transportation, shelter, and basic clothes. But anything above your basic needs is not essential and spending money on acquiring more and more stuff can turn your happy existence into a vicious cycle of never-ending work and spending.

Imagine yourself camping and sitting next to a fire. A few small logs can provide you with ample heat for the night. You don’t need to shove more and more logs into the fire; while big fire might be impressive, it doesn’t match your needs. On top of it, you’ll have to work very hard on controlling it and continuously running into the woods to get more firewood. Why bother?

Same approach with money. You can make your life all about earning more and more money, and spending it all. Your 4,000 sq. feet house will be surrounded by beautiful landscaped land, German cars will sit in your 5-car garage, and you will spend 360 days at work while stressing over your financial situation and never seeing your family.

I’ve learned that I prefer simple life (and I don’t mean that awful TV show with Paris Hilton). It doesn’t mean that I want me and my family to live like monks. But driving a used car with much lower expenses as opposed to leasing a new BMW can be quite beneficial as it gives me more money to invest, and lowers the stress by improving our financial situation.

We can probably afford a bigger house for ourselves if we borrow as much as bank will give us. Still, we’ve decided against it because living in a nice condo meets all our needs. Sure a big house would be nice and would probably impress our friends - but big houses come with big problems and higher expenses, once again. For example, we can easily repaint our little townhouse ourselves over one weekend. What if we lived in a 4,000 sq. feet house? Repainting it would probably require hiring professional painters and thus opening our wallet and saying goodbye to a considerable amount of money. Simple just makes more sense for me.

 

Invest early and regularly

 

It took me quite some time to understand the importance of investing. For this, I had to completely change the way I was thinking about investing.

This is the way I used to think about investing:

” You work all your life and get a paycheck every two weeks. You put away money for your retirement. A little of your paycheck goes towards your life in your senior years. You slowly build up a retirement fund for yourself and your family, and once you have enough you start taking from it and can stop working. As long as your money outlives you, you’re golden!”

But what twenty something person really thinks about senior years? The prospect of buying something cool right now outshines any future needs. Especially when you’re talking about your paycheck - after all, we all work very hard for our money and want to enjoy the paycheck right away. My senior years are so far ahead of me that saving for them just didn’t make sense. Let me in my 20’s enjoy life a little bit, perhaps me in my 30’s or even me in my 40’s will take care of me in my senior years! For now, New Sony Playstation, here I come!

Here’s how I think about investing now:

“You work every day and get a paycheck every two weeks. A little of your paycheck goes towards your freedom fund. The money collected in your freedom fund starts producing income. If you have a little freedom fund, it produces a little stream of additional income. If your freedom fund is substantial, it produces a substantial stream of income. Whether or not you still work, it still produces income. If this income is high enough to live off, guess what - you can stop working and still receive paychecks in the mail every two weeks. Income without work is a beautiful thing!”

For some reason, this way of thinking about retirement really changed my perspective about investing. Imagine being able to cover all your living expenses with your investment income instead of working to pay your expenses when you’re old and retired. If you live a simple life, you don’t really need a lot of money to retire - a moderate stream of income will cover all your expenses without waiting till you’re in your 70’s to retire.

So now I think of investing as building that addition stream of income. Saving money towards it feels meaningful and investing became one of our primary goals.

 

Never borrow money.

 

The concept of borrowing money from a financial institution was quite foreign to me when I arrived in Canada. Up until then the only borrowing I’ve done was through friends - very small sums of course. My parents would sometimes borrow money from their friends when our funds run out at the end of the month to buy groceries. But Canadian borrowing is much different.

Here you can borrow money for pretty much anything. School classes, everyday purchases, vehicles, clothes, housing, and even home pets. Yup, apparently some pet stores will lend you money to buy a puppy.

What did it all mean to me back then? FREE MONEY! Everybody wants to give me money so I can buy stuff, how awesome is this? I can buy stuff right away, and pay it back later once I make money by working! I’ve borrowed money for night school - and boy, was it easy. First day on campus, a major bank was giving out credit cards - and I’ve signed up right away. Then I borrowed money on it to buy everyday things - as long as I could afford minimal payments on it. My paychecks (already pretty low) were spoken for by the time they hit my pocket. Fairly soon, I’ve started falling behind. Soon after, I’ve learned what it’s like to receive a phone call from a collection agency.

Just like the proverbial hot stove, I’ve burned myself on borrowing money a few times before I’ve learned my lesson - never borrow money. If you have to borrow money, it means you’re broke and don’t need whatever you’re about to buy. If you can’t pay for something in cash, you can’t afford it, so move on. Major financial institutions make serious money by lending it to people, and by borrowing money you’re willingly handing over your cash to them just to enjoy something right away.

You don’t need to hand over your cash to a bank just so you can buy a puppy - just save money, and buy it yourself. Remember that when you borrow money you have to pay it back. If you want to buy something for $100 but choose to borrow it, you have to pay back the original $100 PLUS $20 in interest. Interest becomes an additional expense to you and a nice source of profit for your bank. Don’t you have better use for your $20?

I don’t know about you, but I don’t like my bank enough to give them money for nothing. Housing would probably be the only exception to this rule.

 

 

 

 

 

My history of smoking

 

Just recently, I’ve celebrated five years of being a non-smoker. Five years ago, I’ve decided to quit this nasty habit, and puffed away my last cigarette. It wasn’t easy, but after some serious thinking about smoking and its benefits (none), amount of money I was spending on it, and countless other benefits of quitting smoking - I’ve made my choice and threw away my last pack of cigarettes along with my lighter.

As I might have mentioned before, I grew up overseas in Russian Siberia. Unfortunately, smoking is much more prominent there as it is in Canada, especially among youth. Just to give you an idea, according to Wikipedia people smoke 3.5 times more as they do here in Canada. Good news for Canada is that smoking rates have been plunging steadily as more young people don’t even try smoking and don’t get hooked on cigarettes.

 

 

Unfortunately, I was one of the kids who picked up smoking somewhere in high school. Since almost everybody smokes in Russia (at least this is what it looks like), smoking seems fairly normal, and hence it’s one of those things kids want to try. First it was few smokes in between classes (mostly to look cool). Then it became a social habit of smoking while hanging out with my friends. After becoming an adult, it became an everyday habit. I just had to have a smoke in the morning with my coffee, one at the end of the day “to relax” (which by the way is a complete lie), and countless others in between. By the time I was in my mid-twenties, I was smoking roughly two packs a week. It’s pretty light by most smokers’ standards, but nonetheless it was still a nasty habit, and it was starting to affect my health.

I’ve noticed regular headaches that would always creep up on me towards the end of the day. My blood pressure was above the norm. Sometimes, I had troubles sleeping and would venture outside for a smoke in the middle of the night. On top of everything, I almost always lacked energy and felt depressed. Ask any smoker, they have probably experienced these exact symptoms.

But it all changed as soon as I quit smoking.

 

Financial benefits of quitting smoking

 

Since I mostly ramble about financial matters, let’s take a look at how much money I have wasted by smoking. Let’s say I’ve been regularly smoking two packs a week for five years. Presently, the cost of cigarettes is around $9.00/pack.

 

5 years of smoking = 2 packs @ $9.00/pack * 52 weeks * 5 years = $4,680

 

This means I puffed away roughly five thousand dollars in just five years when I was smoking regularly. Now, before you say that $5,000 isn’t really a retirement fund, plug that number into any compound interest calculator - and you will find out how much money I’ve really puffed away by spending $5,000 on cigarettes instead of investing this money:

 

 

What does it mean? It means that by smoking 2 packs/week for only five years, I’ve puffed away $325,000.34 that I would have had in 40 years if I simply invested that $5,000. Not exactly a retirement, but a very good chunk of it, don’t you agree?

Just in case you need some visualization, here are just some of the things I could buy in 40 years with my cigarette money:

 

4 bedrooms, 3 bathrooms, 3,100 square feet house in San Antonio:

Benefits of quitting smoking

 

Lotus Elise (zero to 100 km/h in 6 seconds, baby!):

 

LeBron James’ engagement ring:

 

While I wasn’t spending a lot of money on cigarettes, quitting smoking still benefited us financially as it gave us more cash in our pockets without doing more work. It was like getting a small raise without asking for one. More money means we can invest more money towards our goals, and hopefully reach the proverbial financial independence sooner. At the end of the day, quitting smoking is like finding free money every week.

 

Other benefits of quitting smoking

 

Aside from financial benefits of quitting smoking, there are myriad of others.

1. I smell nicer (please don’t ask to verify)

2. My wife has one less reason to complain

3. I no longer experience crushing headaches and my blood pressure is perfectly normal

4. Running up the stairs doesn’t make me lose my breath for 10 minutes

5. I don’t have to stand outside in exile while everybody is enjoying a party inside.

6. Food tastes better

7. People no longer regard me as the worst person on this planet when I happen to walk by their kids

8. No need to see scary pictures they put on cigarette packs (seriously, they’re disturbing)

9. I save 5 minutes a day now by NOT coughing my lungs out every morning.

10. I can finally recognize basic shapes and patterns

 

Why you should quit smoking too

 

I hope you’ve opened your mind to how much smoking is costing you in the long run. Even if you only smoke for 5 years like I did, you will miss out on huge pile of money at the end of your working career; and the longer your smoke (or the more you smoke) the bigger that pile gets. Every time you light up imagine the house you’re puffing away, or a nice retirement fund. Somebody who smokes a pack a day will smoke through almost $2 million by the time they hit retirement age:

 

To be honest, I feel like nobody has the right to complain about not having enough money if they still smoke. You can give yourself an instant raise - if you quit this nasty habit. You’ll have more month left at the end of your money, and you can take care of your retirement by simply redirecting your existing funds.

Besides money, think of all the other benefits of quitting smoking. By quitting, you will improve your quality of life tremendously at no cost to you. This is a great investment right in front of you!

 

Do you smoke? What are you thoughts on this? Please leave me a message below.