Bridging The Gaap

Okay, so I’d always known theoretically that one should always have an emergency fund available, preferrably with 3-6 months total living expenses therein.

A few weeks ago, I learned empirically why an emergency fund is an absolute necessity.

Recently my doctor suggested that I should get a set of medical tests done. I had two choices:

1) go through the public system and get the scans for free or,

2) pay to have them done privately.

Time was not of the essence, but I wasn’t exactly inclined to wait 3-6 months for a free spot in the public system.

Now though, I’m wondering if waiting is not the preferable option:

The private scans cost $925.

EACH.

It occured to me as I walked away from the private clinic, still flabergasted and consoled only by the fact that the clinic had validated my free parking, that had I consistently put away a little bit of money every month like I said I was going to do, I would have had a nice little bit of money tucked away for oh, say, AN EMERGENCY.

Like needing to pay for medical care.

You can bet on what I did as soon as I got home: I am now the proud owner of a small (but growing) emergency fund!

In a way, I’m glad (that part of me that`s not in constant pain), because this experience really made clear  to me the NEED for an emergency fund. And that I’d better move my behind and START one, rather than let it lapse like I did last time.

I’m just glad I learned my lesson when it was an optional expense: what would I have done if it was something that NEEDED to be paid and I didn’t have the money

Everyday I Learn Something New and here’s what a $925 scan taught me:

If you haven’t already, start your emergency fund NOW!

A recent study revealed that for women who want to lose weight, the trick is to get 55 minutes of moderate exercise every day, 5 days a week (here is a link to that report).

And what kind of exercise qualifies for this? Why…walking! Plain old boring, nothing to write home about walking, when done consistently, will help people acheive their weight loss goals.

So what does this have to do with finance? So glad you asked!

It’s all about being CONSISTENT.

The study shows that it’s not so much what you do (it’s walking for goodness sakes; practically anyone can find some way to walk an extra 55 minutes everyday!), but how often you do it.

In terms of health, small but consistent walks can add up to substancial weight loss. With money, investing small but consistent amounts for retirement (or anything really) add up to substancial sums.

To illustrate, I’m going to use the ING direct savings calculator, which you can use to follow along. Consider the following:

I decided to stop buying a cold drink from the vending machine while I was at school.

A drink cost $2.

I was in classes 5 days a week, and by not buying a drink every day, I saved 10$ a week!

That’s $40 a month!

Let’s take a look at what would happen if I decided to put that $40 dollars a month into a vehicle that paid me 3% interest per year, for 2 years.

If you are following with the ING calculator, input the following:

• Initial savings: $40 (You have to do this or it will only count for 23 months!…see comments below)
• Contribute $40 every month
• Saving for 2 years
• Interest rate: 3%

And the result?

$40 dollars a month for 2 years at 3% compounds to $990!

YoW! My indulgences were not only bad for my waistline, but bad for my pocketbook as well! That $2 a day drink would have ended up costing me $990, and a full $30 dollars worth of interest.

Just like our weight loss example, our little, indistinguished, forgettable $2 dollars a day, when saved consistently, morphed into a huge payout at the end of 2 years.

Everyday I Learn Something New and this is what a weight loss study has taught me about my money:

It doesn`t matter how little you have to save or invest. Just like our daily 55 minute walks, simple, small amounts, when saved consistently, will produce amazing results in the end.

He’s not asking for my money…but he’s getting it anyway!

In honour of our Zero-th birthday (BTGNow.net officially relaunched with a new design and layout on July 1st 2007! Hooray!) BTG has decided to give a gift of $400 dollars to The Uncultured Project.The donation will come in two installments of $200 dollars, one on the 7th of July, and on on the 7th of August 2008. The reason we have to break up the donation like this is that this is all that can be alotted for the next two month’s budgets. We wish we could give more, and one day we will.

So there’s the who and the how of our birthday gift to shawn: what about the why?

Why BTG Decided To Donate To The Uncultured Project:

1) Shawn’s story is laudable: I’ll let him tell it himself:

Shawn was so inspired by Dr. Jeffrey Sach’s lecture that he liquidated his savings and MOVED TO BANGLADESH to try and help the people there. I always promised myself that when I was rich (which god knows is relative), I would seek out self-less, hardworking people and worthy causes and support them. Of course, I thought I’d be 50 and a millionaire before I would be able to make a difference, but hey, I’ll take $400 bucks and early twenties too!

2) Shawn showed me that poor people are people. In this video I saw a poor woman LAUGH.

LAUGH. How often do you see that on those TV spots that make you feel so guilty that you refuse to watch the commercial?

3) Shawn has openened my eyes as to what being poor means. His descision to offer translations of what people are saying has been a very wise choice on his part, and a real eye opener for me. For example, in this video, watch for people throwing aid back into a bus because they are insulted as to the indignity of how the hand outs were organized.

So for all these reasons and more (be sure to subscribe to the Uncultured Project Youtube channel and help spread the word!) BTG is more than proud to give our birthday gift of $400 to The Uncultured Project!

Everyday I Learn Something New, and this is what Shawn has taugh me:

It’s an old saying, but appropriate: you have to be the change you wish to see in the world. Put another way, Shawn taught me to

Just. Do. It.

Stop thinking about it and just do it.

Don’t know anyone affected by the sub-prime crisis? Well now you do!

Ed McMahon was on CNN recently, speaking about his continuing mortgage woes.

You can check out an abridged version of the interview here and the video of the interview here.

Here’s a very quick recap: Ed McMahon (you know him as the guy who warmed the seat for Johnny Carson’s guests) broke his neck and has not been able to work since. Meanwhile, he is behind about $644,000 in mortgage payments on his 4.8 million dollar home.

Everyday I learn something new, and this is what we can learn from Ed McMahon:

1) A single event can change your life in a heartbeat.

This is so damn important for people to understand: your life can change in an instant. Ed McMahon broke his neck, and now he cannot work. You too, could be out of work, out of money in the blink of an eye. You could be killed or crippled or otherwise unable to work. You must, therefore, make provisions for such an eventuality.

You can do this in a number of ways, but two are the most important. 1) Be prepared! Start an emarergency fund with 3-6 months worth of living expenses (all of them!) and feel free to pad it a little if you anticipate expenses related to you being out of work that weren’t present before (ex: medical expenses, no more access to a company car, etc..). 2) Get insured. I’m not qualified to talk about insuarance products, and I haven’t had much experience with it professionally, but I know for a fact that this is something you will want to speak about to your financial planner. What sticks out in Mr. McMahon’s case is that it may very well be that his medical bills, along with living beyond his means, may have helped contribute to the mess he’s in now.

2) There is a difference between income and wealth.

The Millionaire Next Door, written by Stanley and Danko, illustrates this concept more completely than I can in a short blog post. But basically the whole premise of the book is that there is a difference between having a large income and being truly wealthy. Stanley and Danko give many examples (through some very nice quantitative data) of how people earning large incomes (ex: doctors, lawyers, business men, former tv sidekicks) do not necessarily lead to increased wealth, as many of these professionals get caught up in the trappings of social status and luxury goods.

For example: why would Ed McMahon buy a 4.8 million dollar home if he knew he would have trouble affording one? Why wouldn’t he buy a home he could pay for in cash? No matter who you are, or what you do, you must live within your means.

We were discussing risk today in my corporate finance class, and somehow wound up on a tangent that involved gambling and retirement planning.

My professor recalled a study which stated that a disturbingly large proportion of Canadians believed that their retirement would be funded by lottery winnings. I will not mention the proportion we talked about, as I have not been able to find the study and thus cannot verify it’s accuracy. The number my professor seemed to recall, but could not verify, was upwards of 20%.

This leads me to ask you all for help: have you seen or heard of any such study? If so, please leave a comment at the end of this post, I would love to write a blog post or even an article for BTG about the subject.

Even without the hard evidence, the supposed study did make me realize two things:

1) If this is indeed the state of financial education in Canada, something must be done about it.
2) By learning and interacting and participating at BTG and the BTG Blog, we are all, together, doing something about it.

Everyday I learn something new, and this experience has reminded me of an old investor’s adage:

UPDATE!: I have reviewed the Scotiabank Bank The Rest Program here!

Scotiabank had a really neat commercial running for their “Bank the Rest” program today. I cannot post the commercial here as I do not have permission to do so. You, can, however, find the commercial on YouTube by searching “Bank The Rest” (you shoud see a white background with a hand holding a red card), as of the date of this posting.

It looked interesting, so I looked it up online at banktherest.com. It’s a pretty cool website, they explain how the program works and they have a great intereative demo where you can make pretend purchases and see how much you would save with the program.

I chose to pretend I was rounding everything up to the next 5 dollars, cause I’m hardcore like that. I also pretended to make purchases of lunch 5 times a week, gas once a week, and a game once a month.

It all adds up. It’s 75$ in savings for the lunch (saving 3.75$ every day for five days for a month), 10.08$ for the gas every month, and 3.85$for the game.

For someone who is not inclined to save, this may be a relatively painless way of doing so, especially if you make lots of small regular purchases.

Even though I rarely use my debit card, something like this might get me to switch: it seems like it would be a painless way to start setting up an emergency fund!

There are still some questions I would like to have answered before I think about switching to this debit card:

1) Are there any fees associated with opening this account, or the high interest savings account that works in conjunction with your debit card?
2) How easy is it to go into overdraft? For example, lets say you have signed up to round everything to the next 5.00$, you have 12$ in your account and make a purchase for 10$. Will the bank still round you up to 15.00$ worth of purchases, or will the system be intelligent enough to stop if you are in danger of going into overdraft?

Well, the FAQ answers these questions (no fees for the program, nor will it send you into overdraft or furthur overdraft), but I’m still going to call and go in to get my answers, just to be certain.

If you’re interested you can call 1-800-4SCOTIA (1-800-472-6842)!

It’s currently 6:00pm on a Friday here, so I won’t be able to call or go to the bank until later to ask, but rest assured, I’ll update this post when I do!

Here’s what I have learned from this today:

Yesterday night I broke the BTG site as I was trying to update it, and some data was lost (by the time you read this though it will have been recovered). I fixed it, but that was four hours or so I’ll never get back.

Here is what I have learned form this experience:

1) Never work with ugly code.
2) Adobe GoLive help files are actively unhelpful.
3) Save Early, Save Often.

Off I go to triple backup the site’s files!

Everyday I learn something new: here is what a $6.69 pint of Ben and Jerry’s taught me.

I’m an undergraduate student, and therefore, on occasion, have a day when I get monumentally stressed out.

Monday was one of those days.

Enter Ben and Jerry’s Cherry Garcia.

An unlikely catalyst for economic analysis, but useful all the same.

So after my class on Monday, I searched, nay scoured the city for a pint.

The icecream, with a packet of spoons, with tax, ended up costing me about seven dollars.

Seven dollars. On ice cream. Seven dollars. For one person (I mean…er…I was buying it to share, yeah that’s it…).

I don’t make much in disposable income, and this one impulse purchase represented almost 3.5% of my total monthly budget, and worse 4.6% of my disposable budget! And it wasn’t even that good after the first couple of spoonfuls (my utility curve is steep indeed). It doesn’t sound like much until you realize that that means my total disposable income for one month is 150$, and I had just spent 7 of them, on something offering fleeting, temporary gratification.

I was walking down the street, Cherry Garcia not quite so-proudly in hand anymore (but still numbing said hand), berating my lack of discipline, when I had a sudden flash of incite:

It didn’t matter that I was being irresonsible with my money.


Why? Because I had already been responsible with my money:

Let me explain:

If you haven’t read the book review over at BridgingTheGaap.net of The Automatic Millionaire (and The Wealthy Barber, where Bach got pretty much got the idea) you should check it out. For nigh on 2 years now I have been doing pretty much exactly what David Bach suggests: automating my savings, to the tune of 25% a month. I have no other expenses (that I wish to discuss) and therefore anything left over is defacto fun money.

I had been responsible with my money: I had already automated a withdrawl of 25% of my total monthly budget into a mutual fund.

Here is what I have learned from this experience:

Being responsible with my money gave me all sorts of freedom to be irresponsible!

I think I have another hankering for seven dollar ice cream…