I’ve tried over last number of years to keep my expectation around gifts in check by not expecting anything at all.  Thus I avoid disappointment over something I thought I ‘deserved‘ for some reason when I don’t get it.  I’ve also realized there is an additional upside of expecting nothing: I’m very touched by every little gesture people do for me.

I had mentioned a week early that I was taking off a Friday for my birthday at work.  I was then touched that several people wished me a happy birthday as I was leaving on Thursday.  It isn’t much of anything, but I noticed as I get older I care less about the stuff of birthdays but more about the acknowledgement of the day.  I would rather get five wishes of ‘happy birthday’ than six cards any day of the week.

I also had an odd experience this year as I was asked by my wife what I wanted for my birthday.  My first response: a complete and utter blank look.  Nothing came into my head at all for a while.  I had at that moment no wants (for the record, yes it felt sort of zen like).  It was only after paying attention to my life for a few weeks did a few little things come to me that I would enjoy: like a sample set of teas (from David’s Tea), a new set of workout clothes (my old pair is like 10 years old) and two DVDs.

So the big day arrived and guess what I’m thrilled with my day: no work, a good meal planned at home (all appetizer supper) and a nice bottle of wine to go with.  Perhaps I’m getting a little more wiser as I get older and I realize: I don’t need much to be happy in life.  It’s not to say I don’t enjoy the odd restaurant meal out, but I rather prefer a more causal meal at home with my family when I get to do some cooking (which I enjoy).

So has your birthday celebrations changed as you got older?  What did you start doing and what have you stopped doing?

That all came to an end last week because I bought those damn guilty shoes.

But Tim, do you ever feel guilty?  Goodness sake, you are planning to leave the workforce in just 8 more years.  How on earth can you not feel guilt for that and worry about a damn pair of running shoes?

Well in this case, I would call it: structured guilt.  I want to get back into some more healthy habits like running.  After all if you don’t have your health who cares if you got another 20 extra years of retirement.  So to achieve that end, I went out a bought a good pair of running shoes and the helpful advice of a store clerk who was willing to ask me all the right questions and present me with the only pair of running shoes in the entire store that would fit me (I have wide feet, so this happens to me a fair bit).

The problem was the price tag: $170 including tax. For running shoes? Yes.  Shoes Tim? Yes.  You sure? *sigh* Yes.

Needless to say that blew my little old $100 dollar budget right to hell.  Then of course my friend who also runs, I told this tale to, so he keeps asking me if I’m running.  Then I told a few people at work that I’m doing this and they ask.  Then of course I way blew my budget and keep asking myself “Tim, if you paid a $170 dollars for these damn shoes, do you really think the excuse of ‘I don’t feel like’ is going to fly? Go for your run!”.  Thus the term: structured guilt.  If I don’t go for my run I have to face the fact I wasted that money, and tell several people about it.  Now I’ve even told all of you, which will increase the guilt if I don’t use those shoes.

So that is my little tale of the guilty shoes.  No malls were involved with sighs as I found the perfect pair of shoes that I just had to have.  Instead the guilt exists only in my mind to get my butt out of the door at least four times a week.  The good news is for a change of pace this does seem to be working, the next trick will be to keep it up until the habit forms in my head.

So have you ever used guilt to change a habit?  Did it work or not?

This article may or may not interest our American readers, as it deals with our Canadian government systems and their debts.

I get really angry sometimes at our various forms of government.  In the fall, I wrote a letter to my local city councilor – asking how the city could be building large capital projects (city funded) while running consecutive deficit budgets (I still haven’t received a reply).  I don’t really understand how our elected officials have decided that the best use of taxpayer money is building an ice rink in front of city hall when they are in this type of financial situation – this would be like my wife trying to tell me that it would be a really good idea to buy a second car after we found out I was being laid off.

Then, you look at our National Debt – which is now growing exponentially.  My tax dollars are going to pay for interest on deficits that our governments (at various levels) have continued to rack up year after year.  If I was to ask the departments of finance why they think this is a good idea, I’m sure I would get a response back that they have “no choice” – revenues are not coming in to support the necessary expenses in this down economy.

The problem I see, which is very similar to what a lot of households is that there is always going to be seemingly “necessary” expenses that are going to come up.  As an individual, if I continuously racked up deficit after deficit, eventually someone (a bank or other creditor) is going to put a stop to my feverish spending.  In the current climate, nobody is really telling the government to stop racking up the debt (well maybe other than me), something I don’t really understand.

I think that, much like an individual who is not willing to change their lifestyle to reflect their finances, our government is paying for stuff that we as a country can’t afford.  There is really no incentive for the Government to cut spending, as the next party who wants to get elected is going to give back what was cut (and probably more).  In Ontario this February, there was a massive report released stating exactly what the government needed to do to “right” the economic boat.  The report basically boiled down to what I would tell any individual who was having money problems…stop spending and pay off your debt (It was promptly ignored).

I’m not sure what the solution to our country’s problems are.  What I do know is that we’ve tried throwing money at it, and that doesn’t seem to be making life any easier – perhaps we should try something else?  All I know is I am attempting to get out of debt as quickly as possible, with the incentive being that I will gain some additional control over my finances.  I don’t know why our government doesn’t see it the same way.

So, that’s my rant.  I realize that Canada has done alright in comparison to other countries, I would like them to do better though and to fix the financial problems that they don’t seem overly concerned with.  Perhaps my argument is oversimplified – do you agree with our government’s current deficit spending?  Would you do the same thing with your personal finances?

First, it helps me connect to the companies I own. Actually, I only own a tiny percentage, but that ownership represents a relatively large portion of my net worth. I want to feel that I can trust the people who are managing this companies in an effort to be able to provide me with a steady dividend. I wouldn’t want to manage even one company, much less a dozen, so I’m happy to have professionals running the company. That doesn’t mean that management will necessarily keep my interests at the forefront, but listening to them speak gives a pretty good indication of the issues that are driving the corporate agenda.

Second, I like to know what the outlook is for the company. I read the financial statements and I try to find the good news as well as the bad news. I look for any trends or “red flags” that might be worrying. Then I listen to management’s perspective, followed by questions (usually by investment analysts). Is there good news I misunderstood? Is there bad news that I didn’t give enough weight to? Are there credible threats in the near future? But, more than anything, should any of these perspectives change my decision to own this company? During a recent call, the CEO (who is also chairman of the board) talked about long-term investments in building capacity, but failed to share a concrete strategy that was driving the investment. His lack of obvious enthusiasm probably contributed to some of the tough questions that he was asked about vision and planning.

Finally, I need to understand my investments. If I don’t understand how a company makes a profit, I won’t invest in it. If I understand that a company has a seasonal pattern to its profits, I can remain invested despite seasonally poor results. And as I listen to presentations and questions, I better understand the organization and competitive pressures that affect the company.

One of the other benefits of listening to conference calls about company results is to get a better sense of how the economy is currently functioning. Three of the four management teams seemed optimistic and sounded positive about the outlook. Only one company claimed to be struggling due to economic circumstances. It really makes me question why things are different for just one company.

Do you go to these lengths with your investments?

Goals are great to have.  When you have a far off dream like financial independence, I can almost guarantee you won’t get there unless you turn that dream into a goal.

So you set up your budget, fire up a spreadsheet and map out the path to your goal.

Along the path to that goal will be many milestones that you strive to reach.  If you miss them, you’re not on track and have to change something.  Maybe cut back on regular spending, delay taking a trip or buying that new cork flooring that you really really want. [Editors Note: Damn I'm so going to have to take before and after pictures of this floor when we install it. ]

But sometimes you can over-achieve on those goals too.

The temptation is there to keep on a roll.   One of my dad’s favorite sayings was “make hay while the sun shines.”  (Can you tell he was a farmer?)  He was always aware that the weather was unpredictable and if you didn’t keep working, it could rain the next day and your opportunity would be gone.

Isn’t that the smart thing to do?  That’s what most people do when they work and save for 30+ years and then retire at 65.  Sometimes they stop with “too much” money and not enough retirement years.  It’s what most contract job people (like me) do – never take a day off because you don’t know when you’ll be out of work and for how long.  It’s what the fearful part of me wants to do (and she talks very loudly but fortunately not very often).

Except sometimes you get a wake-up call to pay attention to what’s also important.  Obituaries of current employees who have died are posted about once a week on my intranet workplace.  (I’ve always found it ironic that people “like” those posts.)  Every time I see one, I’m sad for them and their families that they never got to enjoy a period of slowing down with their loved ones and hope that they really enjoyed their jobs since they gave so much of their lives to them.  Every time I see one, it reminds me that life can be so short and I can’t control life no matter how many spreadsheet scenarios I run.

For people who strive for financial independence and a better work-life balance, those spreadsheets (aka maps) are essential for both knowing when to step it up – and knowing when it’s ok to slow it down because you’re reaching your destination sooner than planned and maybe it’s time to look around and enjoy where you are on the trip.  Most other people who don’t value that life balance just go out and buy more stuff.  The FI people will do things like cut back to an 80% work week or take unpaid leave and trust that somehow the sun will keep shining down the road.

So I’m booking a lot of unpaid vacation time.  And crossing my fingers that it won’t rain while I’m out camping.  It’s just another way of making hay while that sun is still shining.

In terms of investor types I would typically fall into the value or income investor. So please do keep that in mind while reading this series.  If you have other goals you might end up looking at other factors.

Step 1 – Define Goals

Step one for me is to look at what businesses tend to have a long term profit and also tend to issue dividends. I don’t buy stocks for growth.  I’m after a nice stream of cash from a business and if I get a lot of growth, well that would be nice, but frankly I’m not counting on it most of the time.  So that tends to limit myself a fair bit on businesses, as I avoid start ups and IPOs are also off the table.  Both tend to be high risk ventures with no defined pay out.

As to what sectors I buy into I tend to look for companies that have repeat business on a monthly basis.  That way they have a nice stream of cash coming in to help pay me off in dividends.  So what companies are a good idea?  Look at the bills you pay monthly: water & sewer, electricity, phone and internet, bank fees and mortgage, natural gas to heat your home and gas for your car.  Based on those you look for utilities, telecom, banks (and/or Real Estate Income Trusts if you rent), oil and gas companies.

Step 2 – Determine Level of Risk

Unlike a lot of people who think the stock market is a great thing, I tend to think of it as highly risky.  It’s subject to mass panic, speculation and rumor to define what your portfolio is worth on a given day.  So I did my research and came to an interesting conclusion: you don’t need as much risk as you think.  It is possible to have a portfolio that is only 20% stocks that can still beat inflation (based on average return data from 1950 to 2007).  This isn’t to say you can’t have 100% in stocks, it all depends on your skill set and you comfort level.

In my case I’m planning on about 25% of portfolio in stocks.  Why so low?  Well in a nut shell my low expenses are a double edge sword, yes I get to retire early because of it, but on the other hand I don’t have a tonne of fat left in the budget.  I can’t afford to have massive drops in the portfolio if I had a 100% in stocks, so I aim lower and accept that I will be doing some work during my retirement years as a backup.

Step 3 – Find the Unloved

People screw up, it happens.  What is particularly interesting is when companies or governments screw up?  Why? Because panic and fear can be an investors best friend when looking for value.  I’ve seen it numerous times when people over react to some news and you end up with a really low share price and high yield.  I tend to look at news report of ‘the sky is falling’ to equal ‘let’s go shopping’.  Sort of like the last week or so is getting me scanning companies again seeing where some of my watch list is at.

A decant way to shift through a series of companies on most stock screeners is to use the P/E ratio.  Which is the stock price divided by the earnings per share of the company.  The lower the ratio indicates a depressed stock price.  A P/E of 20 is ok, but a P/E of 10 is ‘oh my god, what the hell happened to you to get crushed’ which means I would look into it further.  A good way to think of P/E is the number of years of earning per share earnings you would have to get in order to pay back your original purchase stock price.  It’s not like you would want to ever get a 100% of the earnings as a dividend, but it makes the ratio a little bit more easier to understand.

A similar method of looking for the unloved is to skim stocks by yield (how much of dividend are they paying divided by share price expressed as a percentage) .  The higher the yield the more likely the P/E is going to also be lower.  Just keep in mind…it it looks to good to be true, you might find a surprise in the financial reports.

Next up in the series – after you have found an unloved company, I’ll show you what I look for in its financial statements.

So what do you do differently when you start looking for a stock to buy?  Any tips or ideas to share?

With all due respect I know the feelings that lead to people shutting things down and moving on.  It has occured to me several times over the last few years myself.  Life is busy and continues to change at a rapid base and some days I really don’t feel like writing a damn thing.  I’ve even entertained the idea of selling this blog once in while.  Yet somehow I find my passion again and keep going even during the low points.

To my readers: thank you for every comment, question, and feedback you provide.  You guys are the reason I keep coming back around.

I may be committing a significant personal finance faux pas – I am (knowingly) leaving money on the table.  Some people will argue that the opportunity cost is just too high, that there are several ways I could be earning more money….but I’m okay with what I’m doing – leaving a significant (half a year’s expenses) sitting in a savings account.

As an alternative to my current “strategy” I could be earning several percentage points more in interest per year, investing in a fairly conservative bond fund (as an example).  I prefer to keep the money earning 1.35% in an ING account and more importantly (to me anyways) close – as close as theoretical money can get.  In “olden” times, I would be the guy with too much money stuffed under my mattress, or buried in a coffee can in my backyard.

I wouldn’t call myself paranoid by nature (I’m not that crazy), I just like the security of having a bunch of money within a 2-day transfer in a secure account rather than at risk in any way.  This way of thinking is contrary to most of my financial plans, which are somewhat risky – the largest risk being my plan to leave the workforce 20 years early.

As an alternative to a largish “war-fund” I could tap into my line of credit, or use a credit card short-term that I could pay off with invested dollars once the stocks/bonds/other investment has been cashed out.  I think that psychologically, I just like having a buffer of cash.

The weird thing about this savings account is that I’m not even really sure what it would be for.  I can’t really foresee any wild economic disaster that would cause me to need this amount of money all at once.  On an annual basis, my household expenses are low enough that my wife or I could support 100% of our needs – there really just isn’t a need to have the money sitting there.

I keep it as a “get out of jail free” card.  I keep this money un-invested because it allows a certain amount of freedom…for me and my wife it is somewhat comforting to have this money here.  My job is as stable as you can get these days, while my wife’s is probably a little precarious (working in a retail business).  Even though I currently enjoy the work I am doing, I like that I could decide to quit tomorrow and really have no problem (for 6 months or so).

So, that is my story about my large emergency fund – large in comparison to my expenses, and the risk that it will need to be tapped.  How do you approach your savings?  Do you have a bank account full of money, or are you fully invested?

My enjoyment of swimming led me to start thinking about participating in a sprint class triathlon that my relatives have done in the past. The event includes a 500 metre swim, a 15 km bike ride and a 5 km run. I’m not sure why the triathlon appealed to me. I really enjoy swimming and I enjoy cycling, but I don’t like to run. Still, I can’t complete a triathlon without running.

When I was swimming for enjoyment, I worked on improving my form and my endurance. It became apparent that it would take quite a bit of work for me to reach my goals. At first, I could only swim one lap (25 m) before stopping to catch my breath. I soon extended that to 50 m and became comfortable with bilateral breathing. A few weeks ago, I was able to swim 275 m before I had to stop and rest. Now that I’ve been swimming for over four months, I am finally able to swim 500 m comfortably (in about 11 minutes).

I realized that the biking and running are going to take a more concerted effort. When I started running, I would run two laps (100 m), then walk one lap. After two weeks of that, I pushed on to alternating three laps of running with one lap of walking. However, my effort was inconsistent.

As the event approached, I found a 10 week training schedule that I adopted. The schedule began by alternating between activities (swim, run, bike) for increasing lengths of time. More recently, my training combines activities (swim then bike, bike then run, swim then run) for a few days, followed by a long bike and a long run. I surprised myself last weekend by being able to run for an hour (and cover 9 km). I’m beginning to feel confident that not only will I complete the triathlon, but finish in a time to be proud of.

The only reason I’m able to push myself to keep biking when I’m tired and it hurts, or to keep running when I’m bored and I’m not having fun, is because there is a definite end point and a specific time goal (1:20:00). I know that I need to be ready by June 2, which will arrive whether I train or not. It’s also clear that I’m now able to do things that I couldn’t before.

That’s the premise of having a financial plan. Most people would rather spend now, besides which saving money isn’t fun. But with an end date, the sacrifice won’t go on forever. The nearer the end date is, the more motivating. Life if full of surprises, which will impact a financial plan. But having a plan isn’t meant to regulate events, it’s meant to motivate. If your goal is meaningful to you, such as “be able to quit this lousy job,” “have much more leisure time,” or “devote more time to family, friends and community”, and if you can see the progress that you are making (little by little) toward your goal, it should motivate you to do whatever you need to (buy insurance, save, invest, look for other work) to make your financial plan successful.

But, I’d like to see less of the psychology behind why you want to retire early and more of the specifics of what you’re actually doing. How do you achieve such a high savings rate?

Um, I hate to give circular answer, but how can you achieve a high savings rate…see the obsession with psychology.  Really that is the reason, but perhaps I should explain that a little better.

My current saving rate is about 50% if you ignore my highly inflated and accelerated mortgage payments, if you include those it jumps up towards 75% of my take home pay.  Yes, it’s a HUGE number.  That comes about from two main reasons.  First off with all income sources my wife and I earn about $110,000/year, so start with a higher income and then do some good tax planning to keep most of it.  Then second don’t spend that income, instead get a low set of expenses that are perfectly balanced to your particular needs and wants so I feel just as content as many people who spend double what I do.  How?

Ah, now we are into the psychology part of the answer. Being somewhat obsessed with psychology of happiness and spending I’m actually aware of how people can spend money like water and not be happy.  We buy things on impulse, we treat ourselves (because we deserve it), we lust over the latest movie or gadget or shoes or (…insert obsession of choice here…) but we still aren’t happy and go buy more.  The main difference is I know what I need to buy to be happy and what won’t make me happy.  Now what works for me won’t work for you so you have listen to your own subconscious, but here are some general hints.

1) Buy Experience over Stuff.  New hardwood floor or that kitchen reno won’t bring lasting happiness, in all likely hood it will turn into your new baseline in under a month.  Then the happiness is gone.  So save up for a trip instead, you likely will be more happy with your memories than the new floor.  (Or in my case next year…do both.  As I said these are hints, not rules, you can break them.)

2) Delay Buying Things.  Well most people understand that not buying on credit is a good thing, since you save the interest cost.  What we often don’t know is the lusting after your purchase prior to getting it can bring just as much happiness as buying the object.  So even when I could just pay cash for something, I tend to save up for it.  Why? To drag out the happiness and make sure I buy the right thing.  So more often than not I don’t screw up and instead I buy the right thing for my wants and I’m more satisfied with my spending.

3) Focus on Equal Outcomes.  I tend to really like to watch movies, but I’m often just about 3 to 6 months behind what came out in cinemas.  Why? I realized I really don’t care when something was released, when I get around to watching it.  So yes I do hit up the cinema, but only like once or twice a year for the movie that I’m REALLY WANT TO SEE.  Otherwise, I hit up the library or Netflix to feed my habit.  I focus on the equal outcome for me: I just want to watch the movie, I don’t care about where that much.  So I spend like a fraction of what others would for a similar movie habit.

There are obviously more tricks, but that should get you started on why I have a high savings rate.  I focus on what matters most to me and screw what other people think.  I am the Joneses of my life, so I don’ t have to keep up with anyone.

So how about you?  What do you do to keep up your savings rate?