CBA Blog

Financial literacy - Part 4 - Paying yourself first & building equity

Life challenges are like the wind.  We cannot direct the winds but we can adjust our sails.  The sailboat needs to get from point A to B.  However, the wind does not necessarily blow in the anticipated direction or speed.  Sometimes, it can be a storm or windless.  Therefore, sailors must constantly adjust their sails in order to steer the boat in the right direction.   

You might be familiar with the book "the wealthy barber".  The book talks about paying yourself first.  The simple barber pays himself first before any authorities or personal obligations.  He owns a simple house, drives a simple car, lives a simple life, and retires a millionaire.  You see, when we were employees, at each payroll, our paycheque shows a deduction for CPP, EI, taxes, and in some cases union dues before we actually see actual money in our bank account.  Depending on your tax bracket, it can go as high as 50%.   Before long, we do not feel anything and it does not take long to accept that life is paying your share to the Government before paying yourself.  When we become self-employed entrepreneurs, we first pay Government taxes in installments or at the very end when we file our taxes.  Even though we draw dividends or payroll from our company, we failed to still fail to pay ourselves first.   

What is actually paying yourself first?  Simply put, it is paying yourself before you pay taxes, expenses, and personal responsibilities.   If you are religious, you should give the first fruits to your creator first before paying yourself.   You set up a pre-authorized payment to invest under your name.  The investment can be a straight term deposit, mutual funds, or other investments.   

This concept of paying yourself is not new.  In 1955, the Government of Singapore introduces the Central Provident Fund which is a compulsory contribution for both employees and employers.  The CPF is Singapore's social security system for a down payment for their primary residenence, medical bills, and retirements.  You can call this "forced savings".   The employees and employers contribute 20% each month which means the employees get to save 40% from their gross payroll.   For example, if your income is $5000 per month, you would have saved $2000.  If you ask me, I would think that force savings are good when you do not know how to spend your earned income.  Today, many retirees in Singapore are millionaires.  They own real estate and savings.   On the other hand, many retirees in Canada are the opposite.  In Canada, working people saving at 40% of their payroll is next to impossible.  However, putting aside 10% is more realistic or $500 per month. 

Suppose you invested in dividends mutual fund and you got an average return of 8%.  When you add compound interest, within 10 years the amount, this $500 a month contribution will grow to $92,582.84.  $296,973.61 within 20 years and $750,647.59 over 30 years.   You get all this by doing nothing and going on your daily life.   By the time you know it, you have built yourself asset and equity.   

Stay tuned for part 5.  

 

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WHAT CAN BUSINESS OWNERS DO TO HELP THEMSELVES IN THE BOOKKEEPING PROCESS

I have a box client whom I dread doing their books. Each year, they gave me bag(s) of mess-up receipts, invoices, bills, bank, and credit card statements that looks like a house robbery in-progress. Oftentimes, papers were folded oddly or have water stained with no meaning pattern to follow. This is not the real challenge as I have other clients who did the same as I have no problem organizing them. I understand they hate paperwork.

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