Now that we've taken a look at some of the tools that you can use to track your budget and manage against it, let's talk about the ideal budget allocation and some of the different scenarios, depending on how aggressively you can save.
So many sources will tell you that an ideal allocation is 50/30/20.
- 50% of your money should be spent on your day-to-day expenses, including your housing, clothing, all of that stuff.
- 30% should be spent on pleasure, vacations family, things like that.
- And 20% should be saved.
Now this is probably a good rule of thumb, depending on your income and, for the general case where somebody makes around 48,000 or 50,000, the median income for a household that makes sense. If you're able to save more it will have monumental impacts in outlying years. And also the earlier you can begin to save has a huge effect. If you're able to save for 35 years so in this case you would typically be 30, let's say, and you'd be starting your journey, then you can save for 35 years.
At 7% adjusted for inflation returns, you will get 10X your money at the end of that 35 years. So for every dollar that you save today, let's say you can not go to Starbucks and save that thousand dollars a year. That's really going to be worth $10,000 in the future adjusted for inflation.
Now, if you can actually save your money for 40 years. So in this case, you retire at 70, or let's say you're 25 and you start saving. Then you actually 15X your money, that extra five years has a monumental outsized of the effect on the outlying years because of the power of compound interest, which I love. And so being able to refrain from costs like that is one way to think about it.
Oftentimes I'll say to myself, do I need this extra new TV? or literally waiting one year, just that one year of waiting will, will be worth $16,000 in the future.
Another interesting thing to think about is the ratio of savings that you can put away.
Note: The graph shared above assumes 5% interest, the podcast assumes 7% based on the youtube video which has a different graph
And as we take a look at this chart, there are some example percentages. So if you're able to save 50% of your income, and again, the beautiful thing about this as it's a percentage. So if you make a hundred thousand dollars a year and your cost of living is 50 K. Okay. That works. If you make 60 K a year and your cost of living is 30 K, this works for you as well.
So the goal is what is the saving percentage as a whole of your post tax income? So if you're able to put away 50%, you'll actually be able to retire in 15 years. If you're able to save 40%, it'll take you 20 years, 30%, 25 years, 20%, 31 years. And if you're saving less than 20%, you're really not going to be able to retire.
Unfortunately, now this is where things get interesting. If you can save as much as 70% of your income, and this is probably more relevant for high income earners. If you're able to save 70% of your income, you'll actually be able to retire in just nine years. Now, this assumes a 7% adjusted for inflation return, as well as a 4% withdrawal rate, which most experts would say is a pretty cautious case to take a lot of people budget for even lower withdrawals.
One thing to think about as also what to do with your savings.
Oftentimes by putting your money into a savings account with a bank, a traditional bank, you won't earn much, even in a high interest savings account. You'll probably be earning just depending on inflation, right around the inflation rate. So 2% are these days, even less than that.
oftentimes if you have the ability to put this money away for a long time, and again, this is after you cover your expenses. So the, that is likely the case. You should be able to put it into the ETFs. I won't give financial advice on specific ETFs, but I personally like to look at index funds, such as the S and P 500.
And so looking at the S &P500 one of the best ways to invest in that is either through a TFSA or an RRSP in Canada at CFSA is a tax-free savings account, which is post tax money. So there's no tax benefits, any money that you make and you put in there has already been taxed. The beautiful thing is money that's generated on that income is tax-free.
On the flip side, you have your RRSP, the RRSP is the re. Registered retirement savings plan, where you can put money into that. The differences one, you can't withdraw that money until you retire without incurring huge penalties and two, that money actually provides a tax benefit. So you not only get the tax shelter at the beginning you only pay.
The taxes, which are taken out as income taxes when the money is withdrawn. , I'll send some links below that you can do some more research, but typically you'll want to take your savings and put it either into one of those two accounts. Once you've maxed out your contribution room which depending on the year and how much you've contributed in the past can vary.
But once you've maxed out your contribution room, you should. Just put the money into, , either a high interest savings account. Or if you feel a little bit riskier, you can still put it into a trading account that is not registered. The benefit of that is that you do get to write off any losses in taxes.
However, any income will be taxed at its full rate.
Investment Tracker Tool
So a great tool that you can use to actually track your investment portfolio and allocate your budget is the measure of a plan investment portfolio tracker. this is version 8.4. He updates this quite often. So just make sure you have the most current version and all you need to do is. Copy over everything that you put into the setup tab and the trade log tab.
So let's actually go into those tabs in detail.
So you can set up multiple currencies. Obviously the ones we care about are going to be the USD and Canadian. They have some other presets, but if you need to add any other ones, feel free to change these ones, the bottom three. There's also investment categories, feel free to add any, if you need, for example, wall street bets. If you're trying to have some fun.
And then any other investment or trade accounts. Ideally TFSA, RRSP and obviously RESP for Canada, and then add up to 250 stock tickers. So these are going to be the ones that you've purchased. This is going to be different for every person. I've set up just some example, ones that I've used in the past. What you do is you put in the ticker, the currency, the investment category, which gets pulled from up here, and then it will, auto-populate the name of the ETF or the stock from Google finance. If you're getting something from the Toronto stock exchange, for example, make sure you put the TSE ticker just before the name of the actual company ticker.
Then on the trade log tab, you can set up the actual transaction. So the dates, the amounts that you bought, how much you paid per unit, the amount before trading fees, trading fees, and what account you're trading it in. You'll make sure that you put all of it in there. Filter them correctly, whether it's a buy, a dividend, a sell, etc, they have a couple of different transaction types here and you can get this typically from quest trade, or somewhere else export via CSV.
Once you load all of these in, you can take a look right on the dashboard.
So it'll show you your portfolio either [today or] on a specific date, which is pretty cool. And a currency, obviously I'm focused on CAD, but just to show you press USD and you give it a second up here, you can see the bar and it will recalculate and do everything now in USD. Wow for the sake of fun, we'll just go back to CAD.
Here, you'll be able to see what are the actual stocks that you hold? What are the investment categories? This is probably going to be the most interesting one. As we talked about the 80/20 rule. Now this portfolio is just an example. It doesn't even follow the rule that closely, but it's an example of a portfolio that I just set up very quickly.
You can see your spread between currencies. So CAD and USD, you can see your performance over time. So how much you contributed, how much you've withdrawn and any investment returns. So between, for example, in this example, portfolio, between these time periods, we had a 13.2% return. It tells you how you performed across different, categories.
So you can tell how you're doing on the portfolio holdings page. We can actually see the amount that we've gained per stock and the unrealized losses and any actually closed losses. So if we. Go a little bit over, you can see in local currency, not converted and in the other currency. So if we set this to USD, this would have set up in USD and any type of investment performance and how it correlates as far as market gains.
Monthly Performance Tab
On the monthly performance tab, once you press go, which will probably take a couple of minutes to process, it will then tell you how your portfolio performed relative to the market and relative to the S&P500. So you can see here, it shows you for example, the S&P500, the TSE:HXT, and other ones, you can actually set a custom on at the bottom.
You can see any dividends you've collected as well as how much you expect to receive in this upcoming year, for example, 2021 received and how much you expect to receive per account. And the realized gains.
And my favorite page, the rebalancing page. So this shows you, for example, if I wanted to put in another 10,000, and so let's say you're opening a portfolio, you haven't actually set up anything in the trade log because this is a new account.
And all you have is $10,000. You could go in here, you could type in 10,000 and based on what you set up. As your ideal portfolio, it will tell you what to buy. So your target asset allocation, you set that up here based on that it'll tell you how much you should buy and sell of any specific stock. So if I were to go in today and I was starting a portfolio, I would set up my allocation to be something like 60% here [QQQ], 20% [VOO] here and I'll put 20% in bonds, but in just for the sake of this, I'll do something like this. I'll put in $10,000 and it would tell me what I should be buying and selling based on this.
You can then go in and actually execute these trades on quest trade or your broker of choice.
Thank you so much for listening. Hopefully this has helped you learn a little bit about budgeting and help you get a better picture of your financial future. I'm looking forward to producing more of these episodes. If there are any specific topics you'd like me to cover, please let me know.
I'm looking forward to seeing y'all in about two weeks.
Resources and Links