How Do You Conquer Your Financial Fears?
“Inaction breeds doubt and fear. Action breeds confidence and courage. If you want to conquer fear, do not sit home and think about it. Go out and get busy.” – Dale Carnegie, American writer, lecturer and self-improvement guru.
Much has been written about fear. It can be a huge deterrent or a great motivator. Fear can confuse, frustrate and put up psychological barriers that are tough to knock down, if ever. Fear can stop our goals from being fulfilled in any life facet.
I have a few fears. I’m not a fan of heights for one.
My wife fears bugs, any bug actually.
What do you fear? How does it affect you?
When it comes to personal finance, I have a few fears there as well. I fear I’ll lose my job at some point and I won’t be able to afford the house I live in because of my fat mortgage. I also worry that I won’t be able to save enough for retirement or retire early like I want to.
I suspect most of us have financial fears or did at one point. Here’s what I’m doing to combat my financial fears.
Build up an emergency fund
Some time ago, I wrote about building up our emergency fund. At this point, our fund is not quite where we want it to be but it is steadily growing. I don’t like the idea of drawing on a line of credit (LOC) in an emergency if it can be helped. In an emergency situation the last thing my wife and I want to do is to add-on more debt. Having an emergency fund is a security blanket that works for us; a blanket that other folks may not need. No matter how stable our jobs might seem, no matter how good our health may feel, $hit can always hit the fan and because of it I feel some preparations are always better than none.
Make lump sum payments the mortgage
I’ve read many times over the last few months that interest rates may not head higher until well into 2014. Who really knows when interest rates may rise, but what I do know is this: rates today are an excellent time to pay down our mortgage. Yes, money is cheap to borrow but it’s also cheap to pay back. Using Bank of Canada language with no “imminent” rate hike on the horizon, I’m working to conquer any job loss fear by getting out of debt sooner than later. I hope to be completely debt free by 2021.
Invest using a two-pronged strategy
First up, let’s discuss the benefits of index investing (indexing). Indexing works because I’ve learned most actively managed mutual funds underperform the index and even if fund winners are found, the winning streaks against their benchmark don’t last long. Also, indexing works because it offers great diversification, with high transparency at a low cost. I enjoy indexing but only do so in my RRSP. Beyond indexing, I also use a strategy of buying and holding Canadian dividend paying stocks for income and capital appreciation. Dividend investing takes on more risk than indexing but I feel it’s worth it because of the cash flow it generates today and with rising dividends over time it will generate more cash flow in the future. My plan is to avoid touching any of these dividend-producing investments today because my plan is to live off most of my dividend income in retirement.
There is absolutely nothing I can do about my job but work hard at it. There is also nothing I can do about the stock market performance to guarantee high returns. What I can do is recognize what I fear, react (better) to those emotions and instead of dwelling on them, just get busy like Dale Carnegie says I should.
What financial fears are you busy overcoming?
If you already conquered some financial fears, what actions did you take to achieve success?
I think our fear was the mortgage and not knowing when and if rates would go up. What we did know is what was obvious and true and that was our current rate. Paying off the mortgage is just one way we are conquering our financial fears. Great post!
@LifeInsuranceCanada.com
Absolutely not.
And @mark and @none, I wonder if that’s not a post topic for you – buying a house in the next couple of years, wise or foolish?
It may be foolish in the short term, when treated as an investment – but if it’s simply a long term place to live, then maybe the math works out that it’s like index funds – ‘now’ is always fine as long as you’re in it long enough, i.e. trying to time the real esate market won’t work. I don’t know – I don’t think anyone’s looked at it this way before.
I do know that I don’t really care about house prices. We intend to live in our current house basically forever. And if I was looking for a house for my family, I’d be looking for a house, not speculating on house prices 2 years in the future. Of course that’s not Warren Buffet type of thinking either
.
@None
@none, I think there’s other considerations, particularly with a mortgage. If I owe $10 and have $10 cash, I’ll pay off the $10 debt have $0 rather than invest the $10. By the same reasoning, you won’t ever find me leveraging no matter how attractive it is. But that’s not a numerical choice, it’s my specific personal choices overriding what the numbers claim to be.
I do agree entirely with you on one thing – running the numbers. Substitute facts for appearances, don’t presume anything until you’ve seen it proven, and then make your best decision. The only reason we’ve ended up at different answers is different inputs.
@My Own Advisor
Sure, as long as what you would be investing in would be outside a tax shelter and you already have a maximum exposure to Can Equities and Dividends I would agree with your math.
If not, then you’re break even point is quite a bit different.
@My Own Advisor
Ah, 4% – I thought you would be around 2.25% or something. As you can see from my post above as the rate gets higher then of course the ‘risk’ of this method increases.
Of course, because I assume you are still investing money and not maxing out paydown payments you at least partially agree with me
All the best.
@None,
Actually, my mortgage rate is around 3.2% right now but I pay that with after tax dollars. Using my marginal tax rate of over 30%, I get this: 3.2% / (1-0.30%) = 4.6%. This is my approximately my breakeven rate. I need to be making at least 4.6% pre-tax on my investment to make the investment trump the mortgage paydown.
All that said, whether my financial fear is justified or not, I want to have no debt eventually.
I totally agree with you: as the mortgage rate gets higher then the risk of that liability increases so it makes sense to turn your attention to the “guaranteed” return (mortgage paydown) when your borrowing rates are higher than your investments can possibly return.
You are correct to assume I’m still investing, I’m not putting everything on the mortgage. I’m trying to strike a balance between my debt obligations and investing to provide some incubation time for my investments to compound.
Great discussion!
@LifeInsuranceCanada.com
I’m sorry but I strongly disagree – whether you pay down your mortgage or not is dependent upon the interest rate you are currently paying and the return you think you could get on the stock market.
For example, if your mortgage rate was 0% indefinitely you obviously should never pay off your mortgage but if your mortgage was 20% you should pay it down as fast as you possibly can. I use this extreme example to illustrate that there is a ‘tipping point’ where one should NOT pay off one’s mortgage (at least after paying off a sufficient amount of the loan to insulate you from a reasonable house correction) and where paying it off ASAP makes sense. I believe now with the rock bottom interest rates and conservative market returns reasonably expected to be around 5% over the short term I see little financial justification to accelerating a mortgage paydown schedule.
I will however, I give you that out of all the ‘sub-optimal’ financial decisions out there paying off your mortgage quickly is a fairly minor one.
@None
It’s always a good time to pay down one’s mortgage (assuming you’ve got something in the way of an emergency fund). Suggesting one shouldn’t attempt to pay down your mortgage when interest rates are low is akin to suggesting that we wait until interest rates are high before paying down the mortgage. I just don’t see it. Pay down the mortgage now, no matter what the ‘now’ is.
The emergency fund vs. loc is probably fair enough, but for most people there’s some side confidence in having cash on hand. I for one am not interested in the possibility of having an emergency where I need cash and at that time being beholden to the bank deciding to give me a loan. I’d rather just have the cash, no middle man.
@My Own Advisor
I understand – I suppose my biggest issue is with your decision to pay down the mortgage. I don’t know if you’ve done this but if you do some projections with a spreadsheet and use some reasonable assumptions I think you would be surprised at how much you are losing in potential gains at the cost of reducing your risk exposure below a level I would consider to be meaningless. Why does the house have to be paid off? I know it’s a fee good thing but I just don’t see the financial justification for it.
I certainly do have a financial fear. We’ve currently decided to become “our own advisors” as well. Consequently, I’m sitting on about 200K in cash waiting to be invested. Do I invest now or wait for a ‘correction’ in the S&P in general?
My largest risk exposure was my house which I sold at a tidy profit – I guess to quote Garth I found myself a ‘greater fool’ (which kind of hurts because a really nice family bought my house). Honestly I think anyone buying a house now, or in the next year or two, will be exposing themselves to an extreme level of risk of losing lots of money without little no to possibility to an extreme level of unjustified risk i.e. no way to make enough gains (through either RE gains or savings in rent) to justify the purchase.
@none,
I can tell
Kidding aside, my mortgage costs me about 4% in interest, my mortgage rate isn’t really that high but because my income is always after-tax dollars, making a mortgage payment is a guaranteed rate of return of about 4%. My mortgage is also well over $100K. This is not a trivial sum of debt. I’d like to be debt-free in my 40s so I have more freedom later in life.
If my mortgage was only $100K or less, I might feel differently. Paying off the mortgage is more than a feel good thing for me; not having debt provides some financial freedom to make choices in life; not owe anyone a penny or having any financial obligations.
As for your own fear, you’ll overcome it I’m convinced. Sitting on $200K cash is a bundle of money!
I know when I have money to invest, I limp in when things are priced more than I’m really willing to pay for it (kinda like now). This way, I have money when there is a correction but I’m also making sure my money is working for me sooner than later. It’s a tough decision I know and everyone has a different opinion on this.
I look forward to your response!
Mark
I had a huge fear of stopping having a ‘safe’ paycheque from a 9-5 job and going to self-employed. The day I quit is seared into my memory. I guess like most fears, you just have to get through to the other side because now I can’t even imagine working 9-5 at an insurance company.
Thanks for sharing Glenn. I would share the same fear, leaving that ‘safe’ paycheck.
I find this post a little ironic because I see some strategies here that have extremely weak financial justification and can only be justified based on financial fear and I would say a incorrect weighting of risk.
Emergency fund: A secured line of credit really is the way to go here. Secured LOC have such low interest rates right now that really there’s no reason to have money sitting in a high interest saving account making less than inflation.
Lump sum payments to mortgage: This has been a popular (and effective) strategy in the past when interest rates weren’t ridiculously low. Currently, interest rates are so low this strategy has little to no financial justification. Now, I’m not saying switch your mortgage to interest only but consider paying off a portion of your mortgage to a maximum of what a reasonable housing correction would be (say 30%; so pay off your house to a maximum of 70%) and use those extra funds to make more dividends/investments.
Index funds/dividends: We differ a little on the value of dividend investing vs straight indexing but both strategies are effective and the debate I feel that much of it would just be debating in the noise of the market in general. Indexing works / dividend investing work, both are effective so why quibble over a possible difference of a couple tenth of a percent.
Thanks for the post, I hope my comment gives you some food for thought.
Thanks for your comment none.
Your justifications are fine, but I think your argument is more philosophical. Meaning, one person’s fear (and evaluation of risk) is not the same as someone else’s. Fear is very much an irrational behaviour and cannot always be rationalized as much as anyone would like to do so.
Take the fear of heights. Why is it that some people have no issues with being in an airplane but they cannot stand up on a ladder? There is no perfectly rational explanation for this, as much as some people try and justify it.
Back to my post…
Re: Emergency fund – I personally need one but I suspect some people don’t, which is fine.
Re: Lump sum payments to mortgage – I feel I need to do this since if and when I lose my job, my mortgage debt will be more manageable.
Re: Indexing vs. dividends – since both strategies are effective and more importantly, they work for me vs. flip-flopping my financial plan about then that’s the best. Put another way, because it’s real returns that matter, whatever strategy or strategies help people maximize their real returns over time is the best strategy.
Thoughts?
Curious – what are your financial fears or do you not have any at all?
Using a two pronged approach as well (well starting to set them up). In the midst of setting up a TFSA with TD water for some eSeries, and getting some dividends on DRIP.
Going to try to automate everything so I don’t have to think about anything. [Except for writing OCP checks and going into the TD account to spend the auto payments, every quarter or so]. Don’t have to think about it, don’t have to worry about it.
Still working on the house thing though, not exactly sure where I’m going with that yet.
Great to hear aB.
I like the idea of automating finances myself and have written a few posts about that. I used to have DRIPs with transfer agents but not I’ve consolidated things over the years since I don’t need traditional DRIPs anyone, I have many synthetic DRIPs running.
Still working on the house? Yeah, us too! Damn mortgage.