My simple saving and investing rules of thumb

To quote the late, great Dr. W. Edwards Deming, arguably the world’s most famous quality management consultant, “If you can’t describe what you are doing as a process, you don’t know what you are doing.”   What a great quote, because there is so much truth to it.

Read on to learn about my simple saving and investing rules of thumb you can apply.

  • Continually reduce our mortgage debt by using prepayment privileges.
  • Use our line of credit only when necessary for major home renovations.
  • Save and invest at least 10% of our net income every year.
  • Keep a $5,000 (or more) emergency fund.
  • Always be on the lookout for ways to cut back on everyday expenses such as heat, hydro and cable bills.
  • Avoid carrying any credit card debt in any month.
  • Optimize our RRSPs.
  • Keep the majority of our RRSPs in indexed products.
  • Keep some U.S. dividend-paying stocks in our RRSPs.
  • Maximize our TFSAs.
  • Use our TFSAs for Canadian dividend-paying stocks.
  • Always keep taxes and inflation top of mind when making any investment decision.
  • Reinvest all dividends and distributions whenever possible.
  • Avoid investing in any “hot stocks”.
  • If we’re going to own stocks, only own companies that pay dividends.
  • Minimize money management fees.
  • Put emphasis on building retirement income (cash flow) rather than portfolio value.
  • Remember the stock market is unpredictable in the short-term.
  • Remember the stock market is predictable in the long-term.
  • It’s OK to splurge once in a while.

Dr. Deming told us all great managers understand where their performance comes from.   They exploit the power of process to understand market trends to be proactive instead of reactive.  As a co-manager of our household finances we’re trying to do the same.  Thanks for reading.

What about you?

What are your saving and investing rules of thumb?


Did you know?

There is no widely-accepted singular origin for the phrase “rule of thumb”?

Most experts agree the phrase originiated from using the thumb for various types of measurements. One potential origin:   plants need a moderate depth to seed properly; the depth can sometimes be estimated using the thumb.  Another potential origin: alignment of an object can be achieved by holding the thumb in one’s eye-line.  The mostly likely origin:  wood workers who used the width of their thumbs rather than rulers for measuring things; cementing its modern use as standard.  In Dutch, thumb (duim) means inch.

20 Responses to "My simple saving and investing rules of thumb"

  1. Filling your TFSA’s with only div stocks/bonds and withdrawing the divs/interest regularly to increase next years room is one way to get max benefits from these accounts. Also always transfer stocks into your TFSA’s when contributing yearly so as not to waste money on fees “inside” the TFSA. Don’t know if you can transfer bonds in but it’s worth trying. Also you don’t mention using DRIP’s. How come? You must have heard that many retirees are now paying more tax than they ever saved building their RRSP’s. This is something to keep in mind so you don’t overload on them. I don’t think it hurts to have a taxable investment account where you’re paying the tax as you go and you get to use the div tax credit. If you sell stocks and withdraw the cash from inside an RRSP your tax bill would be higher.

    1. @Stu,

      Thanks for your detailed comment. While my simple saving and investing rules post, did not include specifics, you have descrbed exactly my plan for the long haul. Here is a link to a previous post:

      Also, I LOVE DRIPs! Full DRIPs, synthetic DRIPs, all DRIPs. To me, this is part of the compounding machine and I intend to run this engine for decades to come.

      My wife and I have a strategy to optimize our RRSPs, for the very reason you have indicated. I don’t want to be a senior and pay more tax in retirement than my working years. We keep quite a few dividend-payers in our taxable account for another reason you have reference: the great white north dividend tax credit 🙂

  2. I think if every investor followed your investment tenets, I think it is unquestionable in that they would become wealthy individuals.

    You have a sound investment strategy and I think you’re doing a fantastic job maximizing the performance of your hard-earned dollars.

    You have prioritized the importance of cutting away at your mortgage (kudos for using prepayment privileges) while at the same time you’ve implemented the 10% rule of ‘paying yourself first’.

    Add the fact that you’re always working to maximize your TFSA contributions, and optimize your RRSP contributions, it’s hard to go wrong.

    Building wealth takes time, but you’re concrete foundation has already been poured and you’re gearing up to put the walls up.

    And I totally agree – splurging from time to time is a necessity in order to preserve sanity.

    Great post, as usual. 🙂

    1. @TWC,

      I’d like to think I’m on “my way”, time will tell, but I do know it feels good trying to follow these rules and I’m seeing some small gains because of it.

      To be honest, I think that’s the part I struggle with now and again. I want to see results, big ones, but it’s hard because investing (unless you have tons of cash) is a get rich eventually strategy. This is especially true with dividend-paying stocks. I’ve been on my journey for a few years but hopefully in another 20, I’ll really have something to celebrate at the top of the retirement mountain with.

      My plan is to keep everyone posted 🙂

  3. Great list here MOA. I like your rules of thumb!

    If I had to put a few together, it might look like this:

    Save at least 50% of net income
    Invest regularly (monthly) in solid dividend growth stocks
    Work out often to stay in shape and limit health care costs
    Budget every expense
    Be patient
    Ignore the noise

    I’m slowly implementing your last one:

    It’s OK to splurge once in a while. (I’m working on it!)

  4. @MOA, awesome list!

    What can I say? Nothing to add to those points… and I think @Elemag brings up some awesome points as well. I was thinking of a similar post as well, but put it on the back-burner a while ago 🙂

    The Dividend Ninja

    1. @Ninja,

      Thanks! Yes, Elemag offered a very detailed response, which was excellent. His comment about human capital was especially important. If you don’t take care of yourself, well, you simply can’t do any of the things in that list very effectively. Folks take health for granted, I know I do sometimes and I shouldn’t!

  5. @My Own Advisor

    Do you use an index for this comparison, and if so, can I ask which ones? Being fairly new to this, I understand the idea but not the “how”. Stocks I can see (DJ, SP500, TSX) but I am not that familiar with the equivalent bond indexes.

    Also, presumably there are times where both stocks and bonds are nearing highs (maybe not the past year or two. ..) – presumably that is a “sit tight” period?

    1. Hey Bill!

      For RRSP performance, a benchmark for me is 60% S&P TSX 60 and 40% DEX Universe Bond indexes, since my RRSP has products that closely match that. I haven’t run any performance metrics against these benchmarks yet, but I know I’m close.

      Yes, there are times when equities run up and you don’t want to buy them then. Conversely, you want to buy bonds when equities are high. Personally, I wouldn’t make a huge purchase into bonds right now because the prices are a little high. Have a look at the charts, 1-year at least, for XBB, for example:

      A good entry point for XBB would be around $29, not the current price. I’m sitting tight as you say on bonds, not buying anymore other than what DRIPs synthetically for me every month, more units get purchased for free; not making a big purchase anytime soon. Equities on the other hand, I’m looking for deals. I think BNS was fairly priced earlier this month at around $50:

      So guess what I did? I bought some 🙂

  6. I completely agree with your quote selection. The most interesting point for me was, “Don’t Invest In Anything We Can’t Explain To a 10-year old.” Basically, you just have to be able to completely understand everything about the company is what your saying, or you just like to keep your portfolio simple?

    1. @My University Money,

      Yeah, that 10-year-old comment was because if I couldn’t explain my strategy, AND, what the company does to a 10-year-old, then I shouldn’t buy the company. The company’s products and services must be simple enough for me to remember, top of mind, easily. If I can’t explain how and what the widgets are to anyone without memorizing the company’s annual report first, I don’t want to own it. I guess I just have a small brain that can’t remember much 😉

    1. @Dave,

      I would suspect some families cannot follow all these rules. We’re not, but we’re trying. I will likely do a follow-up post that highlights how well we are adhering to these rules we set out. A few of them are easy, a few others, not so much. But, having a few written down provides me with some roadmap and some potential to follow them which is certainly better than having none at all.

      Are there particular ones you don’t think some families could adhere to – maybe some prioritization is in order for this list? Thoughts?

      Thanks for your comment, I really appreciate it!!!

  7. The list makes sense but I wonder how many people can do it all on 1 or 2 average salaries. especially if a household is on 1 income, should they go for the mortgage or the TFSA? That’s if they have any meaningful amount left to invest.

    I thin your next post should discuss the strategy to use if someone is only on 1 salary 🙂

  8. Nice list. I try and do them all as well, with the exception of the bond allocation (I have been under-allocated in bonds according to the “age” rule for some time). I am in the process of getting out of my mutual funds and into either low-cost index ETF’s or dividend companies.

    How do you define “bonds are high” or “equities are high”?

    1. @Bill,

      Thanks for your comment! I think it’s great you’re getting out of MFs and into some lower-cost products – sounds like you’re taking charge of your financial future!

      To answer your question, I invoke the “bonds” and “equities are high” for 52-week highs as an approximation. When equities tank for a few months, and bond prices are rising, I buy equities. (Such as recent times.) When equities are on the rise, I definitely don’t buy them and I buy bonds instead.

      So far, the “rule” seems to be working well!

  9. Mark, you have provided us with a great list of rules of thumb. With your permission I will borrow some of them for our own household and we’ll discuss any royalties later : )

    To your list I may add just a few more like:

    – Save big, save often
    – Take good care of things like your house, car, furniture, so that they will last long
    – Take even better care of your body. Something that has always puzzled me is why most people spend so much money on car maintenance packages, oil changes, etc. and at the same time they abuse their bodies with nicotine, excessive caffeine, alcohol and other harmful substances, they don’t excersise and don’t eat healthy. I don’t remember who said once: “If I knew I would live so long, I would have taken better care of my body”. By keeping fit, watching those extra pounds, laughing, having enough sleep and eating healthy people can reduce their healthcare expenses down the road and be able to enjoy longer and better lives.
    – This one comes from Warren Buffett: When considering buying a stock, ask yourself if you would buy the whole company, if you had enough money. If the answer is yes, then buy ad many shares as possible. If the answer is no, then you souldn’t buy even a single share. And also, buy stocks as if on the next day the stock market will close for ten years
    – Make a clear distinguishment between needs and wants

    That’s all that comes to mind. Your list was pretty exhaustful/

    1. @Elemag,

      Geez, you’ve provided a few gems of your own!

      Your third point, taking care of your body, is something admittedly I need to do a better job with. I guess I could rename my blog “my own human capital” because if you don’t have your health, you don’t have much including a hope at personal finance and investing success. I like your suggestions for a “fit” life: laughing, having fun, having enough sleep are certainly underrated things!

      Thanks for another great contribution to my blog. Cheers!


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