Lizard brain makes us do the same things – good or bad – over and over again so it’s the king of bad habits. If you’re chronically late to make payments on your credit card or always forget to transfer money to your savings account, your lizard brain could be to blame. That said, you can counter its reluctance to change its well-worn ways of doing things by automating your personal finances as much as possible. This blocks the lizard from making poor spend-or-save decisions.
Tricking Your Lizard Brain
First, make an unbreakable habit of paying yourself first. This is a powerful strategy that treats your savings like a high-priority fixed expense that automatically gets whisked away from your bank account on or around payday. The idea is that you’re more likely to stick to your plan when you make savings automatic.
Imagine if the government, instead of deducting federal and provincial tax from each paycheque, simply asked employees to send in a lump-sum payment at the end of the year. There’s a reason why government automatically deducts taxes from your paycheque – to make sure it gets paid!
So follow suit and pay yourself first through automatic contributions to your RRSP, TFSA, RESP or other savings vehicles and trick your lizard brain into thinking that money was never there to begin with.
Another tricky thing about the lizard brain is that it makes us act emotionally and live each day as if it were our last. Think of it as the original proponent of YOLO.
That impulse shows up in many of us when we’re shopping and can be exacerbated if we’re paying with plastic. Data from McDonald’s drive-thru sales revealed that people tend to spend more when they use a credit card instead of cash or debit. That’s because we feel more pain when we spend cash than we do when we use a card; therefore we’re less likely to part with a dollar bill.
Credit-card rewards can be enticing, however not at the expense of missing a payment and turning your 2 percent reward into a 19 percent penalty.
So what’s the rule? Use a credit card for recurring monthly payments such as your cellphone bill and Netflix subscription. The steady activity helps build your credit rating. Then arrange to have the full balance automatically debited from your account each month. Use cash for groceries, gas and entertainment – all the things the lizard badly wants – that you can’t automate and need to stay in control of.
Also be aware that lizard brain can be baited. Marketers are well practiced at using psychology to lure that part of our brain into making irrational decisions, constantly tempting us to spend money.
Use what behavioural experts call a commitment device – something you do today that restricts bad behaviour in the future. Ubiquitous examples include freezing your credit cards inside a block of ice to avoid an impulsive shopping binge, or not bringing junk food into the house when you know you’ll go on a late-night pantry raid. A weekly meal plan can be a commitment device if it prevents you from getting takeout after work. See, this is easy!
As for me, my lizard brain springs to life whenever my wallet is flush with cash. Apparently I turn into Mr. Generosity, over-tipping at restaurants, buying drinks for friends, giving in to my kids’ impulsive requests. It’s really quite pathetic.
My wife smartly suggested I stop carrying cash and simply use my debit or credit card when we go out. Hey, that’s a great commitment device, honey! But then when I pointed out all the money she could save by removing the Lululemon app from her phone, her cold stare nearly sent my lizard brain back to the ice age!
This approach comes from the belief that investing has become largely commoditized. Index tracking ETFs can be purchased and held for close to zero dollars. Furthermore, the academic research and empirical evidence clearly suggests that active management (stock selection and market timing) does not add value after fees.
I’m crystal clear about my philosophy to readers of this blog and to the clients in my fee-only financial planning service. Still, there’s more than one way to build a diversified portfolio of low cost index funds or ETFs.
I need to understand my clients before I can make an appropriate recommendation. I want to determine the client’s current needs and future goals, the rate of return required to achieve those goals, their ability and appetite to invest on their own, and their desire for simplicity versus cost savings.
I’ll use that assessment to recommend one of three investment strategies and model investment portfolios that align with my indexing philosophy and meet clients where they’re at based on those factors.
1.) The Low Cost DIY Approach
Some investors feel confident investing on their own and want to cut fees to the bone. In this case, a simple solution is to open a discount brokerage account at Questrade, which offers free ETF purchases, and then set-up a model portfolio of ETFs. That might look like this:
- BMO Aggregate Bond Index ETF (ZAG) – 40%
- Vanguard FTSE Canada All Cap Index ETF (VCN) – 20%
- iShares Core MSCI All Country World ex Canada Index ETF (XAW) – 40%
One alternative low cost DIY approach is to simplify your portfolio and purchase one of the asset allocation ETFs offered by Vanguard (VBAL, VGRO), iShares (XBAL, XGRO), or BMO (ZBAL, ZGRO).
Clients using this approach can expect to pay around 0.25% in annual management fees.
2.) The Robo-Advisor Approach
Some investors understand they’re paying too much in fees for their current managed portfolio of mutual funds. They still want a managed solution, but they want to save as much as they can on fees. It makes sense to match these investors up with a robo-advisor.
These online portfolio managers take the guesswork out of investing, putting clients into a portfolio of index funds and ETFs and automatically rebalancing whenever markets move too far or when client’s add new contributions.
But which one to pick? They all have their own strengths and weaknesses, but here’s a quick summary based on fees:
- Wealthsimple is best for portfolios under $250,000
- Nest Wealth is best for portfolios greater than $250,000
- Justwealth is best for RESPs
Clients using this approach can expect to pay between 0.50 and 0.70% in management fees.
Worth noting is RBC InvestEase, which is best for RBC clients who want to switch out of more expensive RBC mutual funds. That’s a good segue into the next approach.
3.) The Stay-At-Your-Bank Indexing Approach
I want clients to save as much as possible, but some investors don’t have the time or skill to become a DIY investor, and some aren’t comfortable with a robo-advisor. That’s okay – there’s still a low cost solution that allows you to stay at your existing bank.
All of Canada’s big banks offer index mutual funds. TD has the most popular and cheapest set of index funds, called TD e-Series funds. Investors who switch to e-Series funds can expect to pay roughly 0.45% for a portfolio containing Canadian, U.S., and International equities, plus Canadian bonds.
RBC clients have the InvestEase option I mentioned earlier, or they can invest in RBC’s suite of index funds for a cost of less than 1% a year.
Scotia, BMO, and CIBC also carry index mutual funds that cost 1% or slightly higher. Still better than their actively managed (or closet index) funds that come with MERs of 2% or higher.
Clients who opt for this approach may need to meet with a bank advisor and demand to switch their mutual funds to these index funds. Expect all the typical rebuttals from your advisor, but stand your ground and insist on the index portfolio.
This Week’s Recap:
On Wednesday, I wrote about my life insurance mistake – not taking out a private policy before leaving my employer group plan.
I published two posts over at Young & Thrifty:
From the archives: Coping with stock market losses.
Finally, on Rewards Cards Canada, what happened to my credit score when I applied for 13 credit cards last year?
What I’m Listening To, Reading, and Watching:
In this new segment I’ll share what podcasts I’m listening to, which books I’m reading or have read, and what I’m watching on TV or YouTube.
Here’s my current weekly podcast lineup:
- Animal Spirits with Michael Batnick and Ben Carlson
- Rational Reminder with Ben Felix and Cameron Passmore
- Freakonomics Radio
Published less often, but still on my list:
- Against The Rules with Michael Lewis
- Mostly Money with Preet Banerjee
- The Knowledge Project with Shane Parrish
- Revisionist History with Malcolm Gladwell
My favourite personal finance book of the year was Happy Go Money by Melissa Leong.
With two kids (10 and 7) it was a given we’d subscribe to Disney+ when it launched last week. My kids have surprisingly been enjoying the National Geographic content more than the Disney / Pixar content. That’s cool.
My wife and I watched the first three episodes of Star Wars: The Mandalorian – and it’s excellent. I kind of like the release of one episode a week to build the anticipation.
What’s better than a no-fee credit card with up to 4% cash back bonus? It’s stacking a free $75 Amazon.ca e-gift card on top.
Dale Roberts at Cut the Crap Investing looks at living off the dividends and that 4% rule.
Dan Kent at Stock Trades put together a monster post on the 2019 Canadian Dividend Aristocrats List.
Why thinking you’re ‘bad with money’ can become a self-fulfilling prophecy.
Should you roll the dice with an all stock portfolio in retirement?:
“But in retirement the order of stock market and portfolio returns do matter. That’s called sequence of returns risk. A bad year or a few bad years early in retirement can permanently impair your portfolio and your retirement.”
As many as one quarter of Canadians are finding that retirement is not all it’s cracked up to be. It’s so important to ‘find your why’ in retirement.
Rob Carrick says parents are increasingly willing to help their children with the cost of post-secondary and says, don’t blame parents for the student debt problem in Canada.
Nick Maggiulli on Renaissance Technologies and the Medallion Fund: The greatest money making machine of all time.
In his latest Common Sense Investing video, Ben Felix explains why some home country bias is a good thing for Canadian investors:
My Own Advisor’s Mark Seed and PlanEasy’s Owen Winkelmolen do a retirement case study for a couple with $1.2M invested and no pensions.
Tim Cestnick offers five ideas to reduce the clawback of OAS benefits.
Canada’s rental costs are climbing due to strong demand and lack of new supply. This is leading to an increasing affordability problem in Canada’s major cities.
Finally, Scotiabank refused to honour two decades-old GICs until CBC stepped in.
Have a great weekend, everyone!
While you should view any life insurance discussion with a skeptical eye, the reality is that many people are severely under-insured. Most group insurance policies at your workplace only provide coverage for one or two times your annual salary. You might need 10 or 15 times that amount if you have a young family at home.
The other challenge with group life insurance coverage is that it’s not transferable – you can’t take it with you when you leave your employer.
Ending My Group Coverage
That’s the situation I find myself in right now. The group coverage I have with my employer is quite generous at 2.5 times salary. They also offer the voluntary option to add up to an additional $500,000 in coverage at favourable rates (each $100,000 in coverage cost just $4.50 per month). I took the maximum optional coverage and increased my overall life insurance coverage to approximately $700,000. My total premiums cost less than $35 per month.
The rational side of me knew that I’d eventually leave my job and would need to take out a private insurance policy. But I didn’t get around to it. Then I quit my job.
Now I’m scrambling to get an insurance policy in place before the end of the year to avoid any lapse in coverage. First, I performed a life insurance needs analysis. A lot has changed in 10 years. My kids are older (11 and 8 next year). We have a lot more money saved. We have less debt. Do we still need $700,000 in coverage? Do we need more?
A needs analysis considers things like your survivor’s income and spending needs, years of income replacement, personal and household debt, children’s education, non-registered assets, and final expenses. My analysis found that a 15 year term with $600,000 in coverage would be sufficient.
Term Life Insurance Quotes
I shopped around for term life insurance quotes using the website term4sale.ca (no affiliation). I like the site because it offers unbiased comparisons from various life insurance providers, and I can obtain a quote within seconds (without entering an email address or phone number and risk being hunted down by commission-hungry agents).
Armed with a range of quotes from various insurers, I called my long-time auto and home insurance broker to see what he could do for me. He asked about the quotes and so I shared where I found them. He said his quotes might vary somewhat because the insurer will do a more rigorous interview and examination, which makes sense. After all, I filled out a quick five question form online to arrive at those other quotes.
We settled on one insurer who offered the 15-year, $600,000 term life policy at a price that seemed reasonable (less than $45/month). They set up a 20-minute phone interview, and then arranged to have a nurse visit my home to take blood and urine samples, and to take my blood pressure. Definitely more thorough than an online quote!
As I await the results to see if 1) I qualify for coverage, and 2) I received an “excellent” health designation to qualify for the lowest premiums, I can’t help but kick myself for making such a rookie personal finance mistake.
Topping up my life insurance with my group coverage provider was the easiest and cheapest option available to me at the time. But in hindsight I should have taken out a private insurance policy much earlier and held it in tandem with my workplace coverage.
Not that I could have predicted I’d be leaving my employment after 10 years and going to work for myself. But the lesson here is that insurance is cheap and plentiful when you’re young and healthy, so you might as well buy as much as you need through a private policy – just in case. After all, isn’t that what insurance is for?