budgeting sustainably for real life

Drawing up a useful, sustainable monthly budget for your family does not have to be a complicated, or difficult exercise.  The primary goal for putting a budget to paper in our case is saving money and living well within our means.  This will enable us to save enough money so that we can maximize investment growth, capital stability, and be financially secure for years down the road.  You can tailor your budget to serve as a tool for meeting your financial goals.

If you have some basic Microsoft Excel skills you can draw up a useful budget that can serve your tracking needs for years.  I'm not referring to an advanced budget that they might teach you in an online MBA program; just a simple budget.  First you should check your pay stub and your partner's pay stub to determine exactly what your net income is. 

(I use the net amount that we bring home in employment income after RRSP contributions, taxes, etc.  The reason that I do it this way is that our RRSP contributions are fixed and they are deducted automatically so that we never really see this money.  I know what our RRSP contributions are and if I wanted to I could calculate these savings as extra to our budget later on.  For now I just choose to exclude them and know that we are setting aside at least 10% of our income before we even get started here.)

This will be your INCOME section.  Use your net employment income and any other income you receive along with any government child care benefits.  Enter the monthly values in Excel and get to a total income number.

(I choose not to include investment income here because I save 100% of these funds and they get reinvested. I don't consider this as flexible, liquid funds such as employment income as the money really never leaves our portfolios)

Next you need to create your EXPENSES section.  This involves categorizing and filling in all of your monthly expenses from mortgage payments to gym fees.  Try to think of everything and try to be conservative for fuzzy ones.  For some fixed costs such as property tax you will be able to enter an exact amount and for some categories such as entertainment you will need to ballpark what you spend in this area in an average month.  Total up this area as well.

Then take your total from your INCOME section and subtract your EXPENSES section.  Hopefully you get a positive value.  Your will arrive at a figure which I call my "TOTAL NON-REGISTERED SAVINGS PER MONTH". 

How To Use Your Budget
Creating your budget is only one third of the battle.  How you are going to use it is the second piece of the puzzle.  Instead of holding us to only spend $40 per month on haircuts I don't pay particular attention to these small details once they are part of my budget calculator.  The way I use the budget tool is that I key in on our TOTAL NON-REGISTERED SAVINGS PER MONTH.  This is our pass or fail mark.  If this guide number is $1,000 and a month goes by where we saved only $500, I usually know why this has occurred.  Could have been that the dishwasher needed replacing, or it perhaps we went on a small vacation.  If I don't know why, I better re-visit the budget. 

Obviously the third piece of the puzzle is actually matching your life to what you you have entered on this Excel calculator. If you are regularly spending $500 per month on clothes then don't enter $50 per month in your clothes category.  You will certainly need your partner to be a team player throughout this entire process

I find this to be a pretty useful way to budget.  You don't have to watch your nickels and dimes and track every penny.  Just pay attention to how much money you are actually saving versus what your budget says that you should be and you will be well on your way to achieving your financial goals.

would you like to purchase a warranty?

I am always interested in the innovative ways that companies try to grow their bottom line in dealing with consumers.  The promotions, warranties, freebies, bogos, and 'don't pay' sales often have me scratching my head at the stupidity of retailers or their naive customers.

I happened to come across an interesting one last night at Sears when I was purchasing a major appliance.  As is typical the sales associate wound up with the usual warranty offering, usually as this is occurring I am glazed over and getting ready to politely refuse.  However the Sears warranty threw in an interesting twist this time, which I have to admit, is clever and likely works well for them.  If you purchase the warranty for $110 and nothing goes wrong with the item within the 3 year time frame of coverage you receive a $110 gift card for Sears.  I still refused the offer as I want my precious $110 for myself for the next 3 years for obvious reasons to anyone who reads this blog.  Also who's to say that I'll happen to want to buy something at Sears in 3 years time.  That being said, I would imagine that many customers who typically waiver about warranties usually come over to join the protected now that this offer is presented.

quadrupled Bank of America position

It was nice to see my adjusted cost base plummet today as I quadrupled my stake in US Bank, Bank of America (BAC).  The stock is trading around $14.25 per share.  The dividend was all but wiped out during the financial crisis but I believe that it will come back with a vengeance over time.  Bank of America is very well positioned to reap the benefits of a slow US economic recovery, which is probably in the works.  The risk/reward on Bank of America trading at these levels seems very attractive as they own several valuable franchises, have great market share in US deposits, and have paid back their TARP funds.  The bank is currently trading at a multiple on around $1.00/share of earnings which I believe has the potential to expand to $2 without much trouble.  This would put the stock price easily into the $20s which is a signficant jump from here.

The dividend will come back as they years go on as inventors will want income from their investment in this large bank and the bank will no longer be tied down with the lingering issues of 2008.  This stock is rated a strong buy by 70% of analysts that cover it.  Earnings will come back as well albeit slowly and probably won't get to 2006-2007 levels anytime soon.

This is one of those trades where I felt like I needed to do the Warren Buffet thing and buy when others are selling; when the stock does not look attractive.  This industry is still in the toilet, their balance sheet is still recovering, and the economy is still pretty bad.  This is a good time to lower my cost base from my purchase years ago.  One of those 'close your eyes and click submit' trades.

GE - party like it's 1999

Well General Electric (GE) who cut their dividend from $0.31 per share to $0.10 per share in early 2009 has now boosted their pay out to $0.12 per share.  This 20% increase brings their dividend back to levels last visited in before the turn of the century.  Yes, GE shareholders including myself are partying like it's 1999.

This increase came earlier than expected as GE had mentioned that they were looking to a dividend hike in 2011.  They also announced an extension of their share repurchase program as they are sitting on loads of cash.  I'll take a dividend increase any way that I can get one and I remain confident in GE's future.  I especially like their involvement with alternative energy and developing market infrastructure.  Their high weighting in financial services really hurt them during the financial crisis.

market snapshot

Economically sensitive seems to be a good thing this earnings season as the following companies blew through earnings expectations and dwarfed last year's results:

CN Rail: EPS = $1.13 versus $0.76 last year
UPS: EPS = $0.84 versus $0.44 last year
CAT: EPS = $1.09 versus $0.72 last year
3M: EPS = $1.54 versus $1.20 last year

These stocks are about as dependant on the economy as it gets.  There is a strange feeling in the markets lately.  There seems to be a large divide between how main street is looking and how corporations are performing.  Earnings are looking quite good but yet unemployment remains high, housing is still in the toilet, and consumer confidence is weak.  Costs that companies cut during the financial crisis are probably really paying off now as revenues come back to levels above 2009 but below prior years.  The fact that most analysts and onlookers are worried and bearish is probably a sign that markets will rise from here.  Typically in times like this the market climbs the wall of worry as expectations are low and upside surprise is more common.  As usual it is hard to say where the market will go from here but stocks usually trade in line with earnings and for the time being earnings seem fine. 

I will obviously continue to pick away at stocks that are already part of my portfolio but seem to be trading very cheap.  I've noticed the following opportunities lately:

Walgreen (WAG) - I added on June 29 at $26.50.  The stock has since recovered to $29.41.

Sun Life Financial (SLF) - Dividend investors have taken note recently as the shares traded down to under $26 yesterday resulting in a yield of about 5.5%.

saving money is simple & fun

I like saving money.  No, I mean I really love saving money.  You know that feeling that you get when you get something accomplished that you've been working at for days; or the rush that you get after a good run or workout at the gym?  Saving money gives me that feeling.  I don't mean to sound corny at all but I consider it fun when I electronically move money into investment portfolios from our chequing account.

We recently refinanced our residential mortgage in order to lump in our home equity line of credit, which was the result of borrowing money to invest during the financial crisis in late 2008, early 2009.  At the same time we increased our amortization to 35 years and changed our payment frequency to monthly instead of accelerated bi-weekly.  My plan with this strategy is to do what I love to do and save more money.  Since interest rates are currently low, we will be lowering the priority on paying our mortgage off while socking the extra funds in dividend paying investments.  Our mortgage rate of prime less 0.60% (currently 1.90%) will enable us to save more capital and invest it.  At any time we have the freedom to switch gears and make larger payments toward our mortgage if the circumstances change.  For now though saving is the priority and I plan to ramp it up!

One of the main reasons why I like saving money now is that it really pays off years down the road.  I am 31 years old; I want to put dollars to work now so that they can pay us in spades later in life.  I don't need too much stuff right now to be happy in life, and coincidentally I have big plans for any extra funds that don't contribute to that happiness.   A $500,000 portfolio of dividend paying stocks can easily pay out $25,000 per year in income.  Wouldn't it be nice to make an extra $25,000 a year before dividend taxation?

Having saving on my mind every time I log in to my banking site is something that lends itself to my saving prowess.  Moving money around is easy and it gets it out of the way, and out of my sight which inhibits wasteful spending.  I don't like seeing money just laying around, I like putting it to work.

net worth July, 10

It's time to report my bimonthly net worth. It's been a pretty stagnant two months.

Net worth results for the 2 Months Ended July 15, 2010:

• Debt/Asset ratio stayed at a record low of 0.44
  
• Net Worth rose 0.6% (to a record high)
  
• Total Assets rose 0.7% (to a record high)
  
• Total Liabilities increased by 0.8%
  
• House Value/Total Assets fell to 58.5% (a record low)
  
• Non-Registered Portfolio grew 0.4% (to a record high)

2010 Calendar Year to Date Gain/Loss: +9.4%

It's been a fairly flat to down two months on the stock markets. Personally we have refinanced our mortgage by lumping in our home equity line of credit, legal fees, and a little bit more which caused our liabilities to rise slightly. This mortgage adjustment should enable us to ramp up our asset growth going forward as we have extended our amortization to 35 years. We saved a decent amount of money over the last 60 days and most accounts experienced slight increases in value.

Walgreen doubling dividend every 3 years

U.S. drugstore chain, and a stock that I have recently added to, Walgreen (WAG) has just raised their quarterly dividend 27.3% to $0.175 / share.

"This increase reinforces our commitment to provide meaningful returns to our shareholders and extends our track record of annual dividend growth" said CEO Greg Wasson

He was not joking about their track record. Walgreen has increased their quarterly dividend for 35 consecutive years. The company has also growth their dividend at a compound rate of 24.3% over the past six years.

Last year I blogged about how they nearly doubled their dividend since 2006. While in 2008 they raised it by 18%.

Walgreen shares are still pretty cheap trading at $29.30 (a P/E of 14x). I picked up some shares recently for about $26.50 (P/E of 12.7x). Interestingly enough Walgreen has not historically been known as a good dividend payer to hold as the yield on the stock was always well south of 2%. Given this latest increase the stock is now yielding about 2.4%, on my purchase the stock was yielding 2.6%, and on the financial crisis lows of March 6, 2009 the stock yielded a whopping 3.2% considering today's increase.

Haagen-Dazs maker sweetens payout

The maker of Cheerios, Yoplait Yogurt, & Green Giant Corn among several other popular food brands has raised their dividend an impressive 17%. General Mills (GIS) is now paying $0.28 per share and the stock currently yields 3.2%. The company also laid out a 5 year growth plan that includes growing their earnings by 45% from current levels. They are counting on sales in emerging markets such as Russia, China, and India for some of that growth.

Considered a defensive stock, the company generates returns on equity of 28% and has grown their dividend and earnings very consistently over the past ten years. Their net profit margins have also held up fairly well over the years. A reduction in debt levels might make the company even more attractive going forward. Needless to say General Mills is definitely my type of stock.

happy Canada Day!

I'd like to wish all of my Canadian readers a Happy Canada Day!

Not only does Canada Day mark a time to celebrate living in a wonderful country it also marks the halfway point in the year. This makes it a good time to look at our investment portfolios.

So far this year:

S&P 500 Index ($USD) = DOWN 7.6%
S&P/TSX Index ($CAD) = DOWN 3.9%
Our Non Registered Portfolio in $CAD including dividends = UP 0.1%