What Will Your Reality Be?

The realization kicks in around the time we are in our forties.  We feel we have been working endlessly and begin to seriously contemplate retirement.  Will we be financially ready in fifteen or twenty years?  

Up to this point, we haven’t adequately saved.  When we glance at our bank or investment statements, we feel like someone’s been stealing our money.  But the stark reality opens our eyes. We don’t need to worry about anyone stealing our money.  We do a good job of spending it.  When we recklessly spend, we steal money from ourselves.  The harsh reality is we exchange our money for every simple pleasure life offers us now. The practical reality tells us we don’t have to give up living and enjoying life to save money.

Let’s be W-I-S-E about the ways we save and spend while we enjoy life. 

W – Wealth can be built up in multiple ways, both in our investment accounts and home (and other real estate). Putting yourself on “automatic” is the best way to accumulate wealth.  In David’s Bach’s book, The Automatic Millionaire, “automatic” means setting up payments to automatically transfer into a savings plan.  The concept is known as paying yourself first.  The first 10% of your salary belongs to you (to be tucked and hidden away) with the remainder directed to other needs.

I – Investing for the long term is a slow and steady process. We talked about the rabbit and turtle analogy in the previous blog, Connect the Dots.  Because things don’t happen as fast as we would like is not a reason for us to be discontented with the results. Think about someone dealing with a shoulder injury; the healing process cannot be rushed.  A child born today doesn’t graduate from high school tomorrow.  Because you invest $100 a month now, doesn’t convert you into a millionaire in a year.   The world view believes everything should instantaneously happen.  For certain things, like instant oatmeal which cooks up in two minutes or less, this is true but investing in the markets has its own philosophy.

S – Simply spend and borrow wisely. These two need your attention when everyone and everything whisper in your ear, “Why wait when you can have it now?”  Television ads, Facebook posts, and marketers encourage us to part with our money.  If we don’t catch ourselves when temptation knocks, we fall into its trap. 

This point comes from the book, The Automatic Millionaire.

“If we didn’t have enough cash to buy something, we didn’t buy it.  The entire time we’ve been married, we’ve never carried credit card debt. When we used the cards, we paid them off the same month.”

Can you say the same as Sue does?  The interest paid on any unpaid credit card balance squashes dreams.  We don’t want this.  

E – Enjoy life. You are encouraged to dream, the very premise of this blog website. So don’t stop dreaming rather “chase” and “create” the very things you desire to achieve.

Saving for retirement does not require discipline when you heed the advice of making savings automatic. The discipline is only required to set up the process. Your future reality will then take on a life of its own.  The reality of a comfortable retirement is yours to paint in the colours of your choosing.  Do you see the endless possibilities?     

Five Strategies for Sticking with Your Financial New Year’s Resolutions

 

 

Envision taking a trek across the desert.  Surely you would plan for an excursion like this.  You wouldn’t simply forge ahead without pre-determining the things you needed to take: sunblock, compass, water, miner’s light, and appropriate clothing for varying weather temperatures – hot at noon and cold at night.  Your determination to preplan ensures the journey will be enjoyable and you will survive to tell about it.

I see New Year’s Resolutions in the same way.  You may envision where you want to go financially but you don’t take the appropriate time to plan the journey to ensure your New Year’s Resolutions survive.  The typical promises to pay down debt or save more money do not stand a chance without a definite action plan.  Let’s see if the following five strategies can make a difference in approaching your New Year’s Resolutions with gusto.     

1.     Create a Vision Board.  Having a vision board gives meaning and life to “seeing is believing”.   If you want to save $1,000 or $10,000, scribble this balance on a copy of your bank statement.  If you want to see your loan paid off, do the same. Cross out the present balance and write a BIG FAT ZERO under the outstanding balance column.  Clip pictures of your dream Disney World vacation, a new car, or a newly-renovated kitchen.  You may add quotes, draw, or write about the things you want in your life. In essence you are writing your goals, dreams and aspirations in new creative ways on a poster board.  At a quick glance you can see the things you want and add them to memory.  This is the first step to a successful financial plan.  When you do this, you establish a target. Zig Ziglar said, “If you aim at nothing, you will hit it every time.”  Ensure you aim at the things you want.

  

2.    Track your spending.  I know you are going to hate this strategy until it eventually becomes a habit.  Many methods allow you to track your spending.   With the use of phone apps, software programs, on-line banking, or spreadsheets, you can see where you spend your money. The fact is your discretionary spending, not fixed expenses, kills your best intentions of following through with your New Year’s Resolutions. You find yourself led into temptations by marketers leading you astray from your goals and dreams. Don’t be deceived into giving into temporary pleasures.  You must make the decision to resist temptation and press towards your goals.  Each passing week, you will vow to do a better job to manage your money.

 

3.    Set-up automatic transfers to saving accounts.  Getting into the rhythm of savings could be as easy as determining how much you want saved by a specific date.  The math part is easy.   The total is divided by the number of pay periods to determine how much to save from each pay cheque.  The difficult part is actually doing it.  Trusting yourself to make the transfer might not be the best choice.  You could come up with a million reasons why this can’t happen on any given payday.  Setting up automatic transfers to a savings account which you can’t see or touch is the ideal solution.  Some people can handle seeing their savings grow; others cannot because they are tempted by images of what their money could buy them. Knowing your limitations will help you determine the best approach to save and to build appropriate safeguards.            

 

4.    Draw a line in the sand, “No more debt!” Paying down debt will happen “logically” as long as you do not borrow any more money than you already owe. Term loans and mortgages have set payments and specific timelines to ensure your balance will eventually be nil.  Revolving loans (Line of Credit) and credit cards are a different kind of beast which require more discipline on your part to be paid in full.  Simply paying the interest or the minimum payment won’t reduce the balance within a reasonable time. The plan should be to apply any excess cash to the revolving credit debt.  By tracking your spending, you will know where the spending cuts can occur to create the excess cash.

5.    Create a balance of enjoying life, savings and paying down debt.  I love the children’s song, The wheels on the bus go round and round.  There’s something magical in the words found in the first verse. This may sound crazy but the song appears to speak about real life.  Take a moment and imagine your life as a bus travelling around the town. It would be difficult, if not impossible, to cruise around town with a flat tire.   The aspects of your financial life, day-to-day expenses, savings, taxes, and debt, are like wheels.  For example, if you put all your focus on paying down debt, you would not have any savings needed for car repairs, veterinary bills, or replacing much-need appliances. This leads to borrowing more money and increasing your debt.  Your savings happens to be your flat tire.  Developing strategies in proportion to your income, keeps your wheels in good driving condition to manage a well-balanced life.  

 

The Ultimate New Year’s Resolution

A healthy financial plan involves more than “paying down debt” and “saving more money”. You mustn’t forget about the other important items like: reviewing your insurance to protect yourself and your family; ensuring your Will, Power of Attorney and Health Care Directive are up-to-date to reflect your wishes; and establishing an emergency savings. When you click here and include these items to your existing New Year’s Resolutions, and take action as necessary, you will fulfill the ultimate resolution. Studies have shown that Canadians with financial plans are saving more, living well, and experience higher levels of overall contentment in their lives. Wouldn’t that be the ultimate achievement and success to fulfill your New Year’s Resolutions?         

 

If You Don't Pay Yourself, Who Will?

The concept of “paying yourself first” is heard but often misunderstood by many. The rationale is “this is all my money” so how do I pay myself?  This is true! The money belongs to you.  What is also true is everyone wants your money.  Just as quickly as you receive your hard-earned cash, you are dishing it out to pay bills, make loan payments, and buy the daily necessities.  Hence the concept of paying yourself was born. Before you hand over all your cash, pay yourself at least the first 10% of your pay cheque and pay living expenses with the remaining 90%.  Pay yourself first is “what you save”. It’s for future use. 

When money is out-of-sight, it’s also out-of-mind. What you can’t have, you can’t spend. This is why pension plans are effective. People who have pension plans put into practice “paying yourself first”.  When they are eligible to contribute to their organization’s pension, a percentage is automatically deducted from their pay cheque.  Small amounts of income trickled into savings plans over a long period of time will eventually pool into a large sum of cash.  Since fewer pension plans exist today, savings is becoming a necessity for everyone.      

The practice of saving can work for anyone. Discipline is the only requirement.  Saving is a good habit to develop.  If it’s not possible to save the full 10% now, start with a lower amount and continue working toward the goal of the full 10%.  Once you pay off a loan or receive an increase in salary, immediately increase your contributions.

Putting yourself on “automatic” is the best way. In David Bach’s book, The Automatic Millionaire, “automatic” is used to mean setting up payments that are automatically transferred to a saving plan. How many ways can I say it? Right-on-the-spot, same-day-deduction, the-minute-your-money-hits-your-bank-account is the best, and for some the only, way to save. Get Smarter About Money also provides some methods to make it easier to save.   

If you don’t pay yourself first, who will? Don’t cheat.  Don’t rob your piggy bank of its savings. You do not know what the future holds but one thing is for certain, you will not be able to work forever.  Secondly, you may not want to work forever.  Saving small amounts of money as you earn it is not as difficult as trying to save larger amounts in a shorter time period. When you reach the end of your working career, you will be grateful you mastered the concept of “paying yourself first” because you will have a pool of cash to enjoy and support your dream lifestyle.

Why Do I Need a Budget?

When most people hear the word, “Budget”, moans and groans generally follow. WHY IS THAT? For starters, staying on track can be difficult while life events derail your best intentions.  Secondly, having a budget sounds so restrictive that people feel BOXED into a corner.  BUT really a budget is intended to keep you and your money on track.  Most people are fooled into believing a budget is a one-size fits all. NOT TRUE.  Your budget has to be tailored for your family needs.

 The way to get started is to quit talking and begin doing.  ~~Walt Disney

If you procrastinate in creating a budget, the road ends here. Enough talk and a little more action.  GUESS what?  It is not difficult if you have some sound guidance.  It’s as easy as 1-2-3.

1. LOOK at your month-to-month expenditures.  FIRSTLY, they can be easily labeled as:  Shelter, Basic, Discretionary, and Transportation. Placed into one category, these are your LIFESTYLE NEEDS.  The very things you spend your money on day-to-day.  SECONDLY, you may have a loan, credit cards and mortgage payments.  These totals formulate your DEBT.  LASTLY, you have your SAVINGS.  Your list may include long term savings for retirement, education, vehicle replacement, vacations and short term savings for annual expenditures (property insurance and taxes), emergencies, appliances and furniture.

2. FOCUS on only the three categories.  Together as a couple (or single) can be involved in the next important step, determining the percentage allocated to each of the three categories: Lifestyle Needs; Debt Repayment; and Savings.  Initially, prepare to divide your combined net income(s) -- your take-home pay/after-tax income (whatever you call it).  Work with 10 dimes to represent 100% of your income. Each dime represents 10%. YES, this appears elementary but it works! It’s an easy way to determine the percentage to each category by physically shifting dimes with 10% increments, for example: 60% Lifestyle Needs; 20% Debt Repayment and 20% Savings.  Because you have an estimate of your monthly expenses you have a fair understanding of your allocations.  However, the challenge is whether you can reduce our lifestyle needs (primarily in discretionary spending) by 10% in order to allocate this percentage to Savings (i.e. family vacation)? Perhaps your focus is to reduce debt, is it possible to shift 10% from Lifestyle Needs to Debt Repayment?  Regardless the amount assigned to each category is tailored to fit your needs. 

3.  STRUCTURE your bank accounts to align with your specific categories.  This is your budget in its simplest form.   

The following illustration shows all deposits from your income (employment, sales commission, pension, CPP/OAS) directed to an account, designated as the Collection Account. (This can be either a chequing or saving account depending on the service charge package offered.) From the Collection Account, a specific transfer is created to cover your monthly lifestyle needs.  You are restricted from touching any extra cash designated for debt repayment and savings.  In essence, you are giving yourself an allowance, a similar process given to children. This method offers protection from you. (In some situations, you are your own worst enemy. Having too much money in a chequing account can be dangerous.)  Therefore, you can only spend the amount you give yourself in your designated LIFESTYLE NEEDS account.  Because you can check the balance of your account regularly, you always know “when you get close to being busted.”

Your loan, credit cards and mortgage payments are made directly from your Collection Account (the account where your incomes are pooled). Likewise the same process is followed with your savings.  All you need to do is ensure you stick to the allocations assigned to each of the categories.

At the beginning of this process the percentage designated to your debt repayment may be significantly higher; but as you pay off debt, the shift can be made to increase savings. If you receive pay increases, the percentages will increase accordingly to your net income.

The trick to saving is easy {out of sight-out of mind}.  Do not allow yourself a savings account you can access easily UNLESS you are extremely disciplined… or if the account is specifically earmarked as Emergency Savings.  Only you know for certain what an emergency is.  NO EXCUSES.  Otherwise, set the transfer to a mutual fund (for short and long term savings).  You can visually see the balances on-line; but you would physically have to visit your investment advisor to make a withdrawal.  The harder the access, the less the temptation.  As you watch your savings grow, imagine paying for the vacation or new vehicle with this money.   Putting your life on automatic is SO EASY with pre-authorized transfers straight from your Collection Account to designated investments (RRSP, TFSA, RESP, Non-Registered Savings) for specific purposes.  You can equate this to making loan payments to the person who deserves to be paid the most – YOU! 

ROOM for modification is a must.  Remember the tag line: one size doesn’t fit all.  

• If joint accounts don’t work for you; then the set-up can be modified so you share at the very least the lifestyle expenses as a percentage of your incomes. 
• If you work together well as a couple, then one spouse’s income could be designated solely for lifestyle needs; while other pays down debt and contributes to the savings.
• If you like, set up a “Crazy Money” allowance.  This amount is your permission to blow anyway you choose:  “Beer with the boys.  Rendezvous with the girls at a spa.” You decide – you don’t have to report to your partner where the money went all you need to do is stay with your limit. Happy Husband; Happy Wife makes for a Happy Life.

HERE COMES THE CHALLENGE AND REWARD: You may have a budget and are proud because you have taken this important step. If you struggle with making this work, you can always seek help from your financial planner.  This is one of many ways a financial planner can help. The end result is if you spend wisely, pay debt diligently and save faithfully, you can have everything you really want.