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?         

 

Choose Your Debt Wisely

 

Sinking into Debt

Sally graduated with a practical nursing diploma and currently works at a local city hospital.  Over the course of the two-year education program, Sally accumulated $30,000 in student loans. She currently rents an apartment for $1,200 monthly; her utility bills consist of the usual: power, cell phone, and cable. Now that Sally has completed her studies, she decided to purchase a new car for $35,000.  At Christmas time, she and a friend felt the need to escape the cold winter to a warmer climate.  They booked a trip to Hawaii for two weeks.  Sally didn’t have any savings for her vacation.  She charged all the expenses: hotel, airfare and meals, to her credit card.  All the quaint clothing stores had offers too good to resist.  Sally splurged another $1,000 on clothing.  Her credit card now totaled $10,000. Sally convinced herself she deserved this vacation because she worked hard on her studies. She declared this holiday as her graduation present.  Can you see the trend? 

This fictitious incident can easily happen.  Although you may think I am picking on “Sally,” the female gender, men are as guilty of getting carried away with their spending.  So imagine if Sally meets Harry who has spending habits like hers.  They decide to buy a new home and furniture, continue to take annual vacations, and replace their vehicles every second year.  The debt keeps escalating until suddenly their finances seem out of control.  

Pace Yourself

Keeping a watchful eye on debt is not only a smart strategy but also a responsible one.  Debt payments should only account for 20% of monthly income even though lenders permit up to 40%.  In the blog, Borrowing Money is Like Jumping Hurdles, you were shown how to calculate the TDS (Total Debt Servicing) ratio in order to determine your present ratio.  This information helps you understand the guidelines.

I can’t blame you for wanting everything.  Life is meant to be enjoyed.  Owning a beautiful home, travelling to far-off places to escape the winter blues, and planning your dream wedding may only be a few of your goals. You can’t run a 10km marathon in 10 minutes, why would you expect to have and do everything in 10 years when you have a life-time?  P-A-C-E yourself to avoid throwing yourself in a pool of debt and drowning as a result.        

Beware of Sharks

Choosing your debt carefully is like watching for sharks when you are fishing. You can easily get swallowed-up in debt payments.  Beware of obvious signs.

A relentless retail market constantly bombards the public with attractive advertising.  Seeing ads to finance a new fridge and stove @ 0.00% for the first 18 months is very common. Protect yourself by carefully reading the advertising materials, all disclaimers, and sales agreements.

When contemplating a home purchase, I suggest “playing house”. This sounds a bit unusual but in reality considers all the purchases which come with the title of being an official home owner.   Additional appliances or furniture may be required.  Quite often additional expenses like property insurance, taxes, the extra utility bills like energy, water and sewer are forgotten in all the hype. Then don’t forget the lawn mower and gardening tools!

While considering a new vehicle purchase, think of the payment term in months, not years.  We convince ourselves that five years is not a long time simply because counting to five can be done on one hand.  Remember five years (5) is the same as sixty monthly payments (60) or one hundred and thirty (130) bi-weekly payments. Other life events can happen in five years which may also require money to finance.  Falling in love with a new vehicle is romantic until the payments begin.  Vehicle insurance, license registration, fuel, and oil changes also need to be considered.

The smartest strategy is to eliminate one debt before taking on a new one.  For example, before considering a new vehicle purchase, focus on paying off the student loan.   Whatever you have been driving until now obviously works. If your vehicle is in dire need of repair, at the very least, look for a good used vehicle. The concern is that accumulating payments bring accumulating stress.   Avoid this road as much as possible. 

How to Avoid Drowning in Debt

Financial planners can’t stop anyone from borrowing money for the things they want. However, we can make you aware of the dangers. Your income is like a blanket which is intended to cover all your needs: lifestyle, savings, and debt obligations. Someone (or something) could be left out in the cold if your income isn’t able to do this. Do your homework first before you decide to take on debt.     

The word “old-fashioned” applies to many things: clothes, names, and lifestyle.   Although things do become outdated, many things done the old-fashioned way can still work today.  Our ability to save for the things we want is one of those things.  Rather than save, many now resort to the use of “credit.”  The secret to avoid the debt trap is to start doing things the “old-fashioned” way. Although having a mortgage against a home is acceptable for the purpose of owning a home, continually using home equity for vehicle purchases or credit card consolidation is not.  Choose your debt carefully.  Doing things the old-fashioned way may not be such a bad idea.   

The Credit Counselling Society provides a list to alert people to the typical warning signs of debt that might be out of control. Click here to check their list.         

Wait For "It"

Capturing the perfect image of the ocean splashing onto the rocks requires patience.  When you wait, you get the perfect snapshot.  This scene sends an important message: “Wait for It.”  Wait for the things you want in life.    The blood, sweat and sacrifices (and of course, discipline) you pour into savings will pay off because you’ll have a greater appreciation for the things you purchase. 

BUT do we? Do we “wait for it"? Most times the answer is “No!” We’re bombarded with marketing ads.  The advertisement tells us, “Why wait when you can have it now?  The advertisement tells us,  “It’s easy! With these low monthly payments, it’s yours.”  The advertisement also tells us, “There are only a couple items left in stock and then they’re gone.” The pressure is on to buy. And we buy.  In the end, do we actually own it or do we owe money for it?

Most times I see people fall victim to the easy purchase plan (myself included.)  If we are not able to pay the debt in full, the payments seem to go on and on forever.  Having payments restricts our ability to do anything.  If you have ever felt like a prisoner, this is probably the time.  It’s easy to get into a cycle.  When our debt payments escalate, income is restricted for day-to-day lifestyle expenses, forcing us to buy essential items, like groceries, on credit.  Debt begets more debt.

Living in a world which provides easy access to credit and promotes instant gratification comes with a cost.  The cost is the interest you pay over time for the purchase.   

Recognize that some things are worth the wait. When you focus on your goals and dreams, you avoid the temptation of buying things on impulse. You may be able to relate to two experiences you’ve had in the past.  One, when you saved for something you really wanted.  The second, when you bought an item using credit obligating you to make payments.  Which did you prefer?

If you have the ability to make loan payments, wouldn’t it be just as easy to start saving for the item in advance?  Rather than pay "interest", you can actually earn “interest” while you wait. One easy way to save for what you want is to hide the money.  {Well, not exactly!}  We know we can be our own worst enemy; so to avoid temptation, the best solution is to set up automatic transfers to an account (like a mutual fund) which puts your savings out of reach. This prevents dipping into your “pot of gold” until the time is right.  

In the end, when you wait for it, you get what you want and more: freedom to move onto your next purchase, peace of mind knowing you have no payments, and a sense of accomplishment knowing you worked hard to save for the things you wanted without incurring debt. 

No one says, “Wait for it” is easy; but the one sure thing is, “It’s worth the wait”.         

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.