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.

Colour Your World With Real Wants

Do you ever tell yourself or others, there’s never enough money? Is that really true? For some, it may be.  Do you know the difference between “needs” and “wants” or do you simply throw up your hands, believing your spending is all the same?   

By definition, needs are described as your basic expenses, things you must have to live.  Examples are food, gas, rent, power and heating bills.  Wants are the things we really like. These “things” would be nice to have but you can live without them.  They are Tim Horton’s coffee, books, new clothes and tools. The confusion begins when we see our wants as needs. Every item we purchase is viewed as a need without any distinction. All expenditures become “must-haves.”

Let’s introduce a new idea. If we look at sorting our expenses the same way we sort our laundry, then we get a clear view of how our spending can be divided into piles of needs and wants. When sorting laundry, generally you have three piles: whites, darks and colours. 

Imagine:

Whites are “needs,” the things you must have to live.   

Darks are “wants,” the things you like which are often mistaken for needs.

Colours are “real wants,” the things which “colour” your world. They are the kitchen renovation, the trip to Vegas to escape from Saskatchewan’s cold winters, or the new sofa and loveseat.  Maybe it is the money for your child’s university tuition or building your emergency savings.  Whatever colours you want in your world will be unique to you.

How can you focus on colouring your world? The first thing you must do is track your spending for a week (or a month), and then sort through your list of expenses. Think of going through your list as sorting laundry into your three piles:  needs, wants and real wants.

My best guess is that, at this moment, most of your expenses fall into only two piles: whites (needs) and darks (wants).  The goal is to reduce the spending on the things you want to start savings for the things you really want, or moving expenses from the darks to the colours.   

You may not realize the “things” on which you overspend. When you try to stretch money to last the month, it is not possible.  The problem begins when you rely on credit to pay for your wants.  The wants are what get us into financial trouble. Have tough conversations with yourself.   I understand you can always make an argument defending why you “need” to buy something that really is a “want”.  Who are you kidding, though?  

Recognize, Realize, and React are my three “R’s” if you are sincere about colouring your world with real wants. Recognize your spending habits. Realize you are in control. React by developing new spending techniques.

Here are a few clues to help you follow the 3 “R’s”.    

1. Learn to say “No, Thank you!” to yourself and others.  It’s easy to say $5.00 spent on coffee and muffin, $15 on lunch with a friend, and $30 on a new sweater, are insignificant yet the point is all purchases add up. Saying “No” may require some practice.    

 

2. Don’t let convenience steal your money.  The line-ups at the drive through at meals times are endless.  With a little planning, you may not need to spend money on take-out. Packing lunch for the office or finding ways to be creative with meal planning at home can save money for your real wants.

 

3. Identify your weakness. I believe we all know our own weaknesses. Finding ways to steer clear of temptations could go a long way to building your savings.  

 

4. Make wise decisions about specific purchases.  Extra money does not necessarily have to be spent on the best things when other good quality items will work just fine.

 

5. Check your credit card statement for the amount of interest spend on “wants”.  This may deter you from continuing to purchase so many “wants”.  The interest incurred could be directed to your “real wants” rather than an added unnecessary expense. 

  

6. “Reduce” doesn’t necessarily mean “eliminate”.  Reducing the number of times you go to a restaurant each week for coffee with friends doesn’t mean stopping entirely.  The question is how you can find different ways to socialize that don’t cost money.

 

7. Rather than making purchases on a whim, create an impulsive buying list as you shop. That means recording the things you would like to buy as you see them. Then let some time pass to determine whether these purchases are important. Are they “needs” or “wants”?  Impulsive buying can steal your joy from saving for and purchasing your “real wants.”   

Examining your spending and identifying your needs, wants, and real wants is a effective way to stretch your money.  The harm you do to yourself happens when you spend money on things you only half want.  These things accumulate into stuff you don’t need. So be like Santa.  Take a look at your list, check it twice, and determine where you can make changes in your future spending habits. If you want to get more out of life, developing good money management will “colour your world”.  

To Whom Do You Listen

When seeking financial advice, many people have admitted asking their friends, family, or colleagues what they have done.   It’s not uncommon to scout for information from the people with whom you feel most comfortable. However, is this really the best way to get financial advice? 

Advice about specific topics is best sought from professionals who have experience and education in these areas.  I am not saying all advice from people who don’t work in the financial industry is necessarily wrong advice; but consider that what their advisor told them may not work for you. If people receive only a tiny snippet of your story, you may receive inappropriate advice.  

One size doesn’t fit all.  Because some financial strategies may work well for some, doesn’t necessarily mean they’re right for you.  An analogy to help understand this concept can be made to clothing sizes. We do not all wear the same size.   What might be an ideal shoe size for you, size 6, doesn’t mean it will fit your friend’s size 9 ½ foot.

Think about these three scenarios:

If you opt to follow your colleague’s advice, some decisions may be irreversible.  For example, when selecting your pension options with specific guarantee periods and survivor benefits, these decisions, once made, are final.

If you take your friend’s advice, perhaps it doesn’t match your goals, dreams, and aspirations.  The advice you receive is more apt to suit theirs.

If you heed your family’s advice, who will monitor your progress to ensure you are on the right track?  Will you continue to check with them for follow-up guidance?

So if you shouldn’t get financial advice solely from family and friends, who can you look to to be your teacher? CERTIFIED FINANCIAL PLANNER^® professionals have taken the appropriate courses and gained meaningful job experiences to qualify them to provide sound advice.  The comforting news for you is knowing that Certified Financial Planners follow a code of ethics ensuring your interests always come first.  

Information on the various topics related to personal tax planning, insurance, investment, retirement and estate planning is so vast.  Your “go-to-person” should have a strong understanding of these topics to help you make important life-planning decisions.     Who better than the people with financial knowledge to help you make decisions about:

• taking Canada Pension benefits at age 60 or 65;
• using Registered Retirement Savings or Tax Free Savings;
• starting withdrawals from Registered Retirement Income Fund (RRIF) earlier than age 71;
• paying down the mortgage or making contributions to Registered Retirement Savings Plan (RRSP);
• choosing the best options for pension benefits?

Financial Planning Standard Council (FPSC) is a not-for-profit standards-setting and certification body that develops, promotes, and enforces professional standards in the financial planning field through Certified Financial Planner^®certification.  FPSC compiled a list of questions to help you determine whether your financial planner is competent and qualified to provide appropriate advice.  Click here for a list of ten questions to ask.  You are in the position to hire someone based on their credentials to do the best job for you.  You certainly want to be assured they are qualified to do that.

What's Your Story?

As both Financial Literacy Month and Financial Planning Week approach, the focus is on money management.  How well do we handle our money?  ABC Life Literacy Canada has put together a financial literacy program called, Money Matters.  This is synchronicity at its best.  The purpose of my blogs is to provide information in an understandable matter for people interested in wanting to learn and improve their money management skills.  So it’s no mere coincidence that I married the two ideas. Peoples’ dreams are as important as money matters which led to the creation of my blog, Money Matters and So Do Your Dreams.

In preparation to facilitate the ABC Financial Literacy program in the upcoming month, I believe this activity below is worthy to be shared with anyone willing to dare to compare.  I would like you to meet Tenzin and Riley.

Tenzin works hard for his money, but runs out of cash before the next paycheque.  He’s not sure where all his money goes.  There’s the cell phone plan, rent, cable and internet, credit cards, and of course, a guy’s got to eat.  He usually grabs a bite at a sandwich place around the corner from his work, or orders take-out.  He uses the bank machine at the corner store close to his place.  There’s always something he needs…and the place is open night and day.

Riley’s good at making money stretch. She knows how much money is coming into the family (income), and exactly where it goes (expenses).  She uses coupons, comparison shops, and makes the family’s meals at home.  She puts a little money aside each month for a “rainy day”, but wishes she could save more.  She’d like to set aside enough by the time her kids grow up to help pay for their education, but isn’t quite sure how to go about it.  One option she wants to learn more about is Registered Education Savings Plans, and the help she can get from the Canadian government to help her savings grow.      

What’s your story?  Do you have more in common with Tenzin or Riley?

What are some things that Riley does that helps her save?

What are some things that Tenzin does that he could change in order to spend less? 

 

• Think of examples of your spending and saving.
• If Tenzin is #1 and Riley #5, what number would you give to yourself?
• Why?

Spends a lot.
Saves no money.



Spends carefully.
Saves for her future

 

                                                                                                                                    
1                               2                               3                             4                               5


By circling the numbers 1 or 2, you are saying your money habits are more like Tenzin’s. By circling the numbers 4 or 5, you are saying your money habits are more like Riley’s.  If you circle the number 3, then you are saying you equally share money habits of both Tenzin and Riley.

Here’s one of many Money Challenges found in ABC Life Literacy’s activity workbook:

 

Start a money journal. Every day for a month, keep track of everything you buy, from groceries to your daily cup of coffee and snacks.  At the end of the month, use your journal to help you make or change your spending plan.

More information about the financial resources offered by ABC Life Literacy can be found by clicking here.  Happy Learning!  

 

Can Investing Actually Be Easy?

Most people have the perception that investing is complicated.  Making decisions about suitable investments, anticipating whether the markets are headed north or south, and then timing the sale to reap a profit can be overwhelming.   

Investors often hear common phrases such as:

“It’s not timing the market; it’s time in the market.”

“Buy low. Sell high.”

“Buy and hold”. 

Although there is truth in these messages, everyone’s investment strategies are different.  When considering appropriate investments for you, you want to take the appropriate steps.  Confucius, a philosopher, said, “What you hear, you forget. What you see, you remember. What you do, you understand.”  You need to arrive at the point where you understand investing; this will only happen when you take some interest in the process.

To help understand the world of investments, let’s follow a few basic steps.

 1^st Step: Set the Ground Rules

Making choices about the appropriate investments clearly starts with identifying your goals, dreams, and aspirations.  This important step cannot be ignored.  For obvious reasons, your goals will dictate the appropriate investments to align within your time horizon.

2^nd Step: Define the Time Lines

Knowing when you want to accomplish something for the purpose of investing is important if you want the money to be ready when you are.  Whether you are buying a new vehicle next year, planning your elaborate vacation in five years, or saving for retirement over thirty years, you must pace your investment strategy.  Gradually tucking money aside for each important activity is vital, so you are not cramming to save as the deadline looms closer.    

3^rd Step: Select the Appropriate Investments

Diversify, diversify, diversify!  Don’t keep all your eggs in one basket!  How many times have you heard that phrase?

When you are starting to invest, you may not understand the world markets.  The terminology may be enough to either scare or intimidate you.  The word, “risk”, makes you want to run.  Yet if you think about different types of investments as food, investing is not so intimidating.  Here’s your menu:

Light Stuff = Salad

Medium Stuff = Vegetables and Potatoes

Heavy Stuff = Meat and Fish (food with more substance)

Now compare this menu to your present diet. Common sense says you should eat a balanced diet. That’s true.  Yet everyones’ likes are different.  You are unique.  You are not like your neighbor, your best friend, or any of your family members.  Therefore, you select your portion size based on your needs and health requirements.  This holds true for selecting your investments.

In the investment world as in your food world, your choices are the same: light, medium, and heavy stuff.

Deposit-Based investments (Light Stuff) consist of savings accounts, guaranteed investments, and money market funds.  These are your “liquid investments” or investments you can turn quickly into cash.  When you use these types of accounts, your intention is to ensure your money remains safe and the value does not fluctuate.

Income-Based investments (Medium Stuff) are also referred to as fixed income investments.  These investments can be fairly liquid because they are primarily invested in government and corporate bonds.  With income-based investments, you are lending your money to the government or a corporation who in turn pays you interest.  Although a loss on these investments is possible, the threat is minimal.     

Equity-Based investments (Heavy Stuff) involve ownership in publicly traded corporations.  You own a piece of these companies, either directly by purchasing common shares or indirectly through mutual fund investments. Your expectation is either to be paid dividends for your vested interest in companies or to have your investment increase in value. 

4^th Step: Choose the Weighting to Match Your Investment Needs

Do you get queasy when markets fluctuate?  The ride experienced in the markets can be compared to the same ride experienced on a roller coaster: peaks and valleys, highs and lows, good and bad times! Your reaction provides a clear indication of how much risk you are willing to take with your money.  How well you handle the rise and fall in the value of any investment is a measurement of risk tolerance.  

Choosing the percentage allocated to each investment (or asset class) is matched closely with your risk tolerance.  Each investment type is gauged according to low, medium, or high risk. This in turn is linked closely to the rate of return earned at any given time in the market.  When you hear, “asset allocation,” this, in essence, is what you are doing.  You determine how much money you will allocate to bonds versus stocks. You determine your comfort level.

Remember the portions of your balanced diet are similar to the portions of your investments which are related to your saving purpose, time horizon, and risk tolerance. Some examples are:

• You may choose to invest 100% in strictly deposit investments if your vehicle purchase occurs in a year.
• You may choose to invest 25% in deposit investments and 75% in income investment for your trip to Hawaii occurring in five years.
• You may choose to invest 20% in income investments and 80% in equity investments for your retirement occurring in thirty years.     

Understanding the different types of investors helps you recognize who you are so you can select the appropriate investment strategy; BUT remember you can be several investor types simply because you have different purposes for investing with different time horizons.  It’s like having multiple personalities, depending on the situation, yet you are still the same person.  

Here are some examples of investor types with respective allocations (estimated). Determine which aligns with your investment needs.  

Investor Type	Investor Description	Investment Allocation
Safe Investor	Very Conservative	100% Deposit Investments
Income Investor	Conservative	80% Income-20% Equity
Income-Growth Investor	Moderately Conservative	60% Income-40% Equity
Balanced Investor	Moderate	40% Income-60% Equity
Growth Investor	Moderately Aggressive	20% Income-80% Equity
High Growth Investor	Very Aggressive	100% Equity

Final Step: Payoff–Getting Your “Big Toe” Wet

Taking an active part in your investment strategy by understanding the different types of investments will help accomplish your dreams. 

•      The dream retirement
•      The dream vacation
•      The dream vehicle

You need to ensure your investments are going to make your dreams a reality.  There’s two parts to growing your investments.

           ONE: The money you put into the investment account.

           TWO: The money you earn on the money you invest.

You do your part.  The markets will do theirs in helping you build wealth to fuel your dreams.

Important Tools to Have in Your Toolbox

When the combine breaks down during harvest, the first thing my husband does is get the tools.  Anything and everything he might need – the wrench, the gear puller, the hammer – he grabs so he can fix the combine and get it back on the field.   Whether you are a mechanic, plumber, or farmer, the tools assist in analyzing and fixing the problem. Without them, you can only guess what might be wrong.  You are left both helpless and hopeless in detecting the source of the problem without the necessary gadgets.

There are two important tools we use to analyze our current financial situations.  Now you probably have never thought of them as “tools” per se.  Seeing dollars and cents scribbled on a sheet of paper simply may look like (what else?) a financial statement.  A closer look from a new perspective will highlight these “dollars and cents scribblings” as valuable tools that may be used to analyze or fix any financial problem. Without them, you may only be guessing the source of your difficulties.  The two important financial tools are your Net Worth and Cash Flow Statements.

A Net Worth Statement is a listing of everything you own (assets) and everything you owe (liabilities). When you subtract your liabilities from your assets, you determine your net worth. This simply means that if you sold everything you own (home, car) and redeemed your investments to pay off everything you owe (debt), this would be your cash-in-the-pocket.  The question is, “Is your Net Worth positive or negative?”

A Net Worth Statement is an effective measuring tool to determine if you are making progress from year to year.  When your net worth continues to decline, are you accumulating more debt? When your net worth continues to increase, are you diligently investing for the future? It’s important to know whether you are winning or losing the battle of building wealth.  Are you going backward or forward? 

When you retire, you will need to draw from your assets to support your lifestyle.  We know that benefits from Old Age Security and Canada Pension Plan will not be enough.  Although your home may be your greatest asset, you will not sell it at the onset of retirement. What else do you have? The Net Worth Statement is your reality check.

The next important tool you need in your toolbox is a Cash Flow Statement which simply tracks “money in and money out.”  How much money flows into and out of your hands? Since our focus is building wealth, the money has to come from somewhere. If it slips out of your hands quicker than you make it, then the Cash Flow Statement will show you why.  This valuable tool tracks everything: your day-to-day expenses, savings, mortgage and loan payments.  Since the Cash Flow Statement works with net income (income after taxes), you will not need to factor in taxes. This statement determines if any money is left at the end of the time frame you have chosen to use, be that monthly or yearly.

A Cash Flow Statement provides a clear picture of problem areas and helps identify potential solutions.  Possible solutions may be:

• to reduce spending in any one category of your lifestyle expenses to increase savings or reduce debt.

• to direct money to savings when loans are paid. 

• to simply use your savings to pay off loans now rather than later.

• to determine steps necessary to make your next big purchase. 

• to basically show your income may need to increase to fund your savings and pay down debt.

These two valuable tools are important for your benefit. Now common thinking says a Net Worth Statement is only prepared when applying for a loan.  Common thinking says a Cash Flow Statement takes too much work to prepare. Common thinking says no one has time to do this. However, when you go beyond common thinking and are determined to improve your finances, you will make a habit of using these essential tools to measure your progress.  You will be impressed with the results.  Without these tools, you will continue to feel helpless and hopeless about truly figuring out your money problems.  Since some dreams are fueled with money, these critical tools in your toolbox show how your dreams can be funded.

Click the links to create both, the Net Worth Statement and Cash Flow Statement. Like other tools, a Net Worth and Cash Flow Statement, are useful for general inquiries (a maintenance check) to see that everything is running smoothly and you are on the right track.   Congratulations for handling your finances well.

Do You Read?

When we always do what we have always done, it’s because we didn’t know there is a better way.  Reading and applying new techniques are encouraging ways to improve our lives.  When you are learning how to manage money, there is so much to know.  Financial literacy programs encourage people to take control of their money.  Numerous books have been written on the subject. Whether it is basic money management or complex investing skills you want to learn, this new-found knowledge can change your life.

"When you give someone a book, you don't give him just paper, ink, and glue. You give him the possibility of a whole new life." – Christopher Morley.

I wasn’t always a reader. Picking up a book to read was not my idea of a fun time. The only books I read then were text books. This happened to be a requirement to pass the classes.  Then something profound happened.  I uncovered a love for learning. My perception changed and so did my behavior.  I became eager to see what authors were saying and what I could possibly learn from them.  Books suddenly became valuable assets.  I remember the first finance book I read, Success! The Glenn Bland Method.  This book has sold 600,000 copies since it was published in 1975.  Many books like it contain a wealth of information, knowledge, and wisdom intended to improve our lives.  If you are not a reader, I encourage you to become one.

Books breathe inspiration, motivate you, and encourage you to take action. 

• In Gail Vaz-Oxlade’s book, Debt Free Forever, she doesn’t mince words.  “You want your budget to be so tight it squeaks.”   

• In Smart Couples Finish Rich, David Bach helps you determine the true purpose of money in your life.

• Suze Orman’s book, The 9 Steps to Financial Freedom, uncovers fears you may unknowingly have about money. 

There are valid reasons for seeking wisdom from these experts. You e-x-p-a-n-d your knowledge in areas where you may feel intimidated.  Your new-found wisdom will build confidence within you so the possibility of a whole new life becomes a reality. For example:  Gail Vaz-Oxlade says in order to have a balanced budget, you need to implement savings in addition to paying down debt.  This well-known money authority teaches an action step you may not have understood or implemented.   

Occasionally people find their financial circumstances embarrassing so they are reluctant to speak to anyone about their financial problems.  Suze Orman writes, “In our culture it’s okay to talk about therapy we’ve gone through, marital problems we’ve had, our deepest intimate secrets – but telling the truth about money, confessing our worries to our children, our parents, our friends, just isn’t done.  Money is our secret both in private and in public.”   If you happen to be in this type of situation, seeking solutions from financial planning books may be the first step to addressing your money problems until you feel comfortable talking with a financial planner.  Another advantage of having advice in writing is you can repeatedly review the information.  It’s like following a recipe. You can review what the author said multiple times until it makes sense to you.       

Finding better ways to manage your finances can only mean one thing – “More Money For You!”    More money leads to new opportunities. You can improve the life of your family and just as important, you can improve the lives of others with your donations to worthy causes. If you are looking for even the slightest insight to money management, think about picking up a book on the subject.  Start with small baby steps. Find fifteen minutes in a day to read.  Small progress is better than no progress. Earl Nightingale said, “If a person will spend one hour a day on the same subject for five years, that person will be an expert on that subject.”

 

Money Matters . . . And So Do Your Dreams

Our plan is to achieve our dreams but sometimes our dreams do not follow our plan.  Life happens! Our dreams may appear to wash away simply because life takes a different turn.  Because life is changing, your dreams may follow suit.

A favorite quote by Marcia Wieder, author of the book, Dreams are Whispers from the Soul, says, “There are the dreams we have for our life and then there are the dreams that life has for us.”  Life zigs and zags.  While we’re forging ahead, we should put precautions in place.

Although obstacles may stand in the way of your dreams, knowledge is powerful in terms of overcoming these obstacles. At the onset, you can start by developing a personal financial roadmap to drive your destiny.  Unforeseen events can occur so the best you can do is to build “protection” into your plan. When you look at the list of Ten Financial Items Every Canadian Should Have, having insurance is one way to protect your family and you. Drafting wills and power of attorneys ensures your intentions and wishes are known.  Creating emergency savings for those unexpected events will relieve financial stress.

This idea of taking the above precautions is not necessarily different than other precautions you presently take.  They are precautions nonetheless. 

• You carry a spare tire, jack, and tire wrench in case your vehicle has a flat tire.  
• You may carry a band-aide in your purse in case your children cut themselves.
• Before you leave your home, like my husband does, you ensure appliances are turned off to prevent an unnecessary house fire. 

Once you have built in safety features into your plan, then you can incorporate other strategies. These safety features, your building blocks, are like a stairway. You are making your plan sturdy to successfully reach your destination, your dreams.

Every dream is possible with the right strategy. With a dream list in hand, you develop a purpose for saving and making sacrifices becomes easier. It will no longer be a “have-to” but a “want-to” strategy. You may not know how to accomplish your dream.  A financial planner will be able to provide you with options to do so.

• You may want to further your education -- take a few courses, pursue a degree, or enroll in a certificate course.  However, you are unaware of the Lifelong Learning Plan to help pursue this avenue.
• You may want to purchase your first home. However, you are unaware that the Home Buyer’s Plan may be an option for your down payment. 
• You may think saving for your children’s education is a big feat. However, you may not realize the Government of Canada provides assistance with the Registered Education Savings Plan.

Always believe that anything is possible if the right strategy is built to enforce your dream.  Life happens so the best we can do is take care of money matters while we focus on our dreams.