Worry-Free Money

Making Change Happen: You’ve Got Levers—Pull ’Em!

There’s a line from The Simpsons that I love and hate. When Marge mentions that she’d like to try a new career path, Homer says, “I don’t know, Marge. Trying is the first step towards failure.” It’s funny because it’s true. Depressingly so. You can’t fail if you don’t try, right?

Unfortunately, that kind of thinking can creep into your finances as well. If you attempt a change and fall short of your expectations, you risk feeling like a financial failure. After a few false starts it’s easy to give up and stop trying altogether, to just close your eyes to reality and hope that everything will turn out okay.

But here’s the thing: change—real change—is what gives you real hope. Seeing the debt melt away, watching your retirement savings rise and not feeling guilty about the money you spend on a vacation are examples of real change that pump hope back into your finances, even if you stumble a couple of times.

Past financial-plan failures mean nothing. They’re simply an indication that whatever you tried didn’t work for you. It’s like dating. Should you never go on another date because the last one didn’t work out? Hell, no. Dating helps you figure out who meshes with you and who doesn’t. Trying a new financial plan is like dating your money. You just need to find the right fit—one that makes you feel good, one that doesn’t make you worry.

Homer Simpson was wrong. Trying is the first step towards getting what you want for yourself, your family and your future, and it all begins with change. But keep in mind that change does not look the same for everyone. What works for someone else may not work for you.

Small Changes Create Big Waves

When people first come to my office, they usually expect me to tell them what to do. Certainly I can give them a list of things they should start doing with their finances:

• Pay off debts.

• Save up an emergency account.

• Put aside at least 10 to 20 percent of gross income for retirement.

• Pay off your mortgage in 15 to 20 years (if applicable).

It’s a good solid list, but most people can’t possibly achieve everything at the same time. There is only so much money coming in, and the last thing I want is for you to look at a list of financial goals and feel discouraged before you even start. It’s best to think of it as a financial wish list and start by prioritizing which parts are most important to you right now. As I’ve said before, I’d rather you made a plan to save $100 a month and actually do it than make a plan to save $1,000 and fall short of your own (self-defeating) expectations.

You can tackle the rest of the list over time. As long as you’re motivated and are implementing changes, even small ones, eventually you will get there. You will win. Who knows, maybe once you get going on this, you’ll be motivated to make more and more changes. It may even turn into a financial snowball that just keeps getting bigger and better. Never underestimate the power of that first small change.

Meet Dylan

Dylan

Age: 27

Relationship status: newly single

Kids: 0

Annual gross household income: $40,000

Assets: $1,000 in emergency account; $8,000 retirement savings

Liabilities: $6,600 credit card debt at 19% (a hangover from two bachelor parties and two months’ unemployment)

Dylan had been my client for a while. When he last came to see me, I was surprised to learn that he was in the middle of a nasty breakup. Not only was it rough emotionally, the split was completely messing with his finances and his plans.

Dylan had been living with his long-time partner for five years. His ex, Maria, earned $82,000 a year as a brand manager, which was significantly more than the $40,000 Dylan earned as a designer. Together they were renting a beautiful two-bedroom apartment in a great neighbourhood in Vancouver. The rent was $2,200 per month. Maria was paying $1,562 and Dylan $762 of their shared expenses ($2,200 rent + $24 renters’ insurance + $100 for cable/Internet), an equitable split, given that Maria earned more than double Dylan’s salary. He would never have been able to afford that apartment on his own.

After five years, Dylan had grown accustomed to the lifestyle afforded by having a two-income household. They lived near parks and their favourite coffee shops, and many of their friends were within a 20-minute bike ride. The previous year, when I had seen Dylan and Maria together, they were saving for a wedding and a down payment. Having kids was on their three-to-five-year plan.

Dylan was not expecting the breakup. Not only was he emotionally unprepared, he was also financially unprepared for the added expenses of being single. So we sat down to work on a new financial plan. Here’s how his pre-breakup finances played out:

Dylan’s pre-breakup financial goals had been to—

• Pay off his credit card in one year. Using the Debt-Repayment Calculator, Dylan had worked out that he needed to put $612 per month ($400 Meaningful Savings + $212 minimum payment) towards the credit card to accomplish this goal.

• Rebuild his emergency account to $3,000 over the next 15 months. This meant he would have to save $200 per month for the next 15 months ($3,000/15).

His Hard Limit before the breakup was $1,016 per month. Having that much Spending Money for daily life was doable. Yes, he had to be mindful every now and then, but it was enough to allow him to enjoy life and still sleep at night. Post-breakup, not only was he heartbroken, but without a partner to split the monthly bills he was also about to face some tough financial decisions.

“I want to live relatively close to my friends,” he told me. He paused a moment, as though what was coming next was hard to say. “What I want is a one-bedroom apartment. I think I can get one for $1,500. I need to know how screwed I’ll be if I take that on.”

As I mentioned earlier, Dylan had become accustomed to a certain standard of living. I needed to brace him for impact. “Your spending money is going to take a big hit here.”

Monthly after-tax income	$2,800
FIXED EXPENSES: Money You Cannot Spend
Rent (shared)	$700
Utilities (shared)	$0
Renters’ insurance (shared)	$12
Cable/Internet (shared)	$50
Phone	$59
Credit card minimum payment	$212
Life and disability insurance	$141
Bank fees	$10
Total	$1,184	(42% of after-tax income)
MEANINGFUL SAVINGS: Money You Cannot Spend
Credit card above-minimum payment	$400
Retirement savings	$0
Total	$400	(14% of after-tax income)
SHORT-TERM SAVINGS: Money You Cannot Spend
Vacation	$0
Emergency savings	$200
Total	$200	(7% of after-tax income)
SPENDING MONEY: Hard Limit	$1,016	(37% of after-tax income)

The real issue? How low we could take his Spending Money without being totally unrealistic. I wanted to solve this problem first before we tested different rent costs so that the Spending Money he would be left with was realistic. I worried that if I started off by testing the $1,500 rent, Dylan would just agree that he could live within the confines of whatever Spending Money was left over, just to ensure that he could (on paper) afford it. By looking first at how much he could realistically reduce his Spending Money, I would know how low he could go in a sustainable manner.

	Average Spending	EROI	Change	New Amount
Groceries (single)	$270	5	+$30	$300
Toiletries	$30	3	-$10	$20
Work lunches/coffee	$100	2	-$50	$50
Takeout dinners	$116	3	-$116	$0
Dinners out/outings with friends	$170	5		$170
Entertainment (books, movies, music)	$80	4	-$50	$30
Grooming	$20	5		$20
Clothes	$50	5		$50
Alcohol	$80	3	-$16	$64
Fitness	$50	3	-$50	$0
Social outings/tickets	$50	5		$50
Total Spending	$1,016		-$262	$754

After going through Dylan’s numbers, we reduced any Unhappy Spending where we could. This meant the following mindful goals: no more takeout dinners (Dylan loved to cook; Maria was the takeout person); reducing the morning coffee to every other day; no more movies out (that had been a date-night thing twice a month); reducing alcohol purchases to $15 a week; and quitting the gym and working out at home.

That left him with a Hard Limit of $754 per month. This pushed the boundaries of what I would consider sustainable for him, given his former lifestyle. But at least now I knew that if the rents we tested pushed his Spending Money lower than $754, we’d be creating the perfect environment for worry, frustration, frequent F*ck-It Moments and likely quickly mounting credit card debt. I didn’t want to set him up for financial failure.

Dylan was set on a one-bedroom apartment close to friends and community. “Especially now that I’m single,” he said, “I need to be near people.” I got it. So we looked at how his finances would shake down if he rented the place for $1,500.

By renting a new place on his own for $1,500, Dylan would set himself up for a lot of frustrating things to happen with his finances:

• an increase in Fixed Expenses to a whopping 73 percent of after-tax income—well over the recommended 55 percent

• zero money going towards paying down his credit card, so no Meaningful Savings

• zero money going towards his emergency fund, so no Short-Term Savings

• Spending Money reduced to 27 percent of after-tax income, which is a 10 percent drop from his previous 36 percent

Not only would he literally be living from paycheque to paycheque, but when we crunched the numbers using the Debt-Payoff Calculator, we discovered that, without the $400 additional going towards his credit card balance each month, his credit card debt wouldn’t be paid off for 44 months (3 years, 8 months). As a result, unless Dylan received a massive raise or made income adjustments, it would be more than three years before he could put any savings (the $212 that would be freed up after the credit card was paid off) towards his emergency fund. And it would take an additional nine and a half months to build it up to $3,000 ($212 × 9.5 months = $2,000, plus $1,000 in there already). Essentially, a $1,500 rent meant it would take 54 months (4 years, 6 months) to reach his original financial goals.

	Pre-breakup	Post-breakup
After-tax income	$2,800	$2,800
FIXED EXPENSES: Money You Cannot Spend
Rent	$700	$1,500
Utilities	$0	$0
Renters’ insurance	$12	$24
Cable/Internet	$50	$100
Phone	$59	$59
Credit card minimum payment	$212	$212
Life and disability insurance	$141	$141
Bank fees	$10	$10
Totals	$1,184	$2,046
MEANINGFUL SAVINGS: Money You Cannot Spend
Credit card above-minimum payment	$400	$0
Retirement savings	$0	$0
Totals	$400	$0
SHORT-TERM SAVINGS: Money You Cannot Spend
Vacation	$0	$0
Emergency savings	$200	$0
Totals	$200	$0
MONTHLY SPENDING: Hard Limit	$1,016	$754

I asked him about moving into a cheaper basement apartment for $1,200 instead. His Fixed Expenses would still be above 55 percent but not nearly as high as for the $1,500 apartment. Dylan shook his head. “I lived in a basement apartment when I first moved here and it wasn’t good for me. I know it’s cheaper, but it feels like a huge step backwards. Not good for my emotional well-being.”

Realizing that his emotional and mental health were as important as Dylan’s financial health, we dropped the basement idea and instead crunched the numbers for an apartment farther away. But once we added an extra $250 for his likely commuting costs, his Fixed Expenses came in at more than 73 percent of his net income. Again, no win.

Because his family lived in Nova Scotia, moving back home with Mom and Dad for a while was out of the question. That was when Dylan started to lose hope. “So I’m f*cked,” he said.

“No,” I told him. “We just need to delay some of your financial plans. Extend the time horizon.” As his financial planner, it was important for me to show Dylan that there was still hope, even when everything felt so broken.

No matter how basic or fancy your planning tools may be, when it comes to managing your finances, you only have two levers: Earn More or Spend Less. There is no third lever, no magical unicorn solution that will allow you to spend more, earn less and still save. It’s mathematically impossible.

Sure, Dylan could quit his job and move to Nova Scotia, but was that a practical solution? Could he find a job? What about friends? A community? Happiness? No dice. Dylan’s job and his community were in Vancouver. Moving to Nova Scotia was totally unrealistic. No matter which way we sliced it, the breakup meant that Dylan would be forced to live beyond his means for the next five years. Welcome to real life.

But all was not lost. There was still hope, still a way to make it better. For Dylan, we could reach “better” by adding $100 per month in income or subtracting $100 per month in expenses. Just $100.

I started with the first lever: Earn More. “Do you think you could bring home an additional $25 a week after tax?” I asked. “That way you could rent the $1,500 apartment and still maintain $754 as your Spending Money while saving $100 per month.”

He thought for a moment, then said no. “My work isn’t always nine-to-five. Projects have strict deadlines and I’m often working 12- to 16-hour days plus weekends as it is. I don’t see how I can be reliable for another job.”

“Okay, no problem.” I said. I tried the second lever. “Do you think you could find a place to rent for $1,400?”

“Hmm, probably. I think I could crash at my friend’s place until I find a rental for $1,400. But how big a difference would $100 make in the grand scheme of life?”

“You’d be surprised,” I told him. “If you can find a rental for $100 less per month, I think we can get your finances back on track in two and a half years instead of four and a half.” Enter: Hope.

Using that extra $100, we came up with Dylan’s realistic financial survival plan:

• Call the bank and try to negotiate a lower interest rate on your credit card.

• Pay $312 per month towards the credit card ($212 minimum + extra $100 saved).

• Don’t take on new debt. Live within your Hard Limit.

I didn’t want to move the $1,000 that Dylan had in his emergency account to the credit card, because he wasn’t sure about his job security. Yes, mathematically that was probably the best bang for his buck, but I didn’t want to make him feel even more broke and risk putting him into scarcity mode by emptying all his accounts. In addition, taking money from his retirement account didn’t make sense because much of it would be taxed at a higher rate than the interest he was paying on his credit card.

Monthly after-tax income	$2,800
FIXED EXPENSES: Money You Cannot Spend
Rent	$1,400
Utilities	$0
Renters’ insurance	$24
Cable/Internet	$100
Phone	$59
Credit card minimum payment	$212
Life and disability insurance	$141
Bank fees	$10
Total	$1,946	(69.5% of after-tax income)
MEANINGFUL SAVINGS: Money You Cannot Spend
Credit card above-minimum payment	$100
Total	$100	(3.5% of after-tax income)
SHORT-TERM SAVINGS: Money You Cannot Spend $0
SPENDING MONEY: Hard Limit	$754	(27% of after-tax income)

Dylan called his bank from my office. It wouldn’t reduce his credit card interest rate and he couldn’t consolidate the debt, leaving him to pay it off at 19 percent. Such is life. But the good news was that, with our $100 plan, he would pay off that credit card in 26 months (just over two years). That would free up $312 that could then go towards his Short-Term Savings for the next seven months ($2,000/$312), which would add another $2,000 to his emergency account, bringing the total to $3,000.

In just over two and a half years—33 months—Dylan would have paid off his credit card and rebuilt his emergency savings, thanks to the $100 per month he thought wouldn’t accomplish much. “Whoa, seriously?” he said. He still didn’t quite believe that $100 could make such a difference.

“Take a look,” I said and showed him the graphs. “You’ll shave two years off your debt-repayment plan and save about $1,065 in interest on the credit card.” It was a big win.

I reminded Dylan that this three-year plan was based only on what we could see now. “Your life is going to change so much in the next three years,” I told him. “With potential tax refunds, windfalls, new jobs, raises and such, this could all happen a whole lot sooner. We can’t know what’s down the road, but we do know that this plan is sustainable for now. Never discount the power of $100 a month. It goes a very long way.”

He looked relieved. “Okay, I’m definitely going to wait until I find a place for $1,400. And any windfall like a tax refund will go towards the credit card.”

I smiled. “Oh yes.”

Two and a half years later, Dylan and I sat down again. He seemed pleased. His credit card was paid off and he was starting to rebuild the emergency savings.

“Things look like they’re right on track,” I said.

“Better than on track. After our meeting I started to do a bit of freelance graphic design on the side. That money has been paying for things like travel, a friend’s wedding, even a couch—things I couldn’t fit into my Hard Limit.”

“That’s fabulous!” I said. “But the last time we met, you didn’t think you could earn more. What happened?”

“When you first asked about it, I shot down the idea because I was already stretched so thin at work and exhausted. Freelancing seemed daunting and terrifying on top of my regular job. But when I thought about it in terms of $100 a month or $25 a week, I realized that was only about six or seven logo designs over an entire year. I could realistically do that for some of my friends and acquaintances who run their own businesses. It felt doable, you know? Really manageable. I started putting the word out and the work came in! It works out to $1,700 before tax each year. The $1,300-ish I keep after taxes has been enough to give me some extra fun money while still sticking to the credit card and emergency account plan.” (For more on this, see “Side-Hustle Money” in the Resource Library, page 308.)

“That’s wonderful! I’m so happy you found a way to pull the income lever.”

He nodded. “Framing it as only $100 a month or $25 a week helped make it feel doable. Plus, being able to use it for fun things kept it super-motivating.”

I was so pleased. We rejigged things again and updated his plan. His income had increased to $41,616 a year and his Fixed Expenses had remained the same, despite an increase in transit costs. “I got rid of cable,” he explained.

Once he had finished rebuilding his emergency savings, he planned to reallocate the $312 per month to retirement savings and tack on an additional $50 per month, bringing the amount going towards retirement up to $362 per month (10 percent of his gross income, including the freelance work).

“Keep using freelance income to fund Short-Term Savings,” I told him. “No freelance, no trips. Try to match your spikes in income with spikes in spending, and use the steady income to get the heavy financial work done.”

As impossible as it had seemed to him during our initial meeting, Dylan was happy and hopeful again. By being both realistic and kind to himself, he prioritized his needs and determined what was most important to his happiness. Once we knew that staying in Vancouver mattered most, we designed a plan that he could live with. It was one that put him back in control again, knowing he could still move forward financially even though the path would be different and perhaps a bit slower than he wanted.

•

Life happens. Breakups, divorces, job losses, bad financial calls. Things may start to go off track and hopelessness can creep up on you. But here’s the thing: there is always hope. There is always a reason to try.

When the unforeseen happens, remember:

• Your goals may take a little longer to achieve, but that doesn’t mean that won’t happen.

• Even $100 a month goes a long way.

• There are always two levers to pull: Earn More and Spend Less.

Don’t be afraid to try both levers. The amounts don’t have to be dramatic to be effective. Small changes make big waves.

You’ve seen that $100 can go a very long way. But what if that isn’t enough to keep all your financial balls in the air while moving you forward at the same time? How do you make realistic changes and stay motivated when you’re sinking, despite your best intentions?

Meet Drew and Kelly

Drew and Kelly

Ages: 36 and 34

Relationship status: married

Kids: 2, ages 1½ months and 4

Annual gross household income: $150,000 ($75,000 + $75,000)

Assets: house valued at $750,000; $50,000 in retirement savings (plus Drew has a defined benefit pension—yay!)

Liabilities: $475,000 mortgage at 2.7%; $45,000 line of credit at 7% interest

Drew and Kelly came in for an emergency financial meeting. “Every time it rains, I have anxiety because I’m sure that will be the one,” Kelly said. “The basement wall will finally give, and I already know we can’t afford to fix it. We just don’t have the money.”

I hadn’t seen them in four years. Kelly’s eyes started to fill as she gave me the lowdown on what was going on at home. “We just keep taking on more credit card debt, though I don’t feel like we live extravagantly. We budget every single dollar.” She wiped away the tears. “I feel like we’ve done everything we’re supposed to. We make good money, but I feel so screwed every day. I don’t know what we’re doing wrong.”

They both looked at me for an answer and my heart broke for them, because they hadn’t done anything wrong. I jokingly asked if they wanted to go out for a glass of wine instead of finishing our financial session.

They laughed. “Ha, that would be great. We haven’t been able to afford fun in a long time,” Drew said.

Drew and Kelly were married five years ago. They both earn $75,000 a year, which amounts to approximately $8,000 per month after taxes and deductions. Drew has 10 percent pension deductions coming directly off his paycheque and they are matched up to 5 percent, which is great. It means that 15 percent of his income is going towards retirement savings.

In their first year of marriage they bought a $650,000 house with a down payment of $175,000 (27 percent). They were debt-free at the time, with no kids. To a lender looking just at their incomes, their sizable down payment and their lack of debt, the conclusion was easy: Drew and Kelly could definitely afford that house.

Monthly Housing Costs ($34,260 per year)
Mortgage	$2,175
Utilities and insurance	$380
Property tax	$300
Total	$2,855

However, when they came to see me before buying the house, I had told them they should pay no more than $500,000. They wanted kids and needed to think beyond mortgage, utilities and taxes. They needed to baby-proof their finances and make room for the pending costs of raising another human.

But they fell in love with the $650K house. The bank said it was affordable, friends and family said it was affordable; all signs pointed to Go, so they bought it. Like so many people, they assumed their incomes would go up over time and they would grow into the house when they had kids. They moved in, did about $30,000 worth of basic renovations and popped that right onto a line of credit (cheap debt). During the renovations, they got pregnant with baby number one.

Their total monthly costs for housing were $34,260 a year, only 22.8 percent of their gross annual household income. By most standards, housing shouldn’t come to more than 30 to 35 percent of your gross income, so at 22.8 percent they should have been laughing, right? What went wrong? Why was Kelly back in my office feeling like they’d made a huge mistake? Like they were house-poor, with no hope for their financial future.

Here’s the thing: Drew and Kelly weren’t house-poor. After two kids, they were baby-poor. When they were crunching the numbers on that house four years earlier, they didn’t think to add in the Fixed Expenses that were waiting down the road.

Before kids, they were able to put $900 towards Meaningful Savings. Of that, $700 per month ($8,400/year) went towards Kelly’s retirement savings and $200 went to their then $30,000 line of credit above the minimum payment of $850. At that rate of savings, they were on track to pay off their $30,000 line of credit in 2.6 years (see the Debt-Payoff Calculator on page 304) and Kelly was able to put away 11.2 percent of her total gross income for retirement. Everything looked great. In addition, before children they had a $3,000 annual vacation fund, a $3,000 annual home-repair fund and a $1,200 annual holiday/gift fund in their Short-Term Savings.

Then came maternity leave. And after that, the daycare years. The cost of having kids blindsided them, utterly and completely. Kelly and Drew hadn’t baby-proofed their finances, which means they didn’t take the future cost of raising kids into account when they were assessing how much they could afford for a Lifestyle Upgrade like buying a $650,000 house. When you buy a house or take on some other expensive Lifestyle Upgrade based on numbers that don’t reflect future childcare expenses or potential minivan payments, it might look like you can afford all those things. However, if you haven’t planned for diapers, daycare and maybe swimming lessons, affordability can go out the window.

In the past four years Drew and Kelly had tacked an additional $15,000 onto their line of credit, bringing the total up and over the original $30,000 to $45,000, and had emptied their trip and home-repair funds. On average, they were overspending by about $8,000 a year. Here’s a comparison of their monthly cash flows.

After kids, their Spending Money was reduced to $1,695 per month. This was a 4 percent decrease (25 percent – 21 percent). The worst part, however, was that life with kids left no room for Meaningful Savings, let alone Short-Term Savings.

Kelly and Drew were clearly strapped, living from paycheque to paycheque and taking on more and more credit card debt. That’s why Kelly was always anxious when it rained. They truly couldn’t afford the repair, and in this case an extra $100 per month wouldn’t cut it. I felt for them.

“We can’t sell the house,” Drew said. “We have kids, they’re in good daycares. I don’t even know where we’d move to.”

“But we can’t afford the house,” Kelly countered.

“Oh, you can afford your house,” I said. “You just can’t afford daycare plus the house. But here’s the good news: the daycare years are temporary. We just have to find a way to hang on and not sink financially until they’re both in school.”

Drew and Kelly’s financial pain would last another four years. But once daycare was totally done with, they could start a new financial plan. Hope is always there.

Some people would be quick to judge them. “Hey, sell your house,” they’d say. “Downsize and stop whining.” (Hey now, watch that Money Hate.) They might even criticize me for not advising them to sell. But Drew and Kelly did not want to move; they’d already made that clear. Designing a financial plan that asked them to downsize was a nonstarter, and totally unrealistic for how they would continue to live their life.

	Before Kids	After Kids
Monthly after-tax income	$8,000	$8,000
FIXED EXPENSES: Money You Cannot Spend
Mortgage	$2,175	$2,175
Utilities	$280	$280
Home insurance	$100	$100
Property tax	$300	$300
Cable/Internet	$120	$120
Phone	$200	$200
Car insurance	$200	$200
Car payment	$280	$280
Line of credit minimum payment	$850	$850
Daycare	$0	$1,800
Totals (% of after-tax income)	$4,505 (56%)	$6,305 (79%)
MEANINGFUL SAVINGS: Money You Cannot Spend
Line of credit above-minimum payment	$200	$0
Retirement savings	$700	$0
Totals (% of after-tax income)	$900 (11%)	$0 (0%)
SHORT-TERM SAVINGS: Money You Cannot Spend
Vacation fund	$250	$0
House-repair fund	$250	$0
Holidays/gift fund	$100	$0
Totals (% of after-tax income)	$600 (8%)	$0 (0%)
SPENDING MONEY: Hard Limit	$1,995 (25%)	$1,695 (21%)

Instead we turned all their financial goals for the mat leave/daycare years into one simple one: stay afloat. Avoid sinking further into debt while trying to brace for spikes in spending and household emergencies. Forget retirement savings for Kelly in the short run (Drew’s pension would still be happening in the background). Right now they had much bigger financial fish to fry, and 25 years in which to catch up later. The new plan gave them permission to not worry about retirement savings in order to focus on the true financial danger in front of them—debt.

After crunching the numbers, we arrived at their real-life, bare-bones minimum financial goals:

• Live within the $1,695 Hard Limit and stop going into debt during the daycare years.

• Try to put aside $1,000 a year for Short-Term Savings to keep out of debt.

• Try to pay down the line of credit to make room for future home repairs (approximately $5,000/year).

This is a great example of when $100 per month just isn’t enough to help. As motivating and helpful as that extra $100 can be, in this case we needed a bigger overhaul to get them out of financial trouble during the daycare years. But we started by looking at those same two levers: Spend Less and Earn More.

The First Lever: Spend Less

Drew and Kelly’s Fixed Expenses were just that: fixed. The only option they had was to reduce their Spending Money to live within their Hard Limit of $1,695 without taking on any new debt. How to do that? Reduce their Unhappy Spending by $300 ($1,995 – $1,695).

	Average Spending	EROI	Change	New Amount
Groceries	$700	MUST		$700
Dining/lunch/coffees out	$60	4	-$40	$20
Gas	$200	2	-$100	$100
Toiletries/diapers, etc.	$250	MUST		$250
Adult grooming/drycleaning	$70	MUST		$70
Family clothes ($1,000 each)	$160	4	-$50	$110
Outings/entertainment ($75/week)	$300	5	-$25	$275
Date night	$100	5	-$25	$75
Gifts	$50	4	-$35	$15
House stuff	$55	MUST		$55
Kid stuff	$50	4	-$25	$25
Total Hard Limit	$1,995		-$300	$1,695

This was a bit painful, since most things were a must or rated 4 and 5 for Happy Spending. However, they had to make trade-offs in order to live within their means. The $300 had to come from somewhere. Their new mindful spending goals for living within the $1,695 Hard Limit:

• Only get takeout coffee on weekends, saving $40 per month.

• Cut down on gas by walking more and biking to work. Only drive two days a week max, saving $100 per month.

• Shop more at second-hand stores for clothing for them and the kids, saving $600 per year (approximately $50 per month).

• Reduce family outing costs by keeping them under $70 per week, saving $25 per month.

• No gifts unless handmade or under $15. They vowed to tell the family that Christmas would be all about the love and presence (rather than presents), saving $420 per year ($35 per month).

• Reduce toy and kids’ stuff shopping to once a month, saving $25 per month.

• No trips for the next four years.

• Take the children to Disneyland in five years to celebrate the end of the daycare years.

• No home renos except emergency repairs, which would have to go on the line of credit. “If you need to repair the basement or do any emergency house repairs over the next four years, it must go on the line of credit,” I explained. “There is no other option.”

Living within their Hard Limit of $1,695 wouldn’t keep them out of debt if there were any spikes in spending or home emergencies. That was a big problem. But with no more wiggle room in expenses, the only other lever they had was to bring in more money.

I was giving them permission to spend outside their means in the case of an emergency. Even though that’s not “financially responsible,” it’s realistic. Financial plans must be realistic in order for people to follow them and stay hopeful for the future.

The Second Lever: Earn More

Every summer, Drew and Kelly went to their parents’ cottage on weekends and for one two-week stretch in the summer (lucky!). Because they lived in a relatively desirable neighbourhood and owned their home, it was possible for them to offer their house for rent on an online B&B site to bring in more money annually. They typically went to the cottage for one week over March Break (7 nights), two full weeks in August (14 nights) and six weekends over the summer (12 nights). The house was empty and available for rental during those times. Thirty-three days per year—only 9 percent of the entire year—and during prime tourist season in their city. Huzzah!

Given their location, they discovered they could rent out their house for $182 per night, which would bring in approximately $6,000 per year ($182 × 33 nights) before tax. That $6,000 was taxable, but their daycare bill, which was well over $6,000 a year, counted as a tax deduction. That would completely offset the taxes payable on the extra income as long as they had receipts that qualified for the daycare deduction (see “Daycare Life” in the Resource Library, page 309).

Drew was hesitant at first, but I was able to show him how we could use that $6,000 wisely. Under Meaningful Savings, $5,000 would go towards the line of credit each year, in addition to the $850 they had to pay each month. The additional $1,000 would go towards Short-Term Savings for the holidays, large purchases and unexpected life expenses, safeguarding them against more debt.

The extra $5,000 against the line of credit each year meant their debt would be paid off in under four years (see the Debt-Payoff Calculator, page 304). What’s more, if a housing emergency were to occur, they would have paid down enough on the line of credit to leave room for emergency repairs. We weren’t talking decorating or renovations. Strictly emergencies, like leaking walls. Bringing in this extra money was a great way for them to protect themselves against large spikes in spending while holding on for their dear financial life over the next four years.

“Why wouldn’t we just put the $1,000 onto the line of credit for emergencies or spikes in spending, instead of into a savings account where it will earn only 1 percent interest?” Kelly asked.

“Great point, but it’s important for you both to see where the money for large purchases or spikes in spending is sitting. There is something comforting about knowing you have money available, not simply more credit, and that you can spend that money if you need to. It helps take away the guilt about spending and is way more motivating than putting it against the line of credit.”

Drew and Kelly left my office encouraged. Sure, the new plan wasn’t the kind you usually think about when it comes to finances. But they valued staying in their home above everything else and were willing to rent it out in order to bring in more money. (Never underestimate the power of the side hustle to bring in more money.)

Four years later, Drew and Kelly were back in my office. They had only $10,000 left on the line of credit. A few home-repair emergencies had kept them from paying it off completely (the basement did flood), but they had taken on no new credit card debt. Daycare costs had been reduced to $800 per month, since the kids still required afterschool care, but this reduced monthly Fixed Expenses by $1,000 per month ($1,800 – $800).

Renting out their place when they were away had worked out really well. “It’s been our lifeline. I can’t believe we didn’t think of it before,” Drew said.

Now it was time for a new plan. I started with the extra $1,000 per month now available to them. “If you take that $1,000 per month you’re saving on daycare and add it to the $850 you’re paying towards the line of credit, you’ll have the whole thing paid off in six months! Then you’ll have freed up $1,850 a month that can go towards retirement savings and make up for lost time.”

“Do we still need to rent our place out?” Kelly asked.

“You should. You still have to rebuild your home-repair, vacation and emergency funds. Once those are topped up and retirement savings are back on track, you can stop.”

“I have a feeling we’ll be renting it out forever,” Drew said. “What would happen if we put an extra $6,000 towards the mortgage over the next three years?”

Swoon! I opened up the online mortgage calculator. “Your mortgage is at $418,685 right now, with 21 years to go. If you put in an additional $6,000 per year on top of your regular mortgage payments, you’ll pay it off in 16.2 years, 4.8 years earlier than without. You’d be mortgage-free by 60 instead of 65.”

“I’m in,” Kelly said.

“It just makes sense,” Drew agreed.

Our original plan had not only given Drew and Kelly hope when all seemed lost, it had also motivated them to keep making positive changes once they were out of the financial dark. You can see the empowerment and motivation that come from getting the financial ball rolling.

Drew and Kelly are a great example of how getting creative with your finances and thinking of ways to either bring in more money or reduce expenses can help move your finances forward. It takes effort and time but it’s doable, and it feels wonderful once you start seeing financial progress.

Remember, you have only two levers: Spend Less and Earn More. But there are plenty of ways to make those levers work for you! The key is to make your plan realistic and doable in the short run so that it will be sustainable over the long haul.