Money isn’t everything...but it ranks right up there with oxygen.
— RITA DAVENPORT
WHEN I THINK back to my own schooling, by the end of high school none of my teachers had talked about money management, i.e., saving, investing, budgeting, mortgages and loans, having a great credit score and the other day-to-day issues of managing money. The accounting and economics courses were very interesting, but they were too abstract and didn’t deal with the here and now. During my whole public school education, the only money-management lesson I ever got was from my grade eight teacher, who warned us never to use our credit cards unless we could afford to pay for the purchase in cash. I remember thinking: “If you can afford to buy something with cash, why would you ever need a credit card? Don’t people use credit cards because they want things they really can’t afford?”
Most of what I learned about money management in those days came from my mother and her impeccable money management skills. Her favourite expression was: “Money doesn’t grow on trees.” Even though she was a single parent raising three children within very modest means, my mother almost always paid with cash, reconciled her bank statements each month and negotiated a better price whenever possible. My fear today is how nebulous “money” or currency has become. I think if my mother were a parent today, she might declare to me, “Money doesn’t grow in plastic.” Many kids today don’t fully grasp where money comes from as they see their parents hand clerks a piece of plastic and then punch a few numbers on a PIN pad. With increasing popularity of digital payments, such as Apple Pay, rise of cryptocurrencies, and the decommissioning of certain monies, such as pennies, the benefits of transacting digitally are typically considered to outweigh the costs. I fear the unconsidered cost is a cashless society which no longer comprehends the concept of money when spending. On the rare occasions when my mother used her credit card, she would stop and give me the stern warning: “If you must buy something on credit, make sure you pay it off, in full, every month.” Prudent advice, and she always paid off the purchase by the due date. Needless to say, my mother had perfect credit.
As I grew older I came to realize that my mother and my grade eight teacher were very wise. I recognized how much we need to learn at a very early age about handling our own money. The reason is simple: a lot of money is going to pass through your hands over your earning lifetime. No matter what you do for a living, you’re going to earn a lot and, since you are also going to spend a lot, understanding how money works will be essential to your personal success and happiness. As of August 2018, Canadians had an average annual salary of about $51,000, according to Statistics Canada. As an example, let’s suppose that is the average salary for 40 years of working life. At that rate, $2,040,000 (over $2 million!) will pass through your hands. If you have a two-income household, this amount could double to approximately $4,080,000. If you earn more than the average Canadian, you will see even more than that come into your bank account over your working life.
So, if we earn so much money, why are so many Canadians living from paycheque to paycheque? Why are so many Canadians burdened with excessive amounts of consumer debt? And why are we not better off when it comes to retirement? The answer lies in how we manage our money while we’re earning it. How do we balance saving, spending, wants, needs, cash flow, debt and the many other factors that result in the financial expression of who we think ourselves to be or want to be?
Being good with money is not a mystery. It’s within the reach of everyone who is willing to learn and wants to take control of their present and future finances. The question is: What do you need to know? You will be relieved to learn you do not need to know the mathematics of hedge-fund trading or how to survive in the futures market. All you really need to know is how to manage your own money. This knowledge can be mastered by anyone willing to learn a few basic but very important concepts and willing to set up the rules to win. Let me liken the goal of a healthy financial life to that of a healthy physical life. We can visualize the latter and the basic principles are logical to us all. We know that fad diets don’t work (or not for long) and simple solutions, such as eating less and building up our muscles through exercise, take time. The same is true with finance, although the solutions might seem less obvious and be more frustrating. But a little patience with building your “money muscles” and a willingness to not overlook simple strategies will ensure your long-term success.
When I was in my twenties, I worked for one of Canada’s international banks. My job was to provide advice and invest money for high-net-worth individuals. You may be surprised to learn that many of my multi-millionaire customers were average wage earners with very average incomes. Many were investors of modest means who managed to invest a portion of their salaries regularly enough to have accumulated impressive portfolios. What these people realized was that successful management of their own financial affairs was not a secret known only to those who work on Bay Street.
The means of understanding money management is within your hands. A client of mine decided he wanted to understand jazz. So he went online and researched a variety of Internet resources, watched YouTube, downloaded free books from the library and read the basics about the history of jazz and the great musicians, bought many tracks on iTunes and within about six months was very comfortable in the world of jazz. He was no expert, but he could now appreciate what he was listening to. Becoming knowledgeable about jazz was always within his grasp. He just had to make the effort to learn.
Learning about financial management is much like my client’s experience learning about jazz. You have the ability to become comfortable managing your own finances. You too can effortlessly learn about your finances without ever leaving your home! Plus, immersion can be the best source of learning. My friend could attend jazz festivals, start learning the sax or go to a club. You could equally join one of the many online communities or start a money group or investment club.
Sadly, there are too many people who go through their lives in a state of permanent discontent, thinking “life is elsewhere.” If only I had more money, if only I were better looking, if only my parents had been rich, if only I had other friends, etc. If only they could realize that they have all the means of achieving their own happiness right in their hands at any given moment, they could do something to bring about their own happiness. All they need to do is to summon up the willpower to make a few difficult but important decisions.
Once a positive decision has been made, it’s amazing how much strength a person can find within themselves to carry it through. Three simple concepts will get you started:
You can learn enough about financial management to manage your own money for your lifetime so you can live well and retire comfortably. With this Guide, you’ll also be empowered to know how to interview financial professionals along the way. Part of living well is feeling secure about your money. Knowing your savings are growing and that you are paying off your mortgage allows you to sleep at night. You also know that if the worst happens and you’re one of the unlucky ones to be downsized or divorced, you can weather the storm.
This sounds like a cliché and it is. But clichés carry more than a kernel of truth. The big kernel here is that money spent is money not saved. And if you love spending, consider spending a percentage on a very important aspect of your life: You! Which leads us to the next concept.
The third decision is so important it’s worth repeating: Pay yourself first. Save before you spend. Do not look upon savings as something left over after you’ve spent everything else. Save first, live and budget with the net amount. Remember when we looked at what an individual or couple is likely to earn in their lifetime? If you saved just 10%, not factoring in investment growth, you’d have about $204,000 (or $408,000 for a couple) by just skimming a little off the top. Plus, with some investment acumen, that number would be significantly higher (at 7% growth, for example, your money would double every 10 years). I can assure you that even if you put that 10% under your mattress (not a good idea), you’d still have more than the average Canadian at retirement.
The sad truth is that so many individuals will spend more time planning a vacation than they will spend looking at their financial or retirement needs. Too many of us end up doing in real life what Mark Twain once said in jest: “Never put off till tomorrow what you can do the day after tomorrow.”
Saving is not something to be done tomorrow. It starts today. Here and now. You have both the means and the time to be financially successful. Just look at how many hours you have each year to work on your financial plans. Let’s start with the 8,760 hours we have at our disposal every year. If you subtract the 2,000 hours you spend working 40 hours a week (50 weeks a year) and the 2,920 hours spent sleeping 8 hours every night, you are left with 3,840 hours or 43.8% of your life as free time. That’s almost half a year in which to accomplish something important.
In the early, low-income-earning years, we promise ourselves that when we earn more, we’ll save. Then we procrastinate. The noteworthy point is that if we can’t save a percentage of our income when it’s low, we certainly won’t when it’s higher. If good saving habits aren’t formed early on, we will usually find ways to increase our wants (or what we justify as “needs”) and therefore increase our expenses. You can start forming those great saving habits now!
So, if it’s so simple, why don’t we just do it? Why do we value so many other things and activities more than taking care of our money? Why do we not take ourselves more seriously and be more self-disciplined? Because our short-term demands always seem to get the best of us.
The few dollars you spend on muffins, eating out, or other expenditures that you’re not tracking every day, might not seem like much at the time but mount up over the weeks and months and years. Retailers love to hook us in with “it’s only $5 a day or $35 a week.” They know most of us won’t bother to add that up over a year and induce us to spend more by presenting smaller amounts. What they don’t want you to do is add up the numbers. That $5-a-day indulgence becomes a $35-a-week habit and, before you know it, you’ve spent $1,820 per year of after-tax dollars! That’s the cost of a trip each year (or several staycations) by simply not being aware of your daily spending. The bottom line is that we can’t deceive ourselves in the short term and ignore our small expenditures.
Yes, you do! Remember, you have 3,840 hours a year of free time. Getting up 10 minutes earlier (ideally, before the kids) adds five extra hours a month of available time! You have to take care of your money if you want it to take care of you. Use the time to:
• Check your online bank accounts.
• Check rates on mortgages, GICs, term deposits, etc., on bank websites as there may be deals.
• Read about mutual funds.
• Add up your family’s monthly spending. Are the amounts less than the family income? If not, why not?
• Make time to teach your children about money. They imitate your behaviour in all aspects of life, including money.
Yes, you are! Remember, this is not difficult. You just have to care enough to get some information!
Don’t be intimidated. Think about talking to your financial advisor or banker as you would your doctor. Do some research and ask some questions. You wouldn’t hesitate to ask your doctor about your health, so why hesitate to discuss anything and everything about your money with the bank?
Get curious.You don’t need to know everything. Just care enough to start! Begin a list of questions to ask your banker or financial planner (see Chapter 4: Important Financial Conversations).
Fraud. Many victims of fraud get taken because they do not know what questions to ask that would raise suspicions. Victims of fraud all have one thing in common: they failed to pay attention to details. We’re going to look at how to protect your identity in Chapter 7: The Importance of a Good Credit Score.
Fear. Trusted professionals can guide you through uncertain times and should help to keep you grounded so your expectations are reasonable.
This may not necessarily be true. It is safer if you don’t rely on others (and that includes your spouse). No one will care more about your finances than you do. Even if you are dependent on your spouse now, you still need to be aware of your income, debts and investments.
• Since about 40% of all marriages in Canada end in divorce, there is a possibility you may need to rely on your own earning and saving power at some point in your life.
• Accidents happen. A person can be widowed or forced to become the breadwinner when a spouse is incapacitated. Substantial money management skills will be needed if you suddenly become a single parent.
These are all bad ideas!
• The Old Age Security (OAS) the government provides is not sufficient to maintain a middle-class lifestyle. If you rely on government support, you will be living at or below the poverty level. As of September 2018, the OAS amount is about $597 per month per person ($7,164 per year). The Low Income Cut Off of Statistics Canada for 2017 considers a person, living in a metropolitan area, to be in poverty if they are earning less than $20,988 per year. The government doesn’t want you to rely on public funding for your retirement; that’s why it created the Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Accounts (TFSAs) to help you save for retirement.
• Companies go bankrupt, go out of business, are sold or merged with other companies that want to reduce the cost of pension plans. Remember what happened to the jobs, pensions and stock options of employees who relied on employers such as Sears and Nortel?
• Having a lottery win as part of your financial plan is absurd. The chance of winning the lottery is approximately 1 in 14 million.
• Inheritances have a habit of not being as big or coming as soon as you expected. With so many people living longer, there is a substantial risk they will run down their capital significantly before they die and you may receive little or nothing.
Not true! It’s never too late to take control of your money.
• Many people think that because they’re getting close to retirement and don’t have any substantial savings there’s no hope and therefore no point in starting so late. Actually, many people don’t start saving until this time in their lives because of mortgages and their children’s education. Our most expensive years are usually those leading up to mid-life. As a result, the years from your late 40s and early 50s and beyond can be the easiest years for saving. In the absence of mortgage and education costs plus high-income levels means you can still catch up! Many of my past clients didn’t really start to save aggressively until their 50s and older!
When it comes to managing your money (or lack thereof) in your family, the top excuses for putting things off can be a host of uncomfortable emotions. The following three emotions are holding individuals back from confidently taking charge. Defining what you’re feeling is a great first step in order to tame the “enemy” and move forward. Think about the following emotions in the context of your own financial situation:
A period of hard times because of unemployment or divorce, poverty in one’s childhood and other factors can make a person ashamed of their financial health. Just remember you deserve the best possible life despite these setbacks.
Have you ever made a purchase that you felt terrible about later or even hidden from your family? Did you and your spouse take a vacation that wasn’t enjoyable because you couldn’t stop worrying about how you were going to pay for it? If you feel guilty about your spending, it’s probably because you bought a “want” item and not a “need” item. When you knowingly set money aside and save up for these products and services, not only does the guilt disappear, your level of enjoyment and satisfaction dramatically increases as well.
Not everyone feels bad about their financial circumstances, but they probably feel they should know and do more. In an area as vast as your financial life, even the brightest professionals don’t know everything about accounting, investing, banking, budgeting and more. They’re not embarrassed, so why should you be?
If we applied some decisiveness to our financial affairs, would we soon develop wealth-building habits? What if we saved a portion of every paycheque by having a portion taken off the top automatically every payday and saved? What if we had a family financial meeting on the first of the month, no matter what? What if we pre-arranged an annual meeting with our banker to discuss paying down our debts, and with our financial planners to figure out how to save more? Not some appointment we know we should set one day but never do, but an appointment set in advance, carved in stone and taken out of our daily to-do list. More of our day is spent acting automatically than is spent acting as a result of conscious decisions, i.e., much of what we do every day is simply a repeat of what we did the day before. We get up, shower, go to work, come home, eat supper and go to bed. What’s already set out as a pattern is easier to complete. So why not remove the need for making a lot of future decisions by setting up savings and other financial management routines that we do automatically? If you add these habits to your regular routine, before long it will be just as automatic as taking that morning shower.
Easy Action Steps
1. Pick one week to get up just five minutes earlier and use the time to research holiday destinations before you choose one, or get curious about your finances over your morning cup of coffee.
2. List your financial emotions. They don’t need to rule you — you can tame them by naming them!
3. Start your journey on your own bank’s website. They’ll have lots of calculators and articles to get you started!