Every day is a bank account, and time is our currency. No one is rich, no one is poor, we’ve got 24 hours each.
— CHRISTOPHER RICE
YOU MAY HAVE heard of the concept of the Latte Factor™. The author, David Bach, introduced the concept in his book, The Automatic Millionaire. It essentially makes the case for giving up your daily, expensive latte and allocating those dollars to your retirement. While I think it may be a brilliant idea to give up your daily coffee habit and save that money for retirement, I have to admit — it’s not for me. Handling your money well is not just about awareness; it’s also about choice. It’s all very well to talk about giving up your lattes and retiring on the money you’ll save, but who wants to give up something they really love? Forever! Surely, the reason for having more money is to enjoy it and the freedom it provides? The point is: if the sacrifice is too great, we won’t stick with a plan over the long term. This is where choice really comes into play; when it comes to money management, you get to choose what’s most important to you. I choose not to give up my daily latte habit, but I might sacrifice something of less importance to me to achieve the same goal.
This chapter looks at ways to stretch your money without suffering unduly.
It’s been said that we’re only concerned about our health and wealth to the extent that we don’t have them. This is very true. When you recover from the flu, you’re ready to do somersaults the first day you’re back to normal or, if you sprain your ankle and it finally heals, you feel like a new person capable of running a marathon. But before you became ill or injured, you didn’t think about how good it felt not to be sick or hurt.
Good physical and financial health have a lot in common. In theory, it should be easy to keep healthy by shedding some excess weight or remaining thin. Just two simple principles apply: eat less and exercise more. Eat an apple instead of a muffin when you need a snack. Do some sit-ups on the living room floor while you’re watching TV. Doing a little bit at a time and doing it regularly can do a lot for your fitness.
Being financially healthy requires the same discipline. You probably wouldn’t expect to live a long, healthy life if you smoked, took drugs, drank too much, ate too much and never exercised. The same principles apply to your financial health. If you overspend on a flashy car or buy a bigger house than you can carry if mortgage rates increase, you may be gambling with your financial health. So, if we all know we should work out to keep fit and save money to be financially secure, why don’t we do that? Why do we value so many other things over our physical and financial health — both now and for the future? The answer is very simple: short-term demands overrule long-term goals. Whether it’s $1 spent, or a chocolate bar eaten each day, they all add up. We can cheat in the short term, but time is a masterful compounder.
After years of talking to people about their personal finances, one message comes through loud and clear: what most people want is not a life of fabulous wealth, but one in which they can pursue the things they love because they have the financial means to do so, and can do it worry free. Having a relaxed annual vacation in your favourite place shouldn’t seem too much to expect. But, just as good health doesn’t come without a modicum of sacrifice, neither does financial security. I’m sure you will agree that both goals are well worth the effort.
A comfortable lifestyle and a worry-free retirement are achievable only if you are willing to exercise the self-discipline required to do this the moment your earned income hits your bank account. I’m not talking about applying some complex budget plan to your paycheque that requires you to watch every penny in order to squeeze out something at the end of the month to be put away and called “savings”. I’m talking about setting aside something from every paycheque before you do your spending. The truth is that it is almost impossible not to indulge ourselves if we have the money in hand. The “trick” is to never see the savings portion in the first place: out of sight, out of mind.
And that trick is the essential key. We know from new research that willpower is exhaustible. If I want to stick to a weight loss goal, it’s a great deal easier if I don’t have to resist temptation. If my husband brings home my favourite dessert, I now have to use my willpower to forgo the tasty treat. However, if he simply doesn’t bring it home at all, I don’t have to give anything up. So make sure your savings are deducted before the funds ever hit your account.
Let’s start at the beginning: your earnings. Unless you win the lottery or inherit from a long line of thrifty ancestors, your only source of funds will be your earnings. Once you get paid, you can either save or spend. Out of your earnings must come not only the money to be saved and invested to provide income many years down the road, but also money to be spent for day-to-day living.
Conventional budgeting asks you to pay all your bills first, then save whatever is left over: saving becomes optional, but it should be mandatory. This rarely works because it’s too easy to ignore the savings part of the budget. When saving comes last, it often doesn’t happen at all.
In fact, conventional budgeting usually works about as well as a fad diet. Maybe for a month or two we can keep track of our income and outgoings but, after that, everything seems to slip back into the same bad old routine.
Putting your own plan in place is really very simple; carrying it out is even easier. Just follow these three basic steps:
• Pay Yourself First
• Pay Your Monthly Fixed Costs
• Follow the Budget Diet
The key decision behind the success of any money management plan is always, always, always to pay yourself first before you even think about paying for your monthly expenditures.
“But I can’t afford that! It already takes all the money I earn just to make ends meet!” Money should be like time, we should make time for what’s truly important. Since only about 1/3 of the Canadian labour force has a company pension plan, coupled with the fact that access to traditional pension plans is declining, the chances are that you do not have a company plan. As a result, it is going to be your responsibility to save for your own retirement. Not only is paying yourself first essential to your long-term financial planning, asking you to take money off the top is asking you to do nothing more than those friends in pension plans are already doing every pay day: they authorize their employer to deduct money from their pay and put it in a pension fund to provide an income for retirement.
These employees apply their budget plan to their net income. In fact, you too are already doing this to some extent. Your employer deducts your Canada Pension Plan contribution before depositing your pay into your bank account. Money is taken right off the top to create your Canada Pension and you don’t miss it because you don’t see it. Nevertheless, it is doing something very important for you; it’s going to build a fund for your future.
Some people use the 10% factor (which means that 10% of their gross income is the magic number for savings). If that amount works for you, and you are diligent about sustaining this — great. Or, you might ask a friend with an income similar to yours and who has a company pension plan what percentage of their gross income is deducted right off the top of their pay for their pension plan. Arrange to put a similar amount aside for yourself every month and treat that amount as a fixed cost. Start by using your bank’s pre-authorized transfer service to take money out of every pay and put into a special savings account. We’ll look at the best strategies for maximizing your savings in Chapter 8: Investments for Today and for Your Future.
After paying yourself first by setting aside savings, the remainder of your earnings is available for:
1. paying your rent/mortgage and other monthly bills, and
2. spending on yourself and your family.
Your monthly bills are a fixed cost that must be paid every month without any decisions having to be made. Some, such as your rent/mortgage and insurance premiums, are the same each month. Others, like water, electricity, telephone, etc., are paid monthly or every other month. These amounts may vary slightly but they still have to be paid. If you’re paying online, make sure you pay the bill a few days before the due date in order for the payment to clear and reach the merchant by the due date. Do not leave it until the due date; you will almost certainly be charged a late fee if you do.
The money left over after you have paid your mandatory monthly bills is the money you can actually think about and budget. These are the amounts you can choose to spend or not to spend.
I’m often asked how to set and stick to a budget. I always reply with the same answer: I hate budgets because they rarely work. If you were eating 2,500 calories a day and a diet forced you to eat only 1,500 calories, you’d likely never last. Sure, the results would be there, but giving up too much too soon ensures failure in the long term.
So why not focus your fiscal thinking on how to make the most of the money available for you and your family to enjoy? The purpose of this kind of thinking is to get rid of the waste that sees your discretionary money just dribble away in unfocused spending. Tracking your spending will reveal how much of your discretionary income might be misdirected away from maximum enjoyment. Just as we thoughtlessly consume empty calories by continuing to eat even when we’re not really hungry, we can carelessly create financial waste. You might be surprised at how much.
To manage your money better, you’ll need to start by counting your financial calories. The 30-Day Budget Diet is an eye-opening exercise that’s entertaining and can involve the entire family.
If you want to spend $450 a month enjoying restaurant meals, you can’t waste money on small daily purchases like bottled water, coffee and lunches. I can’t tell you to spend only $200 a month eating out and I can’t tell you to slash your spending in certain areas if that’s what gets you up in the morning or excited for the weekend. But I know with almost 100% certainty there are areas of your financial life where you will find waste.
For the next 30 days track what you and your family spend. And I mean every single dollar — not just the cash you spend, but every pre-authorized payment and every debit and credit transaction. This is essentially the same exercise recommended for people preparing to physically diet: for 30 days you write down everything you eat and measure the calories. At the end of the month the desire to cut back will be irresistible. But that’s not the purpose of this exercise. I simply want you and your family to get a one-month snapshot of your normal spending patterns.
Now that you have collected data for a month, group your spending into categories such as:
• rent/mortgage
• cable/satellite/Internet
• insurance
• cell phones
• utilities
• entertainment
• loans
• habits (good — gym membership — and bad — smoking, drinking, gambling)
• car payments
• credit card payments
• gas
• car maintenance and more
• hobbies
• parking tickets
• children’s extracurricular activities (trips, dues, sports fees and equipment)
• late charges and penalty charges
• groceries
• eating out
• self-improvement
Some smartphones and tablets have an app for tracking and categorizing your spending or see cpacanada.ca/flworksheets for an Excel file.
If you have some unique categories that contain regular expenditures, add them to the list. You want an honest snapshot of where the monthly dollars are going.
Numbers are your friend. You don’t have to be good at math to “crunch” the numbers which you need to keep yourself from harmful overspending. For example, retailers work really hard to convince you to look only at the short term and not crunch the long-term numbers. It’s only $3 a day to buy that new TV after all — less than the price of your favourite coffee. But, oops, you didn’t notice that the interest rate on the balance is 29% which means you’ll have paid three times the sticker price once you’ve finished with the financing for that $3-a-day TV. This is the kind of thing that should be revealed by a month of tracking expenses.
Take the monthly results and multiply them by 12. There’s no room for judgment here — this is simply an eye-opener for you and your family as to what you’re spending each year on certain categories.
Now that you know how your family allocates its money, take the list and talk together about how much real enjoyment you’re all getting out of living like this. Places where you can cut back will probably leap off the page. I’m not asking you to cut out entire categories as many traditional budgets may ask you to do. I simply want awareness to drive you and your family. I don’t know one person who’s completed this exercise who hasn’t been shocked by some category. I spend how much on that? And that adds up to what in a year and how much in 10 years? A friend of mine did this exercise once and was stunned to find that he spent $350 a year on getting the daily paper delivered when he could read it online for free. That’s the kind of awareness I was mentioning earlier.
If, after tracking and discussing the family spending pattern, you find out that entertainment is more important to your family than travel, so be it. If having a great TV and cable package or streaming service (like Netflix) creates and strengthens family time and saves money on going out to the movies, that’s wonderful. But remember — just as with our actual calories, we need to have a daily limit. The same is true for our financial calories.
Want an easier and more efficient way to budget and control your finances? A digital budgeting application (app) may be just what you need. Budgeting apps link directly to your financial accounts and provide an up-to-date picture of your finances. There are many apps that are popular in Canada and can be downloaded for free. Check out your bank’s app too. In many cases they will automatically track your spending.
Most budgeting apps:
• allow you to see all your bank accounts in one place
• have easy to use budgeting tools
• automatically track and organize expenses into categories (such as groceries, utilities, transportation)
• alert you of overspending or outstanding bills
• give you a holistic picture of your income, expenses and overall financial position.
To protect your privacy, be sure to download a reputable budgeting app, develop a secure access password, and be conscious of your surroundings when accessing the budgeting app in public.
Your financial life doesn’t have to be just about spending less, cutting back and sacrifice. It can also be about more — more income that is! As you get creative in trimming the financial fat, spend at least an equal amount of time brainstorming income-generating ideas. Is there a part-time business that you’ve always wanted to start? Items in the house or garage that might fetch enough for a small trip by selling them on eBay, Kijiji or Craigslist? Maybe you could sell your baked goods or crafts at a farmers’ market? What about helping your kids sell their old toys and electronics? Or perhaps your teenager could teach computer courses to other kids or maybe even in seniors’ homes? The ideas are endless. You don’t need to necessarily take on a second job. Get creative within your social circle as well. What do they need or want? Perhaps you love cooking or cleaning and have friends who despise both and would gladly pay for your help? And don’t forget about good old-fashioned barter. Do your friends have items or provide services that you could trade for? Perhaps you could start a community Facebook page with your friends dedicated to swapping products and services with each other.
The ideal moment to start your financial plan is right now. There will never be a better time. Remember what I said in Chapter 1: Life is not elsewhere or tomorrow; it is here and now. You have the means in your hands today to take action for yourself. Yes, interest rates are historically low and the stock market is constantly volatile. Nevertheless, unless you believe no government or corporation will ever have to borrow money again and no company will ever sell more of its products and services and make profits, there will be growth opportunities in the future for which you can prepare by saving today. What’s the alternative? To consume all your income and not save? Absolutely not! You’re worth it — start saving for you!
Easy Action Steps
1. Remember that the principles of health and wealth are closely connected. A chocolate bar, an apple or a dollar a day adds up. Contact your bank and set up a savings plan.
Even if you start with just $25 or $50 a month, once you see your account grow, the habit will become effortless.
2. Set a date to start the Budget Diet. The 1st of the month is a perfect time to start.
3. Brainstorm 5 to 10 ideas for earning more income with family and friends and then choose one or two to try.
4. Download a budget app.