I read about David Chilton recently and he is writing another book; an updated version of The Wealthy Barber; The Wealthy Barber Returns. He admitted that all the information in the first book is just as relevant today as it was when it was published in 1989. He said as Canadians we are good at saving, but we are also fantastic spenders; the amount of debt Canadians have is keeping us from being wealthy.
The new book will focus on how to live within your means. Spend less. Manage your expectations. Get realistic. Get your spending under control. Live modestly. Cut back on the unimportant things. Stop using the credit card and credit lines to get things you don’t need. Make compromises and sacrifices.
This is the same line of message from another book I read recently: The One Financial Habit That Could Change Your Life, by Robert Ironside and Edwin Au Yeung. There are many concepts in the book; nothing new, but worth repeating:
Pay Yourself First; deduct your savings as soon as you receive your paycheque. Save at least 10% of it. Make it an important bill and then you can spend the rest. You may need to review your spending if you are normally spending 100 or 110%!
Save 10% of your income and you will automatically become wealthy. This has been said by many authors and financial gurus. The Automatic Millionaire by David Bach comes to mind. Again, If you can get in the habit of making saving a priority, becoming wealthy is actually quite easy. Set it up at your bank or credit union so 10% comes out of your account every pay day into your savings or investment account. Easy!!
Taxes are one of the largest expenditures the average Canadian has to make: a dollar saved in taxes is a dollar extra to save and invest or to spend. Of course this concept is right up my alley! I love helping people save on their taxes. Of course RRSPs are a very good option for most people (not all) to save for the future including retirement. Reduce taxes now and have tax deferred growth. The new Tax Free Savings Plan (TFSP) is another great place to put your 10% saved so you don’t pay tax on the income it earns every year.
Where to put your 10% saved each pay? It depends on when you need the money. If your goal is short term (buy house in future, for example), put your money in a very safe and secure investment in which the principal is protected.
If you are investing for a long-term goal, like retirement, you should consider an investment that provides high expected long-run returns with broad diversification to reduce risk. Mutual funds and ETFs (exchange traded funds) are two investment vehicles that offer instant diversification. Mutual funds can be bought in small amounts on a regular basis in your RRSP or TFSP.
The main concept of the book, The One Financial Habit, is debt can be an expensive and addictive habit. By being able to pay for something instantly you get instant gratification, but constantly satisfying wants can easily lead to spending more than you can afford to pay back.
Credit cards often have high interest rates, 20% or more! If you cannot pay the balance in full each month, you are giving the credit card companies a lot of money. Using cash you have withdrawn from your bank account for your weekly spending makes you think twice about parting with your hard earned money. Saving up for something then buying and owning can be very satisfying!
Mortgages are not bad debt. The book is concentrating on consumer debt – debt used to pay for clothing, electronics, and fancy dinners.
Student loans are also considered good debt – as long as they are used for tuition and living expenses while in school.
So how do you get out of (consumer) debt?
First decide that enough is enough. Decide that you don’t want to be in debt anymore.
Second, look at your debts and the interest rates. Can you renegotiate the interest rates? Can you transfer debts to the credit line or credit card with the lowest interest rate? At least start making major payments against the ones with the highest interest rate.
Remember the pay yourself first and saving 10%? If you have consumer debt, use that 10% per pay against the debts before you start saving. Paying off your debt earns you a guaranteed high return on your money.
Being free of consumer debt makes sense financially and emotionally.
Spending a few dollars here and there on the little things is something we do out of habit. This habit if left unattended, adds up to substantial amounts in the long run.
Take a one-week spending challenge and find out how much you spend in a typical week. Use the information to evaluate your spending habits. Cutting $5 to $10 a day can go a long way!
You can do it!
Anni Markmann is an independent certified financial planner and tax professional living, working, and volunteering in our community. Contact her at firstname.lastname@example.org or at 422-6631 or at 36 Dawson Road in Ste Anne