Did you get another pay cheque this week? How satisfying was that for you? Is it all spent before you get to the bank? And what about that huge donation you made to the tax man?
It is incredibly difficult for us to get ahead financially when our income is overwhelmed by the demands we place on it. We have automatic deductions for our rent or mortgage, pre-authorized debits for our car loan, utility & Internet bills, consumer loans, credit card bills and on and on. Did you that in Canada families are spending 118% of their income? Ouch!
We need to start saving and preserve the wealth we are developing in our lives.
Are you aware that most people spend more time planning their annual vacation than they spend looking after their financial lives? Do you?
I want to show you some ways you can unlock the chains of overspending, and actually hang on to some of that money you earned. If you follow these steps you can get yourself ahead. It will take you a few hours to set yourself up for success, and you won't need to spend more than 15 minutes a month looking after things for yourself.
Are you interested? Let's get started!
Preserving wealth can be about earning more money... but it can also be about keeping more of what you are getting now. Getting a raise isn't the answer for most of us. We just spend the extra money. You get a promotion at work - you want a better car, nicer vacation, bigger house.
I want you to generate some additional forms of income... if all your earnings are from employment you are the most heavily taxed of all earners. But that discussion is beyond the scope of this article. You can if you want to learn about creating alternative income streams.
We need to identify where the opportunities lie for reducing our spending. It probably isn't through getting a smaller house, a cheaper apartment or a different car. Those things could generate some significantly lower expenses, but we probably wouldn' t like the impact on our lifestyle. We need to find where our "other" spending is going... and eliminate that waste from our personal economy.
Author David Bach calls this "The Latte Factor" -- our seemingly insatiable desire to overspend for common items. On our way to work we stop and buy ourselves a Latte, spending $4 for something fancy instead of brewing coffee at home for a few cents or buying a regular coffee at the coffee shop for $1.
We buy a bagel and cream cheese for $1.25 when we could buy six bagels for the same money at the supermarket.
What is your Latte Factor? Cigarettes? Pop? Power Bars? Tabloid newspapers? Bottled water? Gum?
How much could you save every day? $5? That's $35 a week and $150 a year. That won't make you rich, but if you save that regularly at 3% your savings account balance will look like this:
| Year | Balance | |
| 1 | $1,830 | |
| 2 | $3,715 | |
| 5 | $9,721 | |
| 10 | $21,014 | |
| 20 | $49,368 | |
| 25 | $67,068 | |
| 40 | $139,256 |
"Wait a minute, Paul!", you say. I can easily save $10 a day, twice the amount in your example. I'd reply, "Good for you!" Now look at what your bank balance shows:
| Year | Balance | |
| 1 | $3,659 | |
| 2 | $7,429 | |
| 5 | $19,443 | |
| 10 | $42,027 | |
| 20 | $98,737 | |
| 25 | $134,137 | |
| 40 | $278,512 |
Well done! And if you are half of a married or committed couple... invite your partner to the computer and look at where you can be if you both save $10 a week:
| Year | Balance | |
| 1 | $7,318 | |
| 2 | $14,859 | |
| 5 | $38,885 | |
| 10 | $84,054 | |
| 20 | $197,474 | |
| 25 | $268,274 | |
| 40 | $557,025 |
Do you think you can save $5 or $10 a day?
Here's a challenge for you over-achievers that get the message I'm sending:
If you work 40 hours a week, the tax man will take
between 15 and 20 of those hours.
Can you commit to keeping 1
hour of your work each day for yourself?
How much do you get paid
per hour?
Think about it.
So, what is your monthly savings threshold? How much is your Latte Factor?
Fact: budgeting doesn't work. It is fine to write down your weekly/monthly/quarterly/annual income and expenses. But do it as a financial planning exercise and not has a rule book to guide your personal economy. Sticking to a budget is a lot like sticking to a diet, it takes a lot of discipline, self-control and willpower.
Instead, determine your own personal Latte Factor. Print out this chart (you will need the free Adobe Acrobat Reader) and fill it in for one day, three days, five days or a whole week. Write down every item you buy, how much you spent for it and check the box if it was a wasted item. I mean everything. It doesn't matter if it is cash, debit or credit. Include tips and handouts, tolls and allowances, lottery tickets and stamps.
Add up the amount spent on wasted items each day. Average it for the days you track and complete the calculation at the bottom of the page. My guess is that you will be surprised by how much extra money you can have available for savings. My hope is that you will be inspired to use this newfound information to improve your life.
Once you are aware of the wasted spending in your life, you can stop spending and start saving! And the tracking exercise has told you just how much you can save each day, month and year!
First thing, decide how much you are going to save each day. Use the results of your tracking form to guide your decision. I suggest that a great goal is to work your way up to saving every day the amount you earn in one hour. Maybe you need to start smaller, that's OK. Just start.
IMPORTANT NOTE: If you are broke and in debt - you
should pay down your debts first.
Feel free to for assistance in
developing a strategy for getting your head above water.
Make a commitment to yourself in writing. Tape it to your bathroom mirror. It could say something like this:
| I am no longer a spender, I am a
saver! Starting on ___________ (enter a date) I will save $_____ (your Latte Factor) each month Beginning on ___________ (enter a date 3 or 6 months from above) I will save $_____ (your net hourly earnings times 30) each month Beginning on ___________ (enter a date 6 months or a year from the first date) I will save $_____ (your gross hourly earnings times 30) each month I will have saved $_______ after six months and $_______ after one year. Signed: ____________________ Date:___________ |
"But," you say "I have no discipline! How can I depend on myself to systematically save this money, even if I don't spend it?"
You need to develop a habit. Did you know that by doing something every day for 21 straight days you can retrain your mind out of an old unwanted habit and into a new desirable one? Even better, you can set yourself up to have the money saved for you without you having to make a deposit into your savings account every month!
If your employer has some kind of retirement savings plan that you can contribute to, this must be the first place you go for help in developing your savings habit.
Why is this the first place to turn?
My best advice: maximize your contributions to employer-assisted retirement plans. If you have a choice of investment vehicle, choose the guaranteed fund. Fees will be lower and you will maximize your tax savings.
So contact your Human Resources department, and get started!
Today!
OK, you are contributing the maximum allowed to your employer sponsored plan and you are still able to make an additional savings contribution. Well done! Or you cannot benefit from any help from your employer. In either case, there is more help available.
You need to open an RRSP (in Canada) or some kind of tax-deferred savings plan (in other countries). In Canada you can shelter 18% of your income (up to about $19,000). Contributions to an employer plan will affect your contribution limits on other plans. Check with your employer and/or your local Tax Agency for the detailed rules.
Visit your financial institution (or your financial advisor or your broker) to open a tax-deferred account. You should only be considering investing your savings in a guaranteed fund.
Many employers can set up a payroll deduction so they money doesn't go on your pay cheque, but gets deposited directly into your account. Ask your Human Resources folks to get you set up. If they don't provide that service, your financial institution can set up a regular, scheduled transfer from your chequing account into your tax-deferred account. Ask them to make the transfer every time you get paid, on the day you get paid. That way, you are less likely to "miss" the money since you don't "see" it in the account.
If you have savings that you don't want to put into a tax-deferred account, open a special savings account at your financial institution and set up a regular, scheduled transfer to move money from your chequing account.
You are ready to begin preserving your wealth. Here is your Action Plan Checklist:
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Paul
Maclauchlan
"Financial Freedom is when your passive income equals
or exceeds your desired lifestyle." - Casey Combden
Last change: Mon Nov 13 22:50:23 EST 2006
All material Copyright © 1994, 2008 Paul Maclauchlan
