It’s a beautiful summer day. We are camped at Cultus Lake, a forested lake resort nestled in a ring of mountains less than 2 hours east of Vancouver, BC. My kids (all grown up now) have dropped by to visit. Now that I have a captive audience, I was going to give them a talk about personal finances – something I have been planning to do for awhile – but as we were all sitting around the campfire, laughing, reminiscing about camping trips from years gone by, roasting hot dogs, it just seemed like too heavy a topic. “I’m still going to do it,” I warned. “Maybe I’ll make it a blog post.” So here we are.
So why bring the topic up at this late stage? Shouldn’t this discussion have taken place a long time ago – like when they got their first piggy bank? And what makes me the expert, anyway?
* * *
When I was working, every two weeks, like clockwork, a chunk of money would land in my bank account. Ker-chunk! Now I could pay my bills, buy things, and go out for sushi. Life was good.
Ker-chunk! Spend. Repeat.
I never thought about it too much. I was one of the lucky ones. I had a pretty good sense of where I stood. I had a frugal streak (possibly genetic) and managed to stay out of the bigger whirlpools, eddies, and rocks in the white-water rapids of financial waters.
Then, earlier this year, I retired. All of a sudden, the ker-chunks stopped. Now there is only silence. And I have become self-conscious about my spending habits and personal financial resources.
Most people don’t like to think or talk about their personal finances. Like sex, finance is a trendy, even over-hyped, topic – but only in the abstract, or where other people, especially celebrities, are the focus of the discussion. But when it gets close to home, people get defensive, evasive or launch into elaborate fiction.
* * *
Back in the days when we still wrote cheques, maybe 25 years or so ago, I religiously mailed off my mortgage payment at the beginning of the month, and recorded the info in the appropriate place. But I never balanced my cheque-book when my bank statement came. If I needed to write a cheque, I would just peek at my bank balance to make sure there was enough money in there to cover it, and send it off.
Then, one day, I was taken by surprise. The employee at the mortgage company who opened the envelopes and credited the mortgage account (a good thing for me) then simply stuffed the cheques that came in into the bottom drawer of her desk (not so good).
The mortgage company, who did balance their accounts on a regular basis noticed something wrong, traced it to the errant envelope-opener, replaced her, and deposited the entire drawer-load of cheques into their account. Six months of mortgage payment cheques went through all at once. The next time I peeked at my account balance my heart almost stopped.
I said earlier that I had a good sense of where I stood. Maybe it wasn’t all that good. I could tell you about my larger, regular expenditures. Where the rest of my money went, I wasn’t so sure. I think that’s how it works for most people.
“I don’t know where it goes. I never added it up. My whole life has been cash.”
Which brings me to my first two rules:
1. Spend less than you earn.
This is a good general principle. Keeps you out of trouble. Most people will agree that, yes, this is a good rule to follow. (Its corollary is that any use of credit should be done very carefully and only after great consideration.)
2. Know where it goes.
You have to know the value of the things you have and how much you owe other people. The first is usually pretty easy to determine (not very much). The second is pretty easy to avoid thinking about (more than I should – I get a headache if I even try to think about it).
You also have to know how much you take home every month and how much you spend.
$ in ——–> ——–> $ out
If you were a business, that would be your Balance Sheet and your Income Statement. I can see your eyes rolling. (“I never signed up to be an accountant.”)
So you can’t know if you are following rule 1 of you don’t follow rule 2. As you can see, the system breaks down very fast.
The last few months I’ve been tracking every dollar I spend. It’s been interesting. I may not approve of all my spending but I’ve found it fascinating to see where it all goes. How much it costs me to live. (OK, I admit, I miss a few dollars here and there, but it doesn’t matter. I catch most of them.)
I break it down into categories: Groceries, Personal Care, Entertainment, Car Expenses,…. Figure out which ones work for you. You know how your life breaks down. And you can always fix them if you don’t get them right the first time around.
I do it in a notebook. By hand. I know, I know, there’s an app for that. Some damn fine apps, too. But I have excuses. Lousy Internet, for one. The point is, I do it. There are not so many items that it’s a chore, but I have to make sure I do it every day – otherwise it’s real easy to miss something. Do it however it works for you, but do it.
3. Have a budget.
I hate budgets. I’ll bet you do too. I never signed up to be an accountant. But you need something. And something is better than nothing. So, here’s an easy one: the 50/20/30 Budget.
You start with your take home pay (what you actually end up with after all those deductions).
50% of it should go to essential expenses: housing, transportation, utilities, groceries,…
20% of it should go to debt repayment and savings.
30% of it should go to everything else. You lifestyle choices: phone, cable, entertainment, shopping,…
Look at your “where it goes” list and then see how it compares with your “budget”. Ha-ha-ha-ha….!
How does it fit? Not very well? Not surprising – that’s how it is for most people. Do you need to make changes? I mean, you will need to make changes. (No, new party shoes are not an essential expense.) It usually comes down to “I need more take-home pay” or “I need to spend less”. More likely it’s the latter and that can really cramp your style. Sorry.
4. Develop a plan.
After you’ve been tracking your spending, and working on your budget for awhile, you will actually have some money to pay down your debts and to save for the future. That 20% part of the budget really is important.
Now is the time to look for a longer term plan for your life. There are all kinds of financial plans – some simple, some incredibly complex. You can find them in the library, online, and in brochures in the rack where you bank. Every financial advisor has one to offer. (No, you don’t need all those CD’s, DVD’s, books, and seminars – that 20% is for you.)
There is no one “right” plan. As you go along, you will get better at deciding what is the right plan for you. But until then, here’s one that will get you started on your way. It will answer the question “what exactly should I do now?” It’s taken from Dave Ramsey’s Total Money Makeover Plan and captures many of the concepts considered important. Here are the basic steps:
1. Save and put aside a $1000 emergency fund – you’ll need this because something always comes up at the worst possible moment. Your transmission will fail. Your computer will fall out of the window. You’ll need a root canal. Your credit card is not your friend – be prepared in advance for contingencies.
2. Reduce your debts to zero (except for your mortgage, if you have one).
3. Increase your emergency fund so that it will cover 3 to 6 months of living expenses – Because you’ve been tracking your spending, you’ll know how much that is. If everything goes wrong in your life, you can survive without financial stress melt-down for a reasonable time and get your life together again.
4. Put 15% of your gross income into a retirement fund. This is the point where you will start to learn about investments. You will be ready for it. It will all begin to make sense. (You’ll also find that this number is just about the 20% of your take-home that you originally allocated to savings and debt repayment – and, hey, you’ve repaid your debts at this point. See how it all fits together?)
5. You will find that your financial planning has paid off. You have more money to invest. Now is the time to save for other important things – like maybe your kids’ education (if you have kids) – and pay off the mortgage on your house. And to enjoy the money you have.
Do these steps in order. Don’t start on a higher one until the earlier ones are done. (If you’re paying off your debts and you have to spend your $1000 contingency fund, then first rebuild that fund and then go back to repaying your debts.)
* * *
There are many budgets, many plans. This is one suggested starting point – you have to start somewhere. You can fine tune your plan as you learn. Like going to the gym it will take dedication and perseverance. That means time. And false starts. And disappointments. But when it begins to work, you will be energized and on your way to a more solid financial footing.
Me? I wish I was at the bottom of the list, but I’m somewhere between rule 2 and rule 4. I’m working and learning as I go along,I’m no expert but just someone trying to figure all this out myself and become more organized and consistent. And successful. It’s never too late.
Hey,… I’ll see you at the bottom of the list.