Posted by Tim Stobbs on August 30, 2007
I come to a realization lately. I’m extremely weird in my ability to perceive time. I really didn’t think about it until one day I was talking to my wife and she pointed it out. I can easily talk about anything that happens at any point in time with little to no mental gear shifting. I can talk in terms of what I’m doing in the next hour, day, week, month, year, decade or what society will do in a million years or did do 10,000 years ago with little effort. I can easily talk about what I’m doing this weekend or in retirement 20 years from now which is a bit of an asset when planning things.
Yet if you take the idea of planning and expand that out I think that is the main difference between people in good financial shape and poor financial shape. The people with good planning are prepared for everything. We aren’t surprised about how much money we spend at Christmas every year, we plan and save for it in advance. We aren’t surprised by a major disaster since we have insurance for it and have a fund to pay the insurance deductible out of. Retirement may not be planned in detail, but you are aware of it and have a bit of saving plan in place.
This planning is what prevents debts from occurring. If you plan for things you will be forced to live more in your means. For example, I estimate I’m putting 8% of my monthly take home pay towards near future events (Christmas, insurance, winter heating) and another 19% towards far future events. I don’t regret this money going towards future events because in my mind it is already been spent. Just in the future rather than now. By doing this you are actually paying less money, since your cash can earn interest in a high interest savings account rather than you paying interest on a credit card or line of credit.
This lack of planning is what keeps people poor. If you haven’t saved for Christmas you feel guilty about it. Then your spending goes over your budget (if you even had one) and you feel even more guilty when your credit card bill comes in and you have to pay it off over the next two months. Then after you pay off your bill you are so thankful for it being gone you go treat yourself and forget completely about your promise to save something for next Christmas. Planning is what breaks the cycle and sets you free.
So how do you plan for an entire year in advance? List every non monthly bill for the entire year on a sheet. You then add it up and divide by 12. That is the amount of money you need to save in a month to meet your short term future goals. Now create automatic transfers out of your chequing account the day after each payday for the correct amount. This will get you started. Be warned you will have forgotten something and will have to increase the transfer amount as you go along for the first year. Then it will typically take you a few more years to have the money saved in advance of your expenses. After all you are currently still in your old cycle and it will at least two more years for it to completely shift over to prepaying everything.
But you might think “That’s three years to turn things around!”. Yes, it is. This is what planning is about. If you don’t want to do it, stay poor and be at the mercy of others for your entire life. Planning is hard work especially in the beginning, but it also means your taking control of your own money so it can work for you rather than you working for it. In the end this is what leads people to financial independence.
This post is now part of the 116th edition of the carnival of personal finance.