Posted by Canadian Dream on February 9, 2011
Perhaps it is something in the water lately, but after reading Dave’s post and this one over at Krystal’s blog I have noticed that some people are little out of touch with how the stages of personal finance typically works. Although the stages of personal finance has been theorized by other bloggers I will put my two cents on it and then mention how that relates back to these conflicts.
Stage 1: Clueless
We all have to start somewhere and by far most people start here at clueless. You don’t have a budget, because you don’t know what you spend. Your investments were chosen at random or with off hand comments from other people. You likely either have consumer debt or will have it shortly since most people at this stage overspend. Basically you are a baby in the woods and the credit card wolves are circling for a good meal.
Stage 2: Awakening
One day something snaps inside of you. You are sick of this debt and you start to realize you can’t live like this forever. So you start to do a little reading on the topic of personal finance and perhaps stumble across some debt repayment or frugal blogs. The ideas you realize aren’t that complicated and easy to follow. So you start cutting back on your over spending and really focus on paying down that damn debt. Yet the most amazing thing of all is your start to realize how the less you spend means the more you have to pay back debt.
Stage 3: The Wall
After a few months or years depending on how stubborn you are the ‘new debt paying you’ is starting to get old. You are tired of cutting coupons and taking a lunch all the time. You miss going out for supper and damn it it is taking so long to pay back that debt. What is the point of continuing? Maybe you should give up this whole cheapskate existence. At this point people take one of two paths, they either: a) give up entirely and cycle back down to stage 1 again (and likely repeat the process at some other point) or the break through and move on to stage 4.
Stage 4: Strategic Spending
At this stage you hit the wall in stage 3 and managed not to give up entirely, instead you woke up to the fact you have been a cheapskate when in fact what you want to be is frugal. So you start to spend more on some areas of your life that you really missed. At the same time you realize you don’t miss some of your old spending habits. So you entered the strategic spending stage where you cut back in some areas to save some money, but also are ok with spending more on other areas because they are important to you. This stage is why this blog focuses a lot on being happy, since that is a good guide on where to spend your money and where to cut back.
Stage 5: Earning More Money
This is a particularly weird stage as it can technically occur anywhere after stage 1. The appearance of it depends on numerous external and internal factors such as do you know anyone who owns a business, do you like to take risks and do you have the capacity to earn more in your current job? Regardless of when it occurs you realize that you can work the other side of the money equation and just earn more. Getting a promotion, asking for a raise, starting a small business, taking a second job…you get the idea. I personally list this stage here because the majority of people that I’ve talked to tend do this stage about here.
Stage 6: Earning More Time
This stage is interesting as it represents the final evolution for most people in personal finance. You realize you can ‘buy time’ by having your investments make money instead of you. This often lead people to write blogs about early retirement (yes, I’m guilty). Also if they stay here long enough they might also realize that even if you can earn more money doesn’t mean you have to. You can also choose to work less and have more time starting right now. Or the alternative is to earn more per hour, yet work less. In either case, the focus now shifts to finding and keeping that elusive thing called: balance. That sweet spot where you have enough money for today and your future as well as balancing your time for today and in the future. While it is possible to hit that balance it never lasts since your life continues to change. So balance becomes your white stag which we endless chase yet never hold onto for long.
Conclusion:
So a lot of disagreements on personal finance seem to flow out of people who are in different stages. If you aren’t at stage six the idea of choosing to earn less (either with your job or your investments) can be a little mind boggling. The same thing occurs for those that have lots of friends at stage 1 while you have moved onto stage 2, ironically that very conflict is what often triggers stage 3 where some people really do just out grow apart over money. So regardless of what stage your at try not to attack others, but rather struggle to understand their point of view. It might be alien to you now, but in the future it might make sense.
Which stage are you in? Do you have conflict with others in a different stage? If so, what about?
Posted by Dave on February 8, 2011
This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.
My goal is early retirement but I’m not saving for it. Last week sarahhiggs asked a question – whether I was saving for retirement or utilizing a Tax Free Savings Account or Registered Retirement Savings Plan. The short answer is no – my spouse and I have decided our primary goal right now is paying off my mortgage. Paying off the mortgage is our primary financial goal for the following reasons:
1) I don’t like debt
Regardless of your view on whether a mortgage is good debt or bad debt, I think the bottom line is that there is an agreement between the buyer and the financial institution to pay something back. My preference with this debt, as well as all of my debts, is to zero it out as quickly as possible. I don’t like owing anyone, including a faceless bank, money and never really have. Our mortgage will probably be the last major debt that we will ever have (or plan to have) – paying it off is freeing.
Ideally we would have saved the approximately $200,000 to buy our house, but we were kind of anxious to “own” a house. We felt that the $20,000 in interest we would have to spend over 6 years (most of it in the first few) was worth it.
2) Financial Freedom is more important to us than savings right now
After our house is paid off our fixed monthly bills will be approximately half what they currently are. After this point we will have some decisions to make. Right now we plan to work full-time until we have enough passive income to cover our living expenses. With our bills significantly lower we will be able to put significant dollars towards our savings goals and hopefully achieve our financial goal of retirement at 45.
3) The “return” on our mortgage is risk free
Looking at Tim and Robert’s returns over the past year or so I may have been better investing my money than paying off my mortgage. Paying off my mortgage is (to me) a sure thing investment wise. My fixed 3.59% is not great compared to what I could have achieved in the market last year, but coupled with my other two reasons it is a rate I am willing to accept in order to achieve my end goal.
My wife and I keep our finances separate. Right now over 75% of each of my paycheques is going towards paying down the mortgage. My wife’s money is used for our other savings, which will soon be used in purchasing a car, but is also our trip money, house renovation money and other larger “stuff” that we generally buy together.
We are currently 1/3 of the way done paying off our mortgage, with 4 years remaining. I’m looking forward to paying this off in the near future, but along the way we’re trying to have some fun. If we put every penny we made towards our mortgage we could probably shave off a year or so in payments, but we have decided on a more moderate plan of attack right now.
\How about you? Do you have a singular financial goal, or are you spreading your money around to many goals?
Posted by Robert on February 7, 2011
This is a guest post by Robert, who lives in Calgary and works as a financial adviser. He is married, has three kids and plans to retire at age 35. Robert and his wife then plan to return to school and become teachers, eventually living and working overseas.
I’d like to begin by thanking all our readers. It’s gratifying to write for this audience. I also appreciate the comments which are generally thoughtful and insightful. I have a lot going on in my life, so I don’t feel that I can allocate much time to today’s post. I’d like to share a few of those things, then I’ll be happy to answer questions or comments that you post.
In my church, we each take turns speaking during the Sunday meeting. I was asked to speak last week for 15 minutes. The point that I made was that there’s a lot more to life than money. I had an experience during the market crash when the market fell by over 30% and so did my income. Based on the amount of life insurance I had and the current yield of stocks in the market, I was financially worth slightly more dead than alive. That only bothered me for a couple minutes, since I quickly realized that the love in my family, the service to my clients, the service in my community are all worth far more than the income I earn. It’s those things that make my life worthwhile.
One of the things that’s really important to me is public education. I’m working to support a new political party in Alberta in writing their education policy. Although I think there’s a chance of forming government at some point and having that policy implemented, I expect that it will change the direction of discourse around public education for the better. The last couple weeks in Alberta politics have been more interesting than anytime over the last few decades.
Financially, I’m in a very good position. We decided to move over the summer, and for four months we owned two houses and carried two mortgages. That was painful because we had to sell investments for the downpayment on the new home, but especially in the impact on our budget. We cut out all discretionary spending over that time and put all we could toward debt repayments (it was structured as a line of credit, so this was possible). By the time the old house sold, we had no mortgage left. That’s a great feeling. Soon after, I sold my practice and, while I still work on contract, made some real progress toward my plan to retire at 35.
For a partial view of how I’ve been investing my money, or just to see a goofy picture of me, you can view an article on Me and My Money in the Globe and Mail. The comments on that article are pretty silly, but I know our readers can do better. So in the Comments section, feel free to ask questions, make comments or pass judgment.
