Posted by Robert on January 16, 2012
This is a guest post by Robert, who lives in Calgary and works as a financial advisor retired at 34. He is married, has three kids. Robert and his wife then plan to return to school and become teachers, eventually living and working overseas.
Thinking back two years or five years or ten years, how did your earnings then compare to your earnings now? Due to improving skills, seniority and inflation, many of us earn a larger income over time. In my experience, as people earn more, they choose to spend more.
For example, I worked with a young couple who were both employees of the provincial government. As we reviewed the information about their benefits, it quickly became apparent that they would be able to retire between age 50 and 52 with a full pension. After that conversation, they decided to increase their spending, buying a rental property, buying a vacation property and buying a new car. If they’re going to be able to retire early anyway, the thinking seemed to be that they might as well spend their excess income.
For the people that I advised, the retirement age of 60 or 65 seemed to be a constant. When they earned any extra money, they chose to use it for additional spending. In this way, once they were on track to retire at age 65, the variable was how much they spent on their lifestyle in the meantime.
When I began earning an increasing income at work, I chose to hold constant my present spending. As I earned more, I started by paying down more debt. Then I used more money to invest (given the market opportunities). Because my additional income went to increasing my net worth, my retirement date moved ever closer. For me, the variable was when I would be financially prepared to retire.
Everyone in our society has the ability to be creative with how they use their money. Many of us are lucky to earn more than we need to survive. That excess money can either be used to increase spending and current enjoyment, or to bring forward the time of retirement (while holding spending constant). Do you make a conscious choice of how to handle additional income? If so, how do you choose where to allocate it?
Posted by Robert on January 9, 2012
This is a guest post by Robert, who lives in Calgary and works as a financial advisor retired at 34. He is married, has three kids. Robert and his wife then plan to return to school and become teachers, eventually living and working overseas.
Why do most of us spend too much and save too little? It’s the sum of all the little choices we make each day. It’s so easy to rationalize spending just a couple dollars here and there. A muffin, a latte, a magazine, or any other impulse purchase, doesn’t seem like much money. In fact, author David Bach called it the Latte Factor. Dr. Kelly McGonigal
has pointed out that the same idea can be extended farther.
If I were already in the habit of buying a latte every day, I could save $3.00 (or more) each day by skipping it (or making it at home). Multiply that by 20 work days a month, and I could save $60 a month which, according to the Latte Factor, should be redirected to savings. This is a great theory for habits and subscriptions. But habits are hard to break, and some impulse spending is irregular, but still adds up.
Dr. McGonigal explains: “Most people make a fundamental mistake when thinking about their future choices. We wrongly but persistently expect to make different decisions tomorrow than we do today.” This is how we justify impulse spending. For example, I might think to myself that I’ll just buy one bag of chips today, but I won’t next week. I may think that I’ll just skip exercising today, but I’ll have enough energy tomorrow. Or I might just complete one more video game, before giving them up.
But that kind of thinking is unrealistic. It puts faith in my future self to be stronger and make different choices than my current self. The solution is to stop pretending that tomorrow will be different. If I snack all afternoon today, chances are that I will also snack all afternoon tomorrow, the next day and so forth during the coming year. The decision I make today isn’t just a one-time weakness, it’s a habit in the making that will stay with me all year.
My goal, with my finances, has been: consistency. I try to spend a similar amount on food each month. That means my shopping is fairly regular, we eat out infrequently, and I rarely indulge in more than one “treat” per shopping trip. In the past, I made an effort to pay down my mortgage consistently. That’s especially easy with a traditional mortgage. I also focused on saving consistently. Each year, I would work to maximize my RRSP contributions. The RESP is an even better example, because I made an automatic contribution in the same amount and at the same time as the government grant money that arrived in our chequing account each month.
The best way to control spending and saving is to make it a habit and to view each choice as a habit in the making. Instead of impulse purchases, spend a consistent amount each month on food, clothing, entertainment or whatever you choose. Instead of saving only when there’s money left at the end of the month, save a consistent amount each month. And when the temptation arises to spend a little extra, ask yourself if you can spend a little extra each day or week for the rest of the year.
Is your spending and saving regular or sporadic? How do you make sure your budget and savings plan don’t get off track?
Posted by Canadian Dream on January 4, 2012
I’m at the bloody finish line of this challenge and guess what…I tripped. *%^#$ (insert swear of choice here), I messed up on a $1.94 item: LED outdoor lights which were 75% off on Dec 30. I got too damn comfortable shopping at the grocery store that I forgot to pay attention to that one item.
Other than that I did managed to keep to my rules for the entire three months. So as much as I did fail in the end, I did still change my buying habits which was the main goal.
For example, after being completely unable to buy stuff for the last three months you might expect me to be itching to go buy a few things. While this is true, the list is actually really short: hooks to hang bikes in the garage and a plant stand. Yep, that’s my list as it stands right now.
I found the absence of buying stuff strangely liberating. My life got a lot simpler for the last three months as I had to focus on everything else in my life which was great. I finally have a plan on what I want to get done in 2012 and how I will get there.
I also got rid of a pile of crap out of my house. My basement is actually almost clean for the first time in the five years I’ve been living at my house. I even found some things I forgot I had. For example, when I finally purged my half of our bedroom closet. I found a pair of black dress pants that were tossed into the corner. Brand new and never been worn since I still needed to get them hemmed. But given I had recently lost a pair of pants to a broken zipper this was a perfect solution for new pants for a $10 hem job.
I also realized ‘stuff’ is a damn poor word for what I was getting rid of or not buying. Instead I will borrow a word from another language: chindogu from Japanese which means all that useless crap we buy or have. It’s all those late night kitchen gadgets that really don’t do anything more than you already have. For example, a slapchop, which basically does the same thing as a knife. I like my useful stuff, I detest my chindogu.
Most of all I’ve managed to deconstruct an important thought in my head: I am not my stuff. I like some of my stuff, but I’m not defined by it or limited by it. Also when I no longer need that stuff I feel no guilt about selling or giving away things I never use. For example, we gave away two beautiful serving trays we no longer us, even if they were wedding gifts. Instead I’m now using ones I inherited from my grandparents, which mean more to me and are better size.
To help you with your war on chindogu, might I suggest the following:
- Do Not Buy Storage. You don’t need more shelves or containers, you likely need to get rid of things first then buy storage after the purge.
- Start with Garbage. Empty boxes, recycling cans, empty paint cans all need to get out of your house. Your first job is to get rid of that crap so you can see what is left.
- Create a Rule of Thumb. Mine was if I haven’t used this in 12 months why do I have it? Most items that failed that test and were tossed. If you really want to downsize drop down to six months.
- Get Over Getting Rid of Good Things. I tried to give away some things that were in perfect shape and sell some things like DVD’s. You might be able to also donate it, but if all of those methods fail in a week: trash the item. It’s ok to toss new things you don’t need, I even did that with some Christmas gifts I got that I can’t return and I won’t use.
- Keep up with New Stuff. As we unloaded all the new stuff into our house from Christmas my wife and I went around with garbage bags and tossed an equal volume of stuff.
Good luck on your war. Any questions on how my war went?
