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Tuesday, December 6, 2016

Retirement Basics: Spending

Posted by Tim Stobbs on December 5, 2015

When planning your retirement you need certain basic things that just really can’t be avoided if you want to have a good plan.  This isn’t to say your plan needs to be a 332 pages bound document with appendices, but rather you need to have an idea of what you want to do, how you will get there and what everything will cost.

Ironically when starting planning most people start the the wrong spot.  We want to think about all the wonderful things we would like to do with our new found free time or we want a savings target to work towards. Wrong. Stop. Halt! Wrong idea folks.

What you really need to start doing is so basic it isn’t even funny. You need to answer the following question:

Where does your money go right now?

Yep, that’s it.  Not hard right? Well expect it seems that most people don’t have a bloody clue where all the money goes each month. So let’s start with how many dollars did you save last month?  Do you even know or have a clue on how to find out? I suggest starting to look at your transactions in your chequing account.  What investments do you normally make and what do you save for? Kids RESP, did you put money aside for a house down payment? Also did you remember to include your pension deduction or group RRSP that came off your cheque prior to going into your bank account?  After a bit of effort you should be able to find out that number, just don’t include any delayed spending such as saving up for a vacation or your annual house insurance bill.

Now the second part, what on earth are you spending your money on?  If you look at your credit card do you even remember all that times you used it?  After a month it can get a bit fuzzy, which is why I signed up for Mint Canada which pulls all that information together for me.  Then I sit down with my wife and we classify the spending about once a month.  It doesn’t have to be perfect, but it should help give you an idea on where the money is going.

The last part of your spending is going to be hard if you use it: cash.  Cash is so easy to spend and not keep track of, so I installed a basic spending tracking app on my phone and then enter in a note when I spend cash.  Other people like paper and keep a notebook.  So people just keep receipts for everything and enter them in a spreadsheet once a month.  Try out several different means to track your little spending.  Just don’t worry if it isn’t perfect.  I still miss the odd transaction myself, but typically it is under $5 in a month.

Now armed with this information you can do some fun calculations like: your after tax savings percentage.  To calculate add up all your savings and divide it by your take home pay plus any pension savings.  A month of data for this is okay, but a year is even more accurate.

So it would look like this: (savings including pension)/(take home pay + any pension savings taken off on your pay stub).

This one number is basically all you need to start your retirement planning as it will tell you how long you have to continue to work at your current lifestyle assuming you have nothing saved already or very little.  The results go something like this (see here for more data points):

  • 5% or less – I hope you like slavery because your job is going to feel like that for the next 66 years.
  • 15% – You have a 43 year career ahead, so if your twenty this may be okay otherwise that could suck.
  • 25% – It’s now down to 32 years which is actually potentially okay even if your 30 years old.
  • 50% – Now we are talking, you are down to a mere 17 years of work.
  • 75% – Holy cow, you are good at savings you could be out in a mere 7 years.

So now you can see the consequence of having a low amount of savings %, you will be working for a VERY LONG TIME! Of course if you already have some savings you can divide that by your yearly savings rate and deduct that off your years to work total.  So if you save $15,000/year and you already have $30,000 saved you can deduct two years off your result ($30,000/$15,000 = 2).  So if you got 32 years as your result, you would actually have only 30 years of work left.

The point here is to realize that by choosing not to save you are also choosing a long working career.  Most people never realize this is the case and so you need to start here when you plan your retirement.  That way you can actually see the results of your choices regarding spending.  Now you can really look at your spending data from above and ask the question: is this worth it to me?  The one thing made a huge difference to myself on what I spent my money on.  Hopefully it can help you too.

Lack of Value

Posted by Tim Stobbs on July 6, 2015

Perhaps the most common question I get about our financial situation is something along the lines of: how do you save so much?

Well to be honest saving 65% of your income gets easy after a while, so perhaps the easier way to answer the question is simply: I value what I’m saving for.

People often have good intentions with savings so about once a year around RRSP time they think a bit more about it and consider if they are saving enough.  Yet they fail to realize something critical….if you aren’t saving now that shows me you can have good intentions until the end of time and won’t save you a dime.

Look where you are spending your money now and they shows me what you value.  Do you value comfort over convenience?  So you might end up buying more comfortable furniture rather than meals out. Or the other way?  Perhaps you value your appearance over your substance?  Then maybe you buy a knock off designer purse rather than saving for a real one.  Either way isn’t right or wrong, but merely shows you what you value in life.

Me?  I value freedom over comfort, honesty over appearance and love over convenience.  Yes it sounds a little bohemian, but it is true.  These values drive my habits and thoughts more than a spreadsheet to live the life that I do.

Which is perhaps why I drive people I little nuts when they try to understand my success.  They get confused by my willingness to spend over $300 on some higher quality wine kits, but I will rarely buy a book even when I love them.  Or the fact we only have one car when it fact it is a bit of an inconvenience once in a while.  On the surface the issues can look odd, but mainly because the values the under pin them are likely different then your own.

For example, I dress moderately nice at work, but I refuse to wear a suit.  I hate wearing suits so even when I present the highest people in the company I still wear a only a tie, not a suit jacket.  I don’t care about appearance to others that much.  Or the fact I love good food, but rarely eat out…I like to cook instead.  I value quality over convenience.

This of course leads a person to consider who exactly they are.  What are you values?  Then after that painful process of self discovery you can then push yourself to align your spending with your values.  At this point something utter fantastic happens: life gets easy.

Pardon?!?

Yes, when you are spending with your values (rather than the values of others) the decisions you make become obvious.  You know what you value so the choice to save now or spend later is obvious to you.  You spend enough to be happy in life, but know that you wants will exceed your income on a permanent basis.  So once you have arranged your spending to align to your values, saving the remainder isn’t a chore or even an effort….it merely makes good sense.

The real difficulty I’ve found is combining your family values into something that everyone can life with.  So you learn the art of compromising….a LOT.  In my case, it means we spend much more on hot water than I would ever like to, but my wife gets to enjoy her luxury of very long hot showers.  Rather than debate it every day, I got her to agree to a lower flow shower head and now shut up about the water bill.

On the flip side she has put up with my odd little projects like collecting raspberries from the backyard all summer long into a bag in the freezer so I can make a little five bottle batch of raspberry wine from scratch.  It would have been much easier to just buy the bloody berries in the first place, but I wanted to make my wine from local ones.  So we agreed, we would save half the berries.  She rolled her eyes and did it anyway…then proceeded to roll her eyes again when she tasted the first bit of the wine.  It was one of my best yet and now I’m saving berries all over again this summer.

The real trick to combining values is to know the core ones are in agreement. They don’t have to be the same, but enough alike for you to both be happy with the spending that you do.  After nearly 15 years of marriage my wife and I have that down to an art form, which is reason we stay married.

So what do you value?  Does your spending align with it?

The Frugal Computer Upgrade

Posted by Tim Stobbs on June 4, 2015

After recently buying a replacement for my old netbook computer this post might come across a bit hypocritical, but I don’t actually throw money at all my computer problems.  For example, our other laptop computer while being ok for most tasks for my wife and the boys was getting a little slow.  But rather than just blindly replacing that computer I decided to do a bit more work and see if I couldn’t fix the issue with a bit less spending than a new machine. (I should point out while I’m the tech guy in my house I’m no where close to an expert, this is merely stuff that isn’t to hard for the average person to try out.)

I used a two stage process to make sure what I was doing would be worthwhile.  First up I did all the free stuff you know you should do on your computer but never seem to get around to doing.  You know, like:

  • Uninstall all the programs you don’t actually use.  If you haven’t used it in a year it is really good candidate to remove.
  • Turn off all the extra features you don’t use on your desktop (for example, a clock on a sidebar when all you do is look at the corner of the screen anyway) and remove all but the essential shortcuts.  Put any files on your desktop into folders.
  • Turn off all the programs that load every time you start the machine, but rarely use.
  • De-fragment the hard drive.
  • Install all those updates you’ve been ignoring, but your computer keeps reminding you to install.  In some cases, those help fix a slow program.

I did all of the above in perhaps an hour or so.  After that there was a noticeable improvement in the computer starting up.  So ya!  At least that was a minor battle won.

Then I started looking at the computer’s stats and realized it was a bit underpowered for RAM with only 2GB (but when you consider I bought the computer for a $1, beggars can’t be picky about the specs).  So I did a bit of research on which RAM I could use and came across this handy little tool on this website which can tell you EXACTLY what kind of RAM you need to buy if you want to upgrade your computer (you can either enter the specs yourself or have it run a little bit of software to tell you want you need).  Yes of course the website recommends their particular brand of RAM, but frankly I don’t care as it saved me hours of pissing around to sort it out myself.

Then I went to Amazon and did a search for 4GB of RAM (two 2GB chips) and found it for just over $60 (which had free shipping).  Then four business days later the RAM arrived at my house.  I had previously upgraded my old desktop computer RAM before, so this wasn’t entirely new territory for me, but I hadn’t do a laptop yet.  But when I pulled off the section where I thought the RAM was located I could find the one chip, but not the other.  Oh crap, now what?

Like any modern person, I just asked Google, which immediately brought up a Utube video showing me how to find the other chip of RAM hidden under the laptop keyboard.  Three screws and four clips later I had the keyboard up and the other RAM chip in sight.  I installed it and put everything back together and tried to turn on the computer…key word tried.

It didn’t boot up at all.  Oh crap! I had a blank screen and my cap and number lock LEDs were blinking at me.  Damn it!  Back to Google and HP’s website which pointed out the lovely three blinks I was getting was because of a memory issue and if you tried to upgrade your RAM you likely didn’t seat it right.  So I took everything back off and pulled out the new chips and put them back in again.  Then crossing my fingers I pushed the power button again.  This time I see the Window’s icon on the screen and I said “It LIVES!” (To which my wife, just laughed).

Then I tried out a few tasks on the machine and noticed it was working much better now.  So for a total of $60 and perhaps 1 hour to uninstall a bunch of software and another hour to piss around and finally get the new RAM working I have a much better computer for the rest of my family to use.  Two hours of my time and $60 is dirt cheap compared to a new laptop (which ran me about $770 if you must know).  So rather than just assuming you need a new computer when your old one starts to slow down, you might want to consider a simple clean up and RAM upgrade instead.

Ok, to all the much more savvy computer people out there…what else would you recommend people do?  Or if you have fixed this issue yourself, what did you do?