Posted by Canadian Dream on May 4, 2011
Debt is so ingrained into our everyday life that most people would consider it almost unusual to meet someone who is completely debt free. No mortgage, car payment or even a line of credit. In some regards, life after debt sounds a lot like life after death…it sounds good, but until you see it, it is a little hard to believe in.
While I’m not debt free yet, I have made a lot of progress to becoming debt free. It hasn’t been easy road to travel, since too often the lure of new goods can pull you back off the path (for example: ebook readers, new surround systems, or shoes…depending your particular vice). Perhaps that is why life after debt is hard to understand for some people as once you achieve that level of success the results are invisible to most people. Being debt free in some regards would often result in you looking poorer to others as you tend to drive an older car and live in a modest house.
Often the accumulation of debt is a direct result of a desire to compete with others. In an attempt to keep up with the Jones, we buy the newer car even if the old one was fine or get a kitchen reno even when we don’t cook that much in it. In some regards being debt free is the exact opposite behaviour as you often can’t be in competition with your neighbours since you don’t know what their debt levels are at and may in fact never know. So be choosing to go after being debt free you exchange an external competition for an internal one. While some blogs like this one, do you give you an idea of others debt loads often the comparison isn’t correct because of geography, income or even goals. So in the end the desire to move past your debt is a battleground that solely exists in your head.
So how do you compete against someone who knows your every move before you do it? You have to main weapons to defeat yourself and your debt: logic and emotion. The logic side is the one most people are familiar with, as it includes budgets, monthly saving targets and spreadsheet plans full of numbers. If logic worked by itself everyone would be rich since it would be easy to plan or even have someone help you plan your way out of debt. Yet it doesn’t work that way, since far too often the emotion side gets in the way. Emotion is a fantastic way to over ride logic as the ‘right‘ way to go ‘feels‘ that way, regards of the fact the numbers are saving: you can’t afford that.
Yet since we can’t get rid of emotion, you must instead try to accept that and then use it as best as you can to support your logical plan. This is where you start trying to get your mind to work with you by the oldest trick in the book…you bribe yourself. Do not under estimate how critical rewards are to changing and enforcing behaviour, but in the end it won’t be enough. You also have to make the behaviour easy to do and make the wrong thing hard to do. So how do you do that? Here is an example, you could set up automatic payments to your debt so you don’t have to do anything to pay it off. Then you also setup a few points in time where you reward yourself for paying off debt and even have a bonus reward if you get it done faster than the plan. Last, but not least, you leave your credit card at home and keep your limits on your debit card low so you can’t get back into debt easily. While doing all of this may seem like over kill, that is the point. Your playing poker here with someone who knows your cards…you only hope to win is massively over strategically plan for that fact.
So now that you are armed, go out there and slay that debt. Your opponent is a little to smart for their own good, so be careful for their tricks or you might end up in a cave clutching your gold card and calling it ‘your precious’ between rounds of saying ‘charge it’ at the mall.’
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Filed Under: Debt
Posted by Canadian Dream on September 8, 2010
At some point in their lives I think everyone has meet someone who was bad at planning. You know the type, they don’t save much if anything for their retirement because they will get to the ‘later’, but later never seems to come until they have managed to get themselves into a tight spot. Now normally this isn’t a big problem since they only mess up their own lives with perhaps some limited spill over to immediate family. Yet what happens when governments are the ones who are poor at planning?
That essentially is what we are facing in the next decade as the boomer retire and both federal and provincial governments start dealing with some fundamentally unpleasant and unpopular decisions (which is obviously why they have manage to avoid making those choices for so long). In even the US the situation is somewhat similar with a few variations, but in general we are facing some fairly bleak issues such as:
- Lower Income Tax Revenues – It doesn’t take much research on Google to realize that the ratio of worker to retirees is about to take a nose dive from approximately a 5:1 ratio down to 2.5:1 in the next couple of decades. With that in mind you can expect a fairly significant drop in income tax revenue for governments as those high paying boomer drop down to retirement incomes.
- Higher Health Care Costs - Along with all those retirees will come higher health care costs in the next few decades. For example in my home province of Saskatchewan, health care is 40% of the provincial budget right now. Add in the boomers and it isn’t hard to see we have a huge cost issue.
- Unsustainable Retirement Benefits – Both the US and Canada have this issue in one program each. In the US its Social Security and in Canada it is Old Age Security. Given the other two cost pressures these programs can not continue as they are, but no one has been willing to bring up that issue yet. I wonder if we will have massive protests like France is having right now.
So what can be done to fix it? Well in general you should prepare for a combination of less service or benefits and more taxes. How exactly that axe will fall will depend heavily on the particular political slant of the government. How rapid these changes will occur will depend if our governments are willing to deal with the issue now or wait until they are in a similar situation to Greece and have to make massive changes rather quickly.
But what about you? From a personal point of view what can you do about this? Well that’s a little hard to say, but some general ideas include:
- Avoid Debt - With governments in a less than ideal spot, bond markets are going to demand a higher rate of return for government debt which will affect you if you have a fixed rate mortgage. The solution: get rid of the mortgage.
- Avoid Government Dependence – Make sure your retirement plan includes a drop in your government retirement benefits for the programs mentioned above. In general a 50% drop isn’t out the range of possibility.
- Get Healthy and Stay There – Prevention goes a long way with your health and since that is going to likely cost you more as you get older you should try to take care of it now. Get in the habit of eating better and getting some exercise. It will make your retirement more enjoyable and possibility save you a lot of money.
What do you think of the government’s poor planning? Who should pay for the screw up that is now facing us?
Posted by Dave on September 7, 2010
I have never factored in any expenses to my retirement plan that may occur for family members needing my monetary assistance once they retire. My wife and I have assumed that our parents will have reasonable savings to retire on. Right now they are all about 5-10 years from retirement age (we have three sets – my parents are divorced). My wife and I have tried to explained our plans to them, that we may be at a point to stop working at approximately the same time that they do. So far this plan seems to have been met with a level of either: a) indifference or b) skepticism – they think it’s impossible, no matter how we try to explain our plan to them.
Our concern is that we might have assist our parents financially or otherwise as they get older. This would obviously not be their plan A, but perhaps a plan C where they would move in with us or depend on us to support them financially. Although this outcome wouldn’t be ideal, I can see the mindset – it’s the same one I had until I was 23 (when I graduated from University) which was that I could “always go home”.
It’s obvious that at some point my wife and I will have to have a frank discussion with our parents regarding their finances and expectation of us as they age and might require more significant amounts of care. As with most things money-related this is probably a good idea to discuss, but never a comfortable discussion. This is similar to the discussion I had with my wife, when I learned she was carrying $20,000 in credit card debt. It was not a comfortable thing to talk about for either of us, but led to a galvanized effort of getting rid of the debt and a more “team-oriented” goal of early retirement when the debt was gone. In a similar fashion an uncomfortable talk with our parents will hopefully lead to a better understanding about what they expect from us over the next 30 to 40 years as they age, especially when health problems become more of an issue.
If we find out that our parents are expecting us to support them financially, that would mean we would probably have to work longer for us. If, for example we find out that one of the sets of our parents have minimal (or no) retirement savings I’m not sure what impact there will be on our own retirement goals. I would like to say none, but the alternative is to watch our parents live in potential poverty? I’m not sure I could do that, no matter what my personal retirement goals are.
This sort of planning would be less of an issue if I were planning to retire more conventionally, with for example, a full pension at work and some investments in an RRSP. That extra money would provide more than enough money to support our household and cover some unplanned expenses. Retiring at 45 means having more stringent spending plan that requires more discussion around these kind of “other” expenses.
I’m wondering if you have had a discussion with your parents about money, such as this, or alternatively have to dealt with parents who had saved inadequately for retirement? Do you include some kind of support payments for your parents in your retirement plan?
