Oh Look, I Just Found $888,000 In Your Coffee.

There are many wonderful books on personal finance. Here’s my go at it. This book might be a little different because it will not take a book, but just a few words, so it fits in a blog. That’s right, most everything you need to lead a sensible financial life in just over 1000 words.

While my cutthecrapinvesting site is largely dedicated to helping Canadians move away from paying some of the highest investment fees on the planet, and helping them move to one of the many simple low fee options available, there’s more to financial health beyond investing. First up, you gotta have money to invest. Or let’s say you have to find the monies to invest. How do you find the money? It starts with a personal or family cash flow statement.

Know your spending habits.

Write down all of your sources of income, then write down and keep track of all of your spending. Money in, money out. Now certainly you’re going to have fixed costs such as mortgage or rent and vehicles or commuting expenses plus food and health care costs, insurance payments and on and on. You’re also going to have a look at discretionary spending costs. That can include your daily coffee runs, your lunch money, your restaurants, your entertainment, your travel, your clothing, your stuff that makes you look pretty, the gym membership, your gift giving etc.

There’s also your fixed costs as a target.

Now it’s certainly possible that you can find some opportunity on that fixed side of the equation – do you really need to drive a Mercedes? But most of the opportunity will present itself (clearly) on the discretionary side of the ledger. The poster child for needless spending is certainly that Starbucks coffee.

But there are many other targets as well. Keep track of ALL of your spending, then cut the crap. And the thing is, you might not need to cut all the crap, maybe you can simply trim the crap spending. We know that diets don’t often work, same goes for draconian all or nothing financial health plans.

Look at your spending – Cut The Crap.

Ten coffees a week might amount to $1500 per year, three less restaurant or take out lunches a week might amount to another $1500 per year. Two less restaurant dinners per month might find you an additional $1500 per year. OK, we haven’t even moved beyond food and drink and we’re halfway to making you quite wealthy over an investment lifetime. Everyone is unique, and you’re going to find some incredible surprises when you keep track of your spending, and the amount of discretionary spending might make your jaw drop. You’re likely going to be surprised at how much spending might qualify for that cut the crap side of the ledger.

Those coffees and lunches can more that add up, especially when instead of being a drag on your finances, the monies move in the other direction and become wealth builders. Let’s say you find enough to max your TFSA account at the current $5,500 per year and you invest those monies in a sensible low fee investment portfolio.
$5,500 per year with a 7% annual return over a 35 year period grows to over $888,000.
Yes that’s some expensive coffee. And congratulations, future you is rich. And we have not even moved into RRSP contributions or pension income. It should not be that difficult for most Canadians to set themselves up for a very comfortable retirement. It simply takes some discipline and consistency, and yes, time.

How much should you save?

A rule of thumb is at least 10% of your income. I like the idea of 15-20% or more if you can swing it; but the example above shows that we can create wonderful results with modest sums. The key is get started, even if it’s just $100 a month or less. Make saving and investing a habit. If you have a workplace pension or matched contribution group plan that might take care of a large chunk of your saving needs.

Personal finance 101 – top ten.

1. Pay down high interest debt before saving.
2. Create an emergency fund in a high interest savings account. That might be 3-6 months of total spending needs.
3. If you buy a home or property take on a mortgage that you can afford to pay off with ease and in a very reasonable time frame. Accelerate your mortgage payments and payment frequency.
4. Invest your longer term monies in growth-oriented, low fee, stock and bond portfolios. See my Managed Portfolio Solutions or ETF Model Portfolios.
5. Buy appropriate health insurance, but do not get ‘over insured’. If you’re young without considerable financial responsibilities you might skip the insurance, for now.
6. Don’t pay bank fees, you don’t have to. Find a bank or credit union that pays you. Find a credit card that also pays you; there are many 2% or more cash back cards including the offering from Tangerine. For high interest savings and GICs you might consider EQ Bank.
7. Take all free monies from your employer benefits.
8. Understand your tax situation. Do some reading or obtain some simple tax programs.
9. Find ways to make more money or increase your salary. Create a career path.
10. Live well within your means, or let’s say live well below your means. Ensure that there is a healthy financial buffer, we often spend more than we think, and money surprises have a habit of showing up.

Yes, it can be that simple, but at the core is living well within your means. Over time it is your personal net worth that might determine your financial health and happiness. Your net worth will be your total assets minus your debt. Personally, I like having no debt, that can create some personal and financial freedom. My wife and I paid off our Toronto home (I call that our accidental investment) and we drive older (paid for) vehicles that have each traveled over 250,000 kilometers.

Happiness is a financial plan.

Financial and personal happiness can go together, they often do travel together. Studies will show that money can buy happiness, to a point. Those with a financial plan are typically ‘happier’. It feels good to know that we’re moving forward financially. It feels good to track and witness that we are moving forward financially.

Must read. What is an advice-only planner?

You don’t have to be rich, you don’t have to be a high income earner to find that financial sweet spot. I would also put another item high on the list – do something you really enjoy to earn a living. On that front I outlined my personal experience in this Linkedin article Combine Work With a Purpose. Discover The Joy of Work.

Having enough money = freedom. Freedom feels good.

There you go. Most of what you need in just over 1000 words. And yes there are some wonderful personal finance books available, including The Wealthy Barber books from David Chilton. If you have a chance to watch Mr. Chilton ‘perform’, go. He is one of the most entertaining public speakers on the planet. And at some point in your financial life you should certainly speak with a tax professional and perhaps a certified financial planner that will work on a fee for service basis. That is, you can pay per visit, or pay a flat fee. You do not want to or need to pay advisors on an ongoing basis.

You can easily take control and create your own personal financial happiness.

Happy saving. Happy investing.

Dale