New Year has come and gone, and 2016 is slowly marching on. Now that January is all but a memory it’s time we all sat down and had a look at our finances. For many people around the world this doubly true with April, and the end of many country’s fiscal years, getting steadily closer. If you’re looking for ways you can save money in 2016, whether that’s for paying off bills or because you’re looking to start your very own investment portfolio, here are a few tips to help you get the ball rolling.
The first thing you need to do if you want to make a difference is taking a look at where you’re starting from. How much money did you make in 2015? Where did that money go? How much debt do you have to pay off? Take a look back over your spending for 2015 and try to get a rough idea of your spending habits. If you can’t make head nor tail of where your money went, track your spending over the course of the next month and multiply that by 12 – while it may not be an exact reflection of your annual spending, it will give you a ballpark figure of how much you spend on things like coffee and cigarettes.
Now that you have a rough set of figures in mind, you can start working out where you want to save money. Any money you save can be put towards something else, whether that’s paying off debts, paying towards a holiday or wedding, or even just putting aside to invest later on. If you need any help with the way you build or format your budget, there are plenty of free online tools and resources you can use.
There is a surprising amount of money which can be saved by changing everything from your energy provider to the people you bank with. Shop around for the best rates and be aware that the introductory bonus rates that you were given last year probably won’t apply for much longer. If you change any given account to one offering better introductory rates, you could feasibly save up to $150 per year – do that 5 times and you have an extra $750 to play with. Every little helps, as they say.
If you’re struggling with multiple debts it’s well worth looking into the idea of consolidating your debts into a single easy to pay loan. There are a huge number of loan products on the market which can help you do just this, though the products available to you will differ based on your location. If you live in England this could be an IVA; if you live in Scotland you could apply for a Scottish Trust Deed; if you live in the US there are further debt consolidation loans you can look into. Just make sure that whoever you talk to, whichever country you live in, you seek professional advice from a financially responsible, regulated body.
If you’re looking to invest your money you need to be aware of the risks. No investment is entirely safe, regardless of what you may have heard elsewhere online. The old adage ‘no risk, no reward’ is actually truer in the world of investment portfolios than almost anywhere else.
There are several ways you can invest your money, from discretionary portfolio management where you leave your financial decisions to a professional investment firm, to portfolio management options where you set the rules over how and when you want to sell your investments. Either way you need to make sure that you’re happy with how much you’re risking when you step into the arena. Every investment is a risk which may or may not land you a substantial reward. Depending on the company structure, you may actually become liable for further losses too, so make sure you do your research before you start investing money.Comment: 1 Read More
Last year, I went through all kinds of questioning about my budget, future, job and online company. I really needed to put down on paper how much I needed to live and create a comprehensive budget.
Doing this exercise was great not only to focus on debts but also to realize how much I needed to live the good life in my own terms. Some people only need a couple thousand per month to live comfortably while others think they couldn’t live without spending 10K a month. It’s all about your priorities and what makes you happy…
The first question I asked myself was what the most important things were for me. I’m not talking about my family and other personal values here but what is important in terms of material things. For example, I LOVE my house. There is no way I’m giving up my house in my budget. It fulfills all our needs and then some. We are incredibly comfortable in it and even benefit from the daycare at home (we have a separate entry and a room dedicated to my wife’s business). Living in this house definitely makes me happy in my day to day.
On the other hand, my RX-8 wasn’t bringing me enough happiness compared to its costs and wasn’t kept. While the car didn’t have any loan strings attached to it, gasoline and sporadic mechanical problems were enough to make me sell it. Life is a little bit more complicated with only one car and I’m considering buying a second car eventually but this will be a small economical car this time. I’m done spending money on wheels.
Saving money for my kids’ education and retirement also makes me happy. There is no way I’ll jeopardize their education or my retirement. This is why I’m putting almost 10K per year in my investment accounts.
I also love food and wine and I’m not willing to cut out much of my food bills. I’ve made some efforts with wine and restaurants but I really enjoy a nice meal with a great bottle of wine!
When I crunched the numbers last summer, I came up with two different budgets; the first one was the one I need to live comfortably (meaning I don’t compromise on anything) and the second one was the one with strict minimum expenses.
It had helped me to realize what I can really cut out in case of bad luck and what I could already cut today without weeping on the floor. This is how I realized I need about $4,500 monthly to live comfortably. Therefore, I need to find a way to make $54,000 net of taxes each year to keep what I have in place. Where I live, this is about 100K before tax. This is not an easy task but I have managed to reach this level of income since the age of 28 (you can read about the chronology of my income here).
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It may sound like a financial planning topic but this is only common sense: you need an emergency fund. If you are young and starting your career; you need an emergency fund to cover for a job loss. You have a young family and a mortgage; you need an emergency fund to cover a broken washing machine. You grow older, don’t have any debts; you still need an emergency fund to cover for healthcare. As you can see, all your life, you will need an emergency fund.
In financial planning, we often talk about 3 to 6 months worth of salary. If I look at my own situation, this would mean having $16K to $32K. This is a huge stack of cash to be sitting in my bank account doing nothing. Worse than that, if you are like me and have a young family, you know all to well that your money is going towards groceries, activities and clothing. Therefore, there isn’t enough money left to #1 pay off your debt, #2 save for retirement, #3 pay off your mortgage and #4 build an emergency fund.
We will all agree that we need an emergency fund. If tomorrow I need $5,000 to repair my house or because I’ve lost my job, I don’t want to put this money on my credit card. The problem is often finding the money to build your emergency fund. Most people can’t save more than 1-2K per year (besides all other obligations). So how can you save 3 to 6 months worth of income?
This is when you have to think outside the box and leave the savings bank account to frugal people. I will never be able to save that much money in my bank account, so I’ve figured out other ways.
Huh? How can spending more money on an insurance contract assure that I won’t need an emergency fund? By taking disability (or salary) insurance. This type of insurance kicks in when you are unable to perform your work. If you are depressed, ill, or break your leg, you can use disability insurance. This will compensate a part of your salary and will help you avoid falling into credit card debts. I have a pretty good plan insuring 70% of my paycheck in the event of disability. This would be enough to cover most of my expenses already.
Disability insurance is also offered on credit products to cover your payment (for a mortgage as example). Unfortunately, it is not cheap.
I just read an interesting take from Dividend Mantra saying he would rely partially on his dividend payoutsif he were to lose his job tomorrow. Last month, he made $700 in dividends and this is enough to cover his rent. Not bad, huh? In my opinion, having a second source of income is probably the best solution to fund your emergency fund. The money doesn’t sleep in a bank account in the meantime, but will quickly take care of part of your bills if you lose your job.
My dividend income is all in a registered account for tax purposes. This is why I can’t use Dividend Mantra’s technique. However, I do have my online company generating several thousand per month. If I was going to lose my job, I would not go for another one. I also have my employer stocks which fluctuates from 1K to 5K most of the time (this is because I keep selling them each year to pay off other debts).
If I have an unexpected one time purchase to make (like a washing machine or an expensive car repair), I also have a line of credit. I could put a few thousand dollars on this as well if I had an urgent need for money. I would rather use a line of credit as emergency fund than having 10K or 20K sitting in a bank account earning 1%. This idea is simple; you are losing money if you use real cash to fund your emergency fund. You could save interest on your debts or make money investing if you would use this emergency fund instead of having it sleeping in a bank account. This is why I think it’s better to pay off your debt but leave a line of credit open and available on the side for emergencies. If you don’t use it, the line of credit is free of charge!
I often talked about the importance of having a plan B on this blog. The idea of a plan B is to get a way out of financial trouble in case of an emergency. When something bad happens in your life, your emotions put you on the edge and your head doesn’t think right. If your emergency plan is already drafted, you only have to look and follow it. No second thoughts, no hard decisions to make. They were all done in the plan when you had your mind set to think about it.
The good news is building an emergency list is not too hard nor complicated. It only takes a few minutes of your day and it can be revised on a yearly basis to make sure all your solutions are still in place. Here’s mine as a reference:
#1 70% of my income in case of disability (insurance)
#2 An average of 3K quickly accessible through my employer stocks
#3 A side business where I could rapidly withdraw 3K per month to sustain my lifestyle
#4 An average of 3K available on my line of credit to withdraw at anytime
#5 If I was going to lose all my income source for a while, I still have 50K in a registered account where I can withdraw money from it but pay taxes
Do you use cash to fund your emergency fund or do you use other means? What do you think of my plan?Comments: 4 Read More
I just had a very interesting discussion about money with my partner not so long ago. He is the only guy on earth with whom I can discuss this incredibly taboo topic of sex money! We both know each other’s salary, bonuses, net worth, debt level, etc. We don’t judge and simply share.
Sometimes it is quite a relief as I couldn’t tell anybody about my financial situation (besides you guys, but it’s not like a real face-to-face discussion!).
I was telling him how my saving plan was going to fund my children’s private education. I opened a TFSA last year and started saving with a modest $50 every 2 weeks. This year’s goal is to increase it to $150/2 weeks to make sure I have 2 years’ worth of private school at the time the eldest child starts. Even then, we made the calculation and I will be in the hole by $7,500 once the second kid finishes high school. Yet, I still have the third one to fund!
In my opinion private school is not a luxury. For me, it’s like saying that education is a luxury. That getting a good diploma, a good job is a luxury. For me, private school is mandatory (oh boy… I expect some serious discussions now 😉 ).
From what I can see at elementary school in my neck of the woods, is that our system drags everybody down. Good students are left aside with no benefits but to correct the work of others. In other words; they work for free while the teacher has less work on his/her shoulders. We focus on children with problems (behavioural or cognitive) and I’m totally okay with that. The problem is that while we put the focus on children who need help, the good students are stuck to their chairs waiting. It happened to me when I was in school and I see it happening with my kids now.
I also have the chance to compare what my children learn at school with what one of my friend’s children learns at a private elementary school. Both our sons are in 3rd grade. While mine has 1 hour of English per week, the other is already able to keep a simple conversation in both English and Spanish. He is as good in French as my child and has learned two other languages at the same time. He plays more sports, does more math, more of everything. This is why I can’t afford to let my children miss out on private school once they reach high school.
I attended both public and private school when I was a kid. I did elementary school in a public environment (actually went to 3 different schools since my parents moved often) and completed high school in a private institution. The funny part is I didn’t want to go to private school. All my friends were going to a public school nearby and I had to take the bus and go to this unknown environment.
All that for what?
A better education my parents said.
The private school was okay but I wasn’t in love with it either. To be honest, I stuck to the point that my friends weren’t there and as a teenager, I didn’t care about a better education. But after a few years, I realized something: this is not only about a better education.
I was able to compare what my friends were doing at public school versus what I was doing at private school. The difference was huge!
We had more resources (brand new gym, new computers, a 400m trail, etc)
We had more projects (young entrepreneurs, theatre, improv, elite sports, etc)
We learned a lot more (I had the option to attend higher level math class, physics, English, Spanish, etc)
People were motivated (we didn’t have any dropouts hanging around, disturbing the class)
In other words; the public school has everything the private school had, but the private school had it better on all points. I would have been pretty bored to go to a public school as the system is the same as in elementary school; they focus on the problems and let the good student wait in their seats. I think school should be more fun than that!
Ironically, my children will follow the same path that I did: public school at first and then private next. I just can’t afford elementary private school (6K per kid, so 12K/year…). But I can plan for high school. Since I can’t use money from my RESP (Registered Education Saving Plans are for post secondary school), I need to find the money elsewhere. In the upcoming years, I’ll have to focus on that and probably reduce my spending elsewhere.
I’m not a fool either. I know that private school won’t guarantee my children good jobs in the future. They can still dropout and hang around in a park. But there is one thing I know; I’m going to give them a full deck of cards to play with. It will be up to them to manage and do something with it.
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Some say money is the root of all evil, I say money is the root of all dispute…
I’ll tell you upfront, I love money. Nah! That is not completely true, I don’t love money, I love what it brings: freedom, entertainment, comfort, security and good wine! My biggest financial goal is to be able to spend whenever I want. This is what I call financial freedom; living your life without having to worry about what’s left in your bank account.
I don’t expect to live an extraordinary lifestyle with a lot of expenses. But I don’t want to restrain my budget to the basics for living either. This is a balance that is quite hard to reach and I’ve been battling to find it lately. For the past 18 months or so, I’m on a crusade against debt. I’ve updated my net worth statement last week showing the first sign of real progress in almost two years. I’m proud of what I accomplished recently yet not proud of the time it took me to realize my problem.
I’ve been aware that I was living over my budget for almost the past four years. This is exactly when my wife quit her job to stay home. At that time, I was working a project of mine called The $1,500 project. The goal was to generate an additional $1,500 in net revenue stream so my wife could quit her job and we could live a better life. I did find the money but additional expenses came into play as well. I didn’t budget that part properly.
I haven’t accumulated too much debt over the past four years for a guy who lives beyond his means. The reason is quite simple; I also generated some sizable bonuses since I work in the financial industry. My average bonus over the past four years is $37,750. Even after taxes and RRSP contributions, I still have about $12K in my pocket each year to tackle my budget. That’s another $1,000 per month. With this money, I was able to pay back a part of my debts. My total debts are showing $312K and the highest I was in the past four years was when I bought my RX-8. In June 2010, I had $334K in debts. So in the past three years, I’ve paid down 22K in debts while I increased my assets from $480K to $565K.
When I look at my situation over the past three years, I can’t say that I’ve headed in the wrong direction. My net worth has jumped by 100K in 36 months, that’s pretty good! But the problem remains the same: I have to count on my bonus to bring my debt level down. I’ve been working on this problem for a while and found it very hard to find a solution until I had a discussion with my wife at the beginning of the year.
After we came back from Disney, I realized that I had to speak with my wife about a touchy topic; money. Since I work in the financial industry and my wife has little interest in finance, I manage all the financial aspects. I don’t update her very much about our situation since she is very insecure about money. Since I’m a big leverage fan and used our line of credit several times in the past to fund projects (trading on the market, start my online company, etc), I thought we were better off this way.
The problem is that she didn’t know that I was actively battling against our debts and that I was looking for a way where I can pay down my debts on a monthly basis within our budget instead of waiting for my year-end bonus. She is definitely not the type of woman who spends without counting. She is very careful with the household expenses. Still, managing a household of five can lead to more expenses when you don’t keep a close record of them.
It wasn’t easy to tell her that we had to take a closer look at our budget and cut down on our own expenses. We used to go out to the restaurant once in a while and treat ourselves; this time is over for now. It sucks to tell your wife that you are not going to go to the restaurant or the spa next weekend, nor in the following weeks months.
Since I’m the only income earner of the family, I feel a pressure to bring in enough dough for everybody. We can’t complain as we are living a great life. But I live the pressure of maintaining the same level of lifestyle alone. Having this discussion with her felt like I haven’t been able to complete my part of the deal. I wasn’t making enough money so we could spend as we want. In the end, it was admitting a failure on my part.
I also tend to enjoy life and rarely think twice before spending. This is why it was so rough to explain my wife that I changed and wanted to slowdown with our expenses. However, my wife didn’t take it badly at all. At first, she was worried about our financial situation. But I explained to her that it wasn’t that bad but we needed to take control of our budget today and not wait for bad luck to happen!
I now feel better about this whole story since we are now a team facing our debts, I’m not alone anymore and this makes a big difference for me! We are now working together to find alternatives and ways to save money and the results are showing already. I should have definitely not taken that long to speak with my wife about money management!
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