Not a week goes by that I do not read articles about Canadian individuals and families deeply struggling with financial distress. Debt loads are at record levels, and inflation erodes our purchasing power. Plus, interest rates will remain high for years to come and cause defaults for those over-leveraged. So what is one to do?
Each Canadian needs to take personal responsibility for managing their finances and make significant changes if necessary. I will get to solutions shortly.
I grew up in a home where my parents went through the Great Depression and WW2, and these were very challenging times. Yet, their families survived, one in a city (Winnipeg) and the other on a farm in Saskatchewan. I remember my dad fixing everything (cars, appliances, plumbing, etc.) and learning to build some of our furniture. My dad was a saver, and we lived a relatively simple but good life until he passed when I was eleven years old. Dad paid cash for everything except the mortgage and a car payment. I have many great memories of annual family holidays (travel and the tent trailer), and I was blessed to play endless sports as a kid and enjoy a simpler life growing up in Vancouver.
So, what all changed? Credit became the new thing of the 1970s, and technology and advancements exploded in the 1980s til today. Technology promised us so much hope; there have been many incredible benefits. But sadly, I also have witnessed the tremendous cost of explosive debt and the breakdown of society, morals and the family. Some people are awakening that wanting it all at whatever cost has serious consequences.
So, let me share two essentials to breaking bad financial habits in your life: budgeting and savings. We will start with a simple budget. So what is a budget?
- It tracks all of your financial transactions each month. Some great tools/programs are available that can help you with this, or a basic spreadsheet works excellent if you are old school like me.
- A simple budget has absolutes/essentials and discretionary spending (optional choices). It would be best to define what is necessary and limit your choices for optional spending. Many things that we say are essential are really preferences and unnecessary. Having too many options in our budgets get all of us in trouble. If you cannot afford it, remove it from the budget.
- A Budget keeps you focused on what is essential for a good life without severe financial stress.
- Many people get into trouble because they spend more money than they take in each month.
- To build up several saving accounts, you must remove unnecessary monthly spending. Savings will break the back of the debt monster tormenting your life. Start with one or two savings accounts, and add more with different purposes as your financial picture improves.
The Power of Saving!
If you are the typical Canadian, you carry a heavy debt burden. Therefore, you must formulate a strategy to avoid and stay out of debt as it robs your financial freedom. Naturally, savings will be a part of this strategy. Let me explain. So you have created a reasonable budget, track your spending and cut out all unnecessary costs from your monthly income. Let’s say you have $500 extra money each month.
Here is what I recommend; you take $250, put it against your highest interest payment (lump sum), and commit to getting rid of that debt as quickly as possible. Second, you take the remaining $250 and create two savings accounts—one for emergencies and the second as your dream or goal account. Why is this important? First, it helps you not just focus on debt. Second, when life happens, you have the cash to pay for things (emergencies or goals). Third, by committing to doing this for the rest of your life, you will overcome debt and enjoy the freedom of using cash to pay for your dreams and goals. What I teach, I do myself, and yes, discipline is required, but I enjoy life with little to no financial stress. We must learn to say no often to unnecessary spending to enjoy the planned yeses without stress.
As you gain financial freedom, I recommend having multiple saving strategies and accounts. Let me explain.
- Your emergency account is critical. For example, your washer breaks down, and you blow out a tire, and the list continues. No problem, you have cash and no longer use credit. Yes, it will take time to build up this account to $5000 (or whatever your goal is), but it will be part of your financial freedom.
- Second, have a dream or goal savings account. I am not against spending; get into the habit of using cash for almost all your goals. For example, I have not purchased a brand-new car in over four decades and always do my homework (reliable, low running and maintenance costs). I usually purchase a 2 to 5 years old vehicle. Why? Significant cost savings (lets someone else take the depreciation hit), and I have been able to save and pay cash for the last five vehicles (not so easy when we had kids at home). I am not against someone purchasing a new vehicle if they have cash or lease through a business (as you can write off most of this cost). So, whatever your goal (trip, car, computer or whatever), commit to only paying with cash for depreciating items, fun or holidays.
- Third, have investment or business savings accounts. Investing is different from savings. Savings must be in low-risk vehicles like cash, GIA’s (Life Insurance Guaranteed Investment Accounts) or Gold and Silver. Investments are to create growth, take on higher risk (calculated), and hopefully provide higher returns. Quality investments (well-researched) help us create long-term wealth. Business, real estate, farms/land, technologies, and commodities are all speculations, yet these are some of the best ways to create sizable wealth. Use cash for investing after you have built up several savings accounts. I highly recommend that you do not use leverage in investing, as this has ruined millions of people’s lives who have lost everything from taking on too much risk. Leverage accelerates your risk. Even experts blow up businesses, banks and investment accounts!
- Fourth, be creative with your savings accounts. We are all unique and have different goals and dreams. Have fun building up these accounts so you can enjoy life to the fullest and be a blessing to others.
I provide more details about budgeting and savings in my Wealth Foundations course. Consider taking the course to grow your financial knowledge and take action to create your wealth plan. The course is online and can be completed over a couple of evenings or on the weekend. Special pricing, $49 CA. As always, if you need guidance, feel free to contact me.
All the best in 2023!
Bill Westmacott, Owner