Tag Archives: savings

When you run out of money you run out of peace of mind

Less than 45% of us have any kind of savings for retirement. The simple reason is that we don’t pay ourselves first. We pay ourselves last – but since there’s no money left over right now, last means…well never. To start saving, most of us need to make some payments go away first in order to free up some money.

When our debt and payments start getting carried away, we can do one of three things: We can stay in denial and continue our optimism that it will somehow take care of itself.

We can get frustrated, depressed and throw our hands up, or we can have the courage and discipline to view these payments and debts in realistic terms and make simple and fundamental changes to turn things around.
Yes, it takes courage and discipline – nothing is easy, but it’s well worth it. After all, those who understand interest want to collect it. Those who don’t are the ones paying it.

An easy place to start is in the debt chapter of the It’s Your Money book on the step-up debt payments. It walks you through a simple example of $25,000 of debts and pays it off in less than one-quarter of the time with just $100 more each month.

Even if becoming payment free seems impossible, two easy things are to take your smallest monthly payment and do whatever it takes to pay it off. That alone frees up a bunch of money.

The second one is to cut $200 of your expenses each month. If you make it a game and not a pain and honestly look at every dollar going out the door you’ll easily do it.

We may not want to face it today, but at some point we have to change from a consumer mindset to a savings mindset. At that point it shouldn’t take a decade just to get back to zero in paying off your bills.

To have some different results, we have to do some different things. We have to make some better choices which are not based on old patterns, fixed beliefs or previous habits.

Because you and I have experienced it: When you run out of money, you run out of peace of mind.

An E-mail From a Listener:

I’ve freed up an extra $100 in my budget. Do I put it in RRSPs or against the house? Our family income is $90,000, we’re putting $600 into RRSPs, an extra $450 on the house right now.

The listener, let’s call him Greg, is in a 40% tax bracket and in his late 40s. What he didn’t put in his first e-mail is that he’s got a car payment of $250 for 2 more years, a snowmobile owing $2,000 and a boat at $3,000.

Becoming debt free is ALWAYS ahead of savings. In a leaky boat, fix the leak or all the bailing in the world won’t get you anywhere. Greg’s on track to be debt free in two years or so.

If he takes the $100 extra, stops the $600 RRSPs and diverts the $450 from the extra house payments, that’s $1150 a month. The debts get listed smallest to largest, then make minimum payments on all but the smallest debt. Does that make sense?

That pays off the snowmobile in two months. The $1150 and now the freed-up snowmobile money of $200 a month goes onto the boat. That’s now a $1350 payment and clears it off in two more months. Now the boat payment is gone and that $200 a month is added to the $1350, making it $1550 towards the car and it’s gone in three months.

Seven months from now, or February 09 he’s debt free but the house and has $1550 freed up. THAT is some serious money. Now we’re not talking about a spare $100, and $1550 now gets broken down into retirement savings and paid on the mortgage.

A half a step back has jumped Greg tons of steps forward, saved about $4,000 in interest and got him debt free a year and a half ahead of schedule.

A big section of the debt chapter in the It’s Your Money book walks you through this process very simply. Smallest debt to largest, minimum payments on all but the smallest and every one that’s paid off gets rolled into the next one.

Think of Greg in February when he’s got almost $1,600 a month going to pre-pay his mortgage or freed up that $20,000 a year into savings! Oh, and Greg got one more piece of advice: Never buy toys or cars again unless you can afford to pay cash for them.

Is There A Problem Here?

Last week, the Royal Bank released their annual survey of Canadians’ spending and savings habits. Now, any survey gets huge media coverage. In most of the major newspapers across the country it was a full five column story whereas I can’t get one column talking about the insights into credit and debt. But more complaining in a minute.

The survey shows that our savings are dropping and our debt is growing. Yes, it’s all backwards. 83% of us worry that we don’t have enough savings and even more than that say they can’t save as much as they would like. Less than half of us have any emergency savings and under 25% have three month’s worth of savings – and that has to be a minimum rainy day fund! Here’s what I’ve been saying for years and now there’s an actual stat: 67% of us think of our credit cards and line of credit as our emergency fund!

Now onto the whining part: Is it just me or is there some huge conflict here? The survey by Ipsos Reid was sponsored by a bank. Banks are in the business of lending money. That is where they make a profit. When we borrow and go broke – they get rich. When we save money – they pay US interest and on their financial statements, that’s a bad thing!

So am I right to be suspicious that banks are preaching savings while all their ads focus on selling their credit cards and debt? Their Sr. VP of Banking was quoted all over the story that us Canadians should save more, rely less on credit and be ready for financial emergencies. You bet, it’s totally right. But does that mean he will change the whole focus of the bank away from debt and onto marketing savings, lowering service charges and expense ratios on their mutual funds, make GIC easier to obtain and stop charging service charges on savings accounts? I’m thinking not! For me, actions always speak louder than words.

If I’m too harsh or out to lunch – I’m two clicks away from sending me a note, because my purpose and passion is not to be right but to make you think!