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| By Royal Canadian Mint (via Wikpedia), Fair use, https://en.wikipedia.org/w/index.php?curid=35281220 |
Intro
Decades ago I was introduced to a financial manager and agreed to sit down and look at my finances. We met in my one bedroom apartment and his first question was:
"How are you managing your debt?"
My answer caught him by surprised:
"Aggressively!!!"
He was so impressed by this response that he passed it on to your colleagues back at the office. He then asked if I had a budget and I produced a Hilroy 20.3 x 12.7cm accounting ledger and we went through my budget. He noticed that my budget came up in the red and I explained that I was paid weekly and budgeted monthly, which meant that I had a buffer.
I think that my attitude towards money comes from observing life as the youngest of five and comparing it to the lives of my schoolmates. We lived modestly, we didn't have a usable car until I was 13 and used public transportation or bicycles. Pasta and rice figure heavily in my memories of meals with only a smattering of pork chops. My Dad has spent a year in a refugee camp and my Mother had experienced the transition from farm to city life. New clothes were sparse and I remember clearly the annual trip to by my clothes for the new school year. The results, two pairs of pants, two shirts and some socks.
We were definitely middle-class and I never suffered want in the same way as my parents but their and my grandparents attitude towards money left an impression on me.
The genesis of this article came from a discussion with one of my children about how I manage money.
Education
I want to start off with a perspective on earning a living and how having an education can assist in this manner. It was evident that my parents valued post-secondary education because it served as a basis for opportunity and more importantly flexibility in an uncertain world.
Heads-up, I grew up in the 70's and 80's and yes things were different than they are now, yet the level of uncertainty in life remains the same as it does today.
Education, the ability to reasons and to express that reasoning are key to making your way through this vale of tears. My step-father dropped out of school at 14 and was able to make a good living as self-employed tradesman. That is far more difficult these days.
So I emphasize that education is an investment in yourself. Once obtained, it may become rusty, but it can never be taken away.
So, yes, I see education as golden.
Needs versus Wants
A quick note on needs vs wants. You may want that latest phone, but do you really need it? Are there alternatives that fulfill what you need to achieve instead of what you want? These are important questions.
I didn't need to buy a brand new sports car when I was 24, it was an impulse buy. Driven by a disgust for my current car because I learned that my current car had been in an accident and the dealership neglected to inform me. I didn't need the car, I wanted it or more accurately, I wanted to get rid of my existing car!!!
I suffered immense buyers regret when I realized that I had just incurred about $18k of debt. Fortunately, that year I had the opportunity (and youthful stamina) to work so much overtime that I paid it off in a little over a year.
Do I regret buying the sports-car? In hindsight no. I do regret not being in control of myself and buying it after a little more careful consideration. By the way, I knew that I could afford it but was 'triggered' into an emotion purchase because the 'truth' of my first car had been hidden from me.
Creating a Budget
Decades ago I described how I budgeted my money to a relative and received the response "I don't live my life that way". That was their decision and it is their life. What I'm trying to say is that my approach to money is disciplined and that it takes effort.
The first step is to create a budget (see sample below). The primary goal of a budget is to improve your financial situational awareness (Wiki link, UK link). The first objective is to answer one question: Does your income exceed your outgo (i.e. expenses). The second objective is to answer the question of how is your money used. For example, the basic necessity (food, clothing shelter) are priorities and things go awry when there is a problem with necessities.
Having this knowledge gives you the opportunities to make decisions before others make them on your behalf. For example, the bank foreclosing on my mortgage, credit card loans, etc.
I used a paper ledger, but a computer spreadsheet is another way. The basic structure I use is classifying them as 'income vs expense.
The first classification is the "direction of flow": income, outgo / expenses and savings. In the example below, income is a positive number as it increases the amount of 'cash' you have, expenses are negative because it reduces the amount of cash. I have also made 'savings' negative because it is cash that you set aside into a separate account and is reserved for later.
The next is the type of expense. Is it a regular monthly expense (ie rent), something variable (ie fuel costs per week), or something that you pay annually?
Tip: If you can get ahead of the payments and have enough reserves to pay larger expenses in full (e.g. insurance) it is better than doing it by payments. Why? Simply because you pay more and I'd rather use that money for something I need or want.The next category is when do I pay this or when is the bill due to be paid? Property taxes come due once a year, so do a lot of insurance policies. So by knowing when they are due you can calculate how much money you need in a particular month to pay these annual bills and then work backwards to figure out how much you need to set aside to have the money in time! This is essentially managing your cash-flow for those expenses that are fixed and regular.
Tip: If you can pay in full ... do it! Delaying payment mean you are just delaying the inevitable and creating a risk of not being. This is a modified version of don't spend money you don't have.
The next step is to work out the yearly value for each income / outgo. In a spreadsheet I take it a step further by using formulas to calculate the monthly (yearly / 12), BiWeekly (yearly / 26), and Weekly (yearly / 52) values. I also calculate the percentage of the each expenses compared with my net income. Yep, I have a tendency to go overboard on data. Anyway, for shelter I usually look for about 25% of my net income. With a large family groceries will usually meet or beat that amount.
Finally, you may want to sort the expenses greatest to smallest. This is sometimes an eye-opening experience as you see the major drains on your cash flow.
Tip: Rule of thumbs are useful to get a feel for if the amount of money being spent on a particular item is ok. For example, all of our expenses account for about 80% of our net income (My rule of thumb for housing is 25%). The rest goes into savings.
Quick Note: I'm going to say right away that I disagree with the perception that you should 'pay yourself first'. You have an obligation to treat others with justice and deliberately delaying paying what you owe is a non-starter. Once you pay your debtors, then you pay yourself by setting aside something for later.
There are two key items that I include in my budget: recreation and other. Recreation is because without having some recreation you risk feeling trapped by the budget, come to loathe it. The 'other' account is a catch all for what ever life throws your way.
Once completed the budget gives you a perspective on your financial situation. You can see where you might have to cut back on 'wants' in order to pay for 'needs'. Finally you can make an informed decision about expenses and plans. If you want to further your education, then you can determine what you need to save in order to enrol in x years etc.
Tip: A budget is a plan, plans are a perspective on a perceived future and humans suck at predicting the future. The budget is a guide telling you if you are still on the path you wanted to take. It's all about making informed decisions.
Book Keeping
Book keeping is how you know if you are staying on the path. This takes work but it is crucial when others are relying on you ... this is crucial period. It is quite simple, keep a log of your expenses and classify them into the categories you used in your budget. On a regular basis do a check between your planned expenses for the month / year against the actual. Planned versus Actual expenses are really important because it tests the assumptions that you made when creating the budget. Were you able to get by on only $15.25 for recreation every month? Is the 'other' category exceeding your plan regularly? You might want to dig into that area and see what you missed? Do you want to change your spending or goals?
All good questions that you can't answer if you don't have a budget and keep track of your spending.
Managing your funds takes discipline, but it pays off with greater freedom later.
Debt is a Four Letter Word
As evidence from my above answers, I usually say that I have an allergic reaction to debt. I remember sitting in my apartment after I bought my sports-cars thinking what had I done? Then I put together a plan to pay it off as quickly as possible.
There are times when debt is normally necessary in order to obtain some necessary good within a reasonable time. For example, a home and a vehicle.
The key is to leverage the debt to obtain a good in a reasonable time.
My rule of thumb is to assume a debt only if I can pay it off within about 5 years. So instead of taking out a 20 or 25 year mortgage for a larger house, we took out three smaller mortgages that we could pay off in that time-frame. In other words, that we could handle the payment but still pay off the debt in 5 years.
The table below shows the monthly payments and interest paid in a scenario where for the same total mortgage value spread over three homes or over one. In this scenario the person manages their cash flow, but has a 20 year mortgage, whereas by leveraging or 'laddering' their home investment you could arrive at the same amount faster with less interest.
For a better comparison with the same 15 year duration of debt we arrive at the following payments and interest.
So the lesson is to borrow within your means to pay off within a short-term of about 5 years. By making the sacrifice in the short term there is savings in cash-flow. The difference between $735.44 the average of the Home ABC payments ($585.00) over the 15 years. This comes to savings of about $27,079.20, a significant savings of cash-flow.
Tips and Tricks
Cash vs Credit or Debit Cards
Paying with cash creates more awareness of your spending than using a credit or debit card. There is awareness of the amount when you have to count out the amount of money. This awareness helps you to not overspend. People will spend as much as 83% more when using credit cards vs cash.
Credit card interest
Let's say you buy something for $1000.00 and only pay $999.99 of that amount when the bill arrives. You will still be charged interest on the $1000.00 until the you pay that final penny.
How interest charges are applied to your credit card
Interest is the money you’ll pay if you don’t pay your credit card balance in full by the due date. You’ll continue to pay interest until you pay your balance back in full.
Interest rates vary depending on your financial institution and the type of transaction. For example, you may pay 19% interest on regular purchases and 22% on cash advances or cash-like transactions. Rates for specialized and retail credit cards may be higher.
Your credit card statement and your credit card agreement must clearly indicate the interest rates you must pay. Source Canada.ca
So, only use credit cards as a convenience to pay for purchases for which you have the money and always pay off the full balance before the deadline.
Managing Cash Flow
The goal is to always have your accounts with a sufficient balance so you can pay for the expenses (regular and unexpected). It takes time to get to this place
Structuring Bank Accounts
There are a number of account types offered by financial institutions. In this case, I am concerned about two types - savings and chequing accounts.
Chequing accounts are transaction accounts, meant for moving money to pay for transactions - bills, purchases etc.
Savings accounts are where you put money reserved for savings.
In some cases people drop their employment income into their chequing account and then dole it out to pay bills.
I don't use accounts in that way.
In my system, all income goes into the 'regular savings' account that I use as the pot for distributing funds to the other accounts. Every pay-cheque goes into regular savings and then I move funds to annual savings for those annual expenses, and reserve savings to set it aside as 'true' savings.
Then when I pay bills I deliberately transfer from Regular Savings to the Chequing account. This way I know how much money is available for immediate expenses, long-term expenses and then savings.
Conclusion
This is how I've managed funds as we worked to house, feed and clothe a large Traditional Catholic Family. This system has enabled us to have a good situational awareness on our funds and to make good decisions. One of these decisions was for me to go to university to bridge my college diploma. This enabled me to move into positions with higher responsibility with a corresponding higher level of pay.
While having a budget (plan) is a crucial first step, tracking how you actually use (spend) your money is critical. Without this it is like going on a trip and never checking to see if you have taken the right turns.
Money is never everything in a marriage, but it is one of the elements that causes stress and raising a Traditional Catholic Family in this era has enough stressors.
By ChristophRoser. Please credit "Christoph Roser at AllAboutLean.com". - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=47640479
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