Top Ten Practical Tips To
Manage Your Finances
Many people like top ten lists. They're pithy, and a great road map for
the uninitiated. And they're even better when they're proven.
So let's start with that. The first rule in managing your finances is to
systematically save your money. Hang on to what you have, or as they say
in Latin, Retine Quod Habis.
If you dig into the numbers and the magic of compounding, you see it is
not so much about the return but systemically adding to an existing
growing pool of wealth, and not touching it for say 30 years.
Once a week is times 52.
Once or twice a month is 12 or 24. Times $10 it is $520 when saved
weekly, or $120 to @240 if saved monthly or bi-monthly.
Now instead of $10 say it is $100, so that you accumulate $5,200, $1,200
or $2,400 depending on your accumulation pattern. How about $500
or $1000? Putting that away every week is a stretch for most of us, but
done monthly or bi-monthly could work.
Let's assume the savings range is $10,000, $20,000 and $30,000 per year,
and you invest in a plan once per year.
For the following calculations, I used the
Savings Calculator at Dinkytown.net.
Check it out because it has lots of good financial tools specially
created for Canadian interest calculation conventions. This is important
because US calculations are different in compounding methodologies.
If you multiply it by 30 years, you would accumulate $300,000, $600,000
or $900,000 in original payments, but at a 10 percent yield that grows
to about $1,985,000, $3,970,000 and $5,950,000 respectively. At half
that, 5%, it's still about $740,000, $1,480,000 and $2,222,000.
Now a lot of the increase is interest yes, but it is really about the
investment earnings in any COMING year, which is based on savings in the
current year being added to the pool of prior savings plus all that it
has earned so far.
It looks like this. In
year one you save $10,000 to earn 5%. In year two you add $10,000 to the
$10,500 prior year pool. In year three it becomes $10,000 plus
$11,125 from year one plus $10,500 from last year's $10,000. This
will go on for 30 years, then adding that final $10,000 to whatever the prior 29
payments have earned to date.
To drive this point home, investing that first $10,000 at 5% for 30 years grows it
to just under $45,000, earning you about $35,000, while saving
$10,000 per year at 5% grows to about $740,000 in 30 years, earning you
You can readily see that
systemic saving is the key to wealth accumulation so you must have
oversight over your finances and the discipline to save the annual
amount you put away first.
It also means don't worry
about keeping up with the Jones or others with big houses, fancy cars,
exotic trips, etc, that they want right now. Especially if the lifestyle
is financed because incurring debt costs money, and financing anything
means you'll pay far more over time than if you pay cash today. It's the
flip side where the magic of compounding works for the lender and
against the borrower.
Given the math of save
systematically works, and the discipline required to not spend it for 30
years does not come easy, let me advance some guidelines and tips on how
you can get there.
Here's what I think can
1. Live below your means. Way below if you can.
2. Save your money according to your planned schedule . This follows
naturally from #1, but it is so crucial that it needs to be emphasized.
Invest it conservatively and always consider after tax returns. In this
day and age, capital gains and eligible dividends are treated most
favourably for tax. Canadians should have Tax Free Savings Accounts,
RRSPs, and RESPs if you are saving for a child's education. And NEVER
automatically believe what banks and other financial institutions say
about what you need. They ONLY care about getting their hands on your
money, and if they can, they'll convince you to invest it in something
that works best for them.
3. Focus on building your personal capabilities and reputation so that
you can earn more. This makes points 1 and 2 much easier.
4. Make sure you marry someone with the same frugal attitude as
yourself. This results in easy decisions, builds trust, avoids stress,
and this may seem counter intuitive, but allows each to spend freely
without looking over each other's shoulder to see where the money is
going. Set a limit to what you and your spouse can spend, and on what,
without consulting the other.
5. Avoid all debt except debt that builds wealth. So a mortgage to buy a
home, or debt to finance some other safe investment is fine, but do pay
it off as quickly as possible. They key is to avoid, minimize, and if
you have them, eliminate fixed monthly obligations.
6. Don't become house
poor by buying more house than you really need. This follows from point
1, and makes point 2 easier, because it means lower mortgage payments,
property taxes, maintenance, insurance, utilities etc. Do not be
misled by agents and brokers into buying bigger because home gains are
tax free, real estate is a 'can't miss investment", or because interest
rates are so low you can afford the mortgage. The most important
"number" is easy affordability with lots of room available to meet all
your other goals.
7. Never think that anyone who provides you with any good or service is
in it for your benefit, especially when they approach you. EVERY
business wants your money, and as much of it as they can have, so when a
business comes to you with an unsolicited offer, they'll likely say
whatever they think it takes to get it. Mostly, they prey on your fear,
greed, or guilt, but they twist it in terms of why you are better off
than before, and why you should deal with them. The reality is, no
matter what they say, in the end they only care about themselves. So
rely on points 1 and 2 and say no to all unsolicited offers, and when
you do spend your hard earned money, do it on your terms and look for
reputable businesses who provide you with true value.
8. Which takes us to
point 8. When you do spend, make sure you know why, and how it all fits
in to your overall life and family plan. If it's about acquisitions,
it's about how can you best get good value for your money. Be careful
not to fall prey to your vanities and superficial wants. For larger
purchases, always look at at least three alternatives. And it is often
better to spend a bit more on quality and reputation, so that it lasts
longer, costs less to maintain, and is well supported by manufacturers
and retailers. And avoid fads. Think about how attractive something may
be in say 5 to 10 years.
9.Point 7 also leads to buying a car when you don't have to so that you
can shop without pressure. while point 8 provides some guidance as to
when in time you do. Unless there is some compelling reason, buy used,
from a reputable dealer or intermediary, and get the best quality small
car you can without any fancy features. You'll save on initial cost,
gas, insurance, and maintenance. Save even more by only using it when
you have to. Instead, walk, cycle, use public transit, or share a
ride. A car is only transportation.
10.Free financial planning or advice that is advertised is never ever
free. Only deal with objective, independent, knowledgeable, reputable
advisors who are experienced in the areas you use them for. They will
cost you money, but you'll know exactly what you are paying and what
for. And don't focus as much on the hourly rate as the total bill and
what you get for it. When you do pay, make sure you learn as much as you
can from it.
So there you have it. In a nutshell, increase your capabilities and
earning power, and Retine Quod Habis.
© 2015 John B Voorpostel CPA, CA, CMB