Most financial advisors and financial advice books will tell you same thing and I’m pretty much going to repeat it in this article. If you already know to spend less than you take home, if you already know to build an Emergency Fund if you already know to pay off debt if you already know to build a Hard Times Fund, all before you look to longer term goals, if you already know all of that then you might want to skip this....but you may not.
First, a story.
The very first thing you need to do, before you can save a dime, is figure out what you have spent your money on in the past. And don’t ‘fake yourself out.’ Be honest.
When I was 20ish I spent more than I earned. I had no money and had bills coming in. I guess that made me pretty normal for my age. The first time a bill came in that I couldn’t pay immediately, I just delayed it. Made a partial payment and went about my business of being young.
The next month the bill was larger and there was an interest charge that I didn’t like the look of. I felt I had to do something about this. I mean, I was spending money and getting nothing for it! That’s no fun.
I was short on funds, again, and made only a partial payment, again. I realized that I didn’t have a clear idea of where my money was going...except for that interest charge.
I guess I knew that I paid rent & heat & light & groceries but those things didn’t add up to my whole pay cheque. I needed a system of tracking my spending. It turned out to be pretty simple.
I put a basket on top of the fridge and got a paper receipt for every dime I spent. I tossed the receipts into the basket every night....Well, that’s not perfectly true but it was effectively true. I did have to make some receipts myself if I bought something from the ice cream truck or such like. I’d jot a number on a piece of paper with a one-word note for what I’d bought and toss that into the basket.
And going to the bar was a special case. Since I was unlikely to keep perfect track of my spending as the beers flowed I devised a slightly different system. Before going out I’d count the money in my wallet and write the amount on a scrap of paper (Usually the torn off corner of an envelope that a bill came in.) and put the paper in my wallet. In the morning, after I’d had enough coffee, I’d recount the money in my wallet and subtract it from the number on the paper. That told me how much I’d spent, even if I didn’t have a clear memory.
I’d write the new number on the paper scrap along with the word “bar” and toss it into the basket. Oh so easy.
At the end of the month I totalled the receipts in broad categories; home expenses, groceries, transport, bar, restaurant, cloths, etc. I found the physicality of going through the actions and seeing the pile of receipts in the basket made the exercise more real for me.
What was the result? I was really quite surprised. I was spending about a quarter of my take home pay at the bar and another big chunk eating lunch at cafes.
The bar was the big expense and I didn’t want to give up drinking. Fortunately I never thought of the bar as a place to meet women (there are better places for that) I went there to socialize with my friends. A work-around turned out to be easy. It turned out to be cheaper if I just bought a case or two of beer, cooked up a big pot of spaghetti and invited anyone who wanted to come over to my place every Saturday evening to watch Hockey Night in Canada.
It worked out well. I got to socialize. I got to drink beer. I didn’t have to drive home. Everybody thought I was a great guy (at least as long as the beer lasted). And I saved money.
I would still go to the bar on special occasions. I’m not a monk.
I also knocked off the cafe lunches. That was harder. My supervisor called me “cheap” in front of some of the other guys because I wouldn’t go for lunch with the crew. There was social pressure to conform but after a couple of weeks of eating bag lunches it went away.
It took about 4 months to catch up on my bills but after that things got easier. I kept up the receipts-in-the-basket thing for a couple of years, just to keep myself honest.
Society is going mostly cashless these days so counting money in the wallet may not be practical any more. If you buy with a charge card you should be able to reconstruct your spending form the bill, it lists where you spent. If you shop with a debit card you may not know where you spent the money. Get receipts or write notes. It may take a couple of months to get the hang of it.
So here comes the standard advice:
Track your spending. Don’t fake yourself out. Every dime that leaves your hand needs to be accounted for. Sometimes the mere act of tracking is enough to get you to spend less.
If you have money left at the end of the month, great! You’re on the way. If you’re short of money then look for places that you could reasonably cut down. If you spend all that you make you’ll never ‘have’ money. And paying interest charges is like taking a pay cut.
Now put aside an Emergency Fund. Most people will tell you $1,000 is what you should have. I’m going to say that if money is so tight that it will take you months to save that much then aim for $500. Keep your Emergency cash in a place that you can get it reasonably quickly. Don’t lock it into a GIC or Retirement Account. Don’t buy Options or Crypto (more on those later). Put it in a bank or credit union savings account, a high interest one if possible but in a savings account. A Tax Free Savings Account (TFSA) is best.
Next pay off any non-mortgage debt that you have. No taking on new debt. Stop using your charge cards. No new loans from the payday loans place. No new rent-to-own contracts. No new debt.
For paying off existing debt there are 2 systematic methods. The common names are ‘snowball’ and ‘avalanche.’ Both methods involve making a list of all of your debts.
To ‘snowball,’ list your debts from lowest to highest. Make minimum payments on them all then take every spare cent and pay down the the debt at the top of the list, your smallest debt. Do that every month until it’s gone. Then do it with the next debt on the list. You’ll be making larger payments than you made on the first because now you are free of that first minimum payment. Pay off the second debt. Now you have eliminated 2 minimum payments. Move onto the third and keep going. Each paid off debt releases more money to deal with the next. It’s like getting a small raise every time you pay off a debt.
To ‘avalanche,’ list your debts from highest interest rate to lowest rate then follow the same pattern as the ‘snowball,’ making minimum payments on all, then putting every spare cent against the debt on the top of the list.
Psychologically the ‘snowball’ is more satisfying and probably the most successful. ‘Avalanche’ is slightly faster and slightly cheaper but too hard for many people to stick to because progress may not appear as obvious.
Once you’re out of debt you can start on truly saving for a better future.
Pump your Emergency fund up to $1,000 if it’s not already there. Then build your Hard Times Fund to carry you through job loss, lay offs and economic down turns.
Lucky people might make it this far in a year of two. Others may take 3, 4 or 5 years. Or, like my friend in a previous post, 20 years. But I haven’t met anyone who told me that the effort wasn’t worth it.
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