finance | mindwi.se
Even if I consider myself lucky financially in life, it is not a reason to waste money and/or time. I'm quite strict, even if many previous (and future) purchases don't align perfectly. There is always room for improvement.
Without regrets, there is so much I wish knew when I was 18 years old. Bad decisions from the past should not guide our future ones. Most of the decisions can be reversed, the only thing that restricts us to do so is our emotions.
Have you ever had a banknote with a mustache on it?
I discovered in 2013 a blog based on this banal and humorous idea: Mr. Money Mustache. The main line of thought is: save your money by limiting your completely unnecessary spending and you'll be able to retire quickly.
Its principle is simple and mathematical: the moment when you can retire depends entirely from your savings percentage. Totally spend your net income and you will be working endlessly. Save all of your assets and you can stop working now (because you live for free). The interest lies between these two extremes.
If you manage to save 50% of your household income (referring to your net income + benefits), in less than 17 years, you are retired. This is based on the following assumptions:
- You get 5% return on investment after inflation during the savings years;
- You live on the 4% withdrawal ratio after retirement;
- You want your savings to last forever by only touching the gain from interest by thinking of a safety margin.
With all his articles, I learned a lot, like for example that by keeping my current ratio of 10% savings to my net income, I would have 51 years left to work. This is a clearly insane situation. I have to get started and analyze the expenses I am making in order to increase my savings rate to 25% to enjoy life to the full within 32 years ... phew!
Of course, this calculation does not take into account government social programs, such as the Canada Pension Plan (at age 60) and the Old Age Security Pension (at age 65).
How do you achieve such a high savings ratio?
Mr. Money Mustache has lots of ideas and shares them with passion. I only have to think of his obvious suggestion to live closer to his work in order to use his bike and avoid buying a (second) vehicle. With his method of calculation, he estimates the savings over 10 years by using a bicycle instead of a vehicle at nearly $100,000, an amount that seems very realistic to me, given that 46% of my previous expenses concern my three vehicles.
In a society where we agree to get out of school in debt, the principle of being in debt is bastardized. Student loan, car loan, consumer loan (pay nothing for 12 months), etc. Despite what some may lead you to believe, there is no good debt to improve your credit rating. The basic idea is to avoid all debt. Just because everyone is in debt doesn't mean you have to be to follow the pattern.
Come to think of it, the sole principle of debt is nothing more than a stressor and overconsumption in your life.
Whether it's psychological stress due to debt, depending on a lender, reducing your savings possibilities each month (because your margin is reduced by debt payments), buying property too expensive or purely unnecessary purchase, debt is not your ally.
To live simply is also to live in debt and without these problems. Whether your income is $20,000 annually or monthly, it is possible to live well with some sensible changes and choices. By reducing your needs, you can often regain control of your finances and avoid debt. If you really want to live simply, you should really consider the goal of being debt free.
Getting out of a debt situation:
- Change Your Mindset: Reading about financial independence can help you understand how cutting expenses without increasing income is a way to avoid debt and take back control of your time.
- Take stock of the situation: a financial planner can help you straighten your budget and realign your goals. Paying off your debts with the highest interest rates first should be your first instinct. The payment that you have eliminated will then be used to pay off the other debts to create a snowball effect and ultimately eliminate all debts.
- Budget: Whether with You Need A Budget or with a simple spreadsheet file, you need to know where your money is going.
- Continue: During your course, it is important not to give up. Tightening your belt for a while will pay off in the very long run. Increase the intensity if possible by reducing your unnecessary spending and paying off your debts faster.
- Keep Debt Free Finances: When your debts are paid off, it is all too easy to fall back into the trap of justifying a purchase just because the monthly payment can be absorbed now that you have free money. Other than a house, don't consider financing anything. A car can be paid for in cash; this will undoubtedly make you aware of the price paid instead of financing the whole monthly over 5, 6 or even 7 years.
Some advice :
- Avoid falling into the panel of 0% finance rates. Car dealers are great at manipulating the numbers to make you see that you can get into debt on a car. Even at 0%, you will pay a finance charge in the price of the vehicle, in addition to the massive depreciation of a new car in the order of several thousand dollars annually.
- Before any purchase (even without financing), consider a period of reconsideration on the purchase (a few hours or a few days). Often you will change your mind.
- Review the usefulness of a credit card: instead of seeing it as a method of payment that allows you to buy without worrying if you can afford it (to realize 1 month later than you go carry over the balance to the next month), think of it as a payment method connected to your bank account and that you must have enough funds in it to get something. In the first situation, the card becomes a method of financing, while in the second, it remains a simple method of payment.
With time, we come to forget where we save so much that is part of our habits. We live frugally, but the novelty effect of the savings slowly disappears, to the point where we don't think about it at all.
For my part, I tried to put together a list of what I spent annually, but which I decided to reduce or eliminate.
Expenses eliminated from my habits (estimated annual savings):
- Television subscription ($500 to 800)
- Excessive depreciation of a luxury car ($2,000 to 3,000)
- Excessive depreciation of a smartphone ($300 to 400)
- Second car ($7,000 to 10,000)
- Disposable drugstore items, such as razors, wipes and more ($100)
- Various subscriptions, such as magazines and web applications ($200)
Expenses reduced and controlled as much as possible (estimated annual savings):
- Home insurance ($200)
- Auto insurance ($400)
- Plans for 2 smartphones ($500)
- Fuel used compared to an average new car ($500 to 600)
In total, it is between $11,700 and 16,200 including the cost of a second vehicle that I permanently eliminated from my habits.
February marks the start of tax season (in Canada at least). Now is the time to turn the page on a difficult year or a year when long-term savings did not have the priority hoped for. Speaking of which, I often hear people say that they are going to spoil themselves with their tax “return”.
First of all, it is not a return, but rather a refund. Refund as in over-payment. Indeed, it is an adjustment of accounts with the government according to established fiscal standards. It is not free money that is given to you. You worked to earn it. If you stretch every dollar in your budget during the year in order to get the best return, why not do the same with this rebate which is nothing more than the fruit of your labor?
Whether you have $200 or 6,000 in tax refunds, the wisest thing is always to think about it before using it as if there is no tomorrow.
Some questions to ask yourself
If after going through these questions you still have your full refund, there is only one thing left to clear up before you do what you want with it: in the case of an upcoming consumer expense like a trip or a luxury good, do I really need it?
In our case, we'll get two around $2,500 after our respective returns. I am currently juggling the idea of keeping it for a while in a high interest rate savings account (understand that it is a meager 1.85%) in order to use it in a future RESP and maximize government contributions.
- Do you have debts to repay? Auto loan, consumer debt (s), line of credit? If so, then pay off the debt with the highest interest rate first.
- Did you contribute to an RRSP in 2018? If not, then this tax refund could be a good start for 2019 (depending on your current and future situation).
- Have you maximized your TFSA? In order to avoid spending your refund, this is often a safe place to build your long-term savings.
- Have you contributed to your child's Registered Education Savings Plan (if applicable)? The habit of contributing to your child's RESP can also result in up to an additional $7,200 from the government under the Canada Education Savings Grant (CESG). The maximum of $7,200 in grant is obtained after approximately 15 years of contribution ($2,500 / year).
- Can you make an extra mortgage payment? If every year you have this habit on 25 year amortization, not only will you save interest costs, but you will have paid off your loan in 266 months at instead of 300, be after a little less than 22 and a half years. Use this mortgage calculator to familiarize yourself with prepayments.
That gross national product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and it counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman’s rifle and Speck’s knife, and the television programs which glorify violence in order to sell toys to our children.
Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country…
(Robert F. Kennedy, durant une conférence à l'Université du Kansas en 1968.)