Little changes can make a big difference
As this is Financial Literacy month, and the theme is “Take Charge of Your Finances!”, I want to talk about the very foundation of financial literacy, the building block of successful financial management: the budget. I can sense eyes glazing over right now, but before you click away to another more interesting page or a funny cat video, let me talk about lattés instead.
There’s no question, we love our lattés. It’s what’s made Starbucks one of the most successful coffee shop chains in the world. But for that delicious creamy, foamy taste of coffee heaven, you’re paying…what? Most of us don’t even know and couldn’t tell if you were asked. It’s about four and a half bucks for a “tall” one. Two measly little toonies and a couple of quarters. Doesn’t sound like a lot, does it? Add a tasty little snack, a break biscotti maybe, and you’re up to nearly six bucks. Do it every day, and you’ve dropped $30 or so on that “little” treat every week. That’s $1,560 a year.
If you’re a lunch buyer rather than a brown-bagger, you’re paying an average $10 a day. Eating lunch out three times a week adds up to $1,500 per year. Tack on the $1,560 a week for those lattés, and you’re up to $3,060 a year. That’s $255 a month.
So here’s an idea. Give up the lattés for a year. Brown bag it more often. Save that $255 per month in a premium savings account – and don’t touch it for 19 months. After that, with a little interest tacked on, you’ll have saved up over $5,000.
Then what? If you’re young (and Starbucks caters mostly to the young and restless), you’ve got a long investing horizon ahead of you. Lots of time to build up that nest-egg. So with the money you would have spent guzzling Starbucks lattés and grabbing daily fast food for lunch, you can open an investment account.
Okay, the million-dollar question: What kind of investment account? The simplest thing to use as an illustration is a top-performing equity mutual fund. And believe it or not, there are such things. Over a 15-year period ending Sept. 30, 2019, one top-performer in the Canadian equity category had delivered a compounded average annual return of 10.5%. So let’s assume you put your $5,000 into a fund like that and continue to contribute $255 per month. If you’re 25 or 30 years old, after 25 years, that money will have turned into $403,000! Of course, that kind of return can and will fluctuate. But it’ll still amount to a considerable sum, somewhere in the six-digit range.
You haven’t done anything except give up those pricey lattés and greasy lunches – and the fat and calories that go with them! And remember, most of us keep working through our careers. Our incomes increase. We get married. We contribute to employer pensions. Our wealth increases. But that $400,000 latté is your little bonus when you’re ready to retire. Over and above all the other pensions, real estate, and assets you accumulate in your lifetime.
So what’s that got to do with budgeting?
What a budget really is
Too many people think of a budget as a constraint on their activity or lifestyle and therefore avoid ever making one. After all, who wants to give up that pumpkin spice latté forever? In fact, you may not have to. A budget is more of a bird’s-eye view of your income and expenses that can highlight areas of possible trouble and help you avoid financial difficulty.
The first place to start is to try to get a handle on where your money is going. Determine how much income you have. If all else fails – look at your bank statements. Document what you find. Next, perhaps again by consulting your bank statements, determine how much debt you paid off over the past year. Mortgages and credit card debt are the most important items to nail down. Now you can document exactly how much you saved, which can be earmarked for long-term investment purposes.
Now pull it all together. Take your total income and subtract the amount you saved, the amount you paid in taxes, and the amount saved for long-term investment purposes. The amount you spent over the last year is the number that is left. That is what you are spending – no doubt about it. It may be necessary to dissect it a bit more if you are spending more than you are earning.
The most common cash drains are vehicles and credit cards. The big thing right now is to pinpoint the problem areas. Beyond credit cards and cars – each of us seems to have one or two more areas in our life where we overspend. That’s okay – it’s your choice. The important thing is to be aware of the areas where you “overspend,” and decide if you are really getting your money’s worth. The Financial Consumer Agency of Canada has a handy budget calculator on its website to help you get started.
Going for a latté or two every day? Think about it. Maybe treat yourself once or twice a week, and switch to a refreshing herbal tea the rest of the time. Then invest what you save. And if you already have over $100,000 in investable assets, for heaven’s sake, don’t let it sit idle!
© 2019 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.