The remedy for financial overindulgence
Every year around this time, I’m asked how to overcome the seasonal spending disorder that grips a large part of the population. But there is a remedy, and it doesn’t involve laborious budgets and daily penny-counting. Instead, step back and look at the bigger picture from the top down.
You don’t have to create a complicated spreadsheet. But you do have to set some general short term and long term goals. For example, through the year, will you be saving for a down payment on a home? Are you setting funds aside for retirement? Do you need funds for a vacation? Or a new car? Or Christmas presents?
Plan to achieve goals
All of these goals need a plan that allows you to set priorities and assess your resources. On one side of a simple sheet of paper, write down your goal – say a Caribbean cruise. And let’s say it’s going to cost you $5,500. On the other side of the sheet, write down how much you can set aside from every paycheque to put towards that goal. Divide the bigger amount by the smaller amount to see how long it’ll take to save up to pay for that cruise in cash. At this point, you might just give up and use “the card.” But that’s just a plan to forget about priorities and dig a deeper hole.
So maybe you could use a financial planner who is an expert at this sort of thing. If you want to make sense of that shoebox full of slips, and bills, and forgotten priorities, find a Certified Financial Planner to help you out.
Save some money
Sure, that’s what every financial advice-giver says. But how do you do it? The easiest way is to set aside some manageable fixed amount from every paycheque, and put it into an investment account. Make it an automatic transfer from your bank account. How much? Some experts say you should save 10% of your after-tax income. Some experts should get a life! I really doubt that’s possible for most of us. I say set aside whatever you can comfortably afford to, but do it consistently. That’s the real trick: Done regularly, setting aside even $25 or $50 per week can really add up over time. That’s all about the magic of compounding.
Put that $50 a week – say, $200 per month – into a low-risk investment account that generates, say, 4% return compounded annually. Even if you never again increase your monthly saving rate, and that rate of return stays constant for 25 years, your savings will grow to over $102,000!
If you already have investments
If you already have some investments, say an RRSP, a Tax-Free Savings Account, or a non-registered brokerage account, make sure your overall investment holdings match your tolerance for risk. Clients have come to me claiming to be ultra-conservative investors, but with portfolios chock-full of equity mutual funds. Hardly low-risk! It’s a fairly simple matter to fix, with a questionnaire I use to draw up a realistic risk profile.
It’s not complicated. Ask yourself what level of loss you can stand in your portfolio over a given length of time. Are you okay with a drop of 10% over three months? Or a year? On a $50,000 portfolio, that’s $5,000. Remember, 10% is how much the stock market loses when it’s going through what’s called a “correction.” Are you really, truly comfortable losing that $5,000 in a short period of time? Maybe not!
Creating an honest risk profile will help you rebalance your portfolio in the New Year to just the right mix of safety, income, and growth assets that will truly meet your needs – and let you sleep nights.
Setting budgets for the nuts and bolts of your monthly income and outgo are all well and good – and even necessary. But it’s only one part of the personal finance equation. Starting at the top, setting goals, and developing a plan are really the first steps to curing seasonal spending disorder.
Finally, on behalf of all the staff and associates at Castlemark Wealth Management, I’d like to wish everyone a happy holiday season and best wishes for a healthy and prosperous New Year.
© 2014 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited.