Have you ever been so connected to a task that you don’t realize how much time has passed? Well, if you haven’t checked in with your investments or a Financial Advisor lately (has it been more than 6 months? 12 months? 10 years?) this is your reminder to check-in this month!
Story time!
You most likely know that I’m an entrepreneur, business owner and financial advisor based in Toronto but, you probably don’t know that I’m an avid cyclist. I love doing group rides on the weekend to blow off steam, socialize and exercise.
The other day, I was on a long bike ride with our group made up of four strong riders and one good rider. The strong riders set the pace and waited at each light until the weaker rider caught up to the group.
After about an hour of riding and stopping, we were all frustrated and angry.
Riding has a firm rule that no rider is left alone (for safety reasons), so I decided to stay with the weaker rider so the faster group could ride at their pace. I didn’t mind riding slower, because I had completed a long ride the day before and I could use an easy one.
Well, a ride that usually took three hours to complete took almost 5 1/2 hours. But what an interesting time! I had so much fun riding, resting, and taking pictures of the scenery that I completely lost track of the time and was shocked when I looked at my watch.
I bring this up not just because I love riding but to illustrate how life works: we often get lost in our daily/monthly activities and fail to notice how much time has lapsed.
We spend our teens growing up, our 20s completing our education and finding jobs, our 30s raising a family and, when the kids are finally in Grade 12 or university, we’re in our 40s or maybe 50s.
In the mid or late 40s, some folks finally realize that decades have passed while they have been very busy with life and that they have saved very little…
At this later stage, people reach out to their financial advisor and ask, “We haven’t saved very much. Are we too late?”
1. Admit you have a problem.
The first step in addressing a lack of savings is to stop believing or hoping that everything will be okay.
Your financial future is too important to rely on HOPE or LUCK.
Admit you have a problem and become laser focused in addressing it.
For example, I often meet couples who are within 10 -15 years of retirement and have saved very little in their RRSPs and/or within their employer’s group savings plans.
They realize they’re late to the game and are often looking for a “get rich quick” scheme or some sure way to win a lottery.
If you find yourself late to the savings plan, don’t look for a wealth advisor with a “crystal ball.” Focus on developing a realistic solution.
2. Prepare a retirement projection
Good retirement calculators may be found online or through a wealth advisor who runs a detailed retirement projection.
The retirement projection will start with current savings (if any) and make assumptions about the future investment return, inflation rate, year of death and government/employer pension.
Ultimately, the retirement projection will determine how much savings will be required in order to achieve the desired retirement income.
The later you start saving, the higher the amount you’ll need.
3. Track your spending and earnings
From my experience, the inability to save is usually connected to one of the following problems:
a) Not enough income
b) Too much spending
c) Not enough income and too much spending
Unfortunately, many individuals or couples are unaware of their monthly spending. In my 25+ years as a wealth advisor, I have met only a handful who have prepared and followed a realistic budget.
For some, the exercise of reviewing monthly expenses is too time consuming. As a result, they avoid it or delay it indefinitely.
I’ll admit myself that until recently, I found the process of setting a budget and evaluating every single expense to be very cumbersome and time consuming.
But not anymore.
Many apps have been developed that make tracking expenses very simple, even for those who have no experience with budgets.
For example, Mint.com is an app built by Intuit that integrates all transactions from each bank account into budget items (such as car lease, groceries, utilities, and so on).
When properly set up, it takes about 30 minutes per month to track expenses and income against your budget.
For example, I have a budget item for everything I buy, including coffee. On a weekly basis, I update the program and can quickly see how much money I have spent on coffee (and everything else) and can easily determine if I will overspend, given the portion of month left. This information allows me to adjust my spending, if necessary.
Personally, the app has changed my financial life because it allows me to track my expenses in real time and without the need of complicated and time-consuming spreadsheets.
Another app I have reviewed is called You Need a Budget. It is also highly effective in tracking expenses without spreadsheets.
Once you run an app like one of these for a few months, I believe you will determine if you have a spending or an earnings problem (or both).
4. Do you have a spending problem?
From my experience, most people have a spending problem and not an earnings problem. Unfortunately, we are blasted with advertisements every second of the day, and it takes an iron will to avoid temptations.
American financial advisor David Ramsey once said that we buy things we don’t need, with money we don’t have, to impress people we don’t like (or, I would say, people we don’t know).
Do you connect to this idea?
Once you have tracked your expenses for a few months, I suggest dividing those expenses into two groups: discretionary and nondiscretionary.
For example, while mortgage payments or property taxes are usually fixed and cannot be changed, other expenses such as travel, coffee, food, clothing, and so on are controllable.
Armed with the two lists, set up a budget for nondiscretionary expenses first, create a savings budget of at least 15% of take-home pay, then allocate remaining earnings to nondiscretionary expenses.
Once the monthly budgets are set, you should frequently update the app and make it your mission not to overspend.
5. Do you have earnings problem?
To be honest, the easier problem to correct is the spending problem. We have direct control over how much we spend, while our earnings are not something that can be easily adjusted upward.
However, if you started saving late, I suggest an aggressive approach to the problem that involves decreasing discretionary expenses and increasing earnings.
Improving skills or education level, asking for a raise, and changing employers are all viable options to increase one’s income.
But I think one overlooked and potentially rewarding option is starting your own side hustle. Examine your passions. Can one of them be turned into a part-time income?
Here’s a few examples of side hustles:
- Teaching French, piano, swimming, golfing, etc.
- Writing/editing
- Selling surplus goods online
- Dog walking
- Podcasting
- Accounting/law/consulting services
- Home repairs
If you’re looking to increase your income, ask yourself whether you can monetize one of your hobbies or skills.
6. Are your fixed expenses too high?
In some cases, lowering expenses and earning more money will not completely solve the financial problems associated with starting a savings plan later in life.
From my experience, some people have fixed or non-discretionary expenses which are just too high.
For example, some people’s housing cost is too large in relation to their earnings or earnings potential. This is a common problem in the GTA which could get worse if the economy weakens or interest rates rise to a more historical level.
In this case, I would run detailed cash flow projections and may advise downsizing the home and reducing housing costs. This is a hard pill to swallow but may be necessary to right size someone’s financial picture.
Conclusion
Starting to save late doesn’t need to be financially fatal, but it will require a laser focus on the mission and, possibly, making and living with difficult decisions like delaying retirement or downsizing the principal residence.
If you’re in this situation, don’t despair. Call my office. We’ll start with a retirement projection and then help you lower your expenses, increase your income and catch up.
Never Retire Profile
Murray Sinclair
Former member of the Canadian Senate, First Nations lawyer, and chair of the Indian Residential Schools Truth and Reconciliation Committee, 77-year-old Murray Sinclair has been on message for years: the purpose of residential schools was to eliminate Aboriginal cultures and racial identity. As a result, says the TRC Report, Canada has committed cultural genocide. While this is a conclusion many Canadians are only coming to understand today, Sinclair’s personal history as an Ojibway, career as a judge and senator, and civic service on community boards have earned him a tremendous capacity for insight as well as 14 honorary degrees. Heeding his words will help all Canadians to heal, repair and move forward: “Reconciliation is not an Indigenous problem. It is a Canadian one.”
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