By Adam Mayers
The great truth about saving is that while everybody says you should do it, nobody really wants you to, except you.
What everyone really wants — your kids, the bank, the grocery store, your favourite boutique, is for you to spend as much money as you can and as often as possible.
That’s why saving is so difficult.
Temptation is everywhere and the self-justifications for giving in are huge.
The added disconnect for baby-boomers is that they grew up in the most affluent generation in history. They are conditioned to think that things always get better, so why save for tomorrow when you can enjoy today?
The boomers’ kids, seeing how their parents live, want the same good life. You can borrow on your line of credit at 3.5 per cent, so a new bathroom with heated floors and marble tub is a phone call away.You can push the day of reckoning way off into the future by making a monthly interest-only payment, not touching a penny of the principal.
This may explain why Canadian line of credit debt stood at $219 billion at the end of last year, according to the Bank of Canada. That’s double the amount of five years earlier. Twenty years ago this form of consumer borrowing didn’t exist.
Helping us along this path of ever-rising spending are Bank of Canada governor, Mark Carney, and finance minister, Jim Flaherty. They love to admonish us for poor savings habits, while seducing us with low interest rates and easy credit. And where do banks make bags of money? Lines of credit, credit cards and mortgages.
According to Moody’s our debt-to-income ratio is at an all-time high of 150 per cent, higher in Canada than it was in the U.S. prior to the subprime mortgage crisis. It means on average we owe $150 for every $100 we have coming in.
But if you want to succeed, you have to live like The Millionaire Next Door, as the title of a book by Thomas Stanley and William Danko puts it.
Successful people know that the key to financial independence is spending less than you make. Stanley and Danko profiled the lifestyle of these people to find out exactly what that involved. They discovered there’s a big difference between accumulating wealth and having a lot of money to spend.
They found that the wealthy rarely drive fancy cars or live in the biggest house in the best neighbourhood. They don’t wear $1,000 suits, buy status objects, or live a status lifestyle.They live below their means, plowing what they don’t spend into savings and investments.
Their neighbours who live in luxury, wear the expensive clothes and have the new cars have big salaries, but not necessarily lots of wealth.
You can be the millionaire next door. You don’t need a raise, or a better job. You just have to look at what you make and what you spend and bring the spending down below what you make. A small reduction in spending can dramatically boost your savings.
1. Start with a budget. Everyone hates budgeting. It’s boring and time-consuming, so finding the motivation can be tough. But you have to start here. Look at what’s coming in every month. Then look at where the money goes, right down to the $5 a week for the office lottery pool. Spend a month keeping track of where it goes. Write it all down. This is important because writing things down makes it real. You’ll be surprised at what you find.
At the end of the month, come up with a plan that cuts spending to less than the amount coming in. Take the saving and put it out of harm’s way. A good place is a tax-free savings account. Whatever you make inside a TFSA is tax free.
2. Payroll deduction. Out of sight, out of mind, works well with savings because it reduces the temptation to spend. Payroll deduction is your ally. Send your monthly saving directly into a TFSA, or other account (your bank can help) via payroll deduction. If you get a raise, take part of it and increase your deduction. It doesn’t have to be a lot. An extra $25 a week is $1,200 a year.
3. Set the budget aside. Carl Richards, who contributes to the New York Times Bucks blog isn’t a fan of budgets, but is a fan of the budgeting process.
Richards wrote a book called The Behavior Gap, which looks at how and why we make such bad saving and investment decisions.
He believes that financial plans, of which budgets are a part, are worthless, but the process of planning is vital. A plan makes all kinds of assumptions about the future that you can’t possibly know . . . things such as how big a raise you’ll get, or how much the hydro bill will rise next year. But the process forces you to confront what you’re doing now and act accordingly. You can always change the plan.
4. Ask for savings: Once you find some savings, the goal is to find more. An easy way is to make like Oliver Twist and ask. Ever noticed how phone and cable companies have all kinds of great deals, but you never seem to get them? That’s because the juicy come-ons are aimed at new customers. They already have you. But, if you call and ask for a better deal, you’ll probably get one. That’s because they know it’s easier to keep you as a customer than find a new one. This includes your bank. Call periodically and review your services. Is there a bundling discount, a cheaper way to borrow, a better rate? If your mortgage comes due, shop around.
5. How to ask for savings: The key to getting a better deal is persistence, patience and being informed. Always be polite. The person on the end of the phone doesn’t set policy, just executes it.
Do your homework. If Bell is offering a better deal and you’re with Rogers, know the details on the Bell deal and ask Rogers to match it. If the rep can’t help, then ask for the customer-retention department — they probably can. Be reasonable, but be prepared to take your business elsewhere.
6. Spend on things you love: While every little bit helps, don’t forget to reward yourself. The goal of saving is not to deprive yourself of earthly pleasures, but to free up money to spend on things that are important to you.
As Alison Griffiths wrote, in a personal finance column for the Toronto Star: “Though your purchases may rank as wasteful or uninteresting to others, if they fuel your life’s engine, go for it!”
Amen to that.