There is one thing that is of primary importance on the road to financial success. It’s not your income, or Registered Retirement Savings Plans, or home ownership, or negotiating a better interest rate from your bank. The most important thing that determines whether a person will be financially successful is controlling your cash flow.
What do I mean by controlling your cash flow? Very simple: spend less than you earn, and put a little bit away for the future. Like many good ideas though, the fact that controlling your cash flow is simple doesn’t mean that it is easy to do.
There is a lot of temptation out there, and it’s all too easy to spend a little more than a person should. As a matter of fact, it’s jolly good fun to go into debt – that big screen TV that you don’t pay for until next spring, that vacation that gets charged to your credit card, that new vehicle with those low monthly payments. Getting into debt is fun!
Getting out of debt, on the other hand, is a different story. There’s no joy involved in struggling to get out of debt. And getting out of debt can take years.
It can be so very tempting to splurge, to treat yourself, to rationalize that you really do need something bright and shiny. Bright and shiny things are fun. But too many splurges can but a pretty serious kink in your finances, not just now, as you struggle to pay for these bright and shiny things, but later on as well.
Too much debt makes it that much harder to reach your financial objectives. Having monthly loan obligations means that the money needed to service those loans can’t be used for something else, something that increases your net worth. Meanwhile, think of the interest payments on your loans as your money disappearing is a puff of smoke.
People sometimes call me, looking for help after they realize that things have gotten out of control. And these people have one thing in common. It’s not necessarily age, or occupation, or lifestyle choices that these people have in common. No, the trait that they all share is that they are miserable.
Being up to your eyes in debt, to use the colloquialism, sucks. Obviously it keeps you from accomplishing the things that you want to do, but it also is extremely stressful – both for yourself, and for those around you. The misery of the downtrodden debtor.
Here’s the thing that the “buy now, pay later”, instant gratification mentality sweeps under the carpet: There is a price to pay for our spending decisions, and the price can be steep. People who choose to live beyond their means while they are working are likely going to pay a hefty price during their golden years for their spendthrift ways.
Here’s the scenario: During a person’s working life they spent money like a campaigning politician. They lived in a house that they couldn’t afford, leased new vehicles every couple or three years, bought expensive things that sat unused in the closet gathering dust. They couldn’t go through money faster if they set it on fire. The family budget is on life-support. Every penny of income, plus a little borrowed money to boot, gets staked in the perennial game of “Why shouldn’t I get it now?”
Okay, now it’s the end of the working years. It’s time to put our feet up on the porch and enjoy the view. The only problem is that nothing has been saved and there is not enough cash flow to sustain the lifestyle. And now we are looking at pretty severe lifestyle adjustments.
By foregoing smart financial planning during the working years, when a person has both time and resources on their side, many people are going to be in for a rude awakening when they realize that they are staring at retirement with depleted savings. What was supposed to be a time of leisure suddenly looks pretty bleak, with few decades of retirement ahead and little to draw on.
If these people do not change their spending habits now retirement is going to seem more like purgatory than a time for relaxation and leisure. This is not a melodramatic statement. The average Canadian baby boomer carries 5 to 10 credit cards, and yet 42 percent of Canadians have no savings.
This would be less of a problem if people were both willing and able to work their entire lifetime. However, 66 percent of Canadians want to retire before age 65.
To be brutally frank, a very large number of Canadians need a reality check. We have all these people who want to retire, but they have no idea how this is going to happen.
Of these people that you would think would be, at a bare minimum, giving some amount of thought towards retirement, never mind actively preparing for it, 79 percent of people do not have a retirement plan, and 59 percent say that they are behind in saving for retirement.
I don’t know how much more clearly I can state this. If you aren’t preparing for retirement, then don’t expect much of one. Sure you can retire without any savings of your own, but it won’t be an early retirement, or a luxurious one.
In our area we have quite a few people who make (and spend) a lot of money. Here’s the thing though; being “rich” is not a retirement plan. In fact, wealthier people have been found to be at even greater risk of facing an unpleasant and startling decline in their income at retirement. Simply put, very few high-income earners save enough to maintain their standard of living through retirement.
Many people who would generally be considered well off rely on their enviable salaries to pay for their daily bread with Grey Poupon. So what do these people do when those enviable salaries are no longer there?
One of the biggest problems is complacency. Even people who have high incomes are unaware of the need for retirement planning. That’s a mistake. You don’t have to make it. Prepare for retirement now.
A retirement plan looks at how much they can reasonably spend, how you should invest so that you don’t outlive their savings, and how much you can reasonably leave behind for your family or favourite charity.
Live within your means, and squirrel a little away for the future. That’s the key to financial success.