April 21, 2022

Establishing a Mindset for Your Financial Goals and Savings

Establishing a Mindset for Your Financial Goals and Savings

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It’s always a good time to start planning for your financial goals and savings. Whether you are 25 years old, or 55 years old, it makes great sense to have a plan in place to avoid a situation where – especially later in life – you have too little money to get by.  

Look at today’s life expectancies – chances are, you will live well into your eighties.  That’s a long time, even if you’re in your fifties right now.  A long, healthy life requires that you consider today how you want to live your life in those golden years – as well as how you want to live five years from now – and in ten.  We’ll take a look at some approaches to establishing a good mindset for your financial goals and savings.  It’s never too early – or too late – to start thinking about it.

Couples – Work as a Team

If you’re married, you and your spouse are an economic unit, bound by contract – your marriage contract.  It’s not the most romantic sounding description for a couple, but it can play a very significant role in your financial aspirations.  A few considerations for you and your other half:

Set joint financial goals – the two of you are a team, and should work as one financially.  The most effective way to achieve financial stability and a bright future together is to pool your resources, and set everything out on the table – including bank accounts, debts, and ambitions.  There should be no secrets, moneywise, between a couple.  Student debt, credit card debt, any outstanding loans – these all need to be factored to your joint financial planning.  That way one side doesn’t bring down the other, in situations such as applying for a joint mortgage on a home purchase.

Take advantage of the marriage at tax time – take a close look at who claims what, and maximize any opportunities for tax credits, deductions, and savings.  In Canada, unlike many other countries, married couples do not file taxes jointly.  So in each of your returns, look out for the best possible outcome that will benefit you as a couple or household. Keep in mind also that in Canada, a common law relationship is considered a marriage in the eyes of the law, after three years of conjugal living.

Think about insurance – single folks typically don’t think much about it.  Married couples ought to think about it immediately.  Taking out insurance on each other eliminates, or at least greatly reduces financial hardship in the event one half of the partnership dies suddenly.  Pray that you don’t need to use it – but make sure you get each other insured.  It’s a potential major headache averted down the road.

The Golden Years – Planning for Retirement

It is surprising – even alarming – how many Canadians have no plan for their retirement years, or if they do have one, it’s inadequate.  It’s a great idea to formulate a plan now to stop living paycheck to paycheck, and start socking away dollars for that “distant” time – because in many instances, it’s not all that distant.  Think about how the workplace has evolved in just the last decade or two.  Traditional long-tenure jobs with pension plans waiting at the finish line are declining, while competition for those great jobs is fierce. 

Many “old-timer” employees find themselves handed a pink slip quite suddenly, as a result of a downturn, acquisition, or some other unpredictable situation.  The best plan is to be ready.  Take advantage of all the savings incentives out there, including Registered Retirement Savings Plans (RRSP) and Tax Free Savings Accounts (TFSA). Speak with a financial planner, and get going on a retirement plan – one that may have to kick in earlier than expected.  

Investing Strategies

To avoid putting the cart before the horse, as they say, you need to first avoid the paycheck-to-paycheck scenario we described earlier.  Having an investment strategy requires that you have extra income at the end of each month which you can utilize as savings for a rainy day, or for investment purposes.  

An investment strategy need not be complicated.  It can be as simple as maxing out all your RRSP/TFSA opportunities, both as a way of deferring taxes, and providing yourself a nest egg at retirement.

For many couples, their primary investment in life may be the home they own. This is great if you were able to get into the market at a time when prices weren’t so seemingly out of reach.  Real estate is typically a great investment over time, now more so than ever.  It is definitely a challenge for younger folks today to break into the market, but it’s not impossible.  It takes great savings skills, tenacity, and patience.  Chances are, you’ll have to start very small – for example, with a small condo purchase, and build your way up over time to something resembling a dream home.

Other investment strategies are more complex – mutual funds, the stock market, etc. require time and expertise.  If that’s the path you’re considering, read on to the next heading.

Using a Financial Advisor

A financial advisor can be of tremendous assistance in establishing an investment strategy.  You’ll need to first determine, however, how you want to utilize one.  There are two basic approaches:

The financial advisor helps develop the plan – then you take over and manage it.  This will involve a considerable amount of time and knowledge on your part.  You’ll be looking after an investment portfolio on your own.  If you’re comfortable with that responsibility, or if you’re in a relationship where your partner is, it may be the way to go.

The financial advisor develops and manages the plan – with this approach, you sit down with the advisor to develop both the plan, and its execution.  They make any moves or changes to your investment portfolio with, of course, your involvement and approval.

Budgeting Methods to Consider

One of the hardest tasks for establishing your mindset for your financial goals and savings is establishing a budget, and then sticking with it.  The most frugal among us use a very simple budgeting method: Don’t spend any money.  Period. Pay for the essentials – rent, food, bills, and then sock the rest of it away.  The vast majority of us don’t fall into that mindset.  If that’s the case for you, you’ll need the discipline of a budget to ensure money is left over at the end of the month or pay period.  Here are three budget styles to consider:

Pay yourself first strategy – with this simple approach, you have your savings become automatic.  With every pay period, your predetermined savings amount is automatically deposited into a separate account.  It takes willpower to avoid dipping into it, but at the end of the year,  you’ll have the amount saved that you wanted to.

The formula of balanced money strategy

Here, you separate your budget into three categories:

  • Must have – that’s the big one, typically about half your income – for rent, bills, food, etc.
  • Want – you could call this discretionary spending – eating out, entertainment, subscriptions, extra clothes, etc. – practitioners recommend about 30% of your income in this category.
  • Save – the last 20% should be dedicated to that nest egg.  It should be over and above the discretionary spending in the Want category, although you may fall into the trap of swapping dollars out of each. That might not be good self discipline, but it’s often reality.

Barefoot Investor approach – developed by Australian author Scott Pape.  His methodology recommends setting up five different bank accounts to handle:

  • Absolute necessities – i.e. rent, food, bills, etc. – 60%
  • Splurge – to be spent on anything – totally discretionary spending – 10%
  • Big goals – such as vacations, a new car, etc. – 10%
  • Rainy day – money to be used to help pay off loans or long-term expenses – 20%
  • Separate account – with a separate institution – for real emergencies or unforeseen expenses – it should be $2,000 or greater and kept up or increased whenever possible, for example, with tax refund money

No matter which approach you choose, if you’re not the “save every last dime” type, a structured budget such as the above examples may be of great assistance in achieving your financial goals.

Make a Plan to Financial Freedom

With these sub-topics, you can see that there are various methodologies and strategies to achieving financial freedom.  Like everyone, you probably want to feel secure, particularly down the road in years – we’ve already mentioned that Canadians in general are living much longer than just a few decades ago.  That’s why it’s so important to have a plan in place, so that you’re not caught short at a time in your life when you’re least likely to be able to earn your way out of it, by working harder. 

As a Summary

Here are some additional considerations, no matter what plan you establish for financial freedom:

Be proactive.  Particularly when it comes to planning ahead for your retirement years, it’s never too early to get started – mid-twenties, early-twenties included.  The earlier you get started, the better off you’ll be, because of the simple fact that the runway is longer.  Even with financial glitches that may come your way, you have more opportunity to correct and back on track.

Anticipate the unexpected.  There are going to be financial emergencies that come your way.  It could be a premature car breakdown, or expensive repair.  It may come in the form of a health crisis, or educational debt from your kids.  It’s always a great idea to have an emergency fund, and contribute to it regularly.  It may mean skipping a vacation or two, but you’ll be thankful for it in the event of an unforeseen situation.

Learn from past mistakes.  We all make decisions that don’t pan out. Try to take them in stride, whether it’s a bad investment move, or a failed relationship.  Those errors in life are bound to happen.  Learn from each and every one of them, and try to never repeat them.

Be realistic with your lifestyle.  The temptations are all around us.  The expensive toys, baubles, exotic dream vacations – the list goes on.  Many folks, as they start to earn more, crank up the spending at the same time.  It takes a little self-discipline to avoid this trap.  You may be thankful that you saved more as you earned more, especially down the road in years.  It’s called sensible spending and it results in great financial outcomes.

Monitor your money.  Always know where your money’s going. Avoid the paycheck-to-paycheck scenario where you just know where it all goes.  It can be done, by using a budgeting system, or simply analyzing your household spending, regularly and accurately – and making adjustments as necessary.

We hope you’ve found this summary of strategies and approaches to long-term financial planning useful.  For more expert advice on financial savings & investments, consider contacting a financial advisor today.

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