An emergency can trigger unusual spending. If you have no emergency fund, you will have to borrow money to solve the problem. If the debt is large it will take years of catch-up to pay it off. How would you adjust lifestyle to pay off both the debt and the accumulating burden of interest costs?
Sometimes the problem is not created in an instant, but rather over time, caused by unrealistic expectations- of your spouse, children, family and neighbourhood. It just creeps up, always manageable, until suddenly it is not.
Sometimes the problem is created by our attitude of entitlement, this destructive expectation of accumulation without striving or effort. Our next generation, our children, inherit our attitude of entitlement, and perhaps we inherited it ourselves.
The odd reality is that all of these conditions can apply to any of us, regardless of income. Because the problem is universal, an increase in income does not change the pattern. Financial stress is neither caused by nor alleviated by changes in level of income. It is a function of who we are, and our culture.
The rhythm of our culture beats around us and we move with the flow. To make changes that are internalized and lasting you have to step away from the beat.
If you have large debt you must stop spending. Not so easy. Budgets do not work for most of us. I think that budgets work for people who are comfortable with fairly rigid structure. For the rest of us, we have to seek an alternative.
A Three Month Experiment
Step One: This is a three month program that reduces most of your discretionary spending. Learning to say “no” is so difficult because our national prosperity is dependent on achieving ever higher levels of production and consumption. We are bombarded with incentives, planned obsolescence, and changing trends. So, simply list all of your discretionary items, prioritize them, and we will go through it all in the next Blog.
The dictionary gives one definition, “giving of reason to act, incentive”. I still remember the early 90’s, new to the financial services industry, I would watch my branch manager hand thumping on the boardroom table, inspiring our group to be productive. I finally left the fold. The weekly headaches were cumulative.
Another definition describes “forces determining behaviour”, and includes the biological, emotional and cognitive forces that activate and direct behaviour, as well as the social impact. Inner drive is the motivation that fuels most lasting changes in habits and behaviour.
At CashPlan we begin with Motivation. The 5 Step Program works because participants are motivated to make changes in the way they view money, spend money, plan for security, and for their families.
An acquaintance responded to my description of what CashPlan tries to give to clients, with, “I really need that!” And my reply was, “Why?” What can we do for you if what you want to change is the outcome of your habits, but not the habits themselves? At what point will the repercussions of your money behaviour affect you so deeply that you will find a need to change the habits, knowing that the outcome will follow.
The story I just told you about my branch manager shows an attempt to influence through incentive. How can you buy into a person’s call to action when their only ammunition is an enthusiastic voice and hand pounding? Real incentive comes from your core, your gut telling you that you have so much to lose and so much to keep if you change your way of dealing with debt, savings and cash flow.
The first reason that CashPlan works is because of our clients’ motivation. Then we go to work.
There is a looming danger within our sights. Personal debt is the elephant in the room, and catastrophe will hit when interest rates begin to climb.
Today, a million dollar mortgage costs about $4,200 per month, amortized over 30 years at 2.99% annual interest rate. At a 38% ratio of debt to gross income, a family only has to earn about $112,000 per year (assuming all other expenses fall in line) to afford this home. This would be a nice home in Toronto, but not particularly outstanding. Fast forward five years and interest rates are 7%. A one million dollar mortgage amortized over 30 years will cost more than $6,500 per month, which is more than a 50% increase. This family has to pay income taxes, pay utilities, feed and cloth themselves and their 2.5 children, and run at least one car on the balance of available income.
People are not talking about this problem. Couples are not communicating their fears or their reassurances. Is it possible that almost 20% of the population has included lottery winnings into their future financial plans? We have to get real.
If you are under the age of 65, you may have been raised to believe that you are entitled to what you want. This entitlement is disconnected from effort and work ethic. We are not entitled to what we cannot pay for. Soon enough our indulgences will be lost because our income cannot move fast enough to avoid the speeding bullet heading right at us.
There is a solution. You can soften the problem if you start now.
Let me give you a few examples:
1. Renegotiate your mortgage to a five-year rate under 3%.
2. Amortize that mortgage over 20 years and if you cannot cover the monthly payment, consider the need to move.
3. Add up all of your consumer debt and pay off higher interest rate credit cards before lower rate cards. Always make the minimum payment. Do not miss any scheduled payments.
4. Always, always have access to funds if you are hit by an unexpected setback. That means setting up a line of credit that you will not use unless under extreme circumstances such as illness or extended loss of employment.
You can embark on this journey on your own, or you can ask for guidance. Let us show you what we can do for you.
What is CashPlan?
CashPlan is an organization devoted to advising and guiding higher income clients who want to control their financial lives and security. What makes CashPlan different from other organizations are the methods we use to achieve goals; CashPlan designs actionable solutions. This advice, or plan of action, results in a higher possibility of success with less stress.
“Just because you earn more than most, does not mean your life is void of financial stress.”
Using a combination of common sense, financial know-how and your own natural way of approaching change, a plan of action is tailored specifically for your financial obligations, goals and your own way of solving problems.
Three core components to successfully start building your own CashPlan:
1. Financial Analysis
We need to get to know you. The confidential and private forms you complete and submit provide an understanding of your financial situation, including: your assets and liabilities, income and expenses, future obligations and your long-term lifestyle priorities.
2. Common Sense
We believe that to look at the real problem you need to scale away your non-essential financial stresses. That means expenses, such as driving your leased Range Rover or the club memberships that consistently go unused. Other changes may not be as obvious, but if they are common sense solutions they are generally our first plan of action. Make up your own list of discretionary expenses. You may be surprised at the waste each month and the positive changes you can make.
3. Tailored to You
At our first meeting we discuss your financial goals and motivation for change. Making changes in your lifestyle to achieve a financial goal is tough. Those changes can be especially challenging if you have to go through a stressful process. That is a double whammy! CashPlan will ask you to make tough choices, but the process and the call to action will be tailored to your natural ways. This is done through the Kolbe ATM Index(1).
What makes CashPlan unique? Our ability to identify the goal or the problem, our ability to separate solutions into immediate fixes and long-term fixes and our ability to design a plan of action geared to the client’s natural inclination to solve problems.
(1) Kolbe A Index is part of the Kolbe Wisdom. Reference Kathy Kolbe, Kolbe Corp.
Is Your Lifestyle Getting In The Way Of Your Values?
Do you know what is important to you? Really important? What are your values? What are your dreams and what do you have to do to make your visions real?
Is your lifestyle getting in the way of your values? How are you living today? Will that help you live your dreams in 5 years, 10 years or 20 years?
If your lifestyle has run away with your future, you can regain control. Making changes is not easy but, if you are motivated and you have a good strategy, you can make a difference.
Step One: Identify What Is Important To You.
On a page of lined paper draw a vertical line down the centre. On the left examine your life today and identify what is important to you and your family. Include significant activities, actions and plans. This may include: home ownership, volunteering at the local food bank, a private school for the children, and often pets, vacations and cottages.
On the right side of the page examine the life you want to have when you are 60, or even 70. Your lifestyle may be quite different. Do you want to pay off your mortgage and live in your home? Do you want to retire to Costa Rica? What are your expectations for the future? If you value them, list them.
Step Two: Determine and acknowledge that you may have to make changes in your spending habits today to live the lifestyle you are working towards ten or twenty years ahead. What will the cost of that lifestyle be in today’s dollars? Cost it out. Using this as a base, add inflation perhaps at 3%, and an emergency fund to take care of medical expenses and long-term care for a time even further ahead. Is your current lifestyle going to get you there?
Step Three: Re-evaluate your priorities in light of what you have learned through this process. What do you have to do to close this gap between the reality of your current future and what matters most to you for your future life?
We can help,