What do you prefer to spend your money on? Cars, houses, vacations? Everyone spends their money differently. Some people enjoy nice cars, large houses, the latest clothes or gadgets, luxurious vacations, food, wine, restaurants, the list is endless.
But for some of us, we like to spend our money a different way. Some of us like to slowly buy more and more freedom, flexibility, and time.
Like other ways to spend money, buying freedom is a personal choice, but it’s the right trade-off for us. We don’t value expensive cars, or large houses, or expensive clothes, but what we do value is freedom, flexibility, and time.
How much does your vehicle actually cost each year? It’s likely more than you think. With insurance, gas/fuel, maintenance, licensing, future upgrades etc. the list of vehicle related expenses is quite long.
As a general rule of thumb, the average household spends about 15% of their net income on transportation. That’s a lot of money! That basically means 15% of our working lives is dedicated to spending on transportation.
If the average family with children has net income of around $105,000 per year in Canada, that means the average family is spending approximately $15,750 per year on transportation costs!
If that spending carries forward into retirement, that $15,750 per year in annual spending would require a nest egg of $393,750 just to support the same level of spending in retirement.
So, not only will this family spend $15,750 per year on transportation, but they’ll also need to save up $393,750 before retirement to support that spending in the future too!
Spending $15,750 per year on transportation might seem like a lot of money, but as we’ll see, it’s pretty easy to get there depending on the choices you make…
Where do I want to spend my time? Not managing my finances, that’s for sure.
If you spend more than 30-minutes per week managing your finances then you need to simplify! That includes budgeting, paying bills, making debt payments, and moving money around.
Spending a lot of time managing your finances can actually be bad for your net worth. It zaps your energy and leads to bad financial decisions. Spending a lot of time on your finances can lead to budget fatigue and makes it more likely that you’ll make an impulse purchase.
Simplifying your finances doesn’t have to be difficult. It might require a bit of time up-front but once you’ve made a change you’ll immediately start to see the benefits.
One amazing thing to consider about personal finances is the sheer amount of money that will flow through our hands over a lifetime.
Knowing how much money we’ll touch over a lifetime provides a very good incentive to get better at managing income and spending, to learn more about investing, to understand how income tax works etc. etc.
Given the amount of money we’ll handle over a lifetime, learning more about personal finances will pay dividends over many years. If you’re able to manage money well, then you’ll have a life that is free from financial stress (for the most part, it’s never possible to completely avoid financial stress).
Because of the sheer amount of money that will flow through our hands over a lifetime even a small positive change can have a significant effect.
So how much money will we “touch” over a lifetime… is it $500,000? $1,000,000? $2,000,000? $5,000,000? You might be surprised…
Retirement spending is one of the most important assumptions in a retirement plan. Making the right retirement spending assumption can make the rest of a retirement plan much easier. Making the right assumption can also make a retirement plan much more successful.
Making the wrong retirement spending assumption however could mean running out of money in retirement, or it could mean working longer than necessary, or it could mean accumulating millions of dollars late in retirement. All things we would prefer to avoid.
Of course, there are some simple “rules” for retirement spending like assuming 70% of pre-retirement income, but given how important retirement spending is in a retirement plan these generic rules can lead to issues in the future.
When creating a retirement plan it’s important to make the right retirement spending assumption. This means avoiding generic rules and instead understanding your unique spending needs today and how they might change in retirement. This also means understanding the impact of being wrong with your retirement spending assumption and how doing a “trial run” of retirement spending can help improve the level of confidence you have in your retirement plan.
What would you do in a financial emergency? What steps would you take? Do you have a plan in place?
It turns out that nearly 4 out of 10 people don’t have even a basic plan for a financial emergency. In the latest Financial Planning Canada survey, nearly 40% of respondents said they do not have an emergency fund.
While that stat is pretty alarming, the good news is that 6 out of 10 people are saving for an emergency, but is that the only thing you can do?
Our plan includes multiple layers of protection if we were faced with a major financial emergency. There are four key things that we would do. These four things would allow us to cover basic expenses for 5+ years! How’s that for peace of mind!
This 5-year “safety net“ wasn’t something that we created overnight, but we’re thankful we now have a strong plan just in case the worst were to happen. We hope to never get to that point, but it’s nice knowing we have a solid plan that’s ready to go in case things get really, really tough.
Here are the four things we would do in a financial emergency…