Spend smarter and save more

“Pay yourself first.” 

It’s been over 25 years since Roy Miller, title character in The Wealthy Barber, shared this pearl of financial wisdom. Ten per cent (or more) of our pay cheque automatically gets invested for the future. The rest of our budget? We can figure that out after our retirement plan is taken care of.

This crucial piece of advice hasn’t changed since 1989, but many things have. Now we’re dealing with market turmoil, historically low interest rates, easier access to credit and longer life spans (to name a few). The current state of Canadians’ finances is enough to frustrate any financial planner — including Roy’s alter ego, David Chilton.

“After watching Canadians’ savings rates plunge, debt levels sky-rocket and investment returns consistently disappoint over the last decade, I was pulling my hair out,” Chilton writes in the introduction to his recent book, The Wealthy Barber Returns. “I wondered, ‘How could I help?'”

It’s not your typical personal finance book. You won’t get lost in charts or math, and there aren’t any characters this time. Instead, the “Significantly Older and Marginally Wiser” Chilton speaks frankly about some of the challenges, mistakes and triumphs he’s seen in his career managing other people’s financial plans. (All with a sense of humour, of course!)

Here are a few tidbits to help keep your spending and savings on track.

Be your own credit control board

There’s no denying the benefits of building up the Assets side of our net worth statements. Unfortunately, statistics say we’re also racking up the other side of the equation: Liabilities.

“The one formerly sure-fire way to build wealth — pay yourself first — is now often being neutralized by the already-exposed arch-enemy of financial planning: excessive spending made possible by easy credit,”  says Chilton. “It’s really troubling the number of net-worth statements I see nowadays where an individual or couple has built up a significant RRSP on the Assets side but matched it with an outsized, non-mortgage consumer debt on the Liabilities side.”

Our credit card limits have crept up in recent years and it’s become easier to get a line of credit — but Chilton warns we need to cut through what the “credit pushers” (i.e. the banks) tell us about how much debt is “okay”. Forget the formulas that look at your pre-tax income. Chilton warns that “good debt” has three crucial characteristics: 1) you’re borrowing money for an asset that will appreciate, 2) the cost of servicing that debt isn’t affecting your ability to save, and — most importantly —  3) the debt will be retired before you are.

Bad debt, Chilton adds, is “everything else.” And yes, that could include “as much house as you can afford” or refinishing your basement.


Mind your taxes

You may not look at your retirement portfolio the same way again. If you’re like me, you enjoy watching your RRSPs grow in the Assets column.

But here’s the problem: not all of that money is ours. When we withdraw it, the government will take its cut. (Preferably at a lower tax rate than when we made the contribution.) As we watch our wealth grow, we may not be thinking about the tax money we’ll owe as a liability. Consider: if you contribute $20,000 to your RRSP, how much of it that principle and its gains will you get to keep — and how much will the government take? Sadly, we may not be as rich as we think.

However, we can keep ahead of the taxman by being mindful of when and how we’re taking the hit. For instance, if you have the discipline to leave your TFSA alone until retirement, that $20,000 contribution would be yours to keep because you’ve already paid the taxes. If an RRSP is your go-to vehicle, you may need to invest more than you thought — and perhaps stop spending your tax refund as “found money”.

Another option: Chilton suggests adjusting the tax withholding on your paycheque to free up some extra cash for a monthly RRSP contribution. (Instead of putting your tax refund back into an RRSP in a lump sum, you’re making the contributions through out the year — only the government doesn’t get an interest-free loan.) 

Regardless of what vehicle you use for retirement, it’s important to understand how taxes can eat into your future wealth.

Evaluate your spending

Yes, we know it’s tedious — but Chilton advocates that tracking your spending for a few months can be an illuminating experience. You might be surprised where some of your money is going when you create your spending summary.

Here’s a hint: Chilton notes there are three areas where people are consistently surprised: 1) how much they’re spending on transportation (the car payments, gas, maintenance and insurance), 2) how much they spend eating out (especially all the “grabbing a quick bite”) and 3) how all the little things like a cup of coffee or a pack of gum add up.

The goal isn’t to sacrifice things you enjoy. Rather, it’s making sure your money goes towards things that bring you value.

“Financial types like me love to focus on wise savers, but there are wise spenders out there too,” Chilton writes. “They view their expenditures as investments and seek the highest available return. A return not measured in dollars or percents, but in joy.”

Therein lies the value of this “worthwhile hassle”: the spending summary can help you sort through what brings you value and what doesn’t — and make the necessary changes. Consider it your wake-up call.

Remember Diderot

You may be thinking: Diderot, who? The title of this 18th century philosopher’s work is telling: “Regrets on Parting with My Old Dressing Gown: Or, A Warning to Those Who Have More Taste Than Money.”

To make a long story short: the elegance of Diderot’s new gown made him unhappy with other things in his life — sending him on a veritable spending spree replacing other well-loved items.

Lesson learned? It isn’t just outside pressures like our peers and the media that urge us to spend.

“Spending begets spending,” Chilton warns. “Few things influence your spending decisions of today more than your spending decisions of yesterday.”

It’s easy for one purchase to set off a downward spiral of spending — like the pair of shoes you need to go with your new outfit, or the granite countertops you need to match your new kitchen cupboards. Renovations are especially worrisome —  in fact, Chilton warns that four of the most expensive words in the English language are “while we’re at it…” 

There’s nothing wrong with making purchases or completing renovations — so long as they’re done “within the context of affordability”, says Chilton. Unfortunately, credit cards and lines of credit have led us to believe we can afford more than we have.

Admit you can’t afford it

Yes, you read that right. When Chilton tells people to respond to an invitation or sales pitch with “I can’t afford it”, it’s no surprise he’s met with scepticism…  Until people try it and find those four little words are liberating, not limiting.

No, it’s not about whining or self-pity — it’s about the giving yourself permission to say no once in awhile.

“It frees you from the pressures to live beyond your means, and its unassailable truth makes it easier to deal with temptation,” Chilton says. “The fact is, we all have finite resources. We can’t possibility do and buy everything we want. There’s no shame in that. Accept it. Don’t fight it. And don’t let your credit cards convince you otherwise.”

You may have to swallow your pride or tweak the wording, but the key is to fight both the external and internal pressures to spend.  (Especially if you’re tempted to spend on something that doesn’t bring you value.)

Of course, these tidbits are just a few of the many topics Chilton touches on in his book. The Wealthy Barber Returns won’t walk you through creating a retirement plan or creating a diversified investment portfolio — it’s not that kind of book, after all — but it may just change how you look at your finances.

For more information about The Wealthy Barber Returns, visit www.wealthybarber.com.

Curious to hear what Chilton has to say at this year’s ideaCity conference? Watch his presentation:

ideacity on livestream.com. Broadcast Live Free
Photo ©iStockphoto.com/ Alinta Giuca

The debt bomb
10 tips to get your retirement on track
Retirement savings versus debt
What you should know about online privacy
Beyond Age Rage