The Journey of a Lifetime
Imagine this: during our lives, we will spend upwards of 500 months working for a living. That’s about 42 years of earning, learning, and hopefully, saving. Some might work less, some more, and an unfortunate few might never get to stop working.
If we estimate an average monthly paycheck over those 42 years, the total amount earned is staggering. In 2021, the average Canadian income was just over $54,630 per year. This adds up to almost 2.3 million dollars over a lifetime. Many would be surprised to learn that they will earn several million dollars in their lifetime.
With these numbers, it seems quite possible to set aside a small amount each year for a comfortable retirement. For most people, saving for retirement is an achievable goal. So what’s the catch? Why are so many unprepared for retirement when they’ve had over 40 years to save?
The Spending Trap
The answer lies in a slogan financial planners love to use: “It’s not what you make; it’s what you spend.” We have become experts at spending our entire monthly earnings, leaving no room for future savings. How does this happen? The average person has no idea how much the small everyday purchases add up to by month-end.
Think about the daily coffee, muffin, lunches, and other small items. These small purchases, fuelled by wants rather than needs, lead to a staggering outflow of cash monthly. Financial planners call this practice “death by a thousand cuts.” If you take the time to analyze your monthly expenses, you may be shocked at the results.
The usual response to these issues is the desire to make more money. Unfortunately, once spending habits have formed, making more money simply enhances the behaviour. For many people, making more money sets in motion a domino principle of increased spending, resulting in more debt.
Working for Debt, Not Money
When you take on personal debt, you no longer work for money; you work to pay off your future debt obligations. The inevitable trade-off to servicing debt is the inability to save. There is no extra money left over to satisfy the classic rule of saving ten percent of your lifetime earnings. You are no longer working for money; you are working for debt.
By setting aside a reasonable monthly amount of your income for retirement savings, you allow yourself the opportunity to retire and live comfortably. Too many people reach retirement age and are disappointed with what they have to show for those 500 months of labour.
Thinking Like a Tree
To manage your money effectively, you need to think like a tree. Trees are patient, steady, and resilient. They grow strong by taking small, consistent actions over time. Let’s break down this metaphor and see how it can help you manage your money better.
Every tree starts as a small seed. In the same way, your financial journey starts with small actions. Begin by setting aside a tiny portion of your income each month. It doesn’t have to be much at first. Even saving $10 a week can make a difference over time. The key is to start.
Roots: Build a Strong Foundation
Just as a tree needs strong roots to stand tall, you need a solid financial foundation. This means creating a budget. A budget helps you understand where your money is going and how much you have left to save.
List your income and expenses. Categorize your spending into needs and wants. Needs are things you can’t live without, like rent, utilities, and groceries. Wants are the extras, like eating out, entertainment, and vacations.
Trimming the Branches: Cut Unnecessary Expenses
Once you have a budget, look for areas where you can cut back. This is like trimming the branches of a tree to help it grow stronger. Maybe you can reduce how often you eat out or find a cheaper phone plan. Small changes can free up money for savings and help you live within your means.
Growing Steadily: Consistent Savings
Trees grow a little bit each year, and so should your savings. Aim to save a consistent percentage of your income each month. A common rule is the 50/30/20 rule: spend 50% on needs, 30% on wants, and save 20%. If 20% feels too high, start with what you can manage and gradually increase it.
Weathering the Storms: Be Prepared
Just as trees endure storms, you need to be prepared for financial emergencies. This means having an emergency fund. Aim to save three to six months’ worth of living expenses. This fund will help you cover unexpected costs like medical bills or car repairs without going into debt.
Branching Out: Diversify Your Investments
As trees grow, they spread their branches. Similarly, you should diversify your investments. Don’t put all your money in one place. Consider a mix of savings accounts, stocks, bonds, and retirement accounts. Diversifying helps reduce risk and increases the chances of your money growing over time.
Reaching for the Sky: Set Long-Term Goals
Trees grow towards the sky, reaching higher each year. Set long-term financial goals to keep you motivated. This could be saving for a house, your children’s education, or retirement. Having clear goals helps you stay focused and disciplined in your savings journey.
The Power of Compounding
One of the most powerful tools in managing your money is compounding. Compounding is when your money earns interest, and then that interest earns interest. Over time, this can significantly increase your savings. The earlier you start saving, the more time your money has to grow through compounding.
Avoiding Common Pitfalls
Managing your money is not always easy. Here are some common pitfalls to avoid:
- Impulse Spending
It’s easy to make impulsive purchases, especially with online shopping. Before buying something, ask yourself if it’s a need or a want. Can it wait? Sleep on it and see if you still want it the next day.
- Keeping Up with the Joneses
Don’t fall into the trap of trying to match your lifestyle to others. Just because your neighbour bought a new car doesn’t mean you need one too. Focus on your financial goals and what’s best for you.
- Neglecting Retirement Savings
It’s tempting to put off saving for retirement, especially when it seems so far away. However, the sooner you start, the better. Take advantage of employer-sponsored retirement plans and contribute as much as you can.
- Seeking Professional Help
If managing your money feels overwhelming, consider seeking help from a financial planner. They can provide personalized advice and help you create a plan tailored to your needs. A professional can guide you in making informed decisions about savings, investments, and debt management.
- The Reward of Patience
Managing your money is a long-term commitment, much like growing a tree. It requires patience, discipline, and consistent effort. But the rewards are worth it. By making small, sensible changes and staying focused on your goals, you can achieve financial stability and peace of mind.
Real-Life Story: Jane’s Journey to Financial Health
Let’s take a look at a real-life example to see how these principles can be applied. Meet Jane, a 30-year-old nurse. Jane used to live paycheck to paycheck, spending money on little things that added up. She had no savings and was stressed about her financial future.
One day, Jane decided to take control of her finances. She started by creating a budget and tracking her expenses. She was shocked to see how much she was spending on takeout and coffee. Jane made a plan to cut back on these expenses and started bringing her lunch to work.
Jane also set up an automatic transfer to her savings account every month. At first, it was just $50, but as she got used to her new budget, she increased it. Jane also started an emergency fund and contributed to her employer’s retirement plan.
Three years later, Jane has a healthy emergency fund, is on track for retirement, and feels more in control of her finances. She still enjoys life but makes more mindful spending choices. Jane’s journey shows that with small, consistent actions, anyone can improve their financial health.
Your Financial Growth
Think like a tree. Start small, build strong roots, trim unnecessary expenses, save consistently, be prepared for emergencies, diversify your investments, and set long-term goals. Avoid common pitfalls, seek professional help if needed, and be patient. Your financial health will grow steadily, and you’ll be rewarded with stability and peace of mind.
By taking control of your finances, you can enjoy the fruits of your labour and look forward to a comfortable retirement.
Remember, it’s not about making more money; it’s about managing what you have wisely. Start today, and watch your financial tree grow strong and tall.
In my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.
Disclaimer for ManageYourMoney.ca
The information provided on ManageYourMoney.ca is intended for educational and informational purposes only. It should not be taken as financial advice. The opinions shared are those of the authors and are meant to encourage sensible financial habits and decision-making. We recommend that you do your own research or consult a certified financial advisor before making any financial or investment decisions. All investments come with risks, and there is no guarantee of success. Past performance is not a reliable indicator of future results. Always consider your personal financial situation and risk tolerance before pursuing any investment opportunities.
As always, we are not a qualified financial advisors. We just relate financial management to our own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of ours came from expensive experiences.
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