Personal Finance

5 steps to a simple financial plan

5 steps to a simple financial plan

Are you broke because you don’t have the right, simple financial plan?

Spend less than you make! I know this sounds so basic, so simple that it seems absurd to even say it.It is simple – and basic. However, many don’t get this so I’ll repeat myself: spend less than you make!

Sadly, the average Canadian is a few missed paycheques away from financial devastation. We have meagre savings and dangerous debt levels. Heaven help you if you lose a job.

The reasons for our bleak financial positions are in the garage, our closets, the TV room, the jewellery drawer and on our credit card bills. Many of us spend far more than we should on crap we don’t need. We abuse our money while sacrificing essentials like proper insurance to protect our families, our children’s education savings and our retirement security. We borrow without regard for how we’ll pay, sacrificing important things in the process.

If your outgo exceeds your income, then your upkeep will be your downfall. It’s catchy, and it describes how so many of us live.

In his book, Financial Peace Revisited, Dave Ramsay says that young adults generally start out broke. They may make do with an old car, second-hand furniture and a modest income.

(Maybe Ramsay’s experience is different than mine, but I see different lifestyles. Many young people today like to get the expensive stuff, put it onto credit cards and then worry later how they’ll pay for it.)

Ramsay has seen thousands of these situations and cites Joe and Sue, with after-tax income of $3,500 per month. Their budget shows spending of $3,300, which should allow them to save a little. They’re comfortable – and they’re in love.

Joe comes home with the news that he has a 10-per-cent raise. That old car has needed a lot of repairs, so they upgrade. They borrow $16,000, with payments of $300 per month. That raise is gobbled up by loan payments.

They decide to join friends for a trip to Hawaii. They don’t have the money but they do have credit cards.

Joe is tired of going to a friend’s to watch hockey games so he convinces Sue to let him buy a big-screen TV. Of course, that 50-incher needs a sound system, a PVR and a new couch for the TV room. He gets the TV so Sue “needs” new clothes. She and a friend go shopping and she’s rung up $900 on the credit card.

They’re spiralling into financial catastrophe.

“You must limit your style of living,” Ramsay writes, “because you can always spend more than you make. I have counselled people who make $200,000 annually and people who make $20,000, and both spend it all. Yes, the guy with $200,000 had bigger toys and more sophisticated bad investments, but they both had the same result – B-R-O-K-E.”

Ramsay tells the story of a song-writer friend whose monthly income went from $700 to $50,000 when he sold two songs for a new album. He proceeded to do what any red-blooded young man would do. “He proceeded to buy stuff, lots of stuff,” Ramsay wrote.

There was a $40,000 black sports car, then a boat. A big boat! His car couldn’t pull the boat, so Ramsay’s friend drove up in an option-loaded truck pulling the 36-footer.

“A few months later, of course, the cheques stopped as the album peaked and died, but the payments didn’t stop. Today he is bankrupt and writing songs for $700 a month again.”

Ramsay says he has known wealthy people, happy living middle-class lifestyles. It’s not stuff that makes us happy. Money worries cause great stress and affect job performance. They destroy marriages.

How happy would you be if you had no debt and the peace of mind knowing that you’re on track to achieve your financial goals, instead of having tens of thousands of dollars of credit-card debt and worrying whether you can make mortgage payments?

I know wealthy people who live the same modest lifestyles as when they were building their businesses or their careers. One couple, in particular, are in their late 50s and could afford twice the house, twice the car – twice everything. They’re happy with their $400,000 house, their $35,000 car and the stuff they have.

They live well. Their passions are their children and travel. They love to travel (but search for good deals). They have nice clothes, furniture and a few toys, but they’re far from extravagant. They eat well, but buy on sale. They support the kids but are careful givers as they don’t want their children to become financially dependent.

Here is Dave Ramsay’s five-step plan for getting out of financial trouble and building wealth:

1. Set up a budget.
2. Don’t over spend.
3. Stick with the budget.
4. Buy modest stuff; you’ll be able to afford the best later.
5. Save, save, save.

It’s a simple financial plan, as the best strategies usually are.

Texans have a saying: “Big hat, no cattle.” If you want your neighbours to think you’re wealthy by the house you live in and the car in the driveway but you’re sacrificing what’s really important, your financial priorities are severely misplaced.

What’s in your house? Are your closets filled with pricy wardrobes, but no education savings for your children? Do you “need” that winter trip to Mexico or Hawaii but are saving nothing for retirement? Do you have the best electronics, but your family would be in crisis if you lost your paycheque due to death, disability or job loss?

Spend on the things that really matter. You’ll be happier.


  1. Damain

    Budgets always sound like a good idea but I don’t know anybody that can truly follow one unless they’re in dire straights and MUST curtail their spending. More power to those that can!

    • Steve

      I echo your comments on not knowing anyone who can follow a budget. To quote David Chilton/Wealther Barber “There are very few people who can follow budgets. And those people usually aren’t very fun people”. I agree 🙂

      I think the key things really are self-discipline and being able to do basic math in your head. Know how much you actually take home, understand where it goes, think through purchases that matter (i.e., have upkeep attached to them and/or are to do with family time you’ll never get back).

      In short, and I hope the author won’t take this the wrong way, I do not think this book is that helpful. It suggests common techniques that don’t really work in practice and in doing so avoids the tougher questions about oneself that if answered give you the fishing skills everyone is always talking about.

  2. Devin

    It is funny that item 4 is you will be able to afford the best later. Funny thing is you will probably realize that the mediocre does just as good a job as the best. Example cars. A used one gets you to the same location as the luxury one, or the cab, limo, or bike. The result is the same. They say there is value in the journey. It is in the journey not the vehicle you drive.

    Item 6 needs to be added. Invest your savings. Otherwise it won’t help you. You will just sit on it. Find the right reasons to save. If you are saving just to save then you are missing the point.

    The only thing is I wish I would have known this in my 20’s. Debt free at 34 works, but would have been so much quicker and easier if I would have known what I know now. And yes we own a house and cars and have education funds. And yes there is furniture in the house. The biggest difference is that it is just enough. Finding what was enough for us was the hard part. And sometimes it takes a tragedy to find that out. Happiness doesn’t have a price tag, but it does have a state of mind. Find it without dollars and cents and that will be the biggest financial difference in your life.

  3. David Smith

    Hi Wayne. These are enlightening suggestions. People need a simple financial plan to stay away from financial collapse. Consumers will have to stick to their budgets and remember to save a small amount at least every month.

  4. Wayne Rothe

    Some good comments. Thanks for the input.

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