“You do not determine your success by comparing yourself to others. You determine your success by comparing your accomplishments to your capabilities.” – Zig Ziglar
One thing I’ve noticed during conversations with people about finances is that it’s often the people who are doing everything right financially who are most anxious about their financial future and have the most doubts about whether they are managing their money in the most effective way to achieve financial success.
A good example of this is a young woman in her early 30’s I met with recently, who had questions about the Home Buyers Plan. “Julia” and her fiancé are planning on buying their first home within the next two years and she wanted to find out more about how the HBP works and whether it made sense for her to use it. Usually, when I have these conversations with people, it’s because they’re working hard to gather the money that they need for a down payment and they need to use their RRSP savings to get them to their goal. However, as Julia and I talked, it transpired that, over the past 10 years, she has managed to save almost $100,000 towards the down payment. Considering that she has never earned more than $60,000 a year, that’s quite an accomplishment.
However, because her fiancé has close to $200,000 in savings, she was worried that she hadn’t saved enough. Given that the condos they’re looking at are in the $350,000 price range and they were planning on financing part of the purchase with a mortgage, I was able to assure her that what she had saved was significantly more than most people her age had in savings and that, by the time they were ready to start looking seriously for a home, her savings would be more than enough to meet her home buying goals.
Julia’s story is a good example of how we often gauge our own performance based on how we think we compare to those around us. If you’re a natural saver surrounded by other natural savers, you might not realize how strong a position you’re in financially. If you’re a saver surrounded by spenders, you might assume you don’t have as much as those around you. In finances (as well as other areas of life) we make assumptions about how we’re doing in comparison to other people based on their behaviour, the information they share with us and our own perceptions. However, I’m willing to bet that, more often than not, those assumptions are wrong. So, for those of you who have been wondering how you’re doing with your money; here are five clues that you might have a better grip on your finances than you thought:
1. You understand your cashflow
If you know how much money you have coming in each month and how much you have going out then you’re several steps ahead of most people. Good money management isn’t rocket science, it’s pocket science. It’s built on the basics and the foundation is knowing how much you have coming in and how much you have going out each month. If you can manage your cash flow and live within your means, then you’re on the right track to building wealth and creating financial security for yourself and your family.
2. You save
While it would be nice if there was a magical shortcut to getting rich, the reality is that our best chance of building wealth is to save it ourselves. While it’s definitely possible that a lottery win or other unexpected windfall could put us on the fast track to financial freedom, statistically speaking, we have a better chance of winning an Oscar or becoming an astronaut so it makes sense to have a backup plan. Saving is a much better bet when it comes to creating financial security and yet, according to Stats Canada, most of us are saving less than 5% of what we earn.
If you’re saving more than 10% of your gross salary each year towards retirement then you’re keeping pace with the savings benchmark suggested by many financial experts. If you have 3-6 months of expenses in a savings account then you’re well ahead of average and much better protected against the unexpected than the 48% of Canadians who couldn’t pay their bills if they missed one paycheque. (Broadbent Institute 2016). I’m not a huge fan of hard and fast rules when it comes to money because what works for one person doesn’t necessarily work for everyone. However, if you have an automated savings plan, live within your means and consistently save 15-20% of your income then I’m willing to go out on a limb and say that you’re doing well.
Related Article: 6 Principles for Saving Money
3. You’re a conscious spender
As with many things in life, there are two sides to the money management coin: saving and spending. It’s not enough to understand your cashflow; you also have to put that knowledge to work for you by managing your spending rate as well as your saving rate. While saving is a cornerstone of building financial security, conscious spending is a key factor of good money management. If you’re managing your money well, that means keeping your expenses at an affordable level (less than 80% of your income), making conscious choices about what you spend your money on and keeping impulse purchases to a minimum.
4. You keep debt to a minimum
Debt is the biggest obstacle standing between you and financial freedom. A recent Stats Canada report estimated that 14% of the average Canadian's after-tax earnings is used to pay non-mortgage debt. Over the past few years we’ve seen a huge shift in the way debt is marketed to consumers. With an emphasis on payments rather than total cost; an increase in pre-approved credit cards and lines of credit being offered to consumers by their financial institutions and incentives such as 18 months interest-free financing available in many retail stores, it’s hardly surprising that debt levels in Canada continue to increase at a rapid rate.
When you consider the fact that interest rates are likely to start rising within the next couple of years, and that, for most Canadians a 1% rise in interest rates would cause significant financial stress, it makes sense to do what we can to get rid of as much debt as possible while rates are low.
If you pay off your credit cards in full each month and don’t have a balance on your line of credit then you’re way ahead of the curve when it comes to creating financial security. If you’re carrying debt but have a clear plan to be debt-free within the next 3 years then you’re also ahead of the curve. If you’re carrying no consumer debt and are either mortgage-free or on track to be mortgage free several years before you retire, then you’re doing a lot of things right to create a solid financial future for yourself.
Related Article: Make a Debt Plan
5. You have goals and plans
Napoleon Hill once said that “a goal is a dream with a deadline”. A deadline is a key difference between having a goal and having a general intention to get something done. People who are in control of their money tend to not only have a pretty good idea of where they want to go, they also have a plan to get themselves there.
Goals can be simple or they can be complex. Some people have a goal to save a certain amount of money before retirement while others might have a certain percentage of their income that they want to consistently put away. Some people have a plan to aggressively pay down their mortgage while others want to maximize their RRSPs or TFSAs. Some are saving for vacations or home renovations or have a goal to give money to children or parents or causes that mean something to them. Most people have several goals: short-term and long-term; personal and professional; indulgent and altruistic, practical and outrageous and each goal has its own plan and its own timeline.
Goals and plans create a framework that helps guide the way we manage our money and helps motivate us to save. Having goals and plans to achieve them helps us determine how much to save, how much to spend and helps us direct our financial energy towards building a secure and rewarding future.
If you have financial goals and plans in place, and you’re in the process of working those plans, then you’re making real progress towards creating solid financial success.
One last thought…
There are no hard and fast rules for financial success but there are some key principles and habits which can help you get there and that's what I've tried to touch on in this post. At the end of the day, each person’s financial path is as individual as they are. What motivates one person won’t inspire another and what works for one person won’t necessarily work for another.
No matter where you are in your financial journey, there are always ways to do a little more but the choice to act or not act is always ours to make. If you’re doing all the things I mentioned in this article then that doesn’t mean you couldn’t do more. If you’re doing none of them, that doesn’t mean you can’t choose to set a goal, make a plan and make a start.
None of us has the ability to go back in time and undo or re-do the past. None of us can predict the future. However, each of us has the ability to create something better for ourselves than we have right now and to make the world a little better for others in the process.