For many, times have been tough. Since 2009, we've gone through two significant downturns in the stock market. As a result, many investors have become disillusioned with the stock market as a solid investment vehicle for their retirement savings. And who can blame them. Economically, we are seeing the effects of a society that continues to consume and spend money they don't have. The growing debt crisis is a real problem and it is hitting us straight in the face.
What do we do about tough times?
Its times like these we need words of encouragement. It's time to take control of your money so that you can emerge a winner. It is times like these that test our fortitude, our drive and our resilience. Those that can emerge from these times will reap the benefits when the economy and stock market turn for the better and they will. Whether you are an individual, a business, an organization or even the government, it is times like these that really test quality. I've always said quality is not about how you do in good times but rather, how you do in bad times.
Times like these remind us to remember some core philosophies about wealth and money. It's all about taking control of your money and your life and taking the necessary actions to improvement.
1. Get your financial house in order.
My wife is a dietician and she always says to me “If you want to lose weight, you need to start by looking at your life and assessing your habits and lifestyle to see where the root of the problem is.”
In my line of work, we can learn from this common sense message. In order to take control of your money, you first need to know where you stand financially. To do so, you need to take stock by figuring out your net worth. It's kind of like a company's balance sheet. You need to know what you own and what you owe and hopefully your worth is not negative. This serves as a starting point to measuring wealth.
You also need to know how much you spend. How would you know if you are overspending or not if you never took any steps to track your spending in some way shape or form? Some people might assume this is where budgeting comes into play. Not me. I don't like the word ‘budgeting' just like I don't like the word ‘dieting' because they both imply restriction of behavior. I'm not suggesting everyone needs to budget. Rather, I am suggesting that everyone needs to know how much money is spent each and every month. If you have a spending problem, then you need to budget your money. Just like if you have an eating problem, then you have to diet.
Successful people simply live within their means. How can you do that if you don't know what your means are costing you? Take the time to figure out how much money you spend and then devote time to making this a regular habit. I promise you it will go a long way to securing your financial future.
2. Pay down debts.
We live in a society that has way too much debt. Everywhere you turn it is so easy to access lines of credit, credit cards and bigger mortgages.
My 79-year-old father, like many of his generation, was debt adverse. I remember his words so clearly “We can't buy it because we don't have the CASH.” Today, we all use a different language that promotes instant gratification “As long as we can afford the PAYMENTS.” Buy now and pay later might have a place in moderation but it's gone too far. It's time to start paying down our debts!
The problem with most debt is it takes more than a dollar to pay a dollar of interest. Think about it, we all pay tax on the money we make and when we make a dollar, we may only get to keep 65 to 75 cents depending on our tax rates.
So, if the interest on your mortgage is 7%, that is the equivalent of paying 10.8% on an after-tax basis assuming a 35% marginal tax rate. Therefore, paying off that mortgage is the equivalent of making a guaranteed 10.8% investment. Even paying down a 5% debt is the equivalent of investing in a 7.7% GIC. Would you be happy with a 7% to 10% return? Would you move money to a GIC if it guaranteed you returns of 7% to 10%? I know I would which means paying off debt can be one of the best investments you ever make.
3. Know what you are invested in.
Investors are frustrated when they see losses in their portfolios. Often, I get people asking me what they should do with their investments especially when they are losing money. My response is always the same “What are you invested in?” Most people reply with “I don't know, my advisor takes care of that.”
This response concerns me because I believe that nobody cares about your money more than you care about your money. Good advisors might care but they can't care more than you. Worse yet, not advisors even care. Taking control of your money includes knowing what you are invested in. If you buy crap and you hold crap, what will you always have? Crap is the correct answer. So how would you know if you own crap or not if you have no idea what you own? With all the investments out there, is it possible that some of it is crap? Too much of it! Take control and find out what you own and why you own it!
4. Pay yourself first.
There's an old saying “To be successful, you have to save first and spend what you have left over because if you spend first chances are there will be nothing left at the end to save.”
I've had the honor of working with a lot of financially successful people and every time I ask about how they got there, one of their key contributions to success is simply the fact that they always put away a little money. Pay yourself first is something must people understand but don't always practice. It is such a common sense message but unfortunately common sense is not common enough.
If you don't think this strategy works, then why do you think the government figured out a long time ago that the best way to ensure that you will pay your taxes is to make sure it is the first thing taken off your paycheques? David Bach, author of the Automatic Millionaire says, “The secret to success is to pay yourself automatically by setting up an automatic withdrawal from your bank accounts the day after you get paid.
Pay yourself first is one of the basic strategies to financial success.
5. Understand taxes.
A common perception is that the ticket to wealth is to make good investment decisions. I would agree that good investment decisions might help you make better rates of return – one, two, three four or five per cent over time. Although good investment decisions will contribute to wealth, good tax planning can increase your financial benefit by ten, twenty, thirty or forty percent. Tax planning is more important than investment planning.
Taxes are a big hurdle to wealth. It seems like every time we turn around, we face some form of tax whether it is income tax on the money we make, property tax on our homes, or GST on the things we buy. As much as tax is necessary to keep the country running, I am sure none of us want to pay more than our fair share. If you think about it, it's the one expense that we should reduce because it improves our lives.
6. Plan for the future.
People spend more time planning 15-day vacations than they do their financial future. Planning is simply looking ahead into the future and making plans to make it as predictable as possible. Planning is essential to success. For some success happens accidentally but for most it comes from planning, thought, direction and action.
There's a old saying that says “Any road will get you somewhere.” My question is “Is that somewhere where you want to go?” For me, planning is simply taking the time to figure out where you want to go and then taking the right path or steps to get you there. Take the time to create wealth through intentional planning, It's not likely to happen on it's own by accident.
7. Get help.
Nothing in life we do alone. Everything we learn, we learn from others. It is the people in our lives that shape who we are. If you want to become better with money, I would suggest you hang around people who are good with money and learn from them. These people might include:
- A financial advisor.
- A financial mentor
- Your friends and family
The law of attraction says if you want to be happy, hang around with happy people. If you want to be rich, hang around rich people. If you want to be successful, hang around successful people. I believe you are only as good as the people you hang around with.
8. Engage in your life.
The definition of engaging is to get involved and participate. When it comes to money, you have to become accountable for your money. When you realize this you will need to take time to make important decisions about your financial future. Money doesn't grow on trees (at least not at my house). Wealth doesn't magically appear. Wealth is created through hard work.
There's a saying that we should all learn to “WORK SMARTER, NOT HARDER”. The root of this well known saying stems from the time management industry because we all lead busy lives and finding balance has become increasingly difficult. AS much as I can appreciate the message of efficiency, effectiveness and productivity, I'm not sure the saying is appropriate in the world of personal finance. I think this saying has simply created and excuse for laziness. I believe successful people WORK SMARTER AND HARDER. I've met successful business owners and they will tell you that success comes from hard work that sometimes is not visible. It is very rare that wealth comes without hard work.
Hard work pays off and sets the foundation for success. When it comes to your money, get engaged by reading more, going to workshops and seminars, and finding the right help if necessary. If you want to get ahead financially there is no substitution for participation.