Today’s post is going to be short and sweet. When making financial decisions, take a look at the long term view first.
Most people go through a life path where they start their careers, progress with their careers, buy a house, maybe have kids, pay off all debts, save for retirement and eventually retire.
The biggest expense areas can be grouped into the following:
- Housing costs
- Retirement savings
- Living (basically any other spending).
One of the problems that I see with some people is that they spend too much money on living and not enough on retirement savings and paying down debt.
If you are a person who makes the minimum payment on your debts (including mortgage), doesn’t save much for retirement and only saves for things like vacations – you are headed for a bit of a crash at retirement time.
One of the biggest problems with an “I’m not saving for retirement” strategy is that the strategy will work exceedingly well for a long time. You’ll have a great life and won’t have any money worries assuming you can balance your budget. The problem is that once you retire, you’ll have to adjust from living the high life to living in near poverty.
If you are middle class or higher, you need to save for retirement in order keep some sort of decent living standard in retirement.
Cut expenses, save for retirement
If you are young (less than 30), then I wouldn’t be concerned with retirement savings. If you are over 30, you need to start thinking about saving for retirement. Even if it’s not possible now – think about how to make it happen in the near future. The retirement savings money has to come out of your living budget category. Yes, that means you will have to cut back on your living expenses. You can decide which ones to cut.
Housing is a funny category. It’s common for people to buy an expensive house, but then only make the minimum mortgage payments for 30 years or even longer. It shouldn’t take 30 years to pay off a house, in fact it shouldn’t take more than 20 years in my opinion.
Make a plan to pay off your house in a reasonable amount of time. This extra money will come from your living category.
Summary
If you spend too much money on ‘living’ and aren’t putting enough money into future expenses like retirement – try to think ahead and how you would like your life to be. Do you want to be debt free someday? Do you want to retire early or work part time in your 50’s? Those things won’t happen by accident – you need to do some planning and some saving.
This post was part of the Blog for Financial Literacy effort organized by Glenn Cooke from LifeInsuranceCanada.com
9 replies on “Best Financial Tip – Take a Long Term View Of Your Finances”
There is a fundamental misconception in this article: by definition, “saving” is not an expense, it is the opposite. It is money that you keep away for whatever the reason happens to be. North Americans on average save less than 10% of their gross income. For individuals as well as countries, saving is what makes the diference between a broken economy (ie Greece, Ireland, USA) and a bouyant economy ( ie Germany, China)
I have several Friends who have Retired or will soon retire.
They did what this article said to do, they paid off debt, lived within their means, and saved .
One, retired last year, good pension, OAS,CPP and several million dollars split between RRSP’s and investments.
Three months ago we buried his wife and he has found that after a lifetime of saving, he is incapable of spending
.Others we know who still have their health are also incapable of spending, they could buy a new Audi but they are comfortable with their ten year old Caravan.
Savings is good but also take some time for living,health is important and Europe at 30 is a whole lot diferant than Europe at 70.
@Howard – Interesting comment. I got an email last week from someone who is about to retire after being a diligent saver for many years and she wanted to know how to loosen the purse strings and start spending again. She also asked if there are any retirement spending ‘support’ groups available.
Unfortunately, I don’t know the answer to either.
As for your friends – I think there is something to be said for balance. I don’t want to scrimpt and save so that I can be rich in retirement. I want to have a more consistent lifestyle when working as well as when retired.
Nice tip. Found you making my way down the list at Life Insurance Canada. We need to be better at having a long term view.
Great tips. I do disagree with one point though. It pays to start saving for retirement before the age of 30. Compounding interest is a powerful force that should be harnesses as early as possible.
Zeddy,your points are very valid,paying off a mortgage on a home that you will eventually sell and downsize from allows a young person to start saving for retirement and the gains are non taxable.
We along with others have sold high market value homes for low cost residences, when the kids are gone you don’t need four bedrooms and three bathrooms and an inground pool.
I’d say that if at all possible (and it may not be with student debts etc) people should start saving for retirement in their 20s. We did, and it’s making a huge difference now because that money has been invested for so many years.
I think I’d suggest to people not to rush into home ownership. The extra costs (new roof, a/c, furnace, driveway paving, appliances, etc.) can be staggering. It might be better to save like mad for retirement in the 20s, early 30s, then buy a home in mid to late 30s.
I know some people think children suffer in apartment buildings and town homes, but I’m not so sure. Many of my children’s friends are in those types of housing and all are doing well at school, seem happy and well adjusted. It’s also possible to rent houses in many communities.
Certainly when my parents were growing up, most people did NOT own a home while raising their children (that would be in the 30/40s). They didn’t have a house for us till all three of us were partly grown. Private home ownership by one family (not extended) while the children are toddlers is a pretty new, pretty North American idea.
And, yes, it’s scary to see how many of our “well off” friends have nothing in the bank for when they retire. Especially when you see people from Eatons and Nortel talking about how their “good” pensions disappeared when the companies went under.
Anyway, thanks for making us think!
@Howard – It is very difficult to learn how to spend after diligently saving for retirement…. Saving becomes a habit that is a part of you. To weaken that habit, I started out with forcing myself to spend $400 a month. For the first year, I only spent the money on things we could use around the house. During our annual financial review, I realized that I still wasn’t really spending. So, I forced myself to go out for a lunch once a week and do other small frivilous things. (When I use the word force, I mean in the mental way. I didn’t really want to go at first. After all, I could make a tasty lunch at home.) Now, after more than 5 years, I no longer feel guilty about spending money on things I don’t need. Caveat: I still budget and do an annual financial review to make sure we don’t mismanage our cash flow and go into debt.
I disagree that saving for retirement can wait until your thirties. It’s better to get into the habit young to take advantage of compounding and so that the habit is in place. I have a pension at work so that is part of my retirement savings, but I am also putting money away on my own. Savings for things like vacations is really just planned spending, since you won’t keep that money long term. For me, home ownership is not a priority and all the money I will save by renting will be invested, which can provide me with income later on. A house is nice to have for some people, but I don’t think the extra expense and having “equity” is worth it, since you always need a place to live and you can’t spend the value of your house.