I started in this industry through a quirky series of events that led me to what has so far become (and hopefully continues to be!) a very enjoyable career. Within days of my initiation into the industry, I was given David Chilton’s The Wealthy Barber. I read it out loud to Darcy as we drove from Fort St. John to Edmonton and back, on our way to a friend’s wedding.
Pay Yourself First
Through Chilly’s book, Darcy and I learned our first investment concept: Pay Yourself First; a strategy by which you add your emergency fund, long term investments, and insurance premiums in as regular bills, setting aside a fixed amount every month and then you get to spend the rest on the fun things. By saving a fixed amount and then only spending what’s left over at the end, you enjoy the knowledge and safety that your future is taken care of, but will also be able to enjoy the process, as whatever hasn’t been directed to bills is your reward.
The theory is sound, but now after years in the industry, I’ve learned something else; no financial advisors actually do it. Which is crazy to think about. If the strategy good, why aren’t financial professionals doing it too?
The answer is actually quite simple. It’s a very good way to get you to develop the habit for saving But by saving the same amount every month, you inadvertently limit the largest factor in determining your wealth – ambition. Setting a monthly periodic amount ties your thinking to that monthly amount. The biggest risk isn’t that you set a goal and miss it. It’s that you set a goal and hit it – and then stay there.
Now don’t get me wrong – I’m a huge supporter of investing on a monthly basis. It’s a great way to build your portfolio and take advantage of market value fluctuations. And it’s definitely something that financial professionals do as well. But I’m talking about moving beyond that, into a deeper and more meaningful way of cash flow planning that can help you reach your goals faster, free yourself from the vortex of consumerism, and help build a stronger relationship with your spouse along the way.
I would like to present to you an alternative. Imagine taking the concept of Pay Yourself First - setting monthly savings and spending the rest – and just flip it around. Now the amount you set and control every month is your personal spending; an allowance – just like you got when you were a kid, and the variable then becomes your savings.
Building a structure like this is a three-stage process. It’s a lot of work – and you’ll probably hate it – but it’s simple, and it’s successful, so you should do it anyways.
The first step is to do open up a clean and fresh excel spreadsheet where you can record your past income and expenses into categories. Darcy and I went through a year of our finances, but even one month will do. This is not a budget. This is a cash flow plan. The difference is that we are not trying to constrict, or set limits, or be judgmental about, what expenses are going out or what income is coming in. What we are trying to do is embrace the inflows and outflows for the household. Through this recognition, some items will change naturally (Tim Hortons shows up a lot less for us than it used to), but that’s a natural attrition of the process. Go in open minded for the pure discovery of it, and you’ll get just as much benefit as you will from a budget, without the guilt or resentment.
Step 1 - Categorization
So just in case you’ve never actually done this before, and maybe aren’t obsessive about lists and charts like I am, I’ll walk you through the finer steps. But before you even begin, GO GET YOUR KIDS. They’ll appreciate your efforts, and will learn so much faster from watching you do it now than they will making mistakes of their own.
Okay, now to the spreadsheet. Across the top, write the days of the month. Along the side, write three headers, INCOME, EXPENSES, and GOALS, and underneath write category names. In the income category, list the different members of the household. In the expenses category, list your regular bills, and then add an extra one called “horsemen”. Then in the goals category, write all of your debt repayment, savings, renovations, and investment goals.
Finally, go through all of your credit card and bank account statements, and item by item transcribe the income and expenses into the appropriate cell. February 5 – Gasoline - $36. February 6 – Utility; water - $109. Once you’re done, add them all up by category. The total should either balance or be positive. If it’s not, then put a bright yellow label on the front of your credit card that says “NO!”, and every time you go to buy something, don’t. Repeat until the bottom numbers do balance, and then there you are. You have a cash flow plan.
Step 2 – Horsemen money
Horsemen money is what Darcy and I call our allowance. The name comes from Gottman’s Four Horsemen of the Apocalypse, which is a series of relationship-building tools. We have an “eat your frog first” approach to our horsemen money – we have to review some relationship-building concepts before we are allowed to pull the cash. We do this every week.
You’ll want to set a fixed dollar value for your horsemen money, where each spouse gets the same amount regardless of previous spending habits. I mentioned above that this method of cash flow planning helps to build stronger relationships, and part of the way it does that is by equalizing the playing field. Maybe you spend roughly equal amounts, or maybe one of you will end up with a mason jar full of cash. Doesn’t matter. What matters is that the opportunity to spend was equal.
The dollar amount that you choose should be reasonable based on what your previous habits have been, and it can always be adjusted later. We started with $60 per week each, which we found really hard at first. Then, it seemed right. And now it’s become more than either of us typically spends. For the 2018 calendar year we dropped it to $40.
What happens through this process – and that’s through Step 3 below – is that you become unified in your values, goals, and spending habits. By reducing our weekly horsemen amount, neither Darcy nor I have a feeling of loss. Quite the opposite, we’re liberated and at peace with it. Because the money that we’re not taking out for personal expenses is being redirected to our family goals, and accomplishing those goals makes us happier than an extra $20 per week did.
Step 3 – Momma wants a hot tub.
The third step is for each spouse to go through and list all of your personal goals – for yourself, and for your family.
Once you’ve both got a fairly comprehensive list, separately rank each item from 1 to 3 in priority of importance. I know this seems kindergarten, or a bit patronizing, but it is honestly the exact process Darcy and I did to get to where we are. As soon as they’re ranked, add them up and sort them, and you have yourself a priority list.
Use your priority list to help you develop a timeline. On a new spreadsheet tab (yes, another one), list your ages from now until 95. Based on your past-casted results, how much cash flow should you theoretically be able to put towards these goals every month? If it’s $500 per month, and your first goal is a new car, then you can figure that it’ll either take seven years to fund the new car, or you need to consider a cheaper car.
Work down this way to see where your goals can fit, or make some compromises (this is where Gottman’s horsemen come in handy). You can have anything in life you want. You just can’t have everything you want. By going through this process, you see how your dreams are set to become reality, and in the meantime you remain motivated and united as a family, living together with a sense of purpose and direction.
So there you have it! The way that financial professionals manage their money. Let your ambitions lead you to happiness, peace, and prosperity.
Written by Meagan S. Balaneski, CFP, R.F.P CERTIFIED FINANCIAL PLANNER®
Advantage Insurance & Investment Advisors
Manulife Funds Representative
Manulife Securities Incorporated
The opinions expressed are those of Meagan S. Balaneski and may not necessarily reflect the views of Manulife Securities Investment Services Inc.