Budgeting for the Big Stuff (Part 4 of 5)

Ever get nailed by a surprise bill? Yeah, you knew insurance was due for the year but you thought it wasn’t till next month? This episode is about pain relief! More specifically, relief from the impact of those bigger, occasional, or annual bills.

Not only do we need to keep track of our everyday expenses and budget for them, we also need to set up the part of our budget that deals with mid and long term planning. Emergencies also arise, so being prepared for those is very important too.

We often fall into the if-then trap of “If I won the lottery, then everything would be fine financially”. Ironically, most lottery winners totally train wreck their lives. The words of the Bible are so true, “Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.” (Proverbs 13:11).

Because this is so true, we need to step away from this if-then principle and start working on consistent strategies of gathering little by little. Another reason to start this is most of us are not going to win the lottery, have huge inheritances from our parents, or a windfall from the stock market!

There is something called the family stress theory which predicts that improved communication about finances should decrease hostility and increases warmth and supportive behaviours.

You need to talk through all this budgeting stuff with your spouse because not only is financial stewardship the right thing to do, but it is also a significant factor in improving the quality of your marriage relationship.

The researchers cited that financial factors predict 15% of marital satisfaction. That’s a lot of satisfaction based on ONE factor! This means that the greater your financial problems, the lower the quality of your relationship. Financial issues create emotional distress and part of reducing that stress is not only budgeting month to month but also making sure you have a plan for the larger bills and for creating long term savings for yourselves.[i]

Long-Term or Retirement Savings

One great strategy to creating wealth for the future is to find a financial advisor. The intentionality and the relationship you build with your advisor forms a kind of accountability and helps you get real and determined about your savings.

People who use a financial advisor:

• End up establishing long term goals and work towards filling them
• Actually, sit down and calculate their financial needs for retirement
• Create savings accounts dedicated to retirement
• Increase the amount of money they save regularly
• Report greater retirement confidence
• Accumulate significantly higher levels of emergency funds.

If you want these things to be true of you, then you might seriously consider getting a financial advisor who is trained and qualified in helping you create your own retirement savings plan.[ii] Since we got ours, it has created useful discussion and helped us to be very clear, consistent and confident about our own savings.

Another way to make wealth grow is by living within your means and saving. Here are four key concepts to think about:

• Keep finances simple and live within your means. Get loans paid off: credit lines or equity loans, automobile loans and credit card debt. All these things enable you to live beyond your means.
• Save and invest 10% of your earned income annually. This is especially critical if you are employed as a wage-earning family.
• Whatever proceeds come from your investments, that income should be reinvested, ideally, all of it. Interest income should be put back into the investments as a long-term strategy to multiply your wealth.
• Exchange wealth-depreciating assets for wealth-creating assets. [For example, if you were to exchange the asset value of your 50k main vehicle, your 30k second vehicle and your 40k camper trailer and choose 2 vehicles (used) worth 10k and 6k, and scrap the camper. Then you could invest just over 100k in a down payment on a rental house, which would build wealth rather than reduce it.]

A family in the USA with moderate income who is willing to make these changes would free up approximately an additional $14 000 per year for wealth creation.[iii]

I can almost hear some of you saying now that you’d rather have the freedom that comes with credit card debt than the constraints of a budget. You are not alone! Caleb can sympathize, as he feels bound by a budget. However, we need to understand the psychological strategies we can use to help ourselves do what we need to rather than what we feel like doing.

Here are three stages of accumulating savings with the psychological strategies and behaviours to make them happen.[iv]

1. Take some money you planned to consume and save it instead. Or, exchange your time for more income.
   1. Psychological: When you’re thinking about reallocation, the psychological strategy that goes along with it is goal setting. Set a goal. Focus on it mentally. Get encouragement from family or friends. Even choose specific sources of income like a bonus or tax refund, to help you achieve that goal.
   2. Behaviour: Work on being efficient. Buy smarter. Buy cheaper with coupons or off-brand alternatives. Budgeting really helps here because you can move money that would have gone to expenses over to savings.
2. Make your money hard to spend – convert it from something that’s easy to access to something that is harder to get to.
   1. Psychological: Think about your savings as a bill – an expense that you have to pay. Create a mental shift and trick yourself into believing it is obligatory.
   2. Behaviour: Make a deposit into your savings account immediately after getting your paycheque before you make other purchases. Ideally, set it up as an auto transfer to happen immediately after your income is deposited. Make it a passive transaction so it just happens automatically and you don’t even think about it.
3. Once you start accumulating wealth or savings, make sure you keep it. It is easy to see $50K sitting there and decide to buy a boat or some other toy.
   1. Psychological: Create simple rules. Decide what your savings are for and make your money off-limits for anything but that purpose. Make a list of what you can pay for from that money – no exceptions.
   2. Behaviour: Put your savings in a place where the money is difficult to access – even into an account where it is locked in or has a fee to extract it, if necessary. You do NOT want your retirement savings sitting on the other end of a debit card.

You may have decided by this point that retirement savings are not important as you’re going to die with your boots on and never retire. That’s fine and dandy, but what if your spouse continues to live for 20 years after you go? Remember this has to make sense for both of you. Talk about it!

Short-Term or Annual Savings

Having a budget for annual expenses is a great stress reducer. It is never pleasant to get that $1200 bill for car insurance if you’re not ready for it. Paying the bill on a monthly schedule is not necessarily the smart way to go if you have interest or service fees.

So, the solution is to save month by month for these expenses.

Just to give you a personal example here: We have a number of yearly expenses that are larger than would fit comfortably into our monthly budget. These are things like house insurance, car insurance, property tax, income tax, propane (how we heat our house), and vehicle tires (not necessarily yearly but regularly).

What we have done is taken each of these amounts, added them up for a grand total, and then divided that number by 12. We then set aside that amount monthly into an account called “Annual savings”. When these bills arrive, it is so easy and STRESS-LESS to be able to just pay them out of that savings account. There is no stress or drama.

To sum up, we have many different types of expenses in our lives, some are short term and others are long term. All of them need to be paid, and having a savings plan to make sure the money is there when needed is so important.

Make sure you have that conversation as a couple to make sure you’re on the same page as to your goals and visions. Then start in a practical way to work towards that financial freedom you both dream of. Not having to worry about money can reduce a lot of stress and friction in your marriage! Need some help? Give us a shout!

[i] Kevin J. Zimmerman and Carl W. Roberts, “The Influence of a Financial Management Course on Couples’ Relationship Quality,” Journal of Financial Counseling and Planning 23, no. 2 (2012): 46–54,81.

[ii] Mitchell Marsden, Cathleen D. Zick, and Robert N. Mayer, “The Value of Seeking Financial Advice,” Journal of Family and Economic Issues 32, no. 4 (December 2011): 625–43, doi:http://dx.doi.org/10.1007/s10834-011-9258-z.

[iii] Ivan F. Beutler, “What Makes Wealth Grow? A Wealth Sensitive Financial Statement Analysis,” Journal of Financial Counseling and Planning 25, no. 1 (2014): 90–104.

[iv] Sondra G. Beverly, Amanda Moore McBride, and Mark Schreiner, “A Framework of Asset-Accumulation Stages and Strategies,” Journal of Family and Economic Issues 24, no. 2 (Summer 2003): 143.

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