How to Make the 4 Pillars of Money Management Work for You
By Interior Savings
January 15, 2018
Managing your money doesn’t need to be complicated. Having money is like using stepping stones to help you get across a river. Your big financial goals are on the other side, and you’d prefer to reach them without taking a swim. Or better yet, build a safe, solid bridge for you and your loved ones to hike across.
The bridges we help build with our members have four distinct pillars – all of which need to be firmly in place to keep the bridge to their goals from collapsing. Sometimes, we find a gap and need to fill it, so a member can keep hiking.
Are your pillars in place? Or are there gaps that need to be addressed? Here are the four pillars of money management we work through with our members, the gaps we find most often, and ways to start bridging the gaps.
Pillar #1: Cash Flow Management
Cash flow is, simply, the ongoing process of money coming in and money going out. A good cash flow situation means you have money available to spend when you need it. In the days before everything digital, you pretty much knew when your cash was running out, because your wallet was empty.
If you don’t know where your money’s going or what you’re spending your income on then you have a gap in the Cash Flow section of your bridge.
That gap is going to put you on shaky ground. You may get ‘declined’ for a routine purchase. Any surprises and you’ll be overextended. You can’t save consistently for your goals – like travel, school, a move, or other large purchases.
One Small Step You Can Take Now to Start Bridging the Cash Flow Gap:
Check your monthly credit union or bank statements and credit card statements. Categorize and add up all your purchases so you get a handle on what you’re spending your money on.
A next step could be to sit down with your account manager and work out a budget that guides what you spend, so that you’re able to save for some bigger goals.
Pillar #2: Credit Management
Debt is the money you owe (principal), and the cost of borrowing that money (interest). Debt isn’t always a bad thing – when the return on your investment more than makes up for the interest you pay for the money you borrowed, we call that Good Debt. Like borrowing money to buy a house, which is an asset that increases in value over time. Or borrowing for school, when your income from a promising career allows you to pay back your student loans, plus the interest, and earns you steady income doing something you find fulfilling.
Bad debt is borrowing money at a high interest rate to pay for things that don’t increase in value, or have you scraping by just to pay interest. The biggest culprit is credit cards, which can charge high interest rates. Making minimum monthly payments on your credit card doesn’t pay off your principal nor reduce the interest you’re paying.
Now that we have the convenience of automatic deposits, electronic transfers, mobile bill payments, debit purchases, tap, swipe and click… it’s easier than ever to lose track of how much we’re spending versus how much we have in our accounts. And often the only thing in our wallets are loyalty cards!
If you don’t know how you’re going to pay off your credit card balance then you have a gap in the Debt section of your bridge.
One indicator of how you’re managing debt is your credit score. This is an ongoing, financial ‘report card’ that your credit union, bank, credit card companies, utilities, cellphone service providers and other bill payees feed into. When you make payments on time and show progress in paying down your debt (rather than adding on to it) your credit score will improve. Then, when it’s time to borrow money – for a mortgage, a car, a line of credit – your score affects if and how much you can borrow. Making bare minimum payments doesn’t improve your credit score; missing payments, adding more loan products and credit cards hurts your score.
One Small Step You Can Take Now to Start Bridging the Credit Gap:
Write down all the amounts of money you owe and the annual interest rates you’re paying while the debts are outstanding. Now that you know, what will it take to start making a dent in paying those loans back?
A next step could be to sit down with your account manager and combine (or ‘consolidate’) your loans so you can pay off loans with a high interest rate, while you set up manageable payments against the principal and interest amounts of a single loan with a lower rate.
Pillar #3: Retirement Planning
There are multiple ways to save for retirement: Registered Retirement Savings Plans (RRSPs), Tax Free Savings Accounts (TFSAs), pensions, Old Age Security and Canada Pension Plan payouts. When it comes to putting money away for retirement, many people have a lump sum number in their head that they’re trying to achieve. The “What’s My Number” approach isn’t always the best way to plan because, a) that “number” is different for everyone and needs to account for a variety of post-retirement income sources, and b) that one final amount can seem overwhelming, and cause you to throw up your hands in hopelessness.
If you don’t know if you’ll ever have enough to retire then you have a gap in the Retirement Planning section of your bridge.
We talk to members less about a great big dollar amount to accumulate before they can retire with peace of mind, and more about the income they’ll need month-to-month.
One Small Step You Can Take Now to Start Bridging the Retirement Planning Gap:
Imagine what your life will look like when you retire, and take a stab at calculating what your monthly expenses will be. Do you envision living in a smaller home and paying rent? Will you be home more – paying more for utilities but less for gas? Will you spend less on eating out than you currently do, but hope to take more frequent trips away? Once you have a clearer picture of what your monthly costs will be, compare those to all anticipated sources of future monthly income, including pensions, CPP, dividend payments, and Registered Retirement Income Fund (RRIF) payouts. Do you fall short?
A next step could be to meet with your advisor to translate how your current savings and assets translate into after-retirement income. This is an opportunity to figure out if anything needs to change to give you the peace of mind that you’ll be able to afford all the things you’re planning to enjoy in your retirement years.
Pillar #4: Protection Planning
We find that protecting hard-earned assets is one of the most overlooked pillars of financial goal-planning among our members – probably because it’s not an ‘urgent’ concern that confronts us every day.
If you don’t know how your family would manage medical bills, funeral costs, debt repayment, and ongoing expenses without you then you have a gap in the Protection Planning section of your bridge.
While it doesn’t feel urgent, talking about life, critical illness and disability insurance is important. If something were to happen to a member of your family, beyond the grief and coping, there are concrete costs that will come up.
One Small Step You Can Take Now to Start Bridging the Protection Planning Gap:
Calculate roughly what it would mean to your family if you removed your contribution from their lives. That means the income that ceases, and also the debt that’s left behind, as well as the hours you contribute to child-raising and household management.
A next step could be to talk to someone you trust who can help ensure you have enough coverage – something that should be checked every few years since financial situations and goals are always changing. If you don’t have any coverage, then it’s time to talk to somebody who can show you how affordable it is.
It’s never too late for bridge repair! If you’re feeling confident with all four financial pillars, then the journey towards your ultimate goals will, we hope, continue to be smooth and straightforward. And if you do trip up on a gap along the way, remember, we’d love to answer any questions you have about creating a solid financial plan. Get in touch with one of our Financial Advisors. We’d be happy to help.
Article contributed by Audra Germann, Investment Advisor, Credential Securities Inc.