The Simplest Financial Plan Possible

Earlier today I presented a lengthy description of the how planning could work both effectively and efficiently. I would be amazed if anyone takes it to heart. At most a few will try to clarify their goals, maybe assess priorities, possibly even notice that it’s just common sense to a point, and there is not so much after that matters.

The perfect, easy financial plan

Is one where at any point in your life you can say, “I have enough money to live as I wish, and I expect that to stay true.”

That is a result so not  a plan. It does however permit the creation of simple heuristics. If someone followed all three, they could achieve their goal.

The heuristics are simple and easy to manage.

  1. Spend less than you earn.
  2. Respect the power of debt to hurt you.
  3. Devote time and effort to being able to earn more.

The defect

Many people spend more than they earn and use debt to fill the gap. The idea being in the future they will earn more and use the extra to pay the debt off. That idea is quite common and those who hold it seldom achieve their goals. Why? Because a better lifestyle is a trick. You can always live better and without a constraint, you will.

You must make your own decision on the constraint.

Thinking about it.

Here’s a way to think about how much it should be. If your consumption is more than 50% of your income you are in dangerous territory. It could be okay if you have no debt and rent is part of your lifestyle.

Here’s why that’s true.

There are many more people than you in the present who have to live off that income. It will be about balancing those needs.

Who are those people?

The first person is “you the present.” You earn money today and you consume today. Lifestyle is about consumption. Food, gas, clothing, hydro, internet, cable TV, Cell phone provider, rent, entertainment, vacation, and a few dozen more. This money you earn now and spend now.

The big brother character. Before you even see any money from what you earn today, the government takes their tax share, then they take employment insurance, and Canada Pension deductions. The union gets their share. Maybe some group insurance or an employer pension. The last two logically fit elsewhere. You’ll see why.

Then there is “you the past.” How much did “you the past” spend that created a debt and the requirement to repay that debt. You the past can be quite demanding about getting their share. Bad things happen if you ignore them.

Last of all is “you the future.” That’s where group insurance and employer pensions fit. I suppose you could argue EI and CPP should go there too. A detail that won’t change the analysis. Some of the money you earn today must go to pay for the lifestyle of your future self. You can make that person happy or sad, even angry. Old people don’t like to be hungry. Children don’t like to be uneducated and that comes sooner.

From experience, people who have a mortgage, a good job, maybe some student debt, and a car lease cannot meet their obligation to all the players if they have a lifestyle over 50% of their earnings, and that is likely too high. 40% is not such a bad target. If you earn a high income, 50% is definitely too high because big brother wants more taxes. 30% for a high earner might be the limit.

Balance is the puzzle

Lifestyle is the key. If lifestyle is wrong, you will be fighting your future from the very beginning. That is hard to stop later and your best move is don’t start there. Be ruthlessly objective about spending and especially about incurring debt.

Building a control.

Everyone needs a cash flow budget. It doesn’t require a hundred lines of specific detail. It might be better in the beginning if it had it, but a dozen or so should be enough. Food and household sundries, meals outside the home, occupancy costs., (heat, hydro, cable, internet, rent and the like”, transportation, entertainment, children costs, vacation, work related, and so on. Cash flow means the expense appears in the month you expect to pay it. Lumpy things confuse if you budget for them each month. A $300 car insurance bill due each 3 months is not the same as $100 a month.

What you are looking for is the question of how does my estimated cost of living that would have worked in the context of all the players wanting money actually turn out.

Why that?

You want to know and understand the variance from the projection. You don’t need to review it every month, maybe each quarter. You will find most are close and some not. Ignore the ones that are close. There is not much to learn there. The variations are where the learning lives. You expected $400 and got $700, you should know why. Three choices usually. You underbudgetted, you spent carelessly, something changed.

Your benefit is you are more organized and disciplined. When you know where your money goes, you tend to be more careful. A fun exercise is to review the automatic charges on credit cards. Most of us find some cash vampires there. Thoughtful spending is usually more efficient.

Using what you learn

Not all improvements are at the expense of lifestyle. Most people pay no attention to managing tax or their employer pension plan. A few pay a some attention to managing debt, and some pay attention to managing savings. When you look at the whole picture, you find at least 50% of your income is not managed at all. The past, the future, the government and others. Even a small advantage gained there works out to a big win. 2% better would matter.

Seeing the big picture lets you make decisions better and easier.

There are common questions.

  1. Invest or reduce debt is the most common
  2. Tax deductible savings or a tax free savings account
  3. Registered Education Savings Plans or not.

When you think about all the players you can be more efficient.

Most people just need a trigger to look.

The takeaway

Perfect is a dumb goal. The context and you both change in the future.

Understand what you are trying to do and you’ll be better.

If you fear debt and spend less than you earn, you’ll probably be okay

Some effort to be efficient pays off. Far more than you expect.

Learn how to shop. Not coupons or studying the flyers. More like buying things on sale that you know you will need in the future. Check for substitutes. Some store labels are made by market leaders. Why pay for the label?

Share information. Children are good at this if they are well-informed.

I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email

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