Chapter 1: A Fresh Snowfall - Your Income
The bell rings to signal the start of recess at a primary school. The students race out of class, excited for the fresh snowfall that’s been distracting them all morning. Their focus is simple: to build the best and biggest snowman possible. The fresh, damp snow allows snowballs to be created effortlessly. The unpacked, abundant field ensures the snowman will be large, round and done by the end of recess.
The children are unaware that the steps they’re about to take building a snowman are the same they’ll eventually take to prepare their financial futures. The reasoning is quite simple. The growth, maintenance and enjoyment of creating a snowman mimics the growth, maintenance and enjoyment of a successful financial plan. This is where we’ll draw our first analogy and begin to learn the most important steps within personal finance through building a snowman.
Getting to Your Income First
Think of this fresh snowfall as your paycheque or source of income. Each new paycheque presents a vast field of snow—or money—that you now control. Imagine if the school children hadn’t rushed to the fields to build a snowman that recess. Imagine if they had waited days or even weeks before beginning. What the children likely would have found by then isn’t a field of opportunity, but instead a field of trampled down snow.
If you wait to set money aside until after it’s burned a hole in your pocket, you won’t be nearly as successful. Instead, it’s best to set it aside the moment you receive it. Be the first to your paycheque to ensure it doesn’t get trampled down by other spending.
This demonstrates the importance of setting aside a bit of your income as it’s earned. Doing so ensures you’re able to take advantage of that field of snow before it gets rundown. After all, just as the seasons change and the snow inevitably disappears, you’ll eventually reach a point in your life where you no longer wish or are able to work and must rely on your savings to support you from there.
Income Over Your Lifetime
In addition to using analogies throughout this blog, I’ll rely heavily on individual examples to make things real and actionable. For our first example, let’s consider Kelly, who’s starting to save for retirement. Kelly is twenty-five, earning $40,000 a year and wants to retire at age sixty. Setting aside 10% of her income—the equivalent of $333 a month—until retirement would collect $140,000. It’s surprising how much money the average person earns and spends in a lifetime without realizing it. At $40,000 a year, Kelly would earn $1.4 million over thirty-five years. If she’s not careful, she could have very little left over to show for it.
Small purchases add up over time and can erode a paycheque. Therefore, it’s critical to get to your income first and set a portion aside before it’s trampled down to nothing.
While not all savings goals are as long-term as retirement, the steps remain the same. Take, for instance, a couple saving for a down payment on a new home. Between them, they earn $95,000 a year and hope to have enough for a down payment in three years. By setting aside 10% of their income—or $13 each per day—for the next three years, the couple would accumulate a total of $28,500. The first step to achieve any financial goal, big or small, is to get to your money before it’s been spent and set it aside for the future.
Obstacle: The Temptation to Spend
The issue most people run into when trying to save is the persistent temptation to spend their money. This is due to human nature and our difficulty considering long-term benefits in the face of short-term rewards. It’s also what keeps most of us from going to bed on time or tackling that to-do list. We prefer the immediate rewards of doing something else over the long-term gains of getting it done. Therefore, we push the challenge off for another day. It’s so hard to save, even though we know we need to, because there’s an immediate reward to spending.
The best way to fix this is by automatically transferring your money to another account immediately as it’s earned. Keeping your savings out of sight and out of mind is a useful strategy to avoid temptation. The first step is to open a new account with your preferred financial institution—for instance a bank, credit union or digital offering. Once the account has been set up, there are several ways you can transfer over your savings.
Most financial institutions have a service known as a recurring transfer. It’s an automatic, scheduled transfer of money from one account to another. This can be used to transfer a portion of your income the day after it’s received. For example, if you’re paid $1,300 every other Friday, you could schedule a transfer of $150 for every other Saturday. Transferring money before it’s spent ensures that saving for the future isn’t left to the last minute and potentially forgotten.
If transferring a set amount of money on a regular basis doesn’t work for you, there’s another option available. Some financial institutions allow you to transfer money from one account to another every time you make a purchase. For instance, as you pay for your $12 dinner, $1 would also be withdrawn and transferred to your savings account. By transferring money whenever you make a purchase, the act of saving becomes less noticeable. You also ensure that money is being saved because to make any purchases, you must also put aside some money for the future.
Obstacle: Thinking You Need the Money Now
Some people postpone setting aside money because they feel it’s needed today. You likely have expenses and obligations that your money is earmarked for.
However, what’s commonly noticed, and surprisingly so, is that the money you set aside in savings is rarely missed. Quite quickly, most people find their expenses decrease to match the amount of money remaining after savings have been put aside. We tend to spend the money we have available simply because it’s there, not because we need to. As a result, setting money aside allows you to save for the future without much of an impact on your current standard of living. To experience it yourself, try setting aside an extra $5 a day and see if you notice. Even that small change would add up to $9,125 over five years. You can start as small as you’re comfortable with and gradually increase the amount as your spending habits adjust.
Obstacle: Thinking It’s Too Late
Many people worry it’s too late to start saving and feel they’re too far behind to make a difference. While starting early helps, it’s not the only way to reach your goals. You’ll be amazed how quickly small changes to savings habits can add up. It’s never too late to start putting away money for a car, a down payment on a house or your retirement. Every dollar you put away brings you closer to achieving your financial goals.
Take Darryl for instance, who’s forty-five and hasn’t started saving for retirement. He’s currently making $50,000 a year and is looking to retire at sixty-five. He’s decided to set aside 15% of his income for a value of $625 a month. Even with starting at forty-five, Darryl can set aside $150,000 before reaching retirement. Again, this illustrates how regular deposits to a savings account will gradually build to a very useful sum of money.
Budgeting
You can find areas to reduce spending by creating a budget and comparing it to your current expenses. We’ll discuss budgeting in further detail in Chapter 6. The main finding is that you can save for the future while maintaining your current standard of living. Through listing and ranking activities that bring you the most satisfaction, you can ensure there’s enough money for your top priorities even while setting savings aside.
Paying Off Debt
So far, we’ve assumed the income you’re setting aside is going into a savings account. However, more commonly these days you may benefit from first paying off some loans. We’ll cover managing debt in greater detail in Chapter 7. The most important lesson is to pay off high-interest debt before you start setting aside money in a savings account.
High-interest debt generally charges more than 10% interest. It can include credit cards, payday loans and some personal loans. These loans are dangerous because the interest charged means you’re constantly fighting an uphill battle. The interest is like gravity dragging you backwards as you try to roll a snowball up a steep incline.
The steps to pay back a loan are the same as setting up your savings. Get to your income first and set aside as much as you comfortably can. Gradually look for ways to lower your spending to make larger payments toward your loan. The key is to pay enough to cover any interest charges and then as much as you can to repay the original loan amount.
Final Thoughts
Whether through conscious or automatic transfers, saving for the future is a necessity. By getting to your money first and setting some aside, you’ll be better financially prepared. Just as the children ran for the fresh snowfall, ensure you’re getting to your money before it’s been trampled.
Key Takeaways
Get to your money first and set aside savings, so you maintain your standard of living in the future.
Start today and build your savings habits gradually to avoid taking on too much change at once.
Automate your savings to remove the temptation to spend.
This blog is a duplicate of the recently self-published book The Snowman’s Guide to Personal Finance available for purchase here.