Formula for Financial Success

Basic Principles for Gaining Financial Independence

By John Paetkau

Content licence: Attribution 4.0 International (CC BY 4.0)

Cover art credit: https://us.fotolia.com/id/77504165


Forward

27 years ago, when this book was first written, I was not yet old enough to be able to read it. However, as I grew up, the wisdom contained in these pages was discussed often and many of the points seem to me to be basic common sense. Sadly, that is not the case; the sense in this book is as rare as gold and twice the value. If anything the need for this book is greater now than it was in 1988.

What seems to me to be basic financial literacy is to many completely foreign. Most people do not consult with qualified financial professionals. Expensive toys are purchased before purchasing a home. Fancy clothes are worn only once or twice while both parents work to make ends meet.

Perhaps you are the family with tens of thousands, or more, in credit card debt and can never seem to “get ahead”. It is not a lack of intelligence that got you into a mess; rather no one ever taught you the basics about money and what you were taught — or perhaps shown — was faulty. It is imperative that you learn basic financial literacy and put it into practice as soon as possible. This book will give you these simple skills.

I should warn you in advance, “the formula” is like Buckley’s: “It tastes awful and it works”.

Jeff Paetkau — April 2015


Preface to the 2nd edition (2015)

In the 27 years since I first wrote “the formula” much has changed. I have now been married for 54 years and most of my grandchildren have grown up and left their nests. Many of the figures in the 1st edition seem dated.

On the other hand, some things don’t change. The principles outlined in this little book are just as relevant in 2015 as they were in 1988. It amazes and saddens me that so many baby boomers are now reaching retirement and still have a mortgage on their house and maxed out credit cards. So much for freedom 55!

The book has been updated with new figures and revised text as well as improved printing and binding. I hope this new edition is useful for another 27 years and another two generations.


Preface to the 1st edition (1988)

During the last few years there have been several circumstances in my life that have convinced me that I should not assume anything regarding how successful people really are. I have been thinking about writing this book for a couple of years, and because I thought there was nothing I could say that has not already been said, I have procrastinated until now. The recent recession has affected many of my financial plans and has given me new insights on financial success. I have also observed so called successful businessmen go through the agony of losing just about everything they had worked so hard for. These experiences have convinced me I do have something to say.

I have reached “middle age” and have survived my “mid life crisis”! My children are now all adults and have left the family nest. I am still happily married after twenty seven years. I have gained financial independence although I wouldn’t be considered wealthy by many people. I know now I have made many mistakes over the years and have learned some valuable lessons from them. Why am I telling you all this? I guess it is my way of justifying that I have something valid to say to you.

There have been many good books written on how to earn a lot of money, play the stock market and invest in real estate. In fact, many people have followed the advice given in these books and have become rich. But that does not necessarily mean they have become successful. One of the world’s richest men died a miserable old man, without any friends, and no personal peace or self esteem. Many millionaires have paid the price of broken marriages and poor health physically and emotionally to gain their riches. I do not call this a successful trade-off!

I am writing this with conviction because I believe what I am saying is valid and important. If you don’t stand for something you will fall for anything. I also believe everyone needs an absolute standard to base his or her physical, emotional and spiritual values on. For me that standard is the Bible, God’s word to the Old Testament prophets and the teachings of Jesus as given in the New Testament. The many good books I have read over the years have had a positive influence on my life, and have helped me in raising our family. My hope is that, by reading this book you will become a more successful person.


Chapter 1: Evaluate your options

“The true way to gain much, is never to desire to gain too much.” — Beaumont

Financial disagreements are among the leading causes of marriage breakdown. There are so many things to disagree over. Should we save? How much should we save? Should we buy a new car? And the list goes on and on. You don’t need too much imagination to realize the list of potential disagreements is endless!

If financial instability and disagreement is the leading cause for marriage breakdown, it only makes sense that the opposite (financial stability and agreement) should be a major step in securing marital happiness and success.

Financial success is not only required when you are married. Whatever age you are right now, whether you are married, single, divorced, or widowed this is the right time to start working toward your personal financial independence. Notice I said “working” toward your financial success. That is what it will take: work. Earning money is the only successful way to achieve financial independence.

Have you bought any lottery tickets lately? Are you one of the many people who think winning a million dollars will solve all your problems? Those individuals who win or inherit large sums of money are usually unsuccessful at managing it and many wind up in debt and go through emotional hardships because of their windfall.

So, the first step toward financial success is to accept the fact that without a disciplined work ethic it just won’t happen. We were made to work. The Biblical standard is, “six days shall you labour”. Most people are happiest when they work because it is the way we were designed. So accept work as a major part of your life and learn to be happy in your work. We all like to dream about a leisurely life without working, but the reality of life is without work we will never be successful.

You may be stuck in a miserable dead-end job you know you will never be happy with. How do you learn to be happy about working? There are probably several options open to you.

It is important to know that before you will ever realize true satisfaction in your work you must be working at close to your maximum potential. Loafers are seldom truly happy with themselves and most have a low self esteem. You are worth the good things in life, but it is going to take money, and the way to get money is to earn it by working hard and investing wisely.

So, if you are one of the many people who are not satisfied with your job, you should compare your situation with your potential. Do you feel you could do a lot better if only you were given the opportunity? If so, you could do one of several things.

You could choose to work even harder than you are right now at the same job and convince your employer you have the potential to do bigger and more exciting things. Do this before asking for more money. You may be thinking he doesn’t pay you enough as it is, let alone to start working harder for the same wages. This is how it is in real life. We all are sceptics and have the “show me” attitude, and your boss is no different than you or I. It is up to you to make it happen. Your raise or promotion usually won’t come without the hard work before the reward.

Soon after my son Jim graduated from high school he got a job as a shipper receiver at a local hydraulic shop. In our house the rule was, “if a man won’t work he does not deserve to eat”. For 17 years of his life Jim got pretty used to eating and the prospect of reversing this habit did not seem too appealing. So off to work at a job which was far beneath his expectations and at a salary that, in his mind, was far too low. You know how most high school graduates seem to think that as soon as they get working it will be a new car, a friendly girl, and non-stop good times.

The relief to know he would at least be able to continue to live under our roof and eat three meals a day soon turned to discouragement and resentment over his low salary and seemingly dead end job. I gave him the same advice as I just gave you. I told him to work harder and show his boss his true value. To his credit he followed advice from his “old man” and now, 35 years later, he is still working for the same company, is in management, and he earns a respectable salary.

“Our incomes are like our shoes; if too small, they gall and pinch us; but if too large, they cause us to stumble and to trip.” — John Locke

Another option is to make the effort and find another job more suitable for you. You may have to get more education or specific job training to realize your potential. This is usually a major personal decision, especially if you have been out of school for some time or are married with children already on the scene. Education and job training are excellent investments in your own future and usually pay good financial dividends. It may be hard, but thousands of people have done it successfully: you can too!

When I was twenty two years old I found myself in my fourth dead-end low paying job in the four years since I had graduated from high school. I had a wife and two small children and I decided I would not continue in a life of poverty. We made the decision that my wife, Maryanne, would return to work and I would go to technical school for one year and learn a trade.

The time and money invested in my post secondary education was probably one of the best investments I have ever made in my life. After graduating, my first job as a junior draftsman led to twenty years of continuous work in good paying jobs. I have since upgraded my education several times and each time this has paid good dividends in both salary and self-confidence.

You may be saying, “that is impossible!”

I was flat broke. If I could do it, anyone can. There are many student assistance programs and other resources available. Check them out. Whatever you do, set a goal and make plans for your career.

You could decide to start your own business. Why work for someone else when you could be keeping the profits your employer is earning for your labour?

Years ago my friend Ed lost his long time steady job as a sales manager for a construction company. He was so totally disillusioned with working for someone else that he decided from then on he would be his own boss. For the first few years he earned less money and worked harder than in his previous job, but he ended up with his own successful swimming pool and spa business. This is in Prince George, BC where winters are six months long and often -30°C. The biggest obstacle for most people thinking of venturing out on their own is fear of failure. Don’t let that fear hold you back from your dreams and ambitions! If Ed can prosper selling pools in northern Canada, I know you can prosper at almost any business you choose to start.

As mentioned before, God designed us for six days of work and one day of rest. Many people only work four or five days a week at their regular jobs because of particular job schedules. Do you keep yourself busy during those extra one or two days a week, or do you, like so many others turn into a vegetable in front of the TV or computer for the entire weekend? I feel it is important to stay active and constructively occupied.

There are so many exciting and constructive things to do on your day off. It could be a sport or hobby such as, gardening, fixing up the house, or taking your family for a drive in the country. The possibilities are endless. You may even choose to start a small part-time business in your spare time. Why not?

It is important to shut all systems down and rest for one day each week. a time to recharge your personal batteries. Take your family to church, and spend time with friends and extended family. To consistently do this is a major step towards successful living without burning out.

“It is good to have money and the things money can buy, but it’s good too, to check up once in a while and make sure that you haven’t lost the things money can’t buy.” — George Lorimer

Financial success only comes after learning to spend and invest both your money and your time wisely. Success is about more than money.

Have you noticed how some people who earn a lot of money are always in debt? You may have thought if you had that much money coming in every month all your problems would be over. Or perhaps you may be someone like that. You do have a good job earning a high salary but you just don’t seem to ever have enough at the end of the month to pay all your bills. If it is any comfort, you are not alone. The average Canadian household spends almost 145% of what they earn. It does not take a genius in math to figure out this leads to debt. So why do we keep doing it? In the following chapters I am going to suggest a pattern for a new financial lifestyle that will lead you to freedom from debt and into financial independence for your future.

Summary of Chapter One

1) A successful and happy marriage is unlikely to be a reality for you if you don’t have your finances in order.

2) You will never achieve financial independence without working for it.

3) One day of rest every week is important. You are cheating yourself and your family if you don’t take it.

4) If you think you are not in the right job, either change yourself, your job, or both.


Chapter 2: Principles of Budgeting

The first step toward getting your finances in order is to write down how much money is coming in and what is going out. You don’t need fancy software for this procedure. Just list all your monthly expenses on one side of the page — or spreadsheet — and all incomes on the other side.

Simplified Budget Spreadsheet

This is a simplified budget spreadsheet. You can obtain detailed blank budgets online or at a stationary store.

Most people have no idea where they are spending all their money. I suggest you keep track of every cent for an entire month. If you are married it is important that both partners do this. Carry a pen and small pad in your pocket or purse and every time you spend some money jot down how much was spent and what you purchased. For this first month carry on like you normally do, but write down everything. Write down the $1.25 for a newspaper, $2 for a lottery ticket, $2.25 for bus fare, $3.25 for coffee, etc. This includes items charged on credit cards, debit cards as well as cash. It may sound to you like this is a major nuisance, but it is really a simple exercise and after a few days will become a habit. Do your future self a favour and be totally honest — this is not a time to hide that new dress from your husband or those new golf clubs from your wife.

After doing this for a month, most people are surprised at how much money they spent and how little they have to show for it.

There are some bills that come once or twice a year, but for your budget break everything into monthly expenses or income. For example, if your life or car insurance expense is $780 per year, record it as a $65 monthly expense. The same procedure is used for things such as magazine subscriptions, newsletters, life insurance etc. We will go into details on how to calculate your actual car and house expenses a little later, for now just record what you think they are costing you per month.

Don’t be too surprised if after the first month when everything is recorded you find out you are spending more than you are earning. You probably knew that anyway. Now you can see on paper exactly where you are spending it. If you are spending more than you are earning you must stop right away! Put away those credit cards.

Getting Out Of Debt

“The first step to getting out of a hole is to stop digging” — anonymous proverb

You probably already know if you are in debt. Many families owe $30,000 or more on their credit cards. Others are overextended on their mortgage payments and car loans. Listed below are some basic steps for getting yourself out of this mess.

If you drive a car that is not paid for sell it and buy a used car with your equity. If you are leasing, return the vehicle and buy a used car or use public transportation until you can afford to buy a used car

You are probably living in too much of a house if your mortgage payment is over 25% of your budget. You should consider selling the house and renting until you are out of debt. Then buy a modest home that is within your means.

When you don’t pay off your credit card balance each month most cards charge almost 20% annual interest! If you can’t pay the balance each month, stop using credit cards. Start by paying off the card with the lowest balance then stop using it (cut it up). Then move on and pay off the next lowest balance. Repeat on until all your cards are paid off.

You will have to find money from somewhere.

If you smoke, quit! Of course it won’t be easy, but it is an addiction that neither your body nor your pocket book can afford.

Stop eating in restaurants and fast food joints. In the time it takes to pay off your credit cards you’ll learn to eat both better and cheaper.

Don’t buy and new clothes or shoes until your credit cards are paid off. Then splurge and buy something with cash!

Reduce your entertainment budget to almost zero. Many people who are in debt spend far too much time going to sporting events, live theatre, movies and other forms of entertainment.

Keep away from bars and night clubs where drinks cost $7 to $10 apiece. If you must drink, do so at home with family and friends. You can buy a bottle of wine for less than one drink at the bar. An added bonus is you won’t be tempted to dive under the influence.

Cut back on expensive hobbies or sports such as skiing or golf. Putting $100 toward your credit card balance is a far better investment than a round of golf.

Setting Up A Budget

The next step is to set up a family budget. Don’t let the thought overwhelm you. It is not much different from what you have already done with your spending outline. The only difference is now you have to juggle the numbers to ensure you are not spending more than you are earning. Then you must exercise discipline to keep within those parameters.

Now is probably the time to evaluate if your credit cards are getting you in financial difficulties. Some financial adviser’s say if you have unpaid bills and are not too self-disciplined about using your cards, you should cut them up and throw them away. I am going to suggest you change to a cash & debit only system. If you don’t have the funds to buy something, you know you can’t afford it. This system is very simple and it works! Keep at least one major credit card for a genuine emergency and get rid of all the rest.

When I teach principles of finance I encourage people to use the 80/10/10 method of handling their budget. Let me explain: you learn to live on 80% of your net income, give 10% away and save 10%. Now don’t throw this book away or write me off as a nut. If you think you can’t live on 100% let alone 80%? Let me assure you, this system works. The thought of giving 10% of your money away may seem like a radical concept to you but I will explain why this is an important principle of successful financial living.

Give 10%

“Of Money. Make all you can, save all you can, give all you can.” — J. Wesley

For those of you reading this book who are Christians your 10% should go to your local church and other para-church organizations. If are not a Christian and you do not attend church, I suggest you support charities that specialize in helping the poor and hungry.

Did you know, there are over one thousand references to money in the Bible? Jesus teaches the principle of giving to the poor, supporting widows, helping orphans, and feeding the hungry. The bible says if we do this he will bless us. I believe Him.

I believe Him because I have seen this principle applied over and over and I have personally experienced His blessing in all areas — not just financial — of my life.

Have you ever given away a car? Several years ago I was involved with Youth For Christ, a non-profit organization working with young people. It came to my attention they needed a van for transporting teenagers to and from various activities. I had a seven passenger van — and they didn’t have any money — so I donated my van to Youth For Christ and bought myself a new car. It didn’t take God too long to follow through on his promise of “increase in good measure”. The most interesting “coincidence” happened shortly after I gave my van away. One of my tenants abandoned the house he was renting from me, but left four vehicles on my property. As he was in arrears on his rent, I impounded the three cars and one truck. The three cars were old junkers that I sold for enough to cover the back rent. The truck was a late model deluxe 4x4 pick-up worth a considerable amount. It was something I had always wanted for myself! Through another miracle — some people may call it coincidence, but I know differently — I gained ownership of that 4x4 without spending any more than the cost of a couple of stamps and a newspaper ad. How’s that for a good return on an investment?

“A man there was, and they called him mad; the more he gave, the more he had.” — Bunyan

Charity, or being charitable is for everyone, not just the rich, large organizations, or religious people. It is really is “more blessed to give than to receive”. I strongly believe that as we abandon our “gimme” attitude and learn to get involved with those less fortunate than ourselves a new dimension to our personality develops.

An example of this is how most of us feel good around Christmas when we give generously to other people. Why feel good only on special occasions? Make it a lifestyle and be a happier more successful person for it!

“What I gave, I have; what I spent, I had; what I kept, I lost.” — anonymous epitaph

Save 10%

Savings, or as some have said, “pay yourself first” is a financial principle that many people have difficulty putting into practice. Again, this is not just for the rich or for middle- aged people, it is for you no matter what your age or financial status. How many of you spend $5 or $10 a day on a habit such as smoking, a cup of coffee and doughnut, or an afternoon coke? I think we all spend at least this amount. Check your monthly expense record, or have you tried to avoid thinking about that?

Did you know, if you start saving just $10 per day when you are twenty years old and invest it at an average of 6.6% interest you will have a bank account worth just over $1,000,000 when you are sixty five years old?

In my outline I suggested 10% savings. Of that, 5% is for long term savings for your old age or some major economic setback, and 5% short term savings. The short term savings are used so you can act as your own banker. If you follow this guide you will never have to borrow money to buy a new car or major appliance again. Think of it, no more loans to pay! Buying a car with cash could save you up to 25% over the usual option of financing it over three or four years. The only hitch is you may have to wait a year or two while you save for your first major cash purchases. Many people now lease new vehicles which is the most expensive option — unless you can deduct it as a business expense.

Do I mean that you should start saving even if you are in debt? Yes! A principle is the same regardless of circumstances. What is my simple definition of debt? You are in debt if you don’t have enough money to pay the agreed upon amount of all your bills. In other words, you are not necessarily in debt if you owe money, as that is a simple business contract. You are in debt only when you cannot meet the lender’s minimum payback requirements of that contract. However, if you are paying only the minimum amount due on your credit cards, you are paying way too much! You are probably paying more than double what you you would pay if items were purchased with cash. Pay the full balance every month or quit using credit cards.

If you are deeply in debt you won’t be able to start saving 10% until most of your creditors are appeased. However, you should get into the habit of saving something out of every pay cheque, even if it is only $25.

Things that should be sacrificed until your debts are cleared, are the optional variable items in your budget such as entertainment, vacations, gifts, clothing, etc. If someone owed you money and was not paying you back, how would you feel if you saw him drive by in a new car, wearing a new suit? If you are really serious about getting out of debt you will have to make a few short term personal sacrifices. The prospects of long term financial independence should be ample motivation.

Spend 80%

Below is a simple breakdown of approximate percentages to guide you in evaluating whether you are spending too much or too little in a particular area. I will expand on each area later. It does not matter if your income is large or small, the percentages will be approximately the same. An exception may be if you have a very large family or if you are paying alimony or paying off a lawsuit.

These percentages may vary based on your circumstances. However, the must add up to 100% of your net family income or less. Never more!

Food

If you discover you are spending substantially more than 25% of your income on food, including restaurant meals, I suggest you make a plan for modifying your eating habits. It is easy to get into the habit of buying convenience foods or dining out. This is not necessarily bad if you can afford it. However, there is a good chance you really can’t afford that luxury.

A simple habit such as buying a $10.00 lunch every working day can add up to over $600 per month for a working couple. This adds up to around $6,000 per year more than if you took a bag lunch.

There are many other ways of saving money on your food budget — though that is outside the scope of this book and tips are readily available from other sources. What I am trying to emphasize is a balanced lifestyle that leads to financial and personal success. If you earn $8,000 per month you can afford to spend up to $2,000 on food. If you are only earning $3,000 per month you cannot afford to spend more than $750 per month on food — unless, of course, you are willing to make a trade off on some other area of your budget.

Housing

As you can see in my budget breakdown, housing should account for approximately 25% of your take home pay. This figure will vary depending on what part of the country and what city you live in. To have a balanced, realistic budget you should not spend over 30% of your pay on housing.

If you are renting, the percentage figure is easy to calculate. It is simply your total rent costs including utilities divided by your take home pay. In other words, if your pay is $4,000 per month, $1,000 would represent 25%. Owning your home makes calculating your budget limit a little more complicated. The reason for this is only a portion of your monthly mortgage payment is going toward the principal. Most of your payment will be used for paying interest and taxes, however, eventually you will own the house. The portion of your payment that is actually yours, the principal, can be treated as an investment. Therefore, if you are a buyer, your 25 to 30% budget would include mortgage interest only, plus taxes, utilities and maintenance.

If you find you are spending over 30% you have some serious decisions to make. There are several options to evaluate. Choosing to stay in the same house, but refinancing your mortgage may be viable solution. It may take more drastic action such as moving to a smaller home or apartment. You may even be able to find the same size house but in a less expensive area of town. Increasing your income may be the correct solution for you, I can’t tell you. What I can tell you though, is if you are spending more than 30% of your budget on housing, doing nothing is very likely the wrong decision.

Should you rent or buy? Under most circumstances I think, in the long term, owning your own home or apartment is better than renting. You will pay for it either way. How do you think your landlord is paying for his investments? With your rent money! Your house may as well be in your name rather than your landlords.

I am convinced owning your own home is one of the best investments a person can make. In Canada your capital gains are tax free which makes owning a house even more attractive. For this reason I recommend that you use a major portion of your 5% long term savings to buy down your mortgage rather than leave the money in a savings account. Most people take twenty five years or more to pay off their mortgage. I think this is a mistake. In many cases paying as little as $250 per month extra, as a part of your 5% savings, on your mortgage can reduce the term from twenty five years to fifteen years or less. Now if you take that $1,200 per month (or whatever amount your mortgage payment was) and invest it at 6.6% interest over the ten years you have reduced you mortgage term by it will add up to over $200,000. That’s enough to pay for another house (at lease it is here in Prince George)! I don’t know many better investments than this! This will take some discipline and commitment to actually do. That extra $1,200 per month no longer designated “mortgage payment” will be very tempting to spend in other areas. Probably most tempting will be the next area: transportation. Resist it!

Transportation

This is one area where most of us are vulnerable. We all, love to drive shiny new cars.

It is not uncommon for some individuals to spend up to one-half of their disposable income on cars, trucks, motorcycles, etc. Every day we are bombarded with ads trying to convince us that if we buy a particular model of car our whole life will be different. The beautiful girls will come running and doormen will give us special attention. Almost every TV, magazine, and newspaper has automobile ads. Advertising is very expensive and the manufacturers would not be spending their money on advertising if they were not getting a good return. This return is at our expense: you and I driving cars we don’t need and can’t afford.

The budget figure of 15% for transportation may vary a bit depending on where you live or what your occupation is, but not by much. If your income is $4,000 per month, you can only afford to spend $600 per month for your car. That includes depreciation, interest payments, license, insurance, maintenance, and gas. If you are in this income bracket, car payments are not for you!

A new luxury sedan or sports car will likely depreciate more than $500 per month in the first year. New cars are seldom good investments. My philosophy is that one should never buy depreciating or consumable items on credit. If you can afford a new car — by affording it, I mean paying cash and operating it on 15% of your budget — that’s great. I like nice things too!

Clothing

Now we get to something that can really blow holes in a budget! For many of us this is even a more difficult to control this part of our budget than transportation. There is probably more peer pressure and advertising influence on what we wear than anything else we do. Looking good and wearing the right clothing is important. However, like all other aspects of life, if you are wearing clothes you cannot afford and are not paid for, the only one you are fooling is yourself.

Clothing is one portion of the average budget that can legitimately vary between 5% and 8% depending on how large our family is, where we live, and our occupation. Wearing the correct type of clothing is important for many occupations. Industrial workers need special boots and outerwear and office workers should also must wear appropriate clothing. Spending money on clothing can be more than just being fashionable or making you feel good. It can actually be an investment in your career. Where I live in Prince George, winter weather is cold and summers can be warm and sunny. Distinctly different clothing is required for each season which increases wardrobe costs as compared with costs of someone living in a more moderate climate. To save money on clothing costs shop at thrift stores such as Value Village.

There are other circumstances that can affect clothing costs quite dramatically. I know, we had four teenage girls at our house! Have you noticed the cost of a wedding dress? Don’t get sucked into the “designer label” game unless you can truly afford it. That means cash and staying within 5% of your budget.

Entertainment

If you are in debt, this is one of the areas in which you can, and should, reduce expenses until you have paid off all your creditors. Entertainment expenses can vary dramatically as we all like to do different things and entertainment is more important to some of us than others. For example, skiing provides a lot of enjoyment and can be good for you physically and emotionally. However, it is very expensive! The same is true for many other activities such as going to the theatre, dining out, or whatever else it is that you enjoy.

The point I would like to emphasize is that the amount of money we spend on entertainment should be in proportion to our income. If you don’t earn a high salary, don’t take up expensive hobbies and sports and expect to dine out in an elegant restaurant once a week!

There are many inexpensive activities to keep you busy and entertained. Spending quality time with yourself or your family does not have to cost a lot of money. Some inexpensive activities include long walks, playing games, simple hobbies or crafts, gardening, and reading. Reading is an excellent way to spend your free time. Take your family to the local library. The list of things to do is only limited by your imagination. Spending money can be fun, but it is not necessary to spend money to have fun. Until you have cleared all your debts try to keep you entertainment expenses to the 2% range suggested in the budget guideline otherwise your present pleasure could be at the expense of your future financial independence.

Medical

If your medical expenses aren’t covered by your employer, one of the best ways to ensure that medical expenses do not get out of control is to buy a medical insurance plan. Doing this will ensure that you don’t suddenly require large sums of money to pay for emergency surgery or an accident. Many people are surprised by the things that are not covered by government plans such as MSP here in BC.

Having a good dental insurance plan will ensure that you and other family members will not be required to compromise personal health and appearance for lack of funds. I always feel sad when I see children who should receive immediate orthodontic attention. Sometimes the parents cannot afford to have the work done or they have given their child’s health a lower priority than a new car or some other thing they just had to have. With proper insurance this can usually be avoided.

Good medical coverage should therefore be included in every family budget. You can’t afford not to have it! If you live in an area where dental insurance is very expensive, or unavailable, a reasonable compromise would be to have money set aside in a savings account to be used for dental work only.

Life Insurance

How much life insurance should I carry? If you have never asked yourself this question, and do not carry any insurance, start asking! It is generally accepted by many financial advisers that the primary breadwinner should carry term insurance to the value of three to five years income. I feel that three years is adequate. Term insurance is usually the least expensive route to go and the cost will vary with such factors as your age, health, and occupation. Check out several of the many plans available before making a decision. If you are spending more than 2% of your budget on life insurance you are probably over insured or you may not have the policies best suited to meet your needs.

Adequate life insurance should be a part of every family budget unless you are independently wealthy, in which case you probably won’t be reading this book anyway!

Gifts

In our culture, buying gifts is just a fact of life, so you may as well budget for it. In case you have forgotten, Christmas comes every December 25th! Why do so many of us act as if it is a total surprise? You should never have to pay for Christmas in January! That is just poor planning.

There are other occasions for buying gifts such as weddings, birthdays, anniversaries, etc. As you are setting up your annual budget, go through the mental exercise of estimating how many gifts you will be required to purchase in the coming year and what amount you will want to spend on them. Like so many other aspects of your budget, your gifts should be a reflection of your financial status. Don’t get caught in the trap of buying gifts you cannot afford. If your friends are going to love you less for buying a less expensive gift, they are not worth buying anything for in the first place.

Vacations

Vacations are best enjoyed when they are paid for in advance or as you go. It can be quite discouraging to continue to pay for something we enjoyed four months previous. We should all enjoy family vacations, as they are important. Therefore there should be some allotment of funds in the family budget designated for this purpose.

My wife and I still enjoy the memories of some of our family vacations that were taken decades ago. Our kids have not forgotten these holidays and we all enjoy talking about them. You will be amazed at what your kids remember as being the most fun on vacations: they will likely not be what you would think. They remember the crazy things that happened not the extravagance of the place or how much money dad spent!

If you find yourself in the position of having unpaid bills piled on your desk, I suggest you budget for a low cost vacation this year. I know a family that was having some financial problems yet wanted to take their kids somewhere special. They packed up the family and went to a local hotel that has a water-slide and pool and spent the weekend there. The kids loved it! They ate out at the Burger King next door and not at the expensive hotel restaurant. As your finances get under control, your family vacations should represent your financial status. That is why I suggest 2% in the budget outline.

Are you one of those people who has not had a proper vacation for years? Why not? It may be because of poor financial planning or time management. This book should help you control both of these areas. As many have said, “you are worth it”. What I am adding is: there is no reason to go into debt over it.

We have family all over Canada and the US and we like to see them all several times a year. I don’t think we are unique in this, yet I know many people who go for years between visits with family members. There may be many reasons for this, however lack of time or money should not be one of them. This situation indicates where family fits into your priorities of life. I don’t want any of my children thinking they are “second fiddle” to a new TV, gadget, or other toy.

“All work and no play makes Jack a dull boy” — anonymous proverb

I believe in working hard, but if we find ourselves so busy that we never have time to play we are not totally successful. That is why budgeting for vacations is important. Without proper planning they either won’t happen or you may go into debt over them.

Education

One item not listed on the example budget is education. You may have decided to get more education as suggested in Chapter 1 or if you have children, you will be spending money to educate them, either now or in the future. Only you can place a value on your own or your child’s education. For children in elementary or secondary school you have many options including home schooling, public school, and private school. Education options are even greater for post secondary students. However, my suggestion is that at most 10% of your budget be used for education. If you are spending more than 10% you may want to re-evaluate your priorities. You probably can’t afford it.

Miscellaneous

This category of your budget is for all the small items such as gum. candy bars, non-subscription magazines, etc. Subscription magazines and newspapers should be a separate budget line item. Many families find it difficult to control this part of their budget. If your miscellaneous expenses are over 2%, you are probably not exercising enough self-discipline. Another reason may be that you have not set enough categories in your budget.

Summary of Chapter Two

Budgeting is not as complicated as most people imagine it to be. However, it is important to have a written budget so you can plan for your financial success. The hard part is not creating a budget, the hard part is keeping it.

1) Make a written budget and set some realistic goals for your future.

2) “Pay yourself’ — start saving money.

3) Get out of debt and stay out!

4) Buy and payoff your own home.

5) If you can’t pay cash you can’t afford it

6) Have adequate health & life insurance.

7) Take vacations, but don’t go into debt because of them.


Chapter 3: Investing

Get out of the “poverty mentality” of living pay-day to pay-day. Some people can’t even make it to payday; there seems to be a payday loan shop on every corner. Don’t ever consider using one! By getting out of debt, successfully implementing budgeting and planning, you should find yourself in the exciting position of having some money to invest. This is the fun part of budgeting. You know your budget is working when you discover your spending habits are the same one day before pay day as they were one day after pay day.

In my opinion, the best foundation for your financial portfolio should be your own fully paid for three bedroom, two bathroom house in a good neighbourhood. Once you have this accomplished you will have the monthly equivalent of your mortgage payment to invest in more exciting and lucrative ventures.

Many people are attracted to various high risk “get rich quick” schemes before they have a solid financial foundation. That is putting the cart before the horse. I like to use the pyramid below when I am instructing financial seminars.

You can see that by going for the high risk, high profit investments first your pyramid is upside down. You end up doing a financial balancing act, and your dreams are likely to come tumbling down.

The items listed inside the pyramid are examples only. Don’t feel compelled to invest exclusively in the items that I have suggested. Nor should you restrict yourself to only those investments. There are many good books on investing and I recommend that you read several before parting with too much of your hard earned money.

Financial Base

The baseline of your investment pyramid is pretty well self-explanatory. I have already given you my views on the value of home ownership and life insurance. The only other item in the financial foundation is a small savings account. Of course, “small” is subjective terminology. What I am recommending may be much more or less than the figure you were thinking of. Most financial adviser’s suggest the equivalent of three to five months salary set aside for emergencies. I think that three months is adequate.

Low Risk Investments

The second tier of your pyramid shows Registered Retirement Savings Plans (RRSP), Tax Free Savings Acounts (TFSA), pensionss, Guaranteed Investment Certificates (GIC) and government bonds or treasury bills.

The purchase of RRSP’s or TFSA’s can have the additional benefit of saving you money on your income tax. If you can afford it, buy enough to give you the maximum tax savings. The advice of an accountant or tax planner is recommended. I have found the money I have spent on legal and accounting advice has paid good returns on my investment. My accountant invariably saves me more money than it cost me to get his advice.

If you are already on a good company pension plan, the purchase of additional RRSP’s or TFSA’s may not give you a significant tax saving. If this is the case, then I recommend purchasing government bonds through a payroll deduction plan if that option is available to you. This is a particularly good way to save if you find it difficult to discipline yourself to actually set aside cash out of every pay cheque and deposit it into a savings account. When you never see it, it seems much less painful. That is why Revenue Canada insists that your employer automatically deduct your income tax every month; they know if it was up to you to pay it all at the end of the year you probably would not have it! Saving through payroll deduction is the same thing in reverse! Government bonds and t-bills do not pay very high interest, but they are a solid foundation for your financial portfolio.

Extras

After you own your own house, have adequate life insurance, savings in the bank, a pension plan and some government bonds you are ready to venture into more daring investments such as rental real estate or the stock market. Never act on “hot tips” without personally investigating or getting professional advice. There are many good books available to you through your public library and I suggest that you read some of them before making an investment at this level. The next step is to find a reliable and trustworthy real estate agent or stock broker. As your first real estate investment, other than your own home, I recommend another three bedroom, two bathroom house in a good neighbourhood. Try to find one you can purchase with a low down payment. Ideally the rent money you collect should cover your mortgage payment, but it seldom works out that way. You will probably be required to subsidize the monthly mortgage payment and that’s okay. It is usually just for the first couple of years. What will most likely happen is your rental income will increase while your mortgage payment stays basically the same. What I said earlier about buying off your first house as quickly as possible also applies to your first rental house.

Becoming a landlord may sound a bit scary and it will take some of your time, but the end result is worth it. If you don’t know how or don’t want to manage the property yourself, consider using a professional manager. Most charge about 10% of gross rent which will reduce your profits but make your life less stressful. Having a house paid for and collecting the rent money every month. Believe me, you would have to have a pretty good part-time job (one that would take a lot more of your time) to earn the equivalent of that rent money. And that rental income does not stop coming in when you retire at age sixty five (or whatever). That’s the best part of good investments. You let your money work for you, instead of you working for money. I am now enjoying a retirement that my tenants are paying for.

Investments in stocks will require some of your time and attention. Never assume you can just buy a stock and forget about it. It is not like putting money in a bank account. If you don’t have the time or enthusiasm to follow your stock’s ups and downs, don’t buy them. Also, don’t rely on your broker entirely. This is especially true if you are one of his smaller clients. There are many more losers than winners in the market. Corrections in the market can be very sudden and dramatic. October 19, 1987, also known as “Black Monday”, or the 2008 downturn, should be enough of a reminder to be careful when playing the stock market. That said, there are very few investments that can match the performance of a balanced blue chip stock portfolio.

DJIA 1896 to 2015, Log Scale

As you can see by the above chart the stock market has it’s ups and downs. It is not like putting money in the bank. The potential for profit is high. but not without considerable risk.

You may have noticed that I have recommended gold and silver coins. This may be a completely foreign subject for you. I’m not saying every investment portfolio must include gold or silver and recently many advisers no longer recommend it. However, in the past it used to be common to recommend that approximately 10% of your assets be in the form of “hard money”. I think 5% is a good figure, considering the recent volatility of gold and silver.

Gold 1970 to 2014, Log Scale

There are many good reasons for owning gold or silver. The primary motivation for me is as a hedge against monetary collapse or run-away inflation. In such a scenario, my bank account (and yours) and other paper assets will be wiped out. If you are chuckling and thinking I am some sort of “survivalist nut”, look-up and read about “Black Monday”. In case we do have to face a volatile economy, severe inflation or depression, having some “real” money will be very comforting and extremely valuable. Of course, make sure you actually possess your gold and silver. A piece of paper certifying you own gold or shares in a gold mine may not be worth any more than your paper dollars. I personally like “mint state” antique gold and silver coin collections because of their potential increase in value. Bulk junk silver coins are a good alternative but have the disadvantage of being difficult to find safe storage for them.

You should know, all hard money has the disadvantage of not paying interest like the money in your bank account or bonds. That is why I think that a maximum of 10% of your total portfolio should consist of silver and gold. Gold and silver have the potential to increase dramatically in price. In 1979 silver went from $6 to over $40 an ounce and gold went from approximately $300 to over $700 per ounce in a few months? The value of gold has also risen (and fallen) dramatically over the last decade. However, it can go the other way as well so potential appreciation should not be your primary motive for owning precious metals.

High Risk

Owning antiques, works of art, and other collectibles can be a lot of fun as well as being profitable. I have read many interesting stories of huge profits made through the purchase and resale of various items. We all hear about some rare coin bought for $600,000 and sold less than two years later for $2,000,000. The same is true of some classic cars that could have been purchased at one time for a modest sum now cost a mint. On a smaller, less dramatic scale, one year my son-in-law bought $1,000 worth of baseball cards and sold them 8 months later for $1,700.

Collectibles are one area of investment where you really have to know what you are doing and enjoy the risks. This is not the area of investment for you unless you use professional brokers, enjoy the items you are collecting regardless of their potential, and have the money to lose. This level of investing should be at the tip of your financial pyramid and not the base.

Summary of Chapter Three

1) Build a solid investment foundation.

2) Don’t go for “get rich quick” schemes.

3) Take advantage of payroll deductions to save and invest

4) “Hot tips” may be pretty cold!

5) Become a landlord.

6) Gold or silver: your hedge against inflation or depression.

7) Collectibles should be last, never first


Chapter 4: Self Discipline is not Optional

Many of us never achieve our potential because of the lack of self-discipline in certain areas of our life. If you have any hope or ambition of being financially successful you will be required to muster up considerable self discipline.

Discipline Your Desires

“I want it all / I want it all / I want it all / and I want it now” — Queen

This is the “instant gratification” generation. We all want what we want “right now”! Of course, this is nothing new. The classic example is the historical account of Esau trading his birthright for a bowl of stew. Kids right out of school want everything their parents took twenty years to achieve. Don’t succumb to “afluenza” or get sucked into trying to “keep up with the Jones”

Did you know that to be “high class” or “low class” has very little to do with your material wealth? Your position of class in your society is your ability to mentally project yourself into your future, and the ability to discipline yourself to forgo instant gratification for future rewards or satisfaction. That spells success!

If you find yourself indulging yourself now with little or no regard for your future well-being, you are low class! If you want to be “high class” and successful, discipline your desires!

Discipline Your Direction

If you are travelling in strange territory, chances are that without a map you won’t get where you want to go. It is the same for your life-long journey on planet earth, marching toward financial success.

It is almost impossible to achieve financial success without a clearly mapped out strategy. It takes a long time to get somewhere if you are going off on tangents or going in the wrong direction. So commit yourself to the discipline of working out a budget as outlined in chapter three. Decide how much is enough before you map out your investment strategy.

Then set a goal for yourself. What direction do you want your life to take? No one is going to take you by the hand and lead you through life. You must take responsibility for setting your direction! Plan for setbacks, but keep in mind that bankruptcy is not an option that honours God.

Discipline Your Defeats

Do you get discouraged and quit when something does not go your way? Have you made a “sure thing” investment, only to see your money vanish? If so, take heart! Anything worthwhile comes with a price tag and is usually not without some risk. You are never going to win them all, so accept minor setbacks as part of the journey. Even major setbacks such as bankruptcy can be overcome. However it is going to take some discipline on your part. As long as you are working your way out, you have a good chance of overcoming your setback. One thing is certain, if you have given up and quit you will never be successful. So, discipline your defeats!

Summary of Chapter Four

1) Sacrifice some immediate pleasures for future success.

2) Set goals and make plans.

3) Don’t quit if your plan doesn’t work.


Chapter 5: Principles of Time Management

If you have never thought about the value of time, now is a good time to start. Is there a relationship between time and money? Is time worth more, less, or the same as money? Or have you ever even thought about it?

Time is Money

Time and money are interchangeable, except time is more valuable as it is a non-renewable resource. Once you have spent it, or wasted it, the time is gone forever! You can’t get it back.

Let me explain why I said that time and money are one and the same. Most of us have to exchange some of our time for money. You probably go to work for eight hours a day in exchange for your paycheck.

To look at it another way, does it make any difference if you spend three hours fixing your sink yourself, or you pay a plumber to come and fix it for you? If you choose the plumber, you will still have to exchange a certain amount of your time at work to earn the money to pay the plumber!

If you agree with me that time and money are both interchangeable and valuable, let me explain some simple steps to better manage this valuable resource.

One thing that can be said of time is, it is completely fair to each of us. In other words we are all dealt the same amount of time each day: 24 hours. We don’t have control over how many days we will spend here on earth, however while we are here we should make plans for at least 85 year which is about the average life expectancy in Canada. If we live longer, that’s a bonus! We don’t know if we will live to a ripe old age, but we still have to make plans assuming we will. One thing is guaranteed absolutely: you are going to die. Are you prepared financially, emotionally, and spiritually? I hope so. If not start preparing now.

How do you manage your time?

Do you just sort of fumble your way through life, living day to day and hoping for the best? There are three kinds of people; those that make things happen, those that watch things happen and those that say “what happened?”

As I stated in Chapter 4, you will not be successful without self discipline. Now I am stating that you will not be successful without good time management.

There really is no “magic formula” — like most disciplines in life you start by taking one small step toward a more “efficient you”.

Six small steps to consider

1) Do you sleep too long?

“Early to bed and early to rise makes you healthy, wealthy and wise.” — Ben Franklin

I can’t tell you how much sleep you need. However, what I can tell you is, you won’t be making any financial gains while you are asleep! Experts suggest that for most adults about eight hours per day is adequate. To indulge in more than eight hours, except for one day per week, is a luxury you probably can’t afford.

“The trouble with dawn is that it comes too early in the day.” — Susan Richman

2) Are you always late?

If you are ‘one of those people’ who is habitually late arriving for appointments, meetings and social gatherings, I have some unpleasant news for you: you have a problem! You are not portraying the impression that you think you are. Most late comers imagine themselves as important, busy people. The reality is they are perceived by most people to be selfish and disorganized. This is an image you cannot afford if you want to be successful.

3) Make lists

Write down everything you must do and want to do. These lists should include everything you want to accomplish this week, this month, this year and during the next five years.

At the end of each day, list everything you want to accomplish tomorrow. Simply write down everything you want to do or must do. Every morning look at your list and decide what you are going to do today, and in what order. A simple system of prioritizing items is the ABC method. Give each item on the list a prioritization code with ‘A’ being highest priority and ‘C’ the lowest. I find that by taking care of the little tasks first and striking them off the list as I have completed them gives me a feeling of accomplishment. Every time I do this, I am also reminded of the items on the list yet to be completed. To remove an it from the list, I either have to do it, or justify why it should not be done.

4) Get into the habit of using an appointment calendar.

Simply jot down names, places and times. Place it where you will see it every morning. You will then be reminded of things you have to do and places you must go. Forgetting is not a valid excuse for not doing something!

Many of us now have digital devices to record appointments and remind us to keep them. Of course, this fancy technology will do you no good if you don’t actually use it!

5) Do you spend you leisure time or waste it?

We all have spare time. What we do with it can make a difference in what we accomplish.

It is just as easy and relaxing to watch educational, constructive TV programs and videos as it is to watch mindless game shows, sarcastic sitcoms, and immoral soaps. Your mind is the most powerful and complex computer ever created. What you put into it through your eyes and ears will eventually be reflected in your thinking processes and actions. If you spend three or four hours every day watching programs portraying cheating, lying, killing, and committing adultery as normal or even desirable, watch out! You will become a reflection of what you are watching. If you don’t think so just look at those around you.

Reading can be one of the most constructive ways to spend your spare time. I once heard a prominent speaker say, “you are what you read”. I have never forgotten this, even though it was over forty years ago. This maxim has served me well.

Does this mean if I read nothing I will be a nothing? If I read violence and pornography will I become violent and immoral? Will reading books on how to be successful help me become successful. Yes! What is true of TV also applies to books so read books that portray what you want to become.

6) Don’t procrastinate!

“Lazy hands make a man poor, but diligent hands bring wealth.” — Proverbs 10:4

Get yourself a “round tuit” and hang it around your neck on a gold chain. They are simple and inexpensive to make, yet very valuable if you are one of those people who never seem to get around to it. We all experience many lost opportunities because we don’t take advantage of situations when they are available. Sometimes we are just plain lazy! Lazy people are seldom successful.

Summary of Chapter Five

1) Time and money are the same. You exchange your time for money.

2) We all have the same amount of time.

3) Don’t sleep your opportunities away.

4) Being late says, “I am selfish”.

5) “I forgot” really means, “You are not important to me”.

6) Make a list, and check it twice; Santa won’t do it for you!

7) Garbage in. Garbage out. Be careful what you watch, listen to, and read.

8) Read yourself to success.


Conclusion

Is money your master or your servant?

Money is meant to serve us. Before it can become our servant, we must master the use of it. It is incredible how many people are slaves to debt via their banker, car dealer, and other merchants. They have let money master them and rule the order of their lives.

If you are a slave to the debt on your charge card, take heart, muster up some self discipline, and let this little book change you from saying “charge” to taking charge of your life.


Appendix A: Some Proverbs To Consider

Proverbs 3:9–10 — Honour the Lord with your wealth and with the firstfruits of all your produce; then your barns will be filled with plenty, and your vats will be bursting with wine.

Proverbs 3:13–14 — Blessed is the one who finds wisdom, and the one who gets understanding, for the gain from her is better than gain from silver and her profit better than gold.

Proverbs 3:27 — Do not withhold good from those to whom it is due, when it is in your power to do it.

Proverbs 10:4 — A slack hand causes poverty, but the hand of the diligent makes rich.

Proverbs 10:22 — The blessing of the Lord makes rich, and he adds no sorrow with it.

Proverbs 11:1 — A false balance is an abomination to the Lord, but a just weight is his delight.

Proverbs 11:25 — Whoever brings blessing will be enriched, and one who waters will himself be watered.

Proverbs 11:28 — Whoever trusts in his riches will fall, but the righteous will flourish like a green leaf.

Proverbs 12:11 — Whoever works his land will have plenty of bread, but he who follows worthless pursuits lacks sense.

Proverbs 13:7 — One pretends to be rich, yet has nothing; another pretends to be poor, yet has great wealth.

Proverbs 13:11 — Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.

Proverbs 13:22 — A good man leaves an inheritance to his children’s children, but the sinner’s wealth is laid up for the righteous.

Proverbs 14:23 — In all toil there is profit, but mere talk tends only to poverty.

Proverbs 16:3 — Commit your work to the Lord, and your plans will be established.

Proverbs 16:8 — Better is a little with righteousness than great revenues with injustice.

Proverbs 17:16 — Why should a fool have money in his hand to buy wisdom when he has no sense?

Proverbs 17:18 — One who lacks sense gives a pledge and puts up security in the presence of his neighbour.

Proverbs 21:5 — The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty.

Proverbs 22:1 — A good name is to be chosen rather than great riches, and favour is better than silver or gold.

Proverbs 22:7 — The rich rules over the poor, and the borrower is the slave of the lender.

Proverbs 22:16 — Whoever oppresses the poor to increase his own wealth, or gives to the rich, will only come to poverty.

Proverbs 23:4 — Do not toil to acquire wealth; be discerning enough to desist.

Proverbs 27:23 — Know well the condition of your flocks, and give attention to your herds,

Proverbs 28:6 — Better is a poor man who walks in his integrity than a rich man who is crooked in his ways.

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