One Family’s Personal Finance Tale: July Edition

Posted by on July 22, 2008 in Mom2KG Columns

My regular columnist, Mom2KG, checks in on how her family is doing so far this year after making a new year’s resolution to get their finances in order. As usual, she raises some questions which I hope you can help her with. Without further ado, here’s Mom2KG:

So, I’m learning this personal finance stuff is just not easy. I want to give you a round-up on how we’ve done since we started this new era of financial management and frugality. The results are lukewarm at best.

  • Mortgage: This is the best part. We reduced our principal by 12.4% by maxing out on the weekly payments. If we’d paid only the minimum payments, we would have reduced the principal by only 3.3%. That’s about $1250 in interest we haven’t had to pay. This is in six months!
  • Life insurance. Still not done…..
  • Me: I have new job. Better pay, rigid but reasonable hours. Definitely a pay raise. I don’t start until mid-August, and I’m happy with the security and with the work.
  • Investments: Well, this was going okay, until we received a call you never want – our financial advisor/manager called to tell us that the last five weeks had been very bad (not just for us) and we would see a big loss on our next statement. Well, at least he called. We’re going to meet with a new advisor this week, just to get second opinion.
  • RRSP and RESP: Going well, as predicted. On track. By the way, should we count the RESPs as savings or as expenditures? I say savings, as it’s money we are putting towards something way in the future, that won’t have to come out of income then. My husband (ever the conservative) wants to count it towards our spending.
  • Savings: This is the really bad one. In six months of attempted frugality, we have saved – $400! Basically, we’re where we were in January. We did have an unexpected tax bill, and I did take a last-minute trip to Vegas, but still. We’re so far from our goal we don’t know what to do. We just cannot seem to control our costs. Our burn rate is high on both fixed costs and consumer spending, and we can’t figure it out [TMW says: you have two young kids. They burn through money like they burn through clothes...]

On the consumer spending, I still feel we’re not going crazy…but the credit card statements beg to differ. I only see more spending coming up – new job means new clothes (I really do need some suits and shoes), as well as two friends’ baby showers in the near future. On the other hand, I can take the subway to work, so won’t be spending crazy money on gas.

My husband has (timidly) suggested a course of hyperfrugality – a really nice word for living cheap. I’m sort of interested in it as an experiment, but certainly not as a lifestyle. I think we’d do things like not buy any more clothes, alcohol, treats, dinners out, and eat only sale goods, and never turn on the AC or heat (sounds just great). No more dinner parties, or gas-guzzling trips to my in-laws’ cottage. We’ll watch our library of burned DVDs instead of going to movies and renting. No more nights out and babysitting. (Not that we did much of any of those things, but I suppose every buck counts.)

I will confess I’ve not been trying exceptionally hard to save money. By the end of the summer, we’ll have spent money on four trips (two for me alone). And, okay, screw you David Bach, but I’ve been buying my breakfast every day (come on! $2.37 at Tim’s is a bargain!) and often lunch. I’m not giving up the Tim’s but will re-double my efforts to bring a packed lunch to work.

Here is the real difficulty. We don’t have money to put into other personal finance options – we don’t want to touch the current savings as that’s our “emergency fund.” Let me ask another question – how necessary is a savings fund when we have two very stable, well-paying jobs? Does anyone think we could take some of that cash and buy something else? Would it be ridiculous to borrow from that fund to buy, say, stocks or a rental property?

I’m in quite a funk about this. What is perhaps the most difficult is the emotion attached to this. I’ve already said this a few times in my blogs, but I feel, well, it’s all my fault. I’m the one signing the credit cards, buying everything the family needs, which means I’m the one overspending. My husband is on a (very good) fixed salary, but I’m (was) an independent contractor, earning less, and, worse (from a financial perspective), sometimes choose to cut work short and come home to hang with the kids. Three fewer hours at work means that much less cash coming in. Looking for more words of wisdom and support, readers!

TMW comments: I am taking a first crack at this (hey, its my blog). I would define anything over and above your regular mortgage payments as savings. For example, if you have to pay $1000 month on a mortgage with a 20 year amortization rate and you raised your repayment to $1500, I would define that $500 over-payment as savings. I would suggest that you are low-balling your savings rate by not including all the extra mortgage payments your family is making. Readers- should extra mortgage payments count as savings?

I would also look at the budget. Is it remotely realistic for a family of 4 with young kids or is it reasonable and the fiscal discipline is missing? There should not be a general sense of fault without looking at why you are off at the end of each month. To be frank, is the strategy wrong (i.e. the budget) or the execution (following the budget)?

What do you also want in life? If its to retire at 45 then you need to address your short-term spending. If its to enjoy life then you have another set of priorities at play.


10 Comments on One Family’s Personal Finance Tale: July Edition

By Four Pillars on July 22, 2008 at 7:55 am

I think I left a comment on one of your first posts similar to what TMW said – any extra payments towards debt are clearly savings. I would argue that resp contributions are savings too. And didn’t you say that you are contributing (maxing?) to your rrsps? Isn’t that savings?

Not really sure what the angst is about – plus without some actual numbers it’s impossible for the readers to offer suggestions as to where to make cuts.

By Traciatim on July 22, 2008 at 8:36 am

It is my opinion that RESPs for children should be counted as their withdraw amount on your net worth. Simply take your balance, subtract any CESG amounts received and then figure out the tax penalty and add that to your net worth. Once the RESP is used your net worth will drop, since you spent the money on schooling. Since that’s what really happened, it seems accurate to me.

By tom on July 22, 2008 at 1:42 pm

First rule of saving is “pay yourself first”. I’d suggest setting up a pre-authorized saving set-up where you have a set amount of money transfered on pay-day wherever you want to save it (high interest savings account, investment account, RRSP, TSFA etc). The next thing you do is get rid of the credit cards and go to a cash system (or debit, but track spending daily online).

By Patch on July 22, 2008 at 5:55 pm

Why the downer post? I think you’re doing absolutely fine and on the right track. Paying down 12% of your principal in 6 months is awesome. At this rate, you’ll be mortgage free in 5 years.

As for savings, the question back to you is how much do you think you would require if a “real” emergency happened? E.g., if one of you was unable to work for a year. Along those lines, take care of the insurance asap – think of the children!

As for what do with “excess” money after you’ve topped up your emergency savings, I’m with the school that says you should pay down the mortgage first.

If you must put your money into investments, please don’t consider purchasing rental property without doing more research – sure it sounds sexy, but the potential to get burned is huge. Think slow and steady! Putting your money into index funds/ETFs is the way to go to avoid huge management fees or spending time picking individual stocks.

By Potato on July 22, 2008 at 11:39 pm

Emergency savings fund: I think, no matter how much money you make or how stable your job is, that you should have some emergency savings fund. Whether you can put some of the money currently in yours into the stock market and get by with a smaller fund is something you’ll have to decide for yourself, but remember what the savings fund is there for: it’s a source of liquidity when you need it (arguably, a line of credit can also serve this purpose). Money in the stock market should be considered “untouchable” for at least 3 years: if you anticipate any near-term need for that money (tax bills, vegas trips, car repairs, braces, furnace), then keep it in a safer investment. Your savings fund can essentially be considered part of the fixed income portion of your portfolio, though, at least IMHO. (And in the case of a real emergency, like a job loss, my opinion is that you can just take the hit and sell even in a down market, as long as your “cash” emergency fund can cover the first ~1 month of expenses)

I agree with Traciatim and your husband — RESPs are fancy tax-friendly ways of amortizing future education costs; they’re an expense, not a part of your savings. Mortgage overpayments might as well be savings, though.

So, still spending more than you’d like? Did you draw up a post hoc budget of where all the money went over the last month? Did you like what you saw? Did you get enjoyment and meaning in your life commiserate with the expenditures? Can that help tweak your future budgets? When you have to spend an extra 6 months working before retirement because you blew half the year’s savings goal on a last-minute trip to vegas, will you think back and say that it was time and money well spent? Only you can answer those questions, and it might spark you to, say, sit down and write down what your long-term life goals are. What sorts of activities fit within those goals? Do you want to live a rich, indulgent life now, and make up for it by working later in life? Do you want to travel the world’s casinos, or is it more important to watch your rugrats run around your feet on your unmortgaged deck?

Remember: everything in life is a trade-off. You can let your wants drive your behaviour, choosing your trade-offs unconsciously, or you can approach it with a long-term plan and make each choice with purpose and foresight.

So far you’ve been taking baby steps, and from the sound of things making some progress, but not as much as you’d like. There’s a great community here to “support” you if you want — you can post the detailed line-by-line budget for your household, and we can tear it to shreds (or in the case of the others, gently support and provide advice). If you need more discipline, you can think to yourself for everything you buy “Can I justify this purchase to Potato, cheap SOB that he is, at the end of the month on the blog? …Maybe I shouldn’t buy this…”

Binge dieting, in general, doesn’t work. However, binge budgeting might be a good experiment for your personal finances. August is coming up: like your husband suggests, can you go one month living totally frugally? Can you set a firm but realistic budget and stick to it? Can you take out the amount you think you’ll need to live on in cash, and go without charging anything? No movies, no dinners out, no alcohol, no cocaine parties in the hot tub? Not even the whole month: give yourself the long weekend, but from August 5-31 can you “deprive yourself” of just about everything? If you run out of your allotted withdrawn cash, can you stop spending entirely and start going through the canned soup in the cupboard until September comes? Just to see what it’s like, to see what you really do miss, and how much money you have left over for your savings goals? You already know what it’s like to indulge yourselves and go over budget, why not take a month to see what it’s like to go the other way?

An aside to TMW: could you set up Mom2kG with her own category rather than file her posts under “misc” and “uncategorized”? I like going back to the old ones to see what’s happened in the intervening months…

By admin on July 22, 2008 at 11:44 pm

Thanks for all the great comments and advice.

Potato: Yes, I can do that. I’ll fiddle with this blasted WP Template and get a Mom2KG category going. Thanks for the suggestion.

By Mom2KG on July 23, 2008 at 8:35 am

Wow, thanks for all the comments and support. I’m amazed by everyone’s knowlege and suggestions. A few of you asked why I feel so bad. In particular, we set a savings goal in January, and have not reached it. We’re miserably far from it. Hand-in-hand with that, our burn rate is high, in spite of what we think of as a realistic budget. If I could get my husband to count the extra mortgage payments as savings, the numbers would be very different, but he was astounded at this concept, and dismissed it. I guess our concept of savings is too narrow – we think of savings as the cold hard cash sitting around, risk-free in bank accounts.

By Potato on July 23, 2008 at 4:36 pm

Yeah, the extra mortgage payments should be counted as savings — it’s less debt that you owe, so that’s equity in your house you can borrow back against (with a HELOC) if you need to. There is considerable debate about whether it’s better to keep the mortgage and invest savings elsewhere, or pay it down aggressively, but I don’t think there’s much debate about whether you get to count paying off the mortgage as savings in the first place. It’s still an increase to your net worth.

By Patrick on August 12, 2008 at 6:07 pm

It all comes down to the reason you’re “counting” all these things in the first place. The reason is to help you make good decisions.

On that basis, I count anything that increases my net worth as being equivalent to “savings”, except that I ignore everything I call “anticipated expenses”. This means mortgage payments would be as good as savings.

The RESP is more complex. If you ignore it, figuring it will all go to education anyway, then theoretically you have no incentive to maximize it by prudent investment. Conversely, if you do count it, then you’ll face a sudden net-worth drop the day you pay your kid’s tuition, which theoretically is an incentive to prevent your kids from going to college.

We don’t have RESPs set up yet, but in theory, I would take the anticipated education expense, divide it up into monthly payments, and count that against my net worth, while simultaneously counting the balance of the RESP toward my net worth. Whether I will actually do all this remains to be seen…

By Thicken My Wallet » Blog Archive » One Family’s Personal Finance Tale: August Edition on August 28, 2008 at 5:01 am

[...] so, so much to everyone who posted with their thoughts on my July post. As always, there were lots of good suggestions, but the encouragement really helped [...]

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