Is Financial Planning Working for You?
Posted by Gail | Filed under Money Management
I get letters, sad letters, all the time from people who say they are really trying to get a handle on their money, but they just can’t seem to swing it. When you first set off on the road to a balanced financial life you can be so enthusiastic about make a change that you end up sabotaging yourself. Yup. Here are the mistakes I see people make all the time.
1. They choose the easy way out. Hey, if you’re sitting on a pile of consumer debt with high interest rates and you have room on your mortgage to consolidate, that’s a good idea. Sure it is. As long as you don’t consider it the “easy way out.” If you consolidate and then head right back out to spend more money on those balance-free cards or that paid-off line of credit, you did take the easy way out. If, instead, you use the consolidation to lower your costs, and then take the money you were using for consumer debt repayment and use that to help pay down your now larger mortgage, you’re doing well.
2. They are overly optimistic about their future income. If I had a dollar every time someone told me that it’s okay just to pay the minimums on their credit because they’ll be making more money in the future I’d be able to buy an island in the sun. The whole island. People, what makes you think that if you can’t afford it now you’ll be able to afford it, and the interest you have to pay, in the future! Sure, you may make more money. But your expenses will change over time too, often heading up, up, up.
3. They can’t see that they’re doing anything wrong. Really? You’re in debt up to your eyeballs, but you’re not wasting money? It constantly amazes me how many people believe there’s no need to change the way they’re dealing with their money, despite their financial troubles. Understanding that things have to change, and accepting that it’s going to be tough, are the first steps in getting your financial life in order.
4. They can’t deal with setbacks. These are the folks who think that now that they have a plan, nothing bad or unexpected is ever going to happen. They’ll just head off on their super-highway to their Debt Free destination. Hey, the road from Debt Hell is bumpy and full of potholes. You’re going to stumble. You might even fall down. Accept that things will be difficult at times and find ways to stay motivated. You can use a buddy. You can use a visual goal chart. The important thing is to get back up whenever you trip.
5. They think that it’s all about the money. Have you noticed how life sometimes gets in the way of your money management? Sure you planned to get that debt paid off in two years, but that was before your boss came and told you that everyone’s taking a 15% cut in pay. Or sure you wanted to be in your own home before you got pregnant, but The Big Someone had other plans. All sorts of factors can play into your timing and success in hitting your goals. You could get sick. You could lose a ton of money in a market correction. You could lose your job, get divorced, find yourself looking after your parents. You’ve got to be able to roll with the punches, revise your plan and get back on the bumpy road.
Taking control of your money and your life isn’t about laying a plan and then watching everything just fall into place. It’s messy. It’s dirty. It’s frustrating. But it is also hugely rewarding. Knowing that you are actively managing your money brings confidence and a sense of self-determination that just can’t be won in any other way. The path may not be smooth, but it beats the hell out of wandering in the Wilderness of Ignorance.
October 13, 2009 at 6:41 am
Gail,
Sometimes that debt pill is a hard one to swallow. I’m amazed at the those mistakes people made. I’m also thankful that we are making through the road to debt freedom ready for any bumps in the road and willing to roll with the punches. we’ve been on this road too long.
regards,
Jason
October 13, 2009 at 8:43 am
One of the most helpful things I learned from you, Gail, is that a budget is not set in stone–you revise it as you go along and life changes, work changes, new info comes to light, etc. And yes, life is bumpy, so get some savings going to deal with those bumps. We’ve already had a month that would have blown the budget in a big way, but the kids’ needed dental work ($890!) will be covered between our Blue Cross health insurance and the $600 I’ve accumulated in a “medical expenses” fund (love those ING automatic transfers!); ditto the $525 for the over-the-range microwave we finally got around to replacing after our 13-year-old one stopped working months ago. I’ve never has money set aside in a “home maintenance” account (or any other such account) in my life! I love it! So much less stressful this way, and it does not derail us from our goals. Financial planning works, but you gotta keep paying attention–you can’t just set up a system then cruise back to autopilot.
October 13, 2009 at 9:22 am
“They’ll just head off on their super-highway to their Debt Free destination. Hey, the road from Debt Hell is bumpy and full of potholes.”
Wow did I ever need to hear this today. I think it can even be extended… it’s easy to think (or it was for me, anyways!) that “Oh, I’ve made it to Debt Free! Now what?” and get sidetracked.
Staring at the bills this month, it’s clear that we need to get back on track. I’ve been beating myself up for letting things slide for the last few months, maybe I need to remind myself that we all fall off the horse sometimes, the key is to get back on.
October 13, 2009 at 9:27 am
The top two things I’ve learned in the past year (from your show) that apply to this post (because I’ve learned mannnyyyyyy) is that 1) you need to plan into your budget for unplanned expenses. Chit happens. In the past, it is the unplanned things that got me crazy into consumer debt. 2) As Risa said, budgets are made to be tinkered with. In the past when I ‘tried’ to budget, I ‘d pick numbers from out of the sky and when I couldn’t make things work with them, I’d validate that “budgets dont’ work” and off them I’d go, into more debt.
I am very thankful for the lessons I’ve learned this past year and wish I had learned them earlier.
October 13, 2009 at 10:01 am
Just curious and looking for advice- I have noticed many people use ING for automatic transfers. Do you find this advantageous and easy to use?
October 13, 2009 at 10:15 am
“Knowing that you are actively managing your money brings confidence and a sense of self-determination that just can’t be won in any other way.”
This is sooo true!! This is a fantastic message Gail. I really started getting a handle on my debt/savings plans about a year ago and now my boyfriend and I are actually saving and planning together. It’s pretty powerful thing the confidence that comes when you know that you’re being active about a goal not just sitting idle.
@ Linda – ING is Great! If you use someone’s referral code (such as mine 17396382S1) then you and the person’s code get’s a $25 bonus if you deposit $100. It’s a pretty amazing thing ING is doing to get people to start saving.
October 13, 2009 at 10:47 am
@Linda: Ally offers better interest rates than ING, which is currently 1.05% versus Ally’s 2%.
October 13, 2009 at 11:10 am
Linda–We’ve used ING for years and had no problems. You simply link it to your regular bank account (in our case, credit union account) so you can transfer money to an fro as needed. I like that accounts are free and you can set up as many sub-accounts as you like, which makes having planned spending accounts like “home maintenance” or “car down payment” very easy. I cannot say if they are the highest rates around, though in general their rates are competitive and far above the big 5 banks for a basic savings account.
I’ve never heard of Ally bank, but a quick google search led me to them. They are American, and hence insured by FDIC rather than CDIC, for whatever that’s worth. The big difference I noticed was that “only 6 withdrawals or transfers were allowed per statement cycle”, and any above 6 are charged $10 apiece. ING allows unlimited transfers, so depending on how you would use the account, one may be better for your purposes. Hope that helps.
October 13, 2009 at 11:12 am
A budget needs to be flexible and a continual work in progress because as irritating as it is, you can’t plan for everything. After a summer of tweaking, our budget was good and we were cruising. Then a relative fell terminally ill and someone had to go across the country NOW. Because we had an emergency fund and a flexible budget we were able to absorb the loss, as it were, and keep going without missing a step. This is what made me realize that a budget is not made and then left alone forever.
Here are a few other budget categories that we’ve discovered that need to be saved for. License plate renewal (every 2 years) and driver’s license renewal (2-5 years depending on your province).
I have used the dental work story to get my sister to start a budget and emergency fund. I was in school at the time and therefore covered under my parent’s plan so when I needed an emergency root canal (the details of the story are quite convoluted), at the most expensive price ($1500) because it was complicated, I didn’t have to panic. I told her that when you’re in that situation, insurance or no, trust me, you’ll pay whatever they ask and wouldn’t it be nice not to be in debt after?
October 13, 2009 at 11:30 am
@Risa: Ally also has a Canadian division, so it is CDIC insured. No limits on withdrawals, no fees, no minimum balances.
October 13, 2009 at 11:34 am
I use ING all the time. I have an emergency fund, and a TFSA, and a “maintenance fund” for the house & car. I like that I can name the accounts, and that they make a little graph showing how close you are to your goal. Also, when you make it to your goal, they send you a congratulations email. I know much of these are gimmicks, but I like them.
October 13, 2009 at 12:03 pm
Ann–thanks for the info, I will have to check into them further. Interesting that the US account had the 6 limit and the Cdn doesn’t. I thought $10 per transaction above 6 was nuts! How/where did you hear about them?
October 13, 2009 at 12:09 pm
@Linda,
I started an ING account this year. I do have a few other savings accounts, but they are accessible with my ATM card.
Having to go on-line and wait a couple of days for the money to come through makes it unusable for those impulse “must haves”.
(I like the little goal graph, too).
October 13, 2009 at 12:12 pm
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October 13, 2009 at 12:16 pm
Oh and for those with some extra cash, Ing offers a ‘Kickstart TFSA 2010′ account where you can open an account today, and on Dec 31st they’ll double whatever you earn in interest and convert your account to a TFSA account Jan 1st. (The double interest payment will cover any taxes you’ll have to pay on the interest income). I have to admit it’s pretty slick, and one thing that I can’t accuse ING of is not working hard to keep me as a customer (ARE YOU LISTENING, BIG 5?)
October 13, 2009 at 12:49 pm
Number 4 really leaped out at me as the biggie. I used to get super-frustrated when things didn’t go according to my carefully crafted plan to be debt free or save certain amounts etc. I’m learning to roll with it and learn from these bumps instead of resenting them. Learning is the key word here-it’s a work in progress for sure.
Number 5 also rang true, as my mom always said “you don’t solve money problems with money”. This statement has gotten me off my duff more than once, to really examine where the problems arose, and figure out how to change my behaviour to avoid them in the future.
Also, Linda and others, I’ve had excellent customer service from ING, and have had an account there for probably 10+ years. The auto transfers are great, I have a weekly amount that comes out-it helps me to “pay myself first” and not get used to having all my income available to me. As others have said, having to wait a few days to access the money gives you ample time to consider what you’re using it for. I also try to “trick” myself (I hesitate to use that word after last week’s post on tricks, but you hopefully get my drift) into forgetting that the money I’ve put there is available, and I tell myself that it is untouchable except for the purpose for which it was intended. Their strategies to reward customers for making their goals etc. are fantastic-I agree with Geoff that they’re gimmicks but, hey, if they work, why the heck not use them?
October 13, 2009 at 1:13 pm
Thank you for your quick responses and valuable information everyone. I will certainly check out ING and Ally.
Thanks Gail for reminding us the road to debt freedom may have detours and bumps beut stay teh course and we will arrive at the destination
October 13, 2009 at 1:18 pm
@Risa – The Canadian division is competing with ING, thus the no fees and higher interest rates. The Globe & Mail did an article on Ally several weeks ago. Yes, it is a division of GM, but I figured CDIC would have me covered.
October 13, 2009 at 2:09 pm
Yes financial planning is working for me. I basically started when I finished school as I realized how much interest I would be paying to the govt and said ‘hells no!’ to that
The biggest improvement of this year was moving from using my debit cards to cash only and making a sensible budget. Before I used to put too much towards debt repayment and not enough for ‘life’ which involved putting ‘life’ objects on credit card. Now not only do I budget for food (basically all that was budgeted before), but entertainment, clothes and such as well.
Next thing is RRSP’s and more ‘future planning’. Oh and finding that illusive fulltime job
October 13, 2009 at 2:49 pm
What a great post!
I am constantly amazed at how you can lay it all out and have it make sense!
Thanks for another motivating and balanced tidbit.
October 13, 2009 at 4:48 pm
The road is indeed full of pot holes, speed bumps, and road kill. Before I got in the vehicle driving hell bent for leather into debt I thought I knew what I was doing and could handle the road signs, detours and tricky weather conditions. Then I ran out of gas and hit a brick wall. Luckily for me the air bag worked and I am now able to slowly and steadily piece together where I went wrong and get back on the right track. I will only look in the rearview mirror to see my mistakes so I do not make them again. I will not beat myself up. Thank goodness Gail is here to help me follow the rules of the road so that some day when I am debt free I can toot my own horn!
October 13, 2009 at 9:16 pm
Ahh yes, the potholes. Just last month, I blew my transportation budget with a car going in for an oil change, and coming out with a brand new tire rod because the old one was so worn. There was $600 not anticipated and had to come from planned spending. Then today, same car did not start and needed to be boosted. There goes a couple hundred for a new battery tomorrow….so that really nice goosedown comforter on sale at Home Outfitters at almost 50% off is now crossed off the list of planned buys…But 3 years ago I would have bought both the battery and the comforter. Nor would there have been any planned spending to pay cash for both the tire rod and the battery like I am able to do today. So while disappointed I can’t get the comforter now, there’ll be another sale in a few months no doubt. And the repairs to the car are paid in cash.
October 15, 2009 at 1:39 pm
I budget carefully with all planned expenses mapped out in my spreadsheet for 6-12 months in advance so there really are no surprises. We live happily with a tight budget, in order to fund a major family trip every year or two while still working toward early retirement. We rarely eat out, haven’t had cable in 15yrs, pay cash for used cars, and in general don’t buy something except to replace a worn out item. Excluding investing, vacations, and car/house maintenance, we spend only ~50% of our income.
The down side to living (by choice) with all spending under a microscope is that it’s still hard for me to actually follow through with the planned spending. You get so used to not spending that it’s hard to do it even when you’ve planned to. We have the money, I just reeealy hate spending it.
I happily give up the little stuff so that we can have the big stuff. I seem to have the most trouble with the medium purchases, and the ones I feel I don’t have any choice about. Even if we’re expecting to need a dishwasher or winter tires they are still painful purchases for me. I don’t miss the daily coffees, lunches out, unnecessary clothes because I see all those saved dollars in terms of an increased travel budget. I know replacing winter tires and redoing the roof are necessary, but I don’t get any enjoyment out of those purchases. Maybe that’s the difference. If I give up the small miscellaneous stuff, it’s because I’m going to enjoy it later as a trip, or retiring a little earlier. I can’t avoid the new winter tires so I almost resent having to buy them.
I’ve never bothered budgeting $50/mth for 15 years for shingles for example, because it just seems like too much work. I think maybe I need to set up automatic deductions to another account for longterm maintenance. That way it will feel like the phone, mortgage payment, or hydro bill. Just another monthly expense. I guess the next step is to assess what items I should plan for so I’ll know when I have skimmed off enough (roof, carpet, hardwood refinishing, tires for 2 vehicles, furnace, appliances…). How do you plan for these items? Separate savings account? Multiple accounts for the dififerent items?
October 16, 2009 at 9:59 am
Jenn,
I have multiple ING accounts (turns out there is a limit of 5 you can open). Each has a nickname and every payday money gets taken out of my account and divided up between them. I have car maintenance, home maintenance, gift and christmas, pets (I have a gluten intolerant husky that requires expensive food!!) and copays. I am very visual and need to know where everything is going and how much I have allotted. For example, my pet account is down to zero because the dogs just got their shots, my one husky got spayed and we just bought dog food. This lets me know that if I have some extra money I should probably send it to that account so that I can build it up in case of emergency (I also have a baby emergency fund that can be used for anything if needed).
All this to say that I am doing what I can to stop relying on the credit cards and to be prepared when the inevitable happens!
October 29, 2009 at 10:20 pm
[...] Gail lists the reasons why people mean to succeed financially but still fail. [...]
October 31, 2009 at 5:43 am
…I have multiple ING accounts (turns out there is a limit of 5 you can open)…
Actually, you CAN have more than 5 sub accounts at ING, you just have to call and ask them to set up. I currently have 8…
December 2, 2009 at 2:22 am
A career in financial planning is still lucrative despite the worldwide financial crunch. As long as money is used in our economy financial planners will be needed. You have to pay your dues to become a financial planner but once you pass the test and prove your mettle, you can expect a handsome return for your efforts.