At KATA, we deal with all kinds of people with different mindsets and attitudes about financial planning and money. We hear a lot of different things about money, many that are simply untrue. Worse, we’ve seen a lot of people squander opportunities to meaningfully impact their future by firmly believing in these falsehoods and refusing to consider any other possibility.
In this article, we’ll identify some of these financial falsehoods and provide ideas about how to overcome them.
Money Mindset is Everything
“If you think you can, or if you think you can’t, you’re right.” Henry Ford
“I’m always broke, so I can’t afford it.”
We hear this all the time, often from people who are far from being broke. Often, this is because the person is living paycheque to paycheque. Or they might simply be overspending. There are some important things that need to happen to understand where this feeling comes from:
The definition of necessity has changed drastically over time, and it can vary from person to person. Some people feel that owning a car is a necessity while others feel that it’s a luxury. We’re not going to tell you our thoughts on the subject, but you need to understand yours.
Track Your Money
There are a lot of great tools for tracking money. Most major banks have some kind of assistance to offer, and Mint by Intuit can really help you understand where your money is going. Or you can hire an accounting or bookkeeping firm to do it for you if you don’t have the time.
Once you track how you’re spending your money, you can understand what you’re buying that isn’t a necessity. You can make decisions about what patterns to change once you can see and understand your spending behaviour.
The Latte Factor
There’s a term for overspending on small luxuries called the Latte Factor, and it means that small amounts of money spent can add up quickly. Is this something you suffer from? Share your small luxury spending habits and photos with this blog post on social media now.
Make a Budget
Making a budget will help you understand how you can change your spending habits and stop living paycheque to paycheque.
It’s amazing how some people will spend hours binge watching TV or hundreds of dollars at the bar or casino, but not take a couple of hours to put tools in place that can drastically improve their lives.
“I’ll never be able to afford a home.”
This is a comment we hear often, and in today’s marketplace, it’s easy to think of as true. However, if this is true, how do people buy houses? What drives the price of housing?
Some things to consider and do when trying to buy a home:
Unless you’re in a very fortunate situation, it takes effort and planning to make your first real estate purchase. Understanding your relationship with money and how you use it is the first step. Make sure you have a budget.
Improve Your Credit Score
Using a credit card and paying it off completely every month is a great way to build your credit score.
Speak to a Mortgage Broker
Mortgage brokers can help people in all kinds of situations access the debt they need to buy a home. They can also help you plan what to do to position yourself to be able to make that first purchase.
Use Your RRSP and TFSA
The Canadian federal Home Buyer’s Plan (HBP) allows you to loan yourself up to $35,000 to purchase a home. In order to do this, you need $35,000 in your Registered Retirement Savings Plan (RRSP), which doesn’t usually happen overnight. Use your TFSA to build up the rest of what you’ll need for a down payment, and earn tax-free in the meantime!
If you haven’t done at least the first three of these things, you have some homework to do.
“Any debt is bad debt.”
This is a generational concept that is often passed down from grandparent to parent to child. Debt, when used properly, provides access to opportunity. Regular, responsible servicing of debt (paying your minimum credit balance for example) increases your credit score. Your credit score allows you to access loans and other forms of debt. It’s rare to find someone who can pay cash for a home without getting a mortgage.
Some considerations about debt:
Types of Debt
What are the terms? What are the interest rates? Are there hidden fees? A lot of times, people get into situations where they don’t even understand what their debt is, never mind how to resolve it. Get these questions answered before signing up for any future debt.
What’s Your Overall Interest Rate?
This is technically called your weighted average interest rate. This is determined by examining the amount of debt you have at each interest rate. For instance, if you have three debts of $100 each at interest rates of 5%, 10% and 20% respectively, your overall interest rate is 11.67% (5+10+20 divided by 3). Restructuring debt is a great way to lower your overall interest rate and free-up cash.
How Are You Using Your Debt?
Using debt to earn money is an effective tool that has been used in business for hundreds of years. Very few entrepreneurs can start businesses with the cash in their bank account. They need to access debt to bring their ventures to profit. One of the slipperiest slopes we often see is using debt to finance lifestyle. How you use your debt is more important than how much debt you carry.
“I can’t invest until I’m out of debt.”
This is another generationally transferred misconception. Failing to invest costs your future self. Although you may feel like you can’t invest, it’s generally not in your best interest to avoid investing. Many individuals who take this approach will find that they can never retire because they have never planned or invested for it.
Mindy’s Debt: A Fictional Case Study
Mindy has an average debt interest rate of 11.67% on her debt. In other words, she has a negative 11.67% interest rate.
She decides to skip the weekly trip to the bar for a month and builds up an extra $400. She imbues in three investments of $100 at interest rates of 5%, 7% and 9%. They are earning a positive overall interest rate of 7%.
When you add the negative and positive interest rates together, Mindy has an overall interest rate of negative 4.67%.
With the fourth week’s bar tab savings of $100, she pays off the high interest rate debt, the one that’s at 20%. Now, all of a sudden, her average interest rate has gone from being negative to being a positive number.
One of my favourite Einstein quotes is, “There is no force in the universe more powerful than compound interest.” Make sure it’s working for you, not against you.
“I don’t have time to budget.”
Anyone can make time to budget. It’s a matter of priority. Creating a household budget seems far more daunting than it actually is. Start with a tool that helps you track how you’re spending your money. Be prepared to face some uncomfortable truths about how you behaved in the past – and leave those behaviours in the past. It only takes a couple of hours to create a budget, but doing so is the first step to creating a lifetime of hope and success.
“I’ll never be able to retire.”
Anyone can retire whenever they want. The issue is having enough money coming in to pay for everything you want for your retirement. This takes planning, just like buying a home. Start by putting some money into an RRSP, even if it’s only five dollars.
Overcome Financial Falsehoods
If you’ve held true to the ideas above and refuse to change, you’re probably right. But learning can fix all these problems for you. Money is not magical, it’s a tool. You wouldn’t let a wrench keep you down your whole life, right?