End of June 2017 will mark the 4 year anniversary of when my husband and I started to give a damn about our finances. If I could quickly recap, the events occurred as follows:
- July 2013 to Dec 2015 (2.5 years): This was the catalyst that started our journey to financial freedom. Paying off $120,000 of student loan and credit card debt. Almost two years leading up to this moment, we were still making minimum payments on our student loan, paying a ridiculous amount of daily interest and felt stuck. Dec 15th, 2015 was the paycheque that cleared our last debt.
- Jan 2016- June 2016 (6 months): We quickly created a financial buffer to take care of difficult financial times when (not if), they arise. With the help of our tax refund and some diligent saving, we had our $15,000 fully funded emergency fund by June.
- July 2016- Dec 2016 (6 months): We had one out of town 5 day hiking vacation to a national park 4 hours outside of Calgary. We lodged in an affordable hotel 40 km outside of the national park and enjoyed the activities the small town had to offer when we weren’t hiking. We also started aggressively beefing up our retirement savings. Since we put retirement savings on hold when paying off debt, we want to give our savings a boost.
- Jan 2017- until circumstances change: With our retirement savings goal well under way, we decided to create more balance in our lives and spend more money after making major sacrifices for 3+ years. Most important, we decided to be intentional and determined to take more vacations, establish our own individual spending money that we could use as we wish and have more money allocated to discretionary spending for things like eating out, going for a play/the movies etc.
As we became more intentional about how we spent our money, we came up with some financial guidelines this year that will ensure that we don’t find ourselves in a similar financial mess as in the past. These principles provide us with some framework when making family decisions about saving, spending and debt. As our family and income situation changes, we will develop a new set of guidelines to follow that help create healthy boundaries in our savings and spending habits.
- At least 50% of all windfall income goes towards long-term (retirement) savings
Actually, its retirement ‘investing’ to be accurate. When we develop our family budget each year, we never include windfall income in the budget until it is paid, even if we are 99.99% sure about receiving the income and use a conservative number to guesstimate. Why? Well, by limiting our income we limit our spending as well. It allows us to continue maintaining a frugal lifestyle and focus our monies on things that bring us the most value (i.e. travelling overseas, investing money, spending money on experiences etc.). Also, not including windfall income allows us to be pleasantly surprised about the money and not disappointed if we don’t receive it or receive less than we expected. It allows us to manage our expectations by not having any expectations at all.
Why a 50% savings rate? Why not. Since my husband and I have no children yet, have no debt payments, it is very doable.
Another reason why we chose a high savings rate is because I know that we won’t be able to keep up a high savings rate if circumstances change. By investing 50% of windfall income, I am making up for the times I know we will not be able to put away as much.
- All regular income must be distributed in the following order: tithe, retirement savings, needs and wants
This guideline definitely stems from our faith in God and as Christians. Even throughout our debt repayment journey we were tithing and even though I thought that would delay our debt repayment, it did not, if anything it we realized additional blessings. Of course one should tithe/give only if they want to.
After we give our tithe, then our second priority is retirement savings. ‘Spend what you have after saving’ captures this perfectly. I know that if I say retirement savings and reaching FIRE (financial independence retire early) is important to me, but I put my savings goal after all of my expenses, what I say and what I do will not align. To avoid this cognitive dissonance, I make sure what is most important gets taken care of first is. I also know from past experience, whatever is left we can make it work to meet our needs and wants, and I think this is the case for most people if they are willing to ask the right questions.
Once the first two priorities are met, only then do we begin allocating monies towards our needs and wants. Examples of our needs would include: food, rent, utilities, transportation etc. Examples of our wants would include: eating out, going on vacation, gifts for each other etc. I want to stress the fact that this guideline works best for us because we have gotten rid of our debts (and rarely carry a balance). A few years ago this allocation would not be possible for us. When we were paying off our student loan debts we tithed, but put nothing towards our retirement savings, we also spent close to nothing on our wants and tried to cut back on our needs as much as possible. It all depends on the financial situation you find yourself in.
- A minimum of 25% of take home pay goes towards retirement savings
This guideline applies not only to our full time jobs but also side hustle income. It also does not include the 5% before tax contributions we each have deducted from our pay and matched at 5% by our employer.
This 25% is a combined amount for both me and my husband. Since we have joint accounts and all our income flows through our joint accounts, the 25% needs to be split in half to be put towards our respective TFSA accounts. When I get paid 12.5% of my pay goes towards my TFSA investment account(s) and 12.5% goes towards my husbands. The same applies for him when he get paid.
This savings rate will be revised and tweaked up or down as and if our financial circumstances change. For now, I feel this is a healthy rate to accelerate our savings without compromising our spending.
- No more than $3,000 of debt (combined), at any given time
I am not an advocate of consumer debt and my husband and I rarely carry a balance. However, we included this guideline in 2017 because we will be taking a lot of vacations this year. Three out of continent vacations and one vacation in Ontario to visit some friends.
Although we have the vacation expenses accounted for, the timing of our incomes to fund these vacations may not always match. Because of this, we have decided to use our line of credit to fund the income time gap specifically for our vacation expenses. When we see hotel and flight deals we lock in at the lower rate by paying with credit, then we pay back the debt soon after.
To avoid overspending, or putting ourselves in a situation where we feel overwhelmed with the debt load, we put a cap of no more than $3,000 of debt between both us at any given time.
This offers us the opportunity to take our vacations when we can, maintain our current lifestyle and savings rate and not feel overwhelmed with debt.
- All debt must be paid off in 3-6 months
This principle follows the one before it. To avoid getting comfortable with having debt, we established a time line in which the debt must be paid off. We felt 3-6 months is enough time to do this. Since we typically don’t carry debt, this is than enough time for us to get rid of it. Assuming a maximum debt load of $3,000 that translates to $250/paycheque for 3 months or $125/paycheque for 6 months using both our paycheques.
We could have also opted to cut back on the amount we put towards our investment accounts or give less in order to get out of debt quicker, but we decided against this. We made huge sacrifices in our spending when paying off our student loans that we decided that we can’t comprise our savings rate.
Do you follow any financial guidelines? Do you find them helpful when making spending or saving decisions?