Debt-Free Forever (16 page)

So let’s turn the equation around for a minute. If we’re willing to accept that money doesn’t make you happy, is it possible that sadness makes you spend more?

One study found that when people are sad, they spend more money—way more money. The researchers concluded that when people are sad, this sadness could trigger extravagant tendencies. Nicknamed the “misery is not miserly” phenomenon, it’s clear that having access to credit when you’re bummed out can end up costing you big-time.

Maybe the most disturbing part of the study was the fact that the sad people—who were made sad by watching a sad movie—spent more than four times what the not-sad people spent and had not a clue that it was their sadness that prompted them to splurge. They were completely unaware of how their own emotions were feeding into their consumerism. We’re bummed out and dumb about it, so we go Cheer Me Up Shopping.

So what’s a body to do? It would seem that if you’re feeling sad you should stay out of the stores, leave your credit cards in your freezer, and carry the minimum amount of cash. Or you could do something nice for someone else, and that’ll make you feel better and won’t cost a cent. Offer to cook a meal for a harried neighbour. Water someone’s garden. Put a dollar in someone’s meter. Little things that take your focus off
you
and your misery and move your focus outward will help you overcome the desire to go Cheer Me Up Shopping.

An investment in getting happy might just pay dividends on the financial front. Happiness isn’t always about getting what we want. It’s about wanting what we have. So instead of making lists of all the things we want or wish we had—even silent lists in our heads—today make a list of all the things you have that you want. This would be your inventory of how full and rich your life is. Then you can focus on what you have instead of what’s missing. Then the next time you see a tear-jerker movie, break up with a friend, bang up the car, yell at your kids, fail to get the promotion—whatever it is that’s triggering your sadness—you can look at the blessings in your life and say, “Thank you.”

What are you going to do the next time you feel sad and are battling the urge to splurge? Make a plan now since one won’t come easily once you’re in the dumper. And if you don’t have a plan, you’re only going to be sadder when the credit card bill arrives!

Have you ever bought something you just couldn’t live without and afterwards found yourself scratching your head and wondering what the hell you were thinking? Then you’ve experienced something called Buyer’s Remorse.

The fallout of shopping with the Impulse Gremlin on your back, Buyer’s Remorse makes you feel really crappy. You feel guilty about the money you’ve spent. You wonder whether you got a good deal. You question whether you bought the right product.

Whether you leave the restaurant wishing you’d ordered the fish instead of the steak, or cringe because you ended up spending 40% more than you’d planned on the new surround-sound system, Buyer’s Remorse turns shopping into an excruciatingly painful experience. And Buyer’s Remorse is far more widespread than most people think, mostly because we tend to suffer silently. Do you know that some researchers estimate that most people end up regretting up to 80% of their discretionary spending within a year of having spent the money? Wow! That’s a lot of “I wish I could take it back,” isn’t it?

Buyer’s Remorse often climbs on our backs when we find out we’ve paid too much for something, so making sure we know how much the item we’re buying is really worth can go a
long way to removing the remorse. So can putting a little time between seeing the item you want to buy and actually slapping down your money. Getting a second opinion often helps too. Take your sister, your best friend, your mom or dad with you, and ask whether they think it’s worth the price. And if there’s financing involved, figure out what the item will end up costing once you’ve paid the financing charges. If you don’t do this step, you’re deluding yourself and you deserve to feel like a dope.

The best way to avoid Buyer’s Remorse is to ask yourself, “What else could I do with the money I’m spending on this item?” Are you working toward a goal that would be served well by applying this money? Is there another priority that should take precedence? Figure out (or refocus on) what’s really important to you, and then put your money where it will do you the most good.

I was yakking with a TV news chick one day when she confessed that she and her husband sometimes go out for dinner and spend a lot of money. She said they could justify it because they eat at home most of the time. I said, “The only thing you have to worry about is your use of the word
justify.
”

If you’re spending money on dinner out because you have the money and you want to eat dinner out, why do you have to justify it? You don’t. Justification only comes into the equation when you’re trying to convince yourself or someone else that what you’re doing is okay. If you want to be honest about your shopping—instead of playing mind games—lose the justification and move to rationalization.

Here’s how rationalization works:

You see a new set of dishes and you really, really like them. You decide you want to buy them. You ask yourself two questions:

1.
Do I have the money to pay for these right now?

2.
Do I have another purpose for that money?

If you have the money to pay for the dishes, and you have no other purpose for the money—a bill that’s coming due, a savings goal, a debt that must be repaid, or an upcoming expense—and you want to buy the dishes, buy the dishes. If you have to justify buying the dishes by saying something like, “I never buy myself nice things” or “I work hard” or “I haven’t spent a penny in the last two weeks,” then you’re listening to the Gremlin and you should think twice about spending the money.

If new furniture, a family vacation, or a spectacular wedding is so important to you, why haven’t you saved the money to pay for it? I have no problem with how people spend their money, as long as it’s their money they are spending and not credit. You want to blow $50,000 on a wedding? Then have $50,000 in the bank. It’s that simple. But to go into debt for a wedding is just about the stupidest thing I can think of.

If you really want to buy something, and you don’t have a system for keeping your mental accounting honest, you will create the ambiguity you need so you can justify spending the money. But whatever justification you come up with for spending money you haven’t yet earned (shopping on credit) or spending money that should really be going somewhere else (to savings, debt repayment, or on an upcoming bill),
you’re just fooling yourself. If you’re ripping off tags, hiding stuff in the back of cupboards, lying about what you spent, or creating excuses for your shopping, you’re playing games, and you’re going to lose.

If you have a well-thought-out plan for buying something you need or want—if you’ve put it on your shopping list, planned your spending, and accumulated the money—you can go shopping and enjoy the pleasure of the acquisition. You can revel in the drugs your brain releases when you bag your treasure. And you can enjoy shopping without worry of going home with Buyer’s Remorse because you are in control.

O
nce upon a time, when we made $10, we saved $1. Some people saved $2. Some saved 50$¢. But people knew that if they wanted to feel safe they had to have some money put aside just in case. Back in the mid-1970s, Canadians saved 10% or more of their income. By the 1980s, the Canadian savings rate had jumped to about 18%, which is why Canadians got the reputation of being “savers” and so much better than our American cousins when it came to money. How the mighty have fallen: by the end of the 1990s, Canadians’ savings had dived into negative territory.

One reason we stopped saving is that we was fooled. Because of record growth in both the stock and real estate markets, we let ourselves be convinced that we were rich. Another reason we stopped saving was that with ample credit available, we saw no need to save. We believed that the money would always flow smoothly from pocket to pocket, and there was plenty to
go around. If you needed money and couldn’t get your hands on cold hard cash, you could always use credit.

Each of us holds in our hands the power to make the life we want. Each of us can create for ourselves a life that is full, inspired, happy, peaceful, creative, loving, exciting, grand. To do so means setting aside a little of what we have now for when we don’t have so much. Yes, it means “saving.”

We’re full of trepidation about retirement. Some of us just ignore it because we’re sure we’re never going to be able to stop working. Some of us stick our heads in the sand because we’re afraid to look at the possible outcomes. Even those of us who are socking away money every year often find ourselves confused about where we should be putting our money. There are so many conflicting messages that many of us feel paralyzed. Taking no action seems so much easier than trying to figure out the answers to the big questions.

Ya know what? It isn’t that big a deal. Yes, you have to think. And yes, you have to do some math—oh gawd, not more math!—but figuring out how much you’ll need is actually pretty simple. It’s a matter of answering the four key retirement questions:

1. How old are you and how much time do you have before you retire?
   
2. How much will you need and what sources of income do you have?
   
3. How much return will you earn on your investments?
   
4. How serious are you about saving?
   

The earlier you retire, the more you’ll need to get you through retirement. According to the Stats Man, our average life expectancy continues to go up and the gap between men and women is closing. If you’re planning to retire at 60 and stay put until you’re 82, you’ll need enough money to get you through 22 years of not working. The longer you put off your retirement, the more you can accumulate before you trade in your workboots and the less time that money has to last.

If you plan to work part-time during retirement, you’ll be able to supplement your pension with money you earn. This is a growing trend as we recognize that work ain’t all that bad after all.

Part of how you decide how much will be enough for retirement will be affected by how old you are right now. If you’re in your 20s, you’re about 40 years away from dusting off the rocker. While you may have very little information to go on in terms of what things will cost and how much you’ll need, you’re in the best position since you have loads of time on your side.

It’s been estimated that if you wait to start saving for retirement until you’re in your 40s, you’ll have to sock away 18% of your income. But if you start in your 20s, then you only have to put aside 6% of your net income.

Early savers can also behave a lot less desperately when it comes to choosing an investment with a “decent” return. Hunting down an elephant-sized return won’t be half so important if you have time and the magic of compounding return doing most of the work for you.

Sock away $100 a month—or $1,200 a year—in a retirement plan and earn 5% on your money on average over 40 years and you’ll have saved $48,000, on which you will have earned about $133,000 in compounded return, for a total of almost $181,000. Wait until you’re 40 to start, put away the same $1,200 a year at 5% and you’ll have just under $67,000 to work with. If the 40-year-old wanted to have what the 20-year-old has, (s)he’d have to save $3,200 a year instead of just $1,200 a year.

Starting early is best. But no matter where you are now, getting started will get you closer to where you want to be than sitting on your thumbs!

If you’re spending $60,000 a year now (net!), in all likelihood you’re going to need a little more than $20,000 a year to make ends meet. Some people arbitrarily pick a goal for how much money they think they’ll need. That’s where the Magic Million came from. It was a dart thrown in the dark. And it’s no more true for the guy who is currently living on $250,000 a year than for the guy living on $25,000. Guessing is fine if you’re 20 and just starting out. After all, life is going to throw you a huge number of curveballs before you actually get to shake off the harness. But if you’re in your 50s or 60s, it’s time to stop
guesstimating and time to start doing some groundwork. The last thing you want to do is get to retirement only to find out that you have just enough money to last until next Tuesday.

Most people don’t have to come up with all the money they’ll need from their own savings. About half of us have access to a company pension plan. (Sad to say, not everyone takes full advantage of those company pension plans.)

I am constantly amazed at the number of people who don’t know how their company pension plan works. If you don’t know, make an appointment this week with your Human
Resources department to find out. Whatever you will get from your company pension plan reduces the amount you’ll have to save on your own, so this is a big consideration.

How much you end up receiving through government retirement benefits will also have an impact on how much you’ll need to save. While it may not be much, it’s better than a kick in the teeth. Find out what you can expect to receive and plan accordingly. Contact Service Canada (servicecanada.gc.ca) for more information.

If you’re going to be funding your retirement all by your lonesome, then a buck ninety-two probably won’t go far enough. The most common rule of thumb thrown around in the media and by the retirement specialists is that you’ll need about 70% of your pre-retirement income to live comfortably when you finally check out with your gold watch.

Keep in mind that you’ll be retired for 20 years or more so that your needs will change because inflation will make things more expensive. Let’s say you decided you could live on $20,000 in today’s dollars during retirement. If inflation averages 1.5% a year, you would have to spend just over $36,000 a year in 20 years to buy the same stuff you’re spending $20,000 on today.

Don’t get so caught up in the rule-of-thumb calculations that you throw up your arms and say, “I’ll never be able to swing that, so I won’t even bother to try.” The Stats Man has found that people who earned $70,000 at retirement use only about 45% of their pre-retirement income to live during retirement. Those who earned between $40,000 and $50,000 end up retiring on just 59% of their pre-retirement income. And less
than 20% of people with a pre-retirement income of $40,000+ end up living on 75% or more of their pre-retirement income.

Calculating how much will be enough for you means looking over your budget and deciding which expenses will increase in retirement, which will go down, and which will disappear completely. This is an exercise for people who are five years or so from retirement. For anyone younger, a web-based retirement calculator or an experienced and smart adviser can help you decide how much you should be setting aside each month.

Once you decide on your retirement savings goal, you have to figure out how you’re going to invest that money so it will grow to meet your expectations. Everything has some risk attached. Being a fraidy-cat and doing nothing with your money means leaving it to wilt under the pressure of inflation. Expecting “big returns” means taking more risk with your money.

“How greedy are you?” is one of those simple questions that has a ton of implications. If you’re content to hold an investment paying you a 2% return and can stand the scorn of all your friends and relatives at your naïveté, your lack of ambition, or your sheer stupidity, then you’d be pretty low on the Greedy Scale. If you’re insisting on an investment that will turn your $1,000 into the Magic Million in 10 seconds flat, then you’d be right up there with Gordon Gekko.

Some people have huge expectations about how investments should perform. It’s probably because the media hype the Bestest Investments and promote the idea that someone
knows what’s going on. Hello! I have some breaking news for you—nobody knows. So that’s the first thing you need to wrap your brain around. If all those gurus actually had the key to making buckets full of money from their investments, why wouldn’t they just do that instead of trying to convince us of how smart they all are?

The second thing you need to wrap your head around is this investment creed: the higher the potential return, the greater the potential risk.

So back to my question: how greedy are you? Or put another way, how much risk are you prepared to take?

Want to take the least amount of risk? Hey, I’m not here to judge you, just to inform you. There’s a rule you need to know about if you’re trying to figure out how your money will grow and it’s called the Rule of 72. It’s a simple way to determine how long it will take for an investment to double. It’s often used with people who are investing in interest-bearing options like saving accounts or GICs, usually to make them feel small and stupid because their return is low and it’s taking so long for their money to grow. But it’s a good rule and you should know it. It goes like this: 72 divided by the return on your investment will give you the number of years it’ll take for your money to double in value.

If you’re earning a 5% return on a GIC, then the formula would look like this: 72 ÷ 5 = 14.4 years.

This formula is actually a little off and gets more “off” as the rate of return increases, particularly when you’re looking at returns of 20% plus. But it’s handy, particularly for the math-challenged. And it can be used backwards too: want to double
your money in six years? Divide 6 into 72 to find that you’ll need to earn a return of about 12%.

If you invest in a GIC earning 4%, according to the Rule of 72, it’ll take 18 years for your money to double. If you’re thinking to yourself, “Who would settle for a pathetic GIC when you could jump into the stock market and earn stellar rewards,” you’re falling into a trap. Before you go dissing GICs, might I point out that if you are in any way concerned about protecting your capital—making sure the money you sweated your ass off to earn doesn’t disappear into the ether—then you’re concerned about risk. The least risky investments make sure your capital is completely, totally, and utterly safe. Of course, they also have a tendency to earn the lowest return going.

Which is how I come back to the question: so, how greedy are you?

If you’re not prepared to settle for taking 18 years to grow your $2,000 to $4,000, then you’re willing to accept more risk. In doing so, you’re prepared to accept that some of your sweat-money might disappear if market conditions aren’t working in your favour.

It’s important that you understand how much risk you can stand before you start waking up in the middle of the night with the sweats. That’s no way to live. And it’s no way to invest. You should not only know how much risk you’re prepared to take, you should also know what you’re investing in. If you don’t understand what you’re buying, you shouldn’t be buying it. If you don’t know the risks involved, you shouldn’t be buying it. And if you think it’s too good to be true, you shouldn’t be buying it.

This is a simple question that has a wide range of answers from “not at all committed” to “somewhat committed” to “passionately committed.” Do you know what you are?

Let’s call a spade a spade. There are lots of people who say they want to save but don’t have the tenacity to stick it out. They’re what I call Saving Wussies. Lots of talk, no action. Lots of whining about how hard life is, no commitment to doing whatever it takes to make savings a reality. And then there are the people, the Saving Demons, who won’t spend a penny that’s not in the budget because they are so determined to achieve their goal. Do you know what you are? Once you do, you’ll better understand how to save.

You love to shop. You can’t save a penny. You think you should, or you know you should, or you wish you could. But you’re not going to suffer one minute of discomfort. You’re never going to delay your gratification or say no to yourself. Nope. Money is for spending, and that’s what you keep doing.

You know what? It’s your money. Spend it all. Just remember that your conscious decision to spend every penny you make eliminates your right to whine when you finally quit working and can’t come up with food money.

How You Should Invest:
You’re going to want to get at your money whenever the whim takes your fancy. You should keep it very handy. Of course, you could help your case of “got it, spend it” by locking your savings up so you can’t get at them.
But if you’re hell-bent on spending your money, admit it and don’t do anything to incur penalties when you decide to take the money out. Stick with a high-yield savings accounts, 30-day or 60-day term deposits, a money market mutual fund.