After reading an article called 11 Steps To Financial Freedom in the latest MoneySense magazine, I thought it would be interesting to go through each of these steps one-by-one and share my results on this blog. Each week I’ll go through one of the 11 steps to financial freedom, with the intention of creating a complete financial plan by the end of the series.
Adjust Your Spending
According to the MoneySense article, this step is not about punishing yourself or laying blame. If you would rather go out for dinner four times a week than buy a cottage in ten years, that’s your choice. But you owe it to yourself to be honest about what you’re doing so you’re not wondering why you can’t reach your financial goals.
Before our daughter was born my wife and I decided we would make a few financial sacrifices in order to have one parent stay home to raise our kids. This goal was very important for us but the reality was that we needed to adjust our personal budget as well as our expectations for the kind of lifestyle we would be living. Over time we found that we were able to live quite comfortably on a single income, and now that we’ve finally upgraded our house it’s time for us to re-think our financial goals and start a new plan going forward.
Action Step #4: Compare Your Spending To Your Goals
We needed to take another look at “Worksheet 1-Prioritize your goals” and “Worksheet 4-Your spending and savings.” The idea here is to look at how well your current spending habits mesh with your goals.
If you have a cash flow deficit you won’t be able to meet your goals, so you’ll have to see if you can free up cash by cutting back your spending in areas that are less important to you. If you have a cash surplus, congratulations. You can start allocating money to meet your goals right away.
As I mentioned last week, we have been tracking our spending for over two years and have a fairly good grasp on our spending habits. I also track my personal rate of inflation to see where our expenses have increased each year. The good news is that after all of the bills are paid we have a cash surplus of about $1,900 each month.
We’ve already determined that we’re going to allocate an extra $500 a month towards our mortgage, which will help pay it off in 16 years instead of 25. But before we divide up the rest of the surplus, we’ve identified 3 priorities that need to be looked after in the short term:
- Landscaping and fence – $2,500. We moved into our new house in August, but our neighbours have yet to move in on either side of us. We’ve already met the owners though, and we’ve agreed to split the cost of building our fences in the Spring. We’ll also need to set aside some money for landscaping the front and back yard.
- Student loan – $3,500. We’ve just been paying the minimum payments on my wife’s student loan. With interest rates so low (and tax deductible), we weren’t in a hurry to pay off the loan. But enough is enough now and it’s time to eliminate this debt from our lives, which will also free up an additional $150 a month in cash flow.
- New (used) car – $10,000. My ’98 Hyundai Elantra has seen better days and we’ll need a newer vehicle if we plan on growing our family in the near future.
Unfortunately, taking care of these priorities in 2012 means that we’ll be putting some of our savings goals on hold for another year. At least we’ll have a head start on our mortgage pre-payments, and by the end of 2012 we’ll have just over $1,500 a month to start allocating towards my RRSP contributions, our tax free savings accounts and our daughter’s RESP. That should allow us to catch up on the extra contribution room available in our taxable accounts, and maximize our RESP contributions.
Next week we’ll look at our financial goals with Step 5: Set Your Top 3 Goals.