Every new year, many of us begin thinking about our finances. But should we continue to make resolutions for better financial management—resolutions that often aren’t kept—or should we consider revamping our budgets entirely, once and for all?
As you’re wrapping up the figures from this past year, you may be noticing that your balance seems consistently in the red, month after month. Between paying off your car, your mortgage, your student loans, your credit card debt, putting money away for your children’s future, and putting some away for your own future as well, you’re chipping away at the balance in your bank account just a little bit further, month after month. At the rate you’re going, it’ll be decades before you’re able to pay off your debt entirely! You’ll simply keep accumulating lines of credit to supplement your income to pay your other bills. Nothing will get solved if you carry on this way, and you know it.
You can try to change your spending habits—a common New Years’ Resolution and probably one you made last year—or you can re-evaluate your priorities.
Financial advisers usually tell you that you’ll require 70 percent of your working income per annum to survive comfortably in retirement. They will push you to invest more and more into your retirement—because they receive a commission for each dollar you invest!
However, one financial adviser and author, David Trahair, explains that cutting down your contributions to your retirement savings and instead focusing on paying off your debt can significantly decrease your debt pay-off time. Then, once the house, car, and credit cards are paid off, you’ll be able to put money toward your retirement in larger increments—and probably have some left over for a vacation for yourself!
Using the common budget model of a two-parent household with two children as an example, Trahair demonstrates that, even by a generous estimate, you will likely only need 40 percent of your pre-retirement level of income to sustain yourself for 20 years post-retirement. Provided that your children will be self-sustaining following your retirement, your mortgage is paid, and you’re out of debt, your cash outflow can be less than half of what it was when the children depended on you and when you still had car payments to worry about.
Remember that debt accumulates interest, which makes the debt bigger. If you cut contributions to your retirement savings and put more toward paying off your debt sooner rather than later, you’ll be able to pay the debt off more quickly, since you won’t have as much interest to worry about over time! Trahair maintains that anyone can retire comfortably with half of their working year’s income, as long as they’re not in debt.
Doesn’t rearranging your financial priorities sound a lot easier than trying to cut back by skipping your morning coffee?
Trahair dismantles the common myth that you’re going to need $1,000,000 put away in savings before you’ll be able to retire comfortably.
Smoke and Mirrors has been a Canadian best-seller through seven editions and has helped change the conversation about saving, personal budgets, and RRSP sales pitches.