By Heather Compton and Dennis Blas
A: Check your financial report card!
Your Financial Report Card – Part 2 (Cash Flow Statement)
In last month’s article we looked at Part 1 of your semi-annual Financial Report Card – the Net Worth Statement. The Net Worth Statement is just one aspect of our finances and one measure of when or if we can retire (or stay retired). The real key is how much we spend. The second part of our financial report card has us completing a Cash Flow Statement or budget. We look at what will come in – our revenues and what will be going out – our expenses.
We can’t control stock market returns, interest rates or the value of our real estate but getting a handle on cash flow is within our control. The retirement nest egg doesn’t need to be as big if we reduce our spending or if we create cash flow from occasional, part-time or full-time employment.
First let’s look at revenues – for those working that’s your current employment income. In retirement or even during your working life it’s great to have multiple sources of revenue. Consider interest income and dividend income from investments, rental income from investment properties we own or income from part-time work. Perhaps we have income from company defined benefit or defined contribution pension plan and from Government benefits if we qualify for CPP and OAS.
Remember, we only get CPP if we have paid into the program so there will be no income from this source for homemaking partners and OAS doesn’t come into play until 65 but we needn’t have worked to qualify for this income. Check the details of your eligibility for both these programs at Service Canada.
Now let’s take a long, hard look at our expenses. What are we spending our money on? Do you have the spending habits of my depression era mother or are you more like a Saudi prince?
It’s certainly not my place to “should” on anyone and to tell you what it’s OK or not OK to spend your money on. Spend money on the things that bring you pleasure and add joy or beauty and juice to your life, but be mindful and exercise choice in your spending. Whoever told you “You can have it all” obviously had no plans for retirement!
An awareness of daily spending is the greatest gift my Depression-era mother gave her children. She believed that if you looked after the pennies, the dollars would look after themselves. When my father retired, he loved to scan the grocery flyers and let my mother know where the best weekly buys were – eventually she put him in charge of grocery shopping. That was a careful, coupon-clipping generation. Perhaps it’s time we all learned a more frugal outlook, one of my girlfriends takes great delight in her Value Village wardrobe finds.
Those pennies add up! Paying $1 per bottle of water twice a day for a family of four totals $2,920 a year. Invest that in a tax-deferred account earning 7%, and 25 years later it’s $175,401.38! Tap water is free and environmentally friendlier. Purchasing two paperbacks a month for $11.99 totals $287.76 a year. Invested as above that’s $18,777.34. A library card in most major centers is less than $20 annually and gives you access to DVDs, CDs, books on tape for that next car trip and all the latest bestsellers. The Canadian Automobile Association estimates the annual cost of operating a vehicle at $12,000 – could you choose to become a single vehicle household or use public transit instead? Lunch out is a nice “date” and cost less than dinner out. Growing a vegetable garden is a meaningful pursuit for many and game or movie night at home with the grandchildren builds connection and saves money.
Most retirees find expenses for things such as travel, health, dental care and hobbies increase in retirement and things like wardrobe, transportation and work-related expenses such as pension plan and CPP contributions decline. Try tracking every expense for one month, or better yet a full calendar quarter. What does it cost to feed and water you and turn on the lights at your house?
Travelling to third-world countries is a great eye-opener. North Americans lead more than lives of abundance. In many instances, we lead lives of excess. More stuff will not make you happy. The simpler we make our lives, the more abundant they become.
A study conducted by Professor Ryan Howell, a psychologist at San Francisco State University, concluded that people who spend money on simple experiences such as the theatre, dining out or taking adventure holidays tend to be happier than those who buy material possessions, regardless of how much they spend. “Memories of life experiences gave people a greater sense of vitality and being alive than material items.”
Financial freedom lies in managing your resources well. We are enjoying that freedom and wouldn’t choose to return to full-time work even for the promise of more to spend. We have “enough.”
Now let’s do the ballpark finance test – at your present rate of spending how many years before we draw down the Net Worth we calculated last month to zero? A Cash Flow worksheet and model are available from our web site Retirement Rocks.
Next month we’ll look at some great websites for aspiring frugal-istas.
About the Authors: Heather Compton has presented seminars on financial and retirement lifestyle issues for over 30 years. She retired as Vice President and Senior Investment Advisor with a major financial services company. Heather and husband Dennis Blas co-present retirement seminars for a variety of corporate clients and are the co-authors of Retirement Rocks! Canadian Boomers Invest in Life. You can find their book online or in independent bookstores. See more of their advice at Retirement Rocks.