Planning personal finances is a lot like training a puppy

Learning from a new family member

The pandemic brought about so much change in so many walks of life. That’s a literal statement for our household, as we established a family walking routine early on, and then took it to an entirely new level – we got a dog!

Of course, our Piper is more than just a walking companion. She’s a part of our whole family dynamic, and we all continue to learn and grow together. Without taking the joy out of it, the experience has also given me pause to think about some parallels with personal finance.

Training first … but who’s training whom?

A dog will be what her companions allow her to be. Our training classes provided us with expert guidance to get started on the right track, right away. What we quickly came to realize though was that there is learning on both sides of the relationship. In fact, there was probably even more on our side as we had to unlearn established patterns and create new ones, while Piper was ready and raring to go.

Money too can get out of hand if you’re not careful. In response, you might be tempted to force it to be what your current lifestyle demands, but almost inevitably that will be more frustrating than fruitful in the long run.

Instead, commit to understanding the practicality of your finances, both the constraints placed upon you and the opportunities offered. Grounded with this knowledge, you can set a path toward your future satisfaction, with an appreciation of the trade-offs you’ll need to navigate along the way.

Gates and fences

In the early months, our house was an obstacle course of gates and fences. Those small inconveniencies gave us comfort not to have to constantly monitor Piper’s whereabouts. She was safe from potential dangers, while on the other side the many desirable playthings remained beyond the grasp of our inquisitive canine’s canines. (We shall not speak of the early lesson learned of the benefit of digital cash over dollar bills.)

Gates and fences are akin to setting boundaries between the practical need to save and the emotional pull to spend. Those boundaries follow from your financial goals, which in turn are designed so you can reach your personal goals. That means you must first decide what’s important to you, then determine how much it will cost and when, and finally what you need to save in the present to realize that future.

That’s a lot to manage if you try to do it all at once, but if you approach it systematically then it is indeed manageable. This is where a financial advisor can be particularly helpful. More on them below.

Back at our house, we eventually de-constructed the maze of barriers, but in some ways we’re reflexively operating as if they’re still there. Likewise, consciously focusing on your saving and spending practices today can give you the mental muscle memory for the effective habits that can sustain you over a lifetime.

Rewards and punishment

One of the first training techniques we learned was to look for ways to reward desired behaviours, as opposed to punishing faults. We still gently correct the transgressions, but by emphasizing positive reinforcement we expect that the good behaviour will become second nature. It’s still a work in progress years later, but things have noticeably improved.

As you begin to take greater charge of your finances, find as many ways to reward yourself for as many achievements you can identify. Start by thanking yourself for starting. Then build momentum by positively reinforcing the actions you take and the milestones you cross.

By the way, we learned that too much reward in the form of excess treats has its own kind of payback. (Carpet cleaner was involved.) For you and your finances, don’t let this deter you from enjoying some reasonable indulgences along the way. Just be sure to be fair, honest and objective, and you’ll make progress.

With a guiding hand

As much as it may seem like having a dog is all fun and games, we knew this would be a serious commitment. That’s why our very first step was to talk to a local veterinarian about nutrition, checkups, allergies (ours), booster shots and more. This gave us a better sense of what was ahead, including how to budget for it.

Like a veterinarian who works with animals day-in and day-out, a financial advisor can be an invaluable resource. An advisor can draw from the experience of working with families like yours, helping you understand your financial personality, and how to make best use of the financial strategies and products available to you.

It’s a family affair

Full disclosure here, it’s my wife who did the research to find a hypo-allergenic, cuddly and trainable breed, which we then discussed and agreed upon. She’s also the one who attended the weekly training sessions, which again we de-briefed and worked on together.

Similarly in household finance, one person may take the lead in money management, but ultimately it works best when it’s a team effort.

Five ways to weather your way through your debt

Meteorologically managing your money

Credit is a great tool that helps us get established in life, but eventually our accumulated debt needs to be paid off. Easy enough said in principle, but for many people it’s tough to reverse the tap from accumulation to decumulation.

Most people come into debt slowly and steadily over many years. Expecting that it can be overcome quickly and effortlessly may not be realistic. You need to do three things:

- Wean yourself away from taking on more debt
- Make sure you are paying all the interest on what’s outstanding, and
- Pay down the principal owed to your creditors

Where to start

With that in mind, here are some meteorologically-themed strategies to begin dealing with your debt. These are not mutually exclusive so decide what best fits your sensibilities, and keep in mind that planning is nice but you need to commit to action, even if it’s small steps.

Your first step is to figure out what you reasonably need to live on each month while you tackle the debt, which will then tell you how much is available to knock down the debt.

1. Steady soak
– Even payments

The easiest arithmetic may be to just pay the same dollar amount to each debt, being sure that you’re above each creditor’s required minimum where extra interest or penalties may apply. Monitor it monthly (and otherwise don’t fret), and as the smaller items drop off, adjust the amount and reallocate among what’s remaining.

2. Sun showers
– Smallest first

Actively tracking many accounts can be mentally wearisome, and even physically draining. Instead, you could concentrate on your smallest debts one at a time, while paying the minimums on the rest. As you peel away those nuisance amounts, you build confidence in your abilities, freeing time and mental space to move on to the larger balances. As well, early and frequent victories will bolster your resolve.

3. Downpour
– Biggest first

It depends on you, but one of the biggest stress inducers for many people is simply seeing a large dollar figure. Your heart sinks each time you open your statement because you see and feel what seems like an insurmountable obstacle. By wiping out large chunks of this large chunk, you’re able to see beyond it to get perspective on your entire financial picture, and make visible headway toward reaching your goals.

4. Thunder and lightning
– Most costly first

If you ask the mathematical technicians, this is where you should begin. It can easily be shown that eliminating your highest interest debt is the fastest way to stem the flow required to service all of your debt. Once you’ve beaten down that most costly leakage, you can build on that momentum to aim at progressively easier targets. If you are driven by logic, this is the strategy with the strongest appeal.

5. All-weather solution
– Your habits

Again, the key is to get started, but it could be a fruitless exercise in the long run if you don’t know how you got to this position. While you trim your debt, consciously consider your past and present spending patterns and living habits. This can free up more cash for the cause while in the midst of debt reduction, and lay the groundwork to be in a more comfortable position to enjoy and sustain sunnier days ahead.

Building your emergency fund

Getting yours going, and knowing when & how to use it

In the classic sci-fi novel Ender’s Game, gifted children play simulated battle games with aliens at the edge of the universe, until <<spoiler alert>> the title character realizes during an especially intense sequence that he’s in the midst of the real thing, and everything to that point has just been practice.

When you last contemplated your emergency fund, a global pandemic would have been well at the perimeter of possibilities. And yet, that’s what we all just experienced. How comfortable were you with how your finances fared in-the-moment, and how confident are you that you’re ready for a future crunch?

Positioning an emergency fund in relation to regular budgeting

If you had an emergency fund in place, you may still have found yourself asking: Is this the trigger, how much do I take, when and for what? And if you didn’t have one but were fortunate enough not to have been too displaced from your regular earning routine, you were probably jolted into thinking about finally getting one going.

Regular budgeting addresses recurring expenses, plus reserves for periodic capital outlays. Insurance is for the extreme where there are very rare but very costly events. An emergency fund lies between.

This fund allows you to sustain your household in a time of crisis – whether that’s an unexpected injury to you or a family member, job loss or a global pandemic – while expenses continue to pile up.

How and when to use an emergency fund depends on how you define “emergency.” Commit yourself to the above definition when you begin saving so that these carefully targeted savings are preserved for truly pressing needs, and not depleted on emotional wants.

Guidance for using your emergency fund

Like Ender’s alien battle, the pandemic pushed many of us out of practice mode and into active monitoring and logging of our spending. Whether or not that describes you, we can all learn from this painful episode, to help inform how we’ll use our emergency funds in future:

- The immediate non-negotiable needs are food and safety. You can cut down on these expenses by shopping brand-consciously, reducing cost-per-unit by buying in (sensible) volume, and being extra vigilant about portioning and waste.
- Shelter costs like rent/mortgage and utilities are next, as interest and penalties on short/skipped payments will quickly compound the emotional and money stress, further impairing your finances in the recovery time to follow. In the case of a widespread disaster (as it was with the pandemic), government support may be available, but if it is more localized or specific to your family alone, your financial resources will bear the primary or sole burden.
- Dispensing with all discretionaries may not be practical as you hunker down for the days and weeks of any extended emergency period, but try to be selective about the prudent pleasures you choose.
- Suspend luxuries and harbour no regrets. Keep your focus on the present, comforted that yesterday’s conscientious saving actions and today’s prudent spending choices will improve your prospects tomorrow.
- Log where your money is coming from and where it’s going, so you can manage within your changing means. That’s a good habit in good times, and critical in a crisis. As was the case in the pandemic, you may have a bit more time on your hands (unwanted though it may be) to focus on budgeting, which could be a catalyst to reinforce your good money habits over the long term.

Building a fund for future crises

An emergency fund’s purpose is to have money accessible for a specific number of months to carry you through the emergency. But how many? Start by planning for the most likely emergency: an employment gap.

1. Based on your industry, geography and individual skills, how long do you think it would take to get re-situated? As you don’t know what the economic conditions will be, choose a figure between the best-case and worst-case scenarios to obtain a reasonable goal for the number of months your emergency fund may be needed.
2. You may anticipate a payment from your employer on a termination. The amount will depend on the terms of your contract, including your income, seniority and the circumstances of your parting. While this should not be ignored, be cautious and conservative in your assumptions. If the situation is contentious, there may be a delay in reaching a resolution, as well as legal/professional fees you may have to spend before receiving the amount.
3. While losing income is painful, what matters most in an emergency is spending.
  - Tally up your outlays as shown on your banking and credit card statements over the last year, taking out anything truly extraordinary and deducting recurring items you may be able to defer for a few months.
  - Divide the total above by 12 for a monthly average, and multiply by the chosen number of months you decided upon in step 1 – This is your lower dollar limit.
  - Add back the deferred items to estimate how long until those deferrals will be exhausted, again dividing by 12 and multiplying by your target months from step 1 – This is your upper dollar limit.
  - Choose a number between the lower and upper limits for your target emergency fund. Decide whether and how much this may be reduced by an anticipated terminal payment from step 2, again being prudently cautious in your approach.
4. Next, decide how much you will make as a weekly deposit to the fund, ideally aligned with your pay cycle. Assign either a percentage or dollar amount you can commit to, even if it’s a small figure.
5. Now, the gut check:
  - Divide your chosen target from step 3 by your weekly deposit commitment in step 4. This will show how many weeks it will take for you to accumulate your target emergency fund.
  - If you feel a knot forming in your abdomen, go back and see where you may be able to make some adjustments. Balance that unease against the discomfort from the current budgetary sacrifice in order to arrive at a manageable medium.

Supporting role for a line of credit

As a kicker, an oft-suggested alternative to an emergency fund is a line of credit at the ready with your bank or credit union. But for some people, taking on debt at a time of financial stress may be an uncomfortable proposition.

Even so, establishing a line of credit can be an effective complement to an emergency fund, knowing that it will be there to fill the gap if an emergency hits before the fund reaches its accumulation target.

Registered or non-registered?

Your RRSP is not an appropriate choice as an emergency fund. With withholding tax as much as 30%, you will have to take a higher gross amount to net to what you need. And if the withholding is less than the actual tax due, you’ll be scrambling to come up with cash at tax filing time next year. Withdrawing from an RRSP for an emergency also puts retirement at risk. Keep these two needs separated.

On the other hand, the TFSA is well suited for emergency needs. With no tax to deplete withdrawals, budgeting is much more transparent. Withdrawals are also entitled to the usual TFSA re-contribution credit, which can be both the motivation and target for replenishment once the emergency passes.