Can you live on $50K a year?

I was reading and article on MSNBC today talking about the fact that $50,000 is the median income in the US.

It got me thinking about whether $50K a year is sufficient income to life comfortably. I actually went back and checked my expenses this past year so see where I landed.

I also did a quick check using the tax calculator on TaxTips.ca to see what the take home income would be with a gross income of $50K. Here is what I found.

- With a single earner, 4 member family (couple + 2 kids), a $50K income would translate to a net, after-tax income of just over $40K.

- $40K net income translates to about $3300 per month.

- This should allow the family to lead a comfortable middle class lifestyle without giving considerations for RRSP, RESP, TFSA etc. Depending on the family's priorities, they may actually be able to invest in the plans to some extent.

So in my opinion $50K should be sufficient for a family.

And in case you are wondering, I did come in under the $40K threshold as well - not counting the RRSP, RESP, TFSA etc. But if $40K was all I had to work with, I am sure that I would have managed my expenses better (maybe there would not have been the 2 vacations or the 2 cars etc)

What about you? Is a $50K income sufficient for you?

Temptations all around

For someone trying to watch their spending, Christmas time is the worst time of the year. There are sales all around. All those pretty looking flyers with things that you would love to have. The temptation is just too much. So how does one survive this glut of temptation?

A few simple rules ...

1. Decide before hand how much you can afford to spend all season. And then ... most importantly ... stick to that budget. No matter what.

2. Identify the items you need. Maybe these are things for your loved ones. Or maybe they are for yourself. Either way, make a list of the things you need. And stick to needs.

3. Once you have your list identified, you need to figure out how much you will pay for each item. The total for all the items has to be within your budget identified in #1 above.

4. Now watch out for sales. If the items on your list go below you "expected" price, grab them. Most stores will price-match through till Christmas day in case the price drops further. So its a no-risk buy.

5. If the items are for yourself, consider waiting for Boxing day (and week).

6. Finally if you end up with some left-over dough after all items on your list have been accounted for ... Hold on to the rest. Its tempting to spend it all since you have been good all season. But a penny saved is 2 earned. Hang on to it for a rainy day.

Credit Cards are evil right?

The simple answer is NO!

Its not the cards that are evil. What's evil is Credit Card DEBT.

Most financial advisers and articles will tell you that if you are trying to live a financially clean life, you have to start using cash and do away with credit cards. That is true for people that are addicted to using cards to run up debt and spend beyond their means.

However for everyone else who can exercise a bit of self control or who already pays off their credit cards bills in full every month, Credit cards are quite useful.

Here is what I like about Credit Cards...

- They are so bloody convenient. I do not need to worry about carrying change. I do not need to worry if I have enough cash in my wallet if I see a great deal when I am out shopping. I do not need to worry about how to figure out how much I spend each month. Use a single card and other than stuff that you cannot use your card for ... everything is listed on you credit card statement.

- They save you money. A lot of cards offer you all kinds of perks. Rent a car and you can skip the Collision Damage Waiver fee. Buy your flight tickets on the card and you get free Travel Accident Insurance or in some cases even Free Trip cancellation / interruption insurance. Buy something on the right kind of card and you get up to an extra year of Warranty on the items. Some cards will also offer you a Loss or Damage insurance on your purchases. Others will give you Price Protection. All kinds of ways to save you money.

- They let you get something for nothing. All the cards that offer some kind of rewards allow you to get that reward (free travel, cash back, hotel stays etc) simply for buying the stuff that you would have bought anyway.

- They are safer than cash. If your cash gets stolen, you are out of luck. That money is gone and there is no getting it back. Lose your card instead and as long as you report it to the issuer in time, you lose nothing.

The key to using Credit cards is to ALWAYS ALWAYS pay off your monthly balance in full. No Exceptions. Another key is to ensure that it is a no-fee card or if there is a fee, that the reward you get is greater in value than the fee. And you should never chase after a reward by increasing your spending. The card only works if you use it to spend on stuff that you would have bought anyway. Not stuff that you are buying so that you can get a reward.

Also, always know what your balance is on the card at any given point of time. Don't wait to see your statement to figure out how much you spent last month. It'll be too late.

Be smart with your card and you will rarely trip up. Enjoy the benefits and let the companies pay for it :)

Live a life or Fix your finances

Can you fix your finances and still live your life at the same time?

I recently came across a fairly popular blog called Give Me Back My Five Bucks. There was an interesting post on there today when I dropped by. The post, titled, "Why I can't afford to start dating", provides the author's reasons on why she cannot start dating. The is currently trying to sort out her finances and kill about $20,000 in debt.

Why I understand her position and why she would feel this way, I have to disagree.

Fixing your finances or moving to the right financial path is not something that you have to do exclusively. Most importantly, you need to be able to live your life. If you cannot continue your life, the things that make life what it is, then your financial success either will feel empty or it will be very short-lived.

It is like a person who has to lose weight. You cannot simply stop eating and expect that it will work out well. You have to lose weight while still being comfortable with your modified diet and lifestyle. If you are doing this only short-term, you will eventually slip back into the same routine and go back to where you were.

Similarly, you have to be able to live your life while righting your financial ship. And by this I do not mean that you continue to spend like a lottery winner. You have to be disciplined for sure. But that simply means that you have to be realistic in your spending. It doesn't mean that you should stop dating or stop celebrating your kids' birthdays.

Yeah stop having romantic dinners in the fanciest, priciest restaurant with a $1200 bottle of vine. Stop trying to impress the other person with your money. There are a million ways to have a lovely time with someone else without nuking your budget. Take a walk down the beach or in a park. Make a couple of sandwiches and share them with your date on a park bench.

If you are trying to control your spending and fix your finances, you will have to make sacrifices. You will have to separate your wants from your needs. And you will need to prioritise. But try to be smart about it. Don't put your life on hold because money is not the end. The end is to be happy and comfortable. Money is just a small part that allows you to live your life comfortably.

If fixing you finances are preventing you from living your life - a reasonable and normal life - then you are doing something wrong and you need to course correct and get some help and advice.

The Secret

What is the secret to being financially "comfortable"?

Is it a big inheritance?

A Lottery win?

A high paying job?

Getting lucky in the stock market?

Finding a sugar daddy (or mommy)?

In my opinion, I'd pick none of the above. The real secret to comfortable finances is simple.

Spend less that you make!!!

I'll repeat it ... in case you missed that.

Spend less than you make!!!

It really is that simple. Its too bad that most people won't tell you that. They will tell you to invest your money. Buy mutual funds. Buy low. Sell High. And all those wonderful things. None of those are wrong. But the best solution is to spend less that you make. That way you will never be short of money.

Save what you don't spend. Invest that you save. Then you will have enough in retirement. Maybe even some to pass along to your children or grand-children.

Before Budgets

Budgets!

Who needs them? While most financial planners / advisors / bloggers will insist that everyone must have a budget, I prefer to take the road less travelled. It is not that I do not believe in budgets or that I do not think that they have any value. Rather, I feel that budgets aren't the very first thing one should think of when trying to think about finances.

Here's why - How many people out there, who have never thought of or cared about personal finances (or even those that have) can realistically and with some degree of accuracy estimate what they will spend in the coming months. Can you estimate what groceries will cost you each month? Or your bills? Or Gas and vehicle maintenance? Or Eating out? Or Entertainment? Or Travel?

The only people that will come anywhere close to estimating these items correctly are not the ones that have a budget. Instead they are the ones that have given some thought to tracking their spending. If you have never tracked your spending, it is highly unlikely that you will be able to create a useful and effective budget.

To see the future, you must know your past!

So if you are looking to improve your financial situation, the first step is to figure out where you have been spending your money over the past year. How do you do that? In this highly electronic world, most of us use bank accounts and credit cards. Both banks and credit card institutions are fairly generous when it comes to keeping records (and so should you - but we'll come to that a bit later). Also most income you are receiving is likely going to go into your bank account. So your first destination should be your bank account.

The "Checking" account - Check the statements you have received from your bank (or view them online) starting from a year ago. You should be able to list every single thing that took money from your account. Any bills you paid from your account including utilities and credit card bills should be on there. Any cheques you wrote should also be on there. The only thing you can't figure out would be the stuff you paid for in cash. But you can get a good guesstimate for that as well. To pay for stuff in cash, you had to have withdrawn cash from the account. So just total up the Cash withdrawals and you have that information as well. It won't be 100% accurate since you may still have some cash in your wallet (or purse) and of course there is going to be some loose change lying around the house or in your car or in some jeans pocket. But it won't be a large enough amount to mess up your activity here.

Once you have tallied your bank account debits, you should have the total amounts of money you spent each month over the past year. That is a prety good start. Most people can't even tell you how much they spent last year in total. So you're already doing better than them.

The next step would be to pay closer attention to your credit card statements.As you go through your credit card statements, classify your expenditures under a few basic categories ex Groceries, Eating out, Entertainment, Transportation, Clothing, Everything else. These categories will add on or blend in with the ones you got from your bank statements.

Here's an example of what your spreadsheet would look like



And you're done. Now you have listed all your expenses over the past year, neatly categorized and separated by the month of the expense.

Retirement

The word Retirement brings mixed emotions. First, it brings visions of relaxing on a nice clean, warm, sunny beach or trekking in beautiful mountains or something similar. Then the mind moves on the the more practical matters. And all of those end up around the issue of Money.

"Will we have enough?"

"How much do we need?"

"Where will be get it from?"

"When should we start preparing?"

"How long should I plan for?"

These are all good questions. Its important to have answers to these and more as early as possible. Although most people don't start to think of these questions till they're in the late 40s or 50s.

I would like to start off with this simple analysis.

With advances in Medicine we here in Canada (and most of the developed world) can look forward to longer and healthier lives. It wouldn't be surprising to have a lot of people of my generation reach their 90s and even hit the century mark. No one wants to run out of money in retirement. So for planning purposes we will assume that everyone will live to a 100. Now lets also agree that most of us also don't really start earning till we're 25. And even though we would all like to retire ASAP, lets assume that we're shooting for a reasonable retirement age of 65.

So we have 40 years of earning (65 - 25 = 40) that must somehow pay for 35 years of retirement (100 - 65 = 35). In effect, each year of earning needs to pay for 2 years - one is the earning year itself and one in retirement.

I hope you are not already in deep panic. Am I really saying that you effectively need to save 50% of your earned income each year? Not at all! Yes it does appear that way. But in reality, you only need a fraction of that in savings to pay for your retirement. And that's because time is your ally.

Lets say that whatever we save in the first year of earning will pay for the first year of retirement and the 2nd year's savings will pay for the 2nd year in retirement and so on and so forth. So each year's savings have an opportunity to be invested and grow for 40 years. That is a long, long time. What happens to invested money in this long period of time? Well if you invest in the likes of Nortel and Enron or with people called Madoff, it kinda disappears. But you're smart. So you will invest it wisely.

Every dollar that you save and invest in any given year, will grow 7 fold at a very conservative growth rate or 5% for each of those 40 years. If you save $1,000, you get a shade over $7,000. Save $10,000 and it becomes $70,000. And that's all at a mere 5%.

Realistically one should expect it to grow somewhere between 8% and 10%. At 8%, that same $10,000 comes out to over $210,000. Yes that's right. I didn't throw in any extra 0s there. At 8%, over 40 years you can expect your savings / investment to grow 21 times.

I hope you can now appreciate that preparing for retirement is not too difficult. As long as you start early. That's the key. I'll come back to all the questions we raised above. But for starters I simply want to point out that the thought of Retirement does not have to bring a headache. Time is your friend. So do enjoy life now but spare a thought for your future self as well. And the sooner you start to think of your future self, the less you will burden your current self.