Saving almost 50% of his Gross Income is no longer a dream
YES THAT’S BEFORE TAXES
In my February 2015 net worth update post I mentioned I was saving approximately 50% of my gross income – my goal for 2015 is 45%.
The reason I set this goal is my expenses in life right now are likely the lowest they will ever be for the rest of my life (not married, no kids, modest house), so it’s important to focus on savings while the going is good.
I suspect that my salary will increase at a modest rate for the next few decades; however, my expenses will increase at a higher rate.
The key thing about my savings rate is a lot of it is a result of preemptive planning. Below I’ll tackle each piece of my expenses and discuss tips and ideas on how you can trim these down in your own budget.
Government deductions
The government seems to always have his hand in our pocket. This expense is without question my largest, which requires some careful planning to ensure I’m not needlessly paying too much. The main focus of any budget conscious taxpayer should be to legally minimize taxes in a cost-effective manner.
As a chartered accountant I’ve seen all sorts of tax planning schemes and complicated structures in an effort to expose loopholes in the tax system. I’ve learned through observation this is a sure recipe for eventual disaster for two reasons:
- The CRA likely has more resources than you and will eventually get privy to your scheme and will then charge you interest and penalties
- You’ll likely end up paying your accountant/lawyer more in fees than you would have otherwise paid if you had just played the game straight
The tax man always gets his due; however, the best way to legally lower your tax bill is to smooth out your income to keep your taxable net income at a lower tax bracket.
For the 1% of the population with a ridiculously high income this may be impossible and you’re going to be hit hard no matter what they do – which I’m fine with. That’s the tax system at work.
For the majority of financially constraint households the RRSP, TFSA, RESP and other tax planning programs are your primary tools to ensure your money stays in your pocket.
I use the RSP first to lower my taxable income each year, and then I max out my tax-exempt accounts. The reason being is the tax refund received via the RSP each year allows for you to reinvest the money to enjoy the benefit of time via compounding interest.
Housing
Housing is an interesting budgetary topic because there are so many variables that come into play. Perhaps the biggest factor that affects the cost of housing is consumer preference.
Decisions on housing can and often do threaten the household budget. Part of the reason for this is the relative ease in which mortgages/loans can be obtained for housing.
Consider a 5 year fixed mortgage rate was as high as 20% in the early 1980s, whereas now it runs closer to 5%. This has allowed modest income households to purchase ridiculously expensive homes above their means.
While the government has made efforts to curve the mortgage markets in recent years many families still end up house-poor as they often bite off more than they can chew.
(Source: http://www.ratehub.ca/1-year-fixed-mortgage-rate-history)
Credit organizations often recommend spending no more than 36% of your gross income towards your housing related costs. (i.e. if you earn $1,000/month your monthly housing/rental costs should run you no more than $360/month) Related costs include mortgage payments or rent, property taxes, utilities, maintenance and repairs.
What I do with my gross income
My current housing costs represent just 8% of my gross salary. To accomplish this I have done the following:
- I saved and put down over 20% on my house, which in turn has lowered my monthly mortgage payments. While I had to stick it out with my parents for a few extra years while I saved, I also ate a lot better.
- I bought a relatively new house to minimize repairs and maintenance. I did do the roof and some windows over the last few years, but other than that the house has been low- maintenance.
- I have a roommate/significant other and we share the housing costs.
- I live outside a major city where house prices aren’t ridiculously priced. I also have a fairly small place in a modest neighbourhood.
A book written in 1996, The Millionaire Next Door, by William Danko and Thomas Stanley, investigates the habits of wealthy Americans. In it they discover that the average millionaire has lived in the same home for 20+ years and that the home is often the biggest obstacle to accumulating wealth.
To quote Thomas Stanley:
Nothing has a greater impact on your wealth and your consumption than your choices of house and neighborhood.
If you live in a high-price home in an exclusive community, you will spend more than you should and your ability to save and build wealth will be compromised…. [People who live in million-dollar homes are not millionaires. They may be high-income producers but, by trying to emulate glittering rich millionaires, they are living a treadmill existence.
Grocery and dining
I could take living in a cardboard box, so long as I could still eat well. I come from a home where food is sacred as it often accompanies family and friend get-togethers. However, eating well doesn’t have to translate to eating expensive.
A few years back I started experiencing anxiety and a few other health problems. After going to the doctor and running a few tests I couldn’t determine any prognosis for the sudden issues. I went to a naturopath clinic where I was put on a restrictive diet.
The diet was basically salad, beans and dandelions (I’m serious). Thankfully, I basically had a buffet of dandelions in the backyard so my food budget was slashed to very little during the diet.
I found I began to feel better and eventually reintroduced a lot of foods back into my diet but limited the processed crap and alcohol to special occasions.
The point of all this is a change in how you eat will affect your food budget just as much as coupon clipping or any other type of discount shopping.
I still shop at cheaper grocery stores for the most part, but I don’t waste too much time traveling around looking for the best deal in town as most of the staple items I purchase are relatively cheap anyways.
Food and dining out currently takes up 6% of my gross income and I feel this is the area I spend most lavishly on in my budget. Here’s some of my spending habits in this area:
- I buy only what I can carry at Costco. While I love the bulk discounts you get on 30 rolls of toilet paper, things can quickly get out of hand! I know exactly what I need before I go to Costco and I never get a cart. I pick up big-ticket items when they’re on sale, break them up into normal serving sizes and freeze if necessary.
- I’m a huge late night snack monster. Terrible for the metabolism, I know, but I can’t help it. However, my lack of constraint and self-discipline doesn’t equate to a lot of spending as I make my own popcorn or hummus with crackers. Total cost per evening willpower breakdown = approximately $0.40.
- I eat very modestly throughout the week and indulge on the weekend (cheat day!). This has become a great routine for me as I grow older and require a more balance lifestyle to stay healthy. My breakfast on the weekdays consists of simple on the run type food (smoothies, healthy granola bars, rice cakes with almond butter) and I usually eat leftovers from dinner for lunch the next day. This really helps me control portion sizes and doesn’t leave me the option of eating out for lunch.
- I eat out about 4-5 times per month, which I think is quite a bit and it’s usually at the same place where I know the value for my money is there: There’s nothing worse than paying fifty bucks for a terrible steak at a new fancy restaurant.
- I make a grocery list and stick to it. It seems simple enough, but I only see about 20% of people at the grocery store with a list in hand (and I don’t think the other 80% have photographic memory). Making a list keeps you focused and will help you curve those Ben’n’Jerry-type lapses.
Auto
Man, do I hate cars.
There are not too many purchases of this size that decrease in value so quickly. Yes, vehicles are a necessity for most of us whether it be getting to work or transporting the kids, but we tend to overdo it with luxury vehicles beyond our means.
What’s worse is over 60% of the time people are taking out loans to purchase their vehicles. If this seems normal to you, consider taking out a loan with interest to purchase a stock that you know is going tank in the next few years…but hey, your friends might think it’s cool!
My current auto expenses take up 3% of my gross income which is split about 30/70 between insurance and gas:
- I paid in full for my vehicle within a year. I did take a loan on the initial purchase, but quickly realized my error and aggressively paid it off.
- I purchased a car that was used but still had warranty coverage so I wouldn’t be hit up for any major repairs.
- I wash the car myself (…in cut-off jean shorts)
- I bundled my home insurance and car insurance with the same company. I’ve also managed to keep a clean driving record (see old geezer styled driving below), which has consistently decreased my premiums year over year.
- I drive slower than most old people, which reduces wear and tear and saves a bit in gas.
Increasing the bottom line
I’ve talked about managing expenses so far to save 50% of your gross income, but haven’t really touched on income growth. If you’re able to increase your earnings while maintaining your spending you’ll increase your total savings rate. It seems simple enough, but often it becomes difficult to execute.
I wrote a post on salary negotiation in which I mentioned three tips to earn your next raise at work. This is perhaps the easiest way to increase your income because it requires some preparation and a brave discussion with lasting benefits.
Turning a passion into a side business can also be an effective way to increase your earnings, but there is some risk and time associated with this type of venture.
Fun/Other
Who doesn’t like fun?!
I consider fun all items outside the realm of necessity. That includes travel, clothes (yes, you need clothes, but buying $100 designer jeans is a luxury more than necessity), gifts, entertainment and the list goes on.
This category of the budget has a tendency to sneak up quickly on us so it’s essential to understand what you value in your life. Understanding your priorities in life will help you determine where your money is best spent to get the most benefit.
As I mentioned above, I’m a food junkie, so I’m okay with spending more here.
The important thing to remember is money, cars, house, and stuff in general only provides momentary happiness.
Those new designer jeans give us a shot of cheerfulness when we put them on, but then within a short while we’re right back we were started on the happy meter. The amazing thing is (queue sappy music) is most of life’s pleasures don’t require money at all.
Most of my fun budget revolves around sports these days; playing in sports leagues, gym memberships and tickets to sports/music/movie events.
The remainder of my fun is usually free via going for runs, volunteering or vegging out at my modest house. A simple life allows me to save a good portion of my gross income which leaves me with less stress and worry.
Post Contribution: Jon Woychyshyn, CPA, CA, is a Canadian professional accountant and personal finance and lifestyle blogger with experience in public and public accounting. Feel free to contact Jon via his blog at www.thewealthbrickroad.com
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Cover Photo Credit: Freedigitalphotos.net/nongpimmy
