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Early Spring 2011

How to be financially secure on a tight budget

A larger bank account does not increase the enjoyment of simple pleasures.

BY WARREN MACKENZIE

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Financial security is a state of mind and it requires more than having a large bank account. It comes from understanding and dealing with the ideas that cause us to feel insecure.

If you’re 65 with no pension other than the Canada Pension Plan (CPP) and little or no money saved in an RRSP, it may be too late to accumulate a large in-vestment portfolio, but it is not too late to be happy and financially secure. On a very tight budget, there are three things you can do:

1. Increase the cash coming in (Good)
2. Reduce living expenses (Better)
3. Understand what financial security really means (Best – and easiest).

Let’s start with #3 – the easiest way to increase financial security is to know how your ‘financial’ mind works.

If you’re retired with $3,000,000, but feel the need to keep up with your super-wealthy friends who spend $300,000 per year, you’ll be miserable and feel financially insecure. On the other hand, if your retirement income is only $2,400 per month, while you spend $2,300, you’re actively involved with family or friends, and you’re busy with part-time work or hobbies, you can be both happy and financially secure.

There’s no question that people with less money have a different lifestyle, but does a cold beer really taste better in a fancy resort than it does in your backyard with good friends? Does billionaire Warren Buffett get more pleasure from his morning coffee, paper and crossword puzzle than you do from yours?

You can only get so much pleasure from an activity – and a larger bank account does not increase the enjoyment of simple pleasures. Enjoying your morning coffee, a meal with family or friends, or seeing your favourite team win the tournament doesn’t get any better with a larger bank account.

If you have a low income, but you have family or friends, good health, and a part-time job to keep you busy, and you recognize the value of these things, you can be happier than wealthy people who feel they need more or worry about losing what they have.
Next, here are two practical things you can do.

1. Increase cash flow: The easiest way to increase cash flow is to work longer, or if that is not possible, then get a part-time job or turn a hobby into a small business.

There are multiple benefits to working in retirement. There is the increased cash flow, the potential increase in CPP, enriching your life by making new friends, having less time to think about your problems, keeping your mind active, and having less time to spend money on other activities.

Retirees have a lifetime of valuable experience and it’s a shame to let this go to waste. Many wealthy individuals work – not because they have to, but because they know it is good for their mental and physical health. Even Kevin O’Leary, the venture capitalist of Dragon’s Den fame, couldn’t sit on a beach – he went back to work. For him, it was never about the money, but rather the ‘game’ of business.

2. Spend less: There are many ways to spend less. If you Google words such as frugal, spending less, tight budget, etc., you’ll be surprised at the number of ways you can reduce expenses. And don’t forget about the great daily deals online on Groupon or WagJag.

The interesting thing about spending less is that people who do it start to get more enjoyment from saving money on a good deal than they previously did from spending money. Individuals who adopt a frugal lifestyle, and combine this with an exercise program, healthy eating and drinking, not only save money, but they also improve their health.

One of the easiest ways to save a lot of money is to reduce the hidden fees in an investment portfolio. If you have $100,000 in investments, you are probably invested in mutual funds and by taking the time to understand ETFs you can expect better results and save $2,000 per year in management fees. That $2,000 per year – compounded over 25 years – can add $100,000 to your estate.

Warren MacKenzie, CA, CFP, CIMA, is president of Weigh House Investor Services of Toronto. He can be reached at warren.mackenzie@weighhouse.com or 416-640-0550.