Title: Financial planning advice for the Average Joe

Sub-title: Financial advisors tend to focus on helping well-heeled clients. But the average Joe has a lot to gain from effective money management too.


Convenience store workers, managers and proprietors will all tell you that this surprisingly demanding industry has numerous advantages. The work can be learnt quickly, and it provides a decent livelihood for students, recent immigrants, seniors and others who want to get into the job market fast.


That said, let’s face it: the convenience store business is not always the world’s most lucrative. Competition is tough. Margins are tight and as a result, many in the industry feel the pinch financially. But some convenience store workers face an additional challenge: they aren’t always sure how to manage the little money they have.


This shouldn’t come as a big surprise. Many investment advisors won’t even talk to potential clients unless they bring least $50,000 to invest. And financial advice books mostly target the upper middle classes who already have considerable assets or earning power. In short, advice for the average Joe (or Joanne) is practically non-existent. To help fill the gap, we have compiled a list of basic financial management strategies.


1. Make your financial education a priority

The less money you have, the more important it is to manage it properly. Affluent families do make financial mistakes – but the consequences are rarely severe. Not so for lower income earners. If a low income earner doesn’t manage his money properly, when his car breaks down, it sits in the driveway until payday. That said, increasing your financial IQ is hard. Tax management, savings and investment strategies are often technical and challenging to learn. That means reading one article isn’t enough. It requires an ongoing commitment. But it’s worth it. 


2. Get (or stay) married! …or get a room mate.

This may seem counter-intuitive - I mean what does your private life have to do with your finances? Well, if you believe the experts: everything. Recent Statistics Canada research shows that the largest number of people able to move into the upper income classes is dual-income married couples. On the other side of the coin, child poverty surveys show that a vastly disproportionate number of disadvantaged children come from single parent homes.

The bottom line is that couples manage their money better than singles. Think about the cost of monthly rental or car payment commitment. Now divide that by two. You get the idea. Does this mean that you should marry or couple up for financial reasons alone? Of course not. But it’s worth remembering that two people often perform better than one. 


3. Get on the same page regarding finances.

OK let’s say you get married or have coupled up (as most Canadians do). You’ll accomplish even more if you can find common ground on financial matters. Surveys show that arguments over money account for between half and two-thirds of all marital disputes. In short, even if you don’t have as much money as the Jones next door, if you can manage what little you have properly, you can sidestep most of the grief in your married life. And if that grief threatens a breakup, simply resolving financial arguments will bring a huge gain.


4. Stay out of debt.

Let’s face it: we live in a debt society. According to the Canadian bankers association, there are more than 75 million VISAs and Mastercards issued in Canada. That’s three for every adult. That doesn’t include department store and other company cards, mortgages, home equity and car loans. Not surprisingly, Canadians everywhere are deluged with advertising by financial products promoters telling us that debt is OK.


But debt is not OK. True, in some cases, borrowing has its advantages. If want to finance an education it may make sense. Borrowing to buy a house can be OK too, because its value could rise over time. But borrowing to buy a sofa or a television set is a big no-no. Car loans are a scam too. The interest rates that dealers charge or build into the selling prices are outrageous. And while the fact that they are tax deductible makes car loan interest payments a good deal for business people, convenience store employees have no such luck.


5. Pay off credit card and other loan balances in full each month. And shun payday loans.

Credit cards can be an exceptionally valuable financial tool. And these days it is almost impossible to do without them. However to get a good deal from credit cards they need to be managed right. That means not using them as form of long term borrowing and paying off the balance in full each month.

Credit card issuers prey off low income earners and the financially illiterate. Over the years card issuers have built a plethora of fees and charges into the holder agreements.  On top of that they charge interest rates that are often in the high double digits, at a time when the Bank of Canada makes funds available to them for less than 1.0%. Payday loan companies operate much the same way.


6. Spend less than you earn

If I told my daughter this, she would say “duh…” But spending less than you earn, is not as obvious or easy as you think. The average Canadian spends four or five hours a day watching television and during that time he sees actors with the latest and most fashionable clothes, cars and accessories all paid for by marketers doing product placement deals. During commercial breaks, viewers are deluged with ads implying that reckless spending is normal and good.

It isn’t. Successful money managers have long ago learnt that the thrill you get from buying something wears off quickly. However if instead of buying something, you put that money in a jar on your table: you get something much better: the “power,” to spend. True having the power to spend doesn’t provide the same sugar high as does blowing your paycheck. But it is far more satisfying …and it lasts a lot longer.


7. Prepare annual and multi-year budgets.

Let’s say you manage your money well. Every week you spend just a little bit less than you earn and you even manage to put a few bucks aside. Then the first of the month arrives: rent time. Where are you going to get the cash to pay the landlord?


Well by now, most people have figured out that they also need to put aside a little money each week to cover the monthly bills. But there are a slew of other expenses that come up sporadically such as vacation bills, Christmas present costs, insurance levies, taxes and so on. You need to prepare for these too. Preparing an annual budget will help.


8. Start saving and investing early

One of the best tips that investment advisors give clients is to start saving early so that they can take advantage of the benefits of compound interest. When you invest money, you don’t just earn interest and dividends on the principal amount. In later years you also collect interest on the interest that you earned on the initial investments. Those sums add up over time.

One favorite example investment advisors use is the Amy and Amanda anecdote. Amy starts putting $1,000 a year into an RRSP at the age of 20 for 15 years. At age 34 she has invested $15,000. If she earns 6% interest a year, by the time she turns 65, her savings will be worth $141,700.

Amanda on the other hand starts saving much later, but she invests more for longer. At age 30 she puts in $1,000 a year, but for 35 years (so Amanda invests $35,000 versus Amy’s $15,000). With an annual return of 6%, Amanda’s account will be worth $118,000 when she turns 65. In short, Amy invested half as much as Amanda, but earned more. Why? Because she started saving earlier.


9. Buy “capital” not “disposable” items

So you have saved up a couple of thousand dollars and have decided to splurge on either a vacation to Cancun or a laptop. Which is better? Experts define purchases that last several years such as a car, a fridge or a banjo as “capital” items, and anything you buy that lasts less than a year as “expenses.” Any family will balance their spending between capital and expense purchases. But those who manage their money well, will spend it more often on stuff that lasts longer.


10. Learn about and pay your taxes

There is a common misperception among lower income earners that tax planning is not for them. They are wrong. If you don’t file your returns on time, or even worse you “forget” to pay your taxes, the fines and penalties you will be charged are huge. Even worse, the tax structure is filled with loopholes and deductions such as Registered Retirement Savings Accounts and Tax Free Savings Accounts that the well-off never fail to take advantage of. You should too.

Peter Diekmeyer (peter@peterdiekmeyer.com) is CStore Life’s Quebec correspondent.



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