A Course In Frugal Financial Management
Personal financial management is a challenge for many couples and there are really not many places to go for help.
Financial advisors want to show you how to invest. Banks want to consolidate your debts and lend you even more money.
Related: Can You Trust Advice From Your Bank?
Fortunately, there are hundreds of books dedicated to teaching you how to manage your earnings, how to spend and how to save.
Learn the secrets, codes and myths for women, 20-somethings, singles, couples and families.
Can you learn personal financial management from a book? Here’s the story of one couple who did just that.
Meet Randy and Sarah
Randy and Sarah are in their forties and have four school age children. While they may agree on many subjects, money is one issue they always seem to argue over.
Randy is the frugal one in the family. He drives from one discount store to the next to see if he can save a couple of dollars on shoes for the kids, buys giant jars of peanut butter and cases of canned soup, and pounds on the bathroom door to insist that the shower stop immediately.
Sarah, on the other hand, clings to the basic philosophy that if she has to work to help support the family, she deserves a few perks – hazelnut coffees with cream, designer clothes and restaurant dinners.
Related: Why Some Decisions Don’t Make Financial Sense
Both partners came into the marriage with their own value systems. After many years of bickering over their vastly different money styles, they finally agreed to follow the financial management course in a book that was given to them by Sarah’s parents.
Setting the groundwork
The book had a number of work sheets for listing such items as after-tax income, credit card debts, contributions to retirement plans and fixed and variable expenses.
Sarah was dismayed to find she had to ask Randy about their insurance and investment plans. She not only didn’t know how much they had saved, she didn’t know where their wills and life insurance policies were kept.
Planning finances together encourages good communication between spouses when they agree on dreams and goals, and discuss their fears.
Related: How To Overcome Financial Inertia
Preparing a monthly spending plan (budget) is a challenge for couples with different spending styles.
The fixed expenses are easy enough – mortgage payment, taxes, utilities, insurance, and the like. Discretionary expenses are more difficult to deal with. Many couples squabble about amounts at this point.
One strategy is to prepare draft budgets separately, and then compare. Keep discussing and making adjustments until you come to an agreement you can both live with.
Going on a cash diet
Many authors advise setting aside cash for monthly spending in envelopes, one each for food, clothing, gas and car repairs, and entertainment. The cash is then used for that purpose only.
People with spending problems need to pay with cash to have it register emotionally. They can spend 12 to 15 percent more when using a credit card for day-to-day purchases.
Sarah and Randy calculated what they’d likely need for their monthly spending and practically cleaned out their chequing account to get the cash for their envelopes. They’ve paid cash for everything since.
Related: How To Bank When You Live Paycheque To Paycheque
Sarah said she is now more mindful of where the money goes and admits she does spend less. She documents her spending in much the same way as a dieter keeps a food diary and pinpointed many items she could trim:
- Multiple varieties of toiletries for each family member
- Packaged food for meals she could easily prepare herself
- Toys and trinkets purchased for the kids while she is grocery shopping
- Hair products bought at the salon
She calculated the cost of her coffees and began drinking the free coffee at her office instead. The family is allowed to buy lunch only one day a week and the other days she packs sandwiches.
Randy didn’t really need to change his spending habits.
They saved over $100 in the first week.
Saving for a rainy day
Poor planning results in having little extra cash. If anything were to happen that cost more than a few hundred dollars, Randy and Sarah would have to dip into their RRSPs and pay tax, and possibly penalties for the withdrawal.
Related: The Beginners Guide On How NOT To Start Investing
Save at least $1,000 quickly to begin with, and then sock away more money for an emergency fund.
Sarah scoffed at the possible reasons they might need to dip into an emergency fund – loss of a job, family illness or major car repairs.
She thought none of these were likely, but then her 2005 van began making suspicious noises and the mechanic told her she’d have to replace the brakes and pads, to the tune of nearly $600.
She started to see the sound reasoning behind having a rainy-day fund.
General advice is to save the equivalent of at least three to six months’ salary (or three to six months’ expenses) for unforeseen problems. This money was put in a high interest savings account rather than invested.
Shrinking debt
Paying off debt was high on the list of priorities. Seventy-eight percent of North Americans don’t pay off their credit cards every month and many who do are still buying items they wouldn’t have bought if they were paying cash.
The book advised to list their debts in descending order, with the smallest sum first.
Sarah jotted down the total owed, minimum monthly payment and how many installments remained on their loans. She started with paying off the smallest debt first to feel that she was making progress.
The next important step was to cut up all excess credit cards.
Finding nest-egg money
One month into their frugality makeover, they had saved over $500. Sarah originally wanted to put this money into an RESP for their kids’ education. On further reading she realized this was not a good idea for now while they still had debts.
Once all debt (except the mortgage) was paid the money should be used first to maximize RRSP and TFSA savings, then start saving for university.
Related: How Much Of Your Income Should You Save?
They went to a financial advisor to see where they could make changes in their investments to diversify their holdings.
Randy wondered if it would make sense to take out a second mortgage on their house and invest that money. However, their main goal was to become 100 percent debt free so this idea was squashed.
Becoming compatible money partners
Randy and Sarah took many of the book’s suggestions to heart and discounted others – such as putting off contributions to Sarah’s group RRSP at work – so it’s taking a bit longer to pay their debts and build up an emergency fund.
Even though they didn’t do everything outlined in the book, they feel more in control of their finances than they did previously.
Related: 6 Steps To Creating A Sound Financial Plan
Making up a monthly budget means talking to each other on a regular basis, which can be difficult with four kids, two jobs and countless responsibilities.
They at least now discuss and agree on mutual goals and, even if they don’t always see eye to eye on how to make them come true, they work through their differences.
I can completely relate to the story, although I’m the frugal one and my husband is the spendthrift.
We paid off our highest interest credit cards first because we thought that made more sense then the debt snowball method you described (smallest balance first).
One regret I had was not taking advantage of my employer matching RRSP because I was too focused on paying off debt. Ok, my other regret was getting into debt in the first place!
@Vicky: The debt pay down method you chose is also popular. It depends on your debts and what you think will work for you.
When your employer matches your savings plan contributions you’re getting an immediate return of up to 100 % and, in my opinion, this is one of the best deals around.
Good on you for taking care of your debts though. Did you follow a plan in a book, or work it out on your own?
Okay, I’ll bite. Which book did they read?
@John: The book in this case was Dave Ramsey’s “Financial Peace: Restoring Financial Hope to You and Your Family.”
I wanted to focus on the couple rather than a particular book because:
1. Most personal finance books are much the same in content. You just need to find a writing style you like.
2. Dave Ramsey is a US author and, while it’s fine for overall reference (and for US readers), Canadians should stick to Canadian authors because of the differences in products and tax laws. A couple of popular Canadian authors are David Bach and Gail Vaz-Oxlade.
I think becoming compatible money partners is one of the most important things.
If you both are working the same plan, then you are that much more likely to suceed!
Great article – it covers all of the basics of building a solid financial foundation for a bright financial future. I think it’s crucial for couples to be on the same page about their finances, because it’s one of the most important aspects of our lives.
78% do not pay off their credit cards on time? This is bewildering.
Ed(Never carries a balance owing)(a slip up once or twice but that’s it)
Having two people polar opposite can definitely be problematic. I am cheap but don’t like getting tied down in the nitty gritty details…my wife loves playing “defense” and watching where every dollar went (luckily I don’t go to the casino or gentlemens clubs).
The key takeaway I have from this is it doesn’t matter if people are playing different positions as long as they are playing to the same playbook, it works.