High Income but No Savings? Start With Your Cash Flow
Clement Chung
A good income and a growing investment account are two different things. If you are earning well but saving very little, I would look at the movement of money before looking for a more sophisticated investment. Let’s take a step back. How much arrives after tax? What is already committed? And how much of the balance in your bank account is genuinely available to spend? Separate the money by its purpose Start with four amounts: essential bills, debt payments, savings and discretionary spending. If you are self-employed or receive income without enough tax withheld, put the tax provision in the picture too. This does not require five new bank accounts. It requires a reliable way to tell committed money from available money. In a hypothetical household taking home $8,000 a month, $5,000 of bills and debt payments leaves $3,000 before savings and optional spending. A $1,000 savings goal would leave $2,000 for everything else. If actual optional spending is $3,000, the plan has a $1,000 gap. An investment recommendation will not close it. Check the expenses that hide between months Travel, professional dues, gifts and repairs do not arrive evenly. Add up a realistic year and convert those costs into a monthly provision. Otherwise, every successful savings month gets undone by an allegedly unusual expense. Then decide where you want the trade-off. You might save less for a period, reduce a particular expense or redirect the next raise. Make it a choice you can see. How do I know the new plan is working? Look for fewer reversals of savings transfers and less borrowing for predictable bills. Review the numbers after two or three months, using statements rather than memory. The useful question is not “Why am I bad with money?” It is “Where is the plan asking the same dollar to do two jobs?” Related reading: How to Coordinate Your Pension, TFSA, RRSP and Corporate Investments.
A good income and a growing investment account are two different things. If you are earning well but saving very little, I would look at the movement of money before looking for a more sophisticated investment. Let’s take a step back. How much arrives after tax? What is already committed? And how much of the balance in your bank account is genuinely available to spend? Separate the money by its purpose Start with four amounts: essential bills, debt payments, savings and discretionary spending. If you are self-employed or receive income without enough tax withheld, put the tax provision in the picture too. This does not require five new bank accounts. It requires a reliable way to tell committed money from available money. In a hypothetical household taking home $8,000 a month, $5,000 of bills and debt payments leaves $3,000 before savings and optional spending. A $1,000 savings goal would leave $2,000 for everything else. If actual optional spending is $3,000, the plan has a $1,000 gap. An investment recommendation will not close it. Check the expenses that hide between months Travel, professional dues, gifts and repairs do not arrive evenly. Add up a realistic year and convert those costs into a monthly provision. Otherwise, every successful savings month gets undone by an allegedly unusual expense. Then decide where you want the trade-off. You might save less for a period, reduce a particular expense or redirect the next raise. Make it a choice you can see. How do I know the new plan is working? Look for fewer reversals of savings transfers and less borrowing for predictable bills. Review the numbers after two or three months, using statements rather than memory. The useful question is not “Why am I bad with money?” It is “Where is the plan asking the same dollar to do two jobs?” Related reading: How to Coordinate Your Pension, TFSA, RRSP and Corporate Investments.