Worry Free: WalletFriendly How to achieve financial peace of mind
One key to a sound mind: eliminate money worries
The sound body is the product of the sound mind. —George Bernard Shaw
THE GUIDELINES for a sound body are common knowledge: a balanced diet, proper weight maintenance, exercise, restful sleep and regular medical checkups. The recipes for a sound mind are more complex and intensely personal. Mental health is influenced by a range of factors including family situations, work pressures, sexual relationships and living standards. I don’t pretend to be a psychiatrist, but it’s clear to me after almost 40 years of writing about finances that one of the major causes of mental stress is money – or the lack of it.
I believe I can offer some help in achieving the sound mind that George Bernard Shaw believed is so important to a sound body.
Here are three tips I have learned over the years about how to reduce or eliminate anxiety over money.
SAVE A portion of your income should be devoted to saving. You’ll need to decide how much, based on your family situation, but 10 per cent of after-tax dollars is a good target to shoot for. Set up an automatic withdrawal plan at your financial institution so that the money is contributed regularly. After a short time, you won’t even miss it.
Savings represent wealth, which, in turn, translates into financial security and peace of mind. Invest the money in tax-sheltered plans – we are fortunate to have two excellent choices, Registered Retirement Savings Plans (RRSPs) and TaxFree Savings Accounts (TFSAs). If you expect to need the money in the short term, use a TFSA. For longterm retirement savings, the RRSP is the best choice in most cases.
PAY OFF DEBT I have met many people, including some members of my own family, who are so uptight about their debt load that they have trouble sleeping at night. They wake up at 2 a.m. and spend the next few hours tossing and turning as they try to figure out how to meet the monthly bills. Sound like anyone you know?
Of course, the logical solution is not to get into debt in the first place. But that’s easier said than done in today’s consumer-driven society. Remember, the baby boom generation, which is now approaching or at retirement, were the masters of debt creation. Under their watch, credit cards became a financial force, home equity lines of credit were created and car loans became commonplace. You didn’t need a lot of money to live well, only a credit card that required a minimum monthly payment.
So, it’s not surprising that so many baby boomers ran up huge amounts of household debt, especially when mortgages were added on top of all the rest. Statistics Canada reported that in the fourth quarter of 2017, the average Canadian debt to household disposable income was 170.4 per cent. That means that for every dollar of disposable income earned, we owed more than $1.70. The Bank of Canada calls it a significant risk to the Canadian economy. Anyone who is in this situation probably calls it a nightmare.
The solution is discipline and, I admit, that can be tough. It means tighter budgeting, sacrificing some of your small pleasures, perhaps taking a second job to generate more income.
Focus on paying off the higher-interest debt first – the interest rate on credit cards is especially onerous, usually in the 20 per cent per annum range. If you’re carrying card debt, switch to one with a lower rate – you can find a list at rate hub.ca.
Once the high-interest debt has been paid off, switch your attention to low-interest loans like mortgages and student loans. Your goal is to be debt-free by the time you retire although, sadly, fewer people than ever are achieving that. According to a survey released by Sun Life Financial earlier this year, 25 per cent of retirees are dealing with a non-mortgage debt burden. Shockingly, two-thirds of those are still paying off credit cards. Don’t go down that road if you can possibly avoid it.
KEEP SOME CASH In March, the bull market in stocks reached its ninth anniversary. That means it’s now been more than nine years since we have seen a 20 per cent correction in share prices. A lot of people have profited along the way, to the extent that some seem to believe this is the way of the world: stock markets always go up.
They don’t. Think back to the panic in the fall of 2008, when it appeared the world’s entire financial structure was on the verge of collapse. Or remember the tech wreck of early 2000 when the internet bubble burst and markets plummeted. The NASDAQ Composite, which was heavily weighted to technology, lost 78 per cent of its value before the carnage was over. It took almost 13 years for the index to regain its 2000 high.
There is another crash coming. I can’t predict when, but history says it is inevitable. So, for your own peace of mind, keep some of your money in cash – enough to get you through at least a year of tough times, two if you have the resources. Stock market drops and recessions are never pleasant, but you’ll rest a lot easier and worry less if you have cash available to carry you through.
If you achieve these three goals, you should eliminate finances as one of the impediments to the sound mind your body needs. I’ll have to leave it to others to deal with your other concerns.