For the first of what should prove to be many useful blog entries, a proper introduction is in order but I will reserve that for the end of this submission.
The topic today is achieving the goal of saving for a living space, be it rental of an apartment or house, or purchasing your own home. I will provide a recommended format for those who experience wide variations in pay paycheque to paycheque, followed by the format to follow once consistent cash flow is taking place.
The first and most important step to complete with any goal is unrelated to finance: run it through the SMART test. To do this, take your goal and answer the following:
S (Specific) – What life improvement am I focussed on making?
M (Measurable) – How will I track the progress toward my goal?
A (Actions) – What one time or repetitive actions/behaviours will I need to complete?
R (Realistic) – Given my life situation (income, etc.), is what I’m trying to accomplish realistic?
T (Time frame) – What is the deadline I will set for myself and work toward?
Now let’s look at the strategy. The first section below addresses the complication of inconsistent paycheques. Immediately following is a program to utilize once cash flow is smoothed out, be it because you did so yourself or your paycheques are fairly consistent.
The most effective saving programs are achieved through consistent and disciplined saving, so you will have to create dependable cash flow artificially.
(1) Using credit card statements, online banking and cash receipts it is necessary to determine your monthly expenses.
(2) A second bank account should be created and designated to receive all of your sources of income (your ‘income’ account.)
(3) The total of your expenses, along with a little ‘fun’ money, should be transferred into your main account at the beginning of each month. The main account pays the bills, covers your entertainment and is the account with which you live. Any months that your income is higher than the necessary transfer, the ‘income’ account will remain larger. On those months where income is lower, the buffer built in the ‘income’ account will allow the amount for monthly expenses to flow to your main account. Over time, the ‘income’ account will ideally grow. Sound financial planning suggests that you have 3-6 months of emergency savings handy in the event of life throwing us a curveball. It is your choice at what point you believe you have enough built up in the ‘income’ account.
(4) When you feel the time is right, you begin to follow the ‘Consistent Pay’ section because for the remainder of the program, you have successfully created your own smooth cash flow.
*Note: building the emergency fund in your ‘income’ account will take some time, but it is necessary. You will be creating a stable financial situation for yourself, building towards your goal and enjoying the day-to-day while you’re at it. You may need to go back to your SMART layout and modify ‘T’ to include this buffer phase.
The most fail-safe approach to saving for a down-payment or to lay in savings for rent is to let the machines do it; set up a scheduled automatic transfer of money from your main banking account to an account earmarked for your goal.
With your trusty calculator, you can determine using your ‘T’, time frame, exactly how much should be saved in each installment. Divide the total amount required for your goal by the number of weeks or months until your ‘T’ is up. Stare at this number long and hard. Talk it over with any fellow decision makers or people you care about. If this number is ‘R’, realistic, for you to be setting aside on the schedule you’ve made, then you’re golden. If this number is completely outside what you feel you can be setting aside, or could begin causing you stress (mental or financial), then you’ll need to revisit SMART and modify the goal. It could be lengthening the time frame, living with a housemate, etc.
Why a whole separate account?
There are several reasons why having a distinct account for a saving goal helps. Firstly, for some people accessible money means spent money, so the use of an account type which is difficult to access or has few accessibility features (ie: bank card) might be wise. Secondly, ‘M’ is very easily accomplished if there’s no math involved to measure the amounts being saved. Simply look at the account value. Thirdly, once the money has been transferred and (each) goal has been looked after, you know that what remains in your main account can be spent without concern that you are hampering your future plans.* Lastly, this is only one goal of many and not each goal has the same time frame, meaning different saving vehicles might be better suited to different goals.
Next month’s article will explore a number of possible saving vehicles and comment on the perks and drawbacks for each.
*This is assuming that you’ve set a variety of appropriate goals to remain financially balanced and have a similar routine to see to their completion (ie: debt repayment, retirement saving, saving for school, etc.)
**This Blog Post was prepared solely by Sean Cassidy who is a registered representative of HollisWealth Advisory Services Inc. (a member of the Mutual Fund Dealers Association of Canada and the MFDA Investor Protection Corporation). The views and opinions, including any recommendations, expressed in this blog post are those of Sean Cassidy alone and they are not those of HollisWealth Advisory Services Inc. ® Registered trademark of The Bank of Nova Scotia, used under licence.
HollisWealth is a trade name of HollisWealth Insurance Agency Ltd. Insurance products provided through HollisWealth Insurance Agency Ltd.
Sean’s role as an advisor connects him with individuals and families to identify financial goals and implement effective strategies in reaching those goals. Sean’s services are on an advisory basis, meaning that clients are offered a variety of solutions and may decide to follow one, some or none of the advice provided. His services are free of charge to access, so if you have a desire to ask questions or access his expertise please contact 613-634-3191 Ext 4 or email email@example.com**