An amazing thing happened to me recently and it has had a huge impact on my life. I paid off my $60,000 student debt. This was no easy task. In order to get to a zero balance, I chose to sacrifice my social life on many occasions, whether it was staying in for the evening instead of going out or not being able to fly to the Caribbean for a good friend’s wedding.

After months of turmoil watching my social life putter to a halt and questioning whether minimizing my fun to maximize my ability to save was really worth it, I received a bank statement which showed my loan balance at $0 – which is now sitting in a frame on my wall- and my answer is yes; it was worth it. The question I’m now faced with is what next? For the first time in years, I have no significant financial commitments. For a brief moment, I am what is called “financially free,” but not for long. So how does one decide what to do next?

In my first article, I talked about thinking about the future. In this article, I’m going to take you through an exercise to quantify your lifestyle goals and how to measure them against your current income. As for me, I’ve started to think about the life I want, and how I’m going to get there financially. By thinking about the big picture and what that entails, I can start to work backwards and create the starting point for a financial plan on how I’m going to get what I want. The purpose of creating a financial plan is to provide you with guidelines that will help shape your decisions.

So how do you think about the future? The first step is to visualize the type of life you want. In my case, I know the following things are important to me:

• Travel abroad once per year (it’s important for me to see the world)
• Live on my own
• Have a car
• Be able to go out for dinner once per week (I’m a foodie and need to try new foods)
• Be able to go out with friends socially once per week (it’s important to stay in touch with friends)
• Start saving to for a down payment on a house (I can’t afford to buy a house today, but I want to work towards buying a house)
• Be physically active (including tennis and golf)
• The ability to buy new technology twice per year (I’m also a techie and want to be able to buy new toys)
• Wardrobe replenishment twice per year (I usually only go shopping twice a year, but each time it’s a big one)

Now that I’ve put my lifestyle goals down on paper, I can quantify what this lifestyle will cost with ballpark dollar values beside each item. If you don’t know how much something will cost, do a preliminary search on the internet or ask friends and family to help flush out the costs.

In my case, for me to achieve my lifestyle goals, I’m going to need to find $48,200 after tax each year, not including other costs like cell phones, food, investing for the future and miscellaneous costs. If my current salary is not at that level, I’m going to have to either find additional money to cover the shortfall or consider cutting back on some of the expenses above. After you calculate what your lifestyle goals will cost, compare them to your current after tax income see if there is a shortfall between how much you make and how much you want to spend.

The final step in this exercise is to put a plan in place to meet your lifestyle goals by figuring out how much you need to save each pay period. The following will show you how to calculate this. In my case, I get paid every two weeks, so I need to take each expense above and divide it by 26 (which represents the number of pay periods each year) to determine how much of each pay check I need to save for that expense.

Now that I’ve demonstrated how to calculate how much to save each month to obtain your lifestyle goals, you need to start putting your money aside. For monthly expenses such as living on your own and having a car, you can setup an automatic withdrawal to make payments from your checking account each month. This will make sure that you’re paying your monthly bills on time. The rest of your expenses happen on a less regular basis, so you can put those into a savings account – in fact, some banks will let you set up a savings account for each item you want to save for. In my case, I would setup a savings account for clothes, owning a house, travel, and technology.

By thinking about your lifestyle goals and putting down all the costs on paper, you’ll have a clear picture of how much money you need to set aside to live that life.

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In my last article, I talked to you about why it’s important to start thinking about money and the future at a young age – the earlier you start, the better off you’ll be.  This month, I want to talk to you about budgeting.

About two years ago a friend of mine finished school in the US and decided to come back to Canada.  He wasn’t sure how long he was going to stay in Canada as he was thinking about moving to another country.  Because of this uncertainty, he didn’t know what kind of budget he needed to set, or what type of financial goals he needed to create, so he tried to save as much money as possible.  However, he did realize that he would probably stay put for at least a year and wanted to get a car to make his life easier.  When it comes to cars, there are a lot of options, but he decided to lease a new car for a three year term thinking it would be easy to get out of if he wanted to leave the country – he was willing to pay a premium to have flexibility.  The car’s monthly lease payment was $400.

Two years later, my friend realized that he was going to stay in Canada for the foreseeable future, but quickly figured out that the car he had originally leased didn’t make sense to keep – the lease payments were so high that he wasn’t able to save enough money each month to put into his savings and the buyback of the car at the end of the lease was too high – he decided he wanted to downsize to a used car with a monthly cost of about $150, saving him $250 each month, or $3,000 each year.  My friend is in the process of getting out of his lease so he can get a cheaper car, but he’s spent $9,600 for the luxury of uncertainty – basically because he was not sure what he wanted to do, he decided to lease a new car and paid a premium to do so.

Now the question is not what can he do, he has that figured out, the question is what could he have done differently two years ago?  First, let’s assume that buying a new car was out of the question (because of how fast new cars lose their value, you really have to own a car for at least six years to make it worthwhile), and it probably doesn’t make sense to lease a used car – typically this costs almost the same as leasing a new car.  So the options are to either lease a new car or buy a used car.  If he had bought a used car, he could have found one that he would have been happy with for between $10,000 and $15,000, and assuming he was able to negotiate financing, he could have monthly payments of $150.  The table below quickly summarizes the options.

As a worst case scenario, if he bought a used car for $15,000 and sold it two years later for a 50% discount (which is a huge discount), his total outlay would be $7,500; in all likelyhood, after two years of use, he could probably sell his car for between a 30 to 40% discount.  At the end of the day, a used car would come out to at least $2,100 less than leasing a car.  Unfortunately for my friend, he never evaluated his options; he just decided that leasing a car was the best option.  If he had worked out the numbers, he would have quickly seen the better route for him (keep in mind, his primary goal was to save as much money as possible) was to buy a used car.  Instead, he’s paid $9,600 to lease a car, will probably have to pay a small fee (between $500 to $3,000) to get out of his lease, and at the end of the day, will have to pay another $15,000 for the car he is going to get.

Now I’m not trying to scare you off leasing a car, a lot of people lease cars because that works for their financial situation (and there is nothing wrong with leasing a car if that’s the right option for you), but what I am trying to do is get you to realize that you have to evaluate all of your options before making any financial decision.  Regardless of how short a period you are considering, or how little money is involved, if you aren’t evaluating all of your options, which includes looking at the numbers, you’ll have a hard time making the right decision. 

As I discuss in my book, by the time I was 22 years old, I had owned seven different cars – I constantly made decisions without looking at the numbers – I made decisions based on wants instead of needs.  This resulted in me losing a ton of money on these cars because I made emotional decisions instead of factual; if I wanted a new car, I went and bought it, because at the time I had the means.  I never thought about the future, so I made bad decisions which impacted me for several years.  Instead of spending all that money on cars, I could have saved it and built myself a small nest egg to put towards a down payment on a house.  At a young age, you have the opportunity to make some really good decisions to set yourself up for financial success in the future, take advantage of this opportunity and the next time you’re thinking of buying a car, make sure you evaluate all of your options, whether it is leasing or buying a new or used car, make sure you do your research, evaluate all of your options, separate your needs from your wants (you might need a car, but you probably want that sexy new sports car), and make the decision that will help you meet your financial goals.

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Your First Money Talk
Five years ago, my financial life was a disaster. I spent every dollar I made and had no idea why I needed to save my money. Whether it was on cars, clothing, or just going out and having a good time, I spent my money recklessly and never gave it a second thought. I believed I was living the dream – little did I know I was setting myself up for failure. You see, my problem wasn’t that I didn’t understand the basics of financial management. My problem was that I didn’t understand why I had to care. Unfortunately, this problem isn’t unique to me. Many young people don’t understand why they need to care about financial management when they are young. In junior high and high school, students are taught math, science, art, foreign language, and yes, even physical education, but the fact of the matter is that with a jam packed curriculum, it‘s possible to graduate from grade 12 without ever studying one of the most practical and useful subjects in life – personal financial management. If someone had sat me down and explained to me why I needed to care about managing my finances at the age of 16, I probably wouldn’t be 29 years old and living in my mom’s basement.

This could have been avoided if I made some better money decisions when I was younger – of course you need the right information to make the right decisions. My first job was as a swim instructor at the age of 16. I made close to $800 per month, which is a substantial amount of money for a 16 year old (over the course of my swim teaching career, I made close to $20,000). Unfortunately, instead of saving this money or investing it, I spent it. I bought comic books, clothes, and ate out all the time – I was the typical teenager having fun and living life. No one ever told me I was doing something wrong; in fact, barely anyone talked to me about money at all. As in most households, money management wasn’t a subject at my family’s dinner table, my friends didn’t talk about it, and there was no mention of the words “financial management” in high school. To be fair, I did have a conversation or two about how to save money, but no one ever talked to me about why I needed to save money – teaching someone how to do a task is great, but if that person doesn’t understand why they need to do that task, all the know-how in the world won’t help. Fast forward ten years, I accumulated a large amount of student debt in university and continued to spend my money. The result is that I still live at home in my mom’s basement.

As a teenager I didn’t know a lot about my future, but I did know that like almost every other teenager in the world I wasn’t going to live at home forever (as a side note to any parents reading this, I’m sorry to say this, but all the free food and laundry in the world can’t compete with the satisfaction of being independent). There are costs associated with being independent, and you need to understand what these costs are so you can plan for them, and the best way to understand is to have a conversation about them. Now you may not fully understand the costs of independence from just one conversation, in fact it might take up to 10 conversations, but every conversation you have gets you one step closer to understanding.

To get you started, let me paint a picture for you about the costs of moving out. Have you ever sat down and thought about how much living on your own will cost? Well, assuming you make an average starting salary, you can expect over 2/3 of your income would be going to pay for the necessities of life such as food, rent and utilities. To put this in even more perspective, the previously mentioned costs don’t even cover the cost of buying things you want, such as a new iPod, new clothing, or a trip to Asia! Did I also mention that this doesn’t even cover the costs of furnishing your place, that is unless you want to sleep on the floor (note: these costs don’t even take into account a down payment on a house or condo, which usually start at $15,000). The table below outlines expenses that the average graduate can expect to pay.

* Data based on research conducted on the cost of living in Toronto as of January 1, 2008.

** Average starting salary after taxes per month in Toronto is $2,892

*** All estimates are based on research conducted for Following the Goods: Financial Management for the Young and Ambitious (www.followingthegoods.com)

Now the point of me telling you this isn’t to scare you off, rather it’s to emphasize the importance of why you need to take an interest in personal financial management at an early age; one day you are going to move out, and you’ll need money to pay for the things you want. If you don’t start managing your money when you are young, it will be hard to afford the things you want. In my case, I went away to university and when I graduated I had to move back home because I didn’t save any money when I was younger, so I couldn’t afford to live on my own. If I would have saved even half of the money I had made teaching swim, I would have had $10,000 in the bank, and it would have given me a great starting point to afford the costs of moving out. More importantly, having extra money to fall back on means being able to afford the fun things in life, such as travelling the world and shopping for things you want, as opposed to only being able to afford the things you need (rent/food). I’m not asking you to sacrifice your childhood and start working at the age 13; I’m a firm believer that you need to enjoy life. Instead I wanted to have a conversation with you about the costs associated with independence just in case no one sat you down and put the costs of life into perspective. You just took your first step in becoming informed on financial management, and there is a whole world out there for you to explore. Ask your family and friends to suggest some books for you to read on financial management, or sit down and talk to them about the costs of life and how to save money for the things you want.

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