Do you remember that scene in the second Karate Kid movie (surprisingly, almost as entertaining as the first movie) when Mr. Miyagi first takes Daniel into his family’s dojo in Okinawa? He shows him the two scrolls on the wall that represent the basic rules of karate and he reads, “Rule #1: Karate for defense only. Rule #2: First learn rule #1.” That’s true in so many areas of our lives. Like that saying the main thing is to keep the main thing, the main thing. In many careers, industries and disciplines there are basic laws to which we must adhere.
I tried to think of what would be considered the number one principal in financial planning and building wealth and, in the spirit of the great Mr. Miyagi, here it is:
Rule #1: Spend less than you make
Rule #2: First learn rule #1 (and learn it fast)
I know. It’s deep, right?! It is the most important thing that you can do. It’s what Grandma Weekes always said to her kids, “If your outflow exceeds your income then your upkeep will be your downfall.” Spending less than you make is where it all begins. Only by spending less than you make do you have the ability to make choices. It’s where all options to build wealth are born. Do I create an emergency reserve, pay down debt, invest for my children’s educations, build my retirement pension or even start a business? Until I have money left over I can’t even begin to make plans for the future.
Unfortunately, it’s the task at which we Canadians (just like our neighbors to the South) are failing. I first heard that our savings rate, as a nation, had fallen from near 20% of our income in 1982 to 10% by 1994 to just 1.1% in 20181. Since then, our debt levels have continued to rise, by person, household, province and the country as a whole.
Spending less than you make has such an important impact on your financial future. Not only does that gap represent the cash flow that we get to use to dedicate to achieving your goals, but it also represents a part of your income that we don’t have to replace. If you only live on 80%-90% of your income then we should only have to replace 80%-90% of your income in retirement. Once you further subtract from that the mortgage payment, the costs for working and the money that goes toward raising the kids, the amount that you are actually living on becomes much less. We’ll still have to add in retirement lifestyle but that comes later.
Now, I know, no one likes living below their means. I once heard the author, Robert Kiyosaki, in an interview talking about how he hates the idea of living below his means. But if you have read his book, Rich Dad Poor Dad, you will remember that he and his wife Kim, began on their path to building wealth by each getting jobs but only living on one of their incomes.
So how do we start spending less than we make? It all begins with that dreaded word loathed by many. It starts with a “b” and it rhymes with the word “udgeting” (not my most clever code). But that is a topic for another article… coming soon…
I wish you and your family great success.
1 Data produce by Statistics Canada and republished on Tradingeconomics.com under “Canada Household Savings Rate” in 2019
This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Michael Larocque is solely responsible for its content. For more information on this topic or any other financial matter, please contact an IG Wealth Management Consultant.