Early Financial Education Paves the Way to a Rich Future

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"I'll pay this book the ultimate compliment: I'm buying copies for my two university-aged children. Excellent advice throughout!" – David Chilton, author of The Wealthy Barber Returns

Excerpt from The Smart, Savvy Young Consumer,
by Pat Foran

Chapter 8: Are You a Spender or a Saver?

I met a young woman on maternity leave who said she had a good job with her pay topped up to 100% while she was home with her baby. She was pushing her daughter in a $500 stroller (one of three she said she owned). She said she went to the movies every week, dined out with her husband twice a week and had a maid come in every weekend to clean her house. She asked me if there was any way I knew she could make some extra money. Why I asked? “Because we are struggling. There is never enough money to go around.” Of course this young woman didn’t have an earning problem. She had a spending problem, but she just couldn’t see it.

Many people are born to be great athletes, painters, or singers. Some of us are also natural savers and many of us also seem like we were born to spend! Some of us even practice what’s known as “Retail Therapy” —shopping to make ourselves feel better. I remember when we first gave an allowance to our two youngest daughters, one took her first ten dollars and put it in her bank account. The other took her ten dollars and bought a massive Toblerone chocolate bar! (I won’t name which one to avoid any embarrassment—okay it was Vanessa.) The good thing is that if you can figure out what kind of person you are, you can work to overcome bad habits and make yourself a better saver.

Saving too much money is not a rampant problem these days, but there are people in extreme cases who may actually need to spend some money to enjoy life and have fun. When I was growing up I know of two brothers who saved every nickel they ever made, but they had no social life, went nowhere and did nothing. That’s not much of an existence as a fulfilled life is all about finding the right balance. Currently it is overspending that is a huge problem with a large section of our population, and in our consumer driven society there are always tempting products, slick advertising campaigns and aggressive pitchman ready to try and part us from our hard earned money.

While Canadians have traditionally been better savers than Americans, that has recently changed and now Canadians have a debt-to-income ratio that is actually higher than Americans. In early 2011, the ratio of household debt-to-disposable income level reached its highest level ever at 148. 1% according to Statistics Canada. (This means we are spending more than we earn, saving less and paying more for debt relative to our incomes.) This worries the Bank of Canada because if interest rates go up suddenly, and at some point they will, many Canadians won’t be able to handle higher mortgage and loan payments. Bank of Canada Governor Mark Carney said, “We’ve seen a bit of deceleration in the rate of growth of consumer debt, but it’s still growing fast than income.” While it helps our economy when people spend money on goods and services, no one wants Canadians spending so far beyond their means that they are going to end up broke.

If you are a natural save you are a very lucky person already. You may enjoy putting money away for a rainy day. You don’t need the latest gadgets, fashion fads or trinkets. You like watching your bank account grow. You understand a used car may be as good as a new one. You don’t feel the need to eat out in restaurants all the time. You think renting a movie and watching it at home can be just as much fun as going to the cinema. You know that by spending less than you make, you will get ahead day by day.

If you are natural spender you will have to change your ways or you could be headed for a lifetime of debt and never be able to get ahead. That may sound like a dire warning, but it’s true. As you get older there is nothing wrong with wanting to reward yourself with a vacation, a new flat screen TV, a new car and a meal at a nice restaurant. But natural spenders sometimes want all of these things at once with no regard for the future and how much things cost. Spenders will then often use credit cards, lines of credit and bank loans to finance their spending lifestyle. This means they are then paying back interest on their debt as well. (Interest is the rate which is charged or paid for the use of money and, as you’ll see later on, some credit cards have interest rates of 29.9%) If you are paying interest on your debt and you don’t change your spending ways, it will be very difficult to get ahead.

Often people think it may be the poor who get themselves into debt, but studies show that consumers from all walks of like can get into financial difficulty whether they are a chef, a mechanic, or a doctor. There are people with six-figure incomes who need to seek credit counselling because they are spending more than they make. Whether you have a natural tendency to spend or save, you can change yourself for the better. My daughter Vanessa who wanted the giant chocolate bar learned her lesson when the chocolate was gone and her sister Sarah still had ten dollars in the bank. Now Vanessa has become a very good saver. She asked if she could go on a humanitarian trip to Africa to help build a school, then added, “It’s only $4,500.” “Only?” I said. I decided I wold pay for half the trip if she could somehow come up with the other half. So she immediately started handing out resumes and at 16 years old she is now the newest employee at our local pita shop. She is now putting every paycheque in the bank, saving up the other half of her trip to Tanzania. It is a great lesson for her and I hope it will help savings become a lifelong habit. I know she will enjoy the trip that much more because she had to work to help pay for it.