Part 6: The After Picture – How the Average Canadian Household’s Finances look like after JBFI Financial Coaching
This is the sixth and last post that walks through a theoretical exercise of financial coaching the average Canadian household to see how we could improve their financial situation.
In the first post, we did a deep dive into the average Canadian household’s finances – looking at their income, expenses, and net worth.
In the second post, we did a deep dive into the average Canadian Household’s essential expenses.
In the third post, we did a deep dive into the average Canadian Household’s discretionary expenses.
In the forth post, we looked at aligning earnings with your values.
In the fifth post, we walked through how the average Canadian household could go about constructing a savings and/or debt paydown strategy.
Now we will wrap it all together and see the potential impact if the average Canadian household were able to save on essential and discretionary expenses, and earn more!
Let’s look at three hypothetical households that decided to make different levels of changes to their pursuit of financial independence:
- Household A – Household A is quite comfortable with their current jobs and current levels of essential and discretionary spending; they decide to only focus on earning a bit more. Let’s assume that they:
- increase their after-tax income by 5%
- Household B – Household B is willing to try to earn more and tweak a couple of major expenses. Let’s assume that they:
- increase their after-tax income by 10%
- cut their housing expense by 10%
- cut their transportation expense by 20%
- Household C – Household C is sold on the concept of financial independence and is willing to make some pretty major adjustments to reach financial independence sooner. Let’s assume that they:
- increase their net income by 15%
- cut their housing expense by 25% by renting out a room in their house
- cut their transportation bill in half by deciding to only have 1 car
- Household D – Household D wants to take financial independence to the extreme. They are motivated to save aggressively now to reduce the time it takes to reach financial independence as much as possible. Let’s assume they:
- increase their net income by 25%
- cut their housing expense by 25%
- cut their transportation bill by 75%
- decrease all other expenses by 25%.
How does each household’s decision impact their finances?
- Household A’s savings rate increases from 2.0% to 6.7%!
- Household B’s savings rate increases from 2.0% to 16.4%!
- Household C’s savings rate increases from 2.0% to 27.9%!
- Household D’s savings rate increases from 2.0% to 48.3%!
What do these increased savings rates mean for each household’s time to retirement?
- Recall from my article on savings rates (the most important factor when pursuing financial independence), if you only save 2% of your net income you will have to work 85 years to reach financial independence (ignoring government benefits such as Canada Pension Plan and Old Age Security)
- Obviously nobody is going to work 85 years but this is a good exercise to see how long it would take to build a portfolio that would allow you to be fully financially independent
- Household A’s time to retirement decreased from 85 years to 60 years
- They shaved 25 years off of their working years by earning 5% more!
- Household B’s time to retirement decreased from 85 years to 41 years
- They shaved 44 years off their working years by earning a bit more and optimizing a couple of key expense categories
- Household C’s time to retirement decreased from 85 years to 30 years
- They shaved a whopping 55 years off of the time it takes to be financially independent by earning more and making some short term sacrifices to reach financial independence sooner
- Household D’s time to retirement decreased from 85 years to 18 years
- They shaved 67 years off the time it takes to be financially independent by earning more and making some aggressive short term sacrifices.
A few key points to summarize:
- The speed at which you approach financial independence is completely up to you. If you love your job and are happy at your current level of expenses, then maybe no need to make dramatic changes
- Increasing your savings rate can dramatically decrease the number of years that you need to work to reach financial independence
- The sooner you get compound interest working for you (compounding your savings and investments), the sooner you will reach financial independence
- Avoid consumer debt where compound interest works against you (often at a higher interest rate than what you will earn on your investments)
- Even small changes to big expense categories like housing and transportation can make a massive difference. Big changes to big expense categories can shave off years of working / trading time for money (even decades!).
- If you don’t want to cut your spending, you can still significantly increase your savings rate and cut down the time it takes to reach financial independence by earning more! The best part about earning more is that there is unlimited upside (whereas on the expense side, you can only cut so much before you start to feel that you are depriving yourself).
If you liked what you read in my six-part series and are interested in taking my Financial Coaching program for a test ride, get more information on the program here and sign up for your free consultation. Remember, my program is 100% risk free – client value is one of my core values so I will not charge you unless it is clear that you received value over and above the cost of the program. The program will go through a personalized version of what was discussed in this six-part series, including:
- Access to a proprietary Google Sheets or Microsoft Excel template that you can use to track your finances like a business , in addition to support on filling it in
- A personalized walk through of ideas on how you can align your essential expenses, your discretionary expenses, and your earnings with your values
- Constructing a debt-paydown or savings strategy based on your financial circumstance
- In addition, the coaching program includes several related topics that were not covered here, such as:
- Education session on financial independence
- Utilizing tax advantaged accounts to decrease your tax expense
- Discussion on estate planning (wills, power of attorneys, personal directives, life insurance, etc.)
- Monthly accountability meetings to keep you on track and review your progress towards financial independence.