One day you’re a carefree college student and, suddenly you’re not. You wake up one morning to find that you are a homeowner, a spouse, a parent, and poor. Not really poor, but you feel like you can’t seem to pay the bills, pay off the mortgage and still have a bit of a life and save for retirement.
There’s a good reason for that. You are raising a family and that usually means a lot of large extra expenses that stick around for 20 or 30 years, longer if you feed them well.
Actuaries have looked at spending patterns of Canadians for decades and they find that Canadian families will spend roughly 30% of their income to pay the mortgage and raise the kids. This 30% number is pretty consistent regardless of whether your family earns $90,000, $150,000 or $200,000 a year; the more money you make, the more expensive home you buy and the more you spend on the children.
This 30% will typically last for about 30 years and then, Poof, it disappears, hopefully sometime in your early to mid fifties. If you still have debts in your late fifties, don’t panic; just make sure to keep saving your 6-10% per year for retirement and be sure to have all your debts paid off before you retire at age 65. Follow this strategy and your retirement will be comfortable and secure.
Ladies and gentlemen, this is the way it’s supposed to be. You will feel cash crunched when the kids are still living at home and you are paying off the mortgage. You will not have enough money to indulge in fancy holidays or fancy sports cars. Those things will have to wait until you are older.
Your friends who don’t seem to have these same cash constraints are just going deeper and deeper into debt. One day, they are going to have to deal with this; either they will have to keep working past 65, or dramatically scale back their lifestyle in retirement. Or, if they’re lucky, a big inheritance is waiting for them.
One thing I can tell you for near certain, many people who are living the high life are really quite worried about making ends meet. According to surveys I’ve read, 50% of working Americans are stressed out about money to the point that it is having a negative impact on their lives (sleep problems, increased alcohol consumption, arguments with spouse, etc).
All this stress despite the fact that the average Canadian adult is 4 times richer today than a Canadian adult was in 1940. We have never had it so good and that is part of the problem. We are much wealthier but we also have a lot more to spend money on. Add banks and credit card companies that are only too willing to lend and we have a recipe for problems.
I wish I had an easy answer for this, but it’s hard to resist the temptation and peer pressure that surrounds us. None of us are immune to it. The only advice I can offer is to stick to our plan of saving 6-10% of your income for retirement, working until age 65, and paying off all your debts before you retire. What you spend your money on is not important, if you stick to the plan.
I’m a department head for a high school in Toronto. I graduated from the Ivey School of Business at Western University and have been a DIY investor for over 20 years.