Financial difficulty mostly due to lack of planning
Have you ever wondered why some people manage to store away money, no matter how little they earn, while others of us never have any money no matter how much we make?
Researchers tell us that our debts are more to do with our behaviour patterns and our self esteem than with how much money we earn. I call it “retail therapy.” We spend money to make ourselves feel better. If it was our own money, this may or may not be a problem. But for many consumers the money being spent on “retail therapy” is borrowed, money that has a huge emotional price tag if we are not able to pay it back.
Insolvencies for Canada, in 2001, broke the record set in 1997 by a small margin. There were 104,111 insolvencies in 2001, slightly more than the 103,883 in 1997. The breakdown is as follows:
I am a registered insolvency counsellor and credit counsellor. 90% of my clients are in financial difficulty or are headed in that direction and wish to stop the downward spiral. My clients tell me the most difficult part of the whole process is to walk through the door of my office and admit to me, a stranger,that they are having money problems. In describing how they feel about themselves, my clients often use the word “failure,” but I explain to them, “How can you fail at something you have not learned how to do?”
Money management is a learned skill that is largely not taught in school. So, if you don’t learn it at home you may never learn it. Stop and think: Who is teaching your kids money management? Do you know how to set up a budget? Have you ever tried living on a budget?
The word “budget” does not mean deprivation. It means to plan. Download our personal budget sheet to begin designing your own money plan.
“Financial planning” is the popular name for an age-old process usually known as “budgeting.” A budget is a plan for how you intend to spend your future money. It is not a record of what was spent last year. Very often the word “budget” is mistakenly used to imply thrift, scrimping or reduced quality.
The time span for a budget is entirely personal, however, usually we plan our program over a period of one year. Experience has taught us that during this time, many kinds of living expenses and income will have occurred at least once.
Five principles of the financial planning process
- Goals must be identified before they can be achieved. For most of us, it is common to have more goals than money, therefore, priorities must be attached to goals to reflect their importance in our lives.
- An evaluation and understanding of your present financial resources is vital to future planning. Assemble all records of income and expenses for the past year, as well as a list of your assets and debts.
- Successful planning requires balanced cash flow. Refer back to your past spending records to help you estimate the cost of your basic living expenses. Draw up a plan for a specific time period — perhaps one year — that includes a statement of your anticipated income and the way in which you plan to spend it. This plan is called a budget.
- Strategies for the implementation and control of the plan are essential. Budget plans are intended to direct your money and to allow you to manage financial changes as they occur.
- Effective financial management requires an ongoing evaluation of plans and strategies, in order to keep the plan relevant and effective.
All people have personal goals; a financial goal is usually related to the personal goals that we have. Knowing where we want to go, when we want to get there and how much it will cost are the fundamental building blocks of financial planning and goal setting.
Establishing financial goals is a very personal matter. Counsellors can help you to identify your financial goals and priorities. Once your goals and priorities are clear, a counsellor can assist you in learning the money management process necessary to be successful.
A family plan
Compromise is a common challenge for people who share economic resources, but do not always share the same financial goals. One partner may want to save as much money as possible to purchase a large ticket item, while the other has a strong need to pursue a hobby or other recreation. Without an endless supply of money, this couple will have difficulty in reaching both of their goals. It is likely they will experience problems in their relationship until they are able to settle their differences.
Once you are clear about your goals and priorities, the next step is to assess the resources that you have or expect to receive. There are two components to this resource assessment:(i) an inventory of assets, called a net worth statement; and (ii) an income statement. Once you have assessed the data you have compiled, estimate your income for the next year. If you are at all unsure if you will receive a certain income (i.e. a bonus) do not include it.
When your income is irregular or seasonal, it may be more difficult to forecast a budget, but it is not impossible. A critical part of the planning process is evaluating your progress. Many wonderful budgets have been created and then filed away because their creators thought the task was complete, when in fact, it was just beginning.