You Are Poor From a Lack of Planning

I come to a realization lately. I’m extremely weird in my ability to perceive time. I really didn’t think about it until one day I was talking to my wife and she pointed it out. I can easily talk about anything that happens at any point in time with little to no mental gear shifting. I can talk in terms of what I’m doing in the next hour, day, week, month, year, decade or what society will do in a million years or did do 10,000 years ago with little effort. I can easily talk about what I’m doing this weekend or in retirement 20 years from now which is a bit of an asset when planning things.

Yet if you take the idea of planning and expand that out I think that is the main difference between people in good financial shape and poor financial shape. The people with good planning are prepared for everything. We aren’t surprised about how much money we spend at Christmas every year, we plan and save for it in advance. We aren’t surprised by a major disaster since we have insurance for it and have a fund to pay the insurance deductible out of. Retirement may not be planned in detail, but you are aware of it and have a bit of saving plan in place.

This planning is what prevents debts from occurring. If you plan for things you will be forced to live more in your means. For example, I estimate I’m putting 8% of my monthly take home pay towards near future events (Christmas, insurance, winter heating) and another 19% towards far future events. I don’t regret this money going towards future events because in my mind it is already been spent. Just in the future rather than now. By doing this you are actually paying less money, since your cash can earn interest in a high interest savings account rather than you paying interest on a credit card or line of credit.

This lack of planning is what keeps people poor. If you haven’t saved for Christmas you feel guilty about it. Then your spending goes over your budget (if you even had one) and you feel even more guilty when your credit card bill comes in and you have to pay it off over the next two months. Then after you pay off your bill you are so thankful for it being gone you go treat yourself and forget completely about your promise to save something for next Christmas. Planning is what breaks the cycle and sets you free.

So how do you plan for an entire year in advance? List every non monthly bill for the entire year on a sheet. You then add it up and divide by 12. That is the amount of money you need to save in a month to meet your short term future goals. Now create automatic transfers out of your chequing account the day after each payday for the correct amount. This will get you started. Be warned you will have forgotten something and will have to increase the transfer amount as you go along for the first year. Then it will typically take you a few more years to have the money saved in advance of your expenses. After all you are currently still in your old cycle and it will at least two more years for it to completely shift over to prepaying everything.

But you might think “That’s three years to turn things around!”. Yes, it is. This is what planning is about. If you don’t want to do it, stay poor and be at the mercy of others for your entire life. Planning is hard work especially in the beginning, but it also means your taking control of your own money so it can work for you rather than you working for it. In the end this is what leads people to financial independence.

This post is now part of the 116th edition of the carnival of personal finance.

10 thoughts on “You Are Poor From a Lack of Planning”

  1. Great post! I agree that the problem is that people tend to be too optimistic about their finances ie they have an extra $1000 in their account so they think they can spend it on anything they want, meanwhile their annual insurance bill & big car tune up are happening the following month and they really don’t have any extra cash.

    I try to project future expenses to make sure that I have enough money in my chequing account and also so that I don’t put too much into my mortgage. Having a buffer of money helps too – whether it’s in your regular chequing account or in a separate account, as long as you have some extra cash to handle the “extras” then you should be ok.

    And be realistic – if your budget shows that you should have an extra $200 each month and you end up $200 short every month then your budget needs updating to reflect reality.


  2. This makes a lot of sense for people who aren’t living within their means. I find I don’t really have to plan ahead for things like this, just because I’m living SO FAR below my means that the “unexpected” spending is never a big deal (which is certainly nice).

    Perhaps that could be what people could spend the following 3 years doing (after they’ve completed your program), increasing their earning and decreasing their spending until they get back to the point where they don’t have to plan again ;-).

  3. I’m with Mr. Cheap on this one. We don’t plan for car repairs but when we got our last $1000 repair bill, we put it on the visa and still managed to pay it off in full. I suppose we stole the money from some other form of savings but at least we didn’t have to pay interest on it. But the truth is, most people should plan in advance wehn disposable income is tight. We may not always have this luxury ourselves so it never hurts to plan ahead.

  4. Excellent post CD!

    My “Lazy Man’s Way To Save” post of March 11, 2007 talks about how I used auto transfers to achieve savings for both known annual recurring large expenses such as auto insurance and for general savings toward retirement.

    I attribute a lot of my success in retiring at age 55 to this kind of planning. At one point in time I had several things on the go, including a rental property with its own account, and I used a hand-drawn sketch to keep track of how the money flowed from account to account via auto transfers.

    This type of thing also eliminates stress from one’s life because you always know the money is there for the bills.

  5. Planning is important and what you are suggesting is probably the easiest way to go about it. Know your total income, know your total expenses. Plan to save the difference.

    However, it is only start. The way to become wealthy, the real hard part, is the analysis. What do you spend your money on and what are your values? It’s okay if you spend $5/day on lattes if that’s what you value. However, if you want to save up for a Porsche, or perhaps retirement, then maybe the lattes should be cut out.

  6. I definitely agree with CM. Having your present and future expenses automatically deducted from your main checking account automates the budgeting process. I have a variety of high yield savings accounts that take out my rent, emergency fund, and spending money each month. I tap them for their intended purpose when the time comes.

  7. Mike,

    Ah yes the ‘extra’ amount. In every detailed budget I have ever made. I always include a float amount for those little things that don’t work out every month or two as well.

    Mr. Cheap,

    That is another way to look at it. Yet that is a bit harder to explain to someone who doesn’t live even in their means.


    I think everyone still gets the occasional completely unexpected expenses. I was focusing on the more predictable ones.


    I also use the box sketch method to determine transfers. Once you confirm you will never run out of money in the account I tend to ignore it.


    Ah, yes. That is an entirely new post. Thanks for the idea.


    Thanks for the feedback.


  8. What would the world look like if we all spent at least 30 minutes each week in meaningful life planning activity? It would be a greater place to live indeed! I am excited to read what you have here. This is great!

    For a life planning tool that can help you do meaningful life planning and get results–visit and use activation code: MH6934 for a truly free trial. I love it and use it with all of my clients.

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