# Spending Comparison

This is a guest post by Robert, who lives in Calgary and works as a financial adviser. He is married, has three kids and plans to retire at age 35.  Robert and his wife then plan to return to school and become teachers, eventually living and working overseas.

Last week, I wrote about spending too much in the context of world-wide consumption. Even though there’s no right or wrong spending amount, it can be enlightening to understand how one’s choices and habits compare to neighbours. Today, I’ll use the word “neighbour” in its loosest sense as I compare spending in different regions of the world. For this to work, you should really have a good idea how much you spend on a regular basis. Then you can compare your spending amount to the average person in Canada and in other parts of the world.

The first step, then, is to find your monthly spending amount. You could look at your budget, if you keep one, which is accurate if you spend only your budgeted amount. My preference is to look at past spending. This is more likely to include one-time expenditures and reflect what is really spent, not only what was budgeted. I collect together three monthly bank statements and credit card statements, and add the amounts together. I remove the credit card payments from the bank amount to avoid double counting. Multiplied by four, this gives a pretty good estimate of annual spending. Ideally, I would use the last 12 monthly statements, but I don’t always have them available. My annual spending amount after taxes is about \$36,000 not including interest costs or debt repayment.

I’ll look at the GDP per capita to make the comparison between countries. It’s impossible to find how much the average person spends on their monthly living expenses, and average isn’t really meaningful in this context. GDP per capita should give an idea of how much earnings are available per person. As an example, according to the CIA World Factbook, using 2010 US\$, the GDP per capita of Canada was \$39,600. That means a family of five, like mine, is attributed about \$200,000 of pre-tax income. With two incomes, this might be possible, but I suspect there are a few ludicrously high incomes skewing this number. A simple but interesting international comparison, by The Economist, was made to compare quality of life between countries.

In North America, we might compare ourselves to the US, with their GDP per capita of \$47,400 or to Mexico at \$13,800. Or we may compare ourselves to other English-speaking countries: the UK at \$35,100 or Australia at \$41,300. Other developed nations include Germany at \$35,900, France at \$33,300 or Spain at \$29,500. We in Canada are not the richest, but very close to the top of the heap.

Let’s look at countries outside North America and Europe. Some of the most populous countries are some of the poorest. China has per capita GDP of just \$7,400 and is home to around 15% of the population on the Earth. India is at \$3,400 and has about 10% of world population. Brazil is the fifth most populous country (3% of world population) and is at \$10,900. Russia has the ninth largest population and has \$15,900 per capita GDP.

Finally, let’s look at a few of the poorest countries. Many of these are former Soviet republics or located in southeast Asia or Africa. Uzbekistan is at \$3,100 and Tajikistan is at \$2,000. Vietnam comes in at \$3,100 and the Philippines are at \$3,500. In Africa, Nigeria has per capita GDP of just \$2,400, Tanzania has \$1,500 (possibly the poorest in the world) and Zimbabwe, with their political and fiscal problems including hyper-inflation, was reported at just \$400 of GDP per capita.

Do you feel rich? The GDP per capita of the entire world was estimated by the CIA at \$11,100 for 2010. How do you compare? Does this change the way you think about your regular consumption? Bonus question: How do people survive on less than \$500 per month?

# \$2000 Tax Bill = Happiness?

I’ve started working on our 2010 taxes for both my wife and I and so far the preliminary estimate shows that we owe about \$2000 (I’m still waiting for some tax forms to confirm the final numbers).  Strangely enough I’m actually damn happy over that bit of news.  Pardon? Happy?!?  Did I hit my head or something?

Well actually the answer is a bit more simple that that.  At the start of each year I do a quick estimate of what my wife and I should make and then adjust my TD1 forms at work if required.  I generally aim for us to have a \$0 tax refund when I do the estimate as such when we owe money that means we earned more together than we expected.  So the \$2000 owing between the two of us means we earned roughly \$5000 more than my original estimate (a combination of investment and business income).

So the tax bill in my view point is a good thing since I haven’t been giving the government an interest free loan for the last calendar year.  Instead I’ve been using that money for the last year to either invest or pay of some mortgage.  The trick I’ve noticed is you have to keep the amount owing reasonable and be prepared to pay if you suspect that you are doing better than you initially guessed.  The potential pitfall of this method is you don’t want to get your guess too far off from your income.  Why?  Well because if you are consistently owning more than \$3000/year in taxes you will end up having to pay the government tax in installments (see here for information).

In the end I will now likely go back and adjust my TD1 forms for 2011 to have a little bit more tax taken off or another alternative would be to contribute more to an RRSP.  Either method would work depending on what your goals are and what your free cash flow is.  Also remember these are you last few days for an RRSP contribution so if you want to make a lump sum now for your 2010 taxes you still have time.

# Living Below Your Means: A Step toward Early Retirement

This is a guest post by Lauren Bailey.

Many of us would like to think that if we could only earn more money, we’d be so much further ahead with our financial goals. While this is technically true, the money-savvy know that it’s not how much money you earn that leads to financial independence–it’s how much money you keep. Even lottery winners have been known to go broke or even end up in debt after squandering their financial windfall.

When will it ever get through our collective psyches that we don’t have to spend every dollar we bring in? If any of us are going to retire early like we hope, we must start taking significant steps to live below our means. The idea here is that the less we spend on everyday stuff, the more we will have to sock away in investments and savings and the more we will have available to pay down debt.

Establish a Budget—and Stick to It

Most of us who are at least somewhat money-conscious know more or less where our money is going every month. We often let our online checking accounts do the budgeting for us. But have we actually established a budget for discretionary spending? I’m not just talking about a token budget, where we say we will only spend \$150 on dining out each month and wind up spending more like \$350 on dining out each month. I’m talking about a budget that serves as a map toward your financial goals. This budget should have firmly established priorities for savings, investments and debt repayments that don’t get de-railed by impulse purchases of shoes and tech toys, as well as firmly-established boundaries on what you can spend on frills. You’ll know it’s not a token budget when your spouse asks if you want to dine out, and your response is yes or no based on whether it’s in the budget rather than whether or not your stomach is rumbling at the moment. To help us stay on task, my husband and I have arranged for sizable automatic withdrawals into our savings accounts and I have a bank draw for my investment accounts.

Run Your Car into the Ground

Do you really need a new vehicle every two to three years? Remember that the only way to really get your money’s worth out of a car is to run it into the ground—or driving it until the money it would cost to repair the vehicle is more than its current value. Maintain your vehicle well, and aim to drive your car long after you’ve stopped making payments on it. Don’t fall victim to the “three-year itch” when it comes to vehicles. It pays to do some research and invest in a vehicle known for its reliability and longevity. My husband and I both drive 2006 Hondas (he drives an Accord and I drive a Civic). Right now we benefit from excellent fuel efficiency for our commutes, and we won’t replace either vehicle unless way down the road we have to spring for a massive expense like a new engine or transmission.

Don’t Buy on a Payment Plan

Just don’t do it. Save for what you want and pay cash up front (using a debit card with the money there in the bank) or buy with a credit card that you have the ability to pay off at the end of the month (again, with the money already in the bank). This gets you out of the cycle of tacking on more debt.

Stop Competing with Your Friends

Finally, it’s tempting to buy the latest gadget that your friend just purchased. If he just purchased a gas grill, suddenly you find yourself looking for a gas grill. If he just purchased a larger flat-screen TV, suddenly your flat-screen looks a little too small. Don’t fall into the trap of feeling that you have to “keep up” with your friends. Be content with what you have and don’t replace items around your house unless you absolutely must.

In Conclusion

These are just a few practices my husband and I have put into place as we strive toward financial independence. What ways do you live below your means?

This guest post is contributed by Lauren Bailey, who writes on the topics of online colleges. She welcomes your comments at her email Id: blauren99 @gmail.com.