One Improvement at a Time

This is a guest post by Robert, who lives in Calgary and works as a financial adviserretired at 34. He is married, has three kids.  Robert and his wife then plan to return to school and become teachers, eventually living and working overseas.

If you’re thinking of turning around your financial situation, you probably realize there’s a lot of work to do. Personal finance has many moving parts that each need to be functioning smoothly in order for the entire project to be moving in the right direction. It must feel overwhelming for someone who is in financial trouble to realize how many issues need to be addressed. Even those of us who aren’t in trouble realize that there’s always something that could be improved.

In any system (such as personal finance), there’s generally a “constraining variable.” There’s usually one thing that’s holding back the rest of the system. When my car runs out of gas, none of the rest of the system matters: aerodynamics, lubrication, gear ratio, etc. Until I get gas in my car, nothing will help it go faster (or at all). But once it has gas in it, there is a new constraining variable. In the case of my Honda Odyssey, weight is a factor, especially when I took the family camping. When I’ve reduced the weight, maybe it’s the gear ratio. Until I need to change the oil. You get the idea. In each of our finances, there is one thing that, if addressed or improved, would have the most impact on our personal financial situation and it’s not necessarily the same for each of us.

Earning. If a person is not working or is not earning their potential, the lack of income keeps them from being able to meet their needs and obligations. For a person who has no income, finding a job or otherwise generating income will likely be the first priority.

Spending. For someone who is spending more than they earn, it really doesn’t matter what interest rate they can negotiate or even how smart their investments are. In any case, they’ll be digging themselves into a deeper hole. When spending is disciplined, even if it’s higher than the barest minimum, reducing it further (eg. clipping coupons) will probably have a minor impact on the whole outcome.

Debt repayment. For someone with credit card debt, cutting up and paying off the credit card may be the most beneficial thing they can do. When credit cards are paid off in full every month (using cash, not credit), it is probably more valuable to look elsewhere for improvement, especially if spending is disciplined. This assumes that any mortgage is on track to be paid off in a reasonable time frame and there is no other consumer debt.

Saving. Once earning, spending and debt repayment are all in place, a person should focus on saving. Saving should become a routine amount each month, in an amount that is affordable now, but will also allow a person to achieve their goals. Depending on income, $500 a month might be a reasonable goal for a couple.

Investing. There’s no point focusing on investing for someone who has no savings to speak of. But when capital begins to accumulate, the rate of return has a greater impact on the final outcome. Investing is something that can either be outsourced (through professional advice) or done yourself. If you are doing it yourself, you should be learning and improving over time.

Other areas. The areas mentioned above are the basis for a stable financial position. In order to further refine one’s financial strength, a person may choose to focus on: where they spend their time, networking, entrepreneurship, charitable gifting or philanthropy, real estate, insurance or inheritance and estate planning.

There can be a lot of moving parts in personal finance. But using the idea of a constraining variable, there is usually one place where positive action would have the greatest impact. For me, I continue to focus on improving my investment skill, while starting to focus on networking and possibly some entrepreneurship. Where is your focus currently?

5 thoughts on “One Improvement at a Time”

  1. This article came at an excellent time. I’m currently in the debt repayment stage and just created a plan to rid my credit card debt by the end of the calendar year.

    And then I can finally save some!

  2. Otis, I’m so glad to hear that you found this helpful. I hope no one who is arranging to pay off their debt, as an example, will be hard on themselves that they aren’t saving more or investing better. Some people think it’s possible to address each area simultaneously, but I’ve found value in advancing one step at a time.

  3. My focus right now is on controlling spending and accumulating savings. My investments and other financial categories are on track.

  4. Tara, you remind me that these aren’t steps, to be taken in order. These are areas that need to be addressed, but each individual can address them in any order is most suitable for them.

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