Structure vs Freedom: Understanding what works best for you

Managing Your Money

I got my first credit card at 15 years old, and it wasn’t “Daddy” who was planning to pay the bills (though he did cosign for me to get the card). As he was helping me to fill out the form, I clearly remember my mother saying, “you’re crazier than I thought if you’re going to give that “CHILD” a credit card”. And as I look back, my mom was probably right. Giving a 15-year-old a credit card and expecting her to be responsible with it, is generally not a wise move. That being said, I paid every bill on time, never carried a balance, kept a steady part-time job, and rose to the challenge of proving to my parents that I could be responsible with money.

That experience taught me a lot about managing my cash flow and being aware of my spending, even though I’ve never lived on a budget. Many financial gurus encourage people to make a budget, and I agree that living on a budget works extremely well for certain types of people and certain types of situations. A budget gives a clear structure and guidelines, and many people thrive on this. I, however, am not one of them. I also don’t do well on specific diets, so I imagine there’s a link. As soon I’m told I can’t eat something, that’s all I want to eat! But I manage my health and diet extremely well by being aware of how I’m eating and feeling, and then making small adjustments when needed. The same formula works for me when managing my cash flow and spending – simply being aware of and checking in with my spending, and tweaking things when necessary has done me well.

For those who do work well with structure, and they will likely be the people who prefer to have a clear diet to follow, a financial budget can really help to keep them on track and manage their finances with accountability. Sticking to a fixed budget can especially help in managing discretionary expenses. If you have trouble managing your debt or making payments, it may be a sign that you need more structure than you currently have.

But, does everybody really need a budget? No, I think it depends on your stage of life, financial circumstances, and your personality, but I would argue that you should have an idea and awareness of your spending. When I meet clients for the first time, we discuss their financial goals and concerns, and look at their current financial situation. Part of that involves me giving them a tool which allows them to work through their current and future lifestyle spending.  Those who do not regularly keep track of their expenses are often surprised to see how much life is actually costing them.  The reality is that most of my clients do not live on a budget, but they either have, or come to have, a good sense of their cost of living.

Whether you work better with structure or freedom, the first step is the same. Get a full picture of what it costs to live the lifestyle you’re living. Our Lifestyle Expense Tool works great for this, because it’s easy to forget small things that quickly add up. Take for example gifts. Many people forget to include gifts in their spending picture, but when you think about all the gifts that you may give during the year, it can really add up. So, make sure to include everything!

Where to go from there depends on your goals. You may be shocked at how much you’re spending in some areas, or how little you’re saving.  Or you may feel just fine with your spending and be more concerned about how your spending will impact your net worth, especially if you are already retired or soon planning to retire. One of the biggest fears many retirees have is running out of money. It’s one of the reasons I see people continue working into their late sixties or seventies, even when they have more than enough money to retire. This exercise is the first step to getting a clear picture of your financial future so that you may feel safety and freedom while enjoying your lifestyle.

My role as a financial planner is not to judge how people are spending their money, but to help them achieve their financial objectives.  I met with a retired lady recently who is quite wealthy, has never kept a budget, and had little idea of how much she was spending, partly because she really didn’t need to – she had plenty of money to spend.  But one of her objectives was estate planning, and to protect as much of her estate as possible for her children.  I needed to estimate what her estate would be at various points in time, depending how long she lived. To do this, it was important to consider her current net worth, and whether it would grow or shrink based on what her lifestyle was costing her.  When she used the Lifestyle Expense Tool, she was shocked at how much she was spending on certain things, but also felt an empowering sense of awareness over her spending even though she wasn’t planning on changing anything about it.

Also, understanding the benefits of having a clear picture of your cash-flow can really encourage you to do a regular check in.  Whether you’re aiming to achieve retirement or financial independence, or you’re already retired and simply wanting to feel safety and freedom around your money, cash-flow management is key, and so is having a clear picture of your financial future.

Some people need structure and others need to feel freedom. Understanding what works best for you is the key to success in many areas.  Incorporating the help from a financial advisor or financial coach can help you get, and stay, on the right track.

Lynn MacNeil, F.PL. Vice President, Investment Advisor, is a Financial Planner with Richardson GMP Limited in Montreal, with over 22 years of experience working with retirees and pre-retirees. For a private financial consultation, or more information on this topic or on any other investment or financial matter, please contact Lynn MacNeil at 514.981.5795 or [email protected].

The opinions expressed in this article are the opinions of Lynn MacNeil and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances. Richardson GMP Limited, Member Canadian Investor Protection Fund.