We all have a financial thermostat which is usually set at a comfortable temperature. Too low and we get cold, too high and we get hot and uncomfortable. In most cases, whether we experience a financial setback or windfall we will end up at the same basic temperature at some point. Our thermostat setting is usually passed on to us by our parents, friends and society - “Mom and Dad had their thermostat set at 70 degrees, and that felt pretty comfortable but maybe I’ll bump that up to 72.”
At typical salaries for professionals there’s not a lot of money left over at the end of the month after mortgage payments, property taxes, groceries, auto expenses, and costs of raising kids (for some) to name a few (okay throw a few lattes in there too). If you manage to put away a bit each month you are well ahead of the game. However, you’re also looking at 30+ years of more of the same to reach that elusive retirement goal (a whole other topic on its own). After seeing your paycheck size reduced significantly after deductions, year after year, and reading lots of books on the topic, you’ve probably realized that in order to shorten the time to retirement you need to do a couple of key things:
- -Make a lot more money per year (raise my financial thermostat)
- -Reduce your deductions by a substantial margin (reduce the heat escaping from the house)
So how do you raise your thermostat? Simple and not so simple really. You just decide one day to raise it. What keeps most of us from raise our thermostat? I believe most of us feel that if we raise our thermostat, it will lead to more pain and less pleasure (the basic factors that govern all our decisions). Besides, we are pretty comfortable where we are, thank you very much. If I start contracting to make more money I will have to cold call potential clients, network at social functions, wear a shirt and tie, go to interviews and so on. On the reduced pleasure side, it will also mean I will have less free time, less time with my family, less time to watch tv, read, etc. In order to change this way of thinking, you have to start associating more pleasure with making these types of changes than by not taking action. For me it was reading lots of books on these topics and focusing on what I would get by raising my thermostat: more money earned and saved, less time to retirement, and more time to travel and do things I enjoy. In other words, more freedom. I believe freedom (in the sense of choosing your own path) is one of the most sought after goals.
So how can you reduce your deductions? You can incorporate and start contracting (as I do) so that you pay low corporate tax rates and have lots of deductions (auto expenses, home office, phone, etc). Secondly, pay yourself dividends (instead of salary) so that you also pay less taxes in your personal hands and the added benefit is that you don’t pay government employment insurance or government pension payments (in Canada these are referred to as EI and CPP). EI will pay you when you’ve been laid off for a period of time (and ask for some back when you get a job) and CPP will pay you a little each month when you retire. In both cases, you’re better off depending on your own savings to get you through these periods and many people believe CPP is not guaranteed to be there when we retire anyways.
So raise your thermostat for a warmer and more enjoyable life!
