I previously described some of the maladaptive ways that families respond to their growing wealth. The Deniers and The Ditchers. Most people display aspects of both those extremes as they move up the socioeconomic ladder and adjust. The wealthy families that thrive across generations have a strong financial foundation, but also hone their skills to meet the new demands of stewarding larger amounts of wealth. The migration into the new complexities of different levels of wealth will be different for every family. However, in this series of posts, I will share a bit about our family’s journey. I will start in the early years when we built our financial foundation.
Melding Two Financial Lives
Our Pre-Marital Financial Backgrounds
Neither my wife nor I grew up in financially wealthy families. My family had good incomes that put us around the Canadian household median, but we lived on much less than that. Part of that was due to lean-FIRE which my parents worked towards and achieved around the time that I graduated from medical school. That came naturally to them because my grandparents also lived extremely frugal lives on low incomes. The communities that we grew up in were also not affluent. So, to us, this was all normal. That upbringing gave us both tools and baggage for our first move up the economic ladder.
Financial Communication & Collaboration
My soon-to-be-wife and I communicated and functioned financially as a team from pretty early on. The only time that I hid money was in a small envelope that I kept in our closet that I used to buy her engagement ring. Even then, we had discussed what she wanted and that was an exploration of financial values in and of itself. Due diligence for what was ultimately one of my best investments.
Marrying someone is one of the highest-stakes decisions that you’ll make to either boost or torpedo both your happiness and finances. If there are cracks in this part of your financial foundation, don’t expect that they will just go away. Differences in financial values and expectations are a common source of marital discord on their own. Plus, they are accentuated when external stressors hit the relationship.
Once you are married or common-law, your finances legally become intermingled. With a few exceptions, pretending otherwise using separate accounts, and whose name is on what, etc does not change that. Sharing at least some of your finances operationally via a joint bank account may improve the relationship. The underlying reason for that likely has to do with being open and collaborative.
Being open and collaborative provides a foundation. However, how aligned your wealth background and values are also impacts how easily you will align your goals and decisions. Fortunately for us, we both had external financial start points and internalized tight-wad responses to spending that were similar. It is more challenging for those with radically different financial backgrounds and spendthrift vs tight-wad tendencies.
Financial Scarcity Mindset: From Boon to Baggage
In those early days, our tight-wad spending was adaptive to our financial status. However, beneath the surface was our mindset. When I look back on those early days of our relationship, we had a mix of scarcity and abundance mindset. Scarcity when it came to money, but abundance when it came to the opportunities around us that didn’t cost much money.
Initially, our focus on keeping costs low was necessary for our financial survival. However, it quickly became baggage when we started making a decent income.
Scarcity Budgeting & Spending
We tracked our spending down to the penny (pennies existed then). Budgeting and spending carefully were ever-present in our lives. It weighed on us mentally and prevented us from taking advantage of any opportunities that would cost us money upfront. We would also go to extreme lengths to save a few bucks. Sometimes irrationally. On the plus side, we were skilled in that type of money management from our upbringings and it kept our debts from ballooning further.
My wife was already working and made enough to cover our costs of living and the interest on our debt. When I started work as a resident physician, that bumped us up to the median Canadian household income. However, we still had educational debt hanging over our heads. During our upbringings, a time when money was tight and interest rates high, we both learned that debt was scary and to be slain at all costs. As a result, we were both very reluctant to spend money on pretty much anything while in debt. Even when some careful spending would have made sense. Our budget functioned to keep us in check and channel any excess toward debt repayment.
The Problem With Scarcity Blinders
When you are focused solely on spending the absolute least amount of money now, you may make some bad decisions. You could pass up on opportunities that will ultimately pay you more. Those scarcity blinders may also cause you to overlook compromises in other areas that are more important to you.
For example, I rode my bike or took the bus year-round right into the second year of residency. There were no separate bike paths back then. It wasn’t until I had my second physical altercation with a car that I broke down and bought a vehicle. My wife made it non-negotiable. In retrospect, we could have afforded it at the outset of residency and not using our money that way had compromised our core values of health and security. This was an eye-opener that we needed to re-evaluate how we budgeted.
Budgeting: From Survival Skill to Planning Tool
Usual Function of a Budget
Managing cashflow is an essential financial skill and a budget is a tool used to do that. However, as our financial power grew, we needed to change how we used it. Up to that point, a budget was for survival. However, as our situation improved, we needed to shift to using it as a planning tool. Not for our survival, but to start using our money to advance our lives.
We had more latitude to make decisions. Where could we cut costs for things less important to us, but also how much could we spend on the things that do matter to us? New things were added to our budget based on our values and what we could afford.
A Budget Also Helped Us Shift Our Mindset
Our budget became more about planning for our next adventures. Our financial mental default was a scarcity mindset. That relationship with money had been hard-wired into us. However, it changed from somewhat adaptive to definitively limiting as we moved up into the “Middle Class”. Seeing the actual numbers, by using a budget, helped us to feel more secure. That gave us a stable platform to shift to an abundance financial mindset.
Our Early Spending
I don’t have our early budgets from when I was a medical student and my wife had just entered the workforce. They were on a “floppy disc” that no modern computer can read anymore. However, that early data is probably not that useful. Other than to see that we ate cheaply, lived in a sketchy cheap apartment building, and our only entertainment expense was our dogs. Our budget during residency is a bit more useful.
Our Major Spending Decisions
There were three major incremental spending increases during those six years. As mentioned, our dogs were one of our baseline discretionary expenses, and animals have always been important family members for us. They also force accountability for daily outdoor activity. Getting a second used, but safe, vehicle was another cost bump. As mentioned, we probably put that off longer than we should have.
There was an unanticipated expense in that we got “renovicted” in mid-2003 and could not find affordable rental housing that would take our two dogs. So, we ended up buying a fixer-upper house. I renovated it on my own from top to bottom which added value. Still, we didn’t fully appreciate the financial risk that we took by buying a house when we did not know that we would live there longer term. However, we got lucky and it worked out.
In my final year of fellowship, we welcomed our first child into the world. My wife and I only took a brief parental leave and then were back at work. That kept our incomes flowing but came with childcare costs.
The Basics of Middle-Class Living Are Expensive
Despite those strategic increases in our lifestyle spending, we still spent less than the average Canadian household (according to Stats Canada). However, the above chart excluded our non-mortgage debt repayment and investments.
During my first year of residency, most of our after-tax income was spent on food and housing (67%). Our next largest expense was paying our line of credit (22%). Unfortunately, those payments didn’t actually shrink our debt. We could just afford the interest at that point. Fortunately, the rest of our living expenses remained very low.
We had one car. We got married on the cheap. Then, camped and took a cottage vacation for our honeymoon. Our favorite leisure activities were free. We rarely ate out. I have never been known for my stellar wardrobe, and my wife was a whiz at finding quality clothes at a good price.
Looking back, I am pleased that we had also started giving regularly. It wasn’t much (1%), but giving is one of our core values and an essential financial skill that you only get better at through habit and practice. We were able to start investing in our RRSPs. Another important habit.
As I showed already, we kept our living expenses below the average household throughout my six years of training. I was able to moonlight teaching ACLS in my fourth year. Then, as a fellow in my final two years, I had my independent license and could moonlight. We channeled all of that extra income into paying off debt.
By the time I started as a staff attending in 2006, we had paid off our line of credit and even nibbled at our mortgage.
Reflecting on it, I am surprised that our basic costs took so much of our income. We honestly felt quite well off compared to where we were just a few years earlier. I think that the shift from survival and scarcity to stability and planning for our future had a major impact on how we felt. Getting out from under our student debts helped too.
Negative to Positive Net Worth
Debt repayment is a major focus for most early-career professionals in building their financial foundation. For the first four years of residency, we were honestly just able to pay the interest. Every time we did make some headway on the principle, there would be some expense to put us right back to where we started.
We didn’t notice at the time, but our net worth had shifted from negative to positive before our line of credit disappeared. We had also contributed to our RRSP each year from the beginning. Like giving, investing is an important habit and skill to learn early on. Using our RRSP, we were able to start investing and use the tax refunds to put towards our debt.
I took my RRSP tax refunds right away. In retrospect, perhaps I should have saved the tax deduction until 2004 when my income tax brackets jumped. However, it felt good to invest and repay debt, and the math was likely extremely close.
In the modern era, we would have used our TFSA in the first four years, but they didn’t exist yet. People obsess over the optimal sequence of repaying debt vs investing. However, we did a mix. We shrank our debt and got into the habit of investing at the same time.
Social, Emotional, & Financial Foundation
This was just the beginning of our family wealth-building journey. Yours will certainly be different, but I hope that you can take something away from this peek into our early life. We built a solid foundation that has served us well.
If you get married, choose wisely, and commit.
Marriage or a common-law relationship is high-stakes. We openly discussed our finances and figured out how we would work together before we got married. After that, our finances were mingled for better or worse and we collaborated as a team. This was made easier by our having relateable socioeconomic backgrounds and scoring very similarly on the tightwad vs spendthrift scale.
Use a Budget & Adjust
If you don’t have a budget, then you should. A detailed one when you are skimming the surface, and later on at least one with enough granularity to plan for and put “the big rocks” in the right place of your financial foundation. We had to adapt our relationship with money as our incomes increased. Like our mindset, our approach to budgeting shifted from a survival tool to a planning one.
It is hard, but find room for what matters to you.
Starting your financial life can be an uphill battle. We had the benefit of two stable incomes, compatible inexpensive tastes, and a manageable debt level. Interest rates were higher than now, but the basic costs of food, fuel, and housing were also drastically lower. Even then, basic costs of living and shelter ate most of our income. I was fortunate to be able to dramatically boost my income through moonlighting and by keeping our lifestyle the same we eliminated our debt quickly.
Although we did not have much money yet, we did make room to prioritize some spending on things related to our core values. For example, learning new skills, exploring the outdoors together, and giving. That also helped us to build habits to expand on later.
This foundation helps with what comes next.
I included some of our actual spending and the early stages of tracking my net worth to illustrate a couple of things.
First, we built a financial foundation by repaying debt aggressively instead of increasing our spending. However, we also spent strategically and developed our other financial skills like giving and investing. Even in small amounts. That foundation of developing and adapting our finances, mindset, skills, and habits helped us to better adapt and scale up further later on.
Second, it took us years to build our foundation and it was very incremental. We had numerous advantages, as I mentioned earlier. Don’t get discouraged if you are starting out. There are external forces that you don’t control, like interest rates, housing costs, and food inflation. They have been brutal recently and it is hard to see beyond that. However, you can shape how you think, budget, and make decisions. You will eventually get traction. Once you do, the foundation that you’ve laid will be your launching pad.