To overcome the challenge of managing personal finances, nothing beats good planning and motivating goals. Making a budget is a good way to do this.
1. Define your financial goals
Buying a first home, starting a family, retiring at age 60 or traveling several months a year: these are all goals that make you dream, but they come at a cost. If you want to achieve your dreams, you have to start by setting financial goals. Also, good financial planning is the key to success.
When setting your goals, you have to think short and long term. What do we want to accomplish in the coming months? Can we save enough to pay for the well-deserved trip after a busy year? Should we instead start contributing to an RRSP? These are short-term goals.
Those beyond the six-month or one-year horizon are in the medium term, such as buying a first home in three years. In the long term, these are our life plans (eg: deciding at 35 that we will retire at 60).
The benefit of setting financial goals is to realize what financial steps are needed to achieve them. If buying a first home seems out of the question when you’re 20, it becomes more realistic when you set up a monthly savings schedule.
2. Make a personal budget
The personal budget is the daily tool to achieve short, medium and long term goals. It allows us to keep track of our income and expenses and to obtain a clear picture of our financial situation. Many people avoid making a budget because they believe it is necessarily binding. “A budget is above all a matter of choice,” recalls Natalia Sandjian, financial planner at the National Bank. You must first stop prioritizing your expenses, then have the discipline to make consistent decisions every day … several times a day. “
In fact, a successful budget is a budget that you can stick to. By setting financial goals and a strategy to achieve them, you are much more likely to stick to them. Because it is easier to give up this nice discounted sweater if you know that the money saved will be used to pay for a sabbatical year!
Personal finance advisers also agree on the importance of building up a financial cushion equivalent to three to six months’ salary, for the unexpected. If you lose your job or a loved one becomes ill, you can continue to pay your rent and expenses until the situation recovers.
3. Understand the rules of saving
The budget also includes the savings necessary to achieve its goals. Saving early is a highly profitable strategy because each year one usually makes a little profit from the money saved. Because saving usually generates interest. For example, if you save $ 10,000 at an annual interest rate of 2%, you will have $ 10,200 at the end of the year. $ 200 more, without lifting a finger!
If we repeat the operation year after year, the amount that grows becomes even more important, especially if we save regularly. The earlier you invest, the more your money grows. Plus, saving $ 20 a week for ten years is much less demanding than trying to save $ 200 a week twenty years later. The most advantageous savings vehicles are certainly the TFSA and the RRSP.
4. Reduce and eliminate debt
Many Canadians still live beyond their financial means. On average, they spent $ 1.70 for every dollar earned in 2018, according to Statistics Canada. Although a home can be resold later (it’s an asset), credit card, personal loan, and car loan debt must be paid off.
Also, do not wait for debts to crush you before taking the situation in hand. Eliminating them as soon as possible will have a lasting impact on your future financial health, since the longer you drag a debt, the more it costs in the end. It is possible to reduce your debts, in particular by cutting some non-essential expenses in your budget, always paying the minimum due and paying off the largest loans first.
5. Manage your money according to your profile
When you are a student
In school, you have to juggle classes, homework, part-time work, tuition fees and books that can be very expensive . In order not to get lost in the hustle and bustle of young adulthood, a suitable budget is key. It will allow you to concentrate on your studies, without financial worries. Many students even choose to work only in the summer, since they plan their expenses well throughout the year.
When you are a parent
The birth of a child causes many upheavals, especially on the financial level. Not only does it incur a lot of expense, but it often causes a drop in income for parents, who take parental leave. According to a study by the Fraser Institute, a toddler can incur up to $ 3,000 in additional expenses per year for a household, while it costs about $ 4,500 per year for a teenager. It is therefore better to plan it in your budget if you plan to start a family .
In addition, you sometimes have to buy a more spacious residence to accommodate your family. A first house also requires medium-term planning.
When you are retired
Retirement is obviously for fun, but that’s no reason to lose sight of your finances. Retirement often comes with a drop in income, so expenses must follow suit.
The important thing is to respect your financial capacity, like Natalia Sandjian. “The role of a financial planner is also one of daily adviser. I remember a 70-year-old retired customer calling me directly from a car dealership to ask if she could afford her dream convertible. I looked at his file, and told him to go for it! “
Obviously, a well-planned retirement will be more pleasant, because it will not lead to a significant drop in the standard of living. That’s why starting to save early is a winning strategy for a lifetime.
4 signs that your personal finances are in bad shape
1. There is a balance on the credit card at the end of the month
The credit card is a source of short-term credit that should be paid off monthly. The interest rates are too high to make any other use of it.
2. We live from one pay to another
You have to be able to face the unexpected without going into debt, because there will always be unforeseen events… and you have to plan for them!
3. We do not succeed in saving
Saving should be a budgeted habit just like any current expense. We deserve, after all, that a portion of the hard-earned money be used to carry out our projects, and not just to pay the cost of living.
4. There is a gap between our priorities and reality
Feeling overwhelmed by your financial situation, so that you are unable to invest in what you deem important, is without a doubt a big red flag.