In theory, personal finance is pretty straightforward: You earn some money, you spend that money and, somewhere along the way, you save enough to buy a house and a few nice things, and then, hey presto, you retire at 65—with the funds to while away your golden years in Florida.
In practice, of course, it’s a confusing, perplexing, frustrating, emotional source of worry, guilt and probably more than a soupçon of shame. (For most of us, at least. If you’ve already ploughed your way out of debt, used the Japanese approach of kakeibo to save your money and never spend it on dumb things you see on Instagram and have RESPs going for children you’ve yet to have…we’re happy for you, but this probably isn’t the article for you.)
That’s why we’ve rounded up a team of experts to break down the big ideas and give all of us small, achievable steps to make 2020 the year you learn how to save money—and maybe even make some investments.
Take stock of where you stand
When it comes to taking care of your bod, we all know it’s not a one-time, take-the-magic-pill activity. The same goes for nurturing your best financial self, says Kelley Keehn, bestselling author of the new Talk Money To Me: Approach your money the way you would your health. “Being good at money is a process, not an event,” she says. “Going to the gym once or eating that salad one time isn’t going to do it, and the same goes for money. It takes attention every single day.”
Looking for a first step on that journey? Her health metaphor extends to that too. “You need to step on the scale and weigh in financially,” she says. Open your credit card statements, check those account balances online, add up what you owe, check to see if you maybe have an RRSP at work—anything to paint the most complete picture of your actual financial situation as it stands today.
Go on an “anti-budget”
Once you know what you’re working with, says Keehn, it’s time to look at what she calls “financial calories”—AKA where you’re spending your money. “Like diets, I don’t think budgets work,” she says, “but I do ask people to ‘count their financial calories,’ just for 30 days.” This involves tracking your expenses (which you can do pretty easily online if you’re mostly using credit or debit) but also being “a financial detective” and digging into things like what you’re paying for auto insurance or bank fees.
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At the end of those 30 days, you’ll be more aware of where your money is going—and it might surprise you. (Who knew how much was going into interest payments on your credit card because you’ve only been paying the minimum?!) Once you’ve done this exercise, you’ll be able to look for areas where you can, in Keehn’s words, “trim the fat”—things like eating out, subscriptions or even just all that bottled water you buy when you go to spin class because you’re constantly forgetting your reusable. If you can’t cut something entirely, this is also when you should get on the phone and negotiate a better deal, like for your cell phone or internet. If you don’t ask, you don’t get.
Understand the magic of “compounding”
Once you’ve (hopefully!) identified some extra money in your budget that you’re able to allocate to your savings, you need to figure out what to do with it. According to Alyssa Davies, the personal-finance blogger behind Mixed Up Money, that’s when people tend to get overwhelmed, but it’s not has hard as you think. “Just open an account—RRSP or TFSA, which can be done online with no human contact required—and set up a transfer each week or month. The more you put into your account now, the more time it has to grow.” Which, she says, is the life-changing magic of compounding. “That’s when an asset gathers earnings from capital gains or interest, and any earned money is not spent but rather helps to generate more earnings over a period of time.”
Learn about “reverse compounding”
If compounding is all about growing what you do have, “reverse compounding” is calculating how much money you might be losing to interest payments. It works like this, explains Keehn: If you have $4,000 in debt on a high-interest credit card and you’re only paying the minimum payment, it might take you something like 82 years to pay it off. If you do a few calculations, however, you might realize that putting $5 more a day toward what you owe could enable you to knock it dead in just a few years. “And then you realize that you’ll also save, like, $8,000 in interest, and suddenly that’s exciting and you feel like you can do this.”
Consider the “50/30/20” formula
Even if you are saving, there’s always the worry that you’re not saving enough. Like, you can technically afford that latte every day, but should you give it up so you can save more? If you’re in search of a sensible guideline, Mixed Up Money’s Davies recommends the classic “50/30/20” approach: That’s 50 percent of your income toward fixed expenses like rent (which, we must acknowledge, is a struggle in places like Toronto or Vancouver); 30 percent toward “discretionary” expenses—the nice-to-haves, like eating out or shopping; and the rest toward any financial goals you’ve got—a downpayment, a trip, retirement. (About that: “If you’re not saving for retirement yet and you’re over the age of 18, now is the time,” says Davies. “The later you start to save, the larger your contributions will need to be each month to make up for the lost time.”)
When you save money, save that money
Phillip Barrar is a self-professed personal-finance geek—it’s how he earned himself the nickname “Frugal Phil.” “I’m always looking for the best deal,” he says. But it’s about more than the thrill of the deal for him. “In my early days, whenever I got a good deal on something, like if I was going to pay $2,000 for a washer-dryer but [ended up] paying $1,500, I’d take that $500 and put it into an investment account.” That method was part of the inspiration for Mylo, the Montreal-based app that he founded, which rounds up your purchases to the nearest dollar and then invests that spare change for you.
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Don’t wait until you’re rich to invest
And, yes, you can invest with just spare change! There’s a common perception that investing requires enormous sums of money and meetings with men in suits who run hedge funds. If that were the case, literally no one would invest ever. According to Barrar, 53% of millennial Canadians don’t even have $1,000 sitting in an account at any given time. “People weren’t investing because they thought they didn’t have enough money to get started,” he says. “That’s why we created an app like Mylo, where even a nickel can be invested in a diversified portfolio managed by a professional.” Diversification, by the way, is just a fancy way of saying your money is spread across a bunch of different investments so there’s less risk if one goes belly up.
Think of saving as an expense
Barrar bought his first stock at age nine (it was Disney, because nine years old), so he’s been “good” with his money for a long time. The real lightbulb moment for him, however, only came when he decided to stop seeing investing as something he just did with “leftover” money. “I changed my mindset and said, “Just like my credit card bill or my car payment, I’m putting investing into my budget as a fixed expense.” This way it becomes a non-negotiable as opposed to an optional extra when times are good. Oh, and make sure you put that money somewhere that’s hard to access. “Out of sight, out of mind,” says Barrar.
Get an assistant
A virtual one, that is. (You’re not that rich…yet.) Alyssa Davies is a big fan of Cleo, an app that acts like an AI virtual assistant who knows exactly what you’re up to with your money and how that stacks up with your budget and any financial goals you’ve got. “She will roast your spending but also pump you up for all the things you’re doing well,” says Davies. “I use the app mostly so I can keep an eye on my Starbucks habit. Cleo likes to point out how often I spend money there—she’s like a built-in accountability buddy, but without the harsh judgment.”
Heck, get a whole financial team while you’re at it
This applies even if you have $0, says Kelley Keehn. First up, she recommends getting a certified financial planner on your squad. “They’re really important,” she says, “even when you have no money.” A financial planner is like a GPS, she explains: “They help you calculate the best route to where you want to go or help you recalculate if you’ve taken a wrong turn.” They can often do things like find free money for you, such as tax credits or government grants that you might not realize you’re eligible for.
The second team member is specifically for anyone who’s starting this process drowning in debt and feeling completely helpless. “You need to reach out to a non-profit credit counsellor,” encourages Keehn, who says the biggest mistake she sees people make is thinking that next month will somehow be better. A professional can help you make a plan, which can be anything from calling up your credit card company to see if they’ll work with you on a better repayment plan to exploring bankruptcy—which should really only be considered as a last resort.
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The “numbers make my head hurt” glossary of money jargon
With so many terms thrown around, money management can certainly get confusing. Here’s a glossary of all the basics you need to know.
Long heralded as the best way to build wealth, investing is more than just saving: It’s when, in exchange for an ownership stake (however small), a company uses your money to do things like hire more workers, fund new projects and expand into new markets. When they make money from those endeavours, you get a share of the profits.
It’s a piece of a company that the public are able to buy on exchanges like the Toronto Stock Exchange or the New York Stock Exchange. Why do you want them? See “Investing” above.
Think of a bond as a loan you’re making to companies, the government or even cities. The “borrower” agrees to pay back your loan on a certain date, and, until then, they make interest payments to you at an agreed rate. As a rule of thumb, the less risky the organization you’re “loaning” to, the lower the interest rate they’ll pay you…but your chance of getting paid back is higher too. (Yes, there is a chance you won’t get your money back, but this is rather rare, TBH.)
This is an acronym for “exchange-traded fund.” Essentially, such funds have a variety of investments in them—stocks, bonds etc.—that are selected by professionals, aka not you. They’re a low-cost, low-involvement way of getting in on the market action.
This is a registered education savings plan—aka a way to save for your child’s education with a little help from the government. As a parent, you can put money into this account and the government will match 20% of that, up to an annual limit of $2,500. So if you contribute the max, that’s $500 free money! Any profit from that money’s growth is tax free.
Another four-letter acronym, this time for registered retirement savings plan. The way it works is that any money you put into an RRSP is deducted from your income for the year. So, if you earn $50,000 but contribute $5000 to your RRSP, the government will tax you like someone who makes $45,000. That said: You will pay tax on all that when you withdraw your money, but you’ll be, like, 70 then, so the amount of tax you’ll have to pay will most likely be lower because your income will be lower. And look out! There are contribution caps on how much you can put into your RRSP each year.
This acronym stands for “tax-free savings account”—although experts say you should really be using it for investing because you don’t pay tax on any gains (e.g., interest, if you make money on the stock market etc.) made in this account. As with an RRSP, there are caps on how much you can contribute each year.
A personal-finance classic: This is saving up an amount of money to see you through a rainy-day situation, such as a job loss, accident or major unexpected expense. Generally, you’re looking for three to six months of living expenses, but anything is better than nothing.