I was chatting with a friend recently about how little we learn on the topic of money in school. Sure, we might learn to calculate compound interest, or even receive a high-level overview of the stock market in a business class. But the assumption was that you’d learn about these things at home — while a lot of parents assumed the opposite! So today I wanted to cover some of the financial basics that we totally should have learned in school.
Again, please note that I’m not a registered financial planner. I’m sharing tips and lessons I’ve learned over the years and through research. If you have any questions, comments, or suggestions, let me know!
Secure Your Financial Oxygen Mask
If an emergency were to strike today, where would you turn for the financial support you need? Credit cards? A friend or family member? Payday loans?
Would reaching out in that way make your situation better or worse in the long run?
An emergency fund is your first line of defense against surprise expenses or circumstances that might otherwise compromise any progress you’ve made to improve your financial position. Typically an emergency fund would cover 3-6 months of your bare minimum living expenses. Prioritize creating this emergency fund before tackling your bigger financial goals — including, in most cases, paying down debt.
You’ll want to keep your emergency fund saved somewhere that is:
- Easily accessible. It should be liquid (i.e. not locked up in a fixed-term investment or physical asset) so you can pull it out at a moment’s notice.
- Separate. You won’t want it lumped in with the rest of your liquid cash, in case you’re tempted to spend it!
- Working for you. Find a high-interest savings account or another vehicle that will allow it to earn you interest while you hold onto it for a “rainy day”.
Modern Bank Account Basics
In the past, it made a lot of sense to have just two bank accounts — chequing and savings. That way, when you were writing a cheque, setting up payments from your employer, or speaking with a bank teller, you wouldn’t have to worry about keeping track of too many accounts.
Those days are over! With the advent of super-simple smartphone banking apps to track your finances quickly and easily, our money management methods have transformed. Now you can have an account for your emergency fund (see above), your day-to-day expenses, your vacation fund, your future home down-payment, and more. Name your accounts after the goal you’re chasing for additional motivation. Some banks even offer this goal-setting mentality as a key feature in their apps!
Another positive change has been the ability to check your credit card balance straight from your phone, before being surprised by your monthly bill in the mail or your inbox. Consider setting those funds aside throughout the month, or even paying off those charges early as they come in. In a previous blog post I mentioned that I use credit cards within my means to build my credit score and earn rewards — check out that post here!
Online banking also make the budgeting process much simpler. No need to guess how much you spend each month, or which purchases were wants as opposed to needs. Your itemized account and credit card statements lay it all out for you, so you have all the information you need to create a solid plan. I wrote more about budgeting in this post!
Seize Every Opportunity
Keep your eyes open for opportunities to earn more and save more… sometimes with very little effort on your end. Here are some great examples:
- Employer matching. Many employers offer incentives for their workers to contribute to registered retirement plans — they’ll chip in an amount proportionate to your own contribution level. If you haven’t taken advantage of this yet, hop on the wagon! It’s literally free money, as a reward for being a responsible adult and saving for your future.
- Tax-deferred or tax-exempt accounts. Like your employer, your government also wants to encourage you to get your finances in shape. Tax-exempt accounts are self-explanatory: your earnings from these accounts aren’t taxed. Tax-deferred accounts, on the other hand, allow you to pay tax on your earnings much later in life, i.e. in retirement, when your tax rates will be lower because your overall income is lower too. Tax-exempt accounts include Roth IRAs and Roth 401(k)s in the USA, and TFSAs in Canada. Conversely, traditional IRAs, 401(k)s, and RRSPs are tax-deferred. Keep in mind that the “earnings” from these accounts aren’t just from interest in a savings account — the point is to invest them and earn tax-exempt or tax-deferred income! The catch is that all of these accounts have contribution limits each year. You can learn more about these from this article.
- Branching out. It’s the era of the side hustle. For many of us, having multiple streams of income is the key to financial stability and just a fact of life. Feeling restricted by the income available through your 9-5 job is a thing of the past! Click here for one of the many lists online of side hustles you can start today.
Financial Adulting
I’ll be honest with you: I put off investing longer than I should have. It felt like gambling (here’s a video explaining why it’s not) and I didn’t feel well-versed enough to take the leap. The fact is, giving your money time to grow and compound over the decades is a much more solid strategy for long-term financial stability than waiting until they day you become a stock-picking genius. (For many of us, that day will never come!) In essence, the earlier you start, the better. For some Q&As on taking the next steps in your financial life, check out this recording from the Level Up Your Money event with Erin Lowry and Jessica Moorhouse, which I attended live in Toronto back in May.
When it comes to your bigger-ticket financial decisions, such as major investments, purchasing a home, or starting a family, it’s important to find the information and advice you need. If possible, seek out a fee-only financial advisor, who can provide unbiased advice without trying to sell you a specific set of products offered by their employer. Click here to learn more on how to find the one that’s right for you.
What’s the best advice you’ve received to help you along in your financial journey? Share your guidance in the comments below!
