Here’s your crash course on investing and how personal finances should be managed in order to optimally set yourself up for the future.
Money makes the world go ‘round! These days money can free us, or control us; it’s what drives our economies, it’s taken the blame for divorce, and corruption, and in a way, it is the product of all products. Yet, as much as we all make, most of us know very little about how money and personal finances work. And while we could blame our parents or teachers, saying “they should have known, and prepared us better”, it’s pretty clear that placing blame (on them, or yourself) won’t help you learn how to file your taxes (by the way, have you done that?), create a proper budget, or help you invest to grow your wealth. So here’s your crash course on investing and how personal finances should be managed in order to optimally set yourself up for the future.
1. Learn how to create a budget.
Understand your personal finance situation by calculating how much you earn each month, and where your money goes (examples: bills, entertainment, food, clothes…etc). To keep your budget realistic I recommend tracking your expenses in excel for a month or two before you sit down to create your budget. Once you’re aware of how you spend your money, divide each paycheck into 3 accounts; one account for your day-to-day expenses, one account for bills, and one account for saving. The goal is to spend less than your budgeted amount. Bonus idea: to save more each month move any “leftover” cash from your day-to-day account into your savings. Start doing this, and soon enough you’ll start to question what you’ve been doing with all your money!
2. Learn how credit works.
Credit is a contractual agreement in which a borrower (you) receives something of value now and agrees to repay the lender at a later time. Examples of credit are credit cards, loans for a car, education or a home. There are costs associated with credit, so it’s really important to compare the cost of various credit options with the actual features offered with the credit. Also, make sure you spend it responsibly – if you don’t, you may accumulate more debt than you can afford to repay in a timely manner.
3. Start saving early!
While most people lack a savings plan, you don’t have to be in that group! Find ways to build up your savings so that you can weather tough economic times without accumulating big debts. Start saving as soon as possible – even if you start off with a small amount – and make saving a regular part of your life. One suggestion: set up automatic deposits from your paychecks that go directly into your savings account. If your savings are in good order, then maybe use some of your savings budget to make contributions to your RRSP every month (you’ll be happy you did later in life).
4. Never spend more than you make.
It’s called “living within your means” and will determine how much you can (and do) save.
5. Use a debit card.
Most people own a debit card – if you are one of them I suggest you use your debit instead of your credit card. Using your debit will force you to buy only what you can afford (rather than what you think you will be able to afford). If you don’t have the money today, you can’t spend it. Using your debit will also prevent you building up a balance on your credit card and damaging your credit if you can’t pay your bill.
6. Understand the time value of money.
Basically, the time value of money is the principal that any amount of money is worth more today than the same amount of money in the future because of its earning potential. That means if you were to invest $500 today, it will be worth more than $500 in a year, because that $500 could gain value through investments.
7. Understand compounding interest.
According to Investopedia, compound interest is defined as interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. In other words, compound interest is “interest on interest”, making your deposit (or loan) grow at a quicker rate, versus that of simple interest (which is only calculated on the principal amount).
8. Put your money to work for you.
Invest, invest, invest! Invest as soon as possible! Investing earlier in life means you’ll end up with much more than if you were to wait to make more money. For example, if you saved $200,000 and average 6% on your investment portfolio, you’d gain an extra $12,000 for doing nothing but having saved and invested the money. $2 million will earn you an extra $120,000 per year (at 6%), $5 million will earn $300,000 per year — the more you invest, and the earlier on you invest, the more you will make without having to work for it.
Unless you’ve hired someone to manage your money and help you plan for the future, you’ll be doing the legwork yourself. If you’re not happy with the advice you’re receiving, or you don’t currently manage your money (and don’t want to), a company like Nest Wealth will do it for you, for one fair and flat monthly price.