So you’ve finally come to the realization that your nine-to-five grind just isn’t going to get you where you want to go in life financially and you’ve decided you need to look into this whole “investing” thing that people are talking about. First of all, congratulations on taking your first step towards financial freedom. Before you start however, there are a few things you need to do in order to build a solid foundation on which your investments can rest solidly on.
I remain disappointed in our education system in its complete omission of financial education in our curriculum. You’d think that teaching kids about money; about the one thing that is the means to acquire all other resources in our life would be important to teach in school. Instead, our Career and Life Management (CALM) courses teach us where the forks and knives go around a plate at the dinner table and other trivial things that unless you’re dining in First Class on the Titanic, will have absolutely no relevance in your day-to-day life.
Here, I want to go over 5 personal finance habits that you most likely did not learn in school but are important to help you build a solid financial base so that you may have the means to invest and let your money work for you to help you achieve the life you want.
Habit 1: Pay Yourself First
When it comes to savings, most people start by paying off their bills, then they purchase groceries, gas, self-care, etc. and if there is anything left at the end of the month, they put that into a savings account. The problem is, there often isn’t very much left at the end of the month. Instead of paying everyone else first, try paying yourself first. Set aside 10%-15% of your gross income every month, ideally into an account you don’t see often, and live on the rest. Better yet, have the funds automatically transferred every time you get paid so you don’t even see it. This way, you can rest assured that your future is taken care of and you can spend the rest guilt-free. You’d also be surprised how quickly you can adjust to the difference in income. After a few weeks, you won’t even notice it’s gone.
Habit 2: Track Your Spending
The idea here is to track every purchase you make so that you’re aware of where your money is going. What gets measured gets managed as they say and if you’re not sure where your money is going or you have trouble saving and making ends meet at the end of the month, this is a great place to start. The idea is simple. Track every purchase you make down to the penny for 2-3 months to see where your money is going and where you can cut back. You’d be surprised just how much those daily trips to Starbucks are costing you every month. You can do this the old-fashioned way via pen and paper or you can join the rest of us in the 21st Century and use an app instead. My two favorites are Mint.com and YNAB (You Need a Budget). Both of these programs link to your various bank accounts and credit cards to monitor all the money that moves in and out of your accounts all in one place. This way you see where all your money is going despite any sneaky games you think you’re playing with yourself. Mint.com is free while YNAB requires an annual fee. The difference is YNAB requires you to reconcile your budget manually which makes you face your spending head on while Mint does a more passive job of tracking your spending so you can avoid your shame by not looking at it after you dropped $1000 on that designer bag you just had to have. Once you have an idea of how much you’re spending and on what, this leads to you to…
Habit 3: Setting a Budget
I know this word doesn’t sit well with people. It might bring to mind an empty fridge, a life without holidays, and walking through a mall wearing a straight jacket chained to a short leash. The good news is you can still do all the things you want to do. Now that you’ve tracked your spending and are more mindful of where you’re spending your money, you can look for ways to save or cut back on the trivial and unnecessary things so that you can focus on the things in your life that do matter. For example, travelling is one of the things that bring me real joy in life. After setting aside my monthly savings, the next thing I set aside is my payment towards my travel fund. I planned for it, I budgeted for it, and now I can spend the rest without worrying that I won’t be able to take my yearly trip overseas. I would then set aside some money for fun things to do every month, as well as the usuals like groceries, gas, etc. Are there some sacrifices? For sure. Do they really affect the quality of my life? Not really. You may have to make your lunch and coffee at home and not go out to eat or have Starbucks every day. Maybe you don’t really need that $1000 designer hand bag or that brand new titanium and carbon fibre golf club when you have one that works just fine. This is a perfect Segway for our next habit…
Habit 4: Living Within Your Means
Now this concept is going to blow your mind. Ready for it? Here it is: spend less than you make every month. I know, crazy right?!
I don’t have much more to say about that except that I know how easy it is to overspend. Life happens, stuff comes up, and some days you frankly just don’t give a shit. I get it. With credit cards creating that dissociative gap between the act of purchasing and not having to pay until later also makes it super easy to spend too much. It’s a simple concept but not easy but it’s an iterative process where you get better at it every day and as long as you come out ahead more often than not, you’ll be alright.
Habit 5: Never Carry Credit Card Debt
Aside from high-cost mutual funds, credit card debt is one of the main things that’s crushing your financial future. With interest rates as high as 30% annually, there is not a single good reason you should be holding on to any form of credit card debt. According to TransUnion in 2019, outstanding credit card balances in Canada exceeded $100 Billion. Even with 20% annual interest rates, that’s $20 Billion dollars that Canadians are giving away to credit card companies every year. That’s insanity!
Now I’m not saying you shouldn’t have a credit card. On the contrary, credit cards are great if used responsibly. They allow you to build up your credit so you can apply for loans and mortgages, they are convenient in that you don’t have to carry cash everywhere, and some credit cards have a great points reward system that allows you to recoup a percentage of the money you spend.
My point here is you need to use credit responsibly. Make sure you have enough money to pay off the card at the end of every month. Set up autopayments with your credit cards so you don’t end up paying late fees. Use the credit cards to your benefit instead of the other way around.
With these financial habits, you should be on your way to creating a solid nest egg with which to invest and a solid foundation to support your investing empire and the freedom that comes along with it.
– Phil Wong