Your brand-new HD smart TV came with instructions, as did your latest upgrade to the iPhone X. Even the Lurvig cat house from IKEA’s new pet line has a booklet of instructions. Your finances, on the other hand, offer no such luxury. You’re expected to manage your money with absolutely no understanding of the rules.
Left to your own devices, you may not handle your cash with as much poise as you had hoped for. If you’re tired of wondering why you aren’t saving as much as you want, it’s time you teach yourself how to manage your money like a boss. Check out these simple rules, and see how easy it is to keep your finances in check.
- Break down your budget properly
The foundation of your finances relies on a well-made budget. How you arrive at this financial plan differs from person to person, but experts recommend you do more than just compare your income to your expenses. While this is a great first step at understanding your finances, it doesn’t do enough to prepare you for the future.
Financial experts suggest you follow some variation of the 50–30–20 Rule. The original 50–30–20 Rule offered a way to organize your budget using three basic categories: your necessary expenses, savings, and fun money.
The first category should use roughly 50 percent of your income, so things like rent, utilities, and insurance payments take up most of your paycheque. The second category should use 30 percent of your income to create savings or contribute to investments, while the remaining 20 percent is your fun money—the cash you can spend on tickets to Ed Sheeran or that daily double double.
It was first used decades ago. Since then advisors suggest tweaking its percentage breakdown to account for wage stagnation, the rising cost of living, and inflation. Some recommend a 60–20–20 Rule, while others advocate a simpler 80–20 breakdown. The latter’s 20 percent goes towards savings, and the other 80 percent should cover every other expense.
Choose the one that best fits your finances.
- Pay off the right debt first
In September, The Globe and Mail reported Canadian household debt has risen to $2.08 trillion — a new record high. According to Equifax, that means the average Canadian owes $22, 081 in consumer debt, through lines of credit, student and payday loans, and mortgages. With statistics like this, paying off debt is a priority for most people.
Though it may seem like a good idea to tackle the biggest outstanding loan in your name, you’ll want to consider its APR first. When it comes to loans, size isn’t everything. Compound interest and other fees can increase how much you owe. Those debts that have high interest rates will generate more debt the longer you have it faster than those with lower rates.
Compared to student or auto loans, your credit cards and online payday loans have higher APRs. Your student loan can wait, especially if you qualify for repayment assistance. But if you’ve taken out a MasterCard or payday loan online, the government won’t help you repay these. While they may be the best options for eliminating debt in the face of a cash shortage, you should aim to repay them back quickly, before any other loan.
- Save enough for retirement
Being able to retire in comfort is a real concern for most Canadians but many aren’t sure how they can prepare for the future.
Financial experts recommend you save 10–12 times your annual gross income in preparation for your retirement. Making regular contributions into your savings account isn’t enough to get you there. Even the average high interest savings account barely covers the rate of inflation—which means you’re not earning the full purchasing power of your dollar.
If you want savings to work in your favour down the line, you’ll have to use specialized accounts and other investments to help. Speak with an advisor to learn about your mutual fund, RRSP, and tax-free savings account options. You’ll also want to investigate ETFs (or Exchange Traded Funds), stocks, or robo-advisors to see if these products will help you reach the recommended 12 times your income.
Teaching yourself any new skill will take time, effort, and determination. Mastering your finances is no different. It will be a challenge, but it’s one worth the work. Once you teach yourself the ropes, adding to the rules you’ve learnt here today, you can start managing your money like a pro.