10 principles of personal finance
Money concerns us all and it is natural. It supports our lifestyle, needs, wishes, bills, and emergencies. But, isn’t it funny that the majority of us grow through our teens hardly understanding the importance of managing it, more than making it. No matter what job we do, the whole pressure of leaving behind our peers and making more money seems to be a fruitless pursuit for satisfaction, well at least in my opinion.
Few simple books on personal finance gave me enough realization that wealth-building has less to do with where you work. Higher savings along with sound investing and management strategies- can make all of us achieve financial independence way early in our lives than we think otherwise. It’s all about a mindset and a few healthy habits. Based on this notion, my intention is to make you feel happier with what you are doing, possibly give you hope of early retirement, help you start with something you always wanted to do, and create more meaningful connections with the people around you.
Let’s take a stab at understanding the process of making healthier choices- basically to create wealth and security. Well, who doesn’t want to be a part of the latest crypto frenzy or get the best-performing stocks at the lowest price, right! What can really serve you well in your journey into wealth creation is in fact getting the basics right, creating a safety net, and getting all your expenses out of the way.
Simple, but don’t ignore that little bit of homework that you should do for it. It all starts with a paycheque. So you get a paycheque, what happens next or what should happen next?
1. Budgeting
Target the big things. List down the following, think about the sequence of your list:
Rent/mortgage – if you have a rental accommodation, it is a straightforward number and you may not need to add any further expense under this. But, you may also want to list down your strata fee, which is also known as the home owner’s association fee, property tax, and similar mandatory expenses for your property if you have a condo, or any other similar ownership model.
Groceries and supplies – Try to be as thorough as possible, add your stationery, and toiletries
Utility bills– water, garbage, and electricity
Service bills – internet and phone
Insurances – such as your vehicle insurance and tenant insurance
Vehicle monthly payments and fuel
Subscriptions – such as Netflix, Amazon Prime, Audible, and Spotify
Food and drinks – Dinners with your friends, liquor you bought for your home or something you had at a pub, add those daily dosages of coffee, and all the nick-nacks that you land up buying as a snack
Trips – This is extremely subjective and the frequency can vary tremendously from person to person. It’s not a bad idea to have it on the list because you might want to know if you even have a budget for this. You might just realize that you have been making these impromptu trips which are essentially draining your money from other areas of your budget. Basically, be more intentional about your trips.
Shopping – Everyone has a different idea of what pleases them in this segment. Nothing bad in buying stuff, especially if something has gotten old, needs a replacement, or you just love to have the latest trendy thing out there. All good! but just a small piece of advice, a minimalist outlook will go a long way to add value in more meaningful areas of your life.
Miscellaneous – Feel free to add more categories to this list as they may apply to you. Just remember, being comprehensive and exhaustive will paint an accurate picture of your cash flow and that’s the essence of this task.
I intentionally laid it out in this sequence, based on a priority, that justifies my spending. It will vary person-to-person, but I’m sure that certain expenses will take precedence over the others like rent and groceries. We all need shelter over our heads and food to survive before we take a trip outside our country. Try to list your needs and wants in a similar way and calculate the average expense for the month. See if you are able to come out with a positive cash flow. If that’s the case, Awesome! You are on the right track. This will give you an objective idea of where to start trimming those unwanted expenses. Just question yourself with each and every one of them, do I really need it? or if I need that version of it? We all want the best, but maybe there is a time for that best to be enjoyed without killing yourself every month to make ends meet. The smile on your face will be bigger with every dollar that you save.
2. Savings
After all that you have earned and spent to sustain yourself, never underestimate those slimy unknown expenses that come out of nowhere. It can be a car part that got broken, a tap that started leaking, or even an injury that you got going down the stairs of your own home, and so on. There should be yearly targets for those unavoidable expenses like a car service, a routine dental check-ups, and so on. You can further break it down into monthly and weekly costs based on your contingency plan. Savings are going to go a long way to make you feel secure before you even plan to step into investments and that’s another principle that we will touch on soon.
3. Taxes
Pay less taxes. Find ways to reduce it. It can be achieved by claiming deductions, credits, and expenses. Claiming amounts can come under various categories like family, education, disability, pension, saving plans, or even climate action incentives including others. A tax expert can guide you with details of each one of them. There are a few ways you can choose to defer your taxes. Firstly, the Canadian government provides a way to defer taxes by contributing to a Registered Retirement Savings Plan, popularly known as the RRSP. The annual contributions limit varies as per your personal income, which is kept at 18% of your annual income. This is also a means for the government to promote savings for retirement. Secondly, pension plans with your employers do the same job as deferring taxes, with an added advantage of matching your contributions, now tell me isn’t that just great! Also, a Tax-Free Savings Account, a.k.a TFSA is a great means to avoid paying taxes on your gains in the future. Let's say, If you select a high growth security that performs very well in the coming times you will be liable for zero taxes, irrespective of how big it becomes.
4. Insurance
Depending on your needs you may be paying for insurance as a renter, homeowner, or a vehicle owner. Personal care for dental, eyes and similar check-ups are not covered by the government. You may want to use these insurances wisely and spread them evenly across their time periods. It is imperative that we save ourselves and our families from the unknown, but are there things we might rather replace than insure? Is every electronic device really worth insuring? It might be a good question to ask yourself if all your monthly premiums scrape your pockets than secure them in the longer run.
5. Debt
It is important to distinguish bad debt from good. One should know that not all interests are set at the same number. Good debt can come with relatively low-interest rates, for example, you can get a 3.06% mortgage interest for a time period of 30 years (as per Canadian mortgage and housing corporation) and 2%, which is a fixed rate of the prime rate, for education (as per the Canadian government website). Borrowing money on these fronts can lead to equity creation in terms of residential investment or ownership or even help you have a higher paycheque down the road by pursuing education. We should ideally try to limit our liabilities in life and pay out any debt as soon as possible. Try to avoid those high-interest debts for things that quickly lose value and that’s what I’ll define as bad debts. Credit card debts are amongst the most painful of all and at the same time the easiest to avoid. Recreational and luxury items can be temporarily satisfying but can quietly burn a hole in your long-term financial goals. If the credit card debts are paid in full and show around 30% of your limit’s use in your bill, you inch towards a better credit score. It simply highlights your ability to manage the lender’s money, which can actually help you acquire good debt.
6. Investment
Once you have created a monthly budget and kept aside a certain chuck for your short-term needs, investing should be the way forward for the left-over amount. The idea of money-making money is not intuitive. Take your time to build a thorough understanding of how the available tools work. Understand, how can they increase in value, help save taxes (as I mentioned earlier through RRSP and TFSA), counter inflation, and balance market fluctuations over a period. For example, if you invested $10,000 in a fund and the fund earned a 7% return for the year, you would gain $700, and your investment would be worth $10,700. If you got an average 7% return in the following year, your investment would then be worth $11,449. You just made $49 more compared to the first year! The key to this growth lies in compound interest. The interest added to the principal amount increases rapidly after a few years, which can greatly affect the returns on your investments. The easiest way to invest is to start early and commit to a long-term investing strategy. There are many ways to participate in the market but venture carefully with due diligence and guidance.
7. Health
One of the biggest expenses you may have in your life, which is unrelated to your income, is your health. An injury can create a big financial burden and can make you inefficient or even unable to perform at work. This can have a negative ripple effect on the things that depend on your paycheque. This also emphasizes the importance of securing yourself with adequate insurance, which meets the needs of routine and unknown visits to your doctor. A healthier lifestyle allows you to avoid the temptation of overindulging and splurging on food and drinks, especially when you haven’t planned for some. Basically, you think twice about gaining more calories than you burn. Exercising can be mentally stimulating; it can stretch the strained parts of your body. You don’t necessarily need to get a gym membership, you can just go out for a walk, or a run, bike around the city, bike and go to your office, play a sport, any form of exercise is good till the time you simply do something. These activities can also give you some time to socialize, be it with your friends, neighbors, or family.
8. Meals
Life skills are very crucial to this list of principles. Cooking your own food can be liberating and surprisingly satisfying. Any working individual will agree that the inertia of spending a few hours to prepare those 5-6 meals for your week is ominous. The added expense of buying meals may seem justified to many, especially when you and your partner are out there making every hour count to make money. We should realize that the accumulative effect on your pocket and health is going to be alarming in the long run.
9. Reading
You can start redeeming the value of learning about finance in a matter of a few reads. Even though the financial sector holds numerous topics, for the average person the earlier stated principles are a great way to start. There are multiple platforms at disposal e-books, physical books, blogs, audible, etc. Take my advice and try not to spend a single penny on the sources you find. The content is fairly factual and straightforward. Of course, if you want to read a book written by a specific author, go ahead, they are probably famous because their content reasons well with a certain number of people. I would just say that in the majority of cases, personal experiences may vary but the principles don’t differ by much margin. I typically go to my local library, briefly brush through the content and if it relates to what I want to read, I borrow it and it’s proven just fine. Financial advisors and similar professionals are there for a reason, your knowledge simply enables you to understand their advice better. By the way, If you do enough research there is no one stopping you to take the route of do-it-yourself investing, saving the management fee of a portfolio manager, and putting that into further investments.
10. Experiences
Live with less. When you counter your buying habits with experiences, they generally leave a more lasting impression on your mind. Isn’t that what we all want to do with the money we save, go to places, meet more people, and take part in new activities. Upgrading to the latest hardware or adapting to a new trend may take away those few hundred bucks that you could have spent on a lovely weekend trip to a new city or the outdoors. The trade-off of delaying a purchase or completely skipping on it can easily provide for a decent travel plan. Trust me, things don’t have to be expensive to be fun.
The takeaways
1. Target the big things first
2. Plan your saving goals
3. Avoid high-interest debts
4. Lower your taxable income
5. Trim your insurance
6. Invest in your future
7. Keep healthy. It saves money, body, and mind
8. Plan and make your meals
9. Keep educating yourself
10. Invest in experiences, not goods
I hope it all made sense.
