The personal finance community can be a bit of an echo chamber, reinforcing and repeating the same ideas on how to save, invest, and spend our money. This sort of tribalism can be intimidating for outsiders who are eager to learn but afraid to ask questions or know where to start, especially when it comes to more complicated topics.
The truth is not all Canadians are financially savvy. That’s why I think it’s our duty as personal finance enthusiasts to move beyond this little corner of the Internet and start talking to our friends and family about money. Pay the knowledge forward, friends!
It’s not easy to talk in real-life about what we do with money, how much we save, how much we spend, and the foolish mistakes we make. But these are crucial conversations to help each other deal with money and the complex decisions about it that we all face.
We can start by sharing the kinds of tips and tricks that helped us build lifelong financial habits and skills. It’s what financial literacy is all about, right?
Here’s a list of my top 10 financial lessons to share with friends.
1. Avoid credit card debt like the plague
It’s impossible to go through life without incurring at least some debt. I’ve had student loans, credit card debt, a car loan, line of credit, and finally a mortgage.
Carrying a balance on my credit card was by far the most harmful to my finances. Making the minimum monthly payment hardly puts a dent into the balance, and 19 percent interest ensures that balance will continue to grow unless you take action.
Tackle it with the debt avalanche or debt snowball method, and once it’s gone commit to never again paying one cent of credit card interest.
2. Track your spending
To free up that additional cash flow you need to understand how much money comes in and how much goes out every month. There’s no other way around it – how else will you know what you can afford to save?
Whether you use a mobile app, budgeting tool, or good old-fashioned Excel spreadsheet, the point is to track every transaction until you can glean some insight into how you spend your money. Use this information to make informed decisions on which areas of your budget you can cut, and where you’d like to direct any additional savings.
3. Automate your savings
The key to building a life-long habit of saving is to make your contributions automatic and as painless as possible. Pick a day that coincides with your paycheque and set up an automatic transfer into your RRSP, TFSA, savings account, or RESP.
It’s called paying yourself first. Start with as little as $25 and increase it annually, or as your budget allows. This powerful strategy works because it treats your savings goals as ‘mortgage-like’ fixed expenses that come out of your account on a specific day.
4. Save a percentage of your income
One common rule of thumb suggests saving 10 percent of your take home pay for retirement. I say save a percentage – any percentage – of your income as long as you start with something and make it automatic.
One cool trick I learned was to bump up that percentage in tandem with a salary increase each year. So, for example, let’s say you earn $50,000 and saved 5 percent of that amount ($2,500). Then you get a 4 percent raise in the New Year, so now you make $52,000. Well, don’t just continue saving $2,500 – bump that up to $2,600 to stay in-line with your 5 percent savings rate.
5. Invest wisely
An overwhelming amount of research shows that the most optimal way to invest is with regular contributions to a low cost, globally diversified portfolio of index mutual funds or ETFs held for the long-term.
The easiest way to get started with indexing is with an all-in-one balanced fund. Tangerine has a great line-up of low cost balanced mutual funds to choose from. There are no account fees, no minimum account size and once you’re set up the funds are virtually maintenance-free. Management expense ratios (MER) on these funds are 1.07 percent, or about half that of most bank mutual funds.
You can reduce your costs even further with a bit more effort on the front-end. Open a discount brokerage account and then purchase one of Vanguard’s all-in-one balanced ETFs. Again, you’ll get a globally diversified portfolio of stocks and bonds. The MER on these ETFs are 0.25 percent.
Finally, you can strike a balance between low cost and minimal effort by choosing a robo-advisor to manage your investments. You’ll get a similar low cost, broadly diversified portfolio of index funds. Just add new money regularly and the robo-advisor will automatically rebalance your portfolio for you. Expect to pay about 0.70 percent in fees.
One more important point: Don’t go chasing higher returns with speculative ideas, or try timing the top or bottom of the market. Stay invested, rebalance once or twice a year, and try not to pay too much attention to the financial news media.
6. Ask for a better deal
Maybe it’s in our polite Canadian nature to just accept the first offer that comes our way. But we’re leaving money on the table when we don’t ask for a better deal. How good of a deal can you get? That depends on whether you’re negotiating for a higher salary or just trying to save a few bucks on your cable bill. Just remember the answer is always no unless you ask.
One or two questions can make a major difference in your bottom line, especially when it comes to big-ticket purchases like a home or vehicle, or better yet when it comes to your negotiating your salary.
7. Avoid buying too much house or car
Tens of thousands of dollars have been wasted because home builders and real estate agents invented terms like “starter homes” and “trading up”. Buy a home that will suit you for the next decade or more, and stay put.
That goes for cars, as well. I like a new car as much as the next guy, but if you can’t afford to pay it off in 3-4 years max, you can’t afford the car. Drive your vehicle for at least a decade or more so you can enjoy some car-payment free years.
To integrate these two tips I’d suggest one more: Live close to where you work. While this isn’t realistic for everyone, there are several benefits including spending less money at the pump and getting home before dark.
8. Simplify your finances
In an attempt to optimize every part of my finances I forgot to account for the pain-in-the-ass factor – the time wasted researching individual stocks, hunting down credit card offers or savings account promotions, transferring money back and forth between a no-fee bank and a full service bank.
There’s something to be said about finding a simple solution that you can stick with, even if it’s not the most optimal solution for your wallet.
9. Do your research
It can be intimidating to walk into a bank, car dealership, or furniture store and wondering whether the person across the desk is looking out for your best interests or their own.
When the seller has more or better information than the buyer, it creates an imbalance of power. The more you know about the products and services you buy, the better the deal you’ll get.
As a general rule, when you don’t have any specific idea of an item’s value, do some research. Go online, investigate, and ask around. Not for every day decisions like the price of chewing gum, but you should probably dig around for a few hours before going to a car dealership.
10. Save on the big things, spend on the things you enjoy
People often stress over gas prices, bank fees, and cell phone bills while ignoring some of the ways they can potentially save thousands of dollars.
Listen, I’m not a big latte fan, but if you enjoy an expensive coffee then who am I to criticize? Spend on things that bring you joy (or that save you time) and then try to save money in other areas to offset your splurges
Take out a variable rate mortgage instead of a 5-year fixed rate mortgage, avoid mortgage life insurance and other creditor insurance products, switch from expensive bank mutual funds into index funds or ETFs, avoid expensive name brands when a generic brand will do, and don’t fall for deceptive or misleading advertisements.
Your turn: What’s on your list?