Finance: Getting Started for Women
It’s crazy when you think about how most of us know next to nothing about how to manage our money - one of the most important aspects of our lives! But it’s okay to admit this because it’s not our fault. First of all, we learn nothing about money management throughout our entire school careers. Secondly, majority of us have parents who never discussed the details and methods used in their own financial situations. Here we are in school learning how to algebraically solve detailed mathematical equations, but couldn’t even tell you what simple stocks and bonds are. The millennial approach to this topic seems to be a lot more open and conversed, but the further you go back in generations, the specifics of money was less talked about, which really wasn’t helpful to us at all.
The worst thing we can do moving forward though is to IGNORE our money problems! Which is what most people do I may add, putting them into terrible financial positions for the rest of their lives.
Over most of my adult life, my focus has been on getting through school, taking out minimal loans to do so, and trying to live on as much of a “student budget” as possible. After I finished school, like most of us, I was left with the burden of tackling my pile of student debt. I knew I wanted to eventually be in control of my finances, but what does “being in control” really even mean? I didn’t know where to start or how to go about it.
Fast forward to now. I’m debt-free, I know exactly where my money is going, and I have a long term investment plan in place. When I spend money now, it’s with zero guilt, because I have a SYSTEM in place which ensures that before I spend money, EVERYTHING else has already been taken care of. This includes rent, bills, taxes, contributions to my RRSPs, a separate investment portfolio, contributions to savings accounts for future real estate, rainy days, and a “fun-fund” (could be travel, a big ticket item I want etc).
So at the end of day, the money left over in my chequing account is mine to spend and I am able to do so without blinking! The key to setting up this system? AUTOMATION.
When I first decided to take control of my finances, I started by tracking my spendings in an excel spreadsheet - every...single...day. Tracking my finances made me cognizant of how much I was spending per month on different things: expenses, clothes & shoes, recreation, travel, groceries, dining out, gifts etc. The result was that I became aware of where I needed to cut back on my spending in order to be able to put more down on my loans. Another benefit to this practice was that I spent less - simply due to the fact that I had to write down every dollar spent which was:
A) a chore, and
B) diminished mindless spending
It wasn’t until I started tracking that I became serious with my debt and got it paid off quickly.
Now, let’s just be real about the fact that not many people have the discipline or desire to track their every cent eternally. Nor should they because there’s a better way. But I will say that if you don’t have a clue how much you spend on groceries, driving, shopping, dining and other major categories on average per month, DO track your spending for 3 months to gain a good idea. Especially if you constantly have credit card debt and don’t know why you can’t seem to ever catch up! Tracking your finances is a good place to start.
But saving receipts every day and entering them into a spreadsheet for the rest of your life is tedious and unnecessary once you have a general idea of what your spending habits are. There is a better system, which I’m about to show you now, and it takes a whole lot less effort!
The problem is that most people, naturally, will spend more when they see more in their account, regardless of payments, debts, and loans that exist in the back of their minds. This is why when people get paid, they think to themselves:
“Yes! Pay-day! I’m going to go shopping and buy _____.” Or
“I finally have money for the _____ that I wanted”.
By the end of two weeks (or less) their account has diminished to nothing. But...uh-oh...they still need groceries. It’s okay, they’ll just put it on their credit card until they get paid again. This is just the beginning of the cycle. You can see how this is a snowball effect that inevitably puts you more and more behind so that you’re left using each pay cheque to play catch up. Keep living like this and pretty soon you’ll be in lumped in beside the average Canadian who owes over $8000 in consumer debt (not including mortgages). Article
Using an automated system to take care of your finances prevents you from even seeing the money that you shouldn’t be spending in the first place. And will fast track you to reaching big goals such as ridding you of debt, or saving for a car, a home, a wedding…
And trust me, you’ll still have plenty to spend on clothes and shoes, or buying your friends a round of drinks! You won’t feel deprived in the slightest.
So...if you want to be debt-free, have savings to take care of your big ticket items, set aside money for investments, and still be able to spend money day-to-day without worrying about it...Here is what you do:
1. FIGURE OUT EXACTLY HOW MUCH DEBT YOU HAVE AND PRIORITIZE PAYING THE DEBT WITH THE HIGHEST INTEREST RATE FIRST.
2. PICK 3-5 AREAS IN YOUR LIFE YOU WANT TO BE INTENTIONAL ABOUT SAVING FOR. THESE COULD INCLUDE THINGS LIKE:
Emergency or “Rainy Day” Fund
Real Estate (save for a future home)
Auto (save for a future car)
Investments (save for an investment portfolio)
Travel (save for a trip)
Wedding (save for your upcoming wedding)
Fun or Big Ticket Item (something you want but should not buy impulsively)
These categories will differ for everyone depending on where you’re at in your life and what your personal goals are.
3. DECIDE HOW MUCH YOU WILL ALLOCATE FROM EACH PAY CHEQUE TO EACH CATEGORY.
4. CALL YOUR BANK AND SET UP NO-FEE SAVINGS ACCOUNTS FOR YOUR DECIDED CATEGORIES. LABEL EACH OF THEM DEPENDING ON WHAT THEY’RE FOR. (Literally a 30 minute phone-call)
5. HAVE THE BANK DIRECTLY DEPOSIT X AMOUNT INTO EACH ACCOUNT THE DAY AFTER YOU GET PAID.
6. WHATEVER IS LEFT OVER IN YOUR ACCOUNT IS FOR DAILY EXPENSES AND ITEMS YOU WANT TO PURCHASE!
Here is an example so you can get a clear idea of what this looks like:
Example: Kate makes an average Canadian income of $50,000. After tax, she keeps $38,000. This means every month approximately $3000 is deposited into her chequing account.
She has just finished paying off her loans and is ready to start saving. She knows she wants to invest money at the end of the year and wants to make sure she is setting money aside for that. So her first account is “investments”. She also has a wedding coming up in 2 years and decides that she will also create an account building up for it called “wedding”. She would like to start saving for a down payment on a future home so she adds an account for “real estate”. Kate wants to go to Cancun next year with the girls so she’s also going to set up a travel account to help her get started. Kate decides to allocate:
10% of her gross income to investments = $400/mo
5% of her gross income to her wedding = $210/mo
8% of her gross income to real estate = $335/mo
3% of her gross income to Cancun = $125/mo
Automatically each month, $1,070 comes off of her net pay stub and into said accounts. Kate is left with $1,930/mo for rent, other expenses, and leisure.
At the end of the year she will have:
$4,800 saved for her investment portfolio
$1,500 for Cancun
In 2 years she will have:
$5,040 saved for her wedding
In 5 years she will have:
$20,000 saved for a down payment for a home
Deciding what to allocate to each account can be tricky, but working backwards is a good way to start. If she knows she wants to have $30,000 saved for a home in 5 years, she will adjust her monthly allocation in order to reach that goal.
So she is planning for her future, ensuring she will have money for big events and purchases when she needs it, and is still left with $1900 every month. Granted, expenses need to be paid and this is where knowing what those are comes in handy because it gives you an idea of how much you need to have left in your chequing account to cover the expenses plus have some money left over that you can spend on WHATEVER YOU WANT without feeling a pinch of guilt!
Every situation will look differently. When I had student loans to be paid, I focused on having the largest sum I could financially afford be automatically taken off of my cheque and deposited into an account for debt payment. You may have to live a little more frugally until that debt is resolved, but the reward is well worth the wait. The quicker you pay it off, the less you’re paying in interest over time - and that can REALLY add up.
This system takes a little bit of time and work initially, a couple of hours at the most, but after that, you literally don’t have to think about it again. (You may make adjustments each year according to changes in your life) Most banks won’t take percentages off of your pay cheque, so you need to do the math and have dollar amounts ready to give them.
Lastly, let’s talk about timing, which is a critical part of this system.
If you have consistent dates for when your paycheques are deposited, you can choose to have the bank withdrawl 2x in the month - simply divide your allocations by 2. This way the money is coming off of your paycheque right away so that you aren’t spending it.
Example: Kate is paid on the 1st and 15th each month. So on the 2nd and the 16th, money is taken off and dispersed into her savings accounts.
But let’s say Kate’s paycheques come every 2nd Friday and it’s difficult to determine consistent dates each month. She may choose to have 1 lump sum withdrawn from her chequing account and into her chosen savings accounts on the 25th of every month.
Ensure you are choosing a date that makes sense for you - sometime shortly after your money arrives in your chequing account.
And that, my friends, is it! I hope this gives you a new way to think about how you can be conscious about, and organize your finances to really get ahead. There is one thing that is FOR SURE: The sooner you take action on ridding yourself of debt, saving, and investing your money, the better off you will be throughout the remainder of your life. And according to stats, you will be in the minority of those who do! Cheers!