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Personal Finance 101

Learn how to smartly manage your money.

Learn how to smartly manage your money and increase your wealth.

It is never too late to start managing your money smartly. Being responsible about spending and saving your money can greatly improve your lifestyle and help you face unexpected financial challenges such as, layoffs, unexpected medical bills etc. When it comes to handling your personal finances, you should always have realistic short-to-long term goals and create a personal budget to reach them. This personal finance guide will help you learn all about utilizing your personal finances to improve your overall lifestyle.

How to manage your personal finances

Successfully managing your personal finances involves careful planning and dedication. You should set realistic goals for yourself and adhere to your budget. Managing your personal finances means that you will be able to successfully afford your current lifestyle as well as work towards your future financial goals. Sometimes this level of financial security can seem easier said than done.

Here are some important steps to help get you started:

Step 1: Set short-to-long-term goals

To achieve your financial goals, you must first identify them and determine whether they are realistic. To make your financial goals less overwhelming try breaking them down into categories to help you keep track of your progress and understand trade-offs. Nobody becomes a millionaire in one day or one month and while having that as your goal may prove to be very motivational it may prove difficult to stick to your plan if the time your give yourself to reach your goals is not realistic. Categorizing your goals as short term and longer term is a great way to get started.

Below are some examples of financial goals:

  • Short term to medium term goals (6 months-1 year): Small financial goals are easy to start with. They can be anything from creating a small emergency fund to covering your rent and food during tough times, or saving up for a new home appliance or purchase. A savings account can help you put money away on a regular basis, such as, bi-weekly or monthly.
  • Long-term goals (between 1 to 25 years): Long-term financial goals include investing in a property, buying a car, or saving up for your retirement. To save for such long-term goals, set what you want to achieve and plan how you can attain your goal.

For example, saving around 5-10% of your annual salary every year can help you plan your retirement. If you want to buy a house in the next 5-10 years, try boosting your savings by using a high-interest savings account or an investment account such as a TFSA.

Step 2: Create a budget

Once you understand, what your short and long-term goals are the nest step for most is to draw out a budget. A budget helps you identify how much money you are making/spending and can potentially save during a period. Using a budget will help you lay out everything in front of you, allowing you to see how much money is leaving your accounts and what can be put towards savings and your financial goals

A great way to analyze your cash flow is to run it through the popular 50/30/20 budgeting framework.

This approach allows you to spend 50% of your after-tax income on essential costs (e.g., rent/mortgage, food, car payments) and 30% on other needed expenses (phone bill, entertainment). The final 20% is for put away towards your savings and financial goals. This will help you create your emergency reserves, having money for retirement and saving up enough funds for a down payment on a house or your next car.

Step 3: Pay off your credit card debt

Using a rewards credit card responsibly is a common way to give your budget a boost. The right credit cards can earn you rewards points or cash back on every purchase (see our tool for more on this). However, one of the most common speed bumps that can come along with credit is the interest that comes with not paying off your credit card on time. No rewards earned through credit cards will ever net your ahead if you aren’t able to pay your credit card off in full. The rate of interest on most popular credit cards is very high (most commonly 19.99%). Paying off high-rate debt is one of the smartest budgeting moves a savvy saver can make .

Not only does credit card debt can have a huge impact on your finances and ability to save, it also will affect your credit score which may make it more difficult to achieve other financial goals like getting a low rate on a mortgage in the future.

If you are struggling to pay off your current credit card debt at your regular rate of interest, you can consider getting a balance transfer credit card. A balance transfer credit card can help you reduce your credit card debt and pay of your balance faster, as the rate of interest will be significantly lower.

See the best balance transfer credit cards in Canada.

Step 4: Invest in savings

Ok so you got this far, congratulations! You got your budget and your goals noted, and your have been doing well for your first few months. Now you are seeing your savings are starting to pile up, but to get the most out of all your hard work there is still one step question we must answer – where to put the savings. There are a lot of options when it comes to where to put your savings, bank account, TSFA, mutual funds, under your mattress… so how do you decide? The best choice is to match your savings vehicle to your financial goal.

When it comes to a short-term goal like an emergency savings fund, it’s important to remember the savings need to be easily accessible. Your savings is your ultimate safety cushion, incase life throws some surprises at you. For that reason, a high interest savings account may be the best savings vehicle for this goal.

Similarly, if you are saving for a financial goal, which is a bit further away, a less flexible savings vehicle that offers a higher rate of return may be a better choice. Investments such as GICs, mutual funds, bonds or stocks may be a better option for such a goal. When investing, every person has his or her own risk tolerance, preferences and goals. Meeting up with an investing advisor can help you learn more about the different kinds of savings and investment accounts.

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