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Personal Finance: How to Manage Your Money

06 February 2019 by National Bank
Family budget and finances. Serious woman doing accounts and feeling frustrated with amount of monthly expenses. Young female wearing glasses calculating utility bills, sitting at kitchen table

To meet the challenges of personal finance, there’s nothing like a solid plan and some motivating goals. Budgeting is a good way to get there.

1. Defining Your Financial Goals

Buying your first home, starting a family, retiring at age 60, or travelling for several months of the year: these are all goals that we dream about, but they have a cost. If you want to make your dreams a reality, you have to start by setting financial goals. Good financial planning is the key to success.

When setting your goals, think short term and long term. What do you want to accomplish in the next few months? Can you save enough to pay for a well-earned vacation after a busy year? Should you contribute to an RRSP instead? These are short-term goals.

Goals that lie further in the future than six months or a year are medium-term goals, such as buying your first home in three years. Long-term goals are life projects, such as deciding at 35 that you will retire at age 60.

The benefit of establishing your financial objectives is to acknowledge what financial measures will be necessary to achieve them. Although buying your first home may seem out of reach when you are 20 years old, it becomes more realistic when you create a monthly savings plan.

2. Creating Your Personal Budget

A personal budget is a daily tool for reaching your short, medium, and long-term goals. It enables you to keep track of your income and expenses and get a clear sense of your financial situation. Many people avoid making a budget because they think that it is necessarily restrictive. “A budget is above all a question of choice,” says Natalia Sandjian, financial planner at the National Bank.

“You have to stop over-spending and have the discipline to make important decisions every day… several times a day.”

A successful budget is one that you are able to follow. By setting financial goals and creating a strategy to reach them, you are much more likely to respect them. It’s easier to put back that great sweater on sale if you know that the money you’re saving is going towards funding a sabbatical year!

Personal financial consultants also agree on the importance of saving up a financial cushion equivalent to three to six months’ salary for unexpected expenses. That way, if you lose your job or a loved one falls ill, you can still pay your rent and other expenses until the situation goes back to normal.

3. Understanding the Rules of Saving

Your budget also includes the amount of savings that will be necessary to reach your goals. Beginning to save early on is a highly profitable strategy because, each year, you typically make a bit of revenue on your savings, as they usually generate interest. For example, if you save $10,000 at an annual interest rate of 2%, you will have $10,200 at the end of the year. That’s a gain of $200 without lifting a finger!

If you repeat the process year after year, the growing amount will become even greater, especially if you save regularl. It’s also much less demanding to save $20 a week for ten years than to save $200 a week twenty years later. The most profitable savings vehicles are TFSAs and RRSPs.

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4. Reducing and Eliminating Debt

Many Canadians still live beyond their financial means. On average, according to Statistics Canada, in 2018 they spent $1.70 for every dollar earned. Although a house can be sold again later (it’s an asset), credit card debts, personal loans and car loans must be paid back.

You should never wait until your debts are overwhelming to take charge of your situation. Paying off debts as early as possible will have a lasting effect on your future financial health because the longer you carry a debt, the more it ends up costing. It is possible to reduce your debts by cutting non-essential spending from your budget, always paying the minimum amount due, and paying back the largest loans first.

5. Managing Your Money According to Your Circumstances

As a Student

When you’re in school, you have to juggle courses, assignments, part-time work, school fees and books that can be very expensive. In order not to get lost in the whirlwind of young adult life, a personalized budget is key. It will allow you to concentrate on your studies with worrying about finances. Many students can afford to work only during the summer months if they plan their spending wisely throughout the year.

As a Parent

The birth of a child brings many changes, especially in terms of finances. Not only does having a baby involve a lot of expenses, it often leads to a decrease in income for parents who take parental leave. According to a study from the Fraser Institute, a young child can result in up to $3000 of extra expenses per year for a household, and you can expect about $4500 more per year with an adolescent. It’s a good idea to plan your budget if you want to start a family.

Sometimes you need to buy a bigger house to accommodate your family. A first home also requires medium-term planning.

As a Retiree

Retirement is obviously a time to enjoy yourself, but that’s no reason to lose sight of your finances. Retirement is often accompanied by a decrease in income, so your spending must follow suit.

It’s important to respect your financial ability, says Natalia Sandjian. “The role of a financial planner is also an advisor on daily life. I remember a 70-year-old retired client who called me directly from a car dealership to ask me if she had the means to buy the convertible of her dreams. I looked at her file, and I told her to go for it!”

A well-planned retirement will be more enjoyable since it won’t involve much of a decrease in your quality of life. That’s why starting to save early is always a winning strategy.

4 Signs That Your Personal Finances Are Not Doing Well

There’s a Balance Owing on Your Credit Card at the End of the Month

Credit cards are a short-term source of credit that you must pay back on a monthly basis. The interest rates are too high to use them any other way.

You’re Living Paycheque to Paycheque

You need to be able to deal with unexpected expenses without going into debt, because there will always be surprises that you have to be prepared for!

You Haven’t Been Able to Save

Savings should be included in your budget like any other expense. After all, you deserve to use some of your hard-earned money to put toward your projects, not just pay for the cost of living.

There’s a Gap Between Your Priorities and Your Reality

Feeling overwhelmed by your financial situation and being unable to invest in what you think is important is definitely a big red flag.

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