There is no quick trick to successful financial management but there are habits that can be developed over time. Are you up for the challenge?
The Canadian Foundation for Economic Education (CFEE) knows the benefits of proper financial management. So, they have made it their mission to integrate financial education into Canada's schools. In the effort to improve the financial literacy of Canada’s youth, Gary Rabbior, president of the CFEE told WP that one of the challenges faced was training teachers, many of whom were not well-versed in the subject.
Even adults struggle in managing their finances, especially those with no background on it. Among other things Rabbior discussed, he also said, “financial education isn't just about churning numbers and picking the right credit card”. Although his mission involved educating the youth, the same principles of what he taught still rings true throughout adulthood.
Finances are more complicated when you’re financially independent of your parents, but the traits you need to develop within yourself in order to be successful in managing your money are the same.
Know how your present decisions could affect your future
Perhaps the discipline that takes the longest to develop when it comes to financial management is the ability to think long-term. It’s hard to comprehend how a simple purchase you make right now could affect your financial standing in the long run. Rabbior thinks that understanding this trade-off might be the most important lesson. The effects don’t always come as dramatic tidal waves like bankruptcy. However, the purchases you make today could ripple into you making compromises in the future because you didn’t save or invest wisely in the past.
People don’t always see the correlation between now and the future. This is where budget planning comes in. When you lay out how much income you are expecting to make in a month, you will see just how much wiggle room you have for unnecessary expenses. Budget planning also encourages you to be more forward-thinking because it forces you not just to think about what you’re spending within the day but within the whole month. If you want to go even further, you can plan a whole year’s budget.
Sett financial goals and benchmarks to reach them
The importance of goal setting when it comes to wealth management is more apparent to some than others. Proper budget planning can mean the difference between eating three meals a day or eating one meal a day to some. To others, setting goals like saving more can leave you with more capital to be able to invest to further the growth of your finances.
If this practice is something you haven’t tried before, try to take baby steps. Set small goals and work hard to reach them. No matter how high the stakes, the ability to achieve goals that you set instils confidence in your efficiency as a manager of your own wealth. This confidence will result in your setting even harder goals and reaching them.
Know the difference between financial wants and needs
One of the most well-known practices in financial literacy is prioritizing wants over needs. It’s a simple enough concept but one of the hardest to live by. Lord, grant me the serenity! The line between needing something and wanting something can sometimes be blurred (often by the blinding desire to get the things we want). Still, it is not at all impossible to differentiate.
Typically, the monthly expense that should cost the most is housing. It is advised to spend no more than 25-35% of your income on this. Ten to 15% of your income should be put aside for your savings. Do not rely on what’s left after all your monthly spending. Food and transportation should also be within 10-15%. Utilities, entertainment, and clothing should only be around 5-10%.
When in doubt, you can always take your cues from Maslow’s Hierarchy of Needs. Physiological, safety, love and belonging, esteem, and self-actualization: does it fit into any of these categories? If not, then it’s probably just a want. If it does fit into one of those categories, just be sure to prioritize the bottom of the pyramid first — starting with physiological needs.
Of course, the nuances of our individual lives come into play when making these distinctions. But, deep within every well-adjusted person is enough common sense to make these decisions independently.
Choose investment role models to pattern yourself after
The problem of falling into the harmful (sometimes downright manipulative) teachings of online influencers is not exclusive to young people. Rabbior mentioned that with older Canadians, a lot of the work they do is to help people get out of bad financial situations they were already in. The work they do with young people is mostly preventive. Good judgement must be practiced when it comes to choosing who you listen to, especially when it comes to managing your finances.
The wrong influencers in life could also lead a person to think that some wants are needs and vice versa. This could make you end up with a lot of trendy things you wanted but none of the things essential to your growth and survival. Look for models who add value to your life. Make sure whoever you’re listening to has good character and is looking out for your best interest; an advisor who will not just treat you like a client but a person. Krista Kardash, a financial planner at LCU Financial Ltd, said “Wealth management is about enriching lives, not just wallets".
There is no shortage of brilliant young advisors with excellent reviews from their clients and many achievements under their belt. Listening to their insight on personal finance will be sure to prove beneficial.
Live within your economic means
This will probably be the first thing that comes up when you google “financial management for beginners”. You cannot expect something to grow when you don’t feed it and when you keep cutting off its source of nutrition. Keep delayed gratification in mind when you’re tempted to veer away from this rule. Beware of so-called “small purchases” because they do add up significantly you look at it closely. Data from Statistics Canada indicates that about 15% of generation X had under $10,000 in debt when they were 25 to 35 years old in 1999. In 2016, 25% of millennials in Canada between 25 to 35 years old have outstanding debts of around $12,000. This makes the means of millennials even lower than older generations and that makes it necessary for them to eliminate unnecessary spending they cannot afford.
Some say that instead of following this rule, you should work to “increase your means”. Well, the truth is simply this: people are only able to increase their means in the long run by living within their means in the present. Work for the lifestyle you want. Work hard, save as much as you can, invest wisely, and repeat.
The marriage of these five principles
All these principles work hand in hand. It is impossible to follow one religiously while completely ignoring the other. They may be difficult to live by but plenty of people have been successful in doing so. As a result, they are living comfortably and not in danger of financial ruin.
It’s good to get financial education as young as possible but plenty of people did not have that luxury. If you have children, make sure to educate them on such things. However, if you’re already at a point in your life when you’ve made bad financial decisions that snowballed into something more severe, it’s never too late to do damage control. Slowly begin to rebuild and improve your personal finances by applying these habits to your life.