Wednesday, February 13, 2013

Let's Talk Money

If you know me, it's no secret -- I like to spend money. Never money I don't have, but always more money than I should. However, I've realized that impulse shopping is not only an unsustainable way of life, but quite detrimental.

My sister shared a scenario she heard in university (which highlights not only that it is important to save, but that it's important to start early). Take two Students, both age 22. One saves $2,000 a year for 10 years and stops, while the other waits 10 years, then saves $2,000 a year. Assume an average rate of return at 10% and that the contributions are end of year. What will they have at 65 years of age? By age 65, the first student would have $740K, while the latter would have $445K.

So, I've made it part of my mandate to get a better grasp on my personal finances. I'm starting out in the negative, as I have a lot of student debt that needs to be paid off. However, there is such a thing as good debt and bad debt, and student debt is definitely the good kind -- as long as you're working towards paying it off with regular payments.

I've made three goals:
  1. Paying back my debts
  2. Saving 
  3. Investing. 
One of the things I have struggled with is deciding whether to do things separately, in that order (debt repayment, saving, investing) or whether it is okay to do it all simultaneously. I've opted for all three at once. I am the sort to try to have a finger in every pie, and it works for me. It has not been easy trying to decide how to allocate my financial resources but it has been part research and part trial and error.

My financial plan started with assessing my current situation. The first thing I did was lay out where I owe money, and how much interest was accruing. I'm still not fluent in financial literacy but interest in terms of debt repayment, is what screws you. On the other hand, when you're saving or investing, interest is your best friend. Based on what I owed and what I have income wise, I made a plan to pay off my debt in monthly installments. I try to stick to it, and when I have extra, I put it all towards this goal. The quicker I can pay off my debts, the less in added interest I have to pay (I know, so simple, but sometimes easy to forget).

In terms of savings, the rule of thumb is to should put away at minimum 10% of your income. [Through my workplace, I automatically contribute to my pension with every pay cheque, which is a relief to not have to think about. I have yet done the research on this but will report back as I understand how it works.] This is not always easy, though for those of us who still live with their parents, this can definitely be upped. Accordingly, women should actually be putting aside 12% (as women tend to typically live longer, they require more savings in the long run). Here's where it's important to do your research and prioritize your goals. Research your bank, what it offers you for putting your money into savings there. Also, research the different types of accounts there are and what the interest rates are -- if they're fixed and so on. It's amazing how many people our age stick to the banks and types of accounts they were with as students instead of looking into maximizing their dollars. Some accounts charge you to even own that account, and then extra for transactions and withdrawals, etc. I bank with President's Choice Financial, no fee banking all the way. It works for me. If and when I have a lot more money, I will definitely look into larger banks but for where I am in my life, PC is effective. I started a Tax Free Savings Account last year, and I recommend everyone does the same. I consider it as part of my longer-term savings (over 5 years) though you can decide what you want it for for yourself.  My other savings account is for the nearer future (2 - 5 years) to help me move out, go on vacation, etc.

Investing is a longer term goal for me, and I am just starting to understand mutual funds and whether it even makes sense for me right now. In the meantime,  I've started a "spending log" to keep track of where I am mismanaging my funds. It's quite thorough and definitely makes me more accountable to myself. I downloaded an Excel template from Microsoft, but you can even keep track on the back of your planner. You don't have to continue forever, but it is helpful. I also use Mint, which tracks all my spending for me -- you can do this online and through the iPhone app. 

In all, I am becoming more invested in my personal finances and I thought I'd share what I'm learning, because maybe it can help you too.

1 comment:

  1. Definitely a useful post... I'm in the same boat, as I'm trying to find the right balance in saving/spending! Easier said than done, but it helps when you have a plan like yours!