When was the last time you spent even $100 and didn’t feel any guilt?
If you know me, you know I have a “spending” personality. I enjoy spending and typically have lived such a way. Unfortunately, being a student for most of my life, every purchase was full of guilt. Do I really need this? Should this money be better allocated somewhere else? Many people go through their entire lives living like this, even with comfortable salaries. After finishing school, I swore I wouldn’t be one of them.
But it’s one thing to say it, and another to implement a plan – so that got me digging around for the best ways to independently manage finances. I thought I’d share some things with others in a similar situation as me. I’ve come up with a few things that can be used to better manage your financial situation: Automation, Barriers, Goals, and Knowledge.
Knowledge is needed so you aren’t ignorant of the fact that YES YOU DO HAVE TO SAVE MONEY.
Do you plan to have kids? Did you know that it costs between $20,000 and $30,000 per year (Not including University) to raise a child?
Do you plan on getting married? Did you know that the average wedding cost in the US is around $20,000? And that typically the budgets for those weddings are 50% of that.
This knowledge and understanding isn’t meant to scare you, but to make sure you aren’t being ignorant of the fact that you do need to save some money.
Lets face it, it’s tough to save money without a reason for saving. It’s important to have both short term and long term savings goals. I’ve realized that a goal should not be a dollar amount, but instead an object or an event. Don’t set the goal to save $10,000 this year, because money is only a means to an end, and without knowing what that $10,000 will be spent on there is no motivation for you to save it.
Instead, set some real goals: A down payment on a house. A wedding. A yearly vacation. Things that you can feel good about working towards. This will get you some motivation to take the most important step: to implement a financial plan.
What do I mean by a barrier? Active and Passive barriers hinder people from saving money just as they make everything more difficult, including eating healthy and being more productive. An active barrier is a physical obstacle that’s prohibiting something, where a passive barrier is the lack of something that in turn makes things more difficult.
It is important to try to increase barriers that stop you from unconsciously spending money and to destroy the barriers that prohibit you from saving money. I’ve recently started getting my pay cheques deposited into my savings account instead of my checking accounts, the reason for this is because I don’t have access to the funds in my savings account with my debit card, and so if I want to make a purchase I need to log in to my online banking and transfer money into my checking account – which will ultimately deter me from making petty purchases with my debit card that I don’t need. Also, I’ve set up some automatic deposits from my checking account into another savings account – one that I don’t have access to funds immediately. This is by no means a full plan, but it has been helping me tackle some of the barriers while I set everything up.
The first step here is to identify the barriers that need removing or implementing. To get a better understanding on why or why you don’t do some things – try using the 5 Whys method.
Why aren’t you currently saving money? – I don’t have a savings account…
Why? – I don’t have a need for one…
Why? – I have nothing to save for…
Why? – I haven’t thought about the things I’ll need money for in the future.
Why? – I’m scared to think about those things because they stress me out.
And you’ve identified the reason you don’t save money – because thinking about finances and planning for your future scares you. Now you can work at fixing the root problem and start saving some money.
Financial automation will solve many headaches and stresses when it comes to paying bills, saving money, and all around managing your finances. Remember how stressful paying your rent was until you set up a direct deposit? Or how many times you incurred some interest charges on your credit card because you had to physically deposit the money into the bank machine? This can all be avoided with a little financial automation.
So how do I start, what’s the plan?
Determine what’s most important for you right now in terms of saving. A new house, wedding, vehicle, furniture, etc. Rank them in order of importance. This will get some motivation for you.
Visit your bank to learn about RRSP options or talk to your employer if they have some sort of savings program as well. Get an RRSP going as soon as possible.
Open a convenient savings account – I recommend ING Direct because they allow for “virtual” or bucket savings accounts within your savings account. You can do this online or over the phone.
Contact your employer and set it up so that a % of your pay cheque goes right into your RRSP. This will take ALL the hassle out of funding your RRSP, and will insure that even if you don’t cap your limit, you will get at least some of the tax benefits. I would recommend by starting at 10% of your after tax income. So a 90/10 split between your checking account and RRSP account – your employer should have no problems doing this for you.
Note: If you’re a new grad entering the work force, I recommend building up an emergency fund before funding your RRSP. Determine how much it would cost you to survive if you happened to lose your job. IE. Rent, power, and food. (You can suspend your internet, cable, data-phone plan, etc while you find a new job.) And build up a 3-6 month safety net in an account as quickly as possible. Lets be honest, your RRSP isn’t going to help if you get laid off from your first job a few years after graduation, make sure you can survive first.
I recommend another 10% within the first day or two after your cheque is deposited to be automatically moved into your ING savings account, and it can be allocated between your long- and short-term saving buckets. IE. 5% to down payment on a house, 2% into the wedding fund, 2% into the furniture fund, and 1% into the trip to Europe fund, as an example.
Set it up that after another day or two, all your fixed costs are automatically paid for. Your utilities, rent, internet, phone, etc. (you might need to have this split over two withdraws if your employer doesn’t pay you once a month) You’ll need to budget money for food and miscellaneous things, which over time you’ll get good at keeping these consistent and knowing typically how much they’ll be. In the beginning you might want to set aside cash into another account to make sure you can cover them until you get into the routine.
Now: You’ve automatically saved money in your RRSP and long and short term savings, you have your bills paid for the month and money for food. You’ll be surprised now how much money is still in your checking account. This is your guilt-free money. Go shopping for a new pair of shoes, go out with the guys for a drink, buy that new ipod, whatever you do with it enjoy the fact that you can do it guilt-free.
A few things to note: If you have a convenience/credit card that gets you points or cash back, etc. You should use this for your purchases such as your fixed bills, food, and guilt-free purchases. If you don’t have the discipline to stop here, perhaps you either shouldn’t be using it or lower your limit. Also, try your best to cap your RRSP contributions each year for maximum benefit. Lastly, there are huge benefits to investing beyond your guaranteed personal savings accounts and RRSP. If you’re looking to diversify your investments, be sure to do some research and understand investing before jumping in. Also, be sure to invest with money that’s okay to lose.