6 things my parents never taught me about money
My family was never poor. But somehow, we were always broke.
From the outside, you wouldn’t have known it. My folks had a nice home with a big yard in a growing suburb, leased new cars every few years, and made regular visits to the theatre to see Phantom, Les Mis’, or Cats while enjoying a decent bottle of wine.
If Instagram was around in their day, they’d be killing it. But on paper, the story was wildly different.
The reality was that our house was re-mortgaged, more than once. Leasing cars meant the payments were never-ending. The tickets to the latest musical were paid for on credit. Nearly every aspect of life was lived beyond their means, and eventually, the stress of their debt led to divorce. They sold the house, ditched the cars, and stopped going to shows. I’d say ‘lesson learned’, but I’d be lying.
When I was seven, I got my first job — a paper route. And since then, I’ve never not had a job; but for the first 15 years of my working life, my relationship with money closely mimicked that of my parents. Money in, money out.
Then, in the spring of 2010, I got a bill from Canada’s student loan centre for over thirty grand, and my attitude towards money changed immediately. I moved to Newfoundland for my first big-boy job writing ad campaigns, and soon after, I took a stab at creating the first of six things my parents should have taught me about money: a budget.
Lesson 1: How to make a budget
After seeing my parents struggle financially, I was determined to take any step necessary to avoid repeating their situation. Making a budget was the first step. While less than half of Canadians have a budget, 93% of those who do have a budget stick to it most of the time. Clearly, it pays to have a budget.
Fortunately, as a single, child-free 23-year old, my expenses were simple, so my budget wasn’t incredibly complicated. Rent was $400/month, internet was $50, cell phone $50, $200 for groceries, a couple hundred for booze, and every leftover dime went to student loans. Unfortunately, booze budget always managed to bloat — as did I — screwing up the rest of the plans.
I eventually re-examined my budget, identifying two distinct categories: essentials (rent, internet, phone, groceries, debt payments) and everything else (booze and takeout). Arguably, internet and phone were non-essential, but I wasn’t ready to cut to the figurative cord.
Need a budget? Take this template and customize it however you see fit.
While my expenses have changed (hello, mortgage payments, gym membership, and Spotify subscription), my budget has stayed the same, prioritizing the need-to-haves over the nice-to-haves. The process forced me to be honest about the crap I have and use but don’t need, while making it easier to speed up debt repayments and save for big-ticket items, holidays, and retirement.
Lesson 2: How debt and interest work
When I mentioned my allotted beer-budget would often overflow, I didn’t mention how I solved the problem: by swiping my credit card. But while I knew credit cards charged interest, I thought making monthly minimum payments would keep me in good standing.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” — Albert Einstein
Like it or not, Einstein had a point. By carrying a balance on my credit card, I’d be charged interest on the amount owing. And if I didn’t pay my bill in full the next month, I’d be charged interest on the new total amount, including last month’s interest charge. Until my debt was paid off, the interest would continue compounding.
Conversely, compound interest can also work in your favour. If you have $100 in your savings and it earns 3% interest per month, you’ll earn $3 in the first month, giving you a total of $103. Then in the second month, you’ll earn 3% interest on that $103, giving you an extra $3.09. That nine cents may not seem like much, but if you’re saving for 30 years, compound interest makes an enormous difference.
For a more thorough dive into how interest words, check out this article I wrote last year.
Lesson 3: How to prioritize
Once I understood interest, the next step is prioritizing expenses, bills, debt payments, and savings.
Obviously, the essential items from your budget are the first priorities; housing, utilities, groceries, etc. These are things you can’t (actually) can’t live without, and they should come before everything else.
When those are paid, high-interest debt payments, like credit cards and payday loans, come next. The interest rate on that debt can be crippling, and should be paid off at all costs.
And finally, after your credit cards and other high-interest debt is paid off, it’s time to build an emergency fund, pay off low-interest debt, and save for your future.
Lesson 4: How to build an emergency fund
Building an emergency fund is effectively giving yourself an insurance policy. Best case scenario, you never need it, and you’ve got some cash set aside. Worst case scenario, if you lose your job, fall ill and can’t work, or if you face any unexpected expenses, you’ve got the money there to cover your bills.
The rule of thumb for an emergency fund is to have enough to cover 3–6 months of expenses. To figure out how much you need, add up all of your essential monthly expenses, then multiply that by 3–6 months. So if your rent, utilities, groceries, insurance, etc. totals $2,000 per month, aim for between $6,000–12,000 in your emergency fund.
Obviously, this can take a while to build up, but that’s okay. Set aside small amounts of money in a high-interest savings account, so if you ever need it, your money is easily accessible.
Lesson 5: How to invest
As simple as I now know investing can be, I can totally empathize with my parents not teaching me about it. Because, while investing can seem incredibly complex, it really doesn’t have to be. Here are the basic types of investment products:
Stocks are individual pieces (called shares) of a company. If the company’s value goes up, so does the stock that you own. If its value goes down, so does the value of your stock.
Exchange-traded funds (ETFs) and mutual funds are a simple way to invest in hundreds or thousands of companies, with just one product. They’re typically more secure, because if one or two companies drop in value, the other companies in the ETF or mutual fund should prevent your investment from tanking.
GICs and bonds are effectively you giving a company or government a loan, with a guaranteed or promised interest rate coming back to you. It’s good to have a portion of your investments in bonds or GICs, as they’re incredibly stable.
For the vast majority of people, a strategy called couch potato investing is more than enough to prepare for the future. Couch potato investing is an approach where you invest in just a handful of ETFs that cover a huge portion of domestic and international markets, as well as bonds.
The important thing to realize is that storing your cash in a savings account is a sucker’s game (of course, your emergency fund is an exception). Savings accounts pay next to nothing, and thanks to inflation, they can actually cost you money. If you aren’t comfortable investing your own money, there are loads of robo-advisors that take the leg work out of investing — albeit for a small fee.
Lesson 6: How to know when enough is enough
The first five things on this list were gimmes. If you’ve read about personal finance before, most of that should have been old news. But, while I do wish my parents taught me the basics of managing money, there’s something even more important that I’m still struggling with: when is enough enough?
Having some money is good, but having all the money isn’t worth a dime if you can’t call it a day.
Honestly, this is the hardest lesson to learn. Maybe that’s why it’s last on the list. Or maybe because our society as a whole hasn’t figured it out yet. Regardless of why, what the hell can we do about it?
Having some money is good, but having all the money isn’t worth a dime if you can’t call it a day. Spending every waking minute working is horribly unhealthy, and it’s far better to live modestly and within your means than it is to have a bigger home, newer car, or shinier toys, if it comes at the expense of your relationships and well-being. I’m guilty of it, as I’m sure many of you are too. We’ve all put in an few too many extra hours in hopes of getting recognized, earning that promotion, and climbing the ranks. But if you can’t take a step back and appreciate what you’ve earned and accomplished, what’s the point?
I don’t think I have ‘enough’ just yet, but I hope that if I ever do, I can realize it. Or maybe I’m there already, and I’m writing a lesson that I haven’t yet learned myself.
Lastly, I want to be clear about something; I don’t blame my parents for their lack of financial planning or understanding. My dad worked his ass off and made good money for many years, and mum worked while also taking care of my brother and I. They took great pride making sure we never wanted for anything, and I’m incredibly lucky to have learned what I did from them.
I’m just completely fixated on avoiding their financial situation at all costs.