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My family was never poor, but we were always broke.
From the outside, you wouldn’t have known it. We had a nice home with a big yard in a growing suburb. They leased new cars every few years and made regular visits to the theater and enjoyed a decent bottle of wine.
If Instagram had been around in their day, they’d be killing it. But, on paper, the story was wildly different.
The reality was that our house was remortgaged — 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. 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 $30k of student loans, and my attitude toward 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 something my parents should have taught me about: a budget.
Making 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 fewer than half of Canadians have a budget, 93 percent of those who do stick to that budget most of the time. Clearly, it pays to have one.
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, cellphone $50, $200 for groceries, a couple hundred for booze, and every leftover dime went to student loans. Unfortunately, the 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 nonessential, but I wasn’t ready to cut that figurative cord.
While my expenses have changed more recently (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.
If you want to create your own budget, but don’t know where to start, there are tons of online templates and customizable examples, like this one.
How Debt and Interest Work
When I mentioned that my allotted booze budget would often overflow, I didn’t mention how I solved the problem: by swiping my credit card. I knew credit cards charged interest, but I thought making monthly minimum payments would keep me in good standing. I hadn’t yet learned about interest rates and how compound interest works.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” — Albert Einstein (or someone equally smart)
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 favor. If you have $100 in your savings and it earns 3 percent 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 percent 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.
Once I understood interest, the next step was prioritizing expenses, bills, debt payments, and savings.
Obviously, the essential items from a budget are the first priorities: housing, utilities, groceries, etc. These are things you (actually) can’t live without, and they should come before everything else.
After those are paid, high-interest debt payments, like credit cards and payday loans, come next. The interest rate on that debt can be insurmountable and should be paid off as soon as possible.
And, finally, after your credit cards and other high-interest debt is paid, it’s time to build an emergency fund, pay off low-interest debt, and save for your future.
Building 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, become ill and can’t work, or if you face 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 three–six months of expenses. To figure out how much you need, add up all your essential monthly expenses, then multiply that by three–six 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, 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.
The Basics of Investing
I can totally empathize with my parents not teaching me about investing — it can seem incredibly complex, but 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-advisers that take the leg work out of investing — albeit for a small fee.
When Is Enough, Enough?
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?
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.
It all comes down to this: 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 a 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.
While I did figure out all these things on my own, I do 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 my mum worked while also taking care of my brother and me. 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 hoping to avoid their financial situation — at all costs.