Money. It’s the root of all evil; money doesn’t grow on trees; and it takes money to make money are some common expressions that many people have grown up hearing. It’s no wonder then that many people have a dysfunctional experience with money. In fact many people confusedly believe that money is the end goal: money is a tool for us to use to attain our goals. The purpose of money is to allow us to acquire the things that make us comfortable. Nothing more. Nothing less.
Financial literacy is not a curriculum taught in most schools, not even in business schools. Society teaches what it looks like, how to count it, and who has it. What we don’t learn are simple money concepts. A proportion of society considers these concepts common sense. Those are the few who were able to learn from their families or environment. Another proportion of society never take time, or lack an opportunity to learn some of these basics.
The following is a list of basic items that we should all be cognizant of to keep a little more in our pockets.
Negotiate, Negotiate, Negotiate
Most people fear and avoid confrontations. Unfortunately, negotiations are considered by many to be either confrontational, or the other extreme: begging. Negotiations can be a powerful ally to you in your everyday life. You would be surprised at how many things you could achieve simply by asking. Anything can be negotiated, from credit card rates to store discounts—items that usually aren’t considered negotiable. A negotiations course is a wise investment in yourself, as putting it into practice can save you a significant amount of money.
Create multiple sources of income
There is no such thing as job security. The only security is the knowledge that you are not reliant on your employer to sustain your way of life; having multiple sources of income (MSI) is a way that can be accomplished. MSI means earning money from something other than your primary source of income. For example, rental properties, a multi-level marketing program, a franchise etc. The ideal state is for the MSI to be self sustaining, with little to no involvement from you. The early stage of any MSI will require work for it to be developed, but look to develop those items that can grow without incremental effort from you. One of the advantages of creating a business, even a small one, is some everyday expenses will start to become tax deductible, which will put more money in your pocket.
Creating a budget is the best way to help you track your spending. Most people dread the sound of this because it connotates a confinement in how you live, thus stifling your freedom. The reality is freedom can still exist, you will simply be more accountable to yourself now, and you will understand where you’re spending your money. This is a perfect exercise to help you make decisions that can improve your financial situation. If you possess a car, for example, along with car and insurance payments and gas needs, and you live downtown where you can walk or commute to work, your budget will show you the proportion of your income the car consumes, and an alternative could be to sell the car and rent only when needed. The point is the budgeting process will force you to look at those items when you categorize your expenses and tally the amounts for each category.
While it seems very basic, the ultimate goal in this section is to spend less than you make. It’s easy to spend the bulk of what you earn to have a bigger screen TV than your neighbour or friend has; it is much more difficult to be responsible and spend slightly below what you can afford.
Manage debt wisely
Credit is only bad when it is not used appropriately. As much as possible, refrain from borrowing money for household items or non-appreciable goods—goods that decrease in value over time, rather than increase in value. In particular, avoid finance charges greater than 10 per cent. A great practice is to have a credit card and pay the balance in full every month. If you don’t have the cash at hand, use a line of credit to pay off the monthly credit card bill. However, if you look back at the previous section where you’re supposed to be spending wisely, it is advisable to not put yourself in a position where you lack the cash to pay off your credit card bill. Most important is to avoid high interest rates, as it is difficult to get ahead in life while paying after tax earned income on non tax deductible interest.
Use rewards to your advantage
Do the math. Most people don’t care enough or don’t feel comfortable calculating the value a credit card reward program represents. All programs can be translated into a percentage off and most premium cards deduct about 1-1.5 per cent from your balance. Watch out for the cards that have a tiered rate, because the actual rate you receive (based on your spending pattern and credit card usage) will usually be a lot lower than the advertised top tier.
Pay yourself first
No money article is complete without a discussion on investing. An excellent book for beginners is David Chilton’s The Wealthy Barber. In the book, you will learn the concept of paying yourself first, which means you take a portion of every pay check and apply it to some saving vehicle (saving account, term product, mutual fund etc). Another important concept that is introduced is dollar cost averaging. This concept keeps you focused on the long term by not trying to ‘time’ the market. The concept is that if you buy the same dollar amount on a regular basis, you will buy less when the price is high, and more when the price is lower, resulting in a lower average cost.
TFSA vs. RRSP
With the introduction of the Tax-Free Saving Account, the investing decision has become a little more difficult for some. The account forces people to decide between investing in a TFSA or an RRSP. One of the deciding factors will be how soon you require the funds; if you need them within a few years, the TFSA would likely be your choice. If a longer term (retirement or close to retirement) is your time frame, an RRSP may be your choice. Part of the decision also depends on the difference of your expected marginal tax rate when you anticipate withdrawing the funds. A good portfolio will actually blend a combination of the two. As this topic can get complicated fast, it’s best to do your research and talk to an advisor (your local bank can assist you as well).