The Canadian Financial Capability Survey of 2014 revealed that one third of Canadians did not have a financial plan for retirement either personally or through a workplace pension plan. As much as 60% of Canadians do not know how much money they need to save up for retirement to maintain their desired standard of living. To make matters worse, 3 in 10 Canadian adults are not confident about their ability to earn enough money to save up for retirement and only 7.1% of the respondents considered themselves very “knowledgeable” financially.
Interestingly, Canada’s case of financial illiteracy isn’t isolated to our country alone – the same reality plays out in many countries where larges swatches of the population don’t have the requisite information and skills to make smart personal finance decisions. The main reason behind this personal finance inadequacy is that personal financial management is not taught in schools and most people learn how to manage their money the hard way after finding themselves on the path to financial ruin.
This piece provides insight to four steps you can consistently take to reduce your odds of falling into financial troubles.
1. Separate your savings from other expenses
The first step towards making consistently smart financial decisions is to take account of your income and expenses. make sure that you separate your savings from your checking account or any other bank account that you might keep. In fact, your savings account is different from your emergency savings fund – the emergency savings fund is supposed to cover 3-6 months of living expenses in case you suddenly lose your job, or you need to change the transmission on your car. No matter the financial mess you’re in today, just know that all hope is not lost. You can dig yourself out of this hole, rebuild your credit rating, and even boost your credit score. Some traditional banks offer also online banking services with high-yield checking accounts or cash back programs so why not use a rewards credit cards and get something back on your spending?
2. Create and use a budget
After you have successfully accounted for your income and expenses, you’ll need a budget to help you keep your expenses lower than your income. If you look through the list of your expenses, you should see some recurrent needs such as groceries, gas, rent, and coffee. You’ll also see some other expenses such going into fashion, entertainment, charity, and the seemingly explicable expenses. The aim of a budget is to protect you from unplanned and impulsive expenses, so that you only spend the money you can afford to spend both on your necessities and your indulgences. You may want to adopt the envelop budgeting method so that you can have visual representation of how much money can afford to spend on each category of expense in your budget.
3. Reduce your debt and increase your savings
If you did step two properly, you should ideally start having some money left over from keeping your expenses lower than your income. However, if you already have some debts, you’ll need to start paying down your debt fast, starting with the high interest debts. In fact, you may want to cut off your indulgences so that you can have more money to pay down your debts.
More importantly, you need to start making conscious efforts to increase your savings. You should open and use a dedicated account to remove the temptation to deplete your savings every time you see a product or service that looks interesting, cheap, or exclusive. Most of the best savings accounts in Canada have zero fees to encourage you to save, the offer at least more than 2.75% promotional interest rate, and they also offer deposit bonuses in addition to other perks. It is also in your best interest to automate your savings process to commit a predefined percentage of your earnings into your savings account each month.
4. Start making proactive plans towards retirement
Lastly you can start making proactive plans towards retirement by deciding on how much money you need to stash away to maintain your preferred standard of living during retirement. Employer and self-managed retirement plans are good places to start, they help you put a part of today’s earnings away for the future and they also come with tax benefits attached.
Beyond your corporate retirement plans, making smart investment decisions could also help you increase the odds of attaining financial freedom much earlier than you retire. Before you start investing, you should consider having a consultation with a financial advisor who can recommend a mix of conservative, speculative, growth, or income investment for you based on your financial goals, risk profile, and available funds.