At the time of publishing this post, there are less than 60 days left in 2024. You might want to start thinking about your dreams and goals for the new year. Whatever yours are, I’m going to suggest that learning to master your money should be one of your goals. After all, you’re the person earning the money and you should be firmly in control of what your money does. Trust me. Life is better is when your money works harder for you than you do for it.
There’s no need to wait until January 1 to make the following suggested changes. Believe me when I say that you’ll want to master your money sooner rather than later. Start today.
If you’re a person who likes to make resolutions, then you can implement these three steps on New Year’s Day. Everyone else, I would strongly encourage you to do start following these steps immediately.
Top Up Your Emergency Fund
The goal is to have one year’s worth of necessary expenses set aside. I know that most experts recommend 3-6 months’ worth of expenses. Personally, I don’t believe that this is enough. You’re free to disagree with me, of course. The reality is that it’s better to have a bigger emergency fund than you might need. When your income disappears, you’ll want to have as much set aside as possible to tide you over until you get another paycheque.
Your next job might pay you less than you were earning before. It might take you longer than 6 months to find your next position, or to start earning money from your own business. Being unemployed is a bad situation. Going into debt to pay for living expenses while unemployed makes the situation considerably worse.
Do yourself a favor and set aside more than you need. Your necessary expenses are your shelter costs, your basic utilities, your food, your transportation, your medications, and your phone. If you have pets, then you need to cover their costs too. Everything else should be put on hiatus until you get another source of income.
For most people, it will take some time to hit this target. Setting aside a year’s worth of expenses won’t be quick. There will be many, many temptations along the way to spend re-direct money away from the task of building your emergency fund. Do yourself a favor. Set up an automatic transfer from your chequing account to your emergency fund. This way, you don’t have to think about funding your future emergencies as it will happen automatically through the magic of technology.
Invest Your Money
First things first – track your expenses. Ideally, you’ll do this for a month. Write down what you spend. Figure out which expenses were necessary (see above) and which ones weren’t. Of the second group, identify the ones that don’t make you happy and promise yourself to eliminate those ones in the future.
Whatever money is cut needs to be re-directed towards your investment portfolio. Your investment portfolio consists of registered accounts and your brokerage account. Your registered accounts are your Tax Free Savings Account (TFSA) and your Registered Retirement Savings Plan (RRSP).
Fill your registered accounts before you start contributing to your brokerage account. The TFSA will not generate a tax deduction but the money will grow tax-free forever. You can also withdraw money from your TFSA without paying taxes. The RRSP money is tax-deductible, and money inside an RRSP will grow tax-free. Once you start to withdraw the money, you’ll pay taxes on it. Fill your TFSA to its limit, then focus on filling your RRSP.
Once you’ve filled your registered accounts, then you can open a brokerage account and re-direct your investment contribution. Money invested in your brokerage account is not tax-deductible, and you do have to pay taxes on it every year. Ideally, you’ll be investing in securities that generate dividends and capital gains for you. Dividends and capital gains are not taxed as heavily as interest earned in a bank account or from GICs.
Follow this order of investing every year: TFSA -> RRSP -> Brokerage Account.
If you’re starting from scratch, it might take you a few years to fill up the registered accounts. That doesn’t matter. You’re trying to build a nice, fat money cushion for Future You. Consistency is key, so don’t worry about how long it will take. Just start today and don’t stop.
Pay Off Debt
Ridding yourself of debt is just as important as long-term investing. I don’t want you sacrificing one for the other because you need time on your side. You need to have money invested so it can compound for as long as long possible. This is why you should be investing at the same time that you’re paying off debt.
After you’ve eliminated the debt, you will have a hard-working investment portfolio in place. This is a wonderful thing! It means you won’t be starting from $0 if your debts aren’t gone until you hit your 50s or 60s.
Tighten your belt and learn to say “No”. If you have debt, then I want you to do the following.
Take half of your contribution amount and direct it towards your debt. Allow me to be very clear. You’re already paying the minimums on your debts every month. Half of amount that would’ve otherwise gone to your investments will be added to the minimum payment of one of your debts. An increased payment dramatically shortens the time it will take to pay off a debt. Once debt #1 is gone, add that entire former payment from debt #1 to the minimum payment of debt #2. When debt #2 disappears, add the entire former payment that was going to debt #2 to the minimum payment for debt #3. Repeat this cycle until all of you’ve paid off all of your debts.
Do not get bogged down in deciding whether to use the Debt Snowball Method or Debt Avalanche Method. It truly doesn’t matter. The only thing that matters is your decision to start paying down your debt today.
Both methods will get your out of debt. Personally, I like the Snowball Method since it eliminates the smaller debts first. Paying down debt sucks, so seeing wins as soon as possible makes people feel good.
Once you’ve paid off your debts, take the former debt payments and re-direct them to your registered accounts and your brokerage account.
That’s It. That’s the Plan.
Once you’re out of debt, stay out. Save up for large purchases so that you don’t have to finance them. The one exception is your mortgage. Even I will admit that this is the one purchase where financing is nearly unavoidable without a lottery win, a big insurance settlement, or an inheritance.
Keep your emergency fund fully-funded. If you need to use it, then make it a priority to build it back up again. Life can be funny. There’s no rule saying that only one emergency is headed your way.
Invest for the long-term. Put your money into well-diversified, equity-based securities. Personally, I like exchange traded funds (ETFs) more than I like mutual funds. For nearly the same security, ETFs will cost you atleast 80% less. Read The Simple Path to Wealth by JL Collins. While it’s written for an American audience, the savings & investing principles are equally applicable to Canadians.
You’re already doing all of these things, you say? Fantastic! Use this time to tweak your system, if necessary. Consider increasing your emergency fund by 3%, just to keep up with inflation. It’s never a bad idea to increase your contributions to your brokerage account by an additional 1%. Taking this step every year will make a big difference in how much your accumulate. It bears repeating – once your debt is gone, keep it gone.
That’s it – that’s the plan to master your money. If you do these three things, then you’ll be setting yourself up for success.
Everything else is details.