Do you remember the first time that you tried to ride a bike? Or maybe the first time you tried to read? Or maybe even the first time that you tried to do algebra? You might not have been really good at it on the first attempt, which is an entirely normal thing!
The same can apply to personal finances. You can’t just hit the ground day one and expect instant results. After all, practice is what makes perfect. Let’s practice finessing those finances!
Dear Finance Diary,
The day that personal finance starts to click for you is going to feel like the first time you tried your favourite food: you had no idea you could mix things together to make something this great. A weird comparison maybe, but that’s how personal finances are in my mind. A lot of concepts that come together to help you be financially literate and make decisions that empower your financial future.
Let me break this down finessing your finances into three steps for you. I love three steps and I think just about anything can break down into threes
1. Take Inventory
The first and most important step is to know exactly what you have. Imagine you are trying to sell something but you don’t know what you’re selling or what price you want for it. It makes no sense, right? Well it’s the same for your personal finances. You need to know exactly what you have, and also what you don’t have!
When we have a good inventory of our current situation, we can start figuring out exactly what we are missing to master our finances.
Start by making a list writing down all the things that you know: your income(s), your debt(s), your investment(s), your pension plan(s), the concepts in personal finances that you already understand, and even write down the things that you don’t understand.
Next, take your list and break it down even more: what are your individual incomes, what are all the terms and details of your debts, what is the average return on your current investments, what kind of pension plan do you have, what are some resources you could use to help understand the concepts you don’t understand?
While you’re making your lists, highlight different ideas you want to look into further. Use your resources to find out more information (check out my instagram page @thefinancediaries where you can see my posts and make requests for content!) on these topics.
2. Structure Yourself
Having structure when it comes to finances is key: it gives you something to work towards and helps make sure that you’re on track. What you need to do this is to make a budget!
Budgeting sounds boring and restrictive. It might sound like you’re never going to have fun again, but let me be the one to tell you that is wrong. A budget should help guide you rather than restrict you, and allow you to enjoy your life while sticking to your financial goals.
An easy budget structure to follow is the 50/30/20 rule of thumb, which is based on your net income (this means after taxes and deductions):
- 50% should go towards what you NEEDS (housing, groceries, insurance, transportation, medication, etc.)
- 30% goes towards your WANTS (shopping, hobbies, entertainment, bars, restaurants, subscriptions, etc.)
- and 20% goes towards SAVINGS (loan repayments, emergency fund, investments, retirement savings, etc.)
You can see from the above structure that you still have a lot of room to make your budget custom to you. For myself personally, I use my 30% for my WANTS to go primarily towards my travel budget. It has allowed me to travel without feeling restricted, as I always made sure it was included in my budget. You can figure out whatever is important to you and then allocate more money towards it!
3. Plan Ahead
Once we know what we have, what we owe, the resources that can help us, and a budget, you need one last thing: GOALS! Goals give us further structure beyond a budget. The best part of having goals is that good goals help inspire you to get out of bed in the morning, to go work, to hustle harder, to stick to our budget. Goals give us our bigger picture!
The S.M.A.R.T. framework is the best way to make sure your goals are clear and make sense. Here’s how it works:
S – Specific
M – Measurable
A – Achievable
R – Relevant
T – Time-Based
The first part is being Specific: having a clear objective of what it is that you want to achieve. An unspecific goal would be something that lacks detail like “My goal is to have more money” or “My goal is to have savings”. Specific examples would be something like: “My goal is to have $10,000 in my investment account” or “My goal is to pay off my $5,000 of credit card debt” or even “My goal is to save $1,000 for a holiday”.
The next part is for the goal to be Measurable: having a way to see if you’ve achieved it or not. In the previous example of “My goal is to have more money”, there needs to be a more measurable element to it. What is “more” in this example? Is it one dollar? Is it $500? Make it measurable by attaching a dollar figure to it.
Another way you can have a measurable goal is for it to be a yes/no option. An example of this is: “My goal is to own an income property”. This is measurable because you either have an income property or you don’t.
Next you want a goal that is Achievable/Attainable: that you reasonably believe can be done. You wouldn’t want to say “My goal is to win the lottery for $5,000,000 tonight” or “My goal is to spend $1 every week on groceries”. It would need to be something that you genuinely believe is within your reach.
The following element you’ll want is for it to be Realistic and something that is actually possible. I’m not saying to dream small, I’m just saying to make sure that it’s something that you genuinely believe can be done. Like “My goal is to have an alien hand me $500” is maybe not going to be the most Realistic goal you could have.
Finally, you’ll want Time-Based goals. These can be broken down into:
1) immediate term (what you can do right here, right now)
2) short-term (what you expect to be able to complete in less than 12 months)
3) long-term (what you expect to be able to complete in more than 12 months)
If you want to be very Time-Based, you can even put an exact date that you want your goal accomplished by. This can give you that added component to hold yourself accountable!
What does an overall S.M.A.R.T. goal look like put together? “My goal is to put $50 into my TFSA investment account every paycheque until December 31st 2021” or “My goal is to skip buying a latte every Tuesday so I save an extra $6 per week until May 30th 2021” or “My goal is to pay off my credit card bill of $5,000 in the next 18 months”.
Let me know your S.M.A.R.T. goals in the comments!
Using these 3 essential items of Inventory, Structure and Planning, you’ll be on your way to Finessing Your Finances faster than you binge-watched Bridgerton!