We are halfway through 2023 and things are a lot different economically than they were just a couple of years ago. Interest rates and prices for many goods have skyrocketed, real estate price growth has flattened, and although stock markets have fluctuated, the TSX composite index is within 30 points of where it was on this date in 2021. If you had this information two years ago you probably would have done a few things differently with your finances. A crystal ball may helped, but they aren’t an especially reliable financial planning tool — so how do you take some of the uncertainty out of your financial future?
Unfortunately, there isn’t one simple solution and each situation may vary. If you are invested in the markets you could adjust your portfolio holdings and lower your risk. But are there any more fundamental pieces of financial advice that never go out of date and will last a lifetime? The answer is yes.... and here are five that top our list.
1. Start small and invest early
Starting small could be as little as $100 month and starting early means now! Invest what you can and don’t think a $100 monthly will never amount to anything. Only around 5% of Canadians under 25 have a TFSA, which means 95% have already missed out on 7 years of compounded returns! Investing that "measly" $100 month at 5% for 47 years (18-65) will give you $68,754 more than someone who did the same for 40 years starting from age 25. Time really is money when it comes to compounded returns, so get started as soon as possible.
2. Make more or spend less?
Our advice would be to do both, but there are limits on how much income you can generate. Furthermore, if you fail miserably at managing $70,000 dollars because you make poor spending decisions and don’t have any system to save and invest some of your money, then making $90,000 may not solve your financial problems. Learning to manage your expenses and live within your means is a critical wealth-building skill regardless of how much income you earn. You don’t have to look very hard to find a high-paid athlete, movie star, or even a lottery winner who spent it all!
Cutting back on expenses has a larger impact on your bottom line than making more money. You may even be able to cut back without a huge pain factor by first auditing your expenses and keeping track for a couple of months. You may find some expenses you could do without, like that 'lightly used' gym membership or seldom watched 300-channel cable package. A part-time job or side hustle isn’t a bad idea, but it comes with its own pain factor in lost leisure/family time and taxes will also bite into your earnings. If you are able to make some extra income, just make sure you manage it wisely!
3. Re-evaluate your wants and needs
A 1200 square foot 3-bedroom bungalow used to be the standard for many young Canadian families back in the early 1970’s. A lot of us grew up in a house like that with our parents, brothers, sisters, even the family cat managed to squeeze in! Houses are much bigger now (over 2000 square feet on average) and often come with plenty of high-end finishes and 3 or 4 bathrooms.
Lifestyle creep is not limited to housing, it has inundated every part of our life. From what we drive, to how often we eat out, to where we go for vacation, we are constantly presented with a new norm as our wants slowly transition to needs. Being able to satisfy your needs (and hopefully quite a few wants) in retirement will only come from making smart spending decisions about your wants earlier in life and freeing up the cash to start saving and investing.
4. Understand credit and debt
131 months – that’s how long it takes to pay off a $1000 credit balance paying the minimum monthly payment at 19.99%— and it will cost you another $1000 in interest charges! Many people carry a credit card balance and are blissfully unaware of just how much it is costing them each month.
Car loans are another area where the financing costs are often a lot more than most people realize. It wasn’t that long ago dealer financing rates were under 2% and new cars cost $35,000. Dealer financing rates are now around 6% and the average cost of a new car in Canada is now over $60,000 — that's a lot of interest to pay if you have a 7-year car loan!
The key is to be knowledgeable about your debt. Track what you owe and what it is costing you as well as any alternatives that may lower that cost. For example, refinancing your mortgage or drawing on home equity to pay off higher interest loans or credit cards. If you struggle with debt then it's time to bear down on expenses and draw up a strict repayment plan.
5. Get financially literate
Managing your money has become more difficult as we have a lot more spending, saving, and investing options, but we also have access to a lot more information and tools to help us. Some things like a Registered Education Savings Plan (guaranteed 20% annual return for your child’s education) are a no brainer and can easily be understood with an hour or two spent online. Understanding the fees on your investments and how much they will cost you over the life of those investments is another need-to-know piece of information that can be easily confirmed.
Managing your retirement savings is more complicated because there are a lot of variables (lifespan, health, income, taxes, lifestyle) as well as options (TFSA, RRSP, investment properties, pensions) to consider. You may want some professional advice at some point but arming yourself with as much financial knowledge as you have the time and motivation to learn will help you better evaluate any advice you do get.
If you are looking for more timeless advice, make sure to join Arian Beyzaei in next week’s free webinar on the financial lessons from Rich Dad Poor Dad. Written by Robert Kiyosaki more than 25 years ago, this wealth-building bible has sold 32 million copies and is still highly regarded and often recommended despite being written in 1997.
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