What does thinking about your finances do to your blood pressure? For many, money issues are a primary source of stress and anxiety.
In fact, 48% of Canadians say they’ve lost sleep because of financial worries, according to research by the Financial Consumer Agency of Canada.
Money management isn’t a skill that comes naturally to many people. They don’t exactly teach it in school, and even if you have things planned out, life is sure to throw you some curveballs.
With these basic money management skills, you can feel better prepared for financial twists and turns.
1. Tracking cash flow
The first money management skill to master is keeping a pulse on your cash flow — a fancy way of saying “know where your money is going.” After tracking expenses for a few months, many people discover they’re spending more on certain things than they would have thought, such as eating out or subscription services.
With better insight into your spending, it’s easier to make an accurate budget and think about reallocating funds to efforts that will have more long-term benefit, like saving for retirement.
2. Setting financial goals
One of the best money management skills is the ability to set — and stick to — financial goals. This could be anything from paying down debt, to having enough money to retire comfortably. Without set goals in mind, you’ll just be flying by the seat of your pants. Rarely does that work in your favour.
In an ideal world, you’ll work with real numbers to help you reach your goal. For example, let’s say you want to buy a home in five years and you know that you’ll need a down payment of $100,000. That means you need to save $20,000 a year or $1,666.67 a month.
But goals can also be small and simple. For example, setting aside $50 a month in an emergency fund for unexpected expenses. Having achievable money goals is never a bad idea as you’ll always have something that you’re working toward.
3. Using tools to save time (and money)
Most everyone has money sitting in a bank account, but did you know that certain types of accounts earn interest while your money sits there? These accounts won’t make you rich, but they’re a good way to keep your money working for you while pursuing larger goals.
Credit cards can be useful money management tools when used responsibly. Certain cards can help you build credit, earn cash back or make it cheaper to travel. Balance transfers and low-interest credit cards can even be used to reduce your overall debt.
There are also mobile apps that will analyse your spending and even give you suggestions on how you can cut your expenses. Some apps will even automatically save and invest for you.
The point is, whether it’s a high-interest savings account or a budgeting app, there are lots of great tools that can help you manage your money more efficiently, and even help you save.
4. Nurturing your credit score
Your credit score is a three digit number that falls between 300 and 900. Credit scores are calculated based on your bill payment history, credit utilization, hard inquiries and more.
Lenders consider your credit score a key factor when determining whether or not to let you borrow money. No matter if it’s a mortgage or a credit card, the higher your credit score, the more likely you are to be approved at a reasonable interest rate.
Nurturing (or rebuilding) your credit score is something you can take charge of all on your own, at any time. Paying your bills on time, keeping debt balances low and limiting the number of hard inquiries on your credit report are all ways to maintain a healthy score.
5. Understanding how different accounts work
Sometimes, smart money management is a matter of using the right accounts.There many types of bank and investment accounts in Canada. Each one has a different purpose, which is why you’ll want to start with a basic understanding of how each one works. These include:
- High-Interest Savings Account. Money in a HISA earns more interest than in a typical bank savings account.
- Registered Retirement Savings Plan. An RRSP is a common retirement savings vehicle. You get a tax break when you make a contribution.
- Tax-Free Savings Account. There’s no tax break when you contribute to a TFSA, but any interest gained can be withdrawn tax free.
- Registered Education Savings Plan. Setting up an RESP for a child’s future education costs is a smart move since you may get a 20% match (up to $500) thanks to the Canada Education Savings Grant.
6. Planning for retirement
Strong money management means thinking about the future as well as the present. It’s never too early — or too late — to start saving and investing for retirement. Contribute to accounts designed to grow your retirement savings over time by yielding compound interest.
You’ll also want to take advantage of any retirement benefits that your employer offers. If they have a pension plan available, you should join it as soon as you can since it’s basically free money. Any employee stock plans could also go a long way.
Keep in mind that you don’t need to fund your retirement entirely on your own. Many Canadian employees qualify for government retirement benefits, such as the Canada Pension Plan and Old Age Security.