I don't know about you guys, but when it comes to managing money, I have always felt like no matter how many times I try to stick to a new budget or count every dollar, I would quit after a week of frustration. It seemed too strenuous to maintain, and I would quickly get overwhelmed by the entire process. Things finally started to change for me after reading Ramit Sethi's book, I Will Teach You To Be Rich which influenced my mindset around personal finance.
I am by no means close to perfect at managing my money, honestly, there is a lot of growth to come. But what's important is that I am constantly working on improving myself. So far, my experience with implementing this new spending system has enabled me to manage my money while enjoying my present life with minimal worry about my future financial state. Though I have yet to iron out the nuts and bolts of the system, I wanted to share what I have learned so far in hopes of helping you on your personal finance journey.
My Current 3-Step Personal Finance System
Build your spending plan by summarizing your typical monthly spending. Notice the word "typical" instead of "ideal" being used. The idea isn't to deprive you of spending your hard-earned money on the things you enjoy rather it is simply to understand how to fund this lifestyle. To build this "budget" review your spending for the last few months to get a gauge of your spending categories and amounts. The goal is to ensure that after completing the following steps (savings and investments) you can fund the lifestyle established in this step.
TIP: Your mobile banking app may eliminate the heavy lifting of this step if they have a budgeting/spending history feature (e.g. Scotia, Tangerine, KOHO). Be sure to check it out!
The next component of the system is savings. I have 3 types of savings accounts: 1) Emergency fund, 2) Short-term savings, and 3) Medium-term savings. My emergency fund is there to support me in dire circumstances such as job loss, sickness, and unexpected events. Short-term savings are for future expenses within the year such as gifts and travel. Finally, medium-term savings is for larger purchases such as a car or down payment. Every paycheck, I contribute to each of those accounts and work my way up to reaching my savings goals.
TIP: Open high-interest savings accounts at digital banks for market-leading interest rates to maximize your savings (I use EQ Bank and Tangerine).
The final piece of the puzzle is what makes your money for the future. Here, you'll need to have an investment account set up at a brokerage or financial institution. I have TFSA and RRSP investment accounts with Questrade where I invest in a portfolio to build wealth for the long term. Personally, I stick to ETFs for easy diversification, simplicity, and low fees. And just like the previous step, every paycheck, I contribute to these accounts and invest in the stock market.
TIP: Take advantage of your contributions to tax-free accounts such as TFSAs and RRSPs to minimize unnecessary fees and income loss. Make sure to monitor your contribution limits.
How to use the system
- Set up automatic contributions so that with every paycheck you will not have to lift a finger to contribute to each of your savings and investment accounts.
- Review your overall weekly spending to gauge that you are able to fund your lifestyle and make adjustments as needed (such as increasing your income streams or reallocating dollars).
- Stop obsessing over every dollar and take a breath. You can sit and enjoy your life today knowing that you're building for your life tomorrow.
If you'd like to learn more about using this spending system to manage your money, check out Personal Finance Simplified on the podcast!