Updated: Jun 9, 2021
Welcome! I'm back with a new post that will hopefully help you on the path to achieving your financial goals.
It's the new year and you have decided that you finally want to get your finances in order, but where to start? I have summarized a simplified, step-by-step guide on how to get a better understanding of your finances and to start saving for your next big purchase. Whether it is paying off your credit card debt, student loans, or whether you are ready for the next stage in your life, such as saving up for a wedding or even a down payment on a home - you would need to face the realities of your current financial situation first.
Once you get a better understanding of your finances, only then can you move on and starting saving.
1. Set a clear financial goal and define how much you need
It's easy in wanting to start saving right away, I will just save some money for a rainy day. But this sort of mindset will actually deter you from saving since there is no motivation on what and how much to save up for. On the other hand, you may have too many things that need to save up for - you may have student debt, have a wedding come up, and would like to eventually save up for a down payment on a home. Whatever it may be, list those goals (ie. what I want to save up for) in order of priority.
After setting the financial goal, the next step is to define how much you need. This part may require some research on your end. For example, how much student debt and accrued interest do I have after graduating? How much interest will I be paying on my student debt in the next year or two? How much is a wedding? Will I have a simple or extravagant wedding? Realistically, can I afford an extravagant wedding when I have other financial goals I want to save up for? How much are homes in the area I want to live in - can I afford a condo or a house? If I live 30 minutes outside of the city, would the prices of the home be much more affordable? Am I aiming to save up 5%, 10%, or even 20% down payment? Putting down 20% on a home would be smart, considering you would save on mortgage insurance - but how much longer do I need to save up for compared to a 5% or 10% down payment?
These are questions you want to be asking yourself, and once you are somewhat confident in the answers you find through research, talking to friends and family from their experiences, and even reaching out to experts in the area (ie. a wedding planner, real estate agent, etc) - you will get a better idea as to how much you need. Better yet, leave a little bit of a buffer on the amount you need to save up for since, most likely in life, you will find yourself in a position where you are a little short of cash rather than too much.
2. Know your income
While this step may sound self-explanatory, you will be surprised to find that many people don't know the difference between gross and net income. As an employee, your gross income or salary would be the amount in your employment contract. However, your gross salary is not the amount that actually gets deposited into your bank account every month. You will find that after certain deductions are taken from your gross salary, such as federal and provincial/state taxes, employment insurance, pension contributions, medical/dental insurance premiums, etc., you get the net amount.
You may find yourself wondering where all your money went after those deductions (check your payslip to get a better understanding of the deductions). But reality is, this is your starting cash base. And this is before you even start deducting your actual living costs and expenses, which we will be covering in the next step.
3. Know your expenses
I want you to do a simple exercise. This would be easier if you use a debit or credit card for all your expenses. I want you to get your latest debit or credit card statement, and categorize your expenses into necessities and luxuries. Necessities are costs such as your rent/mortgage payments, groceries, transportation, medical, health (ie. gym membership) and basic hygiene (ie. face wash, shampoo, etc.). Luxuries are costs that go beyond maintaining your basic lifestyle, such as going out for drinks with your friends, excessive shopping, expensive hobbies, etc.
Add up all the costs in each category and compare. You may be surprised how much you are spending on luxuries. Sure, there is more to life than the basic necessities - but question yourself, can you afford those luxuries? Can you possibly cut back a little? We will come back to these questions in a little bit, but first, let's now get to the fun part - finding out how much you can save.
4. Calculate how much you can save
Now you know how much money is coming in and how much is going out, it is a matter of simple math.Take your net income less total expenses (ie. costs related to necessities and luxuries) to come up with your potential savings. Are you pleasantly surprised with what you find? Or are your savings meager? Or are you in a position where you are not saving at all since your expenses are greater than your income? Depending on your financial situation, you would need to determine if you are ok with this. If not, let's move onto the next step.
5. Assess and Adjust
So you discover that your current savings (or lack of) is out of sync with your financial goals. Don't worry, this would be the case for many people. It is a matter of stepping back and accepting that you need to do something about it.
Let's start of with how much you need. Now, decide when you need that money by - is it in 2 years, 5 years, 10 years? Divide the amount by the years to come up with how much you need to save per year - then divide by 12 (the number of months) to come up with how much you need to save per month. Can you fit this into your budget? Is it a realistic amount to be saving considering your current income and expenses?
There are two ways to go about this - either (1) increase your income by getting a second job or getting a promotion, or (2) decrease your spending (the more realistic approach). Now is the time to first cut down on your luxury costs, and then maybe even look into your necessities to further lower your expenses. For example, instead of going grocery shopping to Whole Foods, you can think about going to Safeway or No Frills. Or, instead of going to Equinox for your gym membership, you can go to Steve Nash or even that free gym at your office. Whatever it may be, look into your budget and your spending habits to see where you can cut costs to come up with the savings you need.
Once you have a plan, the most important thing in all of this is to stick through it. Be self-disciplined and accountable for keeping on budget and making those savings goals. After time, you will see the savings grow and that you are that much closer to achieving your financial goal.
I hope you found my post helpful. For more details, refer to my video for more illustrative examples, which use real numbers to get my point across.
Did you get a better idea of your finances and now know where to start? Leave a comment if you have any questions, and stay tune for more finance, career, and investing related content!
Disclaimer: I'm not a financial planner by any means. My post is just to share my experience and the tips I have used to save towards my financial goal.