A big part of adulting is being able to manage your personal finances. Unfortunately, knowing how to do that isn’t something you normally learn in school. Nor is it something most parents have a “talk” about, like they do with the birds and the bees. It’s usually something you have to find out about on your own, but honestly: who wants to spend their days trying to make sense of boring articles about finance? Since we have many of the same questions you might have, we went looking for the answers. And with that, we bring you all your personal finance FAQs, answered.
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How do I start saving more money?
You already know that it’s important to save your dollars. You’ve also heard the jokes about eating less avocado toast and brewing your own coffee at home instead of swinging by Starbucks every day. Of course, these are strategies that can help you on the savings path, but what if you don’t like avocado toast or coffee anyway?
In order to start saving, you first need to see what you’re spending your money on and what you could be spending less money on. To do this, track your income and spending for a month, keeping it as detailed as you can. It helps to create personal finance budget categories: housing, utilities, food, transport, debt payments, fun money, and the like. Pro tip: there are several finance apps for young people that will make this easier and some have extra perks to help you save, like offering cash back on certain purchases.
After a month, look at how much you’ve spent in each category. Then look for the things you can easily spend less money on: if it’s not avocado toast or coffee, it could be whatever would be easiest for you to do without. Choose one or two items and for the next month, spend as little as possible on them. By starting small, you won’t feel deprived and making the changes is more sustainable. Over time, you can cut more expenses in other categories too.
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How should I save money for emergencies?
A budget category you should always include is a contingency fund. Most experts will tell you that you need to have enough money in your contingency fund to cover at least three to six months’ living expenses. You don’t have to get to that amount overnight: even having just a few hundred dollars saved up will already help you out in an emergency.
One of the best budgeting or personal finance tips is to keep a separate savings account for your contingency fund. This will reduce the temptation to spend the money than if it’s in the checking account you use every day: out of sight, out of mind, you know? Some people will tell you to open a TFSA — a tax-free savings account — for this but the experts agree that it’s best to keep your TFSA for investments like mutual funds, stocks and bonds if you want to build wealth over time. For your contingency fund, open a high-interest savings account instead and pay money into it as often as you can. If you get a regular paycheque, it helps to arrange a monthly direct deposit into your savings account.
Finally, know what actually constitutes an emergency. Your dog’s vet bill is one, while Sephora’s summer sale is not. For the latter, remember to pay from your “personal care” or “fun money” budget.
See also: How to start managing your money after landing your first job.
What does it mean to have a credit score?
As soon as you start earning and spending your own money, you start building up a credit score. This is a number derived from your credit report and tells anyone who needs to decide if they want to take a financial risk on you — giving you a personal loan or mortgage, letting you pay for something in installments, letting you rent an apartment, etc. — whether you’re likely to pay them when payment is due.
A good credit score is usually between 660 and 900 and you’re more likely to get your loan application, credit card or rental application approved because you’ll be considered low-risk. With a score of below 560, you’ll be considered high-risk and you’ll struggle to get credit or good loan terms. It’s a good idea to check your credit reports regularly to make sure there are no mistakes that affect your credit score.
To build a good credit score, you need to show that you’re responsible with your money. You need to pay all your bills on time, every time. You also need to keep your credit balance low, so if you can, pay more than the minimum on your credit card bill every month and don’t swipe if you can pay in cash instead. Use the best personal finance budgeting software you can find to help prevent you from overspending. Also resist the temptation to have multiple credit cards. It’s actually entirely possible to live without a credit card in Canada and doing so can help you rebuild your credit score if it’s dropped too low.
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How much money should I save for retirement?
When you’re young and having fun, the last thing you want to think about is retirement. However, the sooner you start building up a retirement nest egg, the more fun you’ll still have once you’ve reached the age when you don’t have to work for your income anymore.
A general rule of thumb for how much money you’ll need for retirement is to aim for 70 per cent of your pre-retirement income. How much money you earn before retirement will affect how much you’ll need in retirement, though: if you earn less than $50,000 per year, you’ll likely spend around 80 per cent of your pre-retirement income while if you earn over $100,000 per year, you’ll likely spend around half of that amount per year in retirement.
Other factors that affect how much you’ll need in retirement include at what age you want to retire, where you want to live in retirement, how you’ll want to spend your days, whether you’ll own your home and have paid off the mortgage, whether you’ll have children or grandchildren to take care of, what kind of health issues you’re at risk for and how long you expect to live.
Of course it’s impossible to say exactly how much money you’ll need to have saved up, but to get a ballpark figure it’s wise to use an online retirement income calculator. The calculator will take into account all your expectations for retirement as well as the income you’ll receive through government programs like the Canada Pension Plan (CPP) and old age security, as well as your assets, such as equity in real estate and other investments.
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How should I invest my money?
A great way to build up your retirement nest egg is through wise investments. It’s good to have a TFSA and a high-interest savings account to squirrel away money, but with wise investments you’ll earn more than simply the interest you get from your bank accounts. The sooner you start investing, the more time there is for your money to grow and the easier it is to recoup your losses if something goes wrong.
How much should you invest? The simple answer is: however much you can afford once you’ve provided for your living expenses, your short-term savings and your contingency fund.
The daunting part is to decide where and how to invest. A good beginner’s guide to investing will help you make that decision but to start, it helps to know the different types of investments in Canada:
Mutual funds
These are baskets of securities that help you diversify your investments and lower your risk. They trade once a day, so their value fluctuates from day to day. They tend to have very high fees: as much as three percent of your investment.
EFTs
EFTs — or exchange-traded funds — are similar to mutual funds in that they are baskets of securities. They track indexes like the TSX, commodities and sectors, but you can buy and sell them on the stock exchange just like you would buy and sell regular stocks. Their value fluctuates throughout the course of the day as they’re bought and sold. If you want to start investing in stocks, EFTs are a great option because they’re more cost-effective.
Stocks
You can buy and sell individual stocks through a real, live financial advisor, an online discount brokerage or a robo-advisor. Buying individual stocks are quite risky because there are so many factors that can affect the value of a company’s stocks: even something as simple as a tweet by the CEO.
Bonds
With bonds, you’re essentially lending money to the government or a corporation and they have to pay you back, with interest, by a certain time. These are generally low-risk investments.
REITs
REITs — or real-estate investment trusts — you become a shareholder in a company that owns and operates real estate like malls, hospitals, retirement homes and hotels. Essentially, you get a percentage of the rent they collect.
Cryptocurrency
Two of the most frequently asked questions about personal finance are, “Is Bitcoin a good investment?” and “What even is cryptocurrency?”
The answer to the second question is that it’s a digital form of currency. Instead of being issued by a bank — like actual money is — they’re issued by companies. They’re basically similar to casino chips or arcade tokens but in digital form: you pay real money for them and can only use them in certain places.
The answer to the first question is that it depends: for you to make a profit, someone else has to pay more money for the cryptocurrency than you did. A cryptocurrency like Bitcoin is highly volatile: one day its value can rise by 10 per cent and the next day it can drop by the same amount. So, you can make a lot of money if you sell at just the right time but you can also lose a lot of money if you don’t sell fast enough.
