Every personal financial journey has a beginning, a context that sets the stage for every step taken out in the “real world”. Throughout this blog I will be sharing some of my experiences and background to provide a context for you to examine your journey, learn and grow as you go.
My parents got divorced when I was two and a half, and from about three until thirteen I didn’t see my Father. I had been born in a small town in Eastern Ontario but we moved to Toronto close to when I turned five. You have to remember that at the time divorce wasn’t as common or widespread as it is now, and though it wasn’t as bad a stigma socially as it was even ten years earlier, it still wasn’t very common.
Though city jobs had higher paying salaries than small town jobs typically offered, we were definitely starting to feel the decline of the “single income family” model. (Where a household only required a single income to thrive and prosper.) Each time my mother got a promotion we moved from our very sketchy neighbourhood to one just a little bit nicer. This meant new schools, new friends, and snug household finances.
At an early age, due to my maturity level, my Mother started sharing a large amount of our household finances with me. Though we never went without food, there were many times when being able to have enough food for the following month was a clear and present concern. This reality, and the knowledge I had of our finances, resulted in me supressing any wants and focusing strictly on needs. To this day I am very good at pushing down wants as a reflexive defence mechanism.
The first lessons in personal finance that we learn aren’t actively taught, but passively learned from observation of our parent’s actions. It is the small things, the little day-to-day actions and transactions. Despite being a bookkeeper by trade, my Mother never actively taught me how to budget, because while growing up there wasn’t enough money for her to really budget. The closest I was used to was: Total Income – Fixed Expenses – Necessities = Zero (If you were lucky). To some people this might seem very close to their best household budget, but the mindset here reinforces an approach that prevents you from looking to the future.
There are some fixed assumptions with this approach that should be questioned and not taken for granted. Every day we make decisions / choices. And these choices have direct impacts on our personal financial journey. Your current Income is the result of choices you have made. It isn’t fixed, it can be changed in many ways (more on this later). Your Fixed Expenses are the results of choices you make, actively or passively. The biggest of which is Where You Live (ie. City, Housing Situation, Alone / Shared). Necessities are tricky because we as humans are very good at taking a Want and turning it into a Need. Our ability to justify our choices is unlimited. Also, there isn’t any consideration of equally important Budget requirements like Savings, Investing, Breathing Room, and some Wants.
The first personal financial lesson we should learn is: Live Within Your Means.
This might also sound simple, but the number of people who haven’t mastered this step is staggering.
You have failed this step if:
- You pay off less than the full balance of your credit card every month
- You have a line of credit with a balance at the end of the month (more on this later)
- You have a car loan or a car lease (more on this later)
I haven’t added Student Loans and Mortgages to this list, but there is an argument to be made for both / either to be added (more on this later).
If you approach your personal financial situation from the perspective of Living Within Your Means as the primary rule you start looking at these choices and realizing which serve you and which oppose you reaching your goals. By Living Within Your Means you accept the reality you are in now and provide yourself the ability to change that situation actively for the better. Don’t beat yourself up or blame yourself for where you are. What’s done is done. You can’t go back and change it. But you can take active control over where you are headed and correct the steps that distracted you in the past.
Most Budgets have a formula that looks something like this:
Income – Expenses – Emergency Fund – Savings = Zero
Here is the formula for Living Within Your Means:
Income – ( Expenses + Living ) – Buffer – ( Saving + Investing ) = Zero
Income: Start where you are. There are many ways to grow this. Are you under employed, less than “full time” hours? Pick up extra work. Develop a skill that will get you paid more for your effort / time. We are in an economy where there are lots of workers and little employer loyalty. Often cases you need multiple income streams to make ends meet or to ensure if one source dries up you won’t be caught without enough income to survive. In your early years of employment invest in yourself, grow your skills and be willing to do things you won’t want to until you have the luxury of doing what you enjoy.
Expenses: Accept your current expenses, hiding from the truth isn’t going to change anything. These Expenses represent needs: Food, Shelter, and Internet. The largest of your expenses will likely be Shelter. There are several cultural groups where living at home with your parents is not only acceptable, but actually expected. Don’t be in too much of a rush to pass this up, but also don’t be that 30+ year old living at home and blowing all your money on partying.
Living: Wants or Fun are often things that people believe should be included in your Budget, but I like looking at it as Living. You have to balance your future happiness with your current happiness. It is possible to Save Aggressively, Invest Wisely, and still enjoy a fulfilling life right now.
Buffer: Life Happens. Or if you prefer, Shit Happens. Some shit can be anticipated, and as you progress financially you will be taking that into consideration. But there is still the shit that can’t be predicted or anticipated. As corny as “Be Prepared for the Unexpected” may sound, it is the only way you are going to be able to Live Within Your Means.
Saving: This is the first step to Financial Freedom. Financial Freedom is the ticket to having total control of your life. The Freedom to choose what you do with your time, allowing you to do things you enjoy instead of doing things that pay well.
Investing: This is the second step to Financial Freedom. Investing WISELY will be your ticket to Financial Independence and the ability to Retire Early or, well, anything you want. We will cover what Investing Wisely looks like later on, but it is far easier than you suspect it will be.
Looking at where you stand right now it might seem like there is no way to have that equation balance. Trust me, it is absolutely possible, and not by setting Saving and Investing to zero. You need to develop the way you look at personal finance, and your daily choices and find that balance.
Personally I have found the book “Your Money or Your Life” to be an essential cornerstone to this process. Depending on where you are along your Personal Financial Journey this book maybe of more or less value, but it gives a perspective and language to allow you to bring your Journey in line with your Goals and Values. When I started dating my Wife I FORCED her to read this book…needless to say she was not at all impressed. Her money journey wasn’t as…damaged as my own, so much of this book wasn’t something she needed to learn. But what it did provide was a common ground for us to have those difficult financial conversations and ensure we could get on the same page.
You do not need to read this book to follow my blog, I will cover the key aspects as needed so we build our own common ground. But I still think there is value in the perspective “Your Money or Your Life” (YMOYL) will provide you.
When approaching this book, or any personal financial book, you need to understand some key points about it.
- This was written by Americans for Americans. Canada does not have a way for you to buy Government Bonds directly from the Canadian Government, but there are other ways to get the same outcome.
- This was written a while ago and the economic environment we are in now isn’t the same. Bond Interest Rates are SIGNIFICANTLY lower now than they were when this book was written.
Neither of these points is a deal breaker, or a reason to ignore what knowledge this book has to offer. You will find out quickly that most books on Personal Finance, and most Blogs, are written by Americans for Americans. It will require effort in some cases to adjust for this perspective.
If you read “Your Money or Your Life” I recommend focusing on everything but the investment suggestion of holding Government Bonds. We will cover many ways of Investing Wisely as we progress in our journey.