10 Personal Finance Strategies to Master Your Money in 2021
Suddenly, it’s mid-November; the holiday season is approaching rapidly. December is a month where many of us devote our attention to spending time with loved ones over the holidays, but it’s also a month where many people over-indulge and fall off track with their financial goals. While it’s understandable to temporarily lose sight of the bigger picture in December, it’s also important to have a strong financial plan in place for January, once the holidays are done. With that topic in mind, this week, we’ve got a guest blogger visiting Money Talks! Enoch Omololu is a veterinarian and the resident personal finance expert at Savvy New Canadians. He has a master's degree in Finance and Investment Management from the University of Aberdeen Business School and has a passion for helping others win with their finances. Enoch wanted to share his top 10 personal finance strategies you can follow to ensure that your 2021 kicks off the right way, so we’ll let him take it away…
As the year ends, it is a good time as any to review your finances, highlights where you have had some shortcomings, and prepare for the New Year. Managing your money is a dynamic process that changes from day to day and what you need to do to be better depends on your unique circumstances.
In this article, we cover 10 of the best personal finance strategies to get you started. They are listed in no particular order.
1. Create a Budget and Stick With It
Budgeting is perhaps the most talked about personal finance tip you will come across for good reason. If you really want to break out of the vicious cycle of debt and increase your net worth, a budget is fundamental to helping you reach your goals. Creating a budget involves listing your expenses and income, and determining how you want to go about allocating your income so you have funds left over to meet your other goals, such as retirement savings. While you can choose to use a budget app or spreadsheet for tracking your money, the key to your success hinges on you sticking with the budget you have created.
2. Pay off High-Interest Debt
Not all debts are created equal. If you are carrying a high-interest debt balance, such as credit card debt or a payday loan, you should prioritize paying it off in your budget. Unlike investing, a longer timeframe is not your friend when it comes to carrying and paying off debt. The sooner you get rid of it, the better.
Two of the most popular debt repayment strategies you can use are the “Debt Snowball” and “Debt Avalanche” methods. Debt snowball involves paying off your smallest debt account first while making the minimum payment on your larger debts. This approach makes for quick wins and may encourage you to keep going. Debt avalanche on the other hand, focuses on paying off the debt with the highest interest rate first (i.e. the most expensive debt) while making the minimum payments on your other balances.
While I personally prefer the avalanche method because it saves you money in interest fees, you should do whatever works for you, and get that debt paid off as soon as possible.
3. Have an Emergency Fund
An emergency fund is money you set aside to cover unexpected expenses such as a medical bill if you fall ill and car repairs, or to pay your bills if you suddenly lose your job. Emergencies are a part of life and if you are not prepared, they can throw your budget off-balance and force you to take on more debt. You should aim to keep 3-6 months worth of expenses in your emergency savings account.
An emergency fund is the buffer in your financial plan that puts your mind at ease. Don’t ignore it.
4. Earn High Interest on Savings
Interest rates took a hit during the financial crises of 2008-2009 and they have not quite recovered since then. With big bank savings rates ranging from 0.01% to 0.10%, you are not getting returns close to or exceeding the inflation rate. What this means is that your money is losing purchasing power. If you are setting money aside in a saving account, you can maximize your returns by shopping around for some of the best savings rates available. This way, you can also reach your financial goals faster.
As an alternative, QUBER offers cash incentives for saving that are higher than most savings accounts.
5. Maximize Registered Investment Accounts
Canadians have access to government-registered investment accounts including the popular Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA). These investment accounts are great because either they defer the taxes on your investment gains until later, or you do not pay taxes at all.
An RRSP is primarily for saving towards retirement. However, you can also use the funds to make a down payment on your first home or to pay your tuition if you decide to go back to school. Every year, you get a RRSP contribution limit that is 18% of your previous year’s earned income up to a maximum limit.
A TFSA is very flexible and can be used to save towards any financial goal. It is open to eligible Canadians who are at least 18 years of age and you can contribute up to a limit each year. For 2020, the TFSA annual contribution limit is $6,000.
You can simplify your investing by setting up pre-authorized contributions from your bank. This helps you to stay consistent and not have to worry about remembering to contribute each time. You can contribute a variety of investment products to your accounts including mutual funds, Exchange-Traded Funds (ETFs) and stocks.
In addition, here are guides on how to buy stocks or invest in your TFSA.
6. Cut your Investment and Bank Fees
Banks have perfected a way to make you pay for many things including maintenance fee, Non-Sufficient Fund (NSF) fees, paper statement, overdraft fees, ATM, and replacement fees, foreign transaction fees, and even account closure fees! Add in the interest fees that are payable if you have a loan or carry a credit card balance, and you see why cutting your bank fees is essential.
For your day-to-day banking, you may be able to lower your fees by using an online-only bank; negotiating a discount, keeping a minimum balance, and ensuring your cheques don’t bounce.
Investment fees are no better and you should watch out for excessive fees that erode your investment returns over time. If the mutual funds in your portfolio are expensive, you could easily replace those using low-cost ETFs with similar characteristics.
Options for purchasing ETFs in Canada include using a self-directed brokerage account if you are comfortable with managing your own portfolio, or alternatively, you could make use of a robo-advisor.
7. Automate Your Bill Payments
As a follow-up to the budget you have set, automate your monthly bills to be paid on a schedule. This way you do not forget and have to pay interest, and you do not end up damaging your credit score. Bills you can automate include cable, phone, utilities, subscriptions, loan payments, and more.
I personally avoid the dreaded scenario where a bill is due and I do not have adequate funds in my account by setting most recurring bills and payments to process just after payday.
8. Monitor your Credit Score and Report
The three-digit numbers making up your credit score range from 300-900 and they tell lenders whether you are creditworthy. Lenders are willing to lend you money if you have a very good to excellent credit score, but they are reluctant if your credit score is not that great.You can track your Equifax or TransUnion credit score free online and monitor how your financial habits are affecting it.
Your credit report is a more detailed compilation of how you use credit. It shows whether you make payments on time, the credit accounts you have opened (e.g. credit cards and loans), who has accessed your credit profile, whether you have delinquent accounts, and if there are any negative financial public records against your name. You should check your credit report once in a while to ensure there are no errors recorded in it. It can also alert you to fraudulent activity or if someone has stolen your identity. A free copy of your credit report is available from TransUnion and Equifax once per year.
If your credit score is less than stellar, you can improve it by:
· Paying your bills on time
· Lowering your credit utilization to 30% or lower
· Disputing and correcting errors if you find them on your credit report
· Limiting you credit application
· Leaving old credit accounts open and in good standing
9. Cut your Expenses
While we have already discussed cutting your investment and bank fees, there are a ton of other expenses you can also cut to give your budget some breathing room. Take a look at your monthly bills to see whether there are cheaper options. Call your cable and internet and ask for available discounts. It doesn’t hurt to ask and I have had my cable, internet, and phone bills slashed by up to 50% several times over the years by simply asking.
Cut your food bill by packing lunch, buying in bulk, planting your own vegetables, or by managing your money mindfully with a savings app like QUBER.
Shop around for the best rates so you can save on home insurance, car insurance, and mortgage payments.
Avoid impulse buying. Sometimes, I deliberately hold off for 2 weeks or more before making discretionary purchases. This gives me enough time to contemplate whether I really need the item and if it’s worth splurging on.
Check your subscriptions. Are you still in need of the service, magazine, etc.? If not, cancel it. Every now and then, I go through my emails and unsubscribe from store emails.
These are just a few examples of the many ways you can cut your expenses.
10. Conduct a Personal Finance Audit
At least once a year, my spouse and I take the time to audit our finances from top to bottom. Some things to match out for when you do this include:
Estate Planning: Do you have or need a Will? If you have one, see if you need to update your beneficiaries, guardians for minor children, powers of attorney, medical wishes, etc. A Will is an important element of your financial plan and you can easily create your Will online these days.
Insurance Coverage: Ensure your assets are adequately protected. If there are gaps in insurance, don’t delay in finding coverage. Also, think about life insurance.
Budget: A good budget needs updating every now and then to reflect your new financial realities.
Net Worth: Your net worth is what is left after all your liabilities (debts) have been deducted. It is a reflection of your financial position and a good reminder of your financial progress.
Final Thoughts
There you have it. While it may feel daunting at times to get your finances in order, don’t let that deter you. Take small and incremental steps daily, believe in yourself, and you will find that things get better over time. You’ve got this!
Many thanks to Enoch for sharing these great tips! As mentioned, you can catch up with Enoch’s take on all things personal finance by reading his blog, Savvy New Canadians. We highly recommend it - Enoch’s offerings are thorough, but accessible and still easy enough to understand for beginners in the world of personal finance.
Check back to Money Talks every Monday for a new post featuring more tips and tricks on how to reach your saving goals, and subscribe to our mailing list for blog updates!
Have a suggestion for something you’d like us to write about? Shoot us a message at contactus@quber.ca and we’ll get to work.