Monday, May 26, 2008

7 Money Management Tips from a Guy Who Just Figured Out How to Manage His Money

Back in my late-teens and early-twenties, I got myself into a little bit of money trouble. At the time it seemed like a lot of money trouble, but now looking back, because the dollar amounts were low, it really was only a little. However, I still learned a lot about managing money the hard way, by messing up and finding ways to fix my own problems. Here is my laundry list of dirty deeds that weren't so cheap:

I skipped out on $1200 bill in my name because I didn't have money at the time to pay; I did the same thing for a cell phone bill totalling nearly $200; I didn't make payments on my $500 limit credit card, which ended up being revoked; and I was always scrambling for money to pay bills.

Eventually, (around 23) I got tired of being broke and in debt and I started to take my financial responsibilities seriously. Here are 7 strategies I have used in the past two years to right the good ship Personal Finances and lead a fiscally sound lifestyle.

Make a Budget

And write it down or document it in some way! This seems like a very obvious statement to those people who are already good with money management. However, if you were like I was 3-5ish years ago, your "budget" was something that was up in your head and was easily forgotten about or misremembered. "Budgeting" like this can lead you into lots of problems when you inevitably overspend. And don't start subtracting things in your head, like "well, if I spend $100 at the bar tonight; I should still have enough for the rent so long as the phone bill less than $50, and oh yeah . . . is this the month when the hydro bill comes or is that next month?". You'll fuck up. Trust me.

The only way to keep your head above water is to keep track of the bills, know when they are due, know about how much they are and ensure you have money put away to pay them; which leads me to my next tip:

Create Multiple Accounts

Once you have taken all your bills, averaged out how much they are, and noted when they are due, total up the monthly amount. For example say you pay $400 for rent, $150 for Rogers (home phone, cell phone, internet, cable), $150 for your student loan payment, $100 for your monthly transit-pass, and typically $300 for groceries, total it all up and you get $1300 per month in bills to pay. Most people get paid twice per month, meaning for this example, $650 per pay period needs to go into a separate account that you use only to pay bills. As soon as you get paid, take out the money and put it into your bills account and don't touch it expect pay them.

When I started doing this, it took a huge load off my mind. Even if I inadvertently spend all the money in my chequing account, I know I am not going to get kicked out of my place or have my phone cut off. Follow this advice and you will always get by, of course if you are looking to do more than just get by read the next tip.

Put Saving Money into Your Budget

For years I thought I never made enough money to save. There were so many things I wanted, and because I wasn't separating my pay into spending money and bill money, I always felt like I was scrambling to balance paying my bills and keeping up a decent lifestyle. Once I started separating my pay into different accounts, saving became a little easier. If you are paying your bills account $650 a month already, what's another $50? Trust me, you won't miss it (if you really are going to miss it, scroll on down to the point about living within your means). Open up a 3rd account at your bank, or open up an ING Investment account and put that $100 per month away.

One year later and you can walk around with that rest-easy feeling, knowing that not only is your budget balanced and all your bills are paid, but you have money in the bank backing you up no matter what happens (except your bank going out of business due to some kind of global depression caused by sub-prime mortgages – if that happens I've got no answer for you . . . get a thick mattress maybe?)

Live Within Your Means

If you follow these instructions and pay yourself first by taking money from your pay check and putting it into bills and savings accounts right away, you will soon see if you are living within your means or not. If what you are left with is a measly amount of money you couldn't expect anyone fully grown to live on – say less than $100 of spending money for two weeks - then you are living WAY above your means. You should take no more than 60% of your take home pay and earmark it for bills and savings. I mean, you still have to live right? There are clothes to buy, movies to see, dates to go on, beer to drink, concerts to rock and life to live. If you don't have a decent amount of money to just spend as you like, you are going to feel pretty stressed out.

If you find yourself unable to pay bills, save money and still have 40% of your take home pay left to spend, you need to rip out a page from the modern corporate playbook and downsize. Since you don't have any useless employees to lay-off, you'll need to think about scaling back on the lifestyle. Can you really afford the high-definition cable? Can you really afford cable at all? Do you need to move even deeper into the ghetto? No one said it was going to be easy, but cuts need to be made so get out your scissors. Of course, the alternative is to make more money, but since that's pretty much the accepted meaning of life here in North America, I'm assuming you are probably making about as much as you can pull off right now. If you can take on a second job then maybe that's an option, but don't wait for that to happen, cut first, and buy it back later if you can.

Use Cash as Much as Possible

Banks love to ding you with charges every time you use your debit card. They also like to ding you with charges if you use anyone else bank machine to get cash. It's annoying but they are the ones who make the rules, so unfortunately, we are the ones who need to play by them. I try to take out a decent amount of cash at the beginning of the week, from my bank's ATM so it's free, and then spend that as much as possible without using the debit card.

Not only does this save on service charges, but there is something more psychologically impactful with actually spending paper money. If all you need to do is push a few buttons to buy something, it kind of feels like you didn't spend any money. When you have to hand over the hard earned cash, it really hits home.

Use Credit Sparingly and ALWAYS MAKE PAYMENTS to Anything You Owe

Credit cards are great to use in emergency situations when you don't have the money, (i.e. the dog needs an operation, your car needs repairs and without it you can't get to work). They are also great to purchase things on the internet that you already have the money for, or to use at places like restaurants, or for car rentals when you already have the money, but paying buy credit card is easier. Once you have made the purchase with your credit card, you need to go to your online banking website and transfer the funds as soon as possible.

Anything else will just get you in trouble. You will eventually have to pay it all back with interest. Why prolong the process? There is no getting away from debt. Once you owe it, you owe it forever until you pay it off. When you die, they will come after your kids! If you are like the old me, when you get a letter in the mail that you know says you owe money - more money than you can likely afford right now - you get this feeling that tells you it would be better to just not open the envelope. Just pretend you never got it.

This is wrong. This is the worst thing you could do. If this is something you have a tendency to do, then please:

Pull Your Head Out of the Sand

If you are facing a tough financial situation, do not ignore it. Trust me. This bombs your credit rating. And yes, your credit rating ends up being extremely important. If you attempt to ignore or run away from a debt too many times, you could very well end up not being able to get a home loan, a car loan, a business loan, a student loan, a job, an apartment or any sort of even the most basic credit cards (let alone any sort of fancy black/platinum card that says "yeah I'm rich").

If you owe any money that has gone to a collection agency, you need to call your creditors right away and make some arrangements to pay. Then you need to actually pay. Every single payment. On time. If you are having trouble doing this, see tips number 1 and 2 and apply the same strategy. If you still think you can't afford to make payments to your debt, see tip number 4.


I love it! One more item to add to the savings plan--the RRSP. It will save you tax money (that you can reinvest back into next year's RRSP or add to your emergency fund). Also, the earlier you start saving for retirement, the more imterest compounding, etc, and therefore more retirement money for less investment.

I thought about putting RRSPs in there, but since I don't actually have any I figured it was best to leave it out.

Also, I still need to same some room for another post in the future!