Advice for Beginners

It’s been a while since I’ve worked with clients, giving financial advice, so it’s easy for me to forget to address the basics. In my own financial affairs, the basics have become habits that I barely think about. As with any generic advice, the following is good enough, but as people master these basic skills, they can modify and personalize as appropriate.

Know how much you earn. This seems obvious. But if your family includes two incomes, remember to include both. Then subtract all the deductions. How much is the total net income of your family each month that is deposited to your bank account? Is it the same every month? Some people receive 26 paycheques per year. Others earn commission. Some people might include an annual bonus. You may want to find your annual net income and divide by 12. Whatever you do, you should have a clear idea of how much to expect in your bank account each month.

Know how much you spend. For most people, the answer to this question is very easy: all of it. But how much, after taxes and mortgage and other debt repayment, do you spend on your lifestyle? If you plan to retire one day, this is the amount of income you will need to replace. You might want to set goals in this area, so that you control your spending and keep some for savings.

Repay debt and save. If there is a gap between your regular spending on necessities (including debt), it may be going toward impulse purchases. Or it may be accumulating in an account somewhere (it’s possible, right?). Or you may have set a goal to end each month with $100 left over. Using that money to speed up debt repayment or to save (and invest) for the future is going to have a better impact on your financial progress than blowing it on impulse spending. Usually, repaying debt is final (you can’t get the money back if you need it), but spending preserves some flexibility.

Investment choices. These can be confusing. A savings account (at the bank) or Canada Savings Bond or GIC will give you guaranteed growth (no losses) with a low interest rate. Bonds usually pay a better interest rate, but can fluctuate somewhat in value. Stocks fluctuate a lot in value, but can usually provide the best long-term growth rate. A rule of thumb is to base investment choices on your time frame. For money you need within a year, savings is best. For 2-3 years, bonds are a better choice. And money that you won’t need for 5 (or even 10) years or more, stocks might be more appropriate. One more consideration is whether you can stomach extreme fluctuations. If not, stocks might never be a good choice for you. Finally, mutual funds and ETFs package stocks and bonds in different ways to make investment choices more accessible to beginning investors.

Account types. Once you’ve begun to save, you’ll probably want to open specialized accounts. An RRSP is perfect for saving a bonus and avoiding withholding tax, or for regular savings (if you submit a T1213) especially if you plan to have a lower income in retirement or do income splitting with a spouse in retirement. A TFSA works almost as well as an RRSP for saving (after taxes), but it remains more flexible for taking money out for nearer-term needs. Some people benefit from locking their money into an RRSP, out of their own reach 🙂 If you reach the maximum contribution to a TFSA, an open investment account (no special tax treatment) is possible. Generally, it’s best to hold stocks and bonds in an RRSP or a TFSA, and keep the savings in a regular account.

On top of this, I produce personal financial statements (very brief) every three months, to make sure I’m on track and to see if there are any areas (investments) that need additional attention. How do you arrange your finances and savings? How do you keep on top of it?

4 thoughts on “Advice for Beginners”

  1. I keep my stocks in a TFSA so they can grow, tax free, for the ten or so years until I retire.

    I only put an amount in my RRSP to maximize my tax return. Even though I am a lower income person I still want to avoid taxes upon future withdrawl.

    I use a zero budget (all money allocated to bills/debt/savings before the pay cheque is depostited) to keep on track of it and it is posted on the fridge for all to see.

  2. The thing I needed after understanding income and spending was to track spending. The way I did this (which may be helpful for others?) was to see how much I could spend every week and still meet my targets.

    Informally, if one stays within that for most weeks, then, no problem. Unplanned purchases that are truly necessary can’t be avoided, so I didn’t track those. But as I got more pedantic, I started tracking more. Financial responsibility and outlook has definitely been an evolving process for me.

  3. Knowing how much you spend every month is probably the most important. So many people I’ve spoken with have no idea what they spend per month. Crazy.

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