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It's no wonder so many people avoid the topic of personal finance. One look at the shelves and shelves of money-related books that line the aisles of bookstores and anybody with half a life would scream in frustration. Who's got time to read a dozen books on mortgages, investing, saving and all the other aspects of managing your money? Between work and family life, most of us are lucky if we can squeeze in enough time to read a magazine article.
Fortunately, that's all you need to do. We've always argued that anyone can learn most of what they need to know about personal finance in an afternoon or less. We're so convinced that personal finance can be mastered quickly and easily that we decided to see just how much wisdom we could distill into an eight-part series here on MoneySense.ca.
The results of our efforts begin below. While we won't pretend that a short article can answer each and every question you may have about your personal financial situation, we were pleasantly surprised to find that we could cover all the key areas in little more time than a standard coffee break occupies. Whether it's taxes or investing or saving, we have the essentials ready and waiting for you. So let's go …
How can I save more?
A single tip lies at the heart of most financial bestsellers. The tip? Pay yourself first. In other words, before you pay the mortgage, pay the grocery bill or do anything else with your cash, stash a bit of money in your chosen savings vehicle.
As simple as this tip sounds, it's astonishingly powerful. If you try the opposite strategy, and promise yourself that you'll build your savings by putting away whatever you have left over at the end of every month, we guarantee that you will accomplish little. It's human nature to spend most, if not everything, you have on hand. But if you pay yourself first, you've accomplished your savings goal before you spend your first penny — and your spending will adjust to reflect whatever is left over.
The best way to pay yourself first is to remove temptation and divert money before it ever touches your hands. First, figure out how much you want to save each year. (If you've never saved before, start small. You can always increase the amount later.) Then divide your chosen amount by the number of paycheques you receive each year. If you want to save $3,000 a year and you get paid twice a month, you would save $125 from each paycheque. Finally, ask your bank to set up an automatic transfer of that amount every payday. This automatic transfer should move the appropriate amount of money from your bank account into your RRSP or other investment account — preferably one that doesn't allow easy withdrawals.
Once this simple savings plan is set up, that's it. You're done. By saving first, and spending only what's left over, you never again have to worry about sticking to a budget or falling victim to temptation. In short order, you'll get used to living on your new bi-weekly pay, especially if you make painless adjustments like buying regular coffee instead of $3 lattes.
Here's the payoff. With enough time on your side (say, 30 years) and a decent investment strategy that produces a 7% average annual return, your measly $125 per paycheque will grow into a nest egg of over $300,000 in your RRSP. Convince your spouse to follow the same plan, and you'll wind up with $600,000 between the two of you. There is simply no better way to become financially independent, and anyone can put this plan into practice. If you follow only one piece of advice from this article, this should be it.
What's the smart way to invest?
We know lots of people who figure that smart investing involves reading annual reports and researching individual stocks, or that it depends upon having a dozen or more carefully chosen mutual funds in their investment accounts. Either way, investing sounds like complicated, scary stuff.
We beg to differ. Despite what you may think, it's easy to put together a great portfolio in 15 minutes or less a year. All you have to do is to apply two principles. First, keep your investing costs low. (Hidden management fees and advisory charges can eat up most of your gains if you let them.) Second, diversify your investments. (Holding different assets ensures that no single mistake can blow a hole in your portfolio.)
The easiest way to achieve both cheapness and diversification is to invest in a good, low-cost, balanced mutual fund. Balanced funds earn their name because they're balanced among different types of assets — stocks and bonds as well as a good dollop of foreign content. Buy into a balanced fund and you achieve instant, automatic diversification without having to waste a second worrying about the details involved.
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