To be honest, this is the topic I frequently read about and then continue doing things the way I always do without making changes. However, mastering your relationship with money is one of the key things that will determine not just the quality of your life (and/or quality of life for your children or anyone depending on you including potentially your significant other) but in some circumstances, can save your life. Literally.
You would think I am being dramatic about financial skills saving lives. But hear me out! Case in point: my grandmother. She is 87, old school about money and yet there is one thing she would almost religiously follow: using the envelope method when receiving money and always having savings. It does not matter how big her family is, if others can take care of her – she would continue putting money aside for savings on a regular basis. At one point, my father was even upset with her because he can financially help her and yet she continued saving money.
And then the war happened (she is in Ukraine). The banks have closed and do not allow to transfer any money. I literally have no ability to send her any financial help and she will not be able to receive it since banks do not allow people to withdraw cash since March. In fact, even when people receive pay cheques or pension, the banks would limit withdrawals to $15 a month. To someone who lives in the Western world, relies heavily on credit card and never has cash, this sounds like something impossible to even imagine to survive. And yet grandma was not affected significantly because, having survived default and complete economic collapse of Soviet Union, she never trusted banks anyways and just keeps money in cash. What happened later feels almost impossible to occur in 2022 – her city started getting bombed on almost daily basis. She is in the town with nuclear power plant. To leave the city you need money to be able to afford transportation, pay someone to take you out of the city and, of course, pay to rent a temporary place. And this is where my example of money management skills saving lives proves the point – she was able to do all this without relying on anyone because of her financial management habits. Do not worry – she is in the safe place now, far away from towns being bombed.
However, you can appreciate how important it is to have control over your financial life and habits. Below are some ways to become more organized with money:
- Start with understanding your current state. This is the first thing we do in strategy: how do you know where do you want to go if you do not know where you are coming from?
- Learn exactly how much money hits your banking account every month. This one should be easy since you can expect banking statements from your work or you can just see it by doing online banking
- Learn exactly how much you spend: your bills and expenses. If you have any debts – credit card, lines of credit, mortgage, financing – make sure you know the following: how much money you owe in total, interest rate, minimal payment required and due date, and current balance.
- Identify your goals and figure out how much savings is needed to achieve the goal. For example, if your goals are 1) renovations 2) travelling , figure out how much you need for each and how much you can put aside regularly (e.g., weekly or monthly) to achieve this goal by specific deadline.
- Before you start putting aside money for savings goals, make sure you are: a) putting money aside for emergency fund. Dave Ramsey suggests $1000 but this may not be enough. Realistically, if my mortgage bill is $3000 a month and something happens to my job, I will not last even a month with this kind of savings situation. Ideally, emergency savings need to represent at least 3-6 months of all your expenses. This should include the money you would need for all bills, expenses like food, paying off debt or at least paying minimal amount on all debts you owe. This is the worst case scenario situation preparation. Unfortunately, given current state of affairs this may not be totally impossible scenario. So you may want to consider putting additional funds aside for emergency fund #2. For example, emergency fund #1 is good to keep you 3-6 months afloat in case you lose your source of income. But what happens if during this time your car breaks, you or your pets need medical care or something breaks in your house that needs to be fixed immediately? So emergency fund #2 will make you sleep EVEN BETTER.
- So, when you meet your requirements for emergency fund #1 and 2, the next focus should be paying off debt. This is something that will impact your financial health if you do not address it. I personally think that everything except mortgage needs to be paid off. I have been in a situation where I had a lot of debt because borrowing adds up: money borrowed for education, car loan, financing for furniture, regular credit card debt…at some point I could not save anything because all of my cheque would go to the debt after all the bills and food expenses. This is not something I recommend to do because it will keep you up at night for years until you resolve it. Have a plan how you are going to reduce or pay off your debts altogether. Calculate how much extra you can add to debts to pay them off faster and do it!
- What if your debts are so high that after paying all bills and food you barely have anything left? That’s okay, start small. Saving is like a muscle, it can be developed. Start by putting aside as much as you can. For example, you can automate to have $100 go towards savings monthly. Or you can manually move money to savings. Once you start doing it, you would feel better and you would want to put more money on savings because you will feel you gained control over money. Again, if all your money is going to debt and something happens, it will just push you deeper into debt.
- Develop a system to be able to track your monthly expenses. If you write down the amount you spend every time you spend it, you will spending 25% less! Seeing numbers visually also gives you a better sense of control. After starting doing it, I can tell you the exact number I make, the exact number for every bill and how much we spend on food on weekly basis. Every dollar has a job – I know exactly how much to keep on my chequing because I know how much will be withdrawn, for what bill and on what date. This is critical because if you miscalculate it, you will be charged overdraft. It means that you will have a negative balance and then the bank will charge you for this!
- Dedicate a notebook and keep it up to date. I have tried excels many times, I have tried apps but I forget they exist after about a week. For me, paper works best. Find what works for you, as long as it allows you to keep track. Trust me, managing finances will help you feel in control!