Money is scary to a lot of people and they’d rather run the other way instead of understanding how it works! I am passionate about personal finances, not because I’m some greedy, capitalistic pig, but rather because I believe money is a powerful tool to help us achieve all that truly makes us happy and fulfilled. Much like a hammer is a tool we use to build a house, money is a tool that we can use to … well do anything!
I believe that money management scares a lot of people, because it can appear so complicated and misunderstood. I recently this article that talks about 5 numbers that can help appease our “money fears”. And really, when I thought about it: It’s all simple mathematics (arithmetics) which we’ve learned in Grade 2! They just seem to be more complicated than that.
So the 5 numbers that are good to know are:
- Monthly Income: What comes in?
- Monthly Expenses: What goes out?
- Net Worth: What you own – what you owe
- Debt-to-Income Ratio: How much debt do you have vs. what you make?
- Your Invested Income: Are you making the most out of your money?
#1 and #2 can appear straightforward, but for some they are not. It is simple arithmetics. In grade 2, you had to add 13+35, well in grade life, you just need to add a few more #s together. And now we have excel! I keep a tight watch on all my money that comes in and out. How do I keep track? Excel. I download my RBC bank account statement and TD Visa statement and copy-paste into excel. I instantly see each month how much in the red or in the black I am. I also go an extra step and put them in categories, so I know, for instance, if I’m spending too much on restaurants, booze, or knick-knacks. If anyone wants to see my system, send me a message! There exists software as well such as Quicken. I prefer my own custom system.
#3 Net Worth: People think this is for “rich people”, but it’s really for anyone! It’s basically a snapshot of your financial health. And again : simple arithmetics. Calculate everything that you own that has $ value. How much $ do you have in your bank account? In your pocket? I.e. If you sold your car, how much would that be worth? Your house? How many investments do you have? For what you owe, it’s also straightforward: mortgages, loans, credit cards etc. Also, be sure to include personal debt, and money that people owe you. If this # is positive : great. If it’s negative: you can look at ways to change that trend. Go back to #1 and #2 to see what changes you can make. I’ve included the graph of the evolution of my net worth since 2009 (without the #s). You’ll see a dip in the past 3 years. I chose to use some of my accumulated net worth to “invest in myself and pay for 3 of the most significant and incredible experiences of my life: sailing around the world, being part of the Olympic games, travelling to the Middle East. I’ve eaten into my net worth, yet I’m still positive. Again, this money was used in order to fulfill my dreams. Now that I have a snapshot of where I’m at, and am proud of my actions in the past 3 years I can continue building my net worth to pursue other dreams. Again I can forward my excel “Net Worth Calculator” spreadsheet.
For #4: Debt to income ratio, this is generally more important for purchase of real estate property, but it’s also very important to know in general. Not to sound like a broken record, but again it’s simple arithmetics. The easiest step is to pull out a “credit report”. I just got mine done today at Equifax. So really, this is different than your net worth. Because if your income is much higher than the debt payments, you can more readily pay down your debts. It is generally good to have this # below 35%.
Finally #5 is the last step, once you’ve worked your way down and you have money left over to invest, you can start looking at different options for investment. Myself, I have real estate investments that generate very interesting returns. Others prefer to invest in the stock market, others like to keep it safe and “do nothing”. There are as many options as there are people. There is no right or wrong answer. And again, investments are a means to an end: your life and what you want out of it.
It all comes down to “what do you want out of life?” Do you want a big house? A dog? A boat? Travel all over the place? Kids? Nice Guchi suits? A fancy car? A house by the beach? We often get lost in what others want, and we feel that we need to keep up with others. I find I am the happiest when I think about what makes me happy, and truly happy, and fulfilled. If I can spend my money in those areas, I feel doubly fulfilled. That’s why I’ve started to invest in real estate and to keep a close watch on my money. It’s not for the sake of earning more money, but rather, it is to help me achieve what I want in life: enjoying nature, spending time at the beach, playing sports, sailing, eating really good food (restaurants or food experiences), travelling and exploring new places. For myself, I realize that I don’t need to have the fanciest car, house, or clothes. In fact, if living in a small house, with lower rent (and thus lowered expenses (see #2)) can help me achieve a goal of for instance “more sailing adventures”, then, yeah, I’m down for that! And really, when it comes down to it, people are at the center of it all, partner, children, family, friends. And how can I spend in order to maximize my time and experiences with those who matter?
Each person has their own path, and money is a very important tool in order to get there. The first step really is to discover what is truly important to them. What are some experiences they absolutely would love to have? What’s on their bucket list? How much will it cost to get there? And how can I use sound money management to achieve these goals. And it’s all about Grade 2 Arithmetics! Unless you dropped out of school in Grade 1, you can do it! And now, we can use calculators and spreadsheets, so it’s not that hard really ; )