Not being able to save money has little to do with having less of it — it’s about adopting healthy habits, being honest with yourself, and most importantly, self discipline. You could have the most elaborate money saving plan on the planet, but actually bringing it to fruition is the real challenge.
With good financial habits, even people who make less money can end up saving a lot more in comparison to those with a better paycheque. At the end of the day, it is not your salary that makes you rich, it is your spending habits.
Money management and financial literacy are vital life skills that everyone should possess. Simply doing a few things right can make a world of difference in your financial life.
In this article, we’ll dig deeper into the dos and don’ts of money management along with a few tips on how to budget money and save more.
Reasons Why People Overspend
Everyone knows that spending too much money and living beyond one’s means leads to financial problems. Why then do people still overspend?
Here are some of the main reasons identified by behavioral economists:
Self awareness and self discipline go hand in hand. When we really want to believe something, even if it’s not the truth, we find ways and means to convince ourselves in favour of whatever puts us at ease.
Think about it, splurging on one good meal feels good in the moment; after all, “you’ve worked hard”, “you’ve earned it” and (our favourite) “what good is money if you aren’t going to spend it?”
These are few of the many creative reasons you’re going to use to convince yourself that you need that white mocha frappuccino with breakfast every morning, or perhaps two fingers of Cognac after dinner every evening.
Now that’s dangerous thinking, especially if you’re trying to save money. Convincing yourself to make that seemingly small expense is easy. But when you’re doing it too often, knowing full well that it’ll bring you trouble in the future, you’re on a slippery slope.
Most people are habituated to tagging their money into mental accounts such as rent, food, entertainment and so on. When done right, we spend the money based on dollar values attributed to these accounts.
This phenomenon, in some cases, can go wrong if we only consider the opportunity cost within a specific account without looking at the bigger picture.
For example, you may have a line of credit with $2000 outstanding that you should put your gift money towards, but because it was gifted, you’ve mentally tagged that money as “gift”money, and will choose to use it for more “beneficial” purposes.
The solution is to look at your finances from a holistic perspective. Your cash inflow should be allocated in a way that is optimal and sustainable.
The Present Bias
The present bias is a phenomenon that occurs when people give more far more importance to immediate rewards than to those in the future. The further into the future the reward is, the harder it is to keep its value in mind.
For example, the future-you might want to consolidate all your debt and pay it off, but your present self wants to buy a new car.
When you have a cash inflow, assess how to put that money to its best possible use. The more you discredit your long term interests in favour of immediate gratification, the more you’re likely to overspend.
By keeping long term rewards at the forefront of your priorities, and by reviewing your short term and medium-term needs daily, you’re walking away from financial problems, one step at a time.
Remember that it is okay to spend occasionally, but when occasions present themselves regularly, you know there’s a problem.
Easy Access to Credit
If you have an overspending problem due to the reasons explained above, credit cards will add fuel to the fire. When you pay with cash, you can literally see your funds diminishing, but with a credit card, it’s easy to justify every small expense.
Most people fail to realize that by spending above their means, they’re eating into the money they would have saved. Habits like these give birth to endless credit cycles — when you’re basically living on credit and you deplete your entire salary in a matter of days because you had debts to pay off.
It could be credit card(s), a friend you’ve borrowed too much from, possibly your parents or worse, loan sharks. Whatever the source, your credit ratio needs to come back into balance. For that, you’re going to have to not use credit, at least temporarily.
The Cycle of Credit Generation
Here’s a scenario that may or may not sound familiar — you’re barely halfway through the month, and suddenly, you’ve blown your entire budget. So you decide to continue spending anyway while telling yourself that you’ll “do better next month”, but that never happens.
Naturally, you end up starting the next month by clearing off some of the credit you’ve accumulated in the previous month, which results in less cash on hand, and the cycle goes on. The only way to break the chain is to significantly lower your expenses, pay off your debt, and start again.
Solving the Core Problem
Money is not something we should be whispering about — yet it has always been a hush-hush topic for most people. So it’s unsurprising why many don’t really get a chance to learn about it unless they reach out.
When it comes to identifying the root cause behind poor financial management, it’s clear that the problem originates from one’s mindset about money, and not the lack thereof.
Dig deeper and you’ll find that there’s a much broader problem at play. People who find it difficult to save money often reveal similar behaviour patterns.
Saving money and being resourceful extends to many aspects of your life — not just finance. It boils down to your relationship with efforts and rewards. If you are able to delay gratification now, with the intention of enjoying it in the future, you can do the same with just about anything.
If you’re struggling with money management, here are some things you can start doing to mitigate the issue:
Resisting the Temptation to Spend: Delaying Gratification
Buying new stuff from time to time is okay but your finances can get out of hand if you aren’t careful. The hunger for wanting more and more is what really gets to people.
Once you buy that “one thing you always wanted”, you’ll find the next best thing, and the next thing, and so on and so forth. Not being able to resist these temptations can have dire financial consequences.
This is not to say that you shouldn’t have hobbies or buy the things you like; the best practice in this scenario is to save for the things you want to buy instead of procuring them on credit just so that you can own them sooner.
Consumerism is powerful, and escaping it is difficult. You can start by focusing on owning fewer things. Life gets a lot simpler when you own less stuff.
Living Below Your Means
One of the first things you’re going to have to start doing if you want to save money is getting used to living below your means. At least temporarily.
Just because you have the money for something, doesn’t necessarily mean that you can afford it, or that you should buy it. When you start significantly cutting down on expenses, you’ll experience that a surplus amount of money is suddenly available — this is the money that you should use to either lower your debt or to save up.
Don’t get us wrong though, we aren’t saying that you should pinch pennies every chance you get and live a cheap life. If you want better things, buy them, get it out of your system, but then there has to come a time when you hit pause and start saving!
You won’t really miss the money you would’ve spent anyway — you’ll forget about it in no time. What you will remember is how much you’ve saved. Your savings account will remind you.
Money Saved, Is Money Earned
We cannot stress this enough; small expenses add up really quickly, however, small savings add up much faster.
Saving $10 and spending $10 are two different things — the value that you attach to a specific amount of money changes based on whether you’re saving it or spending it. Hypothetically, in order to spend that $10, you need to be earning at least $15.
When you spend a certain amount of cash, especially on something frivolous, that money is gone. When you’re saving it though, the same amount will prove to be far more valuable in the long run. It will accumulate interest, and most importantly, it’ll be there when you need it.
So while you might feel that it won’t do any good to put away a seemingly small amount of money in savings, trust us, just do it. It will pay off.
Three Pillars of Money Management
Money management revolves around 3 basic principles: budgeting, saving, and investing. Master these principles and that’s half the battle won! Easier said than done, of course.
Budgeting is very important if you are looking forward to gaining financial security. It revolves around keeping your finances on track by regularizing your expenses and tabulating them under one platform.
It’s not about curbing expenses and restricting yourself, it’s about allocating your funds in the right place so that you can live the life you want to live.
Note that budgeting is very subjective — there aren’t fixed sets of rules that you have to follow. Some people like budgeting leisurely while others don’t mind living on a shoestring in order to have healthy retirement savings.
As long as you’re saving at least 20% of your monthly income, and keeping a solid track of where the rest is going, you should be fine.
Save While Spending
Who says you can’t save and spend at the same time? The money that you aren’t saving is going to get spent anyway, somewhere or the other. In fact, most people manage to save a decent amount of money while consistently lowering their debt and inching closer to financial independence, one tiny step at a time.
Remember, some savings is better than no savings at all.
Investing Your Savings
The best part about money is that it can work for you, especially when it is managed correctly. Managed money works harder, and if you have less of it, you need it to work as hard as it possibly can.
So, in order to make your dollars behave, you need to start growing your money by investing it in the right places. Most people can save millions by the time they retire simply by investing consistently from an early age.
If you haven’t started investing yet, we recommend that you get on it at the earliest. The best time to invest was when you were 20, and the second best time is now.
The subject of budgeting can fill an entire book. It is single-handedly the most important financial skill that you can possess. There are no fixed rules when it comes to budgeting, however, it helps to know a few basic tips and tricks before you start out. These include:
Paying Yourself First
If you’re budgeting to pay off bills and debts in all sorts of different categories, why not make one for yourself? By doing this, you’ll be taking care of your needs first, and won’t feel like you aren’t getting a chance to enjoy the money you’ve worked so hard for.
Involve a Friend in Budgeting With You
Tasks done in groups often gain more success rather than the tasks that are done alone. Hence, it’s best to involve a friend with you in your budgeting plans and be accountable for each other.
Revise Your Budget Frequently
As life moves on, our needs and expenses also change. Hence, revising your budget as per the changing needs is essential in order to make it more relevant. The changing rates on your bills, rent slips, employment, etc. each require a revision to your budget.
Use Budgeting Apps
It’s good news that banks and credit unions all over Canada have started providing budgeting tools and apps to keep it easy for people to manage their finances. These apps make it easy for you to maintain budgets at your fingertips.
Set up Automatic Payments
Instead of remembering your bill dates and then eventually forgetting them, it’s better to set the payment schedule automatically. The small piece of tech in your hand, i.e. your phone, can help you make your budget schedules easy and timely.
If you are involved in shared expenses, it’s better to conduct budget meetings on a monthly basis with the other spenders. This will help you to communicate your concerns and problems clearly, and to refrain from spending more than others.
Track Your Spending
This is one of the most important steps to follow in order to avoid unnecessary expenditures and maintain better budget conditions.
How to Successfully Stick to A Budget
If you’re reading this, you most probably have planned a budget for yourself, which is a great thing. But the hardest part is yet to come, which is sticking to your budget and not giving in to the temptations of spending more than you planned.
To stay on budget, you must practice self-discipline, determination, and self-control. Actually, this phase becomes easier with time, as the first few months of staying on budget are the hardest.
Here are some tips for you to stay motivated:
Know Your Circle
You are known not only for the company you keep but also for the company you avoid. If you have a group of friends that peer pressure you into buying expensive things that you don’t need, we recommend finding new friends — those who care about your wellbeing.
Focus On Your Vision
There must be a valid reason for you to plan your budget and try to stay on it. Whether it’s saving money for the future, accumulating wealth, or simply adhering to better financial practices, never lose focus on your vision. Always remind yourself about your budget goals to ensure that you stay on point.
Make Short Term goals
Trying to achieve everything at a time can easily backfire. So rather than trying to do it all at one time, concentrate on developing short-term goals and accomplishing them one by one. By doing so, you will also be able to boost your confidence levels regularly.
In the financial world, to manage your money effectively, it is imperative to have the right tools. Some of these are as follows.
You Need a Budget or YNAB
Of all the online tools available YNAB is one of the most effective for a number of reasons. First and foremost is that it is easy to use and retains that familiar spreadsheet format. Secondly, it encourages you to design your budget based on your previous month’s income rather than on the money that has not even been received yet.
Yes, you read that right. Nowadays there are actually a number of banks that have launched their own budgeting tools. These tools are specially designed to help customers keep track of income and expenditure like mortgage payments etc.
Many Canadians, on regular basis, make use of this personal finance software. Quicken is so appreciated because it has a Cash Manager feature that goes a long way in keeping track of simple day to day expenditures.
As you might have noticed, most of these tools are free of cost and can be availed of by anyone, irrespective of age and occupation. Once you get your hands on these tools you will be surprised to note how easy they are to use and how fun budgeting can actually be!
Simple Tips for Saving Money in Canada
Saving money is not as hard as you might think. Just like how spending money can be addictive, you can tap into the addictive properties of saving money too!
Here are some easy ways to save money and follow your budget:
Account for Fixed Expenses
Fixed expenses refer to those expenses that remain the same every month. This includes payments for mortgage or rent and debt payments. You know what amount these payments would need every month and therefore you can easily shift that amount from your monthly paycheque into this account and forget about it.
However, one rule that needs to be strictly adhered to is to never make any kind of personal withdrawals from these accounts under any kind of pretext.
Account for Variable Expenses
Variable expenses refer to monthly expenses that differ in value based on your need and spending habits. These may include payments for groceries, utilities, cash withdrawals, or entertainment.
One rule that you need to follow for this category is to remember that you need to forego any kind of further spending for the month once the amount in this account gets used up.
Account for Irregular Expenses and Savings
This account is specifically designed to take care of any kind of emergency and save money for a rainy day. Siphoning money from this account obviously has dire consequences.
One thing you can do is utilize the surplus cash from incentives or refunds on taxes to put into this account. Doing this allows you to create a solid backing in case of an emergency.
Leveraging Financial Instruments
In the world of money management, budgeting and self-discipline will only get you so far. Once you’ve passed those hurdles, the next step is to make use of the tools and instruments made available to you by financial institutions like banks and credit unions.
This is where the real magic happens. The power of investing and compounding can transform your financial life if you play your cards right. Some of the best money saving tools available are as follows.
Tax Free Savings Account
Tax Free Savings Accounts or TFSAs are possibly the best way to save money in Canada. Think of this account as your own personal tax haven — in the sense, that it shelters your invested money from taxes.
TFSA accounts allow you to invest up to $5500 each year, without any chargeable tax on the interest. The best part is that, unlike Register Retirement Saving Plans, you still don’t have to pay any tax on the investment even after you take your money out.
These accounts are capped at $6000 per year and the money grows in your account tax-free, till the time you retire.
High-Interest Savings Accounts
Canadian banks and credit unions are known for paying notoriously low interest rates. The average savings account in Canada only pays a 0.05% annual percentage yield; some traditional institutions pay even less.
In this scenario, it makes sense to look for a savings account that gives you a higher than average interest rate. That’s what high-interest savings accounts are for. Even though they’re much more restrictive than normal savings accounts, the benefits surely outweigh the penalties.
With one of these accounts, expect to earn much more interest on your savings — upto 25 times more! HISAs are also federally insured upto $250,000 per depositor.
Guaranteed Income Certificates
If you have a good chunk of money stashed up in a savings account, and if it’s mostly lying dormant, consider putting it into a GIC or Term Deposits. Doing this will allow you to earn even more interest as compared to high-interest savings accounts.
GICs are safe and secure investments with very little risk involved. The only catch is that when you invest in a GICs or Term Deposits, you need to keep your money there for a specified period of time.
Register Retirement Savings Plan
RRSPs are designed to protect your investments from being taxed. Though they work on similar principles as Tax Free Savings Accounts, they’re quite different. Before the government introduced TFSAs, RRSPs were the best way to save.
A Register Retirement Savings Plan is a retirement savings and investment tool wherein pre-tax money can grow tax-free until it is withdrawn, at which point it is taxed nominally.
So that was our primer on the art of saving money. Want to let us in on some of your money-saving secrets? Feel free to leave a comment below.