Three Lessons About Money
Have you looked into your bank account, and thought “My goodness… Where did all of my money go?”. I’ve been in that situation more times than I would care to admit. I started earning money when I was 11, and I was absolutely clueless as to where it all went for the following 8 years. In hindsight, this problem does not surprise me at all, because it is a common struggle among youth and adults alike. This very topic has held my curiosity for the past 6 years, and led me to seek what I can do to overcome the obstacles of financial management.
My understanding of how money works began to grow when I started running a business that forced me to look the problem straight in the eyes. Since then, I made mistakes, sought guidance from mentors, read books, and picked the brains of brilliant individuals who lead exemplary lives. As I approach the threshold of my final term in university free of debt, financially secure, and independent, I finally feel like I have something worthy to share. In this post, I share the three most important things I’ve learned so far.
Lesson One - Money without a plan WILL disappear
Money tends to disappear when not attached to a target. This is particularly true for people in the habit of living on credit. How many times have you spent the extra two, five or twenty bucks on something you didn’t really need? Many people including myself typically do if we aren’t intentionally working towards a goal. Thus, the first step to take control of your finances and make your money work for YOU, is to have a plan for it. Here are several steps that helped me get started:
Step 1: Think about the things that you want to achieve through a short term, medium term, and long term perspective. You can do this on a piece of paper, and here is an example of what some goals can look like under each category:
When you set meaningful goals, every dollar begins to matter. Five dollars saved by avoiding an unnecessary purchase, is five dollars closer to your dream trip. Once you have a goal worth fighting for, the next step is to make a plan.
Step 2: Determine your current amount of disposable income. How much money do you have left after covering your obligations each time you get paid? To do this, you need data. Pull up your 4 most recent bank statements, and circle how much money you had left in the account after making your payments. Assuming you get paid bi-weekly, you should have 2 circles per month, or 8 circles in total. Add them up, and divide the amount by 8 to get an average.
Step 3: Mark your goals in order of priority. Consider “when I have disposable income, how will I split it up among my goals?”. Here is an example:
Long-term goal strategy (recurring draw each pay day):
1. Retirement fund ($83 each bi-weekly pay day = $2000 by the end of year)
2. Down payment for house ($100 each bi-weekly pay day = $2400 by the end of year)
Short-term and medium-term goal strategy (keep filling the top item on the list until goal is hit. Then move on to the next)
3. Tuition ($2400)
4. Budget for holiday presents ($300)
5. Trip to Greece ($2200)
6. Hero 5 Session GoPro ($250)
7. Motorcycle ($3500)
Consider opening a new online savings account to reflect each goal - it is free to set up with most banks, and it can help you visualize your progress. Banks typically give you the option to nickname your accounts. An account can be named “Tuition - $2400”. This way, when $2400 is in the account, you can move on to fill “Budget for holiday presents - $300” and so on.
Step 4: Now that you have a target and a plan to get there, it is time to execute. Be patient with yourself as you get in the habit of actively working towards your goals. Not every pay day will allow you to make a contribution, your goals may change over time, and you may slip up here and there. This is okay, just make sure to adjust your plan and don’t give up by resorting to chaotic spending.
Bonus Tip: If you’re a young reader thinking “this doesn’t effect me.. I’m young and I have lots of time to get my shit together”, be careful. Over 50% of American adults have less than $25,000 saved for retirement (Source: Link). If you’re an adult who is thinking “I have too much debt to implement the steps above” or “It’s too late for me. I only have a few more good decades left before I become senile so I should live life while I can” , don’t give up. It is never too early, or too late to start making the right choices. If you need extra help, seek advice from a reputable financial advisor. If you are curious about how behavioural finance applies to this issue, see my attached essay A Procrasti-Nation.
Lesson Two - Instant vs. Delayed Gratification
When it comes to financial planning and decision making, we have two common challenges:
We have to choose between the pain of Discipline vs. the Pain of Regret
We have to balance Fulfillment vs. Happiness.
Before diving deeper into each ‘dichotomy’, I will define the parts that make them.
Pain of discipline: To make better sense of what this means, I think it’s helpful to use the wise words of Jerry Rice as a base: “Today I will do what others won’t so tomorrow I can do what others can’t”. Taking action and being a hero in your own life is easy when you are motivated and things are going well. What ends up dictating success is how we act when things are hard, when no one is watching, and when we least want to keep moving. As such, continuing to move forward when its hard will feel painful but often leads to breakthroughs and desired results.
Pain of regret: An alternative to choosing discipline when things get hard is the path of least resistance that often comes in the form of procrastination. The pain of regret is crushing when the effects of procrastination, lack of discipline, and poor decision making catch up. When things get tough and we lack motivation, it is much easier to follow the path of least resistance. The decision to procrastinate or avoiding taking the painful yet necessary steps when they are needed is a recipe for regret. The pain of regret binds its host in the past through questions of what could have been such as “Had I only…", “I wonder what things would have looked like if…”, “I will never have that same chance again”.
Fulfillment: Fulfilment is a state felt when you achieve or perform an action or goal that helps brings about a meaningful feeling of satisfaction in your life. Higher human purpose.
Happiness: Happiness is a mental state or emotion that brings about pleasure and temporary satisfaction. Fleeting and temporary chemical reaction.
Pain of Discipline vs. Pain of Regret
I used to enjoy spending money, so this was a difficult lesson for me to grasp and get the hang of. There are countless times that I’ve made impulsive and unnecessary purchases even when I had goals in mind. To be vulnerable I will share an example. My biggest vice was eating out. How bad can the odd lunch be? I’ve never been one to track and analyze data so this vice was further supported through ignorance. The pain of regret hit me hard when it was time to do accounting for my business towards the end of the year and I learned that I spent over $2800 on seemingly insignificant purchases of food and drinks. This could have been a pleasant week-long vacation in Mexico over the winter and then some! This pain made me re-evaluate how I approach my spending, and brought me to the drawing board.
I decided that eating-out was something that I truly enjoyed, so instead of completely cutting it out of my life I made a plan. I would let myself eat out once a week, to a limit of no more than $40. The rest of the money would go towards the other goals that I had in mind. When I started executing the plan, it felt challenging at first. I had to pack lunch, wait until dinner at home, and avoid the temptation of “getting a quick snack” throughout the day. One week passed, and then the next, and before I knew it I started building a habit. The pain of discipline sucked initially because I had to restrict myself, but I began to enjoy my one eat-out meal significantly more. I tried to go to a different place each week, which allowed me to explore the food scene in my town in a way I haven’t ever done before. There were weeks when I lost to temptation, and I think it is important to accept that its okay for that to happen. The amazing part of this experience was that over 80% of my weeks were on track, which led to positive change both in my health and bank account.
Takeaway: To make significant long-term changes, we have to choose the pain of discipline over temptation that leads to the pain of regret. It is natural to slip a few times in the process, so be easy on yourself and aim to choose the path of discipline at least 80% of the time.
Action step: Take a moment to identify one or two things that you are sinking money into, and make a game plan to control your spending.
Fulfillment vs. Happiness
“Money can’t buy happiness”. I think that statement is bullshit. Of course it does! But happiness is different than fulfillment. To better understand my perspective on this point, please refer to the definitions I provided earlier.
We spend money or resources every single day, whether we realize it or not. A number of years ago I began to ponder how different types of expenditures make me feel, and realized that some things made me feel good, some things made me feel stupid, and others made me feel more connected to what I would consider the “bigger picture of myself”. I will provide a few examples to help you better understand what I mean.
1) The purchase of my first decent vehicle.
2) Paying over $700 on NSF bank fees.
3) Going on my first ever backpacking trip.
The first purchase made me really happy. I remember handing a bank draft to my neighbours from who I purchased the vehicle, getting the keys, and driving the car off into the sunset for a rip down the highway. It was awesome. However, as time passed the car just became a vehicle. There are moments where I look at the car, smile, and give myself a small pat on the back as it feels like testament to the hard work that I’ve put in that year, but most days it’s a metal box on wheels.
The second expenditure was really painful. In my first year of running the business I was an organizational mess. As money would come in, I would tuck it away into several other accounts to “be organized”. Unfortunately, there were more times than I wish to count where I forgot to spend the 5 minutes it would take to feed my main account to pay several weekly expenses. Towards the end of the year, the grand total was over $700 in banking fees which felt extremely painful because my hard earned money was being wasted on easily avoidable mistakes.
The third example of my expenditures filled my soul. My first trip that took me to Europe was eye-opening. It helped me realize that I feel most alive and energized when I get to see the world. As such, I learned that travel is one of the best ways for me to treat myself in a meaningful way. This feeling of being alive, energized, and fulfilled started my habit and desire to travel somewhere new every single year. However, at the same time I couldn’t help but think “Just imagine the types of things I could have bought with this money instead”.
Takeaway: Satisfaction in life is best achieved through a balance of decisions that make you happy and fulfilled. It is helpful to know the difference and be conscious of how your spending makes you feel below the surface.
Action Step: Reflect by considering how you’ve chosen to invest your money over the past year. When has spending money made you feel really happy over the short term? When have you used money to enable experiences or purchases that filled your soul? Identify 2-3 examples for each question, and use this information to drive your future goals in combination with Lesson One.
Lesson Three - If It’s Sitting, It’s Not Growing
Just like you work for your money, make the money work for you - do not let it sit idle. If your cash is sitting idle in a savings account, your dollar is worth roughly 2% less each year due to inflation. Although this may not seem signifiant, when added throughout the course of your life it can add up to a shocking amount. With that said, how you choose to invest your money will depend on your risk tolerance, how early you intend to use the cash, and thus how liquid you need it to be (Liquidity = how easy is it to turn asset into cash). Your best bet is to tap your network to find a reliable and trustworthy financial advisor or banker that can guide you to make the best decision for your scenario. In this lesson, I simply want to bring awareness to a few factors to consider when you think about making your money work for you.
I’ve learned that you have a few basic options when it comes to making your money work for you:
1) Invest in your own business
Whether you have intentions to be an entrepreneur who actively manages a company or have desire to build a passive stream of income, money is your best tool to get there. Although this can be risky, you can realize the highest returns while having a certain degree of control. If you’re interested in an active business, build a war-chest of liquid capital that will allow you to pull the trigger when it’s time. If you’re looking for a more passive method of income, you can invest in real-estate, ATMs, vending machines, or crypto-currency miners.
2) Invest in someone else’s business
This is the whole idea behind the stock market. When a company makes an ‘initial public offering’ or IPO, it offers shares of ownership to the public in exchange for cash. After the IPO occurs, the shares are traded in the ‘stock exchange’. The share price will be based on how much the company is actually worth, thus you inherit risk because your investment will be tied to the company’s performance. Before investing in the stock market, it is critical to understand the risks and implications, aiming to learn as much as possible about the companies you are interested to invest in. With the higher risk, comes a chance for fantastic returns. Consider Microsoft where a share was worth $21 when they went public in 1986, and grew to over $130 in 2019. A person’s $1000 investment during the IPO is worth just under $6200 today.
If you choose this path, it is recommended to invest in a range of companies in various industries to diversify your risk. This way, if one industry fails you have a chance that another may succeed and offset your losses. Even with a good understanding of the market, we have learned that it is impossible to predict, making it an educated gamble at best.
You have multiple options if you are interested to pursue this path:
Use a platform like Wealthsimple
Invest directly through your bank, preferably using a TFSA account (any gains generated through TFSA investment is tax-free)
Engage your network to find a reputable stock broker, banker, or financial advisor to help you get started
For a list of the most successful IPOs, and the biggest failures, check out the following links:
3) Invest in financial instruments
The finance industry is massive and complex. For a new person trying to figure out how to invest, the wide array of financial ‘products’ or ‘instruments’ can get quite overwhelming. Instead of looking at each product in great depth, I want to show you what is out there, and where you can learn more. I will put them in order of complexity, starting with the ones that are easiest to understand. When considering investment, your advisor will likely guide you to a portfolio that consists of Index Funds, Mutual Funds, or ETFs. When it comes to Mutual Funds, make sure to understand the disadvantages (management fees, the cost of pulling out the investment, etc) prior to committing to a plan.
TFSA (Tax Free Savings Account)
RRSP (Registered Retirement Savings Plan)
GIC (Guaranteed Investment Contract)
ETF (Exchange-Traded Fund)
Wrap-Up
We all carve our own paths in the unique journey called ‘life’, and financial management is an exceptionally useful tool that can make the journey more enjoyable. The lessons that were covered in this post are by no means the end-all way to succeed in this sphere, but they have been a strong starting point in my own life. I hope these lessons encourage you to take action, or at least think through a concept that many choose to sweep under the carpet.
Lesson One - Money without a plan will disappear
Lesson Two - Instant vs. Delayed Gratification
Lesson Three - If its sitting, its not growing
