Updated: Sep 18, 2021
Let me begin with a personal story of mine. For most of my life, I wasn’t very good with money. I made it and I spent it. The money came in and went out. According to a BDO Canada Affordability report of 2019, the majority of Canadians (53%) confirmed they were living pay check to pay check, 25% said their debt profile was overwhelming while 27% didn’t have enough money for their daily needs. So, I’m guessing these statistics are something many can relate to as well.
After four years of college, I let with a degree in Applied Linguistics and hundreds of thousands of dollars in student loans. I was lucky to land a job with a digital marketing agency, and then I bought a car a few months later. Yes, I did. I told you I wasn’t good at handling my personal finance.
I knew my debt load was massive. I was too scared to even sit down and perform a self-audit. I had dug myself into a hole and I was at a loss as to how to even begin with repairing my credit profile.
The crazy part? All that debt didn’t stop me from going on a spending spree despite the huge debt hanging on my head. Right after buying my car, I got a new apartment and furnished the place to my taste. Of course, I wasn’t going to be left out the trending fashion, so I added some designer wear to my wardrobe.
Despite my many material possessions, I was miserable. I knew I couldn’t go on with the pretence any longer, like everything was okay. I knew that I needed to make a drastic change. I just didn’t know how.
And then I lost my job. Maybe this served as the springboard for the subsequent decisions that I took. I wouldn’t know. However, I was jolted back to reality. Then I began one of the most challenging journeys of my life – a path towards recovery.
Over the course of three years, I was able to pay off every single student loan that I owed. The car payment too, and slowly, I recovered.
Today I think about it and I’m very sure minimalism, a concept I read about and applied while I was on the path to recovery, helped me in no small measure to achieve my financial obligations. This is the same approach I hope everyone facing the same challenges I encountered years back to apply.
The basic formula to personal finance
There’s a basic formula to win at personal finance, and it is this, “spend less money than you make.” In practice though, it is not that easy. Money seems to completely slip through our fingers. No matter how much money we make, our bank account seems to have a completely different agenda.
Why money keeps getting in the way
One of the reasons that we’re bad with money is because money is a taboo topic. It’s rare to see families gather at the dinner table and talk about personal finance. We can’t talk about it with friends and colleagues. In the event that we could, it’s always a pity party, with everyone lamenting about how they never seem to have enough money. Many are scared to bring up the money topic because they’re scared of getting judged or offending the other party. Money is one subject that is not even taught in schools.
What can we do?
However, we can only improve our money habits if we start to have honest conversations about money. We need to remove our egos and actually learn. It is something that must be learned. How can we learn?
1. Learn money management through books.
My recommendations would be The Total Money Makeover by Dave Ramsey, I Will Teach You to be Rich by Ramit Sethi, and The Richest Man in Babylon by George Samuel Clason, a 1926 classic that continues to be relevant today.
All three of these books lay out great advice, trusted advice that has worked and will continue. You sure will find a lot of value in them.
2. Do not fall into the lifestyle creep.
Whenever we get a pay raise or we start making a little bit more money, or we land a really huge contract, the first thing that comes to our mind is upgrading our lifestyle to match our income. We start by upgrading our apartment, buying a new car. Just basically increasing our lifestyle. It could be compensation we gift ourselves for finally reaching new heights, especially one we never dreamt of.
Assuming we were more mindful of our spending, we will keep our lifestyle in check and not inflate it as our income rises. If we’re able to do this, then 5, 10 years down the road, we’re going to be able to live a lot more comfortably and we’re going to have so much security.
Let’s admit it, we buy tons of unnecessary things, and we convince ourselves in a lot of sneaky ways why we deserve it. Not all advertising is bad but a lot of it is driven to make us feel as if we deserve the indulgence. You’ve worked so hard, now you deserve this handbag, this leather jacket, or this car. The truth of the matter is, what you deserve is to be debt-free. You deserve not to live from pay check to pay check.
I look back now at my post-college lifestyle and I’m bemused at what I thought was critical to my living the dream life and generally being happy. I earn a lot more now, and I don’t even need those things I thought I couldn’t live without. I bought into the consumer culture, and I paid dearly for it.
3. Do not give into social media pressure.
We face a lot of pressure from social media. Truth be told, keeping up with the Joneses is a real thing, and if we’re not careful of our news feeds and social media feeds, it can feel like we’re not doing enough. It is very tempting to want to keep up and have the things that everybody else, otherwise we think of ourselves as failures.
But here’s the thing, rich people are rich because they make smart decisions with their money. They don’t go out and lease a brand-new vehicle or rent a penthouse that they can’t afford.
3. Do not give in to pressure from within.
We also face so many pressures from ourselves. There is this thing called, the myth of “I don’t have.” It is something that we tell ourselves to convince us that we need to go out there and get our heart’s desires.
As a YouTuber, you might say I really want to create top-notch content for my audience or that video but I don’t have this lens or this camera so I can’t do it. Or maybe I can’t start my weight loss program just yet because I haven’t found the perfect personal trainer.
But really, the only thing that’s stopping you is procrastination. It’s giving us those sneaky excuses that prevent us from getting started with our goals and dreams. It’s convincing us that buying that extra item is going to solve everything. Bad news. It won’t.
4. Make sacrifices
When I lost my first job, and with my massive debts almost ruining me, I woke up one morning and told myself, “I’ve had enough.” So, I moved back home with my parents. I stopped every unnecessary payment. I also made fewer social outings that would involve me spending money. I knew I had to make some sacrifices to get to a point that I could take risks.
You have to be completely clear with why you’re doing this in the first place. Why do you want to be debt-free, why do you want to have financial freedom? The first step in making uncomfortable sacrifices is understanding why we don’t want to be living pay check to pay check. It becomes easier when we understand the reason behind what we’re doing.
The merits of being financially free are so great. We think about having the security and safety of being able to take care of our family and friends when the need arises. It becomes more obvious why the sacrifices that you’re making are so important. It motivates you to push yourself outside of your comfort zone.
If I hadn’t taken that first step, I can’t imagine what my story would be like today. It was the first step that created the domino effect that I’m enjoying today.
The Minimalist approach to personal finance
Be intentional. You could start by being intentional in taking concrete steps to manage your finance. This means being diligent in your planning budgets, recording expenses, and being purposeful with your spending. This ensures that you’re more financially aware, which empowers you to take control of your finances instead of being scared and running away from them. This does not have to be a very tedious process. You could choose to adopt a minimalist financial system to manage your money, which essentially contains only three steps.
Create a budget: Your budget should consist of a few broad categories of what you usually spend your money on, such as transport, rent, and daily expenses. Try not to create too many categories; if not you would become demoralized when about your own expenditures. Be generous with every budget category so that you don’t have to dip into other categories of your budget when you overspend on your planned budget.
Use an expense tracker: Now comes the tedious part – expense tracking. There are many ways that you can do this. Initially, it would require trial and error on your part. But moving forward, you will find the best way to do this.
Set up automatic transfers: You could set up automated transactions to set amounts to be credited to different accounts for different purposes. By setting aside money to save once you get your salary, you guarantee a fixed amount of monthly savings and can spend money with peace of mind.
The strategy couldn’t be simpler. Spend less money than you make. But as you know, we face a lot of pressure to do the exact opposite. But if you can outmanoeuvre these forces, if you could build a healthy relationship with money, and create positive habits that stick, you will be able to become financially free.