If your life is out of control, how can you expect your money and debt to be in check?
Humans are creatures of habit. That is, most of us would prefer to develop a healthy, sustainable routine and stick to it. Get up at the same time every day, go to the gym, eat a balanced breakfast, go to work, spend lunch outdoors or with friends, go back to work—you get the idea.
We make lifestyle choices every single day, whether we do so consciously or not. Sometimes circumstances, such as unforeseen situations or emergencies, force our decisions, but we always strive to get back to a point of control and routine sooner or later.
The same can be said about managing your personal finances and establishing a winning mindset toward controlling your money.
Changing your personal finance mindset for the better
What if that old saying “He who holds the gold makes the rules” isn’t talking about corporations and billionaires, but average consumers like you?
You have the power to control what you spend and where.
In other words, you make up your own personal financial rules, goals, budgets and habits. You may find yourself in debt—from your own fruition and bad spending habits or from compiling unfortunate and uncontrollable circumstances—but that doesn’t mean that the power to get back on financial track isn’t within reach.
So let’s arm you with some tools to ensure that you have everything you need to take back control of your money.
Understand the big picture of your personal finances
The first step in taking back control of your finances is to understand exactly where you currently stand financially.
To do this, consider downloading your monthly financial statements from all of your chequing, savings, credit cards and other accounts, remembering to include loans, debts and income. Put them in a spreadsheet, or use an app if that’s easier, and look at the last several months. Categorize them based on the following:
- Spending on essentials (such as bills, rent, groceries and healthcare)
- Spending on lifestyle (such as trips, shopping, eating out and socializing)
- Interest payments
Take a look at your credit score
Understanding your credit score is an essential part of managing your personal finances. Why? Because this 3-digit number shows you just how good at managing your money you really are. Lenders like banks use your credit score to see how creditworthy you are—or how much of a risk you currently are if you were to borrow money.
The keyword in the previous sentence is currently. Your credit score fluctuates with every credit card payment you make on-time and with every new debt you accrue. Again, you have the power to improve your credit score and make yourself better at managing money.
Why should you care about that? How well you manage your money may affect your future goals and life plans.
Establish SMART personal financial goals for your future
Let’s say that your goal is to save $30,000 over the next 36 months for a down payment on a mortgage loan for a $350,000 apartment.
First of all, you’ll notice how specific that goal is. That’s because it’s a SMART goal. It is specific, measurable, achievable, realistic and time-based. It would also require you to set aside a savings of $10,000 every year or $833 every month.
Secondly, this goal will require you to have a good or great credit score of more than 700, most likely, so that major banks with reasonable mortgage rates and monthly interest payments will approve your loan. Now you can see your credit score is so important—and why it’s essential to manage your personal finances well.
Create a budget to achieve your goals
Now that you know how much income you have coming in every month and where your spending your money, create a budget to ensure that you have the right amount of savings (plus some for emergencies) to make your financial goals a reality.
- 50% of your income goes to essential spending
- 30% of your income goes to lifestyle
- 20% of your income goes to savings and debt reduction
If we want to save $900 every month for your financial goal of purchasing an apartment and having extra for emergencies, that breakdown would require you to make $4500 income per month after taxes.
If you know that your essentials, for example, costs more than $2250, you’ll have to increase your income or decrease your lifestyle spending to continue to reach your goal. Or, if you have student loans and personal debt to pay off, perhaps you can shift your goals to pay that off first and then focus on your goals.
At Marble, we help thousands of Canadians get out of crippling consumer proposals and we help people like you to understand and build great credit scores. Find out how your credit score is working for or against you and your future goals.