Benjamin Franklin was right when he said, “If you fail to plan, you are planning to fail.” And sadly, financial planning doesn’t begin at an early age.
Essential personal finance skills such as budgeting, saving and managing debt are not taught in schools. While math and English are considered essential subjects, personal finance is often not included in the curriculum.
As a result, most of us leave school without a basic understanding of managing money and are left to figure it out on our own. It’s no wonder many of us go into unauthorized overdrafts or get into unmanageable debt on our credit cards when we are young.
As we get older, we are bombarded with offers of credit, tempted by the promise of free money. There’s also unrealistic pressure on young people through social media to look a certain way, own beautiful clothes and keep up with the spending habits of celebrities.
That’s why it’s so important for schools and parents to prioritize financial literacy and provide students with the skills and knowledge they need to realistically manage their finances later in life.
Additionally, our lack of financial literacy growing up should not be used as an excuse to avoid learning about money further down the line. Take the time to learn how to manage your finances now, and never stop learning.
1. Set up an emergency fund
It’s prudent to have money set aside in case of emergencies. An emergency fund provides a safety net if you get sick, receive a shock bill, or need car repairs.
Setting aside at least $1,000 gives you peace of mind, but ideally, you want to build 2-5 months of living expenses. Why, you ask? Simple. There is always the risk of unemployment. Having 2-5 months of living expenses gives you peace of mind and financial security.
2. Understand the dangers of debt
When you’re a child, no one tells you how hard being an adult will be, and nobody prepares us for managing debt on credit cards, payday loans and lines of credit.
Debt might seem small and insignificant when you are young, but it can have enormous consequences on your ability to obtain credit when you’re older, making it difficult (or more expensive) to get a mortgage or car.
Eventually, you might have a family, so you need to think of taking care of them too. When you have a partner and children, their financial security is also at stake. For example, if you were to fall behind on your mortgage payments, it could lead to foreclosure and homelessness.
It’s a good idea to build an emergency savings fund and have a solid plan in place to deal with your debts.
If you are deep in debt and don’t know where to turn, consider one of the many debt relief options available.
3. Stick to a budget
Budgeting is a must if you want to manage your finances successfully. According to the Financial Consumer Agency of Canada, only 49% of Canadians use a budget. This means that half of Canadians fail to budget their money.
Your budget should include all of your income, expenses and debt repayments. A good starter template is the 50/30/20 budget, which divides your money into necessities and things you want. The remaining 20% is allocated to debt payments or savings.
4. Keep learning
Financial literacy is a crucial skill that is alarmingly low among many Canadians. Many of us don’t understand tax returns, struggle with interest rates, and half of us don’t budget at all. A lack of financial literacy can lead to overspending, debt, financial insecurity and mental health problems.
As always, knowledge is power. It’s vital to prioritize financial literacy and learn how to manage money effectively. Create a budget, learn about saving and investing, and understand how to use credit responsibly.
Take a look at the 5-step plan for reaching your financial goals to help you on your journey toward long-term financial success.