“Financial success, as well as most success in life, is not about perfection, it’s about direction.”
In my last post, I talked about the importance of assessing your financial fitness so that you know how vulnerable you might be in the event of an unexpected expense or a drop in income. I learned the hard way how a sudden job loss can turn your world upside down financially if you don’t have a solid financial foundation to fall back on. It was an experience that changed my life, first for the worse and then for the better as I learned to identify the mistakes I had made in the past and how to rebuild things in a way that would ensure that I would never be that vulnerable again.
If you’re looking to strengthen your financial situation, here are four strategies that you can use to boost your financial fitness levels:
1. Get Educated (and Irritated!)
It’s said that knowledge is power and this is definitely true when it comes to finances. I know that in my own personal money journey, my ignorance of all things financial played a huge role in my slide into debt and disaster. It was only when I stepped up and learned a little more that I really found my motivation to make a change. It takes a powerful motivator to get you out of your “comfortably uncomfortable” reality and on the path to something new and better. For me, that motivator came from getting so irritated by my own situation and how I was letting myself be played by the financial institutions I owed money to, that I finally decided enough was enough and made the changes necessary to get myself out of debt and on the wealth building path. It hasn’t been easy but it has definitely been worth it!
2. Cut Back
There are two ways to create more money – cut back on your expenses and boost your income. I recommend to all my money management clients that they do a financial “cleanse” at least once a year. It’s pretty simple to do, you just go back over your bank statements for the three previous months and identify all the places that money is drifting out of your account: subscriptions for things you don’t use, want or need, random cash withdrawals from ATMs, avoidable bank fees and penalties, and overspending on things like groceries, entertainment and eating out. Too often we lose hundreds of dollars a month to “stuff” that we don’t actually need or enjoy, and keeping an eye on your account lets you stop the drift and redirect that money towards saving for something you actually do need.
3. Build a Contingency Fund
I don’t like the phrase emergency fund because it conjures up images of great disasters for me – so I prefer to use the term contingency fund instead. A contingency fund is basically a savings account that isn’t connected to your debit card (so you’re not tempted to dip into it for non-urgent purchases), but that you can access easily if you need to. For this reason, the money in the account should be in cash rather than invested or tied up in guaranteed investments. Most experts recommend that you have an amount equal to 3-6 months’ worth of expenses in your contingency fund, but $1,000-$5,000 is a good starting point. Contingency funds can take a while to build, but once they’re established you have the peace of mind of knowing that you have a significant buffer zone in place to protect you from the unexpected.
4. Save Regularly
It matters less how much you save and more that you save something on a regular basis. In Canada, our savings rate has been less than 5% for the past 15-20 years. Simply put, we’re terrible savers! The ideal is to be saving 15-20% of your gross income (10% for retirement and 5-10% for other savings goals), but if this isn’t achievable for you right now, then start with just $25 every week/pay/month and commit to finding ways to increase your savings rate over time. Getting into the habit of saving on a regular basis is one of the cornerstones of financial success. If you can, make your savings plan automatic through your bank account or via payroll deductions, then it will become even easier to stick to and you’ll be pleasantly surprised by how much you can stash away without really feeling the impact in your pocket.
As I’ve said before, good money management isn’t rocket science, it’s pocket science. Keeping track of your income and outgoings, keeping your debt levels low, paying yourself first and putting your money to work for you are the cornerstones of financial success. Simple, but not necessarily easy; if you can master those four habits, you’re well on your way to success (and well ahead of most of the other people around you!).