In 2018, when I started my professional career after graduating from university, I had no idea how to properly structure my finances in a productive manner. I had a simple bank account with checking and savings, and I spent money from my checking account as needed, with no tracking or planning. I didn't give it much thought at the time I was living within my means and I figured that was sufficient It wasn't until I started looking into investing that I did more in depth research on how to manage my finances. That's when I came across the reddit page Personal Finances Canada. After sifting through the posts, I came across this guide, which is considered a good place to start. Reading it inspired me to rethink the way I handle my finances and that is why took the decision to change the structure of my bank accounts in accordance with the steps in the guide. In this blog post, I'll explain the structure I created, how I reached that point, and the processes I put in place to keep me on track.
My advantage
In full disclosure, I'd like to begin by stating that I am aware that I had the privilege of graduating from university debt-free. I was able to do so thanks to financial support from my parents and being part of a coop curriculum that allowed me to complete paid yearly internships. This made it easier for me to follow the money steps outlined in the Reddit post. I wasn't concerned with repaying any high-interest debt or student loans. As a result, in the rest of this article, I will document what I did in respect to my situation. I understand that my process may not be viable for all, but I am confident that parts of it may apply to every situation.
Starting point
My starting point was step 0 of the guide, and that was to "budget and cut expenses" I needed to figure out what my initial estimate would be. To do so, I created an annual budget Google Sheet, went through my bank account and credit card statements, and manually entered every transaction from the previous three months into the sheet's expanses tab. This provided me with an overview of my expenses for that time period, and I averaged everything to arrive at my initial budget. Surprisingly, my actual average monthly expenses were significantly higher than what I had expected. I would not have realised that if I had not taken the time to go through this exercise. Therefore, I decided to reduce my monthly budget to a figure I was comfortable with, without sacrificing the lifestyle I was accustomed to. To help me stick to this budget, I decided to open a Tangering checking account with the Left to Spend feature, which automatically records all expenses and calculates how much of the budget is left.
Emergency fund
As I previously stated, I had some money in the bank, divided between a checking and a savings account. That money was then designated as my emergency fund. According to the guide, an emergency fund should be able to cover three to six months' worth of expenses. In my case, I chose a figure that was five times my monthly budget. This is because, in all likelihood, if I were to lose my job unexpectedly, I could reduce my expenses sufficiently to stretch my emergency fund for at least six months. I put the funds in a high-interest savings account because they needed to be easily accessible at all times.
Account structure
To help me remain disciplined, I opened additional bank accounts to separate my daily expenses from my emergency fund and savings. While searching for the best structure, I came across this video explaining how entrepreneurs should structure their accounts and decided to model mine after it. What I came up with is illustrated in the chart below:
To put it another way, the model I thought up included a daily checking account with a credit card, an emergency fund savings account, a general purpose savings account, and investment accounts. The typical flow of funds is as follows: I receive a paycheck from my employer, and a portion of it is deposited into my company-matched RRSP account, up to the percentage matched by the employer (Step 2). The remainder is placed into my emergency fund savings account. My budgeted amount is then transferred to my daily checking account. Furthermore, depending on my income at the time, 10%-20% of my paycheck is forwarded from this savings account to investments; this step is automated, so I never forget to put money in my investments account. Finally, any funds in excess of the the emergency fund would be moved to the general purpose savings account.
This structure was my best attempt at modelling the information from the video while respecting the reddit post's insights. Another advantage of this model is that because I separate my income from my allocated budget, if my income rises, my day-to-day spending remains constant, preventing me from falling victim to "lifestyle creep."
Investments
To reiterate, my investment process is as automated as possible. This is something I learned from a few investment books I've read, including "The Intelligent Investor" and "MONEY Master the Game." To achieve this, I opted to use a Robo-advisor from the well-known Canadian firm, Wealthsimple. In fact, this is a strategy I highly recommend, especially for those who are just getting started with investing. Wealthsimple has made the setup process as simple as answering a few questions and establishing a bank account for transfers. Further to that, the programme automatically handles the reinvestment of any deposits or dividend payments received.
Things change
I know from personal experience that life is not always easy. Things happen, and they have certainly happened for me since I adopted this structure and began investing. Nonetheless, whenever I felt myself slipping, I made the necessary adjustments to get back on track. In his book "How to Consciously Design Your Ideal Future" Benjamin P. Hardy compares life to flying a plane, where the winds constantly steer the plane in the wrong direction, requiring constant course correction in order to arrive at the right location. Although the destination of a financial journey varies from person to person, following the right process and developing the right habits will almost certainly show results get you there in the end.
Conclusion
I'm still puzzled as to why personal finance isn't taught in schools. I see far too many people who are well educated but completely clueless when it comes to personal finance management. In this article, I did my best to describe how I restructured my finances with the help of Reddit and YouTube, as well as some strategies I use to stay on track. Although I wish I had started taking my finances seriously and investing years ago, I'm glad I started when I did. I hope that by sharing my experience, at least one person reading this is inspired to improve their financial health and begin investing. As the popular Chinese proverb says, the best time to plant a tree is twenty years ago, and the second best time is now.