Personal financial management is a topic that sounds scary, but it really isn’t - it’s about understanding where your money goes, and learning how to plan where it should go. The earlier you start your education, the better position you will be to reach your financial goals, thanks primarily to compound interest and financial planning. By starting your financial education early, you’re able to learn good habits to make sure that you carry your financial management skills and tactics well into your adult years.

Unfortunately, this isn’t a topic that is a mandatory part of high-school education even though it should be. A recent study by the University of Manchester found that:

standalone financial education qualifications can dramatically improve individuals knowledge, skills and confidence in financial matters and that long lasting behavioural change can be achieved as a result.

The study also found that:

A specifically designated and substantial qualification is effective in changing young peoples financial behaviour (this contrasts with the Government approach of thinly spreading financial education across the curriculum in a variety of subjects).

Personal financial management education is effective when provided at a time when young people are experiencing the transition towards greater independence and adulthood (this contrasts with the approach of many who believe that early years and a focus on primary school children is appropriate).

Approximately 95% of students reported understanding money matters after taking the course and high levels of knowledge and financial awareness continued to be reported at both the 10 and 22 month follow up periods (FSA research published in July 2008 suggested there was no evidence that other forms of financial education produced lasting improvements).

Students confidence greatly increased e.g. confidence to go to a bank and discuss financial matters, greater confidence in how to research financial options and products and so on

So for the parents out there, the question isn’t “Do I teach my kids about financial management?”, instead it should be “When should I teach my kids about financial management?”.

If you haven’t started the journey yet, maybe you should today.

Here are a few of the financial management blogs I read everyday:

• The Simple Dollar
• I Will Teach You to be Rich
• Get Rich Slowly
• Moneyscribes

What blogs do you read?

Creating a budget is one of the most important things you can do when it comes to personal financial management.  Businesses create budgets every year to help decide where money will be spent, where money will come from, and how much money they need to save.  Your own finances are no different.  If you don’t plan ahead, even for your daily cup of coffee, you’ll end up broke and living in your mom’s basement.

In chapter 5, I talk about the future cost of life - it’s important to understand how much things will cost, and you need to start planning for big purchases as early as possible.

I just saw this post where Stephanie had a project for school that required her to “walk through the steps of buying and financing a house” - a great exercise to help you start thinking about the future cost of life.  Through this exercise, Stephanie started to look at how much her student loans will cost her, and has come to the conclusion that it’s going to be expensive, something which she didn’t realize until she looked into how she was going to finance her life post-graduation.

I wanted to put myself on the standard repayment plan right off the bat, and tackle this debt head-on. I wanted to consolidate my loans into one low rate while rates are dropping. But it looks like just to be able to make the minimums, I’ll have to stay on the graduated repayment plan (where the bills start small and get bigger every year) - with payments of $319 (at first).

Trust me, I’m really disappointed by this. I don’t know why I didn’t run the numbers until now, other than the fact that it’s easier to run them now that I’m done taking out new loans. It’s startling to be this close to repayment and suddenly realize that I will have trouble paying the bills.

My employment is uncertain. I’m going to do the best I can with job applications and internship applications over the next few weeks… but I’ve come to realize that I’ll have to do a lot more than that. I can’t afford anything outside of Ramen to eat and car maintenance, since I’ll be needing that to get to a job. I’ll have to start Compacting again.

I’d thought I was out of the woods, but I’m really, really not. Somewhere deep inside my brain, my current Self is kicking my 17-year-old Self in the pants for getting us into this mess!

Student loans and debt are a necessary part of life, and this post isn’t meant to scare you off of getting an education - it’s a good thing, and well worth the investment.  Rather, this post is meant to show you how important it is to think about the future cost of life, and create budgets to meet your future financial goals - if you plan to own a house after graduation, you have to start saving for it now, if you plan to pay-off your student loans as soon as possible, you need to make a game plan to achieve it, if you want to go travel the world, you better start saving today.

Regardless of what you want to do in the future, you need to start thinking about what you want, set those goals, and create budgets that will allow you to meet your goals, but don’t forget that while you are making those budgets, you still need to enjoy life (just ask Elie).

How do you manage your money?  Do you create budgets and stick to them? Do you track your spending’s with money management software or a notebook? Do you use online banking? Maybe you’re just good at avoiding the pressure to spend from your peers.  GetRichSlowly has a write-up on how to take control of your money in 2009, but if you’re like me, you’ll probably want to make sure your financial management is in control for your entire life.

Below are my first five rules on savings from Following The Goods: Financial Management for the Young and Ambitious.

Start saving money early — the best way to start saving is to start early. If you haven’t started early, start now! If you put away $10 dollars a week when you are 15 years old, and invest that money in a low-risk investment, by the time you turn 35 you’ll have earned almost $40,000. The sooner you save, the more you can save. It’s never too late to start saving. Don’t think about what you should have done, or about opportunities you may have lost out on, think about the future, and start saving now to make your dreams come true.

Create financial goals and meet them — it’s hard to accomplish anything in life without a goal, and savings are no different. Constantly set financial goals and do what’s necessary to meet them.

Pay yourself first — as we discussed at the beginning of this chapter, if you don’t pay yourself first, you’ll have problems paying yourself at all. Even if you can pay yourself $10 a month, make sure you pay yourself before you pay your bills, then take the money and invest it wisely.

Use automatic banking — If you are finding it hard to put savings away each month, set up an automatic savings plan where you automatically transfer money out of your account into a special savings account each month. Additionally, by using automatic transactions, you can make sure your bills are paid on time and that you pay yourself first.

Budget, budget, budget — to achieve any goal in life, you need a plan. By creating and adhering to a budget, you’ll make sure to meet all your financial goals. Just like anything in life, your financial goals and budgets can (and probably will) change, so make sure you are able to track your budget and update it when necessary

I was sitting in a local coffee shop the other day and started wondering if people actually know how much a cup of coffee costs over a year, two years, five years or ten years.

Let’s say you like to drink coffee from one of the high-end coffee shops, you can expect to pay $1.71 with tax for a regular coffee.  Now if you have that coffee once every few weeks, it doesn’t add up to a fortune, but if you’re having the cup of coffee once a day, every day, 365 days a year, it can add up, but the question is, how much can it add up to?

Well, if you buy 1 cup of coffee every day, you’ll have spent the following:

• after 1 week you’ll have spent  $11.97
• after 1 month you’ll have spent $47.88
• after 1 year you’ll have spent $574.56
• after 2 years you’ll have spent $1,149.12
• after 5 years you’ll have spent $2,872.80
• after 10 years you’ll have spent $5,745.60

Now I like my daily cup of coffee as much as the next person, and I’m not here to preach a frugal lifestyle (you do have to enjoy life after all), but it’s important to realize where your money goes, and make sure you include your daily cup of coffee in your budget - $1.71 a day may not seem like a lot, but I’m sure $574.65 might make a difference to your budget.  Something as simple as a cup of coffee can turn into a large sum of money over time - who knew that you could choose between a cup of coffee everyday or a month’s worth of rent?

One of my readers just introduced me to the Investor Education Fund, which is funded by the Ontario Securities Commission.

Canada’s unbiased, non-profit source for information and tools that help consumers make better decisions when investing and managing their money.

This is an amazing site with a ton of information on everything from Investing Basics to Saving for Retirement to GIC’s and Savings Bonds to this great video which describes how credit works!

Oh, and for those of you who are teachers, there is a Teachers’ Corner with helpful resources to incorporate money management into your classroom.

I just saw this interesting article on MarketWatch which states that our beliefs that are formed in childhood about money tend to guide us through our adult life.  One of the article’s examples includes:

one client whose father traveled a lot when she was a child. Before his trips, her dad would hand her a credit card and tell her to “buy something nice” for herself. She now realizes she’s deep into credit-card debt because she overspends when she’s sad or lonely.

The article goes on to recommend that it’s important to validate your perception of money with other people - basically it’s a good idea to talk about what money means to you with your family and friends.  Money and financial management shouldn’t be taboo topics at the dinner table.

Actually, this reminds me of a video, called bust that cycle.

You can learn a lot from your inner circle, but it’s up to you to start the conversation.  Don’t make the same mistake I did and hope that one day everything will just magically make sense to you.

In Chapter 16 I talk about the new Tax Free Savings Account which was introduced in Canada as of January 1, 2009.

As of January 1, 2009, The Government of Canada has introduced the Tax-Free Savings Account, otherwise known as the TFSA. This is a new type of savings vehicle which will help individuals who contribute to the TFSA grow their savings tax-free throughout the lifetime of the account

These new TFSAs allow the account holder to invest up to $5,000 each year into the account and earn interest on it without having to pay tax.

So how does a TFSA work? Well, each year, Canadians 18 years and older can contribute up to $5,000 into the TFSA. Your contribution into the account is not tax deductable, meaning you will have to pay income tax on your contributions. The great thing about the TFSA is that any money created while in the TFSA, whether it is investment income or capital gains are exempt from tax. Yes you heard me; any money that you make within the TFSA is tax free, but the good news doesn’t stop here!

You can remove money from the TFSA and put it back in whenever you want, and you don’t have to pay taxes on money withdrawn from your account. If you make a withdrawal and later put it back into your account, this will not affect your yearly contribution limit. Additionally, any income earned in the TFSA and withdrawals from the account do not affect your eligibility for federal income benefits and credits.

And speaking of contribution limits, you can carry forward the amount of money you don’t contribute into future years. As an example, in your first year of having the TFSA, let’s say you can only afford to put in $2,000, meaning that you still have $3,000 left to contribute to your TFSA before you reach the contribution limit. You can carry this remaining contribution forward into the future. So let’s say every other year for the next five years you put in the full $5,000, and in the fifth year you can afford to put in an additional $3,000, you can do this, because you are allowed to carry the remaining room in your TFSA
contribution limit forward.

For more information, check out the Canadian Revenue Agency’s TFSA page or contact your local bank.

With the downturn in the economy being such a hot topic in the news, there seems to be a ton of articles about financial management, everything from cool new software for your iPod, to basic tips on financial management, tips on how to create a budget, to the value of using online banking.

Even though 2009 will probably have a strong focus on the importance of financial management, it is important to remember that strong financial planning and budgeting is important throughout your entire life, not just when times are bad. Having a strong understanding of your finances to build a strong budget and plan helps to ensure that you stay on track, regardless of how good or bad the economy is doing.

I just saw this news article and I couldn`t be happier. The state of Virginia in the USA is mandating that all public schools must offer personal financial management courses by 2010. Students will learn how to read leases, credit card statements, create budgets, and manage their money. The state is also thinking of mandating this education to be part of the high-school curriculum.

Now if only we could get this type of course to be mandated as part of the Canadian curriculum.

« Older Entries