The Olympics are a spectacle to behold; there’s nothing quite like watching world-class athletes complete physical feats us mere mortals could only dream of attempting. One particularly exciting event, in this writer’s opinion, is the hurdles. They’re also one of the more stressful events to watch; one slight misstep and the race is all but lost.
A hurdle race is a fitting allegory for managing your finances – each one representing a step toward financial freedom. Stumble on one and it extends your race. The more you miss, the harder it is to make up any lost ground.
The good news, though, is that managing your finances is more of a marathon than a sprint. You’re guaranteed to make some mistakes and, unlike in hurdling, those errors won’t cost you an Olympic medal.
Still, it’s important to overcome financial hurdles so you can make it to the finish line. And it’s easier to overcome obstacles when you plan ahead.
So, what are some typical financial obstacles and how do you overcome them?
Paying down debt
There is perhaps no bigger financial pitfall than falling too deeply into debt. Using the hurdle metaphor, missing a payment is like missing a hurdle; it sets you back and forces you to work much harder to make up lost ground.
Especially when it comes to credit card debt. Let’s take a look at some numbers to see how failing to properly manage credit card debt can hurt you in the long-run.
If you carry a balance of, say, $5,000 your minimum monthly payments would likely be 3% ($150). Paying that debt off would be considered a financial hurdle. However, making just the minimum payment will not only extend the length it takes to fully pay it off, it will cost you a lot in interest. And that’s money that could be better spent elsewhere.
Using our example – and assuming minimum monthly payments of $150 – it would take 50 months to pay it off. In addition to the principle of $5,000, you would also pay an additional $2,357.06 in interest for a total debt cost of $7,357.06, according to a debt calculator on debt.ca. Miss payments and you not only extend the time required to pay off the debt, you also end up paying more in interest.
So, to overcome this financial hurdle, you would need a plan. More on that in a bit.
In addition to paying down debt, putting together meaningful savings – both long- and short-term – poses additional financial hurdles. You may want to buy a home one day and, of course, retire comfortably. These are long-term savings goals.
You also want to protect yourself in the event of an emergency or job loss. To do so, you would need to put together a substantial emergency fund (the general rule of thumb is to save 3-6 months’ income).
Both should be part of your financial plan (with the emergency fund taking priority at first). But how do you get started, especially as a young Canadian who is working an entry-level job?
Living paycheque to paycheque
We’ve looked at two major financial hurdles. They likely seem insurmountable to many young Canadians, who may be fresh into the work-force.
We’ve (likely) all been there. After graduating from university, you’re fresh-faced and ready to make your fortune in the field you just spent four-plus years and 25,000 plus dollars on. Then reality sets in.
You realize your degree won’t instantly unlock some high-paying gig changing the world like you once thought. So, you take an entry-level office job and bide your time until your big break.
And even if you are lucky enough to land a job in your chosen field, the base salary likely won’t cover much more than rent (split with a roommate or two), weekend beers, and Kraft Dinner. I’m not speaking from experience here. OK, maybe I am.
But, I digress.
So, you’re in your 20s and finally independent – just not the financial kind. After bills and what little you cobble together for socializing, you find every two weeks is a race against your last paycheque. Never mind savings. It can get frustrating. Especially if you need to pay down debt and want to save some money as well.
What to do? Budget, of course.
Traditional budgeting can be a boring, difficult and self-defeating. It often proposes fixed allotments for every expenditure; $20 per month for clothing, $15 per month for coffee, $100 per month for eating out, and so on.
The problem is that $20 a month won’t cover the new work pants you need and spending more than what you’ve earmarked for specific expenditures can leave you feeling down. Which often leads to spending splurges to deal with the financial depression you find yourself in, and setting yourself back even further.
Try this simple budget instead, which I’ve borrowed from Finance Expert Shannon Lee Simmons (I’m going to offer a simplified version of the budgeting advice she offers. Check out her book Worry-Free Money for more in-depth budgeting advice and other awesome finance tips). We’ll assume you receive twice-monthly payments, which equal 24 paycheques per year.
First, figure out how much you make per month after taxes.
For our purposes, we’ll say that’s $2,600.
Calculate your fixed expenses. This includes your housing costs (rent or your mortgage, insurance, utilities, etc.), your monthly subscriptions, debt payments, car payments, phone and internet, and everything else you know you have to pay each month. Let’s assume your fixed expenses equal $1,100.
Then, calculate what you’d like to set aside for meaningful, long-term savings (such as saving for a house or retirement) as well as short-term savings (your next trip or a new TV – anything that requires some planning to purchase). We’ll say $500 and $100 respectively.
With these three expenses calculated, you now know what you can allot to spending. In this case, it would be $900 per month or $450 every two weeks.
That’s $900 per month you can now spend worry-free because you’ve set yourself up to reach your financial obligations and goals. Spend it on whatever you like and don’t feel guilty about it. Just make sure you stick to your hard limit.
And, best of all, a budget like this will help you get out of the cycle of living paycheque to paycheque.
Play around with some numbers; use the debt calculator to develop a plan to pay down debt as quickly as possible. Figure out what you need to dedicate to paying debts and what you’d like to earmark for the future. Address those hurdles first — so you can get ahead in the race — and use the rest of your earnings for enjoying life.
- Q&A: Shannon Lee Simmons on Worry-Free Money and Making Financial Lemonade
- 3 Ways to Pay Off High-Interest Credit Card Debt
- What is an Emergency Fund, and When Should You Use it?