Simon South

I don’t plan on writing much about personal finance, even though it’s one of my favourite topics. That’s because most of what I really want to learn about are things a person considers after the lessons of personal finance have already been absorbed: Breaking ties to traditional employment, launching a small business, becoming financially independent. But these things are mostly about freedom, and you can’t speak meaningfully about freedom in our society without saying something about money. Besides, it makes little sense for me to toss around lofty ideas for the future of work without mentioning how a normal person might reach the point where these things are even possible.

The bottom line is this: The better able you are to manage your finances, the more opportunities you’ll have available to yourself. If you want to maximize your freedom to work, grow and prosper, you’re going to have to get yourself in the best financial shape you can. Conversely, the more you tie yourself down with debt, obligations and clutter, the fewer choices you’ll have and the less able you’ll be to take advantage of opportunities that present themselves.

What does this mean in practice? Far too much to be adequately covered in a single post, but to get started, here are four important steps a person can take towards building a strong financial foundation for themselves:

1. Learn to spend less. If there were a single secret to financial independence, this would be it. You have to reach the point where you’re spending less than you earn before anything else is possible. Identify all the things you pay for that aren’t adding value to your life—cable television, unused gym memberships and magazine subscriptions might top the list—and get rid of them. Realize that it’s easier to control what you spend than what you are paid. Be aware of how small expenses add up over time. Naturally, reducing your lifestyle requires sacrifice and self-discipline and I suspect it’s at this point most people fail.

2. Set up an emergency fund. Take the money you now have left over every month and stash it away in a savings account at the bank. (If you’ve been looking for a reason to open a tax-free savings account, this could be it.) Don’t spend from the account unless you absolutely have to! Keep saving until you have enough money to cover your living expenses in case you lose your job or suffer some other tragedy. That way, if these things happen, you’ll have some security and won’t be forced into a difficult position.

   How big should this fund be? Canadians spend an average of 15 weeks, or almost four months, between jobs. I always keep about six months’ worth of expenses handy to be safe.

3. Pay off your debt. Free yourself from the mindset that carrying debt is normal or that it’s impossible to live without it. It isn’t and you can. Debt is like financial cancer, constantly eating away at your resources while forcing you to work hard just to stay afloat. Some people make an exception for so-called “good debt”, like mortgages and student loans. I’m one of those who don’t: The money needs to be paid back anyway, and you’ll need to staunch the flow of interest payments out the door before the idea of turning a profit on investments becomes realistic.

   Once you’ve lowered your expenses and your debts are paid off, you’ll probably be surprised (as I was) at the way money builds up in your chequing account each month.

4. Invest the surplus wisely. Despite what everyone in the financial industry will tell you, this does not need to be difficult. You do not need to be a day-trader or an insider on Bay Street to build a manageable, profitable portfolio of investments. You will need to educate yourself, however, and you will need to develop some basic math skills if you don’t have them already. I won’t recommend a specific strategy here except to mention some important guidelines: Focus on controlling expenses; understand the importance of asset allocation and diversification before worrying about specific investments; be skeptical of stock pickers and actively managed funds; avoid so-called “financial advisors” as there is an irreconcilable conflict of interest between their bottom line and yours.

If you can do these things you’ll be well on your way towards the freedom to run your life however you see fit. For a more complete picture of personal finance, I highly recommend Personal Finance for Canadians for Dummies by Eric Tyson and Tony Martin. (Don’t let the title put you off; it’s an excellent book.) I also consistently hear good things about David Chilton’s The Wealthy Barber, which apparently conveys much the same information but in more of a story format. Finally, there are many excellent personal-finance blogs written by Canadians; Canadian Capitalist, Million Dollar Journey and Thicken My Wallet are three of my favourites, all of which publish plenty of good advice.