5 Things You Need to Do with Your Finances Besides Investing

December 23rd, 2022

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This is a guest post by Barry Choi, one of the top personal finance and travel experts in Canada who makes frequent media appearances. You can find him at his personal site moneywehave.com or on Twitter: @barrychoi

This post was originally published in June of 2020.

Once you start investing, it can be a bit of a rush. Some people love how the markets move and can't stop consuming business news. Others prefer the passive approach and like to buy the index as they're perfectly happy being hands-off.

While investing is an integral part of your personal finances, it's not the only thing you should focus on. Here are 5 other things you need to do with your money.

Pay off any high interest debt

If you're investing money while holding on to high interest debt such as credit cards or car payments, you're doing things wrong. You could potentially earn some sweet capital gains by investing your money but paying off debt gives you a guaranteed return.

Credit cards have an average interest rate of about 20%. You're unlikely to beat that on the markets, so divert your cash there for now. Car financing interest rates are lower, but it wouldn't be a stretch to see terms in the 7% range. Sure, you might do better if you just invest your money but getting a 7% return by paying off your loan is a good deal.

Admittedly, clearing your debt isn’t easy, this is why you should consider these 15 ways to get out of debt.

Create a budget

Having a budget is one of the most important things you can do to take control of your finances. The process is simple enough: you list your income at the top of a spreadsheet and all of your expenses below.

Most people assume that as long as your income is more than your expenses, you're good. Not exactly, while it's great to be cashflow positive, you want to make sure that your budget makes sense. That means you should be factoring in savings (RRSP, RESP, vacations, home downpayment, etc.) as well as any annual expenses such as insurance, credit card annual fees, or holiday presents.

Keep in mind that budgets are meant to change as your expenses can fluctuate. It doesn't make sense to get upset if you go over budget from time to time. That said, you want to make sure that you're keeping your costs relatively low so you can divert any extra cash towards your savings (or investments).

Make your bank accounts work for you

Traditional banks pay next to no interest, and they have high monthly fees. In other words, you're paying the bank to hold your money, doesn't that seem insane? Why not have your money work for you by getting a high interest savings account? By doing this, you'll at least be making some interest.

Admittedly, interest rates aren't that high right now, but EQ Bank has consistently been paying about 2%, which is much better than the 0% most traditional banks give. There's also Tangerine, who typically has promotional rates for new customers where you can earn around 2.5% interest for three months.

Build your emergency fund

Having an emergency fund that can cover 3-6 months worth of expenses is one of the most important things you can do. Heck, some people even recommend having 12 months' worth of expenses available in case you go through an extended period where you don't earn any income.

Remember, your emergency fund isn't there just to protect you from a job loss. You might have emergency home/auto repairs, medical expenses or even vet bills. Having money handy will ensure that you don't go into debt to get through your crisis.

Understandably, putting aside months’ worth of expenses can be tough, which is why I recommend starting small. Begin with a monthly automatic transfer of $50 from your chequing account to your emergency fund. You won't even notice the money is gone, but you'll be protecting yourself. Better yet, put your emergency fund into your budget, and you'll reach your goal in no time.

Have your credit cards line up with your goals

Credit cards have become a part of our daily lives. When used responsibly, they can be a great tool to help us manage our money, and they can also provide benefits that have real value.

For example, frequent travellers might want to get a credit card with lounge access or a credit card without foreign transaction fees. Those who prefer to stay closer to home may be more interested in a cash back credit card or a credit card with roadside assistance or price protection.

Besides the benefits you're getting, you also want to maximize the points you're earning. Look for a card that lines up with your regular shopping habits. For example, if you shop regularly at Loblaws owned stores and Shoppers Drug Mart, getting a PC Mastercard will benefit you as you can earn more PC Optimum points. Alternatively, if you spend a lot on gas, get a card that gives you additional points or cash back on gas purchases.

Final thoughts

Personal finance is a fluid situation for everyone. It's great to focus on specific aspects, but you need to pay attention to everything to ensure you're putting yourself in the best position possible.

For more from Barry, you can start by reading Barry's explanation of why ETF's are so popular.

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