The Canadian Money Roadmap
Invest smarter, master your money, live & give more
The Canadian Money Roadmap
The Money Topics You Need To Know
November is Financial Literacy Month in Canada so this episode is a whirlwind tour through the big topics you need to know to master your money:
1. Cash flow
2. Budgeting
3. Taxes
4. Debt Management
5. Insurance
6. Investing
7. Retirement Planning
8. Estate Planning
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Hello and welcome back to the Canadian Money Roadmap podcast. I'm your host, evan Newfield. On today's episode, it is Financial Literacy Month and I'm going to be talking about a number of things that I think are critical to increasing your financial literacy and improving your own financial life. As I said in the intro there, november is Financial Literacy Month here in Canada, and last year I did an episode with my colleague, jordan Narnst, and we went through one of the little quizzes that we found available to test one's financial literacy, but from a Canadian perspective. This year I just wanted to talk about all the things that I think are actually critical for understanding money. As a Canadian, even if you've lived here your whole life, the vast majority of people don't have a great understanding of some really critical topics, and the bad news is there's a lot to know it's. There's a ton of different things that really make a difference if you have a good handle on them or not. Now, the good news is you're already listening to this podcast and we've got three years and over a hundred episodes of topics that are dedicated to the intricacies of each of these big topics and along with that, if you don't want to go back and listen to over a hundred episodes of a podcast and you just want the critical information without all the confusion. And if you like my approach and you like learning from a CFP professional that actually works with real people, I put together a comprehensive resource called the Financial Foundations Course and it covers all of the topics I'm going to be talking about on today's episode in much more detail. It's about 22 videos and almost three hours of video content right now. I hope to add to it in the future as well, but if you're interested in that, the link is in the show notes of this episode and at evanuefeldcom Under the resources drop down menu. You will be able to find it there. But let's get into the episode today about the eight yes, eight areas that I think are really critical for people to understand, for building your financial literacy and actually improving your financial life. Number one cash flow. Cash flow is just knowing and having a plan for what to do when your money comes in and goes out, when you make money, when you spend money. So why is this important? I think simply knowing what happens with your money is the first critical step to controlling what happens with your money. You know I often hear people talk about how it all just disappears every month, and that might be by one way or another, but the vast majority of you are actually just making decisions and choosing to ignore them. If you're someone that says their money just all disappears, so spend some time understanding where it goes first, and then take some steps to actually tell it where to go. So a few different resources that I have talked about before include my three account system for managing your money. So that's setting up a checking account, a short term savings account and long term emergency savings and funding those every month, but also coming up with a plan for moving your money around every single payday. I call that my payday system. That's what I do Pay my bills, transfer to investments and transfer to savings accounts. I even do charitable giving every time I get paid, and that is a way that I've been able to manage my cash flow. Again, in the course, there are multiple videos on each of these topics that I'm going to be talking about already. So number two is budgeting. Budgeting and cash flow kind of go hand in hand. I probably could have done them together, but I separated them a little bit because budgeting people think of it as a bad word, and me included. To be honest, I don't really like traditional budgeting. But there's a few different ways that you can think about budgeting that I'll talk about here in a second. Budgeting is just your plan for how you're going to pay for tomorrow's expenses, and so budgeting often kind of gets lumped into something like austerity, like how little can you possibly spend? You know it's like, ah, we're going to be traveling on a budget or there's a clothing store that's outside my window here as I record this podcast and one of their little taglines is called bougie on a budget. I always get a little bit of a chuckle out of that. But you know, when someone uses the term budget in that context, they're implying that the budget is a limiting factor on how much you can possibly spend. No, a budget is just your plan for what and how you're going to spend your money, regardless of how much. It is Right. So this is important because, regardless of what you spend whether you spend a lot or you spend a little or you're trying to reduce how much you're going to spend that's totally possible. But budgeting is just the idea that it's got to come from somewhere and with a plan you're less likely to overspend, which is a problem, and less likely to go into debt, which costs more money. That's a later section here that I'm going to talk about. So three examples of budgeting. Traditional one is tracking your expenses and then kind of lumping everything into categories and saying, okay, well, every month I got 300 bucks for this and I got 200 for that and 600 for this, and staying into those categories every month is kind of just like the basic idea of budgeting. That's what people hate Like it's. It's this kind of like restrictive plan. Some people love it. I have tons of clients that actually really really like budgeting, but for a lot of people that just doesn't really work for them and it involves a little bit too much effort to really get it done. Another one is made popular by a software called you need a budget. I'm not affiliated with them. This is not a necessarily an endorsement of them or their software. It's just a process that is quite popular and they also categorize expenses. But it's done on a proactive basis where the idea is that you're saving for tomorrow's new iPhone and next year's winter tires and December's Christmas gifts, all these kinds of things, as opposed to just taking what you have every month and kind of allocating it there. It's saving for all the things that you know are going to be actual expenses in your life in the future. It's kind of cool, but it also involves a lot of work and a lot of discipline. A little bit of software actually really helps too, but that comes with an expense. So another option that I call either anti budgeting or reverse budgeting is just the idea of automating all of your good habits and then spending the rest. So if you use my three account system going back to the cash flow section if you have your checking account, your short-term savings and your long-term emergency savings and you automatically allocate to all of those different places, including your long-term investing, you're paying your taxes, you're saving for your short-term vacations, you've built up an emergency fund, all these different things. If those happen automatically and that's very easy to do with most banks it's very simple to set up automatic transfers every month. Then, if you have anything left over and you've already allocated money for everything else that you know you're going to spend in the future, spend the money and don't really worry about it too much, because every month is going to look different. The friend comes into town that you haven't seen in ages and wants to go out for a meal. It's like, well, I didn't really have it set up in the budget. It's like, well, just go, just do you know if you've got the money set aside, you can do that. So, anyways, I really like that approach because it takes a lot of the discipline out of it, because the automation takes care of all the good things that you want to do without you making that decision every month or every two weeks or whatever you have set up. Number three for items that I believe are critical for building financial literacy is tax. Taxes are present in everybody's life, so, whether it's income taxes, sales taxes, property taxes, understanding how tax works is incredibly important because, as everybody knows, the only guarantees in life are death and taxes. So I think it's important to understand tax, because taxes are generally the largest expense that people have in their life, and understanding tax will allow you to make optimal financial decisions and also make decisions that will reduce your tax bills so you don't pay unnecessarily high taxes. I'm definitely a believer that people should pay their fair share. I'm not some sort of anti-government person that says no one should be paying taxes and that's all a scam? No, as it's been laid out by the government by the Income Tax Act. I think everybody should be paying their fair share but I'm stealing this from someone and I don't know who it is. But I I say pay your fair share, but you don't need to leave a tip Right. There's lots of ways that have been approved and instituted by the government to reduce the taxes that you pay. These come in the form of tax credits and deductions and deferral opportunities, and if you don't know what these are, you'll either pay more taxes than you should or you'll have a complete misunderstanding of how tax works in the first place and you might do something foolish like not take a raise at work or not accept a bonus because you think you'll pay too much in taxes. I've talked about that before, but that's not how our tax system works Moving up tax brackets and all that sort of thing. People have a great misunderstanding of how that is. I've got a few episodes about that. If you want to go back and listen to it, or if you want to check out the Financial Foundations course, check it out in the tax section. Number four is debt management. Debt management that's the idea that you need to have a plan for paying off your debt. So understanding how interest works against you when you have debt and understanding all the various debts that you might have is a huge component of financial literacy that people really don't understand and also negatively impacts them the most. So I think debt management is so important because it can be the difference between actually getting ahead with your finances and always staying behind. I previously talked about unnecessary taxes to pay, and debt management involves unnecessary interests that you might pay. So, whether it's understanding how credit cards work or student loans or your mortgage or anything like that, it's really important just to have a plan to pay off your debt. But beyond that, a basic understanding how interest works against you when you have debt is critical. Quickly, there's a couple of different methods for paying off debt that I think are kind of interesting. I didn't make these up. I've seen Dave Ramsey talk about them. I don't know if he made them up, but they are quite common to recommend to people for paying off debt quicker. These include the snowball method and the avalanche method. Yes, we are in Canada, so these are pretty relevant for us as we get into winter. Both of these strategies involve a lot of discipline, but they can be highly effective for paying off your debts quicker or saving the most money on interest that you can. Those are the two outcomes, depending on the option that you pick. The main idea with either of these strategies is that you always have the same amount of money going to debt repayment every month, regardless of how many debts you have, and then optimizing what you do with any additional money that you're using to pay off debt. So every debt will always come with a minimum payment that you have to pay, and so the idea here is that you pay the minimum on everything and then, if you have an extra 500,000 bucks whatever that you're using to pay off debt, choose the method accordingly here. So the avalanche method says pay off the highest interest cost first, so you're paying your minimum on everything, and then you add your extra to the highest interest cost until that debt is paid off. Then you take that additional amount plus the minimum that you're paying on that one, and then add that to the minimum of the next highest interest cost, and it just keeps going, and going and going and eventually it crushes everything. By doing this, you're paying the least amount of interest that you can With the snowball method. This one acts a little bit more on psychological wins and getting the feeling that you're getting ahead of your money. I kind of like that one a little bit better, to be honest. But the snowball method says to pay off the smallest balance first so that you have fewer debts as part of your financial life. So again, you do the same thing you pay the minimums across the board, then you pay off the smallest balance first. Once that's all paid off, you take the payment that you're making there, including the minimum and the additional, then you lump that onto the next one and onto the next one and the next one. So in this case it actually builds every single time you pay off a debt. Pretty cool. So those are a few different ways to think about debt management. Number five insurance. Insurance is something that you can use to transfer financial risk from you over to an insurance company. So to be able to do this, the cost to transfer this risk comes in the form of a premium on a insurance policy that you would own, something like life insurance, which should really be called death insurance, but it's bad branding Disability insurance, which protects your ability to work, and critical illness, which would provide a benefit in case you're diagnosed with a condition that's covered by that insurance policy. So I think this is incredibly important because small likelihood events of dying before your life expectancy, becoming disabled and unable to earn an income or becoming critically ill these are small likelihood events but they can have a massive financial impact. So what do we have to do? We have to compare trade-off on the cost of buying the insurance against these risks versus the financial impact. In many, many, many cases, the trade-off isn't no brainer, but you need to know all the different options that are available and the things that you need and the things that you definitely don't need, because insurance is a place where there's plenty of options and things that are appropriate for some people, but they are sold or pitched often on the internet, often on TikTok inappropriately for people that don't need them. The idea of secrets of the rich or infinite banking and all this kind of garbage is intended to sell you insurance policies that are more expensive and serve a purpose that you do not need. So understanding all the different types of insurance is really important. It is critical to financial literacy to know what options are available to you and how you can transfer those risks over to an insurance company for a very affordable price. Number six investing. Investing is just the idea of your money working for you and buying things that have the potential to increase in value or pay you money on a regular basis. Sounds pretty good, but why is it actually important to meet many long-term financial goals like retiring or buying a vacation property? Retiring is the big one, but even making significant financial gifts either to charity or supporting your kids or all these sort of things, it's typically not enough to save your own money. The main thing that is relevant these days is that inflation increases the cost of tomorrow's goals, and so if you're just saving your own money today, inflation kind of increases the price of everything that you want to buy in the future to the point where you can't really afford to do it. You can't keep up. So along with that, just the sheer amount of money that it costs to either retire or spend money into the future it just makes saving alone impossible. So investing is that idea that when you buy things that increase in value, you're protecting your purchasing power for the future but also increasing your purchasing power over a long enough period of time. There are a lot of topics to discuss about investing in the Financial Foundations course. I have six different videos on this. I have many different podcast episodes about that, so if you want to dive into investing topics more, I will save that for other resources that I've made available. Number seven of things that I believe are critical for building financial literacy is understanding retirement and retirement planning. You might say I'm 18 years old, why do I care? In general, retirement planning is just the understanding that you either can't work forever or you don't want to work forever. If either of those are true and they are how are you going to live the life you want whenever that day comes around? Or that person that says, well, I'm going to work forever because I love my job and I love my clients and I like to do what I do and whatever it's like, okay. What if you have a health concern that limits your ability to do that? Many people are forced into retirement by health concerns. So planning years in advance for a retirement of your choosing or otherwise is critical, because this inevitability will come and it will help you by planning ahead will help you ensure you have enough money to live the life that you want or receive the care that you need if that's a situation where you're forced into retirement by a health concern. So a few things to keep in mind and questions to ask yourself around retirement planning, regardless of how old you are. First one do you know when you want to retire? Are you someone that says I want to retire early for whatever reason, or I don't really ever want to retire? Okay, well, that's fine, but having a general idea of when you want to retire really helps set the stage for how much you need to save on your own and how to invest that money at purpose. A few other things that are a little bit less practical. Perhaps is that why do you want to retire? Anecdotally, here, I've noticed that many people that want to retire because they're so sick of working often have less financial success than people that love their jobs and really enjoy what they do, and so understanding your working life might give you some clues as to how your retirement might end up looking, so that there's this idea of like, what are you going to retire to instead of retire from? So are you going to retire to the couch and watching TV because you just need a break? Unfortunately, that's probably a recipe for retirement failure and there's a bunch of crazy research on this. It gets into psychology and actual physical health about this as well, but having an idea of things that you might be able to retire to instead of retiring from can help shape your retirement plan as well. These could be things like volunteering or starting a new career, being a lifelong learner. I have a bunch of clients that have audited university courses, taken up cooking classes, started a whole new career in small businesses and really need things like that. I have a few people that golf every single day and a lot of people that got tired of that pretty quick. So, anyways, thinking about these things for yourself, I think, is really important. Along with that, a little bit more practically, what are your sources of retirement income? Most people don't know these ones. I've done a survey of podcast listeners before and I've had hundreds of people fill it out, and one of the most glaring answers in that survey came down to this question. I asked if people have a good handle on all their different sources of retirement income and the vast majority of people said no. So in the course I talk about this, but at a high level, your savings aren't going to be the only thing that you have to live on. In some cases you might have a workplace retirement plan that could take the shape of a pension, or perhaps RSP matching, deferred profit sharing plans, all sorts of these kind of things. If you've switched jobs in the past, you could have something called a Lira locked-in retirement accounts. All of these different investment plans kind of pile up a little bit depending on how that has been participated in at your various workplaces. But other sources of retirement income include CPP. I did a great episode with Jason Yee recently about going through the basics and the not-so basics of the Canada Pension Plan. Old age security, the guaranteed income supplement, annuities these are all sorts of different places that you can receive income from in retirement. So financial literacy doesn't necessarily mean mastering all of these things. But just having a general idea shapes your feelings and your ability to plan in advance for it. Because if you don't know that you're going to get CPP or old age security or the guaranteed income supplement or have income from a pension that you had at work and you think it all falls on you, well you might actually be saving too much money. If you don't know, you know you might be making suboptimal decisions. The opposite is also true. If you think you're getting way more than you actually will and you don't save enough, that one's obviously more problematic. Okay, we're nearing the end here. The last section of things that I believe are really important for building financial literacy as a Canadian is a state planning. That might sound a little bit scarier for him, perhaps, but it's just the idea or the concept of planning for what happens when you die. This is a when, not if, but when. So if you have money, if you own anything at all, if you have a family, you need an estate plan. This shows up primarily as having a document called a will. A will determines who gets what and who is in charge of distributing it. That's pretty much it. I recommend that you speak with a legal professional in your province, because the specifics of laying out these things are important and they make a difference. This is money well spent. Speak to a legal professional in your province to get a will set up today. If you're hearing me speak right now, you need to have a will. Okay, so without a will, your money and all your staff will be subject to the rules of the province. That says who gets what and who is in charge of dealing with it. No, it doesn't all just get absorbed by the government. That's a big boogeyman thing. That isn't true. But the process is a pain. I will save you the headache. You do not want this option. Dying without a will is a nightmare. Having a will gives you the power and the control to make sure that your wishes are followed, not some sort of list that the provincial government has put together. It gives you the power, you the control to make sure that your wishes are followed. If and when you pass away. You can change your will too. You know, as your life changes if you get married, if you get divorced, if you have kids, if you sell a business all these different things change, and having an updated will to reflect your current life circumstance and your current wishes is great, so you need to have that. So other considerations with estate planning would be having a power of attorney, and that is a person that is formally recognized as the person that would have authority over your decision making. If you are unable to make decisions on your own. This often shows up medically, of course, but even on later in life I have seen a number of times where people are cognitively completely fine with making their own decisions, but they are physically incapable of signing their own name anymore, and so power of attorney can help them even just fill out the paperwork and all that kind of stuff. In circumstances like that, power of attorney is really important, but it is only active while someone is alive, whereas a will only kicks in when someone passes away. So that's kind of like the before and after types of responsibilities and documentation that you should get set up. Finally, with estate planning, checking the beneficiary designations on your investment plans, there are a few different options that are available depending on the plan type TFSAs and RSPs, in particular if you have a spouse. If you don't double check those, make sure that you understand how they work and that they're set up how you want them to be if you were to pass away. So, high level overview. Again, those were the eight things, but cash flow, budgeting, tax, debt management, insurance, investing, retirement planning and estate planning. I'm sure there's others that I missed, but I think these are the foundational elements for understanding finance. As a Canadian, I think that it's complicated and I think there's a lot of bad information out there, which is why I really started this podcast in the first place because I wanted to make sure that there were good sources of information for people to be able to access for free. If you want something that's quicker and a little bit more interesting and it's not free, but I hope it's affordable for a lot of people I put together the video course that's available there, but, of course, no obligation to do that. It just helps me kind of cover my costs and keep distributing podcasts and things like that. So if you want to support the podcast, that would be a great way to do it. I want to keep things ad free. So, anyways, I really appreciate you listening. I've got a few other topics that I'm excited to bring to you here for Financial Literacy Month. If you like the podcast and you've been listening for a long time, something that really goes a long way, that I haven't really asked for much, is writing a review on Apple Podcast. I've got some awesome reviews recently, really cool. I really appreciate those. But if you have a chance to do that, that really makes a difference and it helps other people find the show as well. Thanks again for listening to the podcast and we'll see you next week on another episode. The ETFs are provided by Sterling Mutuals Inc.
