Making financial decisions is often difficult. Every day, you have to make choices that will have an impact on your financial future, for better or for worse. From everyday purchases, like a morning coffee at Starbucks or Tim Hortons, to bigger decisions like buying your first home or making investment choices for your children’s education savings plan. At almost every stage of your life, effective management of your personal finances is essential to your long-term financial success.

This article discusses the pillars of personal finance in Canada, such as budgeting, saving, investing and your credit report.

Personal finance is a general term that refers to an individual’s management of his or her financial resources. Some aspects of personal finance include:

• Budgeting
• Banking services
• Investments
• Credit report and score
• Insurance
• Mortgage loans
• Financial planning for retirement
• Estate planning
• Etc.

While each component is important, they don’t work as well individually. As the old adage goes, “the whole is greater than the sum of its parts”. In other words, every component, from budgeting to retirement planning, plays a key role in your financial success.

Personal finance goals should be about maximizing your hard-earned money to achieve your financial goals. For example, saving for your children’s education, building an emergency fund, or saving for a down payment on your first home.

In today’s society, personal finance is essential to understand and use to your advantage. Here are a few reasons why:

• Daily needs: Your quality of life is often influenced by your ability to manage your financial resources. The principles of personal finance will put you in a better position to meet your daily needs without sacrificing your well-being.
• Financial freedom: Financial freedom is the ability to financially do what you want, when you want and how you want. Sound management of personal finances plays a major role in achieving financial freedom.

At this stage, having a solid understanding of your personal finances allows you to progress faster!

Believe it or not, we’ve all inherited our personal finance philosophy from our upbringing. The way you were brought up around money will have a significant impact on the way you manage your personal finances.

Some of you have been taught the right things about personal finance, such as saving and investing. Conversely, others may have adopted bad financial habits, such as living beyond your means and racking up debt.

The key is to understand that you can change this reality! But first, you need to understand your money philosophy. For example, here are some principles people can choose to live by:

• Avoid debt
• Spend less than you earn
• Favour experiences over material goods
• Believing that money is the source of happiness
• Living comfortably

It’s important to note that your philosophy on money will evolve over time, for example, when you have children. In short, be flexible and adapt to these new values.

Sound financial habits apply every day. Review your spending habits and differentiate between needs and wants. For example, if you need new clothes (need), you don’t necessarily need designer clothes (want). In short, consume responsibly and intentionally.

Creating a solid budget can help you achieve your short- and long-term financial goals. Keep track of your monthly income and expenses, and analyze which ones you can reduce. Then set aside money for savings and investment. There are several budgeting methods, each with a unique approach to helping you live within your means. For example:

• 50/30/20 rule: This approach involves dividing your income into three categories: 50% for essential expenses, 30% for personal desires and 20% for savings. Divide your net income according to these percentages to get a clear picture of these 3 expense categories.
• Zero-based budgeting: This approach involves allocating every dollar you receive to a specific task, such as rent, groceries, bill payments, etc. Once all your expenses are allocated to their respective amounts, add savings and retirement. And, of course, personal activities! This way, you ensure that your income, minus your expenses, equals zero.
• Envelope system: This approach is similar to zero-based budgeting, except that you operate mainly on a cash basis. In fact, you withdraw your money at the ATM and place it in envelopes for each category of expenditure. This way, you don’t exceed your budget, and you can physically see how your money diminishes after each purchase.

Money makes the world go round. One of the basic concepts of personal finance is your ability to make your money work for you in a variety of ways. There are many ways to earn money, including:

• Employment income: The income you receive from your full-time job will change as you spend more time in your position. To make sure it does, you can improve your skills to get a raise or move up the career ladder.
• Business income: There are many advantages to owning a business. You benefit from tax advantages, and your market value determines your compensation. There are no limits to business ownership.
• Side jobs: Side jobs are jobs you do outside your main job. If you have a passion, there may ways that you can monetize your skills!

The general rule when it comes to income is “pay yourself first”. Saving is a fundamental pillar, as it forces you to put money aside to help you achieve your financial goals. To start, consider saving your money in a savings accounts, according to your goals:

• Daily savings account
• High-interest savings account (HISA)
• Tax-Free Savings Account (TFSA)
• First Home Savings Account (FHSA)

This way, your money can grow with interest income. It’s important to set a goal for your savings. For example: an emergency fund (the equivalent of 3 to 6 months’ expenses), saving for a vacation, or a down payment on your first home.

Now that you understand how to save money, you need to move on to an even more important step: investing. Investing is one of the most important basic concepts in personal finance.

Investing is the process of purchasing assets that generate profit or income. When it comes to investing, there is a wide range of asset classes to consider:

• Cash and cash equivalents
• Fixed-income assets
• Investments in stocks or exchange-traded funds
• Real estate

Once you understand these asset classes, you can decide on your investment strategy. For assets such as stocks or exchange-traded funds, you’ll need to open a brokerage account, such as Wealthsimple, Questrade, CIBC Investor’s Edge, National Bank Direct Brokerage or Qtrade Direct Investment. That said, it’s important to know your investor profile before you start investing in this asset class.

There are two things in life you can’t avoid: death and taxes. To these we could add personal financial obligations.

Paying taxes is a civic duty, but you can still optimize your tax situation. How? Find out about tax benefits, deductions and credits. This will ensure that you pay a fair amount. As a Canadian, you can also take advantage of the tax-sheltered accounts mentioned above.

For example, with an RRSP, you can receive a substantial tax refund and even increase your tax-free family allowance (if you have children). In addition, you may become eligible for certain additional tax credits, since your taxable income will be lower. With a TFSA, you don’t get a tax refund. But returns and earnings are unlimited… and tax-free.

Your credit report and score are important to many aspects of your personal finances. In fact, managing your credit can help you obtain funds to buy a home, start a business, and much more. On the other hand, bad credit can have serious repercussions on your financial options.

When used correctly, credit cards can be an incredibly powerful tool. However, they do have a downside. If you can’t pay off your purchases, you accumulate high-interest consumer debt. Here are some basic tips to get you started:

• Pay off your entire credit card balance on time
• Do not exceed 30% of your credit limit
• Check your credit report regularly

Want to know more about credit scoring? Check out these guides:

Managing your debts can have a major positive impact on your financial life. This is essential for young adults and older people alike.

When it comes to debt, there are good debts and bad debts:

• Good debts: Examples of good debt include student loans, buying a home and getting a loan to start a business.
• Bad debts: These include credit card debt, car loans, payday loans and personal loans to buy consumer goods.

It’s worth noting that good debt can easily become bad debt if you’re overextended. For example, if your student loans don’t allow you to get a job in your field of study, your debt stays in place and increases in interest.

You need to limit your bad debts and pay off your good debts as necessary. When you’re debt-free, you increase your cash flow to create healthier finances.

Insurance is protection against a foreseeable loss. When an insurance company insures you, it agrees to protect you if the insurable event occurs.

Everyone needs insurance at some point. Whether it’s to help your spouse or your family in the event of death, serious illness or short- or long-term disability. But also for home and car insurance.

To compare insurance premiums, use our home insurance comparator, our car insurance comparator and our travel insurance comparator.

Financial planning for retirement is an essential part of managing your personal finances. You need to start planning your retirement and saving as early as possible. That way, you can accumulate enough money to maintain the same lifestyle in retirement.

In Canada, there are many sources of retirement income available to you, including :

• Registered Retirement Savings Plan (RRSP): A savings plan designed to help you save for retirement. RRSPs offer tax advantages. It’s a tax-deferred account, which means you reduce your taxable income when you contribute to it. As a result, you get a tax refund. Then you pay taxes when you retire, when your marginal tax rate is generally lower.
• Old Age Security (OAS): Monthly benefit paid to Canadians over the age of 65. If you are a Canadian citizen and have lived in Canada for at least 10 years, you may be entitled to this benefit, whether or not you have worked.
• Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) for residents of Quebec: Monthly benefit paid to Canadians who have contributed to the plan during their working lives. The typical period of access to this benefit is between the ages of 60 and 72.
• Employer-sponsored pension plan: If your employer offers a pension plan, such as a defined-benefit pension plan, you will be entitled to a pension during your retirement.
• Other personal savings: This could be a TFSA, non-registered investments, GICs, rental properties or other.

Now that you know the basics of personal finance, it’s the understanding and implementation that comes into play.

Financial education is the ability to understand financial concepts so you can have better control over your finances. When you’re financially literate, you know how to make your relationship with money work for your long-term success.

Your financial knowledge is constantly evolving. Here are some ways to increase your financial knowledge:

Blogs are a great way to break down complex information into bite-sized chunks. You can read a blog almost anywhere. It’s usually a fairly quick read, depending on its length. For example:

• EducFinance
• Retraite101
• ElleInvestit (Instagram page)
• Jeune retraité
• L’argent ne dort jamais (Facebook group)

The internet is full of free, accessible and value-oriented courses that you can access. A good starting point is to check your library to see what’s currently on offer. There are also free online courses on personal finance:

• McGill University’s free online Personal Finance Essentials course (available in both English and French)
• UQTR MOOC “La littératie financière et fiscale ouverte à tous” (available in French only)

Here are some of the best personal finance books :

• Les millionnaires ne sont pas ceux que vous croyez and De zéro à millionnaire : Investir en bourse sans souffrir – Nicolas Bérubé
• En as-tu vraiment besoin ? and Liberté 45 – Pierre-Yves McSween
• La retraite à 40 ans – Jean-Sébastien Pilotte (Le jeune retraité)
• Elle investit : Bâtir sa richesse grâce à la bourse – Karman Kong
• Ça coûte encore plus cher, être un adulte! – Béatrice Bernard-Poulin
• Rich dad poor dad – Robert T Kiyosaki
• The psychology of money – Morgan Housel
• A rich barber – David Chilton

If you need help, don’t hesitate to consult a financial professional:

• Financial advisor at your bank
• Independent financial planner
• Accountant or tax specialist
• ACEF (Association coopérative d’économie familiale)
• Etc.

They can help you with your personal finances. In particular, they can help you avoid making costly mistakes, help you establish a strategy to pay off your debts as quickly as possible, and so on.

In short, the personal finance concepts discussed in this article are essential to achieving your financial goals. Your financial education is critical, because you’ll have to make many choices throughout your life: buying your first home, starting a business, saving and investing for your retirement, etc. If necessary, consult a financial professional.