Personal finance can often feel overwhelming, with many Millennial and Gen Z individuals struggling with student loans , the high cost of living , housing market challenges and a general sense of financial anxiety. But just as any challenge can be overcome through skill development and persistence, so can your finances.
Author
- Lisa Kramer
Professor of Finance, University of Toronto
Whether you are just starting or looking to advance your financial skills, there are steps you can take to improve your financial situation. From basic recommendations to more advanced strategies, here are some ways to get yourself on the path to financial stability.
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1. Create a budget
The first step to mastering your finances is working out where your money is going. You may discover, as my now-husband realized when he was a graduate student, that you’re spending a third of your food expenditures on coffee.
Once you determine where your money is going, you can reign in some of your expenses and ensure some money is left over each month to devote to debt repayment or savings. Creating a budget is essential for doing this.
The Government of Canada has an online budget planner tool available , as does the United States Federal Trade Commission and the United Kingdom government’s Money and Pensions Service .
Once your budget is made, you can focus on reducing discretionary costs and redirect those savings toward your financial goals.
2. Boosting your income
It can be difficult to reduce expenses in an inflationary environment – especially when the cost of basic needs like food and shelter are becoming increasingly expensive in Canada , the United States and elsewhere.
But you can still find ways to boost your income without necessarily getting a second or third job.
It can be daunting to ask your employer for a raise , but you’re much more likely to get one if you ask. Arm yourself with quantifiable evidence about your productivity and work ethic. Then, rehearse your request with a mentor who is further along on your career path.
If you don’t succeed on your first try, use the experience to understand how to secure a raise in the future. Another way to get a raise? While still employed – and on your own time, not company time – look for a new job, get an offer and use it as leverage to politely negotiate a raise. If you’re still unsuccessful, it may be time to move on to that new job.
3. Build your pension
Older generations are more likely to have worked in jobs that came with defined-benefit pensions , a type of pension plan that provides someone with a stream of income after they retire.
These days, jobs are less likely to come with such perks. A recent World Bank report found about half of gig workers worldwide have no retirement plan; in some countries, that figure is as high as 75 per cent.
It’s important to check if your current employer offers a defined contribution pension plan, which involves you and your employer contributing to a saving account that grows over time.
Even if you don’t have access to such a plan, consider using a robo-advisor to replicate one of its key features by setting up an automatic monthly contribution to an investment account. Then, you can increase the amount you contribute every time you get a raise .
You should also consider allocating that investment to a well-diversified stock index, or to a blend of stocks and bonds if you are relatively risk averse. An exchange-traded fund , also known as an ETF, is a low-cost way to do this compared to buying mutual funds. While the value of your investment may go up and down over the short term, it is likely to perform well over the long term .
4. Steady does it
Once you have set up automatic contributions and established a routine of increasing them over time, you will see your investment account balance start to grow. Even if you can put away only small amounts each month in the beginning, you’ll develop good financial habits.
Your next task should be avoiding the temptation of timing the ups and downs of financial markets by actively trading. To dodge this common pitfall, avoid examining the balance of your investment account on a month-to-month basis and keep contributing, regardless of whatever may be happening in financial markets.
Ironically, overconfident investors often underperform the market when they try – and fail – to outperform by frequently trading their investment holdings. Successful investors understand the most reliable path to wealth accumulation is paved with a buy-and-hold mentality, meaning you should purchase investments with the intention of keeping them long-term rather than frequently buying and selling.
5. Imagine the future
When you’re young, it can be hard to identify with an abstract future version of yourself in retirement. Your golden years may be decades in the future, and it can seem like you have ages to prepare for whatever life will bring you at that stage in life.
However, research shows that the clearer you can mentally picture your future self , the more motivated you will be to make sensible saving and retirement planning decisions for your future self.
Try imagining what your life will be like when you’re retired, or what you will look like. Will you have grey hair or wrinkles? How will you spend your time? Picture your future self in retirement and the kind of life you would like to have.
Meet the challenge head-on
If you still find yourself overwhelmed by these tips and don’t know where to begin, consider contacting a fee-only financial advisor to analyze your situation and provide you with personalized advice.
Remember, no matter what financial challenge you may face, it’s simply a new opportunity to overcome. With the right strategies and support, you’ll be able to tackle any financial hurdles and work toward a more secure future for yourself.
Achieving financial stability is a journey that requires ongoing effort and dedication. Each milestone you reach brings you closer to your ultimate goal.
