You’re probably used to money spending itself. It tends to fly out of your bank account within hours of payday. You might feel like your money and your bills are out of your control. When you finally get a little extra, something comes up, and the money’s gone, and then you’re back where you were last month.
Without a plan, it’s pretty hard to get ahead. What does that even mean? Spending a bigger paycheque on bigger bills?
Let’s turn this around. You have options. Your money works for YOU. You are its boss. Keep an eye on it and make sure your money is doing the right job.
I found the following helpful list in r/PersonalFinanceCanada on Reddit. It suggests some reasonable priorities and steps that will help you organize your efforts and financial progress. Here’s a list of jobs your money needs to do.1
- 0 Living Expenses
- 1 Emergency Fund
- 2 Employer matched retirement savings
- 3 High-interest debt reduction
- 4 Save for necessary big expenses
- 5 Save for retirement
- 6 Low-interest debt
- 7 Big ticket discretionary savings
Start at the top and make sure each item is being taken care of before going on to the next job in the list.
0 Living Expenses
Pay your regular living expenses each week, each pay period, each month, each year. If you have a “budget” or a “spending plan” then you know how much this is going to cost. If you don’t have enough money to pay those expenses, then you need to make some changes. Some of these expenses correspond to your pay period and some don’t. Anticipate regular living expenses that are recurring but less frequent. If you have a quarterly or yearly expense that you know is coming, set aside enough money so that you can pay it when it comes.
If you find that you’re running out of money, you need to fix it. If you don’t know the total of your regular living expenses, then you must figure it out. If it’s more than your income, then you have to find ways to reduce your regular living expenses to what you can afford. This isn’t optional. And credit isn’t an answer because that just increases your expenses.
1 Emergency Fund
Once you’re paying your way, you need to get ready for unexpected expenses or hits to your income. An “emergency fund” can help you pay a significant unexpected expense, or replace all or part of your normal income if your income is interrupted.
How much should be in your Emergency Fund?
- 1–2 months of your total expenses if you have high-interest debt
- 3–6 months otherwise
- 9–12 months if your income is variable or uncertain
Assembling an Emergency Fund is the first job your money needs to do once your regular living expenses are covered, whether this is your regular earnings or some extra money that falls out of the sky into your lap. Your Emergency Fund should be kept handy, but not too handy. (A separate account is a good idea, so you don’t spend it accidentally.). Don’t invest it in something risky, and don’t keep it in an account that you can’t access quickly enough to pay what needs to be paid.
2 Employer matched retirement savings
If your employer offers matching contributions to a retirement savings plan, you should take them up on it. Don’t turn down free money. If you have this kind of plan, make this your money’s THIRD JOB.
If you’re too young to think about retirement savings, that means your money has lots of time to work for you before you need it. Like magic, a little money invested now turns into a lot of money in 40 years. The money that gets this easy job will thank you for it by making you rich.
3 High-interest debt reduction
is the next job you need to assign to your money. “High interest” means 10% interest or more. That’s just nuts. Don’t let them get away with this. Throw money at them and run away. And don’t let it happen again.
Actually, if you’re paying more interest on a debt than you can earn by investing your money, then this is the job your money needs to do next.
4 Save for necessary big expenses
The next job for your money is saving for big-ticket items that coming up and aren’t really optional—like replacing your car, or saving to go back to school.
Put this money in high-interest savings, or GICs if you know you’ve got time. Nothing risky. You don’t want to end up with less money than you started with.
5 Save for retirement
Once your money is taking care of all the jobs higher on this list (1-5), it’s time to get to work on The Big Job: Saving For Retirement. If you’re planning to replace your employment income at some point, you’re going to need to learn about investing, and you’ll need a lot of time. Invested money is capable of growing a lot, but you can’t count on it happening fast. But if you have 40 years, you’ll be surprised what you can end up with.
Try to put 15% of your pre-tax income into retirement savings. That should allow you to replace that income in retirement. If you start late, then you might need to save more to catch up. I have lots more to say about this later.
6 Low-interest debt
Once the retirement savings machine is ticking along in the background, if you still have money that seems bored, now you can consider sending it in to reduce low-interest debt. By this, I mean an interest rate which you could meet or exceed by saving or investing the money elsewhere.
If you’re anxious to move along to Lucky Number Seven, and everything else is being taken care of, and your prospects are rosy, then you can go ahead if you’re sure you know what you’re doing. It might not be stupid to just keep making minimum payments on low-interest debt.
7 Big ticket discretionary savings
Congratulations! If you’ve got your money handling all the other jobs on this list, you can afford to start saving for rich people things like expensive vacations abroad, real estate down payments, and children’s education.
Don’t get too cocky, though—remain vigilant and keep checking that your money is keeping up with all its jobs.
- This article is based on a list in the r/PersonalFinanceCanada subreddit: r/PersonalFinanceCanada/wiki/money-steps/ ↩︎
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