Financial Literacy Month: The Experts Weigh In
Whether you're trying to pay off student loans, pay for a mortgage, or save for retirement, having a solid financial plan in place is a must. And it all starts with developing healthy financial habits.
We asked some finance and wealth planning experts to weigh in on setting realistic financial goals, the best way to budget, and how to protect yourself against fraud. Read on to learn more about setting yourself up for financial success today and in the future.
Meet the Experts:
Jason Pereira, Partner & Senior Financial Planner at Woodgate Financial Inc
Adam Fisch, Associate Advisor at Stewart & Kett Financial Advisors
Lisa Hannam, Managing Editor at MoneySense.ca
Shay Steacy, Advice-Only Financial Planner at Kind Wealth
Financial Goal Setting
Setting goals is one thing; sticking to them is another thing entirely. The experts share the best approach on how to–not only set realistic goals–but achieve them as well.
What is the best approach to set realistic financial goals?
JP: The first thing to ask yourself is:Is your current reality sustainable? If not, you have to deal with the present before you think about the future. If it is sustainable, think about how the future will deviate from the past. What is your plan for how they would like to spend your time in retirement? What do you want to accomplish before that? What's important to you and the values you hold dear? Are your dreams viable and sustainable? If so, no issue. If not, you need to think about tradeoffs and strategies.
AF: You should absolutely be setting short and long-term goals, even decades into the future. I take the approach that more clarity in your goals is always better. Without setting out clear goals, you can't possibly make a plan to achieve them. At the same time, you also need to be flexible enough to realize your goals will inevitably change over your lifetime. You should regularly revisit your short and long term goals to determine if those are still what you want and be emotionally prepared to accept changes to those goals when appropriate.
LH: The best approach to setting any attainable goals is to know where you are financially right now. Be honest with yourself, and don’t hide any numbers. Many experts suggest using a spreadsheet or a financial app to budget and plan.
Whatever you use to plan, take a little bit of time regularly—at least once a year—to ensure that your strategies are still working. And if they aren’t, it’s time to make adjustments.
What's the difference between a stretch goal and an unrealistic goal when it comes to financial planning?
JP: A stretch goal can be reached within the confines of your economic reality by making changes that require you to give up something else. An unrealistic goal cannot be reached regardless of any behaviour change.
AF: With financial goals, almost anything is possible—provided you want to make the sacrifices to get there. If you want to own a multimillion-dollar cottage in Muskoka by the time you retire, it's probably possible. But you might have to take on a mountain of debt to go to school, work your way up the ladder in a high-stress job, and give up years' worth of time with friends and family.
Once you understand the sacrifices required, you can really decide if that's what you want or if you need to shift your goals. That's why having a financial plan is important; it allows your goals to not just exist in a vacuum but instead as part of the broader strategy for your life.
LH: You should be able to see the difference between a stretch goal (one that is ambitious and challenging and hopefully worth the effort) and an unrealistic goal when you create your budgeting spreadsheet.
If you’re finding gaps in achieving your financial goal, like investing an extra $100 a week without any extra income, then it’s unrealistic. But if you discovered a way to make it work, like finding a job closer to home, which lowers your gas and car insurance expenses, the stretch goal may be more about getting out of your comfort zone and changing your lifestyle.
SS: A stretch goal is something that requires discipline and hard work but is actually achievable given the context of your finances Maybe you want to pay down your debt by a certain date, but it will require you to cut your discretionary spending in half, or taking up a part-time job until the debt is gone. Hard work? Yes. Doable? With self-discipline.
An unrealistic goal would be something that your finances could never support. Perhaps you want to retire in 5 years, but have credit card debt, no savings, and are working on a contract job. It's just not feasible that you'll be able to retire in that short period of time.
What's the number one thing people forget to do when setting financial goals?
JP: Many people fail to clearly define and plan for their goals.
"A goal without a plan is just a wish." Antoine de Saint-Exupéry
AF: A lot of people fail to ask why. Your goal shouldn't be "I want to retire with x million dollars"; it should be "this is what I want my life to look like; what financial plans do I need to make to get there?" Financial goals should be a byproduct of life goals, but often it's the other way around.
LH: Goals–whether it’s financial, health, performance, or education–are easy enough to set. That’s about want. The tough part isn’t achieving them, either. That’s the result. What do people forget? The sticking-to-it part. It’s about taking that inner dialogue of forgiving yourself for not sticking to your goal for today and preventing that from snowballing into giving up on your goals altogether. Create goals that are meaningful to you and the lifestyle you want to have and commit to your goals within a timeline. Check-in on your money regularly—I like to compare where I am with the various goals I’ve set once a month.
SS: Be prepared for the unexpected. A loss of income, a disability, or the sudden loss of a family income earner can bring the best-made plans to a halt. Consider how you can protect yourself against unforeseen circumstances with an emergency fund or by purchasing life or disability insurance.
Setting (and sticking to) a budget
We all know we need one, but how many of us actually make a detailed budget AND stick to it? Turns out just under half of Canadians have a budget in place. The experts share their secrets to creating a realistic budget that not only helps you plan for the future but also helps you live your life in the present.
When it comes to making a budget, what tools and techniques do you recommend?
JP: Budgets don't work for most people. I prefer paying yourself first and frequent analysis. By paying yourself first by automating savings, the money you should be saving is not there to spend.
Personal financial management software like mint.com will aggregate all of your spending in one place and give you reports on where your money went. Make a habit of reviewing this information, and you will start to see the price tag of your spending behaviour. This will inevitably lead you to say, "I spent x on y? That's totally not worth it," and change in spending patterns.
AF: Budgeting is like dieting; it might work, but if you go to extremes, you'll likely give up and be back where you started.
Automate things like transferring money to a retirement account and a separate account for fixed expenses like rent. Then, only allow yourself to spend what's leftover. This way you don't need to fret about every penny because you can distribute that money as you see fit. You can also consider further restrictions if needed, like requesting a lower limit on your credit card to prevent overspending, but a structure like that can at least put you in a position to succeed.
LH: At a basic level, a calendar and a spreadsheet can be enough for some people to create a budget. Others prefer apps, like Mint or YNAB. Even banking apps and websites and those from other financial institutions are giving real-time insights into how you’re spending your money with expense categories. No matter what method you choose make sure you:
Track the money coming in (income, bonus, inheritance, etc.)
Track the fixed money going out (rent/mortgage, bills, car payments, insurance, monthly expenses)
Track payments you can fiddle with (such as entertainment, groceries, clothing, daily coffee run, etc.)
Tally it all up to get a sense of how much money you can direct towards debt management each month as well as savings and investments.
How can people stick to their budget and avoid getting off track?
JP: Keep informing yourself. Review expenses and savings progress. Review expenses so you can cut the fat that doesn't matter to you. Seeing progress in savings will make you feel rewarded.
AF: Unfortunately, in COVID times, some people simply have no options but to borrow to get by until they're back on their feet. Assuming you aren't in that boat, try to remove as many decisions as possible. Decision fatigue is real and leads to giving up on the promises you've made to yourself. Try to build a structure for your financial life that puts you in a position to succeed.
LH: Creating financial goals that truly matter to you is key. It will help you realize the importance of your budget and your financial goals so that staying on track also matters to you.
SS: Expect unexpected expenses- and plan for them! We all have expenses that will come up in our lives, but we may not know when they're going to happen. Do you own a car? You're going to have to spend money on it at some point (winter tires, anyone?!). Do you have a pet? Vet bills can be expensive, and you never know when they might happen. And what about homeownership? Even if your house isn't a movie inspiring Money Pit, stuff will need fixing at some point! Ensuring you've got funds set aside for life's unexpected expenses can ease money stress down the road.
Protecting yourself against fraud
As banking, budgeting, and other forms of financial management move online, it leaves us more vulnerable to fraud. In 2020 so far, the Canadian Anti-Fraud Centre has received more than 40,000 fraud reports from Canadians.
But, the good news is, there are ways you can protect yourself from potential fraud— the first step is being aware of its most common forms.
What are the most common forms of financial fraud to be aware of?
JP: Simple: CRA does not call you; they send mail. Ignore callers claiming to be from CRA.
LH:That’s a tough one to narrow down. It seems like we’re being targeted everywhere, from authentic-looking emails asking us to log into accounts, like Amazon and banking, to stealing credit card information at points of purchase and computer hacking. If something seems suspicious, trust your gut. Always look at the reply-to email before responding to a suspicious-looking email. You can also try calling customer support to ask them if the email is legitimate.
What are the best ways to protect yourself from fraud?
JP: Inform yourself as to the methods being used. The more you read up on types of fraud or see them on the news, the more you know what to look out for.
LH: While many situations can be out of our control, noticing when fraud happens can be in our control by simply reading. Read your credit card and debit account statements to ensure every charge is a real one. Read the email address (not just the name attached to the email) to see if it’s really coming from a trustworthy account. And, before clicking that comment about crypto you saw on Twitter, see if that is a reputable account or a bot.
Like Dr. Seuss says, ‘the more you read the more things you will know.’
Financial Planning Resources
AF: Something like Mint is useful for tracking spending, though it's important not to jump to conclusions from a month or two of data. Khan Academy is a great free resource for learning basic elements of investments.
LH: Our website! At MoneySense.ca, we share a mix of budgeting/spending advice and financial planning help for Canadians at every age and stage.
SS: McGill University has a free online personal financial essentials course. Starting with financial literacy, especially from the context of an education provider, will help build solid foundations.
Top 3 tips for financial well-being
There's a lot to unpack when it comes to having a sound financial plan in place—it can be overwhelming. We asked the experts to distill down their top three most valuable pearls of wisdom when it comes to getting on top of your finances.
Connect with the experts!
Connect with the experts on social media for more financial planning tips and advice.