Shifting Your Mindset Is the First Step Towards Financial Freedom
As a Certified Financial Planner, I have talked to thousands of people about their money. Money means different things to different people. Everyone has unique goals and different levels of knowledge, experience, and confidence when it comes to money.
Everyone starts somewhere different, and there’s no one path to financial success. But there are some habits and beliefs that are essential for anyone looking to improve their relationship with money.
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During my 10 year career, I noticed something surprising. Financial success and confidence have little to do with how much you have saved or how much you earn. In fact, my wealthiest clients were more likely to feel insecure and worry that they would “never have enough”. The successful people were the ones who had the most self-awareness and the best financial habits and mindsets. They had mastered the foundations of financial wellness.
Most financial advice skips the foundation and jumps right to budgeting, investment tips, and tracking apps. While these things do matter, they need to be additions to a solid foundation of financial wellness. What good is creating a budget if you won’t be able to stick to it? How does it help you to stress about the performance of your retirement investments when you’re overspending every month?
Treat financial wellness like any other lifestyle change – as an ongoing process of self-discovery that starts with your mindset. Take 3 months to build some financial self-awareness. Get clear on your goals and examine some of your default behaviors and beliefs about money.
Once you begin to introduce new thought patterns and habits, you can build on the momentum of small wins to make bigger changes and reach your goals.
These three fundamental steps are my top tips for gaining financial self-awareness. Following them will set you up for greater financial wellness and bigger steps in the future.
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1. Track. Every. Penny.
The first step in most financial advice is to “create a budget”. While this is an important step, a budget only works if you stick to it. It’s impossible to take control of your money if you don’t even know where it’s going. Before you think about creating a budget and setting goals, you need to get to know yourself and your spending habits.
I grew up watching my mom balance her checkbook, reconciling her bank statements with the pen-and-paper list she kept in her wallet. Today’s technology makes it easier than ever to access your account balances and transfer money on demand, and there are countless apps that claim to help you track your money.
In my experience, though, the act of physically writing down your spending has a much bigger impact than letting technology do it for you. More often than not, my successful clients were the ones that came into our meetings with their handwritten spending trackers and homemade spreadsheet budgets.
By taking a few minutes every day to track every penny and really thinking about when, why and how you are currently spending, you will gain self-awareness about your financial patterns and begin to see how you can change those patterns. You won’t be able to lie to yourself about any waste, and the expenses that are holding you back from your goals will become glaringly obvious.
Action Item: Get a notebook and pen, and spend a few minutes at the end of each day writing down every penny you spent – bills, groceries, coffees, everything. Take a few extra minutes every week and month to reconcile your list with your bank statements. Spend some time reviewing and thinking about your spending.
Try to suspend judgment and just focus on getting to know your patterns. Ask yourself:
What spending makes you the happiest?
What spending do you regret?
What were the “surprise” expenses?
What effect does your mood have on your spending?
2. Pay Yourself First
This is a well-worn cliche, but as a Financial Planner, I was shocked by how many of my clients didn’t follow this simple principle. Many Canadians are lucky to be part of an employer pension or savings plan. These plans often provide matching employer contributions based on the employee’s own contributions.
Canadians are leaving a ridiculous amount of money on the table. According to some studies, up to 40% of Canadians are not contributing enough to their group plans to receive the maximum matching contributions from their employer. That means that an entry-level employee earning $30,000/year could be leaving up to $2,000/year in employer contributions on the table!
If your employer offers any group pension or savings plan, you need to make sure you are contributing enough to get the maximum matching contributions from your employer. These contributions are deducted directly from your paycheck, so you won’t be able to accidentally spend it – in fact, you won’t even miss the money since you never had it in your hands to begin with.
Don’t have an employer plan, or want to save more than what they’ll allow? You can set up your own “pay-yourself-first” plan by setting up an automatic transfer to your savings account every payday. Opening your savings accounts at a different institution or using registered accounts like TFSAs and RSPs will make it harder for you to raid your savings and sabotage your plan.
Action Item: Call your HR department and get a copy of your pension/savings package. Find out how much you need to contribute to get maximize the matching contributions from your employer, and set up payroll deductions for that amount. If you don’t have a group plan, set up a separate savings account and automatic transfers each payday.
3. Rethink Credit
Rethinking your relationship with credit is an essential step to achieving financial freedom. From cash back credit cards and store payment plans to vehicle loans and huge mortgages, it’s become easier (and more normal) than ever to spend today and pay tomorrow.
Although credit can be an incredibly useful tool (try buying a house in Toronto or Vancouver without a mortgage), it can also be incredibly dangerous. Locking yourself into a payment plan ends up costing you more in the long run, and leaves you with less of your hard earned to spend on things that matter to you. Having a healthy amount of respect for credit is a cornerstone of financial wellness.
A $30,000 car loan may “only” cost you $500/month for 5 years. But over those 5 years, you’ll pay a total of $35,000 for the vehicle. That works out to 10 extra payments, $5,000, or 17% more than the sticker cost of the vehicle!
Getting your relationship with credit under control can have one of the biggest impacts on your financial future. When you stop looking at credit as a shortcut to getting the things you want now and start looking at it as a tool to be respected and used cautiously, you set yourself up to have the principles of compound interest work for you, instead of against you.
Wouldn’t you rather have earned $5,000 in interest that have made 10 extra car payments?
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Action Item: Knowledge is power – get to know your debt. Gather your contracts and make sure you know the basics terms of each of your debts – the minimum payment, interest rate, due date, pre-payment options, etc.
Again without judgment, ask yourself some questions to help unpack your relationship to credit:
Why did I take on this debt?
Could this debt have been avoided?
Is any of my debt holding me back from my goals?
What might I do differently in the future?
As a Certified Financial Planner, I know how complicated and overwhelming it can be to start to re-examine your financial life. Whether your goal is to retire comfortably in 30 years or quit your job and start a business in 3 months, the best thing you can do is to start with your mindset.
It’s important to avoid judgment during this stage. You need to be honest with yourself, but also cut yourself a break for past mistakes and give yourself credit for being willing to reevaluate and change.
Focus on getting to know your spending habits, making sure you aren’t leaving money on the table, paying yourself first and developing a healthy relationship with credit.
These small steps will start to change your relationship with money, and naturally, you’ll begin to seek out more knowledge and ideas to keep building on your wins. From there, the possibilities are endless!
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