How I set up my finances
On the whole I'm relatively confident in this. It comes from a lot of books and blogs and general knowledge. I'll try to explain my priorities where they pop up but on the whole I feel like most people can / should emulate some sort of similar system.
The Tiers of Money
everyday spending
emergency fund
savings for bigger / longer term
Everyday Spending
This is the most self-explanatory. This is all of the expenses you deal with on a daily or monthly basis: food, shelter, clothing, utilities, cell phone bills, etc.
It's funded by your income, whatever it may be, and hopefully the income is more than the outcome.
Unfortunately, this is the tier a lot of people - most people - live perpetually at, either because they aren't earning enough or are spending too much.
Interestingly, even people with six-figure incomes often live paycheque to paycheque because their lifestyle has swelled to be too large and unmanageable. If and when an emergency happens, they too are left to scramble and deal with it. So part of it isn't simply income, it is about living smaller.
Emergency Fund
Since you're living below your means, you have some extra money laying around now, and this goes into an emergency fund.
The common advice for 'how much should this be' is a few months of living expenses, up to your comfort level. Probably 3-6 months.
This is used for things like random car repairs, losing your job, emergency medical bills... anything that might be a substantial chunk of change and relatively chance at happening. Bad luck money.
I cannot proclaim how important this is for your stress levels.
Like, money is good, hooray, and having more feels good, we get it, but having enough to face the world with confidence at its uncertainty is really immeasurably nice.
The classic scene everyone references. It's obligatory here, right?
But deep down, it's true: being able to deal with that stuff from a position of not needing it or worrying about it is a fundamentally freeing, stabilizing place to be.
I don't see my emergency fund as being useless. It's incredibly useful. It sits in my bank account and waits until it suddenly becomes the most useful thing in the world to me.
When I was putting money into it originally, it felt dumb - every dollar that just sits there could buy me some <thing> that I could have and hold and touch and use. Be practical. Tangible.
Something else that's tangible are my teeth. I was grinding them at night, apparently, from the stress of a precarious position. So I didn't buy that TV I wanted, or maybe those clothes I liked or whatever, but I did buy my way out of needing a mouthguard at night.
And it can be slow: the first $1000 is the hardest to save. But a dollar here, a dollar there. Every inch a slice more of purchased freedom, of lowered anxiety.
This is the crux of this article, really, I think everyone should save at least something to this effect and prioritize it over basically all else until it exists and is sitting there.
Long Term Saving
There's two parts here: getting rid of debt and saving money.
If you have student loans, you're probably paying 9% or something for them. If you have credit card debt you're probably paying 20%+ for them. Mortgages are maybe 3-5% which is whatever.
If we assume the average market returns ~7% or whatever nominal number you like (some are more conservative or aggressive, it doesn't matter), and every dollar you put against the debt is a dollar you're getting 9-20% returns from, risk free and instantly, then it becomes obvious which is better to do.
As such, if you have debt, the wisdom is to not be saving for retirement at all yet. It's silly to hold a 401K or TFSA making a couple percent while you're also paying 20% on a credit card. They just don't balance out, especially if you're splitting your income between barely saving on one side and barely paying down interest on the other. That's barely treading water in order to "save" just because you know you should?
Become debt free, then apply that money towards the future.
If you were actually treading water, you'd cut the weight first and then try to swim any distance.
At a practical level, I'll refer the rest towards the investing page.
How I Arrange Mine Myself
I bank with Tangerine, which I'm quite happy with. They let you open as many accounts as you like and just use them as labelled buckets to organize things.
Since savings accounts return better interest rates (1.2%+) than the chequing account (0.65%), my goal is to keep as little money in chequing as possible.
Chequing is kept at $100, because that happens to be the amount of car insurance is monthly, and they auto-withdraw from that account.
Unfortunately that account is how everything interacts with the outside world: that's where e-transfers come out of, that's where income is sent to, that's where debit cards link to (I don't use debit cards), so it's sort of an account that just floats up and down as other things are using it as a doorway.
I have three savings accounts:
personal use (effectively my "chequing account" but earns interest)
tax set aside (where I store money to remit to the government from freelancing + GST holding)
retirement funds (this is a holding bucket where money sits before it gets invested)
I don't necessarily endorse this specific arrangement, but it's what works for me.
Some people have more accounts: you can have a specific emergency fund separate from your day-to-day "free spending" accounts, that's super common from what friends say.
Personally, because I'm so naturally frugal, I don't even have a "free spending" account as much as a) all my money is free to spend whenever I want and b) I know given that freedom I won't ever really go wild with it. It's just not who I am. I sit on cash very easily without temptation.
This account is kept as close to $20k as possible. That's a high number, and I'm still evaluating it because it's arguably underutilized - I could send half of that to investing and still have tons for day to day living. Buuut, I also know that as it drips down over time I get more and more stressed so for whatever reason, keeping it above $15k is my personal comfortable threshold. $20k is roughly 1 whole year of living with my average spending rate, $10k would be 6 months, etc.
It should also be noted that it's different for freelancers: I have stretches where I go for weeks and months without income, so my 'float' amount represents my total runway and might actually get used over time. If you're a salaried employee and have your emergency fund set aside, I wouldn't see any reason to sit on cash like this. It's arguably a dumb practice even for me.
Tax Setaside
This is an accounting thing for the freelance aspect too: because I take 100% of all money on an invoice and then have to give 20-30% of it back at the end of the year, I hold it aside. My rate is 25% off every amount earned and it gets set directly away.
This is not my money. It sits in my account and I make free interest, but it is NOT my money. It is tax money, the same as if it were taken off every paycheque by an employer before you even see it.
It also holds GST in the same way: for Canadian companies I have to charge a 5% GST tax on my services, and I hold that for remittance quarterly. Because I track those things in a spreadsheet the sums can be held together, it doesn't matter for organization sake.
At the end of the year, when I do actually submit the taxes, then they tell me more exactly how much I owe. It's usually less than 25% although as my income increases over time that's changing. The difference, since I've over-saved, goes back into my 'real' money.
I'd rather over-save and get 'free money' at the end of every year than under-save and have to pay it out of my personal cash every year.
And it's sort of exciting, it's effectively like getting a few thousand in tax rebate along with the employees.
Retirement Setaside
This account is actually sort of a hold-over from an earlier time, I'm not sure it's a good plan or not but I will mention why it existed because I do think it's a useful trick:
With Tangerine (and I'm sure other banks) you can set automated transfers from one account to another.
If you wanted to take $100 from your main account a month and auto-move it to a retirement setaside account, that's super handy, right? It just so happened that when I switched to Questrade the way to upload money to them became a manual transfer through the doorway of the chequing account like a 'bill payment' and so the savings account that holds the money became more a tracking method than anything; you could just automate that same $100 a month to go directly to chequing instead and then automate Questrade to suck up $100 a month after that and it'd be even more ideal and hands-free.
As it stands, because my freelance income is unscheduled, I just sort of use it as a place to pour over any amount above the $20k in the main account and then when that stacks up to a few thousand I send it to Questrade in big trackable chunks so I know my TFSA contributions exactly.
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