So in order for this post to make sense, I feel like I need to give you a little financial backstory about myself.
Like many (most?) of us, when I was a teenager and young adult, I was pretty irresponsible with my money. I spent everything I earned, never even considered saving anything, and accumulated some debt. Not a huge amount of debt, but certainly a few thousand on credit cards. That might not sound like a lot, but carrying any balance on credit cards is bad news, because of the astronomically high interest rates (future post on that topic).
So I’m 24 years old, newly married, carrying a few thousand on my Visa/MasterCard, but also holding a few thousand in the bank from wedding gifts. That gift money, of course, belonged to my handsome new husband and I, and for some bizarre reason, we didn’t’ feel like paying off my debt was the best use of that money.
At this point in our lives, we were renting an apartment, and taking the bus. No house, no car, so savings. When I look back on that time, I joke that we basically only had each other.
And I don’t know what might have happened. We might have continued living slightly above our means for the rest of our lives. We might never have gotten ahead. But then something pretty pivotal to my financial journey happened: I got a job at a bank.
I started working as a Client Service Representative in one of Canada’s “Big 5” banks in 2010, and I’m telling you, it was a wake-up call. In that job, I saw the worst-case scenarios – people who had great jobs and earned very healthy salaries, but were buried in debt, literally trapped. I saw people approaching old age, facing the prospect of retiring with no retirement savings. I saw people with such poor credit they couldn’t secure a mortgage to save their lives. It was scary!
But I also saw the best-case scenarios. I saw young people like me who earned modest incomes actually succeeding at saving. I saw them building RSPs, contributing to TFSAs, and buying their first homes. How could they possibly afford to do things like that?
Well, for starters, they didn’t buy things they couldn’t afford. They somehow did this crazy thing where they not only lived within their means, but lived below it. They sacrificed some lifestyle perks that I was mindlessly enjoying so that they could start putting their money to work towards their long-term goals.
Related to not buying things they couldn’t afford, they never carried a credit card balance. Never. Why? Because that costs money – a lot of money, and these people knew better than to waste their hard earned money.
They also committed to regular, modest savings. Amounts that most of us could afford. Maybe only $25 or $50 a paycheque. It doesn’t sound like a lot, and they never missed it from their paycheques, because they set-up automatic transfers. That’s right: on pay day, that $25 would automatically move from their primary chequing account into a savings account, or an investment account. In the banking world, we called that paying yourself first.
So I was starting to get a sense of what I wanted my financial picture to look like, and I started talking to my husband about our financial goals. We wanted to be homeowners, that was our immediate goal.
Through my work at the bank, I learned about the First Time Home Buyers Plan. Basically, it’s a way for Canadians to take an interest free loan from their RSPs to fund the down payment for their first home (learn more HERE). Of course, we didn’t have any RSPs. But we did have a few thousand in cash from wedding gifts. My husband also had some savings he had been hanging on to since before we were together. So we decided to take our gift money, and his savings, and put it into RSPs, so we could take advantage of the First Time Home Buyer’s Plan when it came time to buy our house.
I also set up one of those automatic transfers to my RSP. I can’t remember how much it was now, but I’m thinking $25 biweekly. Very manageable.
Since working at the bank, I had learned about all sorts of other financial products that could help people reach their goals. One such product is a credit line, or line of credit. Credit lines work similarly to credit cards, except the interest rates are typically much lower, and there’s usually no physical card. When I first started working at the bank, I applied for a credit line, planning to use it to pay my credit cards off, but was rejected. I had a history of relying on credit, and I had no savings – how could I be expected to be responsible with a credit line?
But, once I had a few thousand in an RSP, and a regular contribution set up, my financial picture changed. My networth improved, I demonstrated I could save. So a few months later, when I applied for the credit line a second time, my application was approved. Because I worked for the bank, I was entitled to an excellent employee rate, which was much lower than I would have qualified for on my own. I promptly used the credit line to pay my credit cards down to a zero balance, and vowed I would never again pay a cent of interest on them. And I never did.
I also set up a regular, bi-weekly transfer to my credit line – I knew that if I only paid the minimum payments, I would never get out of debt. Since my interest rate was so much lower on the credit line than it had been on the credit cards, the amount I could afford to pay on it out of each cheque suddenly went much further, and I started to see the balance shrink.
The next year, my grandmother was ready to sell her townhouse and downsize to a one-level apartment. My husband and I decided to buy her home. It was small, but well kept, and it was within our price range. We had enough in our RSPs to cover the minimum required down payment, and we were extremely grateful to my grandmother for selling to us for substantially less than she could have gotten on the market.
At 25, married for just over a year, my financial situation had pretty much done a 180. My credit card debt was gone, never to return again (knock on wood). I was paying my credit line balance regularly, and making real progress. I had purchased my first home, and because I purchased a house I could afford, the mortgage payments were quite manageable. Around that time I also purchased my first car, a used Toyota Corolla (future post on why I only buy used cars). I was paying back the money I borrowed from my RSP, and adding a little extra. Things were on track.
Today I’m 32, and I consider myself financially savvy. While I’m far from “rich”, I know how to make my money work for me. I really believe that I would not have turned my financial health around at that point in my life if I had never worked in banking. It really opened my eyes to the impacts that our financial choices have, both in the short term and the long term. It was like getting a degree in financial products and services, and how I could leverage them to help me achieve my goals.
If you stick with me, I’ll try my best to share my experience and tips to help you jump start your financial awakening J