Friday, November 23, 2007

My Money Mistake and How to Avoid it

Canadian Capitalist is three years old. As part of his birthday celebrations, he has asked fellow bloggers to post about a money mistake they've made, and how to avoid falling into the same trap. For me, the choice is obvious:

Lifestyle inflation.

I managed to make it through university with minimal student loans, and although I used a credit card while I was a student, I always paid the balance in full at the end of the month. While I was getting by on a student's wages, I seemed to have a pretty good sense of how much money was available to spend.

When I graduated and started my first full-time job, my income nearly doubled. This seemed to throw a switch in my brain, and I decided that I was suddenly rich, and could buy anything and everything I wanted. I had it in my mind that I was a responsible credit card user, so I started charging up a storm on my card, "knowing" that I would still be able to make full payment. At this point, a few factors came into play:
  • I financed a new car

  • Student loan payments started within a few months

  • Higher income and fewer tax deductions meant that my "twice-as-high" salary didn't actually represent twice as much money in my paycheque
Suddenly, I started revolving a balance on my card, and even made some late payments. I started playing the balance transfer game, moving balances from card to card and chasing rate offers. Over the years, I've developed a more responsible approach to my finances, but it's only within the last few months that I've really started to turn the tables on my debt. It's really amazing how long the consequences of getting into debt can stay with you.

Here's my advice on how to avoid the same mistake:
  1. Know your spending. From the time you first start to earn an income, keep track of how much you spend, and what you spend it on. This will be very important throughout your life.

  2. Know your income. Always know exactly how much your actual take-home income really is. Don't get fixated on the annual salary you're offered; if you start a job at $50,000 per year, you're actually going to see less than 75% of that money after taxes.

  3. Keep your spending below your income. By knowing your spending, and knowing your income, you will know what you can afford to buy. If you always keep your spending below your income, you will avoid debt, and build your savings.

  4. Keep your spending at a lower rate of growth than your income. Every time you receive a raise, you have more money available. If you send a good portion of this new money to savings rather than increasing your spending, then you will always come out ahead.

2 comments:

Canadian Capitalist said...

Hi there! Great post. Thanks for sharing.

Potato said...

I followed the link over here from Canadian Capitalist. Nice post, and I also have to compliment you on your keen goal bar graphs in the sidebar!