Posted by Leo T. Ly on September 22, 2017September 8, 2018
I am a personal finance blogger, a money geek, an investor, a property manager, a diligent saver, an early retiree wannabe or whatever money related personality that I classify myself as it doesn’t really matter. It doesn’t affect my view about money and how I manage it. I think about money on a daily basis and it seems to be hardwired into my thought process. On a daily basis, I try to optimize and improve my finance by asking myself simple personal finance questions.
Some of the personal finance questions can be thought-provoking, some can be inspiring, while others can be a wake-up call. Answering these questions may not be challenging, but taking action to improve your financial situation may be. So without further adieu, let’s see what these questions are and how we can use them to improve our finances.
Do I Earn More Than I Spend Annually?
It’s pretty simple to find the answer to this question. You just add up all of your after-tax pay cheques and subtract all your bills for the year. If the number is positive, then it means that your after-tax earning is more than your expenses. If the number is negative, you have one of two choices. Either earn more money or spend less. Otherwise, a debt spiral will be waiting for you.
Even for the people that are earning more money than they spend, the picture is not as rosy as one may think. According to the Canadian Payroll Association’s survey in 2016, 48% of respondents were living pay cheque to pay cheque. This means only about 52% of people are earning more money than they spend, which leads to the next question.
What Percent Of My Income Did I Save?
According to data from Trading Economics, for the last twenty years, the average Canadian saving rate barely exceeds 6% for any quarter of the year. The worst saving rate was a meager 0.90% in the first quarter of 2005. Let’s think about this for a minute. The average Canadian earned approximately $943 per week, which is just slightly under $50,000 (=943*52) per year based on Statics Canada’s data from 2014. This means that the average person saved at most $3,000 (=$50,000 * 6%) per year based on the average saving rate. With an average salary and an average saving rate, how would the average Canadian be able to afford the average home’s price tag of $478,696 (as of August 2017)?
How Much Was My Discretionary Spending?
We’ve just looked at earnings and savings. Now, it’s time to take a closer look at our expenses per year. Discretionary expenses to be exact. Simply put, discretionary expenses are spending that is in the want category rather than the need category for your day to day needs. For example, these expenses can be vacations, dining out, the daily Latte with your colleague, the golf membership, etc.
Once you add up all of your discretionary expenses, compare that to your savings. If your saving is higher, than you are a diligent saver and are squirreling your way towards achieving financial independence. If your discretionary spending is more than your savings, you are just living your life now and not saving enough for your future. It’s best to lower your discretionary spending slowly over a period of time and direct the extra money towards your savings.
How Much Am I Worth?
To know how much you are worth, you just add up all your assets and minus all of your debts. If this number is negative, then it means that you are deeply in debt. If it’s positive, then it means that you are worth something. Normally, this number doesn’t tell you a lot at any point in time because it’s just a snapshot. If you conduct a net worth calculation over a period of a few years, you should be able to spot a trend in your net worth. Hopefully, your net worth is on an uptrend and it’s growing in the range of 5% to 10%.
How Much Money Did I Make In My Sleep?
The key to achieving financial independence is to have your assets generating income for you passively. You can be worth a million bucks, but if that net worth is not working hard to earn you money, then you’ll most likely have to work for money for the rest of your life. For example, I am worth about $1.2M, but I have about $1.5M in assets working hard to make me more money. Eventually, I hope that my passive income can replace most of my active employment income.
How Much Do I Need To Save In Order To Retire?
Since you have calculated how much money you spent in a year for the first question, you can use that number to find the answer to this question. Most personal finance experts believe that if you saved about 25 times your annual expenses, then you can retire comfortably. Since your expenses are after-tax dollar, I’d recommend using 30 times instead. So if your annual expenses total $50,000 year, you’ll need to have approximately $1.5M (=$50,000 * 30) in savings to retire. (Note: there are CPP and Old Age Security benefits that you were not part of this calculation)
My Equifax and TransUnion credit score.
What’s My Credit Score?
Some people think that their credit score and history are not important and don’t pay much attention to them. We live in a society where borrowing is pretty much a fact of life for most people. Whether it’s a student loan, mortgage, car loan, investment loan, or credit card loan, the higher your credit score, the more negotiating power you have. With a great credit score and history, you’ll most likely be offered better interest rates on your loans. If you are borrowing hundreds of thousands, even a 0.25% discount can mean thousands of savings on interest payments.
How Much Low-Cost Credit Do I Have Access To?
If you have a great credit score and assets, you’ll have great access to low-cost credits like a home equity line of credit (HELOC). You made not need any credit at all or want to borrow any money, but it’s best to have access to credit when you don’t need it. With my credit score and assets, I always have access to at least $100,000 in credit. This allows me to use my emergency fund to invest to earn higher returns rather than keeping them in a savings account that earns me peanuts of an interest rate.
How Much Non-Mortgage Interest Am I Paying?
The ideal answer to this question is zero, with the exception of investment loan interests. Every dollar that you pay in interest that is not tax deductible, it costs you more than a dollar because you pay the interest with after-tax earnings. Hence, to minimize unnecessary costs, it’s best to borrow to invest and buy appreciating assets rather than borrowing for consumption.
Sourced from TaxTips: Ontario Marginal Tax Rates
What’s My Overall Tax Rate?
Your overall tax rate is the total amount of taxes that you paid as a percentage of your gross income. This number allows to you measure how much money you get to keep for every dollar that you have earned. For example, if your gross earnings were $50,000 and you paid $12,000 in income tax, it meant that your overall tax rate was 24% ($12,000/$50,000). You only get to keep 76 cents of every dollar that you earned. My view has always been, “it’s not how much you earned, it’s how much you get to keep after taxes.” Last year, I kept about 88 cents of every dollar that I earned even though my income range is the 43.41% tax bracket.
How Much Free Money Did I Receive Last Year?
Some people say that there’s no such thing as a free lunch. Well, I think that those people were dining at the wrong restaurants. You can get free money when you save. That was how I got a 72% return on my saving using three simple tricks. You can get free money when you spend or apply for credit cards. Heck, you can even get free money when you shop (using Ebates.ca) or pay your bills (using the Canadian Tire Options Mastercard). If you are not getting free money, you’re missing out.
Why Am I Going To Work?
Most people’s answer to this question is to earn money, pay their bills and put food on the table. There is nothing wrong that. I am doing that too. However, an ideal answer would be, “I go to work because I want to, not because I have to.” How do you achieve this? You can do it by setting a goal to achieve financial independence as early as possible. So going to work will be optional for you one day.
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My Two Cents
Sometimes, the answers to our money questions are there in front of us. It doesn’t take a lot of time or effort to find out the answer to our questions. However, what we do after we have the answers to our questions determines if we will be working for money or have our money working for us in the future.
So, what are your answers to the above personal finance questions? Do you think that by knowing the answers to these questions will help you manage your financial affairs better? Are any of the above questions are thought-provoking, inspiring, or a wake-up call for you?
