Money is on everyone's minds right now, but most of us can't make sense of how to manage it. It’s more important than ever to keep an open dialogue about your financial wellbeing, especially as we navigate the effects of the Coronavirus on the economy and workforce. So we're diving into money management, budgeting, savings hacks and the psychology behind how we spend our money with finance expert Melissa Leong.

Melissa is an award-winning finance writer, an on-air money expert on Canada’s leading daytime talk show, The Social, the best-selling author of the feel-good finance guide, Happy Go Money, and the host of the Money Moves podcast. We spoke with Melissa a while ago, before the Coronavirus hit, but her advice on saving, spending, and improving your relationship with money is more relevant than ever.

Melissa makes personal finance fun and relatable, and she wants everyone to start having more conversations with themselves and their peers about money. And when it comes to spending habits, she keeps it refreshingly real: “I’ve learned you can make money work for you, you have to take risks, and you have to invest in the things you care about, like your business, or the things you value...It’s okay to spend money.”

Here are some of the key takeaways from our chat with Melissa:

Budgeting 101: Six key steps for your “spending plan”

1. Calculate your after-tax income and your fixed costs

Your after-tax income is the amount of money that you actually take home each paycheck after all applicable taxes and deductions have been applied. If you’re not sure what your provincial or state tax is, check out these resources:

Canada: https://simpletax.ca/calculator
US: https://www.hrblock.com/tax-calculator/

Your fixed costs are all of the things that you have to pay each month. Think: rent, your mortgage, student loans, car insurance, internet, hydro, etc. Make sure these necessity costs are covered in your budget and that you’re chipping away at being debt-free!

2. Automate your savings

“The savings habits that you establish now will set you up for when you are older,” says Melissa. “You need to start early. You need to have started saving...yesterday! Ten years ago! So if you can, start right now and set up something [that is] automatic.”

Most banks let you set up automatic deposits from your checking account to your savings account on a monthly basis, which you can increase over time. “I don’t care if it’s $5, $20, or $50, set yourself a calendar reminder to bump it up a tiny bit every few months and see if you can keep bumping it up,” suggests Melissa. “I promise you, you’re not going to notice that the money's gone and it will go towards your goals. You need to be putting aside money for short term goals, like a wedding, and long term goals like, retirement. No one is going to look after you, but you.”

3. Track your spending

Once you know your income and fixed costs, track the rest of your spending for one to three months so that you know where your money is actually going (UberEats? Sephora? Manicures? The struggle is real.) There are tons of apps out there like TD MySpend and Quicken (our personal faves) that can do this for you. Once you know where your money is going, you’ll have a better idea of where you might need to cut back—did I really need to sign up for a wine delivery subscription service!?—and how much you can allocate to other important things, like your money values.

4. Set up an emergency fund

As Melissa reminded us, “you don’t know when life is going to turn sour, and you don’t want money to make your life’s problems even worse.” Especially right now, when there’s so much economic uncertainty and job instability in the near future, it’s so important to save up and contribute to your emergency fund. Melissa recommends setting aside three months of living expenses—even more if you’re a freelance worker.

5. Identify your money values

We’re both cutting back and saving up right now, as are a lot of us, but you can still figure out the things that matter most to you that you are comfortable spending money on. These are the priorities that genuinely fulfill you and feel good to spend on, and you should do so without guilt so long as you make concessions elsewhere.

6. Get clear on your financial goals

Trust us, it’s real hard to save if you don’t know what you’re saving for. So whether it’s a new car, a future trip, or a downpayment on a home, get super clear about your goals so you have some purpose to drive all of that saving.

The psychology behind money and spending

Before you can succeed with a spending plan and your financial goals, you first need to understand and solve for your relationship with money. This goes back to how you were raised, Melissa explains. Money is tied to vanity, pride, values, worth, self-esteem and years of associations that you’ve picked up from your environment. But the more we talk about it, the more we can demystify the power money holds: “Let’s talk about how you use money, because money is just a tool,” says Melissa. “It has no meaning. You give it meaning. What meaning are you giving money? What do you think of automatically when someone mentions it?”

The truth is, very few of the things that make you happy can be acquired. “Often, what people spend their money on is to alleviate some sort of pain…we’re buying as a symptom of something. [So] you need to fill your void before you can think about your budget...If you spend because you’re stressed, let’s work on the stress. Then spend your money on meditation classes, or time with loved ones, or experiences.”

Turns out money CAN buy “happiness”...you just need to know how to spend it

“Part of being an adult is making choices, and personal finance is all about choices,” says Melissa. “Don’t let anyone tell you that you can’t buy a latte if you really love lattes.” Remember, it’s not about counting every single penny that goes out your door: “It’s about choosing something that you enjoy, something that you value, something that makes you happy, and then allocating your resources to that and sacrificing elsewhere.”

And that, friends, is why establishing your money values is so important! Identifying them will help you cut back on areas that aren’t actually important to you, so you can spend on areas that fulfill you.

But is there really a happiness threshold when it comes to making money?

Researchers have studied the “magic number” of how much money people need to make to feel happy, and they’ve landed on two figures: Melissa explains that when it comes to day-to-day happiness, the income threshold is $60-$65k USD per household. When it comes to overall life satisfaction, that threshold is closer to $90k per household. But what does that even mean?

“What this [research] is showing is that you need to cover your basics. Any more money above these thresholds is associated with a decline in happiness,” says Melissa. “You may be working more, [it’s] more stressful, you may be focusing on other things that are not as affirming like comparing yourself to others or more material goods.”

One of the interesting aspects of the human psyche is that “we have this wonderful thing called hedonic adaptation, which means whatever it is that you get, you often get used to it, and return to a baseline of happiness,” explains Melissa. This means that no matter how much you make and obtain, you’ll generally get used to that level, and you’ll want more.

So what do we do about it? It’s all a never-ending quest for happiness, says Melissa, but if you want to use benchmarks to be effective in your earnings and success, you should say: “‘If I make this amount, then I will achieve this specific goal.’ That makes it not about happiness—which is a futile quest—it makes it about doing something tangible and helpful to your life, like [paying] off your mortgage faster. Those are specific things, it’s not about joy.”

How do you “flip the script” on your negative money talk and get comfortable broaching it?

When it comes to talking more positively and openly about money, Melissa recommends a few strategies:

Watch your language: “Being aware of the way that you automatically talk about money is the first huge hurdle”, says Melissa. We often don’t pay attention to our internal dialogue and the kind of language we use towards ourselves. “There is a lot of shame and there is a lot of guilt [around money], so being aware of how you put yourself down when it comes to finances is a first step.” Instead of joking that you’re too broke to go out with friends, flip the script and say that you’re working on paying down your debt. “You’re not broke—you’re working on something,” says Melissa. “I don’t feel empowered when somebody is bullying me. So if you’re bullying yourself in your mind, you’re doing yourself a disservice.”
Talk to someone you trust: Talking about your money and savings goals with a friend, family member or colleague will make it okay for them to reveal their own truths about money. “Together we can empower each other to make that conversation easier,” says Melissa.
Take action: “Often confidence comes from doing”, Melissa explains, so even the smallest actions like putting $5 aside each week, or emailing HR about your company’s retirement plans, will help you gain more confidence when it comes to your finances.

What’s the skinny on TFSAs and corporate RRSP programs?

Despite its name (TFSA = tax-free savings account), Melissa reminds us that even though “it’s called a savings account, the power of [a TFSA] is that it’s an investment account.” The beauty of a tax free savings account is that your investments can grow tax-free, so to reap the full benefits of a TFSA, Melissa recommends using it for investing and long-term savings. The Canadian government first introduced TFSAs in 2019 to encourage Canadians to save more money, and since you paid taxes on the money that you put into your TFSA, you do not have to pay any taxes when you take money out. And unlike an RRSP, you can take money out of your TFSA at any time. But there is a limit as to how much money you can contribute to your TFSA each year (known as your contribution limit), which varies from year to year. You can check your contribution limit by logging into your CRA account.

When it comes to corporate RRSP matching programs, Melissa says it best: ”Any program where you are essentially getting free money is...Go! Run there now! Flip your desk and run to HR!” RRSPs (registered retirement savings plan) were introduced to help provide Canadians with tax breaks to incentivize them to save for retirement. The main benefit of an RRSP is that any tax on your RRSP contributions are deferred until retirement when you withdraw your money, so you pay less tax in the year that you contribute. Your RRSP contribution room is 18% of your income, or a maximum amount, which you can also find on your CRA account.

If you can enroll in a company RRSP program or an employee share program where your company matches a portion of your contribution, never leave money on the table!

It might feel overwhelming to get started, but remember that it’s never too late. “I’m sure we can all look back and regret the things we’ve done in the past,” says Melissa, “but we made the choices that we made based on the situation at that time. We did our best. So now we’re trying to empower you with information...but it’s up to you to actually take action!”

We know that these may be stressful times financially, so be sure to consult with a financial advisor or trusted expert if you do need help, and take advantage of any financial resources that you may be eligible for, like the Canada Emergency Response Benefit, if your income has been affected by COVID-19.

We hope that our convo with Melissa inspires you to take control of your personal finances! DM us and let us know how your financial journey is going, and what tips and tricks you’ve used to find financial freedom. See you next week!