Becoming financially literate is a big step for most individuals but learning financial basics for youth, might at times seem like learning a foreign language. However, with the right information, tools, and resources, Philip Wong believes that young people have the power to take control of their own financial future.
Philip, who is a Portfolio Analyst with Sophia Financial Group, is passionate about helping young people begin their journey towards financial empowerment and shares his tips and strategies in Sophia Wealth Academy’s Wise Money Talks session called Financial Fundamentals for Youth. “By asking ourselves five key questions and answering them honestly, with integrity and good intent,” Philip believes that “together we will build a framework to understand how our daily decisions build our net worth.”
“The key component to making your financial plan work for you—is you!”
While many young people may not yet have to worry about mortgages or debt, all financial decisions made today will not only have an impact on their current situation but also their lives for many years to come. “We all come from different backgrounds,” says Philip. “We have different stories, different financial situations, and we all have different goals and different ideas of success. The key component to making your financial plan work for you—is you!”
With all the misinformation out there about managing money, it is no surprise there are many different perceptions about what information young people really need to begin planning their own financial futures in a way that makes sense to them.
“You can own money, or money will own you.”
According to Philip, when it comes to the financial basics for youth, “It isn’t all that complicated as money is just a tool–a tool that you will have a relationship with for the rest of your life.” And like all relationships, there are good relationships and there are bad relationships. “But when it comes to money,” says Philip, “the good news is that it’s up to you. You can own money, or money will own you.”
Philip believes there are five critical questions a young person needs to ask before building his or her own financial plan. While these questions are based on Tracy Theemes’ book, The Financially Empowered Woman, the principles are relevant for all people wanting to take control of their own money, regardless of age or gender.
Step One: Where am I now?
You need to understand where you are now to get to where you want to go. “Just like google maps,” says Philip, “you have to enter your location for it to tell you how to get to your destination.” In addition, you need to remember that, as mentioned before, we all have different backgrounds, financial situations, goals, and different and unique perceptions of the world that drive our needs and wants.
There are two parts to this question, both requiring you to have a clear picture of your current situation around money: cash flow and net worth. “Your daily decisions on cash flow, the movement of money in and money out,” says Philip, “is something that will determine your success or lack of, to achieving your goals. Your cash flow directly relates to your net worth.”
Cash Flow is simple and has two parts:
Cash flow in, is how much money is coming into your pocket. For example, an allowance or income from a summer job, or full-time work, etc.
Cash flow out, is your spending. Things like food, rent, entertainment, car payments, etc.
The total of cash flow in minus cash flow out, determines whether you have a positive or negative cash flow. If you have a surplus, you have more money coming in than money out. If you have a deficit, you have more money out than money in. Managing your cash flow is often referred to as budgeting.
To be successful, you need to be conscious of where your money is going. You can track this using apps like Mint, or you can use the Sophia Wealth Academy free excel spreadsheet, or you can simply write it down with a pen and paper. The important thing is that you can account for every single decision you make when it comes to how you use your money on a monthly basis. The biggest outcome in tracking your cash flow is that it wakes you up to your habits (good and bad).
Net worth is everything you own minus everything you owe. Said another way, these are your assets minus your liabilities. Assets are things like your bank account, your condo, and any investment accounts. An asset is something that has value and can reasonably be exchanged for cash, today or in the future. This could be a home, a car, or even shares of bitcoin. Liabilities are things that you owe, like credit card bills, student debts, mortgages, personal loans, car loans, etc.
Step 2: Do I have a cash reserve?
Cash reserve is money you have set aside for opportunities and potential emergencies and that you can access in less than a day. This is just pure cash in your hand, usually in a high-interest savings account.
There are two main reasons to have a cash reserve. The first reason is because of its psychological impact. With money set aside, you feel calm, and it helps you make better decisions when you are not stressed. Secondly, the practical part is that you have the ability to fund opportunities or life’s unexpected events as they come up. Having to borrow money, or using a credit card, means having payments and paying interest.
The amount of cash you should have in reserve is entirely decided by you and your current financial situation.
Step Three: Where am I headed?
Once you have a sense of where you stand financially and have set aside some money towards your cash reserve, the next step involves setting some goals. Keep in mind that everyone is different. Goals that work for others may not work for you.
Here are some simple steps to setting financial goals for yourself:
- Set your goals and figure out what you want. Is it a new car, a condo, a university education, or maybe you want to retire early?
- Prioritize what is important to you. You can best manage two or three major goals at a time.
- Find out what each costs.
- The last step, which is an important one, is to set a realistic date on when you want to achieve each goal.
Step Four: How do I get there?
This part is about understanding how to invest your money so that you can achieve your goals. This can be a bit tricky and sometimes complicated, so a good place to start is to get some solid advice. You can either approach someone at your bank or seek out a personal financial advisor. You may even consider signing up for Sophia Wealth Academy’s online Financial Foundations Empowerment eCourse to dive deeper into this process and help prepare you for your next steps.
Asset allocation and diversification are helpful terms to understand when ready to invest. Asset allocation is how you divide your assets and this is usually based on how much risk you want to take on. Understanding yourself and your emotional ability to tolerate volatility is critical to building your portfolio. Diversification simply means not putting “all of your eggs into one basket.”
Also important to understand when building your portfolio is whether you are going to use “registered” or “non-registered” investments. A registered investment account or plan (e.g., RRSP, TFSA) is a legal agreement between you and the Canada Revenue Agency that a certain tax structure will be used with your investments, often affecting your bottom line when filing your income tax. Non-registered investments (e.g., stocks, bonds) offer no immediate tax breaks but allow for much more flexibility when investing.
Step Five. How do I stay on track?
Finally, according to Philip, “the reason you need to take control of your financial life is because you will feel empowered.” If there is a certainty in life: it is change. Life happens and you want to make sure that you can adapt and revise your goals when needed. Review your situation on a regular basis and revise accordingly, seeking professional advice when needed. Focus on what you can control instead of what you can’t control. This will help you to stay on track with your financial plan and eventually achieve your dreams.
Listen to Philip’s complete Wise Money Talks webinar session available on Sophia Wealth Academy’s YouTube page to learn more about financial basics for youth. Don’t forget to subscribe if you want to receive a notification when new videos are posted.