Demystify and Take Control of Your Personal Finances

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Personal finance may seem complicated, but it doesn’t have to be. That was Professor Benjamin Croitoru’s main message in a recent McGill Delve podcast interview.

Croitoru is an associate professor of finance at the Desautels Faculty of Management and the academic director of McGill Personal Finance Essentials – a free personal finance course offered by McGill University.

“There’s really not that much you need to know in order to make a difference,” he explained. “With relatively little knowledge, you can gain a sense of control and feel less stressed about your finances.”

For Croitoru, financial literacy is about feeling safer and more confident about your finances and financial habits.

He adds that individuals can improve their financial literacy and take control of their finances with a few simple actions, which can help protect against brash financial decisions. This can also help individuals navigate conversations with financial advisors at their banks.

As a service to their clients, many banks have financial advisors on their payroll to help consumers make investment decisions. While they can offer good advice, financial advisors answer first and foremost to their employers, said Croitoru.

“It does not mean they are bad people,” he said. “But people should not forget that financial advisors are not their friend – they have a job to do.”

At the end of the day, banks make money by selling financial products and collecting fees from their clients. But consumers can protect themselves by learning the basics of personal finance.

Here are three personal finance tips to get started, according to Professor Croitoru.

Financial tip #1: Track Your Spending (and Start Small)

A common financial tip for beginners is to create a budget. This is never a bad idea, but creating and sticking to one can be overwhelming, said Croitoru. So, if you’re just beginning to explore your finances, he said tracking your spending is a better place to start.

“Start thinking objectively about each expense,” he said. “Do I really need this? Does it make me happy? Is there anything I can do about it?”

To simplify things further, he recommends starting small. Pick a few small expenses, like coffee purchases, and tally up your monthly cost. Then you can ask yourself whether the coffee is worth the expense and adjust your spending accordingly. Even if you don’t eradicate your coffee spending completely, small reductions can have a big impact, said Croitoru.

Financial Tip #2: Pay Off Your High-Interest Debt

Credit cards are convenient and can have numerous benefits, like reward points, cash-back, and other perks. But they also have exorbitantly high interest rates, making them a poor way to borrow money. Never use your credit card to tide you over from month to month. Make sure to pay it off in full every month to avoid paying high-interest fees, said Croitoru.

Demystifying Personal Investing

Assuming you feel good about your spending and your debt, you might be curious about investment opportunities. But with so many choices available, it can be hard to know what’s right for you – a feeling that’s compounded by financial jargon and endless abbreviations and acronyms.

But Croitoru believes that most people can do well if they avoid the three most common investing mistakes and stick to some simple guidelines.

Investing Mistake #1: Overpaying in fees

“The data is very clear: you don’t get better returns or better service because you spend more in fees,” said Croitoru.

Some mutual funds, for example, can charge as much as two per cent in fees. But others charge close to zero and they’re no less effective at generating returns.

Investing Mistake #2: Trying To Forecast the Market

Don’t buy and sell based on the dominant mood of the market, said Croitoru. If you do that, you’re always going to be behind the ball. For example, if the New York Stock Exchange has been increasing in value over the past few weeks, you might hop on the bandwagon and purchase some shares. But little did you know, you purchased at the peak of their value – there’s nowhere else for it to go but down. This is a great way to lose your investment quickly.

The opposite is also true. If you sell when the market is down, you could have made more money or mitigated your losses by waiting for it to bounce back.

Investing Mistake #3: Not Diversifying Your Portfolio

“Ideally, you want to have a little bit of every stock that’s available on the market,” said Croitoru.

This can protect your portfolio against market fluctuations. With a diversified portfolio of shares, some stocks might go up while others go down, cancelling each other out and reducing the volatility of your investments.

For more personal finance advice, listen to Professor Croitoru’s full podcast interview on our website or search “McGill Delve” wherever you download podcasts.