Study Up On: Personal Finance 101


I’m now in my late twenties, and I notice that A LOT of people around my age group have little to no understanding of personal finance.

Do you struggle to quantify your short, mid, and long term financial goals and dreams of being Financially Independent?

If you answered yes, you may have been tricked by your schooling into thinking you had all the life skills required to survive in this day and age!

People who went through their studies, spent thousands of dollars learning the tools of their future trade, did not learn one fundamental aspect of life that EVERYONE is subject to: How do I effectively manage my own personal finances?


So where do you start? Start with being able to quantify and track your goals! To track your financial goals, you should understand the three core financial statements:

  1. Income Statement;
  2. Cash Flow Statement;
  3. Balance Sheet;

Not knowing how these work and apply to you and your household is a killer. You should understand what they are and what they can do for you. They are NOT only for corporations. All households should have an idea of where they are financially and where they want to be.

You don’t need the ins and outs of the corporate accounting voodoo that goes on, just the basic functions. These are tools that should help guide you on your heroic quest to being a Frugal Northerner. A badass financial warrior that rises above mediocrity and triumphs over excessive consumerism.

Okay so I’m all pumped up now about Financial Statements!!! What are they?

In a nutshell:

  • The Income Statement tracks what occurs from A to B (think what happens monthly in your household as an example);
  • The Cash Flow Statement tracks what occurs from A to B too, but with respect to CASH items only. For our purposes, we can generally just use a Cash-basis Income Statement.
  • The Balance Sheet is a snapshot at point A and at Point B (Think measuring your net worth at a point in time).

As I mention above, for household use, it’s often enough to look at only a Cash-basis Income Statement and Balance Sheet. The reason you don’t need both Income and Cash Flow Statements is because in a Corporate setting, Income Statements account for what are called non-Cash items such as depreciation of an asset or liability.

Non-Cash Item Example

If a mining company purchases large amounts of dump trucks for one of their sites in one year, they may be able to amortize (i.e. spread) the cost of the trucks over the lifetime of said trucks, maybe 10-15 years. This makes the Income Statement look okay as it smooths the cost over multiple years; if you look at the Cashflow Statement, you would see that in fact, there was A LOT of cash being used in year 1 to purchase these trucks.

For the everyday household, I don’t think amortization or depreciation is necessary. I personally just go with a Cash-basis Income Statement and Balance Sheet.

Items appearing on Cash-basis Income Statement:

  • Household income;
  • Monthly expenses, insurance premium and taxes;
  • Remaining income to be saved / invested;

Items appearing on Balance Sheet:

  • Value at a point-in-time of your assets such as home equity, cash, RRSP balance, TFSA balance, non-registered investment account balance;
  • Value at a point-in-time of your liabilities such as outstanding mortgage, credit card balances, car loans, and other debts;
  • This is where you track your net worth. Remember, Assets – Liabilities = Net Worth.

I personally use for tracking my cash flow month-to-month, creating budgets and all that sort of stuff. I have both mine and my spouse’s accounts linked here. The only thing I can’t link are my RRSPs via my work. While it’s nice to have aggregation of accounts here and you can track against a budget, sometimes transactions can get mislabeled so you need to watch for that. In general, I’ve been happy with this product.

For tracking net worth, I have a Financial Independence excel worksheet* that I update monthly. Most of my account balances I can grab from Mint anyways, but this allows me to add in my RRSPs.

The budget that you design will need to fit your lifestyle. As a first step, it’s always a great idea to just start tracking what you’re spending and figure out ways you can save more. Budgets are personal, and a good one optimizes when you want to achieve Financial Independence / Retire Early and living your desired lifestyle on a day-to-day basis.


What happens when far too many people don’t understand how personal finance works? It creates predatory jobs like Financial Advisors** with misaligned incentives where they are rewarded if they move you to financial products that charge you more. Like it or not, they have personal incentive to put your hard earned money into high cost mutual funds that have Management Expense Ratios (MERs) that are ridiculously high. They charge high fees because these funds are actively managed by a fund manager, and the commission kickback to Financial Advisors needs to be accounted for. Who pays? You pay.

Note that MERs range on products depending on how in-depth the management of the fund is. Very specialized funds that require loads of research and rebalancing often require higher fees. However, I prefer an indexing approach as I’m sure most DIY investors do.

Equity markets are so efficient these days with the speed of information that it is highly improbable you or the fund manager will beat Mr. Market with stock picking. What does this mean? Just invest in Mr. Market, take a long-term approach and relax. There will be ups and downs, but the long-term trend of equities is positive, and generally better than what you will get in other asset classes.

How do I invest in Mr. Market?

Index funds! With Index funds, you’re getting a little slice of all sorts of companies, good and bad. You will get winners, losers, their mother’s uncles and the ugly cousins. BUT, from a macro perspective, you’re betting that GDP per capita will increase over time, and you will benefit by holding a broad index tracking fund.

Long-term historical real return on the S&P 500 averages about 7.0%. Note that “real return” is net of inflation effects. Many pundits estimate real returns will begin to decay, somewhere in the realm of 3%-5%. To me, decay makes sense as we’ve seen exponential growth and expansion throughout history. While we continue to see compounding, it’s hard to imagine a world where that type of growth continues indefinitely. For my own estimates, I generally use a 5% real return for my index investing.

But I digress…when investing, WATCH YOUR FEES – they are a killer on a long-term basis! These actively managed index funds do the same as Exchange Traded Funds (ETFs) tracking an index. The difference is in fees.

  • Vanguard VTI ETF (Total Stock market): 0.04% MER
  • Average Expense Ratio of Similar Funds (According to Vanguard site): 0.97% MER

We all remember compounding and the effect of your choice long-term right? If we’re investing on a long-term basis in a vehicle that will effectively bring the same returns but differ in fees, what kind of impact are we looking at?

You lose 0.97% – 0.04% = 0.93% every year, or retain 99.07% of what you would have with the ETF. Sounds small for one year right? What about over 15 years? 99.07% ^ 15 = 86.92%.

That means that with the same asset base, you would end up with about $0.87 per $1.00 with the average fund than if it were put in VTI. Instead of $1,000,000, you have $869,200. That’s a big chunk of change to pay for expertise that, over a long-term horizon, has an effect of nil.


Whew, this was a long post – glad you made it to the end!!

In closing, people are thrusted into the world with some level of education. But for the majority of graduates, they go through zero formal education about home economics / personal finance. Without even a sniff of what they need to be armed with to live comfortably and retire sustainably; they aren’t given the ability to make choices.

But if you’re here reading this, it means you’re on the right track of learning so that you can have choices, and the choice of Financial Independence is totally yours to make!

*My Financial Independence excel workbook includes my own mortgage calculator comparing cash flow and economic decision factors and user input assumptions, net worth tracking, and saving projections including the impacts of taxation on various accounts.

**I admit I am generalizing here as there are no doubt Financial Advisors that truly want to help their clients, but as a customer just be weary and do your homework as there are Advisors a plenty that wouldn’t mind taking advantage of a non savvy investor.

12 thoughts on “Study Up On: Personal Finance 101

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  3. It’s nice to see someone make posts about the less popular topics that are SO important! The Mr. Market reference is one of my favorite analogies to explain how stock trades are more like small business deals. Keep bringing the good info!

    Liked by 1 person

  4. I like how you distill things down to the Statement of Cash Flow and Balance Sheet. Those are the exact same things I look to every month. I believe your balance sheet (or net worth) is a direct indication of your financial health over time. If it’s going up, then you’re doing something right, if it’s going down or stagnating, you have issues that need to get resolved. Which translates into the cash flow statement. This is my indication of how healthy my finances are and how well I could respond if a surprise came my way.


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  7. Loved your opinion about and Index Funds. I also hate those high MER fees and I watch them very carefully. Most of my 401K investments are in Index Funds just so I avoid those nasty management fees. Keep up the great work!

    Liked by 1 person

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