There's no reason to feel overwhelmed about money. You only need to know 20 per cent of the information available in order to have a healthier bottom line.

"It’s like physical fitness," says Preet Banerjee, author of the new book, "Stop Over-thinking Your Money! The Five Simple Rules of Financial Success."

"I think everyone intuitively knows by now what they need to do to get in shape," he says. "It’s really just you go to the gym every now and then and you try to eat clean.

"When they hire a personal trainer and they get results, the trainer doesn't show them a fancy new way of doing a sit-up, they just make them do the sit-up that they knew they were supposed to do."

Same thing with money. Most people think financial planning means saving for retirement, but it's more basic than that, as Banerjee explains in this interview:

Q: What are the five simple rules?

Banerjee: "If you separate people into those who are good with money versus those who are bad, it really comes down to the fundamentals, which we already know. We’re just not motivated to do it.

1. Disaster-proof your life

Disaster-proofing mitigates a lot of risks that can face you now. They all centre around what happened. Did you run out of money? There are a lot of ways you can run out of money so -- did you lose your job or you can’t get a job? If you become disabled because you are on your way to work but you got hit by a car and you’re no longer able to work and you don’t have an income, that’s how you could not have enough money. Clearly if you died, you wouldn’t have money to support your family that were left over, so disaster-proofing your life is all about mitigating those risks that can affect your ability to earn an income.

We need to make sure that you have a solid foundation first. Once you have that, then of course you can start thinking about long-term planning like saving for retirement. So that’s rule number one, disaster proofing.

2. Run a surplus

Most people get into trouble because they either live beyond their means or they live at their means. If you don’t have a surplus, you don’t have to worry about saving for retirement because you have no money to save for retirement. So it’s imperative that people spend less than they earn. That’s the whole way that you save for the future. So that’s rule number two, run a surplus.

3. Pay down high-interest debt aggressively

Rule number three is pay down high-interest debt aggressively. So we have all been warned even by the governor of the Bank of Canada, that one of the biggest risks to the economy on the domestic side is the level of debt that people are carrying. A lot of people manage credit responsibly but enough people manage it irresponsibly that it is now becoming an issue.

A lot of people who get into trouble with their credit, they realize after a certain point in time how many hundreds of dollars a month is going just to pay the interest on credit cards or high-interest loans. And you realize that if I didn’t pay these interest payments then I could be saving two hundred, three hundred dollars a month for retirement or for short-term savings if I want to go away on a vacation or what have you.

So it’s imperative that people focus on paying down the high-interest debt before they start thinking about long-term planning.

4. Read the fine print

Number four is one that you don’t see a lot in personal finance books. It’s about reading the fine print. I think probably everyone has signed a contract without reading it from beginning to end. And a lot of the complaints that people have with product providers, service providers, they could have avoided had they simply read the fine print.

So we're always busy and in a rush and we don’t take the time to read contracts. You would never see a company, a publicly listed company, complaining about a contract that they signed because they didn't read it. They would complain about some kind of provision that didn’t work out in their favour because they didn’t read the contract. They have people on staff that are paid hundreds of thousands of dollars to read the fine print.

You don’t need to hire a lawyer for every contract that you sign but you should certainly take a look at the contracts that are presented to you from telecom providers, cable providers, hot water tank representatives, anything that you think of, vehicle loans and what have you, because I think that will help people avoid some of the nasty surprises that they complain about.

And it also makes people more informed as consumers. And if there’s something that you don’t understand, you need to ask questions so that you do become an informed consumer. So not reading something and signing it is, in my eyes, a cardinal sin. It’s lazy and it can avoid so many money problems that people have….


5. Delay consumption

And then number five is delaying consumption. And this is very tempting not to do, to keep up with the Joneses. We tend to compare ourselves to our neighbours, to our friends and what they have, what we see on the exterior, the material things that they have. But we don’t know their finances, we don’t know if they can actually afford it. And unfortunately, because there are so many people who probably are buying and consuming things that they can’t afford, we think that they’re doing OK when maybe they’re not.

Especially today, it's probably unrealistic to assume that you can buy a house a few years after graduating. House prices are very high, incomes for youth on an inflation adjusted basis are lower than they have been for a long time, student debts are much higher than they've been, so the deck is somewhat stacked against young Canadians.

So by delaying consumption and being able to understand what people can truly afford, they’ll have much less money stress and they’ll actually be able to spend more money over their lifetime because instead of borrowing to consume, they save to consume; they're earning interest instead of paying interest. And again that’s one of the fundamental ways you can be good with your money is realizing that you shouldn’t be borrowing money, as best you can, you should be earning interest on your money, as best you can.

What’s the one thing people could do in 2014 to improve their finances?

Banerjee: It's the realization about the people who are good with money versus the people who are bad with money -- it’s about how you manage credit.

So if there’s really only one thing that you focus on, its how you think about borrowing money versus saving money. And the realization that those who are good and have relatively low stress in their lives are the ones who avoid interest as much as they can.

Preet Banerjee’s new book will be on sale, January 7, 2014.