As Canada's population ages, the country is facing a looming financial crisis that doesn't garner…
If you are like most people, you weren’t taught much about managing your personal finances, so through trial and error you probably ended up teaching yourself. Without the proper tools to manage our finances, we run the risk of finding ourselves in debt.
That being said, debt is not necessarily a bad thing if you know how to manage it well. But, without the know-how to do this correctly, you can find yourself in a spiral of unmanageable debt.
If your debts become unmanageable you may end up filing an insolvency.
An insolvency is a legal proceeding in Canada that eliminates most or all of your debts to give you a fresh financial start. The two most popular insolvencies in Canada are Consumer Proposals and bankruptcies. In order to file one, the government of Canada requires a Licensed Insolvency Trustee or an LIT for short, to administer the proceedings.
No one wants to deal with financial difficulty for the rest of their lives. To break the pattern of debt and avoid future insolvencies, Invest In Your Financial Well Being. With a few adjustments to your financial lifestyle, you will be able to achieve financial stability.
Manage Your Money
There are a few key rules when it comes to managing money.
Opening the Right Bank Account
The first step toward better finances is to set up the right financial structure. In Canada, you have the right to at least have a basic bank account at little to no cost.
You can get a bank account at no cost if you are:
- A youth
- A student
- A senior
However, several banking institutions will waive their monthly fee if you maintain a certain amount of money in your bank account per month.
There are a few things you should consider to make sure you have the account that works best for you.
- What will you be using the account for? Will it be to pay your bills or for saving? A chequing account is most commonly used for bills and payments while a savings account is most often used for saving money.
- What are the extra features? Your bank account should make managing your money more convenient to you. Some accounts allow you to track and manage your money online. Some allow you to make deposits through your mobile device. Whatever the features make sure they all work to make your life easier.
- Consider the fees you will be charged for the account you open. Read and understand all of the terms and conditions associated with the account you sign up for.
- Research what protections you will be offered with your bank account. Find out if you will get deposit insurance to ensure the protection of your money if the financial institution fails.
Create a Budget
In order to stay on top of your finances, it’s wise to create a monthly budget. To keep out of debt you must spend less than you earn, so create a budget and stick to it. The first thing to do is to calculate how much money you make each month.
After this, list out your monthly expenses. Include both your set bills like rent as well as fluctuating costs like groceries.
Once you have listed them, your average monthly expenses may look like this:
In order to track these expenses, you can look at your receipts for the past month or at your transaction history if you already have a bank account. This should give you a good estimate of what you spend monthly.
Once your monthly bills are covered then, you will see how much surplus you will have each month. Make sure that you put a portion of that surplus toward your savings and investments each month.
Your monthly income should be split up like this:
If you don’t have any surplus after you calculate your expenses or if your expenses are higher than your income you need to make adjustments. Look at your budget to see where you can make changes. Maybe you can move somewhere that has lower rent, or you can consider a cheaper phone or internet plan. Perhaps you can cut some of your expenses like your cable or home phone. Make the necessary adjustments to not only spend less than you make but to have some left over.
All work and no play is no way to live. A budget does not mean that you eliminate all fun from your life. You can spend your money on ‘fun’ purchases as long as you set aside money for the other items in your budget first.
Here’s an easy budgeting tool to get you started with the budgeting process.
Invest and Save
As we mentioned above it’s important to use a portion of your monthly income to save and invest. Savings can serve several different purposes:
Life is unpredictable and sometimes unexpected bills can arise, whether it be from illness, car issues or the like. Having an emergency fund is essential to ensure that your finances are not derailed.
Saving for Retirement
No one can work forever, eventually, you must retire or you become unable to work. As a result, it is a good idea to assign a portion of your monthly income toward retirement.
Saving for Big Purchases
If you need to make a big purchase i.e. a trip, a vehicle, a computer, etc. Whatever it is, if you need to or want to make a large purchase, do not borrow money to do so. Save up bit by bit until you have enough.
Investing is a great way to multiply your money over time. Investments have far greater returns than a simple checking or savings account and can result in a nice nest egg that you can use in the future.
However, beware of bad investments. Go to a reputable financial institution to sign up for an RSP, RRSP or a TFSA. You can even indicate the level of risk you are willing to take for these investment accounts.
You can sign up for these accounts at banks and other reputable establishments but make sure you do your research before you sign up.
Borrowing and Manageable Debt
Debt has become a normalized part of life, but it can easily get you in trouble. When borrowing and taking on debt it is important to manage it the right way so that it does not spiral out of control.
- Don’t borrow from high-interest money lenders i.e. payday loans. Payday loans and the like have extremely high-interest rates (upwards of 400%) and fees. They do not give you a lot of time to work with and if you don’t pay them off in full after two weeks the interest can get you into an upward spiral of debt.
- Pay off your credit debts in full at the end of each month. Make sure that your credit cards and/or your line of credit are paid off at the end of each month in full. When you do this you ensure that you will not incur any interest. Make sure you do not spend more than what you can repay at the end of the month.
- Pay your debts back on time. From a loan to credit cards, all debts have fees for missing or paying late. These fees will begin to pile up if you get too many of them. Create a bill payment schedule so that you will never miss a payment date.
Getting your finances under control can make a huge difference in your life. For the New Year, commit to using the tools above in order to Invest In Your Financial Well Being and bring stability to your finances. If you need more advice on your finances and your debts, come in to speak with one of our experienced LITs.