Many Canadians struggle with their finances. With credit that is often easily accessible, many are spending more rather than saving, using up their credit and accumulating debt beyond what is realistically manageable. Many people develop a lifestyle that is supported by credit, and when that credit runs out, they have to come to terms with their situation, re-evaluate their budget, and learn to live within their means. This reality check is never pleasant. By taking action and following the tips provided below, we can all achieve the goal of a happier, less stressful life with a manageable level of debt:
1) Questioning our needs and wants
One of the first things we need to do is evaluate our lifestyle. How much of what we have was purchased out of desire, rather than true need? We need to be honest with ourselves. Do we need to go as often as we do to that restaurant to eat? Do we always need the latest iPhone, or can we possibly settle for last year’s less expensive version? These items may make life more enjoyable, or even a bit easier, but are they really necessary to our overall well being? They often provide us with a temporary sense of happiness, but that feeling does not last – and often this happiness is quickly replaced by the stress, worry or despair once the bills for these items start to arrive.
2) Set a budget and stick to it
It is important that we take the time to draft a realistic budget and make sure that we are not spending more than we earn. The list below generally indicates how much a person’s budget should go towards various expenses.
30% Housing
18% Transportation
16% Food
8% Miscellaneous
5% Clothing
5% Medical
5% Recreation/Entertainment
5% Utilities
4% Savings
4% Other debts
On top of this, it is also very important to keep a six-month emergency fund. Emergencies will happen at some point and having a “slush fund” will help a person overcome misfortune more easily.
Here is a handy worksheet to help plan out your own budget: http://www.practicalmoneyskills.ca/downloads/pdfs/PMS_Guides_BudgetBasics_CA.pdf
3) Track and Trim variable expenses
Everyone can benefit from keeping track of their income and expenses. A simple application such as You Need A Budget http://www.youneedabudget.com/ can make this task very simple and can be a real eye opener.
Many financial advisors will recommend using only cash as a way to keep spending under control. It is far easier to control and hits home when a person actually sees the money leaving their hands. We get used to the convenience of using debit and credit cards and not seeing where our money is going is a common cause of overspending. Use jars or envelopes to separate cash into specific budgeted amounts to ensure not to spend over a set budget.
Once we can see how much we are spending on variable expenses we can take a look at where savings are available. Are we spending too much on eating out? Too much on clothing? Spending too much on the cell phone bill? People are often surprised to see where the overspending is coming from. Once that spending is identified, it becomes time to trim it down and make adjustments to meet a set budget.
4) Say NO to credit cards!
Credit can be a good thing, if used prudently. In fact, if a person ever wished to get a mortgage or loan of any sort, they will need a record of credit and a good credit rating. The downside to having easily accessible credit is that a lot of times people will turn to their credit cards to avoid waiting to purchase the things they want, rather than using their cards for items they really need. It seems like such a simple concept to just borrow it now, get what you want, and pay it back later with a little interest, but the problem with is that many get carried away with the ‘worry about it later’ attitude that they forget the risk that ‘later’ can hold. No one can accurately predict the future, and you never know what may happen down the road. A job loss, health issue or abrupt life change can drastically alter our finances which can easily affect our ability to pay back what is owed.
Some also fall into a cycle of borrowing for their wants and they lose sight of the amount that has already been borrowed, and the amount of interest they are now paying every month. This can easily lead to a point where monthly credit card payments are going more to interest rather than principal. This, in turn, creates a larger long term debt that can become overwhelming very quickly. If we find ourselves in this situation, it is time to cut those cards, so that we can work within our budget to get the debt paid off.
5) Set saving goals
Let’s face it, living on a tight budget is not much fun, but if we have a specific goal in mind, it makes the task of saving a whole lot easier as we are then rewarded with our hard work. Whether we are saving to eliminate debt, or saving for that ultimate family vacation, it is important that we learn to earn it, and not borrow to have it. A budget is key to making this all happen. It is rewarding in itself to know that when we purchase an item or trip, there are no strings attached, that we do not owe anyone for it, that we did it all ourselves.
6) Plan Ahead
Outside of rewarding ourselves, it is also key to have a savings account dedicated to all of the ‘what ifs’ – an emergency fund. Like we pointed out earlier, none of us truly know what life has in store for us, and the best we can do is be prepared. It is important that everyone has a set amount of savings put aside for those bad days where the car breaks down, or a major appliance decides to quit, or we are taken away unexpectedly from work. Knowing we are covered for these incidents creates a piece of mind, and offers a sense of control over seemingly uncontrollable circumstances.
One other future planning item to be considered is retirement. None of us are getting any younger, and there will come a point in our lives when we are no longer willing, or able, to work. With longer life expectancies than ever before, we need to start working towards creating a safety net to get us through our remaining years.
Starting this process may be difficult, but nothing great is achieved without a little hard work. Once we get into the rhythm and routine of living our lives on a budget, things become a whole lot easier. We become less stressed when bills arrive and, in the long run, we will have prepared ourselves for a secure future that we can easily afford.
