The world is ringing with news of inflation, recession, debt crises, market crashes, difficulty in paying mortgage and more. Unfortunately, we’re noticing similar trends across the country too. The founder of Magna, Frank Stronach, warned that Canada is “fairly close” to a public debt crisis. A poll held recently showed that the individual consumer debt in Alberta was more than $25,000 in the first quarter of 2022. What’s more, 18% of homeowners were already at a stage where they couldn’t afford their homes. Another survey by Manulife revealed that “more than one in five Canadians expect rising interest rates to have a ‘significant negative impact’ on their overall mortgage, debt and financial situation. In addition, 50% of Canadians said that they would struggle to handle any surprise expenses, while nearly half of those surveyed said that their debt is impacting their mental health.
While all of this may seem alarming, there is a way to get control of your finances and pave the way to financial well-being. It includes taking stock of your situation, reducing your debt, and setting a budget. To help you do just that, here are some helpful tips.
Identify financial goals:
When you fail to plan, you plan to fail. This is especially true regarding your finances. The first thing you need to do before you plan is set your goals. These could be as simple as having a certain amount saved up to reduce (or eliminate) your debt, or larger goals such as buying a house or car or pursuing higher education. If you’re new to financial planning, it can seem overwhelming. It may make sense to focus on one simple goal and expand from there.
Setting (and following) a budget:
Once you have your financial goals in place, you can then design a budget that suits your specific requirements. You can choose to set a weekly budget, a monthly budget, or an annual budget. The best approach is to have a broad annual budget and a highly detailed monthly budget. To set your budget, you first need to list all your sources of income. This list should include your salary or your average business earnings, any passive income you earn from assets such as real estate and returns on your investments. Once you have your consolidated income, it’s time to list your expenses.
Your expense list must first include all necessary items that you simply cannot avoid such as living expenses (rent, utility payments, groceries), expenses related to family such as children or the elderly, etc. Next, you need to list all your unnecessary expenses such as travel, entertainment, shopping, dining out, and gifts for loved ones – any expenses that are nice to have but you can do without. Make sure to include as many expenses as you can think of, including that daily cup of joe from the cafe down the street! Finally, you should list all your debt repayment. Debt repayment would include your mortgage payments, credit card bills, and any other loans and lines of credit that you need to repay.
While listing all your income and expenses can be overwhelming, don’t worry. This list is just to give you a clear idea of your finances, so you can take stock of your situation and set a budget accordingly.
Now that you have everything listed, you can proceed to set a budget. Take your total income and subtract your total expenses to understand how much you will have left over to put back into savings or investments. You may find that your expenses are more than your income. That’s where your list of unnecessary expenses comes in handy, to strike off things you don’t really need. A sure path toward financial well-being is to live below your means. That means you spend less than you earn. So, your budget should try to aim to make this a reality.
While setting a budget, a great rule of thumb to follow is the 50-30-20 rule. What exactly is the 50-30-20 rule? It means using 50% of your income to pay for necessary expenses, 30% of your income to be used as spending money, and 20% to be saved, invested, or used to repay your debt. Of course, you can tweak the ratio of spending vs saving, but your savings should not fall before the 20% mark. Your savings and debt repayments will help you get closer to your financial goals.
Remember, your budget is not meant to be severe. It should allow for occasional indulgences while helping you to meet your financial goals. Need more help setting your budget? Talk to our financial advisors today!
Reducing and eliminating debt:
If this isn’t a part of your financial goals, it should be. Debt adds stress to your financial situation, and if it keeps piling up, it is sure to affect your mental health as well. If you’d like to reduce or eliminate your debt, here are a few ways to do it. To begin with, you need to list all your debt. (If you have already done so while creating your budget, then the job is half done!) Once you have all your debt charted out, examine each type of debt: your mortgage, credit card, or any other loan or line of credit.
Next, check if you can swap your existing option with one that is more favourable. For example, if you have a mortgage with a high interest rate, you can think about refinancing your mortgage. Or, if you have a credit card that comes with hefty annual charges, you can switch to another card that offers lower interest rates or reduced annual fees.
You could also take out a debt consolidation loan that combines your debt into one large loan. It’s especially beneficial if your debt payments have many different due dates (making it easy to miss paying) and interest rates (that means you’re paying more in interest overall across the board). Having one loan to focus on also has an important psychological benefit if looking at all of loans is overwhelming.
Now, if you don’t want to change your debt through mortgage refinancing, a debt consolidation loan, or switching credit cards, what should you do? After examining the different types of debt, chalk out a plan to repay your debt as soon as possible. This could be by doubling up on payments by changing your payment frequency or using your savings to pay off a lump sum amount. If you don’t have enough savings, you can look at different ways to cut your expenses so you can pay off your debt faster, choosing to indulge yourself after you are debt-free. Also, make sure to set an automated payment schedule or set reminders so you can avoid penalties for late payments. Remember, debt reduction and elimination are a marathon not a sprint, so be patient with and kind to yourself. Need some assistance on managing your debt, refinancing a mortgage, or consolidating your debt? Speak to our financial experts today!
There you have it! Once you:
- have your financial goals in place,
- get a clear view of your financial situation,
- set a budget that is easy to follow and that works for you, and
- focus on reducing (or eliminating your debt),
you’ll be able to feel more in control of your finances and get started towards achieving financial well-being. Of course, if you need any help, please contact us to get the financial guidance and resources you require.