Money management is one of the most important skills you can have in life, but Canadians receive surprisingly little practical money skills from either their parents or in school.
Essential skills like making a budget, investing, and knowing how credit cards work can transform your relationship with money. You can make progress on debt, start preparing for the future, and get spending under control.
Not knowing how to manage money can land you in a tight financial spot. There are many reasons people wind up in too much debt or come to Debt Help BC, but money management skills can help keep you out of debt and prepare for future financial challenges.
If you’re ready to change your relationship with your income and manage your money to your own benefit, these tips and tools are a great place to start.
1) Your Income vs. Expenses
When you ask someone how much they make every month, they generally know the answer. Even if your income varies based on shifts or tips, most people have a good estimate. What people are usually less familiar with is how much their monthly expenses are.
Go back across your credit card statements, debit transactions, and cash withdrawals for the past several months. Find out what how much you tend to spend each month, how much is on essentials, and how much you spend on “wants.”
2) Make a Budget
The first step to financial freedom is creating a manageable budget that helps you repay debts or start saving. Start with your after-tax income. Next, deduct fixed expenses like:
- Rent or mortgage payments,
- Car payments,
- Utilities, phone, internet,
- Debt payments.
What’s left of your income is how much you have to spend on changing expenses such as:
- Dining out,
- Personal hygiene.
Some of these will be “wants” and others are essentials. This is the first place to start cutting expenses. While you need to eat, you can switch to a budget grocery store and cut back on restaurants to find more savings.
If you earn an inconsistent income (such as a freelancer or a bartender), the best financial advice you can take is to budget for a bad week instead of an average one. That way a string of bad weeks won’t leave you in the lurch, and you can save or treat yourself on those good weeks.
3) Track Your Spending
One effective way to stay on budget is to record your expenses and spending throughout the day. There are apps you can use to make that tracking quick or automatic, but even keeping a notebook or a memo in your phone where you can quickly punch in your purchases will give you an up-to-date picture.
This way you can see whether you’re on track to meet your monthly budget before the month is over. That can make the difference between spending more money than you make and staying on track to get out of debt.
4) Pay Down Debt
Taking control of your finances is a lot harder when you’re in debt. Those payments can take a big chunk out of your monthly income. Debt payments make up 14.9% of the average household income in Canada, and 7.3% goes toward interest charges. That kind of money could get you started on your savings goals quickly.
Paying down debt is one of the hardest parts of money management. While debt like a mortgage helps you build equity, credit cards, personal loans, payday loans, and student loans can hold you back from reaching your financial dreams. If you’re heavily in debt, learn more about credit counselling and how it can help you manage your money.
Credit counselling can mean a couple of things. With us, credit counselling are sessions done alongside bankruptcy or a consumer proposal, regulated types of debt relief. During these sessions, we work with people on creating budgets and helping them manage their money. Other companies offer a form of credit counselling in which they negotiate non-binding agreements with creditors for relief from interest charges.
Talk to a licensed insolvency trustee about credit counselling in Victoria if you’re struggling with debt. We will help go through your options.
5) Give Yourself a Savings Goal
Savings help you make your dreams a reality. Whether it’s buying a house, travel, or making sure you can enjoy the quality of life you want when you retire, setting money aside each month is what makes it happen. Including savings in your budget is a good way to make sure it happens.
How much you should save each month varies. An aggressive savings plan puts 20% of your income away, although even starting with 5-10% is a good way to start. If there just isn’t much breathing room right now, the next time you get a raise, don’t change your living expenses, and save all of the new money. Slowly or quickly, your savings will multiply.
Keep in mind that in most cases you should pay debt first, and then start saving.
6) Prepare for an Emergency
One of your first savings goals should be preparing for an emergency. An emergency can be a surprise expense such as car or home repairs, a lay off, illness, or any other unexpected expense or loss of income. When you’re ready for an emergency with savings, you don’t have to go into debt to make ends meet.
7) Talk to a Financial Advisor About Investing
Once you’re out of debt and you start to build some savings, it’s time to make more out of that money. A financial advisor will ask you about your financial goals and timelines, then tell you about your options for investing.
The same way interest rates can make credit card debt ever-harder to get out of, earning interest or dividends on your money helps it grow beyond your personal ability to save.
Money management will make your life less stressful and help you reach your goals. Take a good, hard look at your finances, make a budget, track your spending, get out of debt, and start saving.