How to manage money and debt wiselyNov 22, 2016
November is Financial Literacy Month in Canada, and this year’s theme is Managing money and debt wisely. With rising household debt, recently increasing mortgage rates and many Canadians living paycheque to paycheque, this theme couldn’t be timelier or more topical. The Financial Consumer Agency of Canada (FCAC) has broken its topic down into five weekly themes, which we will take a closer look at below.
Start with a budget
When it comes to managing your money, budgeting is the best place to begin. A monthly budget allows you to track all your earnings and expenses, so you’ll know how much you make and how much you spend each month. Breaking your expenses down into categories will allow you to see where you might be able to reduce spending and direct some of that income toward paying off debt.
Live within your means
Once you’ve created your budget, using a spreadsheet, notepad or online budget calculator, you’ll then want to see whether you have a budget surplus or deficit at the end of the month. You should aim for a surplus, meaning that you spend less than you earn each month. If you have a deficit, you will need to make an effort to reduce spending, live within your means and avoid taking on debt.
Know your rights and responsibilities
When it comes to managing debt, knowing your rights can help you avoid unnecessary penalties or costs. It would be your responsibility to learn and obtain information about the rates, terms and penalties associated with all your debts. For instance, taking out a balance transfer on a credit card could reduce interest rates in the short term, but there might be consequences if you do not pay off the balance within a certain timeframe. It’s best to always read the fine print of any agreement before you take on a new loan or credit product.
Have a savings plan
Once you’ve got your budget set up and you’re living within your means, you’ll want to create a plan to increase your savings and manage debt. You could have multiple savings goals—saving for retirement, a child’s education, or building an emergency fund, for instance. Once you determine how much money to put toward each goal, it would be a good idea to open separate savings accounts for every individual savings goal.
Review your finances
Your financial situation is rarely static; things can change, often through no fault of your own. For instance, as we approach the end of the year, some people might receive a raise or an annual bonus, which can help them with their monthly budget. Conversely, rising hydro rates or grocery bills might force you to reallocate money toward these increased costs and reduce spending in other areas. That’s why it’s important to review your finances and update your budget on a regular basis to account for any changes in your income or expenses.
While Financial Literacy Month shines a spotlight on managing debt in November, these five steps are actions you can take any time of the year. For more information on this initiative, search for the hashtag #FLM2016 on Twitter or join the conversation with BDO using #LetsTalkDebt.