5 Simple Steps for Transforming Your Finances in 2015
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If you’re like most people, this is the time of year when you look forward to the future and set goals. And like most people, there’s a good chance you’re still paying off a few holiday bills.
The reality is that many of us simply aren’t handling our money very well. In fact, a recent poll conducted by Manulife Financial found about half of Canadians expect they’ll still have debt by the time they retire. That’s a pretty scary statistic!
The good news is that there are some simple steps you can take right now to help get your finances on track. They take some discipline to be sure, but your financial situation will be much healthier for it. And the sooner you take them, the better:
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Step 1 – Create a Budget
The word “budget” sounds so old fashioned, doesn’t it? You might even think it sounds a little scary – some secret code for “the end of fun as you know it.” But in order to turn your finances around, you have to know where you’re spending your money.
Create a spreadsheet or get out that old fashioned pen and paper and start writing down all your monthly expenses, from mortgage payments, to groceries, to childcare etc. and estimate what each of those items cost each month. It might take a few months to get your budget to accurately reflect your expenses, but keep at it.
And don’t forget a line for savings – because we’ll get to that later.
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Step 2 – Live on Cash
If you’re trying to get out of debt, living on cash is important for 2 reasons. First, when you have a set amount of cash in an envelope each month, it’s easier to track how much you’re spending – and you’re not going into debt while you do it.
You may be wondering, why not just use my debit card? That’s the same as cash, right? Wrong! While it’s true that using your debit card doesn’t cause you to go into debt, it does cause you to spend more than you would with cash.
That’s because psychologically it’s more difficult for people to part with actual money than it is for them to use a plastic card. A study by Dun & Bradstreet found that on average, people spend 12-18% more when they use a card.
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Step 3 – Pay Down Debt
There’s no way around it. If you’ve got debt, you need to start to eliminate it. And the sooner the better. Otherwise, you’re just throwing out money in interest payments. Imagine all the fun things you could add to your budget if you didn’t have debt!
Start making more than the minimum payment – as much as you can while still paying for expenses and putting a little away for a rainy day.
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Step 4 – Create an Emergency Fund
Seeing your level of debt drop can give you a great feeling of accomplishment. But what happens when you have a major issue with the car? Or the basement gets flooded? All of a sudden, you have a big bill and no way to pay for it except to put in on the credit card – once again putting you further in debt.
You can avoid this frustration by having an emergency fund in place. Figure out how much you can afford to put away each month, and start saving money in a separate account. Set goals with yourself. Build your emergency fund up to $500, and then to $1,000 and eventually try to get it between 3 and 6 months’ worth of expenses.
It’s amazing how much calmer your emergency will feel when you have the finances to deal with it!
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Step 5 – Create a Retirement Fund
It is said that the best time to start saving for retirement is yesterday. The second best time is now. If you have a plan that you can invest in through your employer, call your HR person and enroll immediately – especially if your employer offers any kind of matching incentives.
If your employer doesn’t offer a plan, then you will have to invest on your own. Factors such as risk tolerance and how much time you have before retirement will determine what type of investment vehicles you use. How much money you earn (your tax bracket) and your contribution room will help determine what vehicles you use (eg. RRSP, TFSA etc.). A licensed financial advisor from a reputable institution can help you make these choices.
Getting out of debt and saving for retirement takes work and it’s definitely not easy. But having peace of mind in knowing that you can enjoy a comfortable retirement is well worth the effort.