How financially savvy are you?

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Financial savvy tips


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Money Management

  Establish a budget

Establish a detailed budget listing all of your fixed monthly expenses (utilities, phone, internet, rent, mortgage, etc.); your flexible expenses (groceries, car repairs, gasoline, etc.); your credit card and/or loan payments; and your income. Then you’ll know exactly how much disposable income you have, and whether you have enough income to meet expenses. Your debt ratio shouldn’t be more than 36%.

If you have good money management habits, your kids probably will, too. That's what a survey by the investor relations firm T. Rowe Price, found. The study revealed that parents who have at least three savings accounts – such as a general savings account, an emergency reserve and a registered education savings plan, their children are more likely to have good money habits.

A 2015 study done for the Consumer Financial Protection Bureau in Washington, D.C. found parents play a critical role in instilling good financial habits in their children. Here’s the advice of report researcher Elizabeth Odders-White, an associate professor of finance at the University of Wisconsin-Madison: Don’t sit down with your kids and try to do complicated financial calculations with them. Simply talk about the decisions you’re already making. Tell them, “"We need to buy this, we want to buy that."

Parents have a critical role to play in their children's financial savvy. That's because kids aren't being taught enough about money smarts early enough in school. In our education system, financial literacy isn't even part of the curriculum in some provinces. In others, it's not taught in every grade. In some schools, financial literacy isn't part of the math curriculum until high school. So, start teaching your kids "money smarts" early, at home.

If you've never had a credit card, you probably don’t have a credit rating. That can make it difficult to buy a car, qualify for a mortgage, rent an apartment or condo, or get a loan. With all these things, a credit check is involved. If you're off the credit grid, you'll automatically be considered high risk … and you could be turned down.

Unless you need a separate credit card for business, have only one. Otherwise, it's easy to rack up credit card debt. Pay off the monthly balance in full, or pay down as much as you can each month.

Debt Management

  Debt consolidation

In Canada, 65.5% of household debt is mortgage debt; 29.4% is credit debt; and 5.1% is other loan debt. Have only one credit card, and pay it off in full each month, or as much as you can – not just the minimum payment. Try to make an annual lump-sum payment towards your mortgage, so you'll pay it down faster. And if you have multiple loans plus credit debt, consider a consolidation loan to reduce your monthly payments, and so you're only making one monthly debt payment

If your debt's overwhelming you, you may want to consult with a credit counsellor. He or she will go through your budget and all your income and expenses with you, and help you figure out the best way towards debt recovery. Declaring bankruptcy should be considered the last resort.

If you're living on a fixed or single income, it can be challenging to meet all of your monthly debt payments. That's when it’s important to focus on the most important ones first – your mortgage, for example. You need to make sure you keep that roof over your head, and your home is collateral. Think about transferring all your monthly debt to a single credit card with a low fixed interest rate. As well, consider talking with a credit counsellor.

Do you know your debt ratio? Make sure your monthly housing expenses aren't more than 32% of your gross monthly income. (Total housing expenses include mortgage payments, property taxes and heating expenses.) As well, your total monthly debt payments shouldn't be more than 40% of your gross monthly income. (Canada Mortgage and Housing Corporation)

If you're living on a fixed or single income, it can be challenging to meet all of your monthly debt payments. That’s when it's important to focus on the most important ones first – your mortgage, for example. You need to make sure you keep that roof over your head, and your home is collateral. You could think about transferring all your monthly debt to a single credit card with a low fixed interest rate. As well, think about talking with a credit counsellor.

Here are some guidelines for monthly debt management. Alot your paycheque this way: About 35% for mortgage or rent; 25% for daily living expenses; and 10% for savings. (Credit Counselling Canada)

Talk to any credit counsellor or financial planner, and both will tell you this: pay off your most expensive debt first. Often, that’s your highest-rate interest card if you have more than one.

Have a plan, or a roadmap. Figure out the debts that need to be paid off, and in what order. Usually, it's a good idea to pay off your highest-interest debts first. When you have a plan and stick to it, debt recovery will be a lot easier and faster.

Follow the adage, save early, save often. Aim to put 5% to 10% of every paycheque into your savings. Credit Counselling Canada advises shooting for that 10%.

Should you merge everything into a joint account, or keep your individual accounts? That's one of the key questions when you find that special someone and start living together, or get engaged and married. There are a couple of good reasons to open a joint account instead of having separate ones. First, everything's in one account. Both of you know your total financial resources and where the money’s going. Second, if anything happens to either of you, looking after estate finances will be a lot easier. You’ll have full access to the account. Read more about how joint accounts can make your financial life as a couple easier.

You can put more money in your savings account by making some lifestyle changes. Instead of buying a Tim Hortons every morning, for example, make a portable mug of coffee before you leave the house. A medium-size Tim Hortons coffee is $1.79. If you buy a cup of day, over the course of the year that adds up to $465.40. If you like to indulge in a Starbucks grande latte every work-day morning, you’re looking at $1,079 over the course of a year! It’s better to bank that amount for an emergency fund than drink it.

A good way to pay yourself first: Set up a weekly automatic transfer from your chequing account to your savings account. Transfer as much as you can afford in your budget. For example, transferring $75 weekly will deposit $300 a month ($3,900 a year) in your savings; $150 weekly means you're growing your savings by $600 a month or $7,800 a year!


  Mix it up

Remember not to use your credit card to pay for everything. Relying on a credit card – or more than one – can quickly rack up your credit card debt. For many smaller transactions, debit or cash is much more practical. Good spending management involves using a mix of cash, debit and credit wisely.

If you're spending more than your total income every month, you're going to have an unsustainable problem. The Canada Mortgage and Housing Corporation recommends that your total monthly spending (expenses plus elective spending) shouldn't be more than 40% of your gross income (before taxes and deductions).

If you need to cut your spending, make some lifestyle choices. For example, cutting out a $1.79 coffee five days a week will reduce your expenses – and increase your savings – by almost $300 a month, or $3,600 a year. Instead of buying coffee, make a cup of instant coffee in a portable mug at home before you leave for work.

Do you really need to spend $3,000 on a 4K, 70-inch television, or is it more of a want? Deciding on your needs versus your wants can help you manage your spending.

Don't go crazy with your hobbies. If, for example, you have a model railroad and have no more storage track space for locomotives or rolling stock, then it doesn't make sense to buy more just because there's a new one you’d like to have. If you're an amateur photographer, do you really need the latest full-frame DSLR?

Over time, leaving the lights on in rooms when you're not in them, can add up on your hydro bill. Open the curtains or drapes and let the sun shine in. Simply remembering to turn lights off can help you cut your spending on utilities.

If you have a lot of financial savvy, a good sense of how all the elements work together and you thrive on managing your own investments and financial interests, then you probably don't need a professional advisor. But if you're in the majority (like most people are) who don't manage their own investments, then there's a lot of value in consulting with a financial advisor. Research by Russel Investments, a money management firm, shows you can increase your returns 3.75 per cent through working with a professional financial advisor who follows best practices.

There are a lot of savings and investment options out there today for both short - and long-term savings. The most popular investment tool for this today is the tax-free savings account (TFSA). Check out this infographic for a snapshot of TFSAs, and read more about them. Although TFSAs are very popular, don't make a hasty decision about opening one. Make sure it’s the best option for you. Sit down with a professional financial advisor before you head to your financial institution to open a TFSA.

Investing wisely means having a plan. You need to have a clear idea of what your financial and lifestyle interests are, and then figure out how investing – and what kinds of investments – for both the present and the future will help you accomplish your goals. It's wise to sit down with a professional financial advisor, who can help you map things out and then determine what's best for you.

Do you know your investment risk comfort level? If you sit down with a financial advisor and talk about your situation, your needs and your interests, one of the first things he or she will do is walk you through an investment risk questionnaire. It will help you discover your risk level (low, moderate or high), and what kinds of investments are appropriate for your comfort level.


Build your financial savvy



How do you find the right advisor for you? For the most part, advisors rely on referrals to build their business. You'll want to find an advisor with whom you’ll be comfortable building a long-term, trusted relationship. Watch this video for more.


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