If you are in the same financial spot year after year, struggling to make ends meet, consider these tips to help you save better, invest better and feel better about your finances.
Know where your money goes
Make sure you have a budget, and not just in your head. Write it down, review it, and revise it every three to six months to make sure you stay on track.
Pay yourself first
Before you pay Bell, Rogers, your car note, insurance, or anything else, commit to putting 10% of your annual income into your pocket.
Understand the Investment Rule of 72
This simple equation will tell you how long it will take you to double your money at a fixed interest rate and help you decide whether you should leave your money in a savings account or make investments. To use the rule of 72, divide 72 by the interest rate you are getting; the result is the number of years it would take to double your money. For example, at a 2% interest rate, it would take 36 years for your money to double. Once you have that number, you can decide if you want to wait that long for that return on investment.
Think about where you put your money
Though you may think your money is ‘safe’ in a savings account, what you’re not considering is inflation, which at a rate of 2% eats away at your money. You should also account for the taxes you have to pay on the interest you make. Most people don’t realize they are taxed at their highest rate for money saved in a bank account – 1.50% inflation @ 2%. When you must pay taxes, you are losing!
Don’t wait until tax season to think about taxes
If you’re not thinking about taxes all year around, you are missing out on huge savings opportunities. Worrying about taxes in February is the Tax Time Bomb. This is something you should be doing all year around to get the necessary deductions to lower your taxes.
Give yourself a raise
The T1213 form reduces taxes at the source. That means fewer taxes are taken off your paycheque. Your tax rate can be reduced if you have one of the following:
- RRSP (outside of your company’s plan)
- Childcare Expenses
- Support Payments
- Employment Expenses
- Carrying Charges on Investment loans
- Medical Expenses
Get a TFSA – Tax Free Savings Account
A TFSA will allow you to avoid paying taxes on any gains. However, this account should not be used to park your money. To get benefits out of this account, it has to be used for investments. That is going to allow your money to grow substantially, so you don’t have to pay taxes on it.
Do the math on your credit card and line of credit debt
Remember that Rule of 72? Let’s add debt to the title and flip it. Use Debt Rule of 72 for credit cards and lines of credit. Your debt will DOUBLE with interest-only payments. For example, if you have a balance of $5000 @ 18% interest and you’re ONLY paying the interest, your balance will double within 4 years to $10 000.
Don’t ignore your credit score
You have to know your credit score; you don’t want any surprises when you go to buy a home or car. Credit scores range between 300 – 900, and the average Canadian’s score is 680 – 780. To access loans and other forms of credit, a score of 650 or higher is ideal. You can find out your credit score through Equifax or Credit Karma.
Stay away from assets that depreciate on purchase
Why buy a new car? As you drive it off the lot, its value plummets immediately. Now you have the average carrying costs of a new car for years to come: $500 + $450 gas + $120 insurance = $1070 EVERY month! Buying a used car with lower monthly payments, maintenance, and insurance is a more financially-wise option.
Understand the expense of your furry friends
Don’t let the love of your pet cause you to miscalculate the cost of taking good care of them. The average cost of petcare is $2700 per year or $225 a month. If you still want to incur the cost, think about getting pet insurance to offset the vet bills.
Don’t walk away from Mutual Funds--run!
- High Fees
- Management gets paid regardless of earnings or losses
- Average return is 3-4%
There are other investments that will give you safety and growth without the high fees.
Your finances don’t have to be a daunting task. Even if you implement just half of these tips, you will be one step ahead of the game. As you change your habits, it will become routine for you to think about finances in a way that lets you take control of your money and make it work for you!
Ian Webster's nearly two decades of recognized experience at several well-known financial organizations has given him the inside track on the upsell of products such as mortgages and mutual funds and allowed him to help clients with everything from lowering their taxes to developing profitable investment portfolios.
His expertise has been featured in The Globe and Mail, Toronto Star, Toronto Sun, and Time. He has also been a featured financial speaker at many high-profile networking functions.
Find Ian online at www.financialfighter.com and on Twitter, Facebook, Linkedin, and Instagram.