Does your financial plan look a lot like Cinderella before she met her fairy godmother. Frumpy, frizzy, washed out, washed up, and dressed in rags. If that about sums it up, you just might need a financial makeover. So while you’re getting set for the glitz and glam of another holiday party season, spare a few moments for poor Cinderella…and give her a makeover too. Here’s how.
1. Budget
It’s not a four-letter word. In fact, it’s six letters. And if you’re going to spruce up your finances, you’d better memorize them. I can almost hear the sighs and see the eyes rolling now. But believe it or not, budgeting isn’t that difficult. We’re not talking Miss Grundy looking over your shoulder, wagging her finger every time you fork out a couple of bucks for a latté. It’s more basic than that.
You probably know what you earn every month. Well, simply deduct what you spend from what you earn every month. If you come up with a negative number, you’re “over budget,” and you have a problem. If you have money left over, you’re on the right track.
Chances are very good that you fall into the “I have a problem” category. Let’s face it. Most people are lousy at budgeting. And most spend everything they earn, and then some. That’s when you have start paying more attention to where your money is going. So what’s stopping you? Find out! Simply record every expense – and I mean every single dime you spend – for a month. It won’t kill you, and believe me, it’s going to start solving a lot of problems for you.
2. Pay off your credit card, already!
This one is closely related to that six-letter word I just mentioned. We live in an instant-gratification, consumer-driven culture. And it’s great, isn’t it? You can get what you want – and get it now – with the tap of a plastic credit card or, increasingly, the beep of a smartphone. But all that tapping and beeping means you’re deferring payment. Remember, the key word in the term “credit card” is “credit” and not “card.”
When you pay using a credit card, you’re borrowing money and agreeing the repay according to the terms of the loan agreement you signed up for way back when. If you don’t pay in full when your monthly bill turns up, you get charged interest on the unpaid balance, somewhere between an 18% and 30% annual rate, compounded, of course. That’s like an extra $300 on every $1,000 you leave unpaid for a year.
Pay off that credit card debt first. And do it now!
3. Big savings!
Those big retail sales at this time of the year can be irresistible. But how about saving yourself? If you don’t start some kind of a savings plan, you’ll never have any investments, emergency fund, or retirement plan to speak of. So pay yourself first. Set aside a certain amount every month through an automatic withdrawal arrangement with your bank, so that funds get sent to a savings plan directly from your account each time you deposit your paycheque. That way, it feels like just another deduction from your paycheque.
Open a Tax-Free Savings Account or Registered Retirement Savings Plan. You don’t need to put in a lot. Start with small regular deposits and increase the amounts as you get your financial house in order. And as a bonus, both of these plans have great tax benefits.
4. Addicted to insurance
Canadians tend to be a heavily-insured bunch. We buy life, health, dental, major medical, critical illness, disability, long-term care, property, casualty, accident, travel, and auto insurance. If it’s insurable, chances are Canadians have insured it. And chances also are that we’ve bought way too much, or the wrong type, or unnecessary coverage.
And insurance coverage can be expensive. You might, for example have life insurance coverage through your employer, through organizations you belong to, a credit card perhaps, or coverage you’ve purchased yourself. Same goes for medical insurance.
So give yourself an insurance audit. Review what you’ve got, and what you’re paying in premiums. You could end up savings hundreds, even thousands, of dollars a year in insurance premiums by combining coverages, eliminating duplication, shopping for the best policies and rates, or simply cancelling what you don’t need.
This four-step financial makeover will get rid of your money frumps and frizzies for now. But to really get into the habit of good financial grooming, you need a top-to-bottom rethink. And that’s where it makes senses to consult an independent financial planner.
