Money 101: how to get back to basics

Inflation, interest rates—food, home, and gas prices.

It probably comes as no surprise to find out these are among the top financial concerns currently facing Canadians.

In fact, according to a recent study conducted by FP Canada, money is the leading source of stress for 44% of the country.

The weight of that stress can fluctuate depending on a series of factors—including how early you are in your career, where you are on the pay grid or what your pension income is in retirement. And while you may never be able to fully escape feeling some level of pressure where your finances are concerned (well, apart from winning the lotto or receiving a sizeable inheritance), there are certain things you can do to help ease that stress.

Getting back to basics is a good place to start—beginning with your budget.

Having a budget in place is the most effective way to manage your day-to-day finances, because unlike inflation or interest rates, it’s something you can actually control. However, although you might be familiar with the basic premise of a budget, being able to successfully stick to one may ultimately depend on the type of budget you put into practice.

For instance, there is the ‘50-30-20’ approach.

This type of budget is based on separating your monthly income into three main categories:

• NEEDS (50%): which involves allocating half of your overall budget to essential expenses
  (i.e. mortgage/rent, utilities, food) and minimum debt payments
• WANTS (30%): these are the nice-to-haves, such as eating out and online/in-store shopping—basically any type of purchase you could live without (if budget cuts were needed to be made)
• SAVINGS (20%): this category is important if you’re looking to realize any future goals, like one day having enough of a down payment to buy a house or for building up an emergency fund

Naturally, you can fine-tune this budget approach to suit your specific financial situation.

For instance, if you find that you’re regularly spending only 40% of your take home pay on the ‘needs’ category, you could then decide to increase your savings contributions to 30%. And maybe your ‘wants’ require a bigger portion of your budget during July and August. In which case, temporarily dialing back on savings over summer break would enable you to have more cash flow to draw from (without having to rely on credit to make up the difference).

If you’re all about maximizing every dollar, then you might prefer the zero-based budget strategy.

This is where you create an itemized spending list—literally capturing anything and everything.

Once that list is complete, assign a dollar amount (or percentage) to each of those items, so that by the end, your monthly net income minus spending/expenses equals zero.

While this approach is more time consuming to create, it can also be a very effective budgeting tool in that it provides you with ultimate visibility into where your money is going. This could help you to become more disciplined where your monthly spending is concerned—especially if you find sticking to a budget somewhat challenging.

For those of you serious about realizing financial goals, you may want to adopt the savings-first approach.

Also known as the ‘pay yourself first’ budget, this strategy still factors in all of your regular needs, while cutting out most (or perhaps even all) of your wants in order to prioritize savings goals. Since the savings-first budget involves only two categories, it also tends to require less effort to create. However, like any type of budget, its success will entirely depend on the level of commitment you’re willing to make.

Create your budget in a matter of minutes using our Budget Calculator.

In addition to having a budget in place, you’ll also want to stay on top of your credit/debt situation.

One of the key ways to do this is to access your credit report (the summary of your borrowing history). Since this report can influence both your credit score and rating (which then impacts your overall borrowing power), you should get into the habit of checking your credit report once a year.

This is especially essential prior to applying for a mortgage.

Checking into your credit report will ensure all the information contained within it is accurate and that you haven’t become the victim of fraud.

It’s also important to fully understand the pros and cons when it comes to your credit options:

Being aware of the types of debt you take on (or currently have) will provide you with the capacity to develop a strategy to pay it off.

If you’re looking to pay that debt off sooner rather than later:

• Make more than the minimum monthly payment (whenever possible)
• Pay off debt with the highest interest rate first
• Consider lowering the limit on credit cards
• Set spending limits or pay with cash
• Get a consolidation loan

Need help getting back to basics when it comes to your finances? Reach out to us.

No matter where you are on the pay grid or what your pension income is in retirement, our educator-specific approach means you’ll be able to stress less about your money so you can focus more on achieving your financial dreams and goals.

Let’s get started

https://www.fpcanada.ca/2024-financial-stress-index