Mistakes we make with our money

We all make mistakes with our money; we buy things on impulse and suffer the inevitable regret. We make investment decisions that are not profitable (short or long-term). Occasionally we over-spend and owe some bank or credit card company a little (or a lot) of interest.?

Look, the reality is we all make mistakes. It’s ok to make them because that’s how we grow as individuals. Remember the quote “what doesn’t kill us makes us stronger” - Friedrich Nietzsche. So, before you die a horrible financial death, let’s review some of the more common mistakes so you can become financially stronger.

?1. What budget? How many of you have a monthly budget? Do you know how much money comes in and goes out each month? You absolutely should. No excuses. It doesn’t matter how much you make. You make what you make. What matters is how you spend it. Your basic budget should first cover savings, shelter, transportation and food (and in that order). If you have any money left over then you can determine where to spend it.

Here are a few tips to help you budget:

1. Separate food cost into groceries (food at home including meal services - Hello Fresh), dining out (pizza delivery, restaurants, drinks, etc) and alcohol (at home). These 3 groups will certainly clear up where your funds are going.
2. Savings, in the budget, will be categorized into emergencies, mid and long-term savings. Read Section 3 below.
3. Break down broad expenses. For example, insurance relates to several categories. To simplify the numbers, separate your insurance premiums and include them in their related categories (ie. home/liability insurance in housing, car insurance with auto expenses and life/health insurance in medical expenses).
4. Last, but not least, determine a base level of savings and be sure to prioritize it in your budget. Pay yourself first!

2. To credit or not to credit? Given the sky-rocketing interest rates of 2022, this question has never been more appropriate. Nothing causes more stress than when your credit is out of control. What ever happened to saving your money? We are beaten up constantly with ads about this new thing or that new gadget. When are we supposed to use our credit? A credit card is supposed to help you manage your cash-flow, not drain it. If you can’t pay off your credit card bill at the end of the month then you have spent too much. Now that being said, there are emergencies that will pop-up from time to time (big expenses for the car or house) that may require the use of credit, however clothing, electronics, entertainment and other lifestyle expenses are not on that list.

3. Not saving your money??You’ve heard this from everybody including your parents - You have to save money. I had a former Sun Life colleague once explain saving to me this way (thanks Gopala!!). Every pay cheque you get has to pay two people – the one you are today and the one you will become tomorrow. Essentially, every pay cheque has to be divided. How much you save needs to be determined and constantly re-assessed.

Savings is a general concept that includes money put aside for short and long-term needs. So, what are the types of savings “buckets” you need. Emergency Savings for emergencies like job loss or income disruption due to health. These funds will cover only household expenses while you wait for your unemployment or disability benefits or your first pay cheque. Mid-term Savings fund future purchases or lifestyle expenses like clothing, appliances, electronics, and vacations. This means that you need to constantly accumulate money so that older things can be replaced, and you have places to go other than your backyard. Finally, Long-term Savings are associated with money that will be needed in 20 years or more. These funds usually incorporate retirement and education savings.

When we talk about savings, you can see that we are talking about a lot more than retirement. Savings can be used for everything (except for most car and home purchases but you should still have a good down-payment). Maybe it's time for you to re-consider what you use your savings for.

4. The “Big” House. How much house do we need to live in? The years of low interest rates were great and have allowed many Canadians to enter into their own homes. Now that rates have increased, is it time to re-assess the kind of home you will want to live in and for how long?

My advice to first-time buyers who are still looking – buy the house that you can see yourself living in for the rest of your life. Generally speaking, housing costs (mortgage, taxes, and fees) should not total more than 39% (GDS) of your gross monthly income. This leaves you an additional 5% (total TDS 44%) for all other debt including your car and unsecured credit (credit cards and lines of credit).

For those still interested in real estate investing, unfortunately there are new challenges that will need to be overcome. Higher interest rates will potentially drive mortgage payments higher than the competitive rental rate. This will definitely impose short-term cashflow issues. Perhaps, the 20% down-payment will not be sufficient and higher amounts will be required. Given the new real estate investment environment, financial planning becomes more important so that you are aware of all the complications before your sign for that mortgage and property.

An expensive real estate market coupled with the stress test and higher interest rates will certainly force many to re-evaluate their real estate purchases. A little financial planning and sacrifice will allow you to focus your efforts and money to get you into your home faster and with more cashflow. Nobody wants to be house-rich and cash-poor.

5. The “Right” Investment? If you got a gift of $5000, what would you do with it? Would you invest it or pay-off some debt? The correct answer is focus on what is costing you more. There is no point throwing the money into an investment that will generate a return that is less than the interest you are paying on your credit cards or lines of credit.

Here’s a simple example: You have a 20.99 % credit card carrying a $5000 balance. If you pay $100 towards that card every month, it will take you?10?years?to pay off your debt and you will pay?$6,972.81?in interest. If, however, you had paid off the credit card and saved the $100 monthly for those 10 years, with 5% rate of return, your investment would be worth over $15,500. Now that’s the “right” investment!

As a Certified Financial Planner, it's not my job to tell you how to spend your money. My job is to guide you to determine how best to spend your money. It’s your money. You work hard for it. There is no value in contributing to the profitability of our financial institutions. Contribute to your well-being and make the best decisions that you can make for you and your family. If you need any help getting started, I am certainly a DM away.