1. Create a Spending Plan & Budget
If you are spending more than you earn, you will never get ahead—in fact, it’s a sure sign that your finances are headed for trouble. The best way to make sure that your income is greater than your expenses is to track your expenses for a month or two and then create a budget. It can be a very simple budget, but you should have one.
2. Pay Off Debt and Stay Out of Debt
One of the best things you can do for your finances is to pay off all of your debt. To get started, focus on your most expensive debt—the credit cards and loans that charge you the highest interest. Once you have paid off all of these debts, focus on paying off your mortgage. For your mortgage, consider splitting your monthly payment in half and paying bi-weekly. Then pay extra as you can afford it. This will shave years off your mortgage and save you tens of thousands of dollars in interest.
Saving money for your future is crucial. If you don’t set savings goals and steadily work towards them, you will have to rely on credit when times get tough. You might even need to work through your retirement years to supplement your small government pension. Entering retirement may also be delayed or impossible if you are in debt because you need enough money to make all of your payments.
- Start saving on a regular basis using a Tax Free Savings Account (TFSA) or an RRSP, or both
- Plan for your retirement. Figure out how much money you will need to retire comfortably, and then start saving. This money also makes a great rainy day fund if you lose your job or suffer another unexpected financial setback.
- Make sure you have enough insurance. Accidents happen. 1 in 4 people are hurt on the job. Natural disasters can easily cause thousands of dollars in damage to your home. Make sure you have enough insurance for the place you live and the lifestyle you lead.
- Write a will and decide who will get your assets and/or take care of your children when you die. This lets you decide who benefits from all of your hard work.
4. Start Saving Early – But It’s Never Too Late to Start
Due to the magic of compounded interest, even when the rates are low, someone who starts to save for their retirement early doesn’t have to save as much as someone who starts saving later in life.
If two people decide to save for retirement, but one starts at 21 and the other at 31, the 21 year old can save $100 per month until they are 65 and accumulate $253,000 for their retirement (assuming a 6% annual rate of return). The person who starts at 31 on the other hand, will have to save $190 per month to have the same amount by age 65.
So the second person would have to pay almost twice as much per month to make up for waiting 10 years. It’s never too late to begin saving, but the sooner you start, the better off you will be.
Many people will do more research before buying a TV than they will before purchasing an investment or buying a home. Make sure that you’re not one of them. Buying a home and saving for retirement are two of the biggest financial decisions most people will ever make.
6. Sleep On It – Don’t Be Hasty With Big Financial Decisions
There are no major financial decisions or major purchases that need to be made on the spot. In fact, being pressured into making a hasty financial decision is one of the warning signs that the deal might not be as good as it seems.
All worthwhile opportunities will be there another day if you are patient. It is better to wait and learn a cheap lesson, then hastily rush into something and learn an expensive lesson.
When you take the time to sleep on big decisions you have time to consider alternatives, evaluate whether you really need to do this, and probably get some other opinions or information. These are wise things to do every time you make a big decision—but especially financial decisions.
7. Know your credit score
Lenders and creditors can tell a lot about a person from their credit score. But what goes into that number? Here are the five factors that affect it.
- payment history, outstanding debt, credit account history, recent inquiries and types of credit.
Payment history simply tracks whether you make your payments on time. If you’re late paying your bills, your rating could take a hit. Usually, a company will report a late payment to the credit bureau if it’s more than 30-days late.
Having too much debt is another thing lenders look for. Lenders want to know whether your outstanding debt—credit cards, mortgages, lines of credit, etc.—exceeds your ability to pay it off.
How much debt is too much? You should try to limit the amount of debt you owe to no more than half of your credit limit. In other words, if you have two credit cards with $5,000 limits, and a $10,000 line of credit, you don’t want owe more than $10,000 between the three of these debt products. Aim for balances under 30%.
Credit history looks at how you’ve paid off loans in the past. You’ll get a better score if you’ve been using, and paying off, the same credit card for 10 years versus one you’ve had for only a few months. That is why it’s cautioned against cancelling cards, especially old ones. If you close an account, that credit history gets wiped out.
While you can check your own credit as many times as you’d like, others can only check your rating twice in 12 a month period before that info turns up on your credit rating. “Applying for a loan at five different places shows that a person is having trouble getting credit and may not be financial stable. “What happens if they all say yes and now all the sudden you have five times the credit then you did before? There’s a real risk you won’t be able to handle it.”
Lastly, lenders want to know what type of credit you have. They want to see that you can handle more forms of credit than a simple credit card will give you. Having a mortgage, a car loan and a line of credit, in addition to a credit card, will help your rating.
What’s the right score?
A perfect credit score is 900, but the average score for Canadians is around 700, which is still a good number. Anything under 620 could affect your ability to secure a loan.
If you do have a low score it doesn’t mean you’ll never be able to borrow again. Some places will lend you money, albeit at higher interest rates.
It’s not always about the score. Each institution has its own scoring model, which a lot of people don’t realize.
Don’t wait for an ad to tell you to check your credit score. Pay attention to it, make sure it’s good and try to fix it if it’s not. You need to check your credit. Especially if you have a big purchase coming up.
Want to find out your credit score? There are two credit reporting agencies that can provide this information: Equifax Canada and TransUnion. For a fee you can get your credit report instantly from one of these two companies. (Equifax charges $24.95 while TransUnion charges $14.95 for its instant credit reports.) You will need your social insurance number, driver’s license and other identifying information to fill in the online form.
These companies will also give you your credit report for free, but you have to print off a form and mail it in.