Michael Lawrence, CFP®, CIM®
Many Canadians find today's rising cost of living difficult to manage. If you're on a fixed income, or haven't been able to increase your income, you're probably noticing that the value of a dollar isn't what it used to be. Everything costs more these days, and there is less money available at the end of every month for saving or discretionary spending. Without an increase in income, or a decrease in spending, many Canadians may feel like they've hit the limit for monthly spending long before the end of the month.
Focus on the things you can control
My grandmother used to say, "worrying is like a rocking chair, it gives you something to do, but it sure doesn't get you anywhere." She also used to say that worrying was the reason her friends all had grey hair and she didn’t. Her message was simple: focus on things you can control. Rising interest rates, record high inflation, the ongoing conflict in Europe, and a global pandemic are all topics that gather a lot of media attention. But those topics are beyond your control and focusing on them provides you with no additional influence over the situation.
Instead, focus on the things you can control, like making changes to your personal finances that will allow you to mitigate the impact of today's financial environment. This can include strategies such as paying yourself first, contributing to your TFSA or RRSP, and saving income tax where possible.
Outlined below are five steps to help you tackle rising expenses and stay on track with your long-term goals.
Understand where your money goes
You may be like many other Canadians and have a general idea of how much you spend each month. If it has never been a problem in the past, you may have very little interest in tracking your monthly expenses.
This strategy may work during times of financial ease but is less than optimal during more challenging times. An easy place to start is to identify how much you're spending on wants rather than needs. A 'want' refers to discretionary spending, such as eating out in restaurants or going to the movies. On the other hand, a 'need' is an essential expense that supports the necessities of life, such as utility bills and mortgage or rent payments. There is nothing wrong with spending money on the things you want, but if you need to reign in your spending, these items are typically the first to address.
Review your debt for savings opportunities
Not all debt is created equally. If you're carrying debt, you should review the terms of the agreement and explore any options you may have to reduce the balance. This could mean increasing your monthly payments, which in turn can reduce the amount of interest you pay in total. Another option to consider is consolidating multiple debts into a single debt. Consolidation is a strategy used to combine your high interest debt, such as credit cards, into a lower interest rate option, such as a home equity line of credit.
Establish a rainy-day fund
If the last three years have taught us anything, its that life is unpredictable. Therefore, it’s always a great idea to have some cash set aside for those unpredictable expenses. This is commonly referred to as an emergency fund, and we typically recommended that you have three to six months' worth of expenses available in an account designed solely for the purpose of covering unexpected costs.
Take advantage of compound interest
According to Albert Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.” Compound interest can be thought of as interest on interest and increases exponentially over time.
As an example, assume you have $10,000 in an account that pays 5% annual interest. In the first year, you earn 5% of $10,000, which is $500 interest. That $500 gets added to your account, and in the second year, you earn 5% of $10,500, which is $525. In year three, the interest has grown to $551.25, and the process continues. Start investing early and commit to a disciplined investment strategy in order to maximize the value of compound investment growth.
Plan for the long-term
With breaking news and the latest fads constantly available at our fingertips, it's easy to get caught up in the here and now. However, thinking long-term can raise important questions, such as:
- When can I retire and how much money will I need?
- How much will tuition be when my kids or grandkids go to post-secondary school?
- When should I start taking my Canada Pension Plan (CPP) retirement benefits?
- How much should I dedicate to my investments to make sure I reach my goals?
- Should I contribute to my RRSP, TFSA, or perhaps some combination of both?
Planning for the long-term doesn’t have to have so many question marks. With the right guidance, you can get through many of life's challenges and feel confident in your journey.
Call to Action
Ask your Edward Jones advisor to create or review your budget with you. You may be surprised to learn about how much you spend on certain items, which in turn may highlight opportunities to optimize your cash flow. Remember, budgeting isn't about doing less, it's about doing the most you can with what you have.