Money & Career

How to get a fresh start on your finances

Author: Canadian Living

Money & Career

How to get a fresh start on your finances

Budgeting
Set up a budget. "A lot of people see a budget as something they are tied to; that’s going to restrict their spending. It’s not that way at all. It’s a tool to help you make decisions," explains Lynn Biscott, president of Fernwood Consulting Group Inc., a financial education and communications company in Toronto. First determine your monthly net income. Then figure out your expenses. Determine how much you'd like to put aside for savings (RRSP contributions), and create a budget template with appropriate categories.

Track your expenses. Use financial software, such as Quicken, or free online budget templates to track your spending. Get a receipt when you pay cash for an item, so you can track it. Enter your expenses weekly so you can see when you are getting close to your limit.

Take it to the next level
. Do you have a specific goal you want to reach, such as taking a vacation? Determine how much money you need, and work it into your budget as a savings item, creating a realistic time line for the goal. Tip: Putting aside just $20 a week will add up to $1,040 in a year.

Savings Strategies
Build an emergency fund. This isn't only for big contingencies, such as job loss, but it's also for unexpected expenses, such as a car repair. Try to accumulate three to six months of living expenses, Biscott advises, and put your money in a premium savings account that pays higher interest rates. ING Direct and President's Choice Financial are both currently at three per cent.

Increase your savings. Open a savings account and deposit your paycheque there. Transfer what you need to live on to your chequing account and leave the rest in the savings account, where it will earn higher interest. When you get a raise or a larger paycheque, keep the extra in the savings account.

Use the right account
. Use a chequing account for day-to-day transactions and a savings account for savings. A savings account pays a higher rate of interest, and while some allow you to write cheques, they generally charge high fees to do so.

Minimize ABM fees. Banks typically charge $1.50 per transaction at the bank machine. Minimize your ABM fees by purchasing a monthly service package ($4 to $25) that includes either a set number, or an unlimited amount, of transactions. The Financial Consumer Agency of Canada has an online Banking Package Selection Tool where you can find the best package for you. Some packages will waive the fees if you keep a minimum balance in your account. If you're paying for transactions, take advantage of retailers – such as Wal-Mart and Loblaws – that offer cashback upon purchase, so you can reduce your trips to the ABM. Also avoid using other institutions' ABMs because the cost per transaction can jump to $3.


Page 1 of 4 – Learn how to increase your savings on page 2.
Claim unclaimed money. There are about 938,000 unclaimed balances worth a total of $320 million in Canada today. When money sits dormant in an account for 10 years, it is sent to the Bank of Canada, where it's held for another 30 years if the balance is under $1,000 and for 100 years if it's over $1,000. To see if you have unclaimed money, go to the Bank of Canada website, select the Services menu and click on Unclaimed Balances, or call 1-888- 891-6398. If you have money, there will be forms to fill out before you receive it.

Think long term. Contribute your maximum to an RRSP or employer-based retirement plan. Your money will compound and grow, building up your retirement savings, and you don't have to pay tax on it until you start taking it out. If you were to contribute $1,000 a year at rate of six per cent interest a year for 20 years to an RRSP, you’d end up with $42,199.86.

Credit
Check your credit rating. Banks and lenders use this rating to evaluate your credit worthiness. Contact a credit bureau (such as Equifax) to find out your credit rating. You can get your credit report mailed to you for free or get it immediately online for a small fee. If you believe your rating is inaccurate, request an adjustment and the credit bureau will investigate your claim.

Establish your own credit. Even if you're married, each spouse should have a credit card in his or her own name to establish a credit history, Biscott advises. Divide responsibility for the utility bills for the same reason.

Switch to a low-rate credit card
. Change from a credit card with a high interest rate of 19 per cent to one with a low interest rate of 12 per cent. Even if the low-interest card charges an annual fee, it’s still worth it. "If you're someone who never carries a balance, then get an Aeroplan card or one that will save you on gas or groceries, but if you carry a balance, even a few times a year, choose a lower-interest credit card," advises Pat Foran, author of The Smart Canadian's Guide to Saving Money (John Wiley and Sons, 2008, $26.99).

Renegotiate your credit card interest rate
. Go to Bankrate.ca to compare different Canadian credit cards. Then contact your credit card company to negotiate a lower interest rate. You'll be in a better position if you have a good credit rating (FICO score).

"If you miss paying your credit card bill for two or three months, that throws up a red flag on your credit rating," Foran warns. And would the company waive the annual fee? Some may, some may not. "It never hurts to ask," Foran says.

Pay down credit card debt
. Transfer your credit card balance to a card with lower interest. You'll immediately put yourself in a better position. For example, if you're carrying $2,000 on an 18 per cent card, you'll rack up $360 in annual interest fees. But if you transfer the $2,000 to an 11 per cent card, you'll only incur $220 in annual interest charges. Then start chipping away at your debt. Tip: Beware of cards with zero per cent introductory offers, because that rate usually expires after a short time to be replaced with a much higher one.


Page 2 of 4 – Get information on how taxes and insurance can affect your money earned on page 3.
Taxes
Do your own taxes. File your own taxes if you have a straightforward tax situation. "It's not that difficult to do, and it gives you control of the process," Biscott says. Plus, you'll save on the accountant's fee. It's easy to file on your own with tax software, such as QuickTax, which walks you through the process. To help you maximize your savings, the Canada Revenue Agency has an A to Z menu of topics online.

Give to a charity. Not only will it help to make a difference in the world, but contributing to a registered charity will also earn you a tax credit. Make sure to get an official tax receipt. The Canadian Book of Charities allows you to search for information about a charity and donate directly online.

Insurance
Buy life insurance to protect your children. "Work out the level of income you need to replace and how much capital you need to invest to produce that income," Biscott explains. Often you need a policy worth seven times your gross annual income.

Determine the best type of coverage for you. Generally speaking, there are two different types of life insurance: term and permanent (whole life). With term, you purchase insurance for a set period of time – five, 10 or 20 years, or 100 in the case of term to 100. It's less expensive initially, but premiums increase as you get older. Also, there’s no investment component; you pay only for the cost of the benefit. With permanent, you pay in every month and your premiums never change. It's more expensive, but you can cash in your policy for the money that you accumulate. So what's right for you?

"It really depends on your situation, but, for many people, term insurance is often enough," Foran says. Be wary of insurance policies with low monthly premiums and no medical exams, though. "These really only pay out enough to bury you," he adds.

Reduce your disability premiums
. If you work for a company, you likely already have disability insurance, but if you're self-employed, you'll need to purchase it. Reduce your monthly premiums by choosing a longer waiting period before the insurance kicks in. "Instead of having it start one month after you become disabled, choose to have it start three or six months after, and prepare to self-insure for that initial period," Biscott recommends.

Get car insurance tailored to your needs. Some insurance companies will be more receptive to your particular situation (the car you drive, your driving record, your location) than others. Visit the Insurance Hotline.com to compare auto insurance quotes. Foran advises against making a claim unless absolutely necessary. "If you file a claim and then get a speeding ticket, you can actually be denied coverage by your insurance company," he says. Other recommendations to minimize your rates include keeping your insurance active, taking only necessary coverage and fighting every ticket.


Page 3 of 4 – Find out bad money habits that you should break on page 4.
Your mortgage
Choose biweekly payments. Ask for biweekly payments rather than monthly payments. With more frequent payments, you’ll save thousands in interest. Take, for example, a $100,000 mortgage with a 25-year amortization and a seven per cent interest rate. Making biweekly payments, you'll pay $188,596 in total. In contrast, when you make monthly payments, you'll pay $212,038. The biweekly option saves you $23,442. Alternately, consider shortening your amortization to 20 or 15 years. Yes, your payments will be larger, but the good news is you'll save thousands in interest.

Make a lump sum payment. When you negotiate your mortgage with your bank, make sure lump sum payments will be applied to the principal, says Biscott, because they aren't in all cases. Then, when possible, use a tax refund or a work bonus to make a lump sum payment. Check your mortgage documents to find out how often and how much you're allowed to pay down.

Renegotiate your mortgage at renewal time. When your mortgage comes up for renewal, don't accept the first rate you’re offered from the bank. Check around and get quotes from other banks and lenders, then renegotiate with your bank.

5 bad money habits to kick:
• Spending without a budget. Without a budget, you don't know how much to set aside to cover your fixed costs, so you may overspend and find yourself in a pinch.

• Cash advances on your credit card.
Unlike making a purchase on your credit card, when you take out a cash advance, you start paying interest right away.

• Payday loans. Payday loan services use your paycheque as collateral to allow you to borrow money for short periods (two weeks) at astronomical interest rates –between 300 and 900 per cent (or more), according to advocacy group ACORN Canada (Association of Community Organizations for Reform Now). This traps most customers into a cycle of debt they can't pay off.

• Getting an additional credit card when your first is at the limit. If you've maxed out your credit card and can't pay it off, call a credit counsellor such as CreditCounsellingCanada.ca for help rather than get yourself deeper in debt with another card.

• Treating your mortgage as a pot of money. Sometimes it makes sense to refinance your mortgage if it's a cheaper way to borrow money than a line of credit. However, Lynn Biscott, president of Fernwood Consulting Group Inc., a financial education and communications company based in Toronto, warns against frequently taking out cash. You can easily rack up more debt than you can handle and you will delay getting your mortgage paid off.


This story was originally titled "Get a Fresh Start on Your Finances" in the February 2009 issue. Subscribe to Canadian Living today and never miss an issue!


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