Change your financial habits, change your financial life

Bad financial habits are easy to fall into and impact wealthy households, low income individuals, the highly educated and uneducated alike. They can cause all sorts of personal and financial difficulties — but it’s often not until they’ve done significant damage that people begin to recognize how their bad financial habits are sapping their wealth and holding them back.

Take a moment to reflect on whether any of the following behaviours sound familiar to you. It may be surprising to discover how they’re impacting your life, and how a few small changes can completely transform your financial outlook.

1. Spending more than you earn

There are any number of reasons why people overspend — from the high cost of living in many cities to trying to keep up with the Joneses. It can be challenging to keep up with the seemingly endless list of bills and financial demands, but if you want to get ahead, you must find a way to spend less than you earn.

The solution: Budgeting

Making, tracking, and sticking to a budget is the best way to stay on top of your expenses and avoid overspending. A budget will help you determine which costs are necessary, which are optional, and which ones you can reduce.

It can also help you prioritize your spending, design a plan to lower your debt, increase your savings, and plan for your long-term financial future. You can use MNP’s free budget tracker spreadsheet to get started.

2. Living on credit

The typical credit card charges 19.99 percent in interest. That means any purchases you don’t pay off will cost you 19.99 percent more than you paid at the point of sale.

And it gets worse: If you don’t pay off last month’s balance, your credit provider will charge you interest on the interest they’ve already charged you! It’s no wonder debt can build up quickly and can be so challenging to pay down.

The solution: Switch to cash

Stop using your credit card and commit to making all purchases with cash (or Interac) until you’ve paid off your debt. Incorporate common purchases like groceries into your budget so you always have the funds available when you need them.

If you decide to resume using credit cards once you’re debt free, be sure to spend only what you’ve budgeted and never more than you can afford to pay off every month.

3. Paying the minimum

The longer you pay to service your debt, the more you’ll struggle to save for emergencies, build wealth, and get ahead. Consider that a typical credit card with a $5,000 balance and 19.99 percent interest rate will take more than 35 years to pay off and cost you more than $6,000 in interest if you make only the minimum payment.

The solution: Crunch the numbers

Even small increases to your monthly payment can really accelerate the paydown process. Raising the monthly payment to that $5,000 credit card debt by $25 per month would cut the timeline by 27 years and $2,800 in interest. An extra $100 would reduce it to three years and less than $1,500.

The Financial Consumer Agency of Canada offers a fantastic and user-friendly calculator to help you budget your credit card payments. Use this tool in conjunction with your budget to plan out your credit card payments and set a payoff goal.

4. Ignoring your bills

Most people are extremely cautious not to miss a debt payment because they don’t want to damage their credit. But missing any payment can reflect poorly on your credit report and result in unwanted calls from collections agent. Your payment history on any bill, be it credit or utilities, contributes nearly 35 percent of your credit score — so make sure you always pay on time and pay in full.

The solution: Automate payments

Set all your regular bill payments up for auto-withdrawal so you never miss a payment or face another late fee again. When you budget and manage your spending accordingly, this simple step can go a long way in simplifying your finances and staying  in your creditors’ good books.

Be sure to monitor your accounts regularly to make sure the payments are occurring as expected and the right amounts are being debited from your account.

5. Taking out payday loans

Payday lenders are known for offering short-term loans at incredibly high interest rates. However, it can be difficult to fully grasp the cost of these loans because many payday lenders advertise flat fees rather than an annual percentage rate (APR). Many push the boundaries of the federally mandated maximum interest rate of 60 percent — so it’s no wonder these are infamous for trapping consumers in an endless debt cycle.  

The solution: Avoid payday loans

There’s never a good time or reason to take out a payday loan. They’re simply too expensive. If you’ve never required a payday loan, count yourself fortunate and commit to never taking one out. If you’re currently trapped in the payday loan cycle, consider speaking with a Licensed Insolvency Trustee to discuss your options to break free and consolidate your debt.

6. Impulse buying

An impulse purchase is any transaction you didn’t budget for or intend to make. It can be as small as a pack of gum or as large as a new car. Most people equate these to treating themselves with a new gadget or clothing item — but consider how many extra items you typically buy at the grocery store that weren’t on your list. Or, how often you decide to order food delivery rather than cook.

With the ease of online shopping and the average person seeing more than 20,000 advertising messages every day, it’s no surprise impulse shopping is on the rise and costing consumers big time.

The solution: Make a list and wait a week

The first line of defense against impulse buying is to make a list of what you need to buy any time you run errands and commit to buying only what’s on that list. The second line of defense is to give yourself a sufficient cooling off period between the urge to buy something and when you complete the transaction.

You may come to realize your emotional attachment to a new coat or smartphone becomes far less urgent and visceral with time. Give yourself 24 hours for any purchases under $20, a week for anything less than $100, and a month for anything over $500.

And if you succumb to a regrettable impulse buy, take advantage of Canada’s buyers remorse laws and return it ASAP!

7. Not saving

Believe it or not, the most common cause of Bankruptcies and Consumer Proposals in Canada has yet to appear on this list. While many of the habits above no doubt contribute to a large proportion of insolvencies, unexpected expenses are what push most households over the edge.

The MNP Consumer Debt Index consistently finds fewer than one third of Canadians are confident they could weather a job loss, major home or auto repair, divorce, or illness without taking on more debt. Yet over the past three years, Canadians have only saved $0.07 on average for every dollar they earn — significantly less than the recommended 20 percent.

The solution: Pay yourself first

Warren Buffet famously said, “Do not save what is left after spending, instead spend what is left after spending.” Build a regular savings amount into your monthly budget and transfer these funds into a separate account every pay period.

Try to set aside between three- and nine-months’ living expenses for emergencies. As we saw with the pandemic, it only takes a few days for everything to change. And while the hope is you’ll never need these funds, you also can’t put a price on peace of mind.