Financial Literacy Month Get Serious About Your Finances

November 1 marks the beginning of Financial Literacy Month in Canada. Each year, Canadians set out on a month long journey to become more literate, more mindful and more in control of their finances. One of the main causes of financial difficulty is lack of control over the use of credit and the debts that result from the misuse or overextension of credit. In order to avoid using credit, you have to take active steps to manage your money, by developing a realistic working budget. Think of your budget as a spending plan, rather than as a mechanism that imposes limitations on your spending or deprives you of a certain lifestyle. Your budget will provide you with the freedom to make better choices with the money you have and allow you to reach your financial goals. More importantly, sticking to your spending plan will help you pay off your debts or avoid debt altogether! Here are four basic steps to follow to develop your spending plan.

1. Set Realistic Goals

Before you start to put your spending plan on paper, consider your short long-term financial goals. A short-term goal may be buying a new laptop. A medium-term goal may be taking a vacation or saving for a down payment on a vehicle. A long-term goal typically includes your plan for retirement. Goal setting allows you to determine how to make your goals a reality and how to adjust your monthly living expenses in order to achieve these goals. Start by making a list of all of your financial goals and putting them in order of importance to you. Take a close look at what your needs are and what your wants are and ask yourself – do I need to have this or would it be nice to have this? Once you have identified your “need-to-haves” and your “nice-to-haves”, you will be able to move forward with setting your financial goals. When setting your financial goals, figure out how much you need to save, how long you need to save and how much money you need to put aside each month. For example, if one of your short term goals is to purchase a laptop for $1,200 in twelve months, you would have to put aside $100 each month in order to purchase the laptop next year. Having an emergency fund is a financial goal that all of us should have. You should do this before anything else, by setting aside enough funds so you have three to six months of your monthly expense amount saved.

2. Track Your Income and Expenses

Start by writing down and adding up all sources of household income and the amounts that you receive each month. If you get paid on a bi-weekly basis, only include two pay periods in your monthly income, so you can save the other two extra pay cheques toward your emergency fund or to help you achieve your financial goals. If your income varies, you can estimate your monthly income by taking your income from the previous year and dividing it by twelve months. Tracking your expenses will be more difficult than tracking your income. There are different ways to track your monthly expenses:

1. Keep all receipts.
2. Record all expenses in a notebook or pocket calendar.
3. Review your bank statement at the end of each month, if you only use your debit card. Make sure to include your annual or irregular expenses (for example: gifts, car repairs, back to school shopping).

You can estimate these amounts by calculating how much you spend for each category each year, and then dividing this amount by twelve to determine the monthly amount spent on these types of expenses.

3. Develop Your Budget

Before you continue, you make sure that your monthly expenses do not exceed your monthly income. Take a look at the monthly expenses you tracked and decide which expense are needs (for example: rent or mortgage payments) and which of your monthly expenses are wants (for example: buying a coffee on the way to work every morning). Spending small amounts every day adds up. Even though a coffee may only cost you $2.00, if you buy a coffee every morning on the way to work, this could add up to $520 a year. Once you have reviewed the amounts you spend each month, create an improved version (your spending plan or budget) that reflects your financial goals and monthly expenses. For example, if you spent $300 on groceries last month, try to budget $250 for groceries this month and, put the extra $50 toward your emergency fund or toward achieving your financial goals. It is important to be realistic though. If you try to shave too much off your monthly expenses, you may be setting yourself up for failure. Your budget has to be achievable. Once you have finished creating your budget, you will need to track your expenses to ensure that you are sticking to your spending plan. Remember that your budget is a living thing. Meaning, your income, expenses and financial goals will change over time, so you may need to make adjustments to your spending plan to reflect these changes.

4. Putting Your Plan Into Action

Now that you know what your monthly expenses are and when you need to pay for them, you will want to come up with a system for you to manage your budget. Here are some helpful tips:

• Review your bank statements every month.
• Arrange automatic withdrawals for bill payments, to avoid late charges and interest.
• Use phone and internet banking for convenience.
• Use equalized payment options for utility accounts to avoid seasonal fluctuations. Set up monthly payments for annual or irregular expenses (property taxes, insurance).
• Purchase prepaid gift cards from grocery stores so you only spend the amount you budgeted for that month.
• Use the “envelope system”. Put cash in separate envelopes for separate expense categories (for example: groceries, fuel, entertainment, clothing). Once the cash is gone from one envelope, you can use money from another envelope. You will need to ask yourself if you can accept the consequences if you spend money from one expense category on another expense category. If you decide to do this, write a note on the envelope. Doing this over and over again means it is time to revise your budget.

Learning to stick to your budget gets easier the more you stick with it. If you track your expenses and make changes where you need to, you will form good habits. If your monthly spending does not vary much from your budget, then you are on track to achieve your financial goals and benefit from them.

If paying off your debts is one of your financial goals this November, contact your local MNP advisor today to learn how to achieve this goal. One of our Licensed Insolvency Trustees will be able to give you advice on how to defeat debt and live debt free!