With inflation challenging the cost of living, it can be difficult to know what to do with your money to stay on top of expenses at the very least, let alone what to do to maximize your return on investments or savings. Here are a some suggestions to help you manage your money despite high inflation.
Spend Less than You Make
One of the common pitfalls of personal finance, is spending all or even more than you earn. This is a difficult pattern to break and makes it very hard to improve your finances. Most people are not aware of exactly how much they spend because they simply don't track it. The best way to know what you are spending is to create a budget for every month and then track all of your spending to make sure your budget is realistic and that you don't over spend.
Tip: When you first start budgeting you may not know how much money to allocate to every item on your budget. This is normal and it takes time to get your budget accurate. Don't wait for the budget to be perfect. Make a budget with your best estimate of what you spend and then track it for three months making adjustments if you spend more or less than you thought.
Pay Down Credit Cards
Interest rates on credit cards are unbelievably high. It is common for the interest rate on a credit card to be about 20%. If you use a credit card, make sure you always pay the balance to avoid any interest charges.
Tip: Research has shown people tend to spend more money when they use credit cards than cash or debit. If your spending habits are out of control, you may want to eliminate the credit card altogether and stick to a good old fashion cash budget for the month.
Home Loans
Mortgage rates have been increasing over the past year and are expected to rise further. If you’re planning to buy a home soon, position yourself to be able to take advantage of lower rates once they return to the market. Speak to a mortgage specialist for the best strategy for your situation. A mortgage professional will be able to advise you on what financing option will suit your situation best.
Tip: Pay special attention to the fees associated with leaving or refinancing your mortgage early. It is possible that we will be in a lower interest rate environment again before the end of your mortgage term and you may want the option to refinance at a lower rate.
At the same time, do not rush into any large purchases that you aren't sure about. Even with interest rates increasing, it is important to take your time to think through your purchases regardless of what interest rates do in the future.
Bank Savings
Even though interest rates are rising, you may not see that translate to the interest you earn on your bank account. Big Banks often don't need to offer much incentive to attract customers. If earning higher interest on your accounts is important to you, some online banks now offer higher returns than the traditional brick and mortar locations. If you do decide to switch make sure any bank or credit union you consider are federally insured by the Canadian Deposit Insurance Corporation (CDIC).
Tip: Aim to set aside an emergency fund of 3-6 months of expenses. This money should be set aside in a bank account that you can easily access if you have a major unexpected expense or lose your job.
Investments
The stock market has been through a tough year with global economic uncertainty. Without a crystal ball, it is very difficult to know which stocks will payoff and it takes a lot of time to become an expert on investments. A good place to start is with a mutual fund which pools money from different investors and is managed by a professional fund manager. Speak to a financial planner if you are looking for specific investment advice or need to develop a long term investment plan.
Tip: Most people get caught up in overanalyzing the best place for investment returns. Research suggests the biggest predictor of investment growth over time is consistent contributions. If you can make room for it in your budget, aim to contribute 10-15% of your monthly income to savings and retirement.
Looking for More ideas?
The rising cost of living and economic uncertainty has created financial stress for Canadians. The best way to work through these times is to minimize and pay off debt, to live within your means (spend less than you make) and to save a little bit of every pay check to create an emergency fund to help buffer you from unexpected costs. If you are looking for more information, we highly recommend checking out Dave Ramsey's book, The Total Money Makeover. Ramsey's book has everything you need to know to master your personal finances.
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