This year has certainly delivered a hit to our economy, and for many of us, our own wallets. It’s important that we gain a deeper understanding of our personal finances to protect our livelihoods and maintain financial security, perhaps more now than ever before.
Alberta’s credit unions know that personal finance can be a difficult subject to navigate for many people. While some are naturally good at managing their money (if this is you, consider yourself lucky), the fact is that most people have to work at it. But you don’t have to go it alone; your local credit union representative is ready to help. Developing a plan to manage your personal finances doesn’t have to feel like climbing a mountain; while there is a lot to learn, these four areas can be considered low hanging fruit in helping you quickly organize your finances.
Lesson One: Spend Less Than You Earn
Seems obvious, but many of us don’t follow this basic rule. How many times have you checked your account and wondered where all your money has gone? It’s difficult to feel financially stable if you’re living paycheck to paycheck and don’t know how much you’re actually spending each day, week or month.
A good way to start tracking your spending is to spend 15 minutes before bed each day recording how much money you spent and what you spent it on. This will allow you to gain a better understanding of your habits and re-evaluate where you can cut back. It will also help you create a budget (see lesson three).
Cut back on your bank fees! One of the most prevalent myths about credit unions is that they charge high fees – or extra yearly fees, or special fees that the banks don’t charge. We compared banks vs. credit unions in this “The myth of high fees” blog: albertacreditunions.com/blog/the-myth-of-high-fees
Lesson Two: Use Credit Cards Responsibly
When it comes to personal finance, credit cards don’t have the best reputation. While they allow you to make larger purchases with a grace period to pay them off, high interest rates and spending more than you can afford can become a slippery slope to unnecessary debt and poor credit. However, when used responsibly, they can actually be a beneficial tool for your finances.
Credit card companies report your activity to credit bureaus, which makes credit cards a great way to build and/or improve your credit score. If you can manage your credit responsibly by staying below 30% of your credit limit and paying the full balance of your card on time, you will likely build good credit. Having a good credit rating demonstrates financial health and responsibility, allowing financial institutions to trust you when it comes to obtaining a loan, a mortgage, etc.
There are a wide variety of credit cards out there with differing fees, interest rates, rewards and privileges: consider your spending habits and choose a card that will help you save money in the long run.
Lesson Three: Create a Budget
Developing and sticking to a budget is integral to maintaining a healthy balance between your income and expenses. To start, create a list of your fixed monthly expenses including rent or mortgage payments, student loans, utilities, phone bills, etc. Don’t forget automatic subscriptions (remember that free trial you forgot to cancel last month?). Then add in your variable expenses and you’ll start to see where all your money goes and some places you can cut back.
Use the My Expenses Calculator to easily see your expenses on a weekly, monthly or yearly basis.
Now that you understand your monthly spending habits, you can create a monthly limit to spend on those variable expenses. Don’t forget to allocate some money to three key areas:
- Emergency Fund
- Lifesyle (restaurants, gifts, travel, etc.)
By setting a specific monthly amount for each of these areas, you’ll be able to ensure that you are financially stable enough to handle any unexpected costs while setting aside money for your future and enjoying yourself while doing it.
Lesson Four: Pay Off Debt
Debt can feel like a constant weight dragging you down. However if you have debt, you are not alone: A 2019 survey conducted by Statistics Canada indicated that over 73% of Canadians have some sort of outstanding debt. Creating a manageable plan to pay off debt over time is a key component of financial stability.
To tackle your debt, start by pinpointing anything that may be considered debt in the first place (this could be a mortgage, student loan, line of credit, etc.) and flag the ones with the highest interest rates. High interest debts should be your top priority to pay off so that less of your money is going toward paying the interest. Allocate the largest portion of your monthly debt budget to these expenses.
For debts with lower interest rates, consider consolidating them into one expense to avoid making multiple payments monthly. This will allow you to lump as much of your debt into one place, making it easier to manage and easier to tackle.
Learning to manage your personal finances effectively is a learning process that requires commitment and discipline, but credit unions are here to help. Alberta credit unions are focused on helping communities thrive, and can provide you with banking solutions to get your finances aligned with your goals.