You don’t need a money coach or financial advisor to learn the basics of how to start saving money, Financial Literacy Month is all about educating yourself. This 3-minute DIY workout will help build your financial fitness and steer you around eight of the most common pitfalls we see every day.
- Spending too much on a car.
You should be aiming for 15% of your take-home pay for the car payment, insurance and gas. The monthly operating costs of a brand-new Hyundai Santa Fe (base-model $33,284 at 3.19%) would be minimum $800 month for 84 months. You would need to take home over $5K/month after tax ($90 to $100K in salary) to “afford” one. Slightly used cars are still very reliable and offer a lot more value.
- Investing before paying off debt.
Make sure you pay off the right debts first! If your only debt is a mortgage at 3%, relax and go ahead and invest. Any loans or lines of credit up around 7% or higher (credit cards are around 20%) should be on your hit list before you even think about investing.
- Spending more than you have.
It hurts to write something so obvious, but how can something so simple in theory be so difficult in practice? Too many “wants” is the root cause, but easy credit (not cheap, just easy!) and failure to track your spending and see just how big a hole you are digging every month with that credit card debt facilitates this downward spiral.
- Putting off saving, investing and retirement planning.
Maxing out your TFSA ($6000 year deposited to an index ETF) from the time you are in your early twenties to when you retire at 65 could easily make you a millionaire. Never underestimate the power of compound interest when it is working for you! And don’t forget, the TFSA and RRSP also offer huge tax sheltering benefits on top of the compound interest!
- Not understanding your student loan agreement.
Many students are not fully aware of their loan details and mistakenly assume their interest rate will be low. They also underestimate the future monthly payment and how long it will take to completely pay off student loans. Repayment of student loans will put a bigger dent in post-graduation lifestyle than most students ever imagine! Education has great value, just make sure you do the math, confirm that value, and know what to expect down the road.
- Not creating and using a workable, realistic household budget.
Have you ever failed at budgeting? Of course you have, everyone does! The problem is not budgeting itself, it’s your process for creating a budget and your system for tracking household expenses. Relying on guesswork and not your actual spending, ignoring an emergency fund, not leaving any "wiggle room", too time-consuming – these are all fatal flaws for a budget.
- Getting caught up in "lifestyle creep".
“The more you make, the more you spend”. It’s an old saying that rings true for most of us, but why not enjoy the fruits of your hard work? How much of your cash you can afford to use for enjoyment depends on your situation and you need to constantly re-assess your lifestyle. If you were just getting by before (and not saving for retirement) and get a $500 a month raise – do you get a shiny new car or a TFSA?
- Failure to build credit and ignoring your credit score.
Completely eschewing credit will keep you debt-free, but do nothing for your credit score. And make no mistake, a good credit score will save you a ton of money over the course of your life! You can easily learn how to improve your credit score — simply using your credit card and paying it off in full every month; or financing a car (IF the dealer offers a great rate) are two ways to send your score soaring.
If these tips sound familiar, your financial literacy may be better than you think, or maybe you have been attending our free webinars? We offer great webinars on all sorts of topics and there isn’t a better way to improve your financial literacy with so little time. We do the research, present the facts, answer your questions, and get you motivated to act – all in 60 minutes!
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