Decluttering and spring-cleaning are hot topics at this time of year. If this is an upcoming project for you do this, while you are gathering items to sell or donate, take the time to reflect on how hard you worked to purchase them. A popular decluttering strategy is to determine if a possession brings you joy. When it comes to getting our finances in shape, a better question is, did I need to spend the money in the first place? Now is a great time to spring-clean your financial situation.
The actual strategy of financial management is relatively simple. Like eating right or exercising, we already know what to do. You need to make more than you spend, avoid unnecessary and high interest debt, and save to invest excess cash. You also need a clear true understanding of what you spend your money on. To take it to the ultimate level, you need to ensure that your budget aligns with your goals and values.
The average North American household, taking a page from our federal and provincial governments, is living off borrowed money. A vast majority of us live in a world of want, rather than a world of saving for future need.
It is impossible to earn more than you can spend, so the only sure way to ease financial stress is to live on less than you earn. This requires self-discipline, which many of us lack in this regard. The good news is you can learn spending self-discipline. Developing and adhering to a budget is a great place to start. More on this later…
Shopping is fun! Impulse buying can give you a rush of pleasure…..until the credit card bill comes due. If you know what you need, and make yourself wait to save up for the things you want (rather than whipping out a credit card), you may find you don’t really want them so much after all. As an added bonus, waiting will help reduce clutter in your life. Research shows that clutter can increase stress.
Preparing a budget can be as simple as writing down all your sources of income, as well as all your regular expenses. Ensure your spending first covers off the basics (food, clothing, rent, bills, cell phone, transportation), then things like insurance and medical expenses; and then also some savings (the long-term goal is to have funds equal to six months worth of expenses set aside). Finally, you should carve off a portion of any excess funds to be invested for the future (think RRSP’s and Tax-Free Savings Accounts). Once all of the above items are covered, only then should you move onto spending money on wants. Be careful when categorizing your needs or ‘basics’. Having a $300 a month cell phone bill because you ‘need’ the hottest android device is not really a basic need; it is a want.
This article provides a brief overview of considerations for your financial fitness. Saving for the future can be complex, and there are always tax consequences to consider with certain purchases or investments. It is always best to discuss such taxation and investment considerations with your accountant to discuss which strategy is right for you.
Contributed by: Leanne McDougall,
Senior Manager, BDO Canada LLP