Every Friday my column appears in a bunch of papers in Ontario and Saskatchewan. This week, in light of the Christmas season and our spending habits, I want to share seven ways to help avoid financial stress.
UPDATE: I wrote this for a secular audience, but it really should have an 8th: Tithe. No matter what your financial situation, give 10% off of the top. We have always done that (and made our goals higher than 10%), and it is amazing how God has always blessed us. It also helps you keep the right perspective and not be so caught up in money, but instead excited about what God is doing in your community and around the world.
Christmas isn’t the only thing that’s fast approaching. So is indigestion, and not just because you had to eat Aunt Ruth’s lumpy mashed potatoes. It’s because after Christmas comes all the credit card bills, and those can cast a pallor over the whole season.
So I thought today I’d share seven quick tidbits that, if properly followed, can help us avoid financial stress.
One: only go into debt for four things: a house, a car, education, or to start a business.
Even some of those are debatable: it’s usually not worth $40,000 in debt for a Philosophy degree, and many people can save and buy a used car without debt. Nevertheless, these are the four things where debt may be necessary. Notice that Christmas isn’t on the list!
Two: Know your financial situation.
If you don’t know your income and expenses you can’t budget and you can’t plan, and that means debt is almost inevitable. So add up all of your assets (like a house, a car, savings) and all of your debts (credit cards, lines of credit), and the difference is your net worth. Then figure out your income and your expenses. If you own a business and don’t have a regular income, check your net income on your tax returns for the last three years. The average of that is likely pretty close to your income. Divide that by twelve, and now you have your monthly income.
Three: Make a budget.
Know how much you’re going to spend in each category on a monthly basis. Then spend cash, not credit. Stash cash in envelopes for food, entertainment, miscellaneous, etc. Include in that budget money for debt repayment, and repay debt, starting with the highest interest debt, as fast as you can.
Four: Create an emergency savings fund.
Once your debt is paid off, save the equivalent of three months’ income and put it in a savings account or money market account where it’s easy to access. That way, if you ever are out of work for a time, due to a layoff, an accident, or a family emergency, you won’t have to borrow money.
Five: Start saving for the long term.
Now that you have your safety net, take at least 10% off the top of your income and invest it in an RRSP. Pay yourself first through an automatic monthly contribution so that you’re not waiting until the end of the month to save “whatever’s left”.
Six: Budget for upcoming big expenses.
Let’s say you want to send your kids to camp next summer, but that will cost $1000. You’re unlikely to have $1000 in July, so budget for it throughout the year. Similarly, if you need $1000 for Christmas, don’t think that will magically appear in December. Let’s say you also want to take a cruise next year that’s $3000, and you want to buy clothes over the course of the year for the family for about $1000. Add that up and you need $6000, or $500 a month in savings.
If you will need another car in three years, and you want to spend about $15,000, you need to save $5000 a year. So add another $417 in savings every month, for a total of $917. Set up an automatic payment into a savings account for that amount on a monthly basis. If that price tag sounds too steep, remember: If you can’t afford to pay for it beforehand, you certainly can’t afford to pay for it after the fact, when you’ll end up doling out interest, too!
Seven: Finally, here’s the clincher. Don’t buy stuff you can’t afford.
The stress isn’t worth it. And the freedom that comes from being out of debt and having a financial plan? That’s something money can’t buy.
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My daughter actually wrote on this same topic this week, although she was writing from the perspective of how to budget as a student. I love her idea of the separate accounts. Check out how to save money as a student.