With the lazy days of summer behind us, it’s time to buckle down for school and work. Part of adulting means having a handle on your family finances, whether that means creating a budget or simply having a better idea of how money flows in your home. There’s no better time to get started.
The most common money mistake that Canada’s Money Coach Judith Cane sees young families make is failing to plan.
For example, a family may decide to purchase a home and focus on saving for the down payment, but fail to look at the longer-term financial implications of home ownership, such as furnace repair, a new roof, furnishing a house or even figuring out what size of house they need versus what the lender says they can afford, says Cane.
“The second most common money mistake is what I call leakage,” Cane says. This includes “going out for coffees, buying a newspaper or a magazine (and) grocery shopping at a big-box store that has way more than just groceries (think Costco, where you need to pass everything else before you get to groceries).”
Other sources of leakage include buying prepared food or take-out due to lack of planning and going shopping to relieve boredom. Leakage can lead to thousands of dollars of overspending, Cane says.
It’s a shocking number, but Cane has seen it before. She’s been helping people with financial planning, investments, and insurance for almost 30 years. Now a speaker and educator, she has focused on money coaching since 2010.
Most of her clients are between the ages of 35 and 55, have a partner and one or more children. They have good incomes ($75,000 +) and usually own their own homes with a mortgage.
“What I hear from my younger clients is that they learned how to handle money by watching their parents and their parents never taught them anything about money,” she says. “In the ‘60s, we were still mostly a cash society and then credit cards started to appear and I think that’s when debt problems started to ramp up.
“Once you could start depositing or getting money from bank machines, people weren’t going into banks as much. We were moving away from seeing cash in transactions, which I think made people stop thinking about the relationship between money and things.”
The good news is that there are young families who are doing things right, says Cane. These are the people who meal plan, use cash for monthly spending and pay off credit card purchases immediately. “They know where every dollar is being spent.”
Judith Cane answers the big questions
What is the priority between investing, paying down the mortgage, saving for education and paying down credit card debit?
The best bang for your buck is to pay down consumer debt first and with everything you have, says Cane. She also says everyone should be putting something into a savings account monthly. “Not only is it wise, but it feels good for the client to be paying off debt and saving money, even if it is a small amount.”
If you don’t have a pension through work, you should be putting as much money into your RRSP as is allowed. If you do and it’s a defined benefit, move on to putting money into an RESP “because no investment advisor ever will be able to guarantee you a 20-per-cent return on your investment, which is what the government is doing,” Cane says.
If you get a big tax refund from your RRSP, you can use it to make a one-time payment on your mortgage, Cane says. She suggests leaving the mortgage payment to the end, because interest rates are low. “The RESP and defined contribution strategies will earn you more in the long run than the mortgage is costing you,” she says.
What advice can you give a family who wants to buy a home?
Cane believes that home ownership isn’t the be-all, end-all. She suggests writing down the reason you want to go from renting to owning and doing a financial comparison of renting versus buying. While ownership might work for a family planning to stay in one place, it might not work for someone who has a job that has transfer potential.
How can a family set up a budget without completely depriving themselves?
Start by writing down goals for the next 12 months, whether it’s a new baby or buying a house, and putting a timeline and a cost to it, Cane says. “Once you have your goals down, then you can start working on a spending and savings plan. Start there with your net (after tax and all the deductions) income. I use monthly because it’s easier to figure things out.
“Next, subtract your fixed expenses that are must haves, like rent/mortgage condo fees, utilities, property taxes, insurance, vehicle loan or lease, debt repayment and daycare. Then whatever is left over is allocated to monthly expenses that are ‘needs,’ like groceries and transportation. Whatever is left over is allocated to everything else.”
It comes down to choices, she says. “Would you rather have your kids in hockey or a big clothing budget?”
Cane’s tips for improving your finances
- Create a budget for monthly expenses, like groceries, gas, and entertainment. Use envelopes for each of these categories, withdraw money on payday and divide it up into the envelopes. When the money’s gone, it’s gone.
- Find a better deal on Internet, phones, cable, and online streaming services.
- Make sure all your fixed expenses are set on automatic, including saving money into an emergency fund, TFSA, or any other savings program.
- Create a worksheet for expenses that happen throughout the year, but not on a regular basis. Kids’ activities are a good one, Cane says. “This list can include equipment, fees, tournaments, competitions, hotels, food, etc. to get a realistic picture of what the activities cost. I’ve found that people grossly underestimate what their kids’ activities are costing them.” The holidays are another example. “Most people have absolutely no idea what they spend on Christmas.”
- Budget blown? Cane, who works with clients to help change their behaviours around overspending, suggests: “Use cash, stop using your credit cards or line of credit. Figure out where you can cut back this month to make up for overspending. And think about what it was you overspent on and why you did it.”
Ottawa parents share their tips
Set up a budget
Michelle Beaton suggests setting up a budget that considers all your fixed and variable costs and sticking to it. “Track every dollar you spend against your budget. You will be shocked how much you spend in certain categories that you never would have thought, and that is how you can determine where there is room to save.”
“I also do preauthorized payments so we don’t miss a bill and we clear our credit card each month so we accumulate points but not the debt,” says Josmi Bansal. “We also do automatic transfers for RRSP and RESP accounts, along with savings and emergency fund so that our goals are met.”
Consider owning only one car
It’s not practical for all families to get by on one car, but if it is, it can pay off. For Michelle Beaton, being a one-car family yields significant savings.
… Or do it all
Rachel Gill and her family joined a Freecycle group, cancelled their cable, share a Netflix account with a family member, limit eating out, buy second-hand and grow their own produce.