Budget big in the coming year…
Millions of people ring in the new year with their own set of resolutions for the next 365 days. You might have even done it yourself. Resolutions can be personal and kooky (like my dream of tracking down El Nino…damn you, disruptive weather pattern!) or they can be general and universal (like putting those pilates tapes to good use). But did you know that three out of five people that do make resolutions resolve to save money?
Credit card bills piling up? Here's how you can keep the collectors off your back (in a totally legal way, of course).
Okay, I totally made that up, but it sounds plausible because money can grant access to the many things that we want to do - like taking that dream vacation, buying your red Corvette (I know Corvettes may sound outdated to car aficionados, but I'm not one of them, and so I don't know), or paying off your student loans…finally.
Now that crunch time is over, i.e. the Christmas holidays, your wallet, like mine, might feel a big light. There are two ways to get back on track: make more money, or use less of it. The former is only applicable if you've just purchased the winning ticket to the lottery but haven't cashed it in yet. For the rest of us, there's the second option. No need to despair, though, because saving money and creating a budget for yourself is as easy as pie. No, not really. Let's be frank - it's hard, it takes a lot of devotion (every year, millions of people go into debt for a reason), and will probably suck for a while. But after seeing your bank account balance double, triple, and all those zeroes rolling in, you'll feel a lot better. Especially when you're sipping those yummy Pina Coladas in Barbados.
Here are some ways you can tighten those purse strings:
Make a budget. Nine out of ten financial consultants recommend it, and it works. Here's what to do: carry a notebook around with you and record everything that you spend in the span of a week. Yes, even that pack of gum. When the week is over, look over your neat and carefully documented notes, and divide your spending into categories, i.e. entertainment, food, rent, clothing, alcohol (that last one made my list), etc. You'll quickly see where your money is being eaten up. Now that you've had your math fun, it's time to buckle down and decide where you will cut back. And make sure that cutting back doesn't just stop at not buying that pack of gum - at this rate, you'll be debt-free by 3015.
Delegate. According to MSN Money Central, you should be dividing your monthly take-home pay into categories: 50% for necessities, such as food, shelter, and clothing; 10% for retirement savings; 10% for short term use (i.e. car repairs, birthday and holiday gifts); 10% for emergency use; and 10% for entertainment (i.e. that new Vin Diesel movie, The Pacifier, that I've been dying to see - and I say this with sarcasm dripping out of my eyes). If you have large loans to pay, MSN Money Central also advises that you use your savings (about 20-40% of your earnings) to pay those off first.
Pay your bills. Even if you really hate those customer service people. Paying your bills on time will not only ensure that your credit stays good, but it will also help you to keep on top of things before your loans start ballooning. Try to pay more than the minimum because banks love it when you don't - it will never make up for the interest that they charge on top of your amount.
Consolidate your loans. If possible, it's a good idea to put all your loans together and get a good interest rate. For example, it is more beneficial to pay 4.5% for 10 years on a $10,000 debt than having to deal with three separate loans at different rates.
Carry cash. And while you're at it, leave the credit cards at home. That way, you'll be carrying what you've budgeted, and won't be tempted into spending more. A website suggests freezing your credit cards into a block of ice so that impulses will be hampered while waiting for your frozen plastic to melt. You don't need to do that - just leaving them in a shoebox (out of sight, out of mind) is enough. If you don't think it is, the next best thing is cutting up your cards and leaving one for emergencies (or for booking your plane tickets, when the time comes). Go to the ATM machine only once a week. If you're finding that daily trips are in order, then it's time to cut back.
Choose wisely. As soon as I turned eighteen and was therefore considered an adult by everyone but my parents, I ran out and got a credit card. I would take it out at lunch and show all my friends, this shiny plastic rectangle with my engraved name and signature on the back. We would marvel for hours at its unlimited possibilities - well, as unlimited as my credit limit allowed. When I finally used it, a little part of my innocence died. Quicker than you can say, "charge it," I found myself buried under a mountain of unpaid bills. Creditors would call and ask nicely for their money. By the fifth call, we were on a first name basis, and they weren't so nice anymore. The moral of this tragic, teenaged spending spree is that credit card kiosks are set up at post-secondary institutions across the world for a reason. If you want to apply for a credit card, shop around for rates. Most of them are similar, but you may find some plans that offer lower interest fees, especially if you're a student. I visited my own bank's website and found that I had to click on five links before I found a list of hidden charges for just carrying a card around. Whatever you decide, make sure to always read the fine print before committing to anything. Some institutions offer pre-paid credit cards that require a deposit in order to be used (for instance, you give them $500 and that is how much your limit will be). This kind of defeats the purpose of credit, but if you have bad credit and want to get out, then using this system will improve your credit rating without pulling you into further debt.
De-clutter. This may be hard to hear, but if you own a cell phone, satellite television, a gym membership, high-speed Internet, or anything close to extraneous spending, it may be time to let one of them go. Don't worry; if it's meant to be, it'll come back to you.
Think about your cheap friends and then copy them. Say to yourself, "What would Chuck do?" Use him like Luke Skywalker used Yoda, and start saving away. Bring your lunch to work or school, and cook in bulk and freeze for the week. Skip the cappuccino from Starbucks and grab free coffee at work, or bring a thermos to school. Let's use me as an example - if I were to brownbag to work (which I do) and skip the morning coffee (which I don't), I would save about $100 per month, or $1,200 yearly. Grab a library card instead of heading to Chapters. Do magazine subscriptions and save 25% off the newsstand price. If you colour your hair, use a subdued dye close to your natural hair colour and skip the bimonthly touch-ups. Buy an inexpensive kit and do your nails at home. Take the subway instead of paying for gas. Invite friends over for a potluck and ask them to bring their favourite DVDs to watch. Get creative, and the cash will flow.
Investing your money to watch it grow isn't a bad idea. It gives you security that you have money in case of any emergency, and getting it back with a cherry on top will greatly improve your mood. Here's a quick rundown of some of the more popular savings plans offered in Canada. This is by no means the end of the story, though. There are assets and drawbacks to each of these plans. If you'd like more information, contact a financial consultant at your local institution.
Guaranteed Investment Certificate (GIC): GICs are investments that you, as the lender, make to the bank (banks need loans too). Banks that your cash and invests it. After your specified term is up, the bank will return your money, plus interest, and keep the difference, i.e. if your loan was $5,000 and interest accrued was $600, and the bank net $7,000 from their investment, you'd only get $5,600 back, while the bank keeps $1,400. GICs are named as they are because, no matter what the outcome of the investment, the bank guarantees the loan. Well, guarantee is technical here - most banks only insure up to $60,000 per investor, not including interest.
Registered Education Savings Plan (RESP): They say children are our future, so why not invest in them? More specifically, this plan is designed as an investment in your child's education. Monthly payments are tax-free, but not tax deductible. These plans can go as long as 25 years, after which they will be terminated. You won't lose your money if your child decides to forgo post-secondary education, though. RESPs can be transferred to RRSPs.
Registered Pension Plan (RRP): Registered pension plans are company plans that invest in your future. The employer determines who is eligible, and usually deducts a percentage of your paycheck to put into this savings plans. If your employer is also of the generous nature, he or she will also make contributions (usually matching your deductions) to the account, thus letting you know that your overtime was not in vain. These contributions are tax deductible.
Registered Retirement Savings Plan (RRSP): This is the big daddy of all savings plans, and gets the most hoopla in the investment banking world. Basically, RRSPs are investments that, like all the others above, are designed to let your money grow over a specified amount of time. Unlike the others, these investments can range from mutual funds, to bonds, to the stock market, to real estate. We've all heard that infamous phrase, "diversify your portfolio." This basically means that, in order to avoid risk, you should be investing in an assortment of things, just in case something goes wrong with, say, the stock market. Usually, investments constitute a percentage of your yearly income, and any unused RRSPs can carry forward to the next year (the deadline for tax year is March 1). Retirement savings plans can also be used for Home Buyer Plans (HBP), or, if you decide to go back to school, Lifelong Learning Plans (LLP). RRSPs grow tax-free and are tax deductible, but take heed: there are heavy penalties for making a withdrawal before the term is over.
Now that the year has officially kicked off, it's the perfect chance to start anew and explore everything that you've always wanted to do but have put off. If saving money is on your plate of things to do, then there's no better time than the present. So kick back, take things one day at a time, but always plan for the future. It'll probably be one of the best decisions that you'll ever make. ¤ C.Ho.