Another chance to get it right
We generally view every new year as a chance to start afresh as we make declarations about what we intend to work towards in the next year. To help with the financial declarations I hope is a part of all of our yearly declarations, I had the itch to write this post. Some financial attitudes and behaviours are more harmful than people realize and not recognizing the damaging effects is a major part of the problem.
Viewing monthly income as disposable income…
isn’t that how people get stuck living paycheck to paycheck? This a huge issue that stems from not having received financial education growing up or simply wanting to keep up with the Joneses. I keep telling people, your monthly income is not, and should not be seen as the amount available to spend monthly. This is one of the reasons why I advocate automated savings. A small portion of your income should automatically be designated to savings. Whatever is left is what you have to scale your total monthly expenses to. Let’s attach numbers to it to give a little more perspective. Say you earn 40k a month, your income after taxes is around 34k ignoring any deductibles you may have at your disposal. If you save 10% of your monthly income after tax and plan to spend the rest on expenses but are unable to on most months, you are most likely living above your means. Budgeting comes in handy here.
Not providing children with basic financial education…
isn’t that what produces adults who make terrible financial decisions as they become more financially independent? Financial blunders that start at young adulthood (after high school) are very difficult to correct as they become ingrained as behaviour. The deeper into a hole you’ve dug yourself, the harder it is to get out of it. Growing up my dad always emphasized the importance of saving which always seemed funny to me since he gave us all the money we had (pocket money) and basically expected us to save his money for ourselves. He gave us lunch money to school everyday but expected us to be smart enough to not spend it all because he knew, and we knew we really didn’t have to. He encouraged us by giving the occasional shout-out to that sibling that saved a lot in the month, buying us piggy banks and then eventually opening us up savings accounts to put our piggy bank fortunes in. During a conversation with a colleague recently she told me that her mother had lived pay check to pay check so she didn’t imagine it any other way. The aim for her -before becoming more informed- was spending all of her income and making sure her income went around all she thought she needed for the month. The most basic importance of savings is having something to fall back on in times of emergency and the importance of that itself cannot be over emphasized.
Viewing credit card as free money…
but is it though? For most financial institutions in Canada the typical interest rate on a credit card is 19%. Consider that you spend $1000 on your first credit card which has an APR of 19% and make a payment of $25 (that is the minimum monthly payment of $10 plus some), it will take you 64 months to pay off your credit card assuming you don’t spend any more on the card and just dedicate your effort towards paying that first $1000 you have spent. That is 24 more months than it would have taken if you were not paying interest, 2 whole years of paying off interest that would come to $596 at the end of the 64 months thanks to Compound Interest. If that sounds free to you then I guess you can keep piling up your credit card debt. I always advice people to put their expenses on their credit card in order to take the most advantage of their credit card points and rewards BUT to make sure to pay it off bi-weekly unfailingly. You must pay off your credit card balance at the end of your statement period if you would not pay it off bi-weekly (which spares you interest payments completely). The last thing you want to do is to pay $4000+ to absolve credit card debt of $2000 because of compounding interest payments. Your monthly credit card spending should never be higher than your checking account balance assuming you have a separate account holding your savings. This is another scenario where automated payments come in handy since the funds will come out of your account whether you like it or not.
That December overdraft…
is it really necessary? On the last month of the year banks see a greater number of people coming into to see if they could possibly increase their overdraft and credit card limits. This might sound silly to those that observe the tradition of gift giving (including giving to oneself) during the christmas season regardless of financial situation but really, don’t give if you cannot afford to. The worst way to start the new year is by taking on consumption debt, that is debt that doesn’t reap any financial benefits. I recognize that there is more to life than money, but make the gifts by hand, thrift, do whatever you can to avoid spending ridiculously or going into more debt towards the end of the year in preparation for the new year.
Failure to plan family size according to earnings…
is that cloth you have cut really your size? One of the biggest problems for families living from pay check to pay check is that there are more children than there is money to go around. Kids cost a lot and there needs to be more planning going into having them than just having that inclination or gut feeling of being ready. With the younger generation being a lot less eager to procreate and with most women preferring to participate in the work force, this is becoming less and less of a problem but it nonetheless is still a problem, especially among working-class families.
The list doesn’t end here but I better stop before I end up writing a book. I hope this helps!