Adèle Manseau | Desjardins Group
Even if you’ve never sailed before, you know that the goal is to stay afloat and on course. When it comes to your finances, it’s pretty much the same thing.
Nicolas Boivin is a tax expert and a professor of accounting science at UQTR. He’s identified 5 things people do to put their finances at risk, simply because they’re not aware of good spending habits.
1. Not making a budget
“This is like sailing without a rudder,” he says. “Buying whatever you want, with no limits and no plan can sink your finances pretty fast.”
According to a study by the Canadian Payroll Association, 46% of Canadians set a budget and, of those, 93% stick to it. “The numbers speak for themselves—making a budget works! A budget shows you how much you can really afford to spend. It helps you differentiate your ability to pay from your ability to borrow. Just because a retailer offers you credit, doesn’t mean you can afford to buy the product. That’s something you know when you have a budget,” he says.
Professor Boivin says there are 2 easy ways to make a budget and dismisses the myth that you need to be good at math.
This budget has just 2 columns—monthly income and monthly expenses—so you just need to add and subtract. But be careful to include all your expenses so you get a clear picture of whether or not your income can cover your expenses.
If you really hate math, then this is the option for you. At the end of each month, lay out all your loan and credit statements (credit cards, line of credit, car loan, etc.) and take a photo. Do the same thing the following month. If the balance on your debts goes up from one photo to the next, it’s a red flag—it means you’re spending more than you make!
2. Buying whatever you want
“This is one sure way to sink your financial boat! As a consumer, it’s important to set limits, even if it’s painful. And this is especially important for young people who haven’t had time to build up their savings.
You don’t need to live like a monk, just don’t give in to every temptation. Putting limits on your spending will help you keep control of your finances. If you never feel frustrated by the fact that you can’t afford something, it could be a sign that you’re over-spending,” advises Professor Boivin.
Where can you cut?
- Transportation: re-think how you get around. Here’s a list of options from the cheapest to the most expensive:
. Use public transit when you can. Buy a used car or choose a fuel-efficient model that’s reliable and reasonably priced. Avoid leasing a new vehicle every 3 years
- Clothing: do you really need that designer top?
. At their most basic, clothes are just to keep you warm. There’s no denying thatclothing has a social aspect, but try to keep your choices low cost.
- Restaurants, cigarettes, trips and other luxuries
Decide on one thing you can do without or cut down on. When you start to see the savings, you can move on to other areas of your life.
3. Paying with your credit card
“If you can’t pay the full balance at the end of the month, then don’t charge it. And remember that when you only make the minimum monthly payment, you’ll be paying interest on top of the purchase price. Repeating this month after month can create a vicious debt cycle,” explains Professor Boivin.
A credit card isn’t a necessity. If you buy online, stick to one credit card with a low limit, and only use it when you really need to.
Paying cash is the best way to avoid spending money you don’t have and it makes you aware of your spending. When you don’t have to hand over the cash, you can lose the sense of how much money you’re spending.
4. Shopping the monthly payment
Avoid the monthly payment trap. There are so many tempting financing offers out there, but it’s easy to overspend when you only think in terms of the monthly payment.
Professor Boivin likes to give the example of buying an airplane for $300 a month. “That doesn’t mean you can afford it! It’s easy to make something seem affordable by extending the repayment period. Don’t get drawn in by the promise of a low monthly payment—it doesn’t mean the product or service is a good deal!”
5. Not thinking about the future
Of course you want to have fun when you’re young. It’s important to make the most of life, but remember that the financial decisions you make today will impact your future. When you think about it, your life is a succession of present-day yous, with continually changing needs. So make sure you have a plan to take care of all the future yous.
The tighter your budget, the more closely you should stick to this advice. As your financial situation improves, you can make your plan a little more flexible. But remember to keep it in mind as you think about all the future yous because good spending habits will help you secure your financial future.
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