Exacerbated by the Covid-19 pandemic, Canadians are facing more financial difficulty than ever. Believe it or not, 40% of Canadian bank accounts are unprepared for an unexpected expense, which can come at any time.
Fortunately, there are ways to improve your financial situation, and they’re easier than you think. It’s all about living within your means, which most Canadians weren’t taught how to do.
Well, we can help with that. Let’s talk about how to live within your means and improve your financial health today!
What Is Financial Health?
To put it simply, your financial health is determined by how well your expenses and income match at the end of a given period, usually one month. If you end up with a surplus or “in the green” after each month, then you are financially healthy.
On the other hand, if you are breaking even or finding regular deficits, or you are “in the red” after each month, then that’s a sign you need to improve your financial health with smart spending.
Proper financial health will allow you to save money, prepare for unexpected expenses, plan for retirement, and live a happier life. Let’s talk about how!
Breaking Down Your Expenses
First, let’s define the categories and subcategories of your expenses, along with the approximate portion of your income they should represent. Once you understand this, it’s important to look over your own financial situation and see what needs improvement!
Essentials
Ideally, you want your essential expenses (needs) to take up 50% or less of your monthly budget. This includes:
- Rent or mortgage payments
- Groceries
- Utilities
- Recurring bills (not subscriptions)
- Auto payment
- Insurance
The list goes on, including any of your personal needs. If you check your bills and find that you are within a couple of percentage points from 50%, then you’ll only need to make some slight adjustments. For example, you can try finding ways to save on groceries, utilities, and more.
However, if you find that you’re closer to 60% (or even more), then you may have to consider some serious adjustments like downsizing. More on that later. If you find you’re going under 50%, then it isn’t your essentials that you’ll need to sacrifice!
Wants
“Wants” is the category that most people struggle to contain, as we all want to spend our hard-earned money on things we enjoy. These types of expenses include:
- Personal shopping
- Online purchases
- Nightlife
- Going out to eat
- Subscriptions
Ideally, you want to keep these types of purchases under 30% of your monthly income. It can be challenging at first, but if you take a look at where your money goes, then it will be easier to adjust your spending accordingly.
For some simple steps that can go a long way, you could try making coffee at home, meal prepping, canceling subscriptions you don’t use, and hanging out with friends at home. If you spend 25 cents to make coffee at home instead of $4.25 every morning, that alone will save $120 a month!
Also, if you’re spending a lot of money going out to eat, spending more on groceries could save you hundreds of dollars over the course of each month.
Savings
Whether you want to put your money into a savings account or some type of investment, preparing for your future is important. 20% of your income should be going toward retirement funds, savings, bonds, stocks, precious metals, real estate, or anything you want.
If you can’t afford 20%, then that’s a clear sign that you aren’t currently living within your means.
Fitting Your Budget to Your Means
First, and most importantly, take a look at how much you are making and how much you are spending. It’s hard to fit a budget into those categories we mentioned if you don’t understand how your money is coming in and where it’s going.
Try to use credit or debit cards for a full month to make it easier to track. Then, check your statements at the end of the month, along with your pay stubs, and see which areas need the most improvement.
From there, follow some of these tips to help you fit your budget within your means!
Save on Housing
If you’re currently renting, then consider saving up for a house. Rent is often higher than mortgage payments, and you aren’t building equity with each payment.
Find a house that fits your needs and price range, adjust your budget, and start saving for a down payment.
Get Out of Debt
More specifically, get out of high-interest debt. If you’ve ever heard the expression “poverty is expensive”, this is one of the main reasons why. The more debt you have to take out, the more expensive it becomes to climb your way out of the hole.
This is most apparent with both credit card debt and payday loans. If you have an interest rate of 25% on $20,000 worth of debt, then you could find yourself with an extra $5,000 in a year if you only make the minimum payments.
Also, if you have to take out more debt, you’re a day late on a payment, or an unexpected emergency comes up within that year, it could be a lot more than $5,000.
For that reason, getting out of high-interest debt should be your top priority, even higher than investments or savings. Always have enough saved to prepare for an unexpected expense, but prioritize paying off troublesome debt.
One option is to take out a personal loan with lower interest rates and pay off your high-interest debts. That way, you’ll have preset installment payments without having to worry about compound interest adding up over time.
Also, this will help you improve your credit score, which can help you save money on future loans. If you decide to buy a house in the future, your means will increase dramatically with a higher credit score and limited debt!
Save on Your Commute
With gas prices at record highs around the world, it may make sense to save money on your commute. If you live in a city with decent access to public transportation, then consider selling your car. This way, you’ll eliminate the need for car insurance, auto payments, and high gas bills.
If it makes more sense for you to drive, consider buying a better car for your budget. Toyotas and Hondas tend to be the most reliable cars on the market, often exceeding a 500,000-kilometer lifespan, and they are no more expensive than other comparable cars on the market.
Prioritize
“Keeping up with the Joneses” can only last for so long for the average income, and how much satisfaction do you really get out of it? Don’t focus on where other people are spending their money. Instead, prioritize where your money is going.
Buying new items will only offer momentary pleasure before it just becomes another “thing”. Studies have even shown that people who spend their money on experiences rather than items live happier lives!
Boost Your Income
If you’re having trouble living within your means, then try to increase your means! We live in a world where that’s easier to do than ever before.
Online, there are thousands of ways to earn money for people with any skills or resources. Have a car or bike? Try delivering for DoorDash or driving for Uber/Lyft.
Are you a good writer, editor, videographer, photographer, coder, graphic designer, or anything else you could possibly do on a computer? If so, there is more than enough freelance work to go around that you can do entirely on your own time.
If your schedule is already too tight for your liking, try asking for a raise at work! A 5% raise could help you fit your budget into your means within a month!
Learn to Say No
If you have trouble with overspending when you hang out with certain friends or family members, learn to either say no or find cheaper alternatives. Cooking dinner at home is far cheaper than going out to eat, and there are plenty of free activities to enjoy throughout Canada.
Taking a walk, going for a hike, enjoying nature, and so much more are entirely free and may keep you out of financial trouble. Whatever floats your financial boat!
Take Care of Your Financial Health
Now that you know how to improve your financial health, why wait? The sooner you put these tips into practice, the sooner you can start saving money and living within your means!
Stay up to date with our latest financial news and feel free to contact us with any questions or for help with your finances!
