When you want to take control of your personal finances, knowing where to start is essential. There is a list of key things to know before you start investing. Here are five aspects of your personal finances that you need to master.
1. Make a budget
Budgeting is boring, but there are some techniques that can make the exercise less strenuous. Marc Blais, CPA, and business coach gave us one of them which is to differentiate your fixed costs from your variable costs.
First, you need to identify your fixed costs. These are expenses that are periodic and invariable from one period to another. For example: renting your apartment; your telephone plan; your taxes; or the repayment deadlines for one of your loans.
Your variable charges represent charges that are not necessarily periodic and are not the same from period to period. For example your grocery store; your gasoline costs; as well as all expenses in clothing or outings, among others.
Once these charges are identified, place the number of your fixed expenses in an account at the beginning of each month. This will allow you to set aside money to pay for your fixed expenses. In addition, if you really want to plan ahead, add 5% of the amount of these fixed costs in the account. This amount could allow you to cover an unforeseen expense. At the end of the year if you haven’t needed that 5%, you can put it in an RRSP or TFSA.
To help you make a budget you can also rely on your bank. Indeed, a large number of financial institutions offer a personal finance management tool. For example, you have: Managing my expenses at BMO; My financial management at RBC; or My Budget with Desjardins.
2. Control your debt
One of the bad things to do when you’re in debt is not wanting to check your bills and letting things get worse. As you deal with your debt, you will find that your financial situation is generally more positive than you imagined.
Take the example of a person who earns $ 40,000 a year and has $ 5,000 in debt spread over three credit cards. We are talking about a level of debt that should be manageable. But how to pay off such a debt?
First, change your consumption habits. Second, consolidate that debt by meeting with your banker. Offer to consolidate the debt with a single loan that you pay back over three or four years, for example. It may sound like a long time, but it’s part of learning how to manage your personal finances and preventing you from making the same mistakes again.
3. Understand the issues of real estate ownership
Buying or investing in real estate is usually the biggest expense you will ever have to make in your life. It is therefore important to make the right decisions.
Fixed-rate or variable rate?
When you take out the loan from your bank, you must choose between a fixed rate or a variable rate. For those who have forgotten the difference, remember that a fixed rate will be the same over the entire length of the loan, while a variable rate will be subject to changes in interest rates.
On the one hand, if you borrow at a fixed rate, the interest rate is generally higher than if you borrow at a variable rate. On the other hand, you ensure stability in the repayment of your interest.
On the other hand, if you borrow at a variable rate, you are likely to pay less interest, but there is a risk that it will increase. This is because market interest rates are generally below fixed rates, but can be volatile. So how do you choose?
Here you have to question your ability to pay the monthly mortgage payments since there is a very real risk that they will increase significantly. Let’s take an example. From 2000 to 2010, the Bank of Canada’s key rate varied between 0.25% and 6%. This difference, of 5.75 points, is quite significant and revealing.
If you cannot afford an increase, choose a fixed rate for the next 5 years. On the other hand, if you can afford this increase, you can opt for variable rates.
Regardless of whether you go with a fixed or variable rate mortgage, keep in mind that it’s worth shopping around for the best possible rate.
Let’s take an example. If you buy a property for $ 400,000 and a financial institution offers you a fixed rate of 3.29% that’s like paying $ 1,707 per month for 25 years. Say another institution offers you a fixed rate of 3.69%, that’s like paying $ 1,780 per month for 25 years. Per month, the difference between these two proposals is $ 73 and therefore $ 876 per year. Over 25 years, you save $ 21,900 with the first institution.
4. Set up a savings plan
Setting up a savings plan comes down to setting specific financial goals. For example, you might want to buy a house in 15 years or get a new car in five years. Projecting allows you to identify savings choices that will allow you to reach your goals.
In addition to their personal savings plan, savers who are in a relationship would benefit from setting up a joint savings plan with their life partner.
Let’s take an example. If you want to complete a project in five years at a cost of $ 50,000, you know you need to save $ 10,000 per year or $ 833 per month. You could then open a savings account, which could take the form of a TFSA, in which you would deposit the sums necessary for the realization of your project. Then you just have to wait.
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Personal finance is a term that covers managing your money as well as saving and investing. It encompasses budgeting, banking, insurance, mortgages, investments, retirement planning, and tax and estate planning.
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The finance field includes three main subcategories: personal finance, corporate finance, and public (government) finance. Financial services are the processes by which consumers and businesses acquire financial goods.