by Scott Hannah
Q: I’ve been living paycheque to paycheque for years even though I make a good living as a tradesperson. Maybe it’s because I am turning 30 this year that I’ve come to recognize that I can’t ignore my finances anymore. All that I’ve managed to accumulate on my own is a three-year-old truck but at least it’s paid for. I don’t own a house or condo and have less than $1,000 in savings. I also owe about $10,000 on my two credit cards. I want to turn things around in 2017 but could use some help in determining the best financial moves to make. Any advice would really be appreciated. ~Jeremy
A: Long-term improvement in a person’s financial wellbeing will only come about by making effective changes to the way we manage our money and having concrete financial goals to keep us motivated to stay on course. It’s easy to get distracted in the early stages and give up when you are not making progress as fast as you would like. Financial success doesn’t come overnight or with only one smart money move. Anything worthwhile takes time and diligent work; approach this in the same manner as you did to become a journeyman in your trade.
The one thing all financially successful people have in common is that they set goals. They know what they want to achieve and find ways to make it happen. Once you adopt this mindset, you’ll be surprised how much easier it is to stay focused on finding ways to get what you want.
To help get you started on the path to financial wellbeing, here are 5 smart money moves you can make this year:
1. Make Your Budget Your Ally – Why It Matters
Without a spending plan (budget) to guide your money decisions your chance of financial success is limited. Moving away from living paycheque to paycheque requires that you track and plan your spending in advance of receiving your paycheque. It also means reducing and setting limits on expenses that prevent you from achieving your goals. Set aside a portion of each paycheque in a separate savings account to pay for annual and seasonal expenses.
While it will take a bit of time to learn these new money management skills most people become comfortable managing their finances with a budget within three months’ time.
2. Eliminate Expensive Credit Card Debt
Credit card debt is one of the top reasons why people have difficulty saving. Assuming your two credit cards have an average interest rate of about 20%, you’re paying approximately $2,000 in interest charges each year. Essentially you’re paying for your past instead of saving and planning for your future. Once you are balancing your budget effectively each month I would encourage you to obtain a low interest line of credit from your financial institution to consolidate and pay off your credit card debt.
At an 8.0% APR (annual percentage rate) and a monthly payment of $455 you will be completely free of your debt in 2 years’ time. I also encourage you to put your credit cards away until you have paid off this debt or until you are disciplined to the point of only using your credit cards for safety and convenience, and always pay off the balance in full each month.
3. Step Up Your Savings
To increase your savings you need to live below your means. Many people describe this as being frugal with their spending, which is different than being cheap. Frugal means you’re less wasteful, you ensure that you get very good value for your purchases, and you are happy living with less clutter and stuff. Also look for opportunities to increase your income by putting your skills to good use outside of work. Earning an extra $100 a week can make a huge difference in helping you to achieve your financial goals.
To get the most out of your savings have the amount you save automatically transferred to a separate savings account each payday. Also detach this savings account from your debit card to reduce the temptation to use these funds for discretionary purposes.
4. Build an Emergency Savings Fund
Equally important to paying down your credit card debt is building an emergency savings fund. This may seem odd to have this as one of your smart money moves for 2017 but if you don’t have savings on hand to manage an unexpected car repair you’ll likely turn to your credit cards to manage the expense. Three or more months of carefully paying down your debt could be wiped out if you don’t have some savings on hand. Ideally a person should have a minimum of three months of living expenses on hand to manage unforeseen financial expenses. Start with a goal of saving up the equivalent of one month’s living expenses each year until you have built up your safety cushion.
5. Increase Your Financial Skills and Knowledge
There are a lot of resources available online and offline to help a person become financially literate to the point where they have the skills, knowledge and confidence to make sound financial decisions. Read books and blogs, attend a money skills workshop or webinar, talk to your banker, or ask a friend or family member who is good with their money for advice and tips. The reality is that none of us were born with money skills. Don’t let that scare you; instead, make it your goal to learn more.
The Bottom Line on Smart Money Moves for the New Year
The key to making smart money moves is recognizing that it takes time to develop new habits; don’t set yourself up for failure by having goals that are beyond your reach. Financial wellbeing is a journey not a destination. Along the journey setbacks are bound to occur. This is normal especially in the early months. Use these setbacks as an opportunity to learn and hone your skills and abilities and you will find yourself moving closer to achieving success.