You have now learned about financial planning and how to create your personal budget from our last two blogs. Before creating your budget or while you are working on it, here are some random tips that have been helpful to us.
Cash inflows…don’t we all want more of that?! Well perhaps you already do. Other sources of income might include rental or investment income, or perhaps you receive dividends from a family business, parents who are sharing early inheritances with you, child support or the government with child tax benefits and such. Some of this you might need to for your day-to-day living but if not, this might be where some of your extras come from. For example, child support is meant to help pay for your children’s food, clothing and such so it should be added to your normal cash inflows. Child tax benefits, on the other hand, although the government gives it for the same reason, if you don’t need it in your monthly spending, this could be invested into an RESP for your child’s education fund which then has the added benefit of the government investing into it too.
There are many expenses that are only once a year; i.e. property tax, water & sewer, house insurance, vehicle insurance, etc. You generally have options to pay some of these monthly but for things like house or vehicle insurance, you will be charged interest. Albeit a nominal amount, if you have the ability to pay it annually, why pay the interest when you don’t otherwise need to. Some mortgage companies will also take your property tax with your mortgage payment so that it is pre-saved for when it comes due.
For myself, I preferred paying once a year and not pay the added interest. But I would always make sure I had the money saved if I chose not to pay monthly. To do this, I setup a savings account with an automatic transfer every month for 1/12 of the annual premium. And I always rounded up because let’s face it, when has your property tax or insurance ever decreased?!?
Besides taxes, our mortgage is likely our largest expense every month. My mortgage was originally setup to match my semi-monthly pay when I was an employee. But as I transitioned to being self-employed, I switched to bi-weekly and then to weekly. Although the payments over the course of the month were essentially the same, I found that I saved a lot more on interest and the balance of my mortgage went down even faster.
I also structured my mortgage so that when my principal went down, the difference went into a line of credit that I could access if needed, which can sometimes come in handy when self-employed or extra extra (yes written twice intentionally) expenses come up. Talk to your mortgage broker about this one and see if it’s still available and/or will work for your situation.
Back to those unknown and unexpected things that come up. Your vehicle breaks down. Or the hot water tank on your house goes. This is where you want savings to help. So once you have determined the extras, you can then determine how much you want saved for emergencies. Again, I set up a separate savings account for this and the amount goes into my account weekly or monthly. Think about what you have spent on various emergencies in the past to help determine what to set aside. Some of those emergencies might have already come up while you were tracking your “every” penny so that would be a helpful guidance as well.
Vacations are a must. Away or stay-cation. It doesn’t matter but our brain definitely needs the break one-way or another. Therefore, another savings account was created for vacations. I set my budget for how much I want to spend and then it automatically transfers weekly too. Out of sight, out of mind and available for when I am ready to travel.
Savings are always beneficial regardless of how it’s done or what you call it.
Education and retirement savings are also set up weekly or monthly. For my children’s RESP, I try to save the maximum for each child where they benefit from receiving the full government grant.
For retirement, although it’s not in my near future, I save some here every month too. Where I save for this one is based on many other factors. If you are a union employee with a great pension, I don’t often recommend RRSP’s (personal choice) and will focus on the TFSA first so there is no tax impact on either side, the contribution or the withdrawal. Or sometimes a spousal RRSP is recommended if you have contribution room and your spouse doesn’t have a pension, like many self-employed individuals (besides CPP). The amount of taxable income is also taken into consideration; if your income is too low, you may not benefit from RRSP’s and a TFSA might be a better option. There are many other options like life insurance or non-registered accounts.
This is the time when you want a financial planner as part of your professional team as you will have extra to save or invest and they will help determine what your best options are while we continue to help with the tax aspects of those options. When I make mention of life insurance in the budget, I believe it should almost always be part of your plan so this here refers to an additional investing source.
Have any tips that have worked for you? Please share them on our social media or email to us and we will add them here.
**This blog is for information only and not to be used as tax advice or planning without first seeking professional advice. Information is subject to change without notice.