Starting out
Budgeting
One of the most crucial parts of managing your financial affairs is establishing and maintaining a realistic budget. Without understanding the sources and uses of your income, you will not be able to understand where you are financially and certainly not where you are going.
It is probably safe to say that the majority of people who encounter financial difficulties—sometimes even leading to bankruptcy—have not had or have not followed a proper budget. Financial issues are often the number one item that people cite as a source of stress in their lives. Establishing and becoming used to following a budget will go a long way to eliminating or at least reducing that stress. It may take some time and seem like a chore initially, but the benefits will be substantial and long-lasting.
Managing the Budget and Savings
Once you establish your initial budget, you need to consider what adjustments are needed or possible. If the final line is negative, it means that you are living beyond your means and will be slipping into a debt situation. This can cause you major problems, particularly in the medium- to long-term.
You may be encountering debt for the first time if you’ve taken out a student loan, financed the purchase of a car, or are using a credit card. If you are in a debt situation—or even if you just want to be able to save more each month—you should analyze your budget to determine where you may be able to find savings. The first place to look should be your discretionary expenses—things like eating out in restaurants or taking trips. However, you might find that even by reducing your discretionary expenses that you are still experiencing a monthly shortfall. Some areas where you might find savings are:
- Use public transportation instead of your own vehicle
- Bring breakfast/lunch to work and cut down on expensive coffee shop stops
- Host dinner parties to limit spending in restaurants – often healthier, too.
- Review your accommodation costs – should you buy a smaller house or rent a cheaper condo?
- Review your phone plan. Are your mobile/data costs too high?
Banking
When you are starting out in the working world, it’s very important to have a reasonable budget that you can stick to. Part of this process involves setting up an efficient banking routine so that you’re paying your bills on time and not paying more fees than necessary. Having a straightforward and easy-to-understand banking arrangement will go a long way to ensuring that you meet your financial goals with the least amount of effort. Here are some things to consider about banking:
Pre-Authorized Payments
In your parents’ day, they probably had to spend quite a bit of time ensuring that cheques for monthly expenses such as mortgage, heat, electricity, and telephone were prepared and mailed on time. Nowadays, most of these regular expenses can be structured so that the payments are automatically debited from your chequing account at pre-arranged times. You will receive monthly statements that will help you track your expenses and match them to your budget. It’s a good idea to set up pre-authorized payments to avoid late payment charges and interest on your regular expenses.
Overdraft Protection
You may find yourself in the embarrassing (and expensive) position where you have spent more money than you have in your account—such as when a cheque ‘bounces’. Most banks will offer overdraft protection when you apply for an account to help you deal with this situation. Usually overdraft protection will be in the $250 to $5,000 range so that if you are in a negative cash position, that shortfall will be covered by the bank through a temporary loan. There is usually a fee when the overdraft protection is used, and that fee can vary from bank to bank and can add up. You will also have to pay interest on the shortfall until it is repaid—and the interest rate can be in the 20% range. Most financial institutions will require that an account is in a positive position at least once a month in order to provide overdraft protection.
Important Note: Overdraft protection can be very useful for temporary shortfalls, and it is nice to know it is there. However, many people have fallen into the overdraft trap where they are using overdraft on a regular and ongoing basis and paying off the minimum shortfall for one month only to go into overdraft the next month. This is not only a poor way to manage your financial affairs, but it also results in substantial interest costs and fees. A proper budget that is realistic and that you follow closely can help you avoid this situation. While overdraft protection does provide peace of mind, ideally it should never be used.
Using Multiple Accounts
Depending on your financial situation and objectives, it may make sense to have several bank accounts.
Chequing Accounts
- deal with multiple deposits and withdrawals
- ideal choice for when you have ongoing, regular expenses
- pay little in interest on the money in the account
Savings Accounts
- pay a higher amount of interest
- charge you fees if yo make too many withdrawals from the account each month
- good choice for short-term savings: vacation, car, emergency fund
For longer-term savings such as a down payment for a home or retirement, there are other investment and saving options such as an RRSP or TFSA. Your advisors can help you determine what type of account(s) you may need to fit both your immediate, short-term and long-term goals.
Online Banking
In the modern, computerized world, online (or telephone) banking is widely available. It is an accessible and convenient way to do your banking that minimizes the actual visits you need to make to a branch. Your financial institution can help you set up your online access and give you the details of the various banking and investing features available to you.
Choosing a Bank Account
The Financial Consumer Agency of Canada has several useful online tools, including an Account Comparison Tool to help you choose the right account for your needs.
Talk to your advisor about your savings goals and what types of accounts or investments fits your needs and goals.