Financial Literacy

5 Good Money Habits to Boost Your Retirement Savings

~ Jessica ~ Leave a comment

Think back to your most recent savings goal. How long did you have to save in order to reach it? Was it a concert ticket or some new shoes that took a few weeks of budgeting? Was it a big-ticket item like a new computer or a summer vacation that took a year or two of planning in advance? Perhaps you’re currently saving for an even more ambitious goal: a car, a wedding, a down payment on a home? Although savings goals vary from person to person and range in size and scope, it’s likely that your longest-term savings goal will be your retirement.

Saving for retirement poses some unique challenges: How are you supposed to prioritize retirement savings against the long list of more immediate goals? How are you supposed to find the motivation to prepare for something that’s decades away? How can you quantify the amount you will need to save when you have no idea what your future will look like?

The good news is that you can boost your retirement savings by practising the same good money habits that apply to smaller savings goals. Read on to find out which money skills will also level up your retirement savings plan.

1. Eliminate roadblocks. No matter what combination of financial goals you have in the works, this is the top priority. Think of it as creating the right environment for your savings to grow. Savings thrive when they have long stretches of uninterrupted time in which to accumulate and compound, so it’s in your best interest to eliminate any obstacles that threaten those ideal saving conditions. Focus on paying off any high-interest debt—you know, the kind that sucks up money that could otherwise be going toward your goals (credit card debt is an example). Revisit the terms of any loans you’re paying off and do a little research on potential consolidation or refinancing options—you might find a way to pay down your debt more efficiently and free up some extra funds for your savings goals at the same time. Eliminating roadblocks also means having a healthy emergency fund in place, so that your savings progress doesn’t get wiped out by an unexpected job loss (a good starting point is three months’ worth of expenses).

2. Automate savings. So your emergency fund is set up and your debt-management plan is in place—now is a great time to see if there are ways to automate your savings at work and at home. Can your employer automatically deduct your retirement contributions from your paycheque? Can you set up your online banking system to regularly transfer a certain amount to your savings account? Look for ways to make the act of saving easier, more consistent and less time-consuming.

3. Picture your goals. One of the reasons it’s hard to get motivated about saving for retirement is that it’s an abstract concept—especially when pitted against more self-explanatory savings goals like “new car” or “tropical getaway”. Take 10 minutes to ask yourself a few basic questions and to design your ideal retirement: do you see yourself relaxing at the beach, or enjoying a beautiful home and watching your family grow, or pursuing a passion or hobby you couldn’t make time for in your working years? Does your ideal retirement mean indulging yourself, or would you prefer to downsize and keep things simple? Would you want to continue working (part time or in some capacity) throughout your retirement? Do you picture moving into a new space? A new city? A new country? Fleshing out the details of an otherwise ambiguous savings goal allows you to ground the goal in reality and to get excited about it—and it’s easier to contribute to a savings goal you’re actually excited about.

4. Practice living with less. Increasing contributions to your savings goals (usually) means decreasing your monthly spending. This doesn’t necessarily mean adopting a super-frugal lifestyle; however, if that’s what you want to do to get to your goal sooner, go for it! Create some monthly challenges (like a month of packed lunches, or a month of free things to do) to see the impact of spending a little less. Put the money you would have otherwise spent towards your savings goals. If you live with a partner, challenge yourselves to live off of one income, and put the other toward savings. You will soon discover that spending a little less here and there does not require a complete lifestyle overhaul. Understanding the give-and-take of budgeting is a powerful skill, and it’s easier to cut spending when you can put it in the context of achieving a goal. Cancelling a cable package “just because” is not an enticing idea—but what if you knew that cancelling that cable package and investing the money saved would allow you to retire four years sooner? Having the right motivation can make it easier to save.

5. Increase savings along with income. This tip is an extension of living with less. Try to maintain your current lifestyle and expenses even as your salary rises over time. As your income increases, increase the amount you contribute to your savings goals. It’s very easy to slip into a slightly larger lifestyle after a raise. It’s equally easy to treat unexpected income as “extra money”, whether it’s a bonus at work or $20 in a birthday card from Grandma. There’s nothing wrong with rewarding yourself from time to time, but limiting your living expenses—even in times where you don’t have to—will free up more resources for your long-term savings goals. More importantly, you’ll be better prepared should your income levels take a hit. Allow your savings to scale up with your income, but don’t let your expenses scale up along with them!

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The good money habits outlined above will create a routine that motivates you to find a few more dollars to put toward retirement. Even little changes can make a huge impact on a long-term savings goal that has decades to compound and grow. Because time is on your side, there is a lot of value in prioritizing contributions (even small ones) to your savings goals now. Choose a couple of tips to put into practice this month, and notice the impact it has on your budget—and on your financial peace of mind.

Use Psychology to Build a Budget You’ll Stick With

~ Jessica ~ Leave a comment

When you start looking for financial advice (or any kind of advice, for that matter), experts will share their take on what’s “good” and what’s “bad”. In personal finance, there are some classifications that we can all agree on: Debt is bad. Emergency funds are good. Overdrawing your account is bad. Earning interest on your savings is good.

Aside from the obvious examples, the guidelines are a bit murky; plus, the financial advice gurus often contradict each other. One expert will tell you that spending money is “bad” and saving money is “good”. The next will say that saving money is “bad” and investing it is “good”. Another might tell you that there are some “bad” investments and some forms of “good” debt.

If you’re waging an inner battle of good vs. bad every time you whip out your credit card or peek at your monthly bank statement, it’s probably time to give your views on budgeting a shakeup. Start by losing the desire to classify everything as “good” and “bad”. There are good and bad ways to spend money, just as there are good and bad ways to save it. Following that logic, there are good and bad ways to budget.

A good budget is one that, quite simply, works for you. It allows you to meet your needs and plan for your goals, and—most importantly—it motivates you to keep on budgeting. Successful budgeting systems vary wildly in their approach and in the tools you need, but they tend to have the same three actions as building blocks:

  • PRIORITIZE
  • TRACK
  • REWARD

These building blocks not only help you organize your finances, but they also have the ability to boost your motivation (and there’s real science to back that up). Read on to see if your current budgeting system has all three building blocks in place.

  1. PRIORITIZE

What it means: Prioritizing your goals means taking a little personal reflection time and writing a few things down. Prioritizing your goals should not be confused with categorizing your expenses—we’re not talking about combing through your budgeting spreadsheet and pondering whether “fast food” and “takeout” should be combined into a single category. We’re not even talking about what you think you “should” be saving up for. No, we’re talking about your goals. What do you want your life to look like over the next few years? Is it your dream to train for a new career? To have an adventure in a foreign country? To throw an awesome wedding? To start your own business? To raise a family? Allow your goals to be a judgment-free zone—goals and dreams are as diverse as the minds and personalities behind them. In most cases, goals reach beyond the familiar trifecta of “pay off student loans, buy a house, save for retirement”.

Why it works: Prioritizing your goals gets you buzzing about what your money can do for you. There are a couple of motivating factors at work here. Number one: by prioritizing your goals, you are asserting your beliefs and your values. You are also reminding yourself of why you’re willing to adopt a budgeting system in the first place. Studies show that you’re more invested in activities that you see value in—and although budgeting literally deals with values (the dollars-and-cents kind), including your personal values in your budgeting system is what generates determination and stamina. Creating and sticking to a new routine is a pain if you think you have to or you should do it; it’s a lot easier if you’re mindful of why you want to do it. Number two: prioritizing your goals is a great starting point because it reminds you that you’re in charge. You have a say in where your money goes. Social scientists point to autonomy as being a critical element to sustain motivation—and what’s more autonomous than realizing that your budget is a collection of choices you make in order to create the life you want?

Get started: Grab a pencil and paper. Ask yourself what you want. Think about it for 10 minutes. Write the answers down. Realize they are achievable.

  1. TRACK

What it means: Tracking your expenses means being aware of where your money is going as you spend it. This is the part where financial advice experts start to disagree again: some swear by tracking your expenses with good ol’ pencil and paper, others swear by budgeting apps and spreadsheets, and some push more unique approaches like portioning your spending money into envelopes. The good news is that it doesn’t really matter how you go about doing it, but just that you do it. When you track your expenses, a couple of things come to light right away. You start to realize that every transaction, no matter how big or how small, is either contributing to a goal or taking away from it. There’s no such thing as “buying a pumpkin spice latte just because”. You will soon see that the cost of your fancy coffee comes out of somewhere—ideally out of your budgeted spending money, but potentially out of your vacation fund or your groceries or your student loan repayment plan. The second thing you’ll notice is that the longer you’ve been tracking your expenses, the more you’ll see evidence of your progress.

Why it works: Yet another critical element in sustaining motivation is competence, or your ability to do something well. As it turns out, we thrive on being reminded that we’re improving. On the surface level, tracking your expenses helps you to identify your spending patterns and to course-correct when necessary. More importantly, by tracking your spending, you’re also tracking your efforts. You’re creating a record of your progress along with a record of your transactions. Before long, you’ll have tangible evidence of how your actions and your follow-through are contributing to a calmer, happier financial life. You’ll see how capable you are of budgeting. You’ll find it easier (and even exciting) to keep your budgeting winning streak going.

Get started: Try out a new budgeting system today. Browse the App Store or do a quick web search, or pick up a book on the topic. Don’t spend much time evaluating or comparing budgeting approaches. Just pick one and try it out.

  1. REWARD

What it means: Rewarding yourself means encouraging and celebrating your progress as you create healthier financial habits. Don’t be afraid to use some creativity when defining your personal finance milestones and rewards. Milestones can be time-based (e.g., using a budgeting app every day for 30 days), achievement-based (e.g., paying off all credit card debt) or increment-based (e.g., having your emergency fund reach $500, $1,000, $2,000…). Rewards can take on many forms as well; material rewards are the most common, but consider incorporating time- and experience-based rewards into the mix too (for example, you can list “permission to spend an entire day just vegging out” as a reward).

Why it works: Quite simply, rewards feel good. They highlight our achievements and renew our commitment. As kids, we loved earning those gold star stickers, and although that familiar achievement/reward structure practically disappears in later years, it doesn’t mean that rewards are any less effective in adulthood. By assigning rewards to the milestone of any given goal, you’re creating added incentive and boosting your motivation. When you earn, claim and enjoy a reward, your brain gets an extra hit of dopamine, which in turn increases your focus and drive.

Get started: Set a timer for 10 minutes and brainstorm two lists: a list of budgeting milestones and a list of possible rewards. After the 10 minutes are up, assign the rewards to your milestones. They should reward your effort realistically and be super exciting to work toward at the same time. When you reach your milestones, claim your rewards.

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The act of creating a budget contributes to your ability to follow it through. It solidifies your values, it promotes competence and it highlights your achievements as you work through it. Incorporating Prioritize, Track, Reward into your budgeting method of choice will boost your motivation while tackling your personal finance goals at the same time.

Finding The Loan That’s Right For You

~ Jessica ~ Leave a comment

Loans help finance some of our biggest goals in life. They can provide access to possibilities that we can’t afford upfront—possibilities like going to school, buying a home or starting a business (to name just a few).

A loan is also one of the biggest financial commitments we make in our lifetime. Rushing into a loan without fully understanding how it will affect your budget can create a very stressful situation that can quickly spiral out of control.

The good news is that you can avoid this stress entirely by choosing the loan that’s right for you: a loan you can afford, from a reputable lender, with a payment schedule that makes sense.

Not sure where to start? The five tips below will help you shop smarter for the loan that’s right for you.

#1: Take your time

Reading the fine print is not fun, researching loan options is not exactly exciting and asking financial questions can feel intimidating—but these all play an important part in helping you find the right loan product. The process is not easy, and if you’re tempted to rush through it, just remind yourself that being thorough now can save years of financial stress down the road. You should never feel pressured to sign anything on the spot. Remember: this is your loan and your future—you’re in control!

#2: Be honest about your budget

In order to choose the right loan, you need to have a clear idea of how much you can comfortably afford to borrow. Spend some quality time with your budget (if you don’t have one, now is a great time to make one). You’ll want to come up with a range, so calculate a few different scenarios:

  • If your income and expenses stay exactly the same as they are now, how much of a monthly payment could you afford?
  • If you suddenly lost your job, how many payments could you make before running out of cash? Do you have an emergency fund in place?
  • Is there an area of your budget where you can reduce spending to cover a planned (or unplanned) increase in your monthly payment?

Picturing your loan payment alongside your other budget items will give you a sense of what you can realistically afford so that you can confidently shop for a loan without worrying about the financial effect on your lifestyle.

#3: Give yourself some credit

Your credit score plays a huge role in determining the loan rate you qualify for. Additionally, knowing your credit score before you go loan shopping will save you some time by making it easy to weed out offers you’re not eligible for. In the meantime, keep up those good credit habits: pay your bills in full and on time, and try to use only 10% of your available credit limit each month.

#4: Do some research

Start with brushing up on some basic loan terminology and then move on to learning about different types of loans (such as secured loans, unsecured loans, fixed-rate loans and variable-rate loans). Research loans online to get an idea of the interest rates for the products you’re interested in. When comparing various loans, look at more than just the Annual Percentage Rate (APR). Consider the fees, the payment schedules, the eligibility requirements, and the application and approval process. Also, check out the history and reputation of the various lenders—especially if you stumble upon offers that seem too good to be true.

#5: Check in with your credit union

Credit unions are known for offering competitive rates on loans. You may also qualify for discounts based on your existing membership or because you have other banking products with your credit union.

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Once you’ve done your research and you know your budget inside and out, then arrange to meet with a loan officer. And bring a ton of questions with you! Don’t be shy—ask about any wording you don’t understand. Ask for your lender’s opinion and ask if they’ve worked with someone in a similar situation as yours. To really put your loan in context, ask a variety of “What happens if…?” questions:

  • What happens if I miss a payment?
  • What happens if I default?
  • What happens if I want to pay off the loan faster than expected?
  • What happens if I pay weekly instead of monthly?

The most important thing to remember is that taking out and repaying a loan is not intended to be a stressful experience—it’s intended to make large purchases or investments affordable for you. It’s easy to get sucked into horror stories about things like foreclosures and student debt, but a little knowledge and preparation will make your own loan story a lot happier and a lot less dramatic. So study up, focus on your specific needs and ask around—your perfect loan is out there!

Where You Seek Financial Advice Says a Lot About You

~ Jessica ~ 2 Comments

How did you decide where to open your first bank account? Where did you learn to budget or pay bills? If you have a money question now, what do you do? Who do you turn to?

If you’re under the age of 30, your answers to the above questions are likely some combination of “my parents”, “the Internet” and “I don’t know—I just kind of figured it out”. Although you might have been lucky enough to take life skills classes in high school, most young adults don’t receive any kind of formal financial education. So, it’s likely that you’ll need to seek guidance when it comes to money management.

That guidance can come from any combination of sources: family, friends, apps, blogs, classes, forums, financial institutions, articles, books—the list goes on. No source is inherently better than the others, as long as it empowers you financially. But the reality is that when it comes to getting financial advice, most of us have a comfort zone or a pattern we fall into: we ask mom and dad because that’s how we’ve always done it, or we start with an online search because we’re not comfortable with asking someone for help. Your default information sources say a lot about you and your values, and even though each source has good things going for it, it’s important to keep an open mind. Your financial health can always benefit from including new sources of advice.

Advice Source: Parents and Family Members

What it says about you: Responsibility is important to you, and you believe that big decisions should only be shared with people you absolutely trust.

Why it’s great: Recent studies have found that 49% of Millennials turn to their parents for financial advice. It’s not hard to see why—family members have a trust factor that just can’t be rivaled by any financial institution. They’ve known you literally forever and they truly have your best interests at heart. They’re familiar and accessible and, since they’ve guided you through most aspects of life, it makes sense that they guide you through your finances too.

Where it’s lacking: No two families are alike. In some households, money is talked about casually and in others the topic is totally taboo. Some parents are fully involved in teaching their children about money; others get stressed out even thinking about it. Parents are an excellent resource if they’re money-savvy and if they’re comfortable talking to you about finances. If that’s not the case, then you might want to look for other sources of financial information before consulting with mom and dad.

Advice Source: Financial Advisor or Financial Planner

What it says about you: You value expertise in decision-making, and you’re not afraid to ask for help from a professional.

Why it’s great: Whether you consult with an advisor at your financial institution or hire an advisor independently, it’s hard to top the results you get from working with a dedicated professional. Having an expert assess your financial situation and design a plan for you is an extremely powerful tool because they can recommend products, services and strategies that you might never have come across on your own.

Where it’s lacking: Many young adults shy away from this advice source. One possible reason is because, as helpful as a financial advisor can be, reaching out to one can be intimidating if you’re used to your finances being a very private matter. Maybe you feel embarrassed about your current level of financial understanding, or maybe you’re not used to talking about money. Using some other sources on this list to gather information before meeting with a planner can help you feel in control and better prepared.

Advice Source: Personal Finance Blogs/Online Forums

What it says about you: You value privacy when it comes to your finances, and you know that research is critical before making any important decisions.

Why it’s great: It’s fast, it’s specific and it’s private—the Internet is great for financial guidance. Some helpful online resources include your credit union’s website, personal finance blogs geared toward your life stage, personal finance sections on news sites, and FAQ sections or forums on popular financial websites.

Where it’s lacking: As with all online content, you need to have a critical eye when gathering data. Who’s the author of the content? What’s their motivation? Is this review biased? Is that research trustworthy? When you use the Internet as your go-to information source, it’s up to you to sift through all the sites and articles to find the content that’s most relevant to you. Getting a second opinion (or better yet, a professional opinion) on a topic you’ve been researching is a great way to get more comprehensive advice.

Advice Source: Friends and Peers

What it says about you: Maintaining the status quo is important to you. You feel most confident with decisions that align with what others are doing.

Why it’s great: Friends and other peers can be a good place to get financial advice— they’re typically in the same age range, they may be facing some of the same financial challenges or situations as you, and they might be easier to talk to than your family. They’re believable role models and can serve as good examples of what certain products, services or financial habits look like in practice.

Where it’s lacking: Even the closest of friends can have dramatically different financial backgrounds. When you go to your friends for financial advice, it’s very easy to compare yourself to them; in some cases, that can do more harm than good. Everyone has a unique set of financial priorities and circumstances. Getting general financial advice from your friends is great, but when it comes to more specific advice, look elsewhere.

Advice Source: Apps

What it says about you: You value efficiency and are always looking for ways to improve and upgrade daily tasks.

Why it’s great: Personal finance apps are wonderful resources because they’re often better at slotting into our busy schedules than some of the more traditional approaches to learning about personal finance. Why bother researching different budgeting systems when a comprehensive budgeting app is just a 99-cent-download away? Convenient and well-designed apps that fill a real need can actually lead you to pay more attention to how you manage your money.

Where it’s lacking: Personal finance apps are usually geared more towards actions than they are to education. They’re a great way to check an account balance on the fly or to set up a budget, but they don’t always provide the education that goes along with those tools. Apps are awesome tools that tend to work best when combined with a broader understanding of financial topics.

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Also consider how your credit union can help you further your financial knowledge. If you were to draw a diagram of your financial advice sources, your credit union would sit quite comfortably in the middle. It may not be related to you, but your credit union does have your best interests in mind as a member-owner. Your credit union can also provide you with current, professional advice and can give you access to all sorts of additional resources—both online and in person. It’s worth checking out, especially if your current combination of financial resources isn’t quite making the cut.

All About Registered Disability Savings Plans (RDSPs)

~ Jessica ~ Leave a comment

rdspseminar-image

Are you …

  • Receiving the Disability Tax Credit?
  • Less than 50 years old?
  • A Canadian resident?

You could be eligible to receive up to $4500 annually in government grants and bonds.

Join Randall Smisko of First Wealth Management for an informative evening presentation on everything about RDSPs.

The RDSP is a Canada-wide registered savings plan for people with disabilities, and is designed to help people living with a disability and their families save for the future.

Wednesday November 23, 2016
6:30 PM – 8:00 PM
Powell River Recreation Complex

To register, contact the Powell River Recreation Complex at 604-485-2891

To Lease or To Finance: That is the Question!

~ Tara ~ Leave a comment

When it comes to buying a new car, you have three options: purchasing it with cash, purchasing it through a loan (also known as financing) or leasing it. For most shoppers, the decision comes down to buying or leasing.

On the surface, the differences between leasing and buying a vehicle seem fairly straightforward. Leasing a car means you’ll usually have access to a new set of wheels every few years; buying it likely means that you plan to drive the same car for a much longer period of time. Leasing usually includes a warranty that covers most of your repairs; buying means accepting larger repair costs, which are inevitable as the car ages. Leasing agreements can limit your mileage and your ability to customize your ride; buying means you can put as many kilometres as you want on the car and customize it however you’d like.

Looking only at the comparisons above, you might conclude that buying a car is a more practical and economical option than leasing a car—but if that’s really the case, why are monthly lease payments so much lower (often 40% lower!) than monthly loan payments? Why is leasing considered more expensive in the long term if you’re paying less on a month-to-month basis? To answer these questions, let’s take a look at the concept of depreciation.

Depreciation means a loss of value over time. New cars are a textbook example—you’ve likely heard that a car loses thousands of dollars in value the moment you drive it off the lot. That’s accurate, and that’s depreciation at work (and yes, it can be kind of depressing).

All cars depreciate in value over time, but the steepest drop happens in the first three to five years, as you can see below:

  • Brand new to 5 years old—the car depreciates by 15% to 20% of its value each year
  • From 5 years to 10 years—the rate of depreciation slows slightly to 10% to 15% of its value each year
  • 10+ years—the rate of depreciation tends to level out to less than 5% a year. By this time, the car is usually worth less than one-fifth of its retail price!

Depreciation takes its toll on the value of every vehicle. However, your decision to lease or buy will have an effect on how that depreciation influences your finances.

When you finance a car, you own it once you pay off the loan. This means that you personally take the hit on its depreciation, but it also means you also “own” its residual value. Although that value depreciates over time, if there comes a time when you’re ready to sell it or trade it in, you get the benefit of that resale or trade-in value.

By contrast, when you lease a car, you never actually own it. The company that leases the car to you is responsible for selling the car once you’ve completed your lease term. The leasing company also ultimately deals with the car’s depreciation in value. You get to drive a brand new car without needing to think about its loss in value. That sounds pretty great, right? In reality, even though the leasing company deals with the eventual sale of the car, you’re the one who makes up for its loss in value through your monthly payments. That payment includes an estimate of how much the car will depreciate by the time your term is up. Monthly payments are lower because you’re not paying for the entire car—you’re just paying for how much the car will depreciate in those few years that you’re driving it (a period of time when, coincidentally, the car depreciates the most).

When you finance a car, the monthly payments are higher because you are paying for the entire car, plus interest on the loan. When you pay the loan back, your monthly payments stop (unlike leasing payments, which continue as long as you’re still leasing) and even though your car will have depreciated in value by that point, you will own the remaining value.

As with any major financial decision, there are also other factors that come into play. You need to be realistic about your budget and honest about your lifestyle, and you need to figure out what’s most important to you as a new car owner. How comfortable are you with the limitations set by a lease agreement? How prepared are you to pay for eventual car repairs? Will driving a new car every two to three years be worth thousands of dollars more in the long run? To some people, it might be—it all depends on a combination of your personal needs and preferences.

Be Prepared, Because Life Happens!

~ Rachael Barton-Bridges ~ Leave a comment

An emergency fund is an essential part of your personal finances. Its importance is stressed in almost every personal finance book and budgeting blog, and yet 27% of Canadians have one month or less of expenses in their emergency fund.

If an emergency fund is, in fact, so important, why doesn’t it seem that way? Why is it so easy to procrastinate on emergency-fund saving?

The term itself could be a source of confusion. The word “emergency” brings to mind images of car crashes, natural disasters and terrible accidents—and although these are valid examples of emergency expenses that affect people all across the country every day, they’re extreme enough that it’s difficult to imagine ourselves in those situations. It can be difficult to set aside a large chunk of change for emergencies when you “just don’t feel that your car is going to break down today”. Our wants (or discretionary spending) often feel more immediate than our need to cover hypothetical and unpredictable emergency expenses.

The reality is that emergency expenses come in many forms and that there are less traumatic examples out there that would be equally good at messing up your financial situation, so it might make more sense to think of your emergency fund as a “life happens” fund.

But, whatever name you give it, absolutely everyone needs an emergency fund in place because no one is exempt from life’s surprises and obstacles—and while we can’t completely prevent emergency situations, we can at least limit their potential damage. An emergency fund allows you to respond immediately to financial emergencies, which allows you to handle the situation without having to deal with additional stresses like struggling to make ends meet or spiraling into a cycle of debt.

If an expense is unexpected (or it results from an unexpected circumstance) and it has the ability to derail your regular cash flow, then it’s an emergency expense. By that definition, a delayed insurance reimbursement is as much of an emergency expense as a meteorite landing on your car. The important part is being prepared for those expenses, no matter how mundane or how extreme they turn out to be.

Let’s look at what types of expense should—and shouldn’t—be dealt with by an emergency fund.

Expense Type #1: Known unknowns

“Known unknowns” are situations that we can partially anticipate—so this is the type of expense that should not be dealt with by an emergency fund. These situations are on our radar (known), even if we don’t know exactly when they will happen (unknown). For example, if you own a vehicle, you know that at some point it will need repairs, just like you know that your home will eventually need a new furnace or that your pet will eventually need a visit to the vet.

A good budgeting exercise is to make a list of all the known unknown expenses you can think of. Then compare the list to your budget and see if there are any categories you’re not currently saving for. Odds are that there are probably a few areas your current budget doesn’t cover, so you’ll want to adjust it to include these additional categories.

Expense Type #2: Unknown unknowns

“Unknown unknowns”, which are the types of expenses that emergency funds are truly designed for, are situations that take us completely by surprise. We don’t know when they will happen, how much they’ll cost or even what they will be until they’ve happened. For example, a family member could suddenly fall ill and you need time away from work in order to care for them. Hopefully, you’ll never experience an unknown unknown, but if you do, the knowledge that you have an emergency fund to cover additional expenses will undoubtedly help to ease a stressful situation.

Expense Type #3: Underestimated known unknowns

Although your emergency fund is not intended to cover known unknowns, if one of those situations has spiraled into a bigger-than-expected expense, that is something your emergency fund would be able to cover. For example, although you have a budget for regular vet visits, you discover that your beloved pet needs surgery, which will cost $2,000. Or you might have savings to cover your car insurance deductible, but it takes three months longer than expected to receive reimbursement from the insurance company. In these situations, it makes sense to dip into your emergency fund to cover an underestimated known unknown.

How much money should be in your emergency fund?

Emergency funds vary widely from person to person. The regular recommendation is six months’ worth of expenses, but some prefer having nine months’ or a year’s worth tucked away. It’s a significant amount, as it should be—it’s what you would be living off if you didn’t have an income for an extended period of time. Whatever amount you choose, it’s a hefty savings goal and it will take time to meet it, but it will make all the difference in tough times. When setting your emergency-fund savings goal, consider the following:

  • Set mini-goals: Saving six months’ worth of expenses might sound downright impossible right now—and that’s a completely normal reaction. Instead of feeling overwhelmed and giving up on the idea, choose a smaller goal and then gradually increase it over time. When you’re just starting out, aim for $500 in your fund; once you’ve reached that goal, congratulate yourself and then set a new goal of $1,000. Once you get there, consider setting weekly or monthly contribution goals to stay on top of your savings.
  • Avoid wishful thinking: According to a 2014 Workopolis survey, it takes four months on average to find a new job. When planning your emergency budget, you might like to think that if you lost your job, you could turn it all around in two weeks—but that could be setting yourself up for a very stressful situation. It’s not fun to think about a worst-case scenario, but when it comes to emergency-fund planning, that kind of thinking can help you come up with a more realistic savings goal.
  • Imagine your lifestyle: If you had to quit your job in order to handle an emergency situation, what would your lifestyle look like? Would you be willing to rough it until you found a new job? Or would you need things to stay pretty much the same to stop your stress levels from skyrocketing? Consider your desired lifestyle carefully when planning your emergency fund. If maintaining your current lifestyle in times of emergency is a priority to you, you may want to save nine months’ worth of income, rather than nine months’ worth of expenses. But if rolling with the punches and going back to a diet of ramen noodles while you figure things out is more your style, then a smaller emergency fund would likely be able to meet your needs.

Ultimately, your emergency fund is about your peace of mind. Design it to fit your specific needs.

Boost Your Credit Score: 4 Myths Debunked

~ Tara ~ Leave a comment

Credit scores are an area of personal finance that seem a lot more mysterious than they actually are. Many people believe that improving them is a matter of trial and error and, as a result, there’s a lot of “credit score advice” floating around that can end up doing more harm than good. Four common credit score myths have been rounded up and debunked below:

MYTH #1: You have no control over your credit score

There are a lot of factors that make this myth easy to buy into—credit bureaus keep their exact credit score formulas a secret, you can’t access your credit report whenever you’d like online without paying a fee and it’s possible to be financially stable and still have a miserable score. It’s OK to find credit scores confusing, but if you have an accompanying “there’s nothing I can do about it” mentality, ditch it right now! Your credit score is a reflection of your borrowing and repayment behaviours, and that means you have a lot more control over it than you think.

MYTH #2: There’s a “quick fix” for your credit score

Although junk mail and late night commercials try to convince you otherwise, boosting your credit score doesn’t happen overnight. The good news is that the things you can do to positively influence your score are simple and don’t require a lot of time (or even that much effort!)—but the trade-off is that you’ll have to be patient while waiting for your new good credit habits to take effect. Your credit score is more of a track record than a snapshot, so consistency is key.

MYTH #3: Checking my credit report will negatively affect my score

This myth comes from confusing two different types of credit score inquiries: hard inquiries and soft inquiries. Hard inquiries are made by lenders or credit card companies when you apply for a new line of credit (a loan, a new credit card or a mortgage, for example). Soft inquiries are made by you or by others for background check purposes (a potential employer or landlord, for example). Because hard inquiries suggest you might be taking on more credit soon, they usually lower your score by a few points. Soft inquiries, on the other hand, do not affect your credit score in any way. This means you have nothing to lose by accessing your own score—in fact, doing so will help you understand what your current credit activity looks like and how you can improve it.

Note: there are some situations (like renting a car or a landlord running a credit check) where either a hard inquiry or a soft inquiry can be made. In these cases, it’s a good idea to find out beforehand what kind of inquiry will be made so that you know what to expect.

MYTH #4: Opening or closing a bunch of credit cards will improve my score

Even though these actions are the complete opposite of each other, this myth is still widespread—and very misleading. This is because opening and closing credit cards affects several different aspects of your credit score.

Opening new credit cards gives you more available credit, which in turn lowers your credit utilization ratio. This is a fancy term for the amount of available credit you actually use each month. (For example, if you have one credit card with a $1,000 limit and charge $200 to your credit card that month, your credit utilization ratio is 20%). Lowering your credit utilization ratio is a good thing, so opening new credit cards to boost your score might seem like a solid strategy. But remember those pesky hard inquiries? Opening a bunch of new credit cards means a sudden increase in the number of hard inquiries. Each hard inquiry docks a few points from your score, and if many are made within a short amount of time, it makes you look risky, which can further influence your credit score in a negative way.

So then closing a bunch of accounts must be the way to go, right? Not quite. Depending on the accounts you close, you could unintentionally be raising your credit utilization ratio and shortening the overall length of your credit history. Both of these consequences lower your credit score.

The best approach is to space out any credit account openings or closings. Try to time them in a way that any short-term negative impact on your credit score won’t interfere with an important upcoming car loan or mortgage. Do your research, only apply for credit products you need, and understand what a specific credit card is contributing to your score before making the decision to close it (that first college credit card may have a low limit and no rewards, but if it’s adding a few years on to your credit history, it’s best to keep it in rotation).


5 Identity Theft Jackpots (and How You Can Safeguard Against Them)

~ Tara ~ Leave a comment

Identity theft is nothing new, and yet it still manages to cost its victims billions of dollars (yes, that’s billions with a “b”) globally each year—not to mention the time and hassle involved in recovering a stolen identity.

The good news is that there are tons of things you can do to deter identity thieves. The bad news is that many of us do little beyond choosing a decent password—and some people don’t even bother doing that! Here are the top 5 information jackpots for identity thieves, along with helpful tips on what you can do right now to protect yourself.

  1.  Your Trash Can

Even if you’re really careful about the information you put online, your trash bags and recycling bin can still be an easy target for identity thieves. Dumpster diving may sound old school, but it’s still an easy way for identity thieves to get access to your personal information.

  •  Get a shredder (a basic model will run you $20 to $30 at a big-box store) and use it!
  • Get into the habit of shredding things before throwing them out, especially things like bank statements, expired credit cards, utility bills, cellphone bills, paycheque stubs, old boarding passes and travel itineraries, and ATM receipts.
  • Don’t forget to check your envelopes! Anything with your name and address on it needs to be shredded, too.
  1. Your Phone

Odds are that you’re carrying a lot more in your phone than just your contact list. With smartphone theft on the rise, protect yourself:

  • Have a password-protected lock on your home screen. This is a standard feature on all smartphones for a reason, so take advantage of it! Bonus points if your smartphone also has location tracking (also known as the “find my phone” feature).
  • Public Wi-Fi networks are not secure, so avoid checking your bank accounts or doing your online shopping from the local coffee shop or during your layover at the airport.
  • Do not store sensitive information on your phone—storing passwords or login information in a note-taking app is bad news.
  1. The PIN Pad

It seems like every few months a new point-of-purchase scheme emerges—skimming devices, keystroke loggers, ATM hacking… the list goes on! Here are some good practices for when you’re out and about:

  • When making a purchase, keep your debit or credit card in sight at all times.
  • Use your hand to block the buttons when entering your PIN number, even if there’s no one immediately behind you—a camera can always be watching.
  • Choose a good PIN. Avoid PINs derived from your personal information, like your telephone number, address or birthday. Avoid an easy-to-guess PIN, like the dreaded “1234”.
  • Change up your PIN, especially if you use the same combination for your debit card and for unlocking your cellphone.
  1. Your Mailbox

Like the trash-picker approach mentioned above, mail tampering is a low-tech but relatively easy way for identity thieves to compromise your personal information. Here’s what you can do:

  • Familiarize yourself with your billing cycles. A late credit card statement or a bill that never shows up could be a sign of mail tampering.
  • Identity thieves will sometimes request a change of address to illegally reroute your mail to a different location. If you suddenly stop receiving mail, check with the post office to make sure this isn’t the case.
  • Use a mailbox with a locking system to deter thieves.
  1. Your Computer

You would think that this one would be common knowledge by now, but every so often a virus or scam comes along that trips us up. Stay one step ahead of scammers:

  • Keep your firewall, anti-virus and operating system software up-to-date. No matter how new and fast your laptop is, it still needs protection.
  • Enable spam filters on your email accounts.
  • Look out for sketchy links and emails. Ignore any suspicious password reset requests, unexpected tracking numbers or anything that asks for your personal information via email.
  • Don’t overshare on social media. Do your Facebook friends really need to know what year you were born? Can people tell when no one is home based on your Instagram feed? Keep your accounts private and make sure you’re not accidentally broadcasting sensitive information.

By being aware of the top 5 information jackpots and by implementing these simple strategies, you can keep identity thieves at bay.