Improving your money management

Getting a better handle on your money is a common goal. A natural question that comes to mind is, ‘Where do I start?’ To help answer this question, the following post provides common next steps driven by major life events. This is the first of a three-post series that will cover:

1. Major life events (this post)

2. Your current financial situation

3. Your money goals and financial behaviour

Taking a more specific approach will help provide relevant and valuable opportunities to take your finances to the next level.

If you’re looking for a high-level checklist to get started, I offer the most common steps to take control of your finances. While this list is a great start, it can’t take into consideration your unique situation and preferences. If you’d like a more tailored set of opportunities, then let’s get to know your situation in greater detail.

Major life events

Many life events trigger opportunities to revisit your money. Here are some of the more common events, which we’ll cover in this post:

• Recent graduate

• New job

• Buying a house

• Recent child

We’ll discuss helpful resources, tax considerations, tools and mindsets that will allow you to navigate each moment to get the most from your money and life.

Recent graduate

Congratulations! You may be taking some time off to travel, be looking for the right role or have already found a position and be jumping right into it. The following list of ideas should help you get started:

1. Paying off debt

With more Canadians opting for post-secondary education and many financing part or all of the purchase through loans, entering the workforce with existing debt is more common each day. While we’d all love to be debt-free, it’s important to remember that the education you purchased often pays for itself over time. Either through an increased salary or the expanded mindset and experience set that you can draw on in the future.

• Your ability to repay your loan will depend on your ongoing expenses, how much you’re earning and how much you owe. As it’s likely not possible to adjust the amount you owe at this stage, let’s focus on your spending and how much you’re earning. You’ll also want to factor in how much of a priority it is for you to quickly pay off your debt.

• When it comes to your spending, one of the highest costs is likely to be housing. If you can live at home or find a suitable roommate for a few years, you can lower your spending significantly.

• If you can establish yourself at your new job early on, you’ll have an opportunity to ask for a raise at your annual review. While you’re still in the learning mode, you may benefit from earning technical skills suited to your job through resources like Coursera. You can apply any raise you’re able to achieve towards your student loans without impacting your current lifestyle.

2. Budgeting

With changes to your daily routine comes the opportunity to revisit how much money you want to be spending. Once you know how much you can spend, it’s essential to decide how it can bring the most satisfaction.

• Budgets are often seen as a limitation, something that tells you what you can’t do. However, a good budget allows you to spend guilt-free on what’s most important to you. If you list out what brings you the most satisfaction and ensure you always have enough money for those activities, you’ll be better off.

• A typical target is to budget 50% of your money for required spending (e.g., housing, groceries, transportation), 30% of your money for discretionary spending (e.g., hobbies, travel, dining out) and 20% for savings or paying off debt.

• While there are rules of thumb and targets, the most important thing to remember is that a budget is meant to cater to your unique preferences and circumstances.

• You can learn more about budgeting here. Or get the most from your money with our budgeting tool and 5 step walk through.

3. Building credit

If you had a student credit card, you might have already been building up your credit score during school. Regardless, it’s important to be aware of your credit score and to take steps to gradually improve it.

• Your credit score is a number that falls somewhere between 300 and 900. It signals to lenders your ability to take on and repay a loan.

• Financial institutions reference your credit score when deciding whether to lend you money and how much interest to charge you. Employers and landlords may also reference it.

• While taking steps to improve your score is helpful, it’s important not to obsess over your score or to take out products to increase your score. Best practices include:

  • Only borrow what you know you can payback.

  • Make payments on time.

  • Avoid maxing out your borrowing accounts.

  • Check your credit history occasionally to ensure there are no errors.

• There are several free online services to check your credit score, including Borrowell and Mogo. You can also learn more about credit here.

4. Lowering your taxes

The Government of Canada recognizes the benefits of getting a post-secondary education, and they’ve provided tax incentives for those who do. When you file your taxes on an annual basis, you can reduce the amount you owe by claiming these tax credits.

• A major benefit is the tuition tax credit, which allows you to lower the taxes you owe if you paid tuition in the current or previous years. You can currently receive ~20% (depending on your province or territory) of your tuition back through this credit.

• Another tax-saving opportunity is that interest paid on government student loans is tax deductible. If you paid interest in previous years, you may be able to carry it forward for up to five years to reduce your taxes.

• You can file your taxes each year through a growing number of online options. A service I’ve used in the past is SimpleTax. They allow you to automatically pull in some of your tax information if you have an online account with CRA. You can set up an online ‘My Account’ here.

New job

When you start a new job, it’s a great time to step back and look at your financial picture. Your income may have changed, allowing you to save more or requiring you to reduce spending. Your needs may have also shifted. Perhaps you can now take public transit to work. Here’s a list of ideas to get you started:

1. Paying yourself first

One of the most important and commonly referenced ideas in personal finance is to pay yourself first. Just because you receive a paycheque on a bi-weekly or monthly basis doesn’t mean you’re being paid.

• If all your money comes into the account and out the door to your landlord, the grocery store, local bars and cafes, you’ll have nothing left to show for your hard work.

• Before you spend any of your paycheque, set aside some of your money in a savings account. You can do this through regular, automatic transfers from one account to the other. You could also have your purchases rounded up to the nearest $5 or $10 and have the difference deposited into a savings account.

• Learn more about the importance and power of getting to your income first.

2. Employer retirement plan

Unfortunately, fewer Canadian employers are offering retirement plans for their employees these days. In addition, the employers that do offer pensions are finding many employees leave money on the table by not taking advantage of them.

• Check with your HR department if your employer offers a pension plan for employees. It could be a Registered Retirement Savings Plan (RRSP), Registered Pension Plan (RPP) or otherwise.

• Find out whether your employer makes deposits to your account, and whether there’s anything you need to do to receive these deposits. In some cases, employers will match 50% or 100% of what you deposit, up to a set limit. This could be up to 10% of your annual income in additional benefits.

• You can learn more about employer retirement plans here.

3. Emergency fund

Life has a predictable way of catching people off guard. When you plan for the future, the only sure thing is that it won’t look exactly like you expect. Whether it’s an emergency or temporary job loss, it’s important to minimize the impact that unexpected events have on your life.

• It’s common to set aside three to six months of mandatory expenses in a savings account to buffer yourself from a job loss or major expense. Mandatory expenses include anything you couldn’t avoid paying if you needed to cut back on other spending. Often it covers housing, food, contracts that are too costly to get out of early and other major commitments.

• This money is often kept in a high-interest savings account so it’s readily available if needed. However, one challenge with an easily accessed stash of cash is that it can be tempting to spend it on non-critical items. To avoid this temptation, you could set up your account at a different financial institution to keep it off your daily mind or set up rules on the account for withdrawals.

4. Saving for retirement

Whether your employer offers a pension plan or not, you’ll likely need to set some money aside for your future retirement. For many, retirement seems so far off and vague. Another way to think about retirement is to look at your current lifestyle and ask if you’re comfortable giving up most of your spending. If you enjoy travelling, spending time visiting family or having a few hobbies, you’ll need savings later to keep paying for these.

• The Government of Canada recognizes the importance of saving for retirement and created two accounts that can help you get there. The Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) both offer ways to lower your taxes when saving for the future.

• If you’re starting early, typically in your early twenties, the rule of thumb is to save 10% of your income for retirement. Another benchmark is to aim for twice your income in savings by age forty and eight times your income by sixty-five.

• Because retirement is far off, and you’ll likely need a sizable amount of money when you stop working, the compound growth possible through investing is critical. You can learn more about the stock market and why it’s not as risky as you might think, as well as how to start investing to help your money grow.

In addition to these, the topics of paying off debt, budgeting and building credit covered above may also apply to your current situation.

Buying a house

The opportunity to settle down into your own place is a major goal for many of us. Whether you’re in the early stages, ready to make an offer or recently moved in, here’s a list of topics to keep in mind:

1. Rent vs. buy

The decision to buy a home combines numbers (e.g., upfront costs, ongoing costs) with your preferences and unique circumstances. While renting is often viewed as throwing away your paycheque, it’s important not to rush into buying a place.

• Ben Felix, a fantastic resource for Canadians looking to learn more about their money, covers the number considerations here. He outlines that if you’re able to rent for less than 5% of what you’d pay for a property, you’re better off renting from a purely financial standpoint. For example, if you can rent a $600,000 property for $2,000 a month, you’d be paying 4% of the purchase price in rent.

• In addition to the dollar considerations, finding a place to call your own, where you don’t have to worry about being forced out by a landlord, is desirable. If you’ve found an area where you plan to stay for the foreseeable future, and you can cover the mortgage and other ongoing costs, it may be time to purchase a home.

2. How much to spend

Robert Brown, author of Wealthing Like Rabbits, has a great line that says, “Asking your bank how much you’re allowed to spend is a bit like asking Ronald McDonald if you are allowed to supersize your Big Mac and fries.” The idea being that just because the bank says you can afford a specific mortgage amount doesn’t mean that’s how much you should borrow.

• If you’re able to pay more than 20% of the price of a property upfront as a down payment, you can avoid buying CMHC mortgage insurance. This can save you 2.8% to 4% of the price of your home.

• One way to achieve a 20% down payment is to use your RRSP’s Home Buyers’ Plan (HBP) to borrow up to $35,000 from your account.

• In addition to the mortgage payment, it’s important to remember all the other costs that you’ll experience. There are annual property taxes at ~1% of the home’s value, maintenance costs that often equal another 1% and upfront closing costs that could equal up to 4% of the purchase price.

3. Lowering your taxes

A common theme of this post is that each life stage offers specific tax benefits that are important to be aware of. Until the Government of Canada can know and chooses to tell you what you’re eligible for, it’s up to you to make sure you’re aware.

• If you’re buying your first house, you may qualify for the Home Buyers’ tax credit. This credit allows you to lower your taxes by up to $750.

• You may also be eligible for a land transfer tax rebate if you’re a qualifying first-time home buyer.

• If you live in your home as your primary residence and later sell it for a profit, referred to as a capital gain, Canada’s current tax system doesn’t require you to pay taxes on the profit.

4. Buying insurance

To receive a mortgage, you’ll need at least a base level of insurance on your new property. Insurance removes unmanageable risk from your life in exchange for a monthly or annual cost. The amount of coverage you need depends on your current financial situation and how comfortable you are with risk.

• The price you’ll pay, called your premium, is determined by the likelihood you’ll need to make a claim and how much it would cost the insurance company if you did. Important factors include:

  • The amount of coverage - the maximum payout you could receive from the insurance provider.

  • Your deductible - which represents whether and how much you need to pay if there’s damage or theft.

  • Your location - which impacts how likely it is that you’ll need to make a claim.

• You can learn more about how premiums are calculated and how much coverage you may need here.

Recent child

Congratulations! While all major life events are a chance to pause and reflect on how amazing life can be, starting a family or adding to your clan stands out.

1. Lowering your taxes

A new child will test your financial situation. While you’ll quickly experience increased costs from the nursery, clothes and diapers, the good news is that you may qualify for certain tax benefits that can help offset some of these costs.

• The Canada child benefit (CCB) is a tax-free monthly payment provided to eligible families raising at least one child who’s under 18. The amount you receive is based on your net income, the number of children who live with you and their age. The maximum per child is ~$6,000 per year.

• In addition, there’s a GST/HST credit and disability credit paid to qualifying families. There are also several provincial and territorial programs to help lower taxes for those eligible.

2. Education savings

If you went through a post-secondary experience recently, you might have graduated with student debt. This is an ever more common reality for many of us in Canada. As a result, the opportunity to help your child pay for a future education may be one of your priorities.

• To help stretch your money as far as possible, you can use a Registered Education Savings Plan (RESP). The two advantages are that growth in the account isn’t taxed until it’s withdrawn, and you can receive incentives deposited into the account. The Canada Education Savings Grant (CESG) matches up to 20% of your deposits to the account, with a maximum lifetime match of $7,200 per child. Also, for lower-income families, the Canada Learning Bond (CLB) will provide up to $2,000 per child with no requirement for you to make a deposit.

3. Life insurance

Life insurance is a crucial step in almost all financial plans. While budgeting, saving and investing are all important, their benefits are of little help if an income provider passes away.

• Most personal finance specialists recommend that most Canadians purchase term life insurance to minimize the cost and obtain the specific amount of coverage required.

• You can determine how much insurance you need by calculating the total expenses you’d need to cover if a provider were to pass away, or by replacing that provider’s income for a set period.

• You can learn more about life insurance and the calculations involved here.

4. A will

It’s hard to imagine the worst-case scenario occurring to yourself or a loved one. This is likely one of the reasons many Canadians don’t have a legal will in place. If you pass away without a will in Canada, the laws of your province or territory will determine how your estate is handled.

• To maintain greater control over your children’s guardianship and how your money is handled, you can set up a will. You can complete a will in person or online, and you should revisit it from time to time to keep it up to date with your situation and intentions.

• While I haven’t used the service myself, I’ve read great reviews about a new online offering called Willful.

Closing remarks

In the coming weeks, we’ll also look at your current financial situation for specific steps depending on whether you’re earning more than you’re spending, have existing savings or debt, and more. The final post in this series will look at how you interact with money, including your preferences, goals and behaviour.

If you have feedback or questions about this post or have other major life events you’d like help navigating, I’d love to hear from you below. Alternatively, please feel free to send me an email directly at steven@snowmansguide.com. If you enjoyed the post, please share the word, it’s much appreciated!