Many tend to make financial mistakes that can impact their lives. Sometimes it’s for simple reasons like being short sighted about the costs. At other times it might be a case of simply being unaware.
Sometimes financial mistakes don’t have an immediate impact, but we eventually pay for them. It’s not uncommon for someone in their early twenties to run up credit card debt and damage their credit score, only to realize later just how important this can be. The following are relevant at any age, and important to your financial health.
Having a good credit score is an important part of managing your personal finances since it has everything to do with what kind of interest rates and loans (or credit) that you might be eligible for. The average credit score in Canada is around 670, and most banks and lenders reserve the best rates for those with a credit score of 750 or more. If you’re thinking of borrowing in the near future but it isn’t urgent, improving your credit score before applying can literally save you a lot of money in interest charges if you can qualify for better borrowing rates.
The reasons behind why you might be borrowing can be another concern. Sometimes there are unavoidable emergency expenses like repairs to your car or home that require immediate attention. When you don’t have the savings, a loan may be required. Other times people might choose to borrow for reasons like a wedding or travel. While this is your option, many experts advise this may not be wise. So long as you’re comfortable with the idea and can afford making payments for the term or duration of the loan repayment schedule and the cost of borrowing (interest on loan) this is one only you can decide whether right for you. The most common reasons for borrowing are often unexpected expenses or debt consolidation, but sometimes loans for home improvement can be a consideration.
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Avoid making the mistake of going all in on paying down your debt if it’s at the cost of contributing to your savings or retirement, especially for an extended period. Being strategic about debt reduction often starts with paying off high interest loans or credit card debt. This is often accomplished with a debt consolidation loan where the rates are lower than the outstanding debt. Whether you get a personal loan or installment loan often depends on what you might qualify for, based on your credit score and history. Getting a debt consolidation loan is for paying off your current debts, not a shopping spree. Only borrow as much as needed and are able to afford.
When you start paying down your debt, do not continue to carry a credit card balance, or continue using the cards unless you are certain to pay them off immediately. If you keep using your cards when trying to pay off debt, it won’t allow you to make much (or any) progress towards being debt free. Additionally, don’t apply for other credit cards while trying to pay down debt as this can affect your credit score.
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A budget can help to keep your finances on track, yet only half of Canadians make use of one. Those that do tend to have less financial issues since they know their finances and are able to manage where their money goes. Stay on track to help manage your expenses, but you have to maintain things for this to work. Some have a budget but it isn’t managed, or only when convenient. To effectively track your money you have to keep the details up to date. Making use of budgeting apps to monitor things can make the whole process easier.
When you manage your budget and have money left over, it’s a sign that you have not allocated or assigned all available funds effectively, or you haven’t put enough in your savings. Some think of this as fun money to spend however, but it would be best to assign it to either paying down your debt or building your savings after all other bills and expenses are taken care of.
Another important way to budget is to also build an emergency fund. This can take time, and how long can depend on what you contribute. A good reference for how large this should be is to squirrel away at least 6 months worth to cover essential expenses like rent/mortgage, bills and similar that would allow you to get by if you lost your job. Of course it isn’t for this reason alone but a reference. You might have an expected expense later where your emergency fund comes in handy, and allows you to avoid borrowing an emergency loan when you have the money already saved.
If you’re living paycheque to paycheque and finances are tight, eliminating expenses and budgeting are often advised. Creating a plan to get financially fit starts with most of the above suggestions to enable you to be on a better path in the future.