When it comes to personal finances and money management, you want to stay on top of things at all times. If you aren’t tracking your finances, it can lead to some surprises like increasing debt, damaging your credit score or worse.
Start by taking stock of your personal finances to determine where you are and what you owe. This provides you with some basic info to help you analyze how you are doing and should help you to identify where you might need improvement with how you manage your finances.
Look and compare such things as incoming and outgoing funds, what and where you owe, along with keeping in mind how things might impact or improve your credit score.
- Do you live within your means?
- Do you have savings for emergency expenses?
- Do you have difficulty paying off debt?
If you find yourself living paycheque to paycheque then you should examine your personal finances so that you can make some smart money moves to get ahead of your situation.
Money Management Basics
After you have reviewed your finances, including incoming, outgoing, owed and similar, you should have a pretty good idea of how things look. But this is just the beginning of your financial journey. Next you want to develop a plan to work with what you have for paying bills and expenses, along with paying down debt.
Money management goes beyond spending less and has a lot to do with tracking your expenses, working within a budget, monitoring your credit score, paying off debt, as well as saving and even investing. Your ability to manage your income effectively without getting too far into debt can benefit you both in the short and long term.
Develop Good Money Habits
It’s never too late to adopt good money habits, and it’s easier than you think. Practising some easy to follow money habits can help you avoid issues later, like when you could use a loan but don’t qualify because of previous bad credit or bad money habits.
While you won’t improve overnight, when you commit to developing your financial literacy you can expect incremental success as you improve upon how you handle your money. This puts you in a better position over time, allowing you to save more, and provide more options and access to credit in the future.
Paying On Time
First and foremost, pay your bills on time. One of the biggest factors that affects your credit score in Canada is your payment history. How late you are on payments, along with how many payments that you are late on all count towards your payment history. Pay on time, every time.
The details of missed payments include:
- Number of days past due on your payment (e.g. 30, 60, 90)
- The amount that is owed
- How recent that you missed payments
- Total amount of missed payments
Your payment behaviour and history is very influential towards your credit score, and should be carefully managed. Late payments mainly affect your credit score when you reach more than 30 days past due.
You should also look closely at your credit utilization ratio, which is the amount you owe in comparison to the amount of credit available to you. By having lower utilization ratios, you generally have a better credit score.
To get an idea of your credit utilization ratio, start by comparing the current balances on your revolving accounts, primarily credit cards. Add up the balances of what you owe on all your credit card accounts. Next, divide the total amount owed by the sum of all your credit card limits. Finally, multiple that number by 100 to get a percentage, which is your credit utilization ratio.
You want to keep your utilization under 30% to benefit your credit score, and if possible, it’s extra beneficial to keep that ratio under 10% of your available credit.
As you pay off your debt your utilization ratio will decrease, but how you go about it can have an impact on several things. It’s important to compare the largest amount owed versus what has the highest interest rates so you can figure out what debt repayment to prioritize.
One way that many take control of their finances is through debt consolidation, where they take a loan with a lower interest rate to pay off other debt with higher interest rates. The options available to you depend on your credit score, so there are times where some may need to work on their rating before they can qualify for a rate that works in their best interest.
Your Financial Future
You can get money motivated by doing a number of things to help you with your own personal financial future. Start by creating some goals, such as a big purchase that you are interested in. It can be other options as well, like travel goals or something else that is like a reward.
Setting specific financial goals for what you hope to accomplish with better money management skills like when you hope to pay off certain debts is another way to motivate yourself. Also be sure to set smaller, short-term goals so you can celebrate more often, such as saving money every payday for something you want to buy. Almost half of Canadians use a budget, and for those that do, they have better insight and control over their finances.
While it pays to be frugal, it doesn’t mean you necessarily have to live cheap. It’s often about making wise choices, doing more comparison shopping, and analyzing your spending habits. Reviewing your credit report on a regular basis, staying within your budget, building a rainy day fund for emergencies, and paying off your debt are all things that put you on a better path towards a brighter future that will provide more options you can truly need them.