Budget basics

Want to pay down that debt and save for a rainy day? Start by taking control of your finances
Mar. 11, 2011 | By: Alison Dunn

As a nation, Canadians are sinking further into debt than ever before. At the end of 2009, the Bank of Canada released a report that found Canada’s debt-to-income ratio had risen to 142 per cent – a scary statistic in anyone’s book.

The biggest problem, according to the central bank, is that this statistic means Canadians are taking on new debt in record numbers. If interest rates start to rise (which they will), it will leave households “increasingly vulnerable” to any economic shocks.

Can you afford to let that happen? Like most Canadians, the answer is likely no. With so many Canadians in debt, it’s becoming clear that many of us just aren’t managing our money properly.

Why are we so bad with money? “It’s partly because no one every taught us even something as simple as tracking what we’re spending,” says Gail Vaz-Oxlade, a well-known financial expert and host of Til Debt Do Us Part on Slice Network.

And because we haven’t been taught to manage our money, we think we don’t have any control over it. “Accept the fact that you have control… but you have to exercise it,” Vaz-Oxlade adds. “There are days when you don’t want to do it; when you say, ‘I just can’t be bothered.’ But you’re going to do it anyway.”

Tracking what you earn and what you spend doesn’t have to be hard. Vaz-Oxlade offers this advice to help take control of your finances:

1. Write it down: Vaz-Oxlade recommends keeping a spending journal where you write down every penny you spend and deduct it from how much you have left in the bank. This will help you keep track of all your spending and figure out which expenses are unnecessary.

2. Deduct your fixed costs automatically: At the beginning of every pay period, deduct exactly how much money is coming out of your account to go toward fixed costs. Those can include mortgage payments or rent, insurance, heat, hydro and all your other fixed expenses. Then you’ll know exactly how much money you have left before your next pay period.

3. Dedicate something to savings: You must have both an emergency fund and the right kind of insurance – these are non-negotiable, says Vaz-Oxlade. “The idea of not having enough money in the bank to do something I have to do is anathema,” she says. “I can’t even conceive of not being able to buy my kids food or pay my hydro bill.”

4. Pay off what you owe: Yup, you guessed it. You’ve got to eliminate that debt. On her show, Vaz-Oxlade counsels couples to pay off their consumer debt in three years or less. Figure out how much you’re going to owe on your remaining balance and pay off as much as you can each month. And forget paying the minimum payment. If you owe $2,500 on a credit card with an 18 per cent interest rate and you just pay the minimum payment, you’ll end up spending more than $4,000 in interest.

5. Stop using credit: Again, you might not want to hear it, but you’ve got to stop spending money you haven’t yet earned, Vaz-Oxlade says. If you want something, save up the money and buy it with cash. “Once upon a time there was no credit, and we were fine,” she says. “Now we spend eons of time working to pay interest on crap we bought that we didn’t actually need. We didn’t have the discipline to say, ‘Not yet. Not until I’ve saved the money.’”

The truth is, once you take control of your finances, you’ll be happier for it. “Until you have experienced the freedom that comes from knowing you have money in the bank and that you can cope with just about anything life throws at you, you can’t imagine the sense of balance you have,” Vaz-Oxlade says.