While the likelihood of an upcoming doomsday scenario or an economic disaster involving the breakdown of our entire country’s monetary system (hyperinflation) is slim, there are plenty of personal financial disaster scenarios that can and do happen on a daily basis (unemployment, homes in foreclosure, overwhelming debt, etc). This article will focus on financial preparedness for these everyday situations.
Statistics Canada reported that at the end of September 2015, Canadians debt-to-income ratio increased to 163.7%. Which means that Canadians owe almost $1.64 for every $1 they earn. Getting out of debt may seem impossible but even a small change in spending habits can make a huge impact over time.
The ideal situation is to just live within your means. If you don’t spend more than you make, you won’t need credit cards and in turn you won’t go into debt. By tracking your income as well as your expenses/spending you can see how much disposable “spending” money you have per month and budget accordingly. The goal should be to save and spend wisely, which comes down to the basic “needs vs. wants”. However, the idea isn’t to eliminate all wants but to prioritize and make room for them in our budget by lowering costs/spending in other areas while still increasing savings.
Most financial experts recommend having savings or an emergency fund in place, even if you are currently in debt. The amount will vary between families but generally speaking a good safety net would be all living expenses covered for 3 months (6 months would be even better). If your budget is already tight, how do you magically come up with that kind of money? There are ways (that don’t involve magic), they can include getting a second job or offering your services if you have certain skill sets. Selling all the extra stuff you have laying around the house that you don’t use is another viable option. If all else fails, look at your budget again, as tight as it may seem there is always room to cut it a little further. A little short term pain will be well worth the long term financial gain.
On the flip side, what if you are not in the ideal situation and haven’t been living within your means? Being in debt can be overwhelming especially if you are living pay cheque to pay cheque. With all the added monthly interest, credit card debt feels like it will never go away. It’s not an easy task but with patience, commitment, and time it is possible to get out of debt. There are two popular methods of paying off debt, the traditional is “Debt Stacking” and the other is “The Debt Snowball”. Debt stacking involves making a list of all your debts and ranking them by interest rate, from highest to lowest. Each month you make the minimum payment on all debts and then put any extra money into the loan with the highest interest rate. Once that balance has been paid off then continue to the debt with the next highest interest rate. The benefit of this method is that it saves you the most money on interest, the negative is it can take a long time before a debt is paid off. The alternative is The Debt Snowball method, created by financial expert Dave Ramsey. With this method you put all extra money into paying off the smallest debt first, regardless of the interest rate. The reason for this method is psychologically you feel like you have accomplished something when you see results quickly and can cross a debt off the list. Which in turn will keep you motivated to pay your debts off. The obvious negative with this method is it will cost you more in interest over time. Which method you choose is entirely up to you, the ultimate goal is the same with both, becoming debt free!
Although it is impossible to predict for certain what the future will hold, you can take the necessary steps now to be financially secure in the future by shifting priorities, eliminating debt and sticking to a financial plan. In closing a relevant quote from Benjamin Franklin “If you fail to plan, you are planning to fail!”