6 Ways To Have Minimum Debt For The Holidays

Christmas is almost here, meaning the shopping season is in full swing. Between gift giving, travel and holiday parties, the expenses add up quickly this season. Many find themselves struggling to figure out a way to pay for it all, and turn to credit cards so they can afford the holidays.

For those turning to cards this year, here are some tips to keep your debt to a minimum:

Create A Budget

The holiday season should not be an excuse to spend wildly. Just like other purchases throughout the year – determine how much money you can afford to spend. If you are using a credit card, you are borrowing that money, which means you can not afford it.

Have A Plan

Make a list of exactly who you plan to buy for and what you want to give them. Once you’ve bought their gift, cross them off. Don’t give in to the temptation of buying additional little gifts throughout the season that are just “perfect for them”. This also goes for who is on your list. You are not Santa, and thus not expected to buy for everyone you know. If you are worried that someone not on your list may have a gift for you, keep a few bottles of wine wrapped up under the tree in case they pop by.

Get Creative

If you have a large group of friends, colleagues or family, instead of buying for each person, try secret santa or white elephant gift exchange.

Borrow Party Clothes

Instead of spending a fortune on a new dress for your work party, see if you can borrow one from a friend.

Sell old items for holiday cash

Go though your clothes and sell the stuff you never wear on Carousell or Refash. You can also post items for sale on Facebook. Holiday Cleaning can especially be a win-win when it comes to kids toys – tell them that to make room for their new gifts, they need to give away the items they don’t play with anymore.

Pay it off quickly

If you do wind up using credit cards, pay off your balance as soon as you can, within the billing cycle, to avoid costly interest charges.

Your Emergency Fund: How Much Is Enough?

As much as we’d all like to, it’s impossible to stop adverse events such as job loss or sickness. If you don’t have the cash to cover an emergency, you’re taking a big risk.

You don’t want to find yourself in need of cash you don’t have, which is why you must have an emergency fund. While it can be hard to figure out how large that fund should be, this article aims to help you decide how much to save in case bad luck hits.

What’s the right amount to set aside?
It’s impossible to know how much an emergency will cost you, but it’s better to be over-prepared than under-prepared. Typically, it is advisable that your emergency fund contain enough money for you to live for about three to six months.  

This should be calculated based on essential expenses you’d keep paying in times of hardship. Have enough to pay for housing costs, food, utilities, insurance, transport, debt payments, and personal expenses. You don’t necessarily need to save enough to ensure you can keep eating out twice a week or to cover other entertainment expenses. The must-pay expenses are what matter.

An emergency fund with three to six months of living expenses could sustain you if you suffer a serious medical issue, can’t work for a while, and aren’t eligible for disability benefits. Or, if you were to be deemed redundant by your employer, it could give you the money to keep making mortgage payments until you find your next job.

In other words, it could mean the difference between a brief period of financial hardship and long-term financial disaster.

How should you decide whether to save three months or six months of living expenses?
There’s a rather huge difference between saving three months of living expenses and saving six months of living expenses – so what size of an emergency fund is right for you? The answer depends on how vulnerable you are to a financial emergency.

Your emergency fund should be more substantial if:

  • You’re the sole or main breadwinner
  • You have an unstable job
  • It would take you a long time to find a new job if you lost your current position
  • You have no other money saved for home or car repairs
  • You aren’t very healthy

The likelier it is that you’ll lose your sources of income or need lots of money to pay surprise expenses, the bigger your emergency fund should be.

When does a smaller emergency fund make sense?
While saving three to six months of living expenses in an emergency fund is a good rule of thumb, it takes a lot of time and financial discipline to put aside this much money. And, there is one situation where you may not want to set this big goal right away: when you have a lot of debt.

If you owe a lot of money, you still need to prioritize building up an emergency fund before paying extra toward debt. If you don’t, you can’t break the debt cycle. While extra payments could help reduce your debt balance, a single bit of bad luck would lead you to accumulate debt on your credit cards again. This creates a never-ending cycle where you don’t make progress – and there’s a big risk that you’ll give up on aggressive debt repayment.

To avoid this problem, save up a mini emergency fund, then switch to bigger debt payments. The amount of your mini emergency fund will also be determined based on your personal situation. Saving $2,000 to $3,000 is a good rule of thumb, and you should aim for a larger amount if income is uncertain or there’s reason to believe you’re at high risk of costly emergencies.

When your mini emergency fund is built up, shift focus to paying your debt – although if you spend your fund, go back to building it up again. After debt is paid down, finish saving enough so your emergency fund covers the recommended three to six months of expenses.

Simple Financial Tips That Can Make A Difference

tips2018 has certainly flew by and wow.. we’re going into March already? Perhaps now is a good time for us to do a stock-take on our money. Here is a couple of tips on how to keep more money in your wallet this year.

1. Don’t Do Mental Accounting When Building Your Budget
Mental accounting means the behavioural thinking of having different piles of money for different reasons. You might have a “jar” that says this is for emergencies or a vacation, and you’re putting money in there every month – at close to zero interest rate.

Then you also have a credit card debt. You mentally classify it as a different thing and pay your debt with income each month.

Financially, this doesn’t make much sense. Money is fungible, it really is all the same. You shouldn’t have a jar with money sitting in it that’s getting no interest or growth while you still have credit card debt.

The solution is to think about all your money as the same. People like to put cash in different buckets for different reasons, but that’s mental accounting and we need to overcome that hurdle.

2. Prepaying your mortgage
Some people add a little extra to their monthly payments to pay the loan off faster. This brings up a common question – is this a good use of the extra cash?

With current mortgage rates at under 4%, you should not be prepaying your mortgage. In fact, mortgages have really low interest rates and are designed for long periods of payments, and you should stick to that payment.

Prepaying it means you are giving up opportunity to use that money elsewhere – whether it’s paying off credit card debt or just investing it, putting it aside for retirement. If you’d be getting 8% returns on your long-term investments, why put your money in something that’s only 4%?

So from a financial planning standpoint, it’s not a good strategy. Nonetheless, people feel comfortable doing that. I know you want to feel like you’re paying off the house faster, but resist if you can.

2 Investing Biases that Hurt Your Retirement Savings

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Being aware of our behavioural biases could mean a significant increase in retirement savings. There are two common biases that can affect how we save for retirement:

1. Present bias – the tendency to put more value in current or short-term decisions than the future

2. Exponential-growth bias (EGB) – the tendency to underestimate and neglect the power of compounding investment returns.

A person with present-bias may intend to save more in the future but never do so; while a person with EGB will underestimate the returns to savings and the costs of holding debt.

All is not lost, however, as understanding your own biases is the first step to creating a proper retirement savings plan to fund the lifestyle you want when you stop working.

Self-awareness has the potential to reduce the impact of our biases. For example, a person who is aware of his/her EGB could rely on the market to acquire tools or seek advice, and a present-biased person could use committed arrangements to control the impulses of his/her future self.

It is proven that people who understand their EGB, hence accurately perceived the power of compounding, had about 20% more savings than those who neglect compounding completely.

So what does this mean? Be aware and keep check of your biases, and your retirement nest egg could be a lot bigger.

3 Obvious Ways to Build Wealth

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You don’t have to be a rocket scientist to build wealth. The wealthy understand that while being smart can certainly help you earn money, that doesn’t necessarily mean you’ll build wealth with your earnings.

Likewise, being famous doesn’t necessarily mean you’ll be able to build wealth. Sure, it can help, but there are countless stories of those who earn a ton of money only to watch it disappear seemingly overnight.

So, what are the secrets to building wealth? And, once you build wealth, how do you keep it? The truth is that the “secrets” to building wealth really aren’t secrets at all.

They are simply common sense behaviors that, when practiced with purpose and over a long period of time, are likely to result in a pool full of cash. Let’s take a look at some of these behaviors.

1. Say “no” to debt.

Saying “no” to debt is truly a behavior at the heart of so many wealthy individuals. Why? It has something to do with interest rates.

Student loans, credit cards, personal loans, car loans, and many other types of debt all have interest rates. Some of these rates are higher than others, but one thing is guaranteed: you will pay a lot more money than necessary if you make minimum payments on a loan, and the interest rates will slowly drain any wealth you do have.

Unfortunately, that’s where many people get stuck. They are so used to debt, they think it’s normal and shrug it off as a way of life. Sure, it might be a way of life for some people, but it doesn’t have to be a way of life for you.

The way to get out of debt is to focus your energy on saying “no” to more debt. Make money fast, you might choose to attack your debt even faster than you might initially think possible.

2. Practice discipline and invest for the long-term.

It can be all too easy to get caught up in the hype of this stock or that stock. The media continually reports this or that “new hot stock.” Don’t fall for the trap. It is always better to diversify your investments and not get carried away by the allure of quick wealth.

The number one behavior that inevitably leads to more wealth is staying disciplined. Emotions are very real and very dangerous, and it’s hard to be objective about your money, especially when people around us are talking about doom and gloom as it relates to the economy. Most of your money is invested for the long-term – do not make short-term decisions about your long-term money.

The best way to get market-like returns is not to meddle with your investment mix. If you do, the probability of achieving your financial goals will most likely go down. Predicting where the stock market is headed and making decisions off the prediction is a fool’s game. It requires a crystal ball – and no one has a crystal ball. Stay disciplined.

3. Stay frugal.

It’s human nature for any increase in income to be immediately swallowed by lifestyle improvements, a phenomenon known as ‘lifestyle creep’. Avoid lifestyle creep and build guaranteed increases into your savings plan by changing the way you think about annual raises. The next time you are presented with a raise, challenge yourself to save half of the increase, and ‘creep’ with the other half. This strategy will allow you to pay yourself first, enjoy the fruits of your labor, and build wealth over time.

It’s better to stay frugal, build wealth, and have a firm financial position rather than squander your money on things that you really don’t need – especially over the long-term.