Practical Money Skills

[Pages:28]Practical Money Skills

A guide to help you manage your money

From budgeting and saving, to investing and spending, financial decisions are about weighing your choices and making informed decisions.

Managing your money can seem confusing and overwhelming at first look, but if you take it step by step, you can actually understand personal finance better than you ever thought possible. This brochure helps you start by outlining the basics. And, as you go through the brochure, you'll find out about important information that will help you manage your money.

Through initiatives like practicalmoneyskills.ca and this brochure, Visa Canada is committed to helping you learn practical money skills for everyday life.

Table of Contents

Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Building a budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Four-step program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Get SMART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Banking Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Chequing accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Savings accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Electronic banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Saving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Interest calculations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Savings resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 What is credit? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 The 3 Cs of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Credit Cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Credit cards 101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Choosing a card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Credit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Debt load . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 What are you worth? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Warning signs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Getting out of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Talking to bill collectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Your rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Credit counselling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Budgeting

Building a budget

Guidelines

If you want to make sure that you're not spending more than you're earning, you need to make a budget. A budget is a plan for your money that maps out how much you make (your income) and how much you spend (your expenses). The chart below offers some advice on how to divide your after-tax household income wisely.

Guideline for after-tax . expenses:

30%: shelter 10%: fixed expenses 10%: loan payments 10%: personal spending 10%: savings

Four-step program

Step one: add up your income

To set up a monthly budget, you need to know how much money you have available to spend every month, after you pay your taxes. This is your net household income, because it is the number that's left after you have paid out all your deductions to the government.

If you get paid once a month, just look on your pay stub to see your net monthly income.

If you get paid weekly, every two weeks or twice a month, you'll need to do some math to figure out your net monthly income:

Step two: estimate your expenses

Here is where you write down what you think you'll spend your money on. It's easier to remember all the places your money goes if you divide your expenses into groups. You can lump them into big groups, like "shelter" and "loans," or you can get really specific, and figure out how much you spend monthly on more particular things, like "clothes" and "transportation." Divide your expenses in whatever way is easiest for you to track. The sample categories on the next page will help organize your expenses.

Step three: figure out the difference

After you've created your budget, you need to record your actual monthly income and expenses. This will help you understand the difference between the amount you plan to spend on something, and the amount you actually spend.

You may be surprised when you first start budgeting to find gaps between what you think you spend and reality. That's why making a budget is such a good idea. It shows how you really spend your money.

Step four: track, trim and target

After you track your spending habits for a little while, you may realize that you are spending more money than you're making. You will also see where you are spending too much money.

In some cases, it's not too hard to cut expenses. In others, it's very hard. For example, you have to pay your rent and electricity bill. You don't have to buy a new CD.

Once you get used to only spending as much as you have coming in, you will probably feel much more relaxed. You won't feel the pressure of dealing with bills that you don't have the money to pay for. And you might even have enough left over to treat yourself from time to time, or to save some money for the future.

n For weekly pay, multiply the weekly amount by 4.333

n For every-two-week pay, multiply the amounts by 2.167

n For twice-a-month pay, multiply the amounts by 2

Sample Expense Categories

Shelter

n Rent or mortgage payments

n Property taxesaxes

Fixed Expenses

n Electric bill n Gas bill n Telephone bill n Mobile phone bill n Internet expenses n Childcare expenses n Water bill n House/tenant and

automobile insurance n Cable bill n Life insurance n Car maintenance n Grocery bills n Transportation costs n Other fixed expenses

Loan Payments

n Lines of credit n Credit cards n Car loans n Student loans n Other debtss

Personal Spending

n Clothes n Hair cuts and styling n Movies, concerts,

sporting events n Restaurant meals n Kids' extra-curricular

activities n Electronics, CD, DVD

purchases n Furniture

and appliances n Home repairs n Hobbies n Reading material

(newspapers, books etc.) n Gifts n Miscellaneous (dry cleaning, corner store, or cash purchases, etc.)

Contribution to Savings

n RRSPs n RESPs n Emergency fund n Vacation fund n Bank accounts

or other savings

Goals

The planning process

Would you like to own your own home one day? Would you like to buy a car? If so, you need a plan. Here's a four-step model to help get you started.

1. Assess Needs

Your wants are things that may make your life easier or more enjoyable, but which you don't need to live. You may want an electronic gaming system, for example, but you don't need one. You do need a winter coat, and a bed. Without these things, your life would be very difficult.

So make a list of everything that would be good to have in your life, and write it down.

Next, divide the list. Go through every item, and mark it with a "W" (for want) or an "N" (for need). If there's anything you're not sure of, ask yourself how your life would be improved if you had it (and how terrible it would be if you did not). This will help tell you whether it's a "want," or a "need."

2. Set Goals

Put aside your "want" list. Now, turn your "need" list into a collection of goals. Some people like to set daily, weekly, and yearly goals for themselves. Set up your "goal list" in whatever way works best for you.

3. Make a Plan

With goals in hand, you must now begin to develop a plan for achieving them. Break each goal down into steps. If you can afford to set aside $10 a week toward purchasing a winter coat, for example, figure out how long it will take before you have enough money to buy it. Then make a calendar with an instruction to save $10 a week. Writing your plan down makes it easier to achieve.

4. Take Action

Now you have a plan. Congratulations. Print several copies, look at them often, and take action.

Get SMART

A realistic goal is SMART . (in more ways than one)

Specific

Measurable

Attainable

Relevant

Time-related

Specific: Smart goals are specific enough to move a person into action.

Example: Deciding to save enough money to buy a refrigerator (as opposed to simply saying, "Save some money.")

Measurable: You need to know when you have reached your goal, or how close you are to it. Goals that aren't measurable, like "I'd just like to have more money," are much harder to achieve. What's more, there's no way to tell when you've gotten there.

Example: A refrigerator costs $600, and you have $300 already saved. You need $300 more before you can buy the refrigerator.

Attainable: The steps toward reaching your goal need to be possible.

Example: My budget must allow me to put aside enough money each week so that I can meet my goal within one year.

Relevant: The goal needs to make sense. You don't want to work toward a goal that doesn't fit your needs.

Example: You don't need to save money for 18 pairs of shoes.

Time-related: It's important to set a definite target date.

Banking Services

Unless you plan on sleeping with your cash under the mattress, you need a safe place to keep it. A bank can cash your pay cheques, offer bill payment services, and ways to save or invest for the future.

Chequing accounts

Why get a chequing account?

Convenience: If you have a chequing account, you can write cheques to pay bills without having to go to a bank or post office to buy a money order. You can stay on top of regular payments by sending out post-dated cheques (cheques that are dated in the future). For example, post-dated rent cheques for rent payable the first of every month.

A chequing account also allows you to arrange regular withdrawals from your account (for things like newspaper subscriptions) with a copy of a voided cheque. A voided cheque is a blank cheque taken from your chequebook with the word "void" written across it. That way, the cheque itself can't be used to withdraw any money from your account right away, but contains the information necessary (in the numbers printed across the bottom) for the merchant to set up the required regular withdrawals with your bank.

A chequing account also comes with a bank card that lets you access your account at thousands of banking machines across Canada. Keep in mind that if you use an ATM (Automated Teller Machine) that is not affiliated with your bank, you may be charged an extra fee.

Record Keeping: A cancelled cheque (a cheque you have written that has been returned to you by your financial institution, showing that the money has been withdrawn from your account) is proof of payment. This can come in handy if you want to question a debit you see on your online banking page or monthly paper statement. It's also useful if you ever need to prove that someone you owe money to has received payment.

Example: The repairman says my refrigerator won't last another year. I need to get my new refrigerator in the next eight months.

Saving Money: It costs around $4 a month to maintain a chequing account. Some financial institutions offer a set number of free transactions each month, such as withdrawals, transfers, or cheques. Financial institutions might even offer no-fee accounts, provided you keep a minimum balance in your account each month, and never let the money in your account drop below this level. But even with that fee, a chequing account is cheaper than constantly buying money orders ($3 to $6.50 each) to pay your bills.

Balancing your chequebook

It's important to keep track of all the activities in your account in your cheque register (the little notebook that comes with your cheques).

Here's how:

Step 1: Get a clean piece of paper and list the current balance from your bank statement.

Step 2: Add any deposits that you've recorded in your cheque register but that are not yet shown on the statement.

Step 3: Subtract any outstanding cheques, withdrawals you've made with your debit card, regular automatic payments you set up, and any withdrawals you make at a bank machine.

Electronic banking

Financial transactions and . technology

Not surprisingly, technology has made the world of banking a lot easier. Here are some examples:

Direct deposit

With direct deposit, your pay (or government payments) can be automatically deposited into your bank account. This saves time, effort, and money.

Online banking

Online banking allows customers to check balances, pay bills, transfer money from one account to another, deposit RRSPs, draw on lines of credit, and even apply for loans on the Internet.

Automated teller machine

Automated teller machines, or ATMs, allow customers to get cash, deposit money, and do other banking without standing in line to talk to a teller. Keep in mind that you may incur additional service fees when you use a bank machine that is not your own bank's ATM.

Step 4: Compare the result you arrive at with the balance in your cheque register.

NOTE: The balance in your cheque register should be adjusted to include: (a) deductions for service fees or other charges; (b) additions for direct deposits and interest earned.

Savings accounts

Choosing a savings account

If you want to save some money for your short term needs, a savings account is a good bet. With this type of account, money that stays untouched earns interest. Interest is the money the bank pays you for letting it use your money. The amount of interest varies, depending on the bank and type of account you choose, and interest rates in general.

There are a few different ways that banks calculate interest. For more information on how your bank calculates interest on your account, contact your bank.

Generally speaking, the higher the balance, the more interest you'll earn.

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