Living paycheque to paycheque is stressful. About half of Canadians reporting living paycheque to paycheque, and over half report being just $200 or less away from insolvency. Given the cost-of-living crisis, the housing crisis, and a challenging job market, the majority of Canadians are struggling to stay afloat.
Despite these dire circumstances, there are proactive steps one can take to help improve their financial situation. Here are 10 tips for finally escaping the cycle.
1. Create a Budget
According to Statistics Canada, about half of Canadians reported having a budget. Based on 2019 numbers, a further 17% could benefit from a budget. These numbers have likely increased since the pandemic. This leaves virtually no-one who could not use a budget in Canada today, given the rising cost of living, a massive housing shortage, and a difficult job market.
To get started with a budget, list your total after-tax monthly income. You can use a budgeting app, a spreadsheet, or even pen and paper. Then list your fixed expenses. Be realistic about your fixed expenses. For instance, most people spend at least $300-400 per month on groceries. The fixed expenses are the ones that you must pay every month to maintain a basic lifestyle, including rent/mortgage payments, groceries, transportation, and utilities.
After that, list your variable expenses – those that may change month to month. Consider whether you can spend less on frivolous things like a morning coffee from a restaurant chain.
Based on your realistic budget, you will be able to tell whether you earn enough income to cover all your expenses, or whether you have some unnecessary expenses that you can get rid of.
2. Start an Emergency Fund
Statistics Canada reports that two thirds of Canadians (64%) have an emergency fund sufficient to cover three months’ worth of expenses. However, that leaves about a third of Canadians who lack an emergency fund and therefore are ill-equipped to deal with life’s curveballs. Moreover, these numbers predate the COVID-19 pandemic. The situation has likely worsened since then.
When it comes to the emergency fund, set a target amount you want to reach, such as three to six months’ worth of expenses. Start putting aside a small amount every week, such as $50 or $100. If you cannot spare $50 or $100 per week, you may have to work on your income. (More on that below.) However, any amount will accrue over time if you set it aside consistently. Set an interim goal such as $500 or $1,000. Once you hit that smaller target, you will feel encouraged to pursue the larger goal of three to six months’ worth of expenses saved up.
3. Work on Your Debt
About one third of Canadians feel like they have too much debt, a number that has likely increased since the COVID-19 pandemic. For most Canadians, their biggest debt burden is their mortgage. However, many are also struggling with credit card debt, student loans, car loans, and even tax debt.
Broadly speaking, there are two approaches one can take to tackle their debt: the avalanche method and the snowball method.
The Snowball Method
The snowball method means that you will pay off your smallest debt first and work your way up to the largest debt. As you see the smaller debts paid off, it will motivate you to proceed to the largest ones.
The Avalanche Method
The avalanche method is almost the opposite of the snowball method and involves paying off the debt with the highest interest rate first, followed by the second highest, and so on down the line, until you are done.
These two basic approaches to debt repayment require discipline and commitment, not to mention patience.
4. Pay Yourself First
It may be tempting to start spending money as soon as you get that paycheque. However, consider setting aside at least $50-100 as soon as you get paid. That will ensure that you save some money before you spend all of it. This may help reduce the temptation to fritter away your hard-earned cash.
Paying yourself first is essentially a budgeting strategy aimed to help maximize your savings before you’re tempted to spend your money on anything else. Instead of mindlessly spending money and not tracking any of your expenses, you will at least be setting up a financial cushion, however slowly and steadily.
5. Reexamine Your Expenses
You could consider cooking at home more often. That will likely result in healthier and cheaper meals as well. You could also consider brewing your coffee at home instead of getting it at chain restaurants. This would also mean better control over how much sugar, milk, and/or cream, if any, you put into your cup. That, in turn, can help with things unrelated to financial health, like weight management.
Making better and healthier choices for yourself is a matter of self-awareness and prioritization. Make sure you are conscious and aware of everything you spend your money on so that you can put all of your money to work in a productive way.
6. Save Up for Future Purchases
Instead of rushing to make that fancy purchase, start setting aside money every payday. In time, you would be able to build enough savings to secure that purchase without breaking the bank.
By consciously saving up for future purchases, you avoid taking on additional debt to pay for them. This may help stabilize your financial situation as you will have less debt to repay and more opportunities to put your money to work elsewhere.
7. Increase Your Income
This may be hard to do, especially when good, well-paying jobs are so hard to find. Yet there are ways to augment your income.
One thing you can do is take on a part-time job or weekend gig.
Another thing you can do is monetize a hobby or passion of yours, potentially with the help of social media.
Finally, you might consider retraining for a new profession using online courses, bootcamps, and tutorials. You can even enroll in school part-time to augment your credentials.
Some or all of these methods combined can lead to a higher income, which will make budgeting and saving easier from that day going forward. Higher income may be the key that solves your budgeting problem, along with managing your expenses more wisely.
8. Avoid the So-Called Lifestyle Creep
Those who suddenly increase their income or break into the next tax bracket sometimes fall victim to the so-called lifestyle creep. Lifestyle creep refers to the tendency of some people to start spending more as they start earning more, almost in a directly proportional relationship. The more you earn, the more you tend to spend, in other words.
To counteract the lifestyle creep and make the most of your potentially higher income, consider increasing the amount of money you save and/or invest rather than spending it on fancy purchases or frivolous pleasures. This is more about being conscious and disciplined about where your money is going, so that you don’t fall victim to the lifestyle creep without even knowing it.
Many of these tips require that you take the helm and stop living your financial life on autopilot. Don’t operate purely in defensive or reactive mode. It’s important to take proactive and measurable steps to improve your financial situation.
9. Use a Budgeting App
About 20% of Canadians who reported having a budget in 2019 used a digital tool such as a spreadsheet, budgeting app, or other financial software. Budgeting apps can provide a quick and convenient way to visualize your income and expenses as well as calculating any adjustments you need to make to your earning or spending habits. These in combination may allow you to set the course for a better and healthier financial future.
Here is a list of some of the best budgeting apps currently on the market.
10. Track Your Progress Over Time
Running one’s financial life is not that different from running a business. It’s important to keep track of your metrics over time. Without measurable KPIs (key performance indicators), it will be difficult to see if you’re making any progress. Seeing small wins accumulate over time is going to have a hugely beneficial psychological effect, beyond the simple math equation of cash in and cash out.
Make sure you exercise patience and persistence in your pursuit of a healthier financial life. While the future may seem unclear and uncertain, it’s important to take control of our financial lives. We’re not going to see any results by living life passively, without careful planning and execution. It’s going to take some time before your situation improves, but it’s best to start today.
Conclusion
The above 10 tips should help set you on a better financial course. The key step is taking action on these tips! If you need help covering urgent expenses, apply online via LendProConnect. We don’t check your credit score or credit report during our simple online application process. We’re here to help you on your financial journey.
