The Top 10 Exercises for Flexing Your Money Muscle (Numbers 6-10)
Filed under: Budgeting & Planning, Credit Cards, Debt, Family Finances, Investing, Loans, Saving
As a single mother, Melanie Buffel's journey toward financial competence very much began as a trial by fire. "I've sort of learned a lot of my money skills through the school of life," she says. "At times there has been a very high tuition cost, you make significant mistakes and learn what not to do."Click here to see part one of Broverman's post.
Though her background is in community economic development, helping women earning low incomes gain control of their household finances for 15 years. Now, as a money coach for Money Coaches Canada, she has been helping middle-income singles and couples whose cash is flowing, but they don't feel like they're getting ahead -- much like she felt once upon a time.
"They're sort of running the hamster wheel of their finances and their cash is flowing, but they're not really capturing it anywhere. They're not saving towards things that they want they're kind of vague about what's happening with their money and they just want a better sense that they're working toward their dreams."
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Besides, whether your New Year's resolution is getting fit or getting your debt under control, you still have to put into practice and exercise that muscle. So, let's continue the Top 10 Exercises for Flexing Your Money Muscle from where we left off, numbers 6 to 10.
6. Invest Wisely
Now that you have all of these different pots of money you are saving, it's important to match your investment opportunities with your savings goals, your time-frame and your risk tolerance.
"If you want to go on holiday next year, it's probably worthwhile just to put your money in a high interest savings account and pull it out when you go on holiday," says Buffel. "If your target for saving is three to five years away, you may want to look at a term deposit or a GIC instead. Both of those are very safe, but you're locked-in for a certain period of time."
From there, you cross the line into traditional investment options, such as stocks, bonds, mutual funds, RRSPs, RESPs and RDSPs.
"My biggest message here with people is just educate yourself on your options," says Buffel. "Really read, talk to people, ask someone at the bank, do a lot of informational interviews and really understand how to best match your goals with your time-frame and your risk tolerance."
Though the lure of higher returns could be irresistible when it comes to playing the stock market, high returns always come with greater risk.
"When it comes to guaranteed returns, that word guaranteed has no teeth behind it. It's not a guarantee," Buffel continues. Of course, the research involved can be a bit overwhelming, so Buffel's gold rule is "if you don't understand it, don't invest in it."
If you're consulting a financial advisor, you cannot, but all your faith in them that they will do the right thing. You have to understand the language, or "banklish" that the advisor is speaking to you enough to comprehend it yourself before handing over your money. You need to be involved in the decision making process as well. Buffel recommends getting some books on investing and for her, one of the best is the Dummies series, including Investing for Canadians for Dummies. Though, she'll also say there's no rush. "Whether you have your money in a high yield investment option, as long as you're saving at all, you're good."
7. Know What Your Credit Report is Saying
Not only is your credit report important if your applying for a large loan, but also if you want to rent an apartment.
"If your credit history is poor or non-existent, that might be reason enough to put you in the 'No' instead of the "maybe" pile and there is heavy competition for these apartments," says Buffel.
Checking these reports also makes sure that what they are saying is correct because many can come back with errors on them. Of course, there's lots of pay services that you can join that will keep you updated on your credit score on a monthly basis.
"I think that's overkill personally," says Buffel, "unless you've been a victim of identity theft, but even then you can put a freeze on your credit, so no one can apply for credit in your name. Those monthly tracking things are just a real money maker for the credit bureaus."
Remember too that things can change rapidly. If you don't pay your credit card bill for a month, it may affect your credit score, but as soon as you start paying again it'll be back to normal. "Credit bureaus are required to give you access to your credit report once a year for free," she says.
You do this by downloading the forms from the Equifax and TransUnion and sending your request through the mail.
A credit bureau is a private company. It's not the government or a collection agency or a credit granting agency. They are strictly a database of information and they collect this information with our permission from creditors and then sell it back to them.
A credit report is like a report card that runs down all of the creditors we owe things to, whether we're being sued for money and whether our debts have been referred to collections. Our credit rating is like our grade for our individual forms of credit and the numbers, such as R1 or R9, refer to how late you are on a payment. On time is R1 and if you stop paying a bill it goes to an R9 and is rated as a bad debt that would likely be sold to a collections agent.
A credit score is like your grade-point average of all your credit ratings, which ranges from 300 as the worst and 900 as perfect. "A good credit score is 700 and up," says Buffel.
8. Get Very Cozy with Your Credit Cards
Most people probably don't look at the terms and conditions in their credit card contract very closely, but they absolutely should really understand how their credit cards work. "So, how many credit cards do you have?" asks Buffel. "If you have 15 credit cards, that's an automatic red flag. How in debt do you want to be? If you added up all the limits on your credit cards and it equals your yearly income, that's probably not a good thing."
Unless you are paying off the balance each and every month, you really need to understand your interest rates, how interest is calculated and how long the grace period is on your card. Are you paying an annual fee on your card? If you are, what are you getting for that annual fee?
"An example that I use is a woman who was paying $120 as an annual fee because she thought it would be good for collecting air miles so she could go on a trip, but it actually took her a number of years before she had enough miles to actually go on that trip," says Buffel. "Meanwhile, she had paid for most, if not all, of the trip in her annual fee. If she had saved that money, she probably could've taken that trip a lot sooner."
There are a lot of different credit card options out there for people and there are a number of good websites Buffel recommends for comparison, including creditcards.ca. The Financial Consumer Agency of Canada has a credit card selector tool that can help people determine which credit card is right for them.
"If you're carrying a balance, my personal approach is to not use the credit card until the balance is paid," says Buffel. "Once it's paid off, you can use it again, but only for things that you know you can pay off at the end of the month." If you go out for dinner and use your credit card, Buffel recommends going home and paying it off online right away.
9. Pay Down Your Debts
At this point in the process, you should have a good idea of how much money is coming in and stopped a lot of the bleeding associated with your spending. Now, the mission is to pay down your debts.
"Consumer debt costs you twice, it costs you the money they are charging you, but it also costs you the money you could be earning," says Buffel. "It's robbing from your future to pay for your past."
Normally, Buffel takes her clients through all the balances they owe, all their minimum payments and all their interest rates. You can do the same thing with the calculator she uses, The CNN Debt Planner.
In an effort to pay off their debts, some people will transfer their credit card balance to a line of credit with a lower interest rate, but that only works if you can be discipline about your spending. "There's a mathematical side to this, but there's an emotional side as well," says Buffel. "If you look at it from the mathematical perspective, it makes complete and total sense to save yourself the interest, but it also gives people an opportunity to rack up their credit card debt once again with their former balance waiting for them on the line of credit."
If you are one of those people who would rack up more debt after transferring a balance, Buffel recommends power paying your credit card balance as soon as possible instead of putting it on a credit line. "If you think you can handle it though," she says, "transfer the balance to the line of credit, but then those credit cards need to go away until that balance on the credit line is paid."
"It takes a lot of thought and a lot of reflection and a willingness to set yourself up for success with some of these strategies you've already put in place."
10. Don't Be Afraid to Ask for Help
When it comes to investing, Buffel will tell you to deligate, not abdicate and when it comes to debt reduction, you need to get good advice, especially if you have $30,000 to $40,000 of credit card debt.
"I would send people to a bankruptcy trustee and really encourage them not to be afraid of that," she says. "They are required by law to lay out all of your options in front of you. They don't usually charge you for a first time consultation and then your armed with some really good information on whether you can realistically make a debt repayment plan, whether you need a consumer proposal (bankruptcy lite) or whether you need to file for full-blown bankruptcy."
Though it's never too late to ask for help, you don't have to wait until your financial situation gets that dire.
"Don't wait!" says Buffel. "If you're $50,000 to $60,000 and can't make your minimum payments, there would've been many red flags before getting to that point. If you're starting to feel that things are getting a little out of control, go now instead of later."
Though there is no third-party certification process for money coaches, Money Coaches Canada founders Sheila Walkington and Karin Mizgala have taken it upon themselves to train, vet and certify all their money coaches internally. Also, if you're doing any type of investing, don't take any advice from anyone who doesn't have a Certified Financial Planner designation.
A money coach is also a great option, as they take a holistic approach to your finances. "It's not just about the numbers or the money, but the behavior that's preventing you from achieving your dreams or your financial goals," says Buffel. "It's about knowing yourself really well, setting your goals and then setting up a strategy to help you achieve them."
Missed Numbers 1 to 5? Go Back and Check out the First Five Exercises for Flexing Your Money Muscle.
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