5 Tips To Help In A Tight Economy

No matter how you look at it, the economy is going through some difficult times, and many Canadians are facing tighter budgets than they have seen in a long time.  The following are a few tips that can help people manage their finances through the ups and downs ahead.

Watch out for high interest rate debt
As of Oct 31, 2007, there were over 64.1 million credit cards in circulation in Canada.  Many of these cards charge standard interest rates of 18% or more.  The way most credit card payments work is that your monthly payment will cover the interest charged and 3% of the balance of the card.  If you have a balance of $2,000 on your card, and you make the minimum monthly payment, this means that after 5 years you would have paid over $830 dollars in interest, and still have $321 left to pay on the card.


If that $2,000 was used to purchase a TV and stereo, that means you would still be paying on it after 5 years, and the cost wasn’t the $2,000 you paid for it, but approaching $3,000 when you include the interest.
In addition to having high interest rates to begin with, credit cards also have very strict payment penalties.  For many cards, if you miss two monthly payments in a row, not only will your credit score take a hit, but your interest rate can rise to over 24%, making it even more difficult for you to pay the debt down.
Purchasing items on credit greatly increases the cost of what you buy.   With a credit card you buy now, and pay later.  That often sounds good, but the price you pay later can be much higher than if you paid for the item in cash.

Watch out for “No Payments Until...”
Every year there are many sales advertised as “No Money Down” or “No Payments Until...”  These types of payment programs usually come with a payment postponement fee of $50 to $200 and then an interest rate program of scheduled payments starting a year from now.

The problem is, if you have paid $100 for a payment postponement fee on a $1,000 item, you have just paid 10% of the item in fees.  Those fees don’t reduce your principal at all.  And be careful of the repayment programs as they often carry interest charges of over 20% with other fees and charges above that. You’re better off to pay with cash up front and avoid the fees and high interest rates.

Buying the house you need
Over the past several years, housing prices have increased dramatically, increasing the cost of housing from 28% of a family’s income in 1998 to almost 40% of a family’s income in 2007.  This means a lot more of a family’s money is going to make the house payment this year than was the case only a few years ago.
When buying a house, it is best to look at what your needs are first.  How many bedrooms do you have to have, how many bathrooms.  You should also figure out the monthly payments that you can live with.  Just because your bank approves you for a $300,000 loan doesn’t necessarily mean you should use it all.  Even at today’s relatively low variable mortgage rates of 5%, that is still over $1,700 per month going to the house payment.  And remember that the larger the house, the larger the heating bills and the higher the property taxes as well.

Needs versus Wants
Unlike the other tips that are all about math, this one is more about consumer behaviour.  With the tremendous amount of economic prosperity that Alberta has enjoyed over the past several years, many of us have developed spending habits that may not be suitable for, or even detrimental during tough economic times
A need is something that we have to have to survive.  Shelter and food are needs.  How we met those needs is often more subjective: taking a lunch from home or eating out, buying a large vehicle or something that is good on fuel. This part is not trying to be judgmental, just trying to make people think about what they spend money on.

We make spending decisions everyday that can affect our financial balance.  For some of us, we choke at the thought of buying a $150 pair of jeans, and for others this is completely normal.  We may have a perfectly good 27” inch TV at home, but you have to buy the 52” widescreen for $2,000, and actually give away or throw out the old one.  Or do we buy a child a toy because they are making a lot of noise in a store, even though they have too many toys at home already.

Whatever the cause, we often make unnecessary purchases, justifying that we need them. During tough economic conditions, we all end up cutting out the extras, and often find out we didn’t really need them in the first place

What to do right now

1. If you feel that difficulties are coming, keep in mind the following, so that you don’t become overwhelmed with debt:
2. Set a budget so you can know your spending limits each month.
3. Track your receipts.  You might be surprised how much you spend in a month on gum, burgers, and magazines.  The little things can add up when you track them all.
4. Buy what you need.  Think about your purchases.  Can you make do with what you have, or do you have to have the new item.
5. Pay for everything in cash.  Do not use credit cards.  Whatever is bought on credit cards costs much more than the original purchase price.
6. Pay off the credit cards.  You will not get ahead by making minimum payments when you are being charged 18% interest.  Post your statement on your bedroom mirror every month so you can see the balance coming down.

In addition to the above, you should also try to have at least 3 months worth of living expenses saved just in case of emergencies like vehicle repairs or even layoffs.  Jerry