Christmas Bonus

Christmas comes twice a year for some Canadians - or so they think.

The three-paycheque month is viewed across this country as some type of well-earned bonus that comes through the sleight of hand of being paid every two weeks as opposed to twice a month.

Instead of 24 paycheques a year, you get 26. When you get that "lucky" month depends on when your two-week pay period is calculated. For whatever reason, perhaps because people budget on a monthly basis, those two extra paycheques are considered gravy by many workers.

Most people budget on a monthly basis. We know people have their monthly mortgage payments and certainly other expenses are probably monthly too but in most cases your paycheque is coming on a biweekly basis

Approximately 59% of Canadians get paid on a biweekly basis, opening up the possibility of the three-paycheque month.  The good news is that 89% of people go for direct deposit - something that probably goes a long way to eliminating that feeling of money burning a whole in your pocket.

The problem with being paid on a biweekly basis is that many people feel they have extra money to burn.  After all  you had already allocated your regular two paycheques towards your mortgage and other bills. So, bonus – right?

If your thinking is that you've got some sort of free month, then it likely means you are not doing a good job of coordinating your income with your bills.  The problem is that this is a major mistake, and at the end of the day that third paycheque should probably be thought of more as an opportunity.

 The other time people think money is free is RRSP time when they get their taxes [or refund] back from the government.

If you're complaining about not having enough money, use these opportunities to liberate what is yours. These are the times you should be dealing with your debt, if you are like many Canadians, topping up your savings or some combination of the two.

When you think about all the unpaid credit-card balances, leftover RRSP room, unopened registered education savings plans and underfunded tax-free savings accounts, there are plenty of places to put those extra paycheques.

In some ways, that extra paycheque is almost a bit of forced savings. It's yours. Do what you want with it, but why not make it go a lot further by investing it?

Of course, it is December. So if this is your three-paycheque month, Merry Christmas.

Can I stay home with the kids?

One of the big questions many new parents are faced with has to do with deciding whether or not one of the parents should stay home with the child. Obviously, if you’re accustomed to living on dual incomes, the thought of giving up an income may sound like a daunting task. Even so, if you sit down and crunch the numbers, you may find that it might be more doable than you thought.

The True Cost of Working

When you think about it, your job not only provides income, but it likely creates some expenses as well. If you were to decide to continue working with the child, you’ll probably create additional expenses in caring for the child. On the other hand, if you were to stay home, you would also eliminate many work-related expenses. Some of the expenses you may have if you decided to continue working with a child:

·                        Child care: Depending on the level of care you require, you’re looking at anywhere between $400 and $700 per month per child. It isn’t uncommon to spend upwards of $8,000 -$10,000 each year on full child care during the child’s early years.

·                        Food and Beverage: While you can save money by taking your own lunch and drinks to work, most people end up grabbing a coffee or a lunch on the go while working. Even just $5 a day on lunch adds up to about $1,300 each year.

·                        Transportation: This varies greatly depending on how far you have to commute and whether or not you have public transportation, but even if you spend just $25 each week for transportation costs (gasoline, bus, subway, etc) you might be spending another $1,300 each year just to get to and from your job.

·                        Odds and Ends: If you’re in a profession that requires certain attire, you may need to spend money on clothes or dry cleaning. This can add another few hundred dollars a year. Your job may also require certain licenses, professional fees, or continuing education courses that could tack on additional expenses annually.

As you can see, there is more to that second income than meets the eye. Most people will think of the paycheque that comes with the job and assume that’s the bottom line, but there are many other factors to consider. While giving up that job may result in a loss of income, if you consider the expenses you will also give up, the end result may not be as painful as you had suspected.

The Non-Monetary Benefits

While all of this discussion about money is good, you have to think about the other benefits tied to staying home with your child. Money can’t replace the time spent with your children, and if the bonding aspect of parenting is important to you, this can factor in greatly when determining whether or not you can give up an income. Everyone is different and your priorities may lead towards one direction over the other, but don’t overlook the non-monetary issues when making this important decision.

The Bottom Line

There’s no right or wrong answer, and as you can see, it isn’t as straightforward as deciding whether or not you can live with one less paycheque in your pocket. Depending on the type of job you have, how many hours worked, and how much money you make, you may reach the conclusion that it’s impossible to be able to provide for your family if you give up this income. On the other hand, you may find that after factoring in the expenses related to working and the other benefits of staying home, you’re giving up a lot less than initially thought.

So, take your time and go over your options carefully. The decisions you make will significantly impact your family, so it’s important to take everything into consideration. And if you do find that you can afford to stay at home, you can find plenty of assistance at Stay-at-Home Parents site.

Investing begins with Savings

How do you start investing money?  The key to investing is savings. An effective savings strategy coupled with a smart investing strategy will help you to meet your financial goals.

Every dollar saved now helps you to control your current consumption by which the size of the income that you think will be required for retirement is lowered. Also, through the power of annual compounding, it increases the size of the nest egg you’ll have for retirement.

   

SAVING AND INVESTING STRATEGY

Discipline

To achieve any goal in life, one needs to be disciplined. Similarly, saving and investing too requires discipline. A disciplined approach helps you to remain focused on your financial goals. Formulate a plan and review it periodically to ensure that you are on the right track.

  

The 10% rule

Your goal should be to save at least 10% of your total before tax earnings. This should be the minimum. Most millionaires live far below their means as they are disciplined and highly focused on their financial goals from the beginning. They are millionaires because they have decided to be so.

 Review your current consumption patterns

Conduct a careful study of your consumption patterns. Identify items of expenditures that you can do without or explore opportunities to reduce your costs without unduly sacrificing the item. Review such items as your cable bill, telephone bill, entertainment expenditure, insurance, brokerage services, utilities, cars. Divert these cash savings automatically to an investment account.

Budgeting Plan

Budgeting is vital to any savings strategy. It helps you to identify where your money is going. Wasteful consumption patterns can be controlled through successful budgeting. Often a simple spreadsheet in Excel would suffice. In fact, you can use the budget template that is already available when you buy the Home edition of Windows XP.

Plan to make saving automatic

Find out from your employer whether you can direct your paycheque to different accounts. If you don't have such a service, you can set up an account that will take the money automatically out of your chequing account each month. Let the amount be directed to an investment account. This is re-enforced savings which implies you save first and spend the rest from your paycheque.

Tips for Financial Health

Money, that fickle mistress, is very hard to keep. It seems like the more you get, the more you need. Most of us have said something along the lines of, “If I only had $X more per month, then I’d be fine,” at some point in our lives. However, it rarely works out that way. Money can be a difficult, painful, frustrating subject for anyone. It doesn’t have to be, though. With the right tips and techniques, you can start creating better financial health in your life. Here are ten of the best ways to start.

1. Slash Your Debt

Slashing your debt might seem like an easy thing to do, until you look at all that credit card debt, that is. While you might “know” how deep in debt you are, it often requires a very hard look to actually understand how bad your situation really is. The first thing you need to do is list all of your debts from smallest to largest. Start repaying them now, starting with the smallest and working your way up

2. Plan, Plan, Plan

Before you can enjoy better financial health, you have to know where you’re going. What IS financial health to you? A good financial situation is different things for different people, and how you get there is up to you. The best way to start building better financial health is to make a plan. Write down your goals (for the week, the month, the year, the decade, what have you). Having a plan will give you something to fall back on, to look at and say, “I’m here and need to be there, and this is how I’ll do it.”

3. Prepare for Hardship

This is one of the hardest things to accomplish, but you need to build a financial buffer. You need to have money in your account so that if you lost your job, or some other emergency occurred, you would have the cash to cover it. You need the security that only having good savings can offer. Moreover, this should be separate from your investments – it needs to be readily accessible.

4. Budget Your Pants Off

Any good financial situation is founded on a solid budget, even the rich have to budget some things. Make a budget before you do anything else (and it’ll help you with building that cash cushion, as well). Identify areas where you can cut back spending (stop buying $5 cups of coffee, for instance), and then DO IT. Creating a budget can be tough, but it has to be done. You can use online budgeting and financial tools to help if you’re more comfortable using these services than going it alone.

5. Build for the Future

While tough times have made the investment market a murky, frightening place, you need to keep going. Choose the safest investments out there and keep putting your money away. Sound financial health means having the money that you need when the “golden years” finally sneak up on you. Find a good financial planner or advisor who understands that slow and steady really is the best option and follow his or her advice. Keep investing, but do it with an eye for constant, steady growth, rather than making a fast buck.

6. Evaluate Your Job

While the current economy has forced slowed down hiring, it is slowly beginning to pick up steam once more. If your career is not what you want, or not enough to give you financial security, then now is the time to get where you want to go. Where do you want to be in five years? How will you get there? Make your plan, change your job (or apply for a higher-up position) and embark on your journey. Now is the time.

7. Rent or Own?

This is a question I hear quite often. Investing in real estate now might not be the best idea for you right now (based on your current situation) and you may need to rent. If your rent is low enough, this can be fine. However, if you want to OWN a home and have the credit to get a loan approved (criteria is tighter these days), then now may be a good time. You’ll enjoy lower interest and will be growing equity.  Just be sure to factor in all those additional expenses associated with home ownership like taxes, repairs and maintenance costs.

8. Slash Your Expenses

Your spending is yours to control – no one else can do it for you. You need to identify where you can cut costs and then follow through on it. For instance, if downsizing your car will save you money, and you can make it work, then do it! There’s no need to pay for more car than you need. The same principle can be applied throughout your life.

9. Communicate

Your partner needs to be kept in the loop. Communication is the cornerstone of any good relationship, and you need to make sure that you keep a two-way flow of communication with your partner at all times. Discuss your financial goals, and possible ways to achieve them.

10. Free Investment Money

Yes, there is free money out there for many folks. If your employer offers a pension or matching RRSP contribution, then take them up on it! That’s more money for you, that you don’t have to work for – free money.

Manage Money by Setting Goals

The best way to avoid financial problems is to establish financial goals and a household budget to help achieve them. Your financial goals should be specific, realistic, time based, and flexible. As you put together your financial plan, place each goal into one of three categories:

• Short-term goals: These are goals that you believe you can accomplish within the next six months to two years, such as putting a certain amount of money in your savings, paying off a loan, outfitting your kids for the start of school, or having enough money to join a health club.

• Medium-term goals: These are goals that you feel you can achieve within the next three to six years, such as having enough money for a down payment on a home, paying off a car loan, or putting a certain amount of money in your retirement account.

• Long-term goals: These are goals that you project will take you longer than seven years to achieve. They may include sending your kids to college, having enough money to retire, taking your dream vacation, and so on.

Be realistic about your goals and about how long it will take you to achieve each one. If you are not, you’ll be setting yourself up for frustration and disappointment.

Unless you are lucky enough to come into a financial windfall, you probably can’t afford to work toward all your goals at the same time. If you try to do so, you may spread yourself so thin financially that you don’t achieve any of them. Instead, prioritize your goals so you know which goals to focus on first.

Most likely you will begin working toward short-term goals first because they are probably the most pressing, but you may be able to work on some of your medium- and long-term goals at the same time. For example, maybe you want to pay off your car loan over the next six months, and you also want to start stashing money away for a down payment on a home with the goal of having the money you need in two years.

After you decide which goals to work toward first, decide how you’ll achieve each goal and set a realistic time frame for doing what you’ve set out to do. For example, you may decide to get a second job and put all the money you earn from it toward a certain goal. You may decide to finance another goal through a combination of cash and credit.

Either way you do you it just be sure to revise your budget as necessary.

Money Saving Monday - 5 Money Lessons from The Wealthy Barber Returns

Dave Chilton, author of classic personal-finance book The Wealthy Barber, has returned with a sequel. Here's what he wants you to know about money, debt and investing.

Dave Chilton, author of The Wealthy Barber always swore he'd never write a sequel to the book that sold more than two million copies nationwide.

But 22 years later, the sequel has arrived -- The Wealthy Barber Returns. In his new book, Chilton tackles society's addiction to debt, and touches upon many important and well-known personal finance lessons -- lessons he says have become lost in today's world of plummeting savings rates, skyrocketing debt and disappointing investment returns. Here are five things he wants you to learn about personal finance.

1. You have to remove temptation triggers
Chilton explains that our brains have become so wired by the emotional excitement created by temptation that it can overwhelm our common sense.

By limiting our access to the triggers that drive our temptation, we will be less likely to give in. For example, if your weakness is clothing or purses, stop going to the mall or reading fashion blogs; if you have a habit of spending your cash on lattes, stay away from ATM machines and stop carrying cash with you -- or take a different route to work in the morning that doesn't go past the coffee shop.

2. Banks are a business

Contrary to what many of us would like to believe, bankers are not looking out for the customers' best interests. Banks are a business, and their goal is to drive more money into the pockets of their shareholders -- not yours.

3. Credit cards are evil, even if you don't carry a balance
Aside from the absurdly high interest rates on unpaid balances, credit cards encourage us to become less sensitive to the true cost of what we are buying. When a clerk swipes our credit card, it's a lot easier to miss -- or ignore -- how much we are spending.

Not only that, but people who don't carry a balance on their credit cards are not immune to the credit card trap. They might be able to pay off their credit card bills every month, but using the card could still lead to overspending.

4. You can't have everything you want
Even millionaires can't afford everything. Chilton believes that making small cuts in our spending habits can lead to dramatic results -- without sacrificing our quality of life. The key is to indulge in the areas that are important to us -- whether it's travel, a particular sport or fine wine -- and cut our spending everywhere else.

5. Save when the saving's good

"It's crucial to understand that wealth flows from savings, not from income,” says Chilton. So when you get an unexpected windfall or a raise at work, or you take on a part-time job to generate more income, it's important to put away at least 10 to 15 per cent of your income. Life happens, and money might not come as easily down the road. A divorce, a bad investment return, a job loss or an illness can leave you financially crippled if you haven't planned ahead.

The Wealthy Barber Returns is a must-read for all Canadians. Chilton's easy-to-understand financial tips and humorous approach to teaching us about money makes this book appealing to people of all ages.

Money Saving Monday - Emergency Money

Keeping a budget is not enough.  Life always hands us surprises and we often end up with expenses we did not plan for.  Because of this there should be another aspect of your financial picture.  That other aspect is called emergency money.  I like to refer to this your 'OH S#!T' fund.

Emergency money is money that you put away not as an investment and not as savings, but for emergencies.  And these do happen.   It is best to put away about two months worth of income for this purpose.  Some experts say it should be three months.  The actual amount is debatable.   Whatever you decide on make sure it is enough to adequately handle whatever comes up.   The original basis for the three-month rule was the fact that most short-term debilitating illnesses require three months for healing and recovery.

How much should you save for emergencies? Calculating the amount needed should be fairly easy.   What you want is enough money to pay all of your bills and cover the normal expenses you have budgeted for a typical month.   For example, if your net budget and spending income for a month is $3000 then you should put away $9000 for emergency money.   This is not money for investments or for retirement.  Those two categories should be allocated separately.

Emergency money is used for expenses such as accidents, healthcare expenses not covered by insurance, and death and disability or other instances where you did not have a budget made for a particular expense.   Insurance is a separate issue and should be a separate part of your financial plan.   If you do have disability insurance then this will serve in some ways to protect you in the event of short-term disability.   Thus, you should determine what the benefit would be and then reduce the amount needed for emergency expenses by that number.   The bottom line is to make sure that any applicable insurance actually covers all the contingencies without any problems.  You can ensure that is the case by checking the policy or talking with your agent or financial advisor.

Where should this type of money be invested? Ideally it should be in a very liquid investment that is very easy to get to and can be accessed quickly.   Money market funds are the most popular option.  These are short term, liquid investments that most mutual funds and some banks provide for easy access and cash type liquidity.  They usually pay a nominal rate of return somewhere just above the average savings account rate of the typical bank.  The risk involved in these types of investments is nominal but should not be discounted.  The best recommendation is to read the prospectus and verify for yourself that the manager is investing in dependable and safe short-term investments.

Other possible options for emergency money is the savings account, cash or some other asset that can be easily liquidated without taking a loss.  Many CD's would qualify under this category and should be looked at as an option.  Of course when investing your emergency money you should be seeking to get the maximum return possible without compromising on safety.