Do you have bad financial habits? You are not alone. A recent survey found that two-thirds of Canadians confess that they have personal financial habits that they plan to work on.
A financial habit is just the value standards and routine practices that people rely on to move through their day to day financial lives. It supports our ability to effectively manage money and respond quickly to financial decisions and challenges that occur.
Licensed Insolvency Trustee, Rob Johnsom from Allan Marshall & Associates joins us today to talk about financial habits – the good and the bad. What are some of the basic financial habits that we all should have and what are the ones to be careful to avoid. Rob also discusses:
- The top 5 financial habits for effective money management
- Five financial habits to avoid
- The negative effect of bad financial habits
- How to avoid the debt cycle and keep on top of your financial obligations
- Budget, budget, budget
Licensed Insolvency Trustees are considered some of the best financial advisors in the country and the only ones licensed by the federal government of Canada. With their knowledge and expertise you can be assured they will give you the best unbiased advice about debt relief options.
Read the Transcript
Welcome to another edition of the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. I’m Wayne Kay. Today we’re going to be talking about financial habits to develop and some to avoid.
My Licensed Insolvency Trustee for today, Rob Johnson joining me from Allan Marshall and Associates. They’ve got offices in New Brunswick, Nova Scotia, Prince Edward Island, and a new office in Alberta. Rob, thanks very much for being on the show.
Rob Johnson 0:33
Thank you very much for inviting us today.
I am more and more excited about financial habits, every show I do. I just love talking about money and figuring out ways to budget and stuff. So let’s talk about, what are some of the financial habits that you’re talking about?
Rob Johnson 0:49
Well, the first thing might be to just define what a financial habit is. Maybe some people don’t understand it but really – it’s just the value standards and routine practices, rules to live by, that people rely on to move through their day to day financial lives. These habits support their ability to effectively manage money and respond quickly to financial decisions and challenges that may occur from time to time. They’re always those unexpected events in everybody’s life that they don’t expect, right? It’s the ability to manage and move with those.
Yes, those are the little things that happen. We’re going along, and all of a sudden – we look at what’s going on right now, for many people, financially. Raising the kids, which costs a fortune, by the way, and all of a sudden, we see gas prices now. It’s just astronomical numbers. We see food, we see groceries, everything is going up, up, up. Inflation is up like crazy and so this is where it’s more important than ever to really have good financial habits.
Rob Johnson 1:55
Correct! Yes, and there’s some basic financial habits that everybody should have, just so they can kind of manage their day to day lives and stay on track. Some of the top five financial habits identified for today:
Number one would be preparing and reviewing a monthly household budget. A simple budget can help you track your weekly or monthly income and expenses, and helps you focus on your financial goals. A budget should include your monthly expenses and future goals that you’re saving towards – and it’s also important to review your budget at least monthly to track your progress – and to check that you aren’t spending more than your income, or overspending a particular area that you might not be aware of. But a budget at the end of the day’s aim is to keep your expenses within your income while staying on track to achieve your financial goals.
The second financial habit that I’ve identified would be paying yourself first. This is something that everybody forgets about. For many of us one of the biggest barriers to saving is simply remembering to do it because we’re so busy paying bills, we forget to pay ourselves first. That’s a pretty easy solution these days now that we have banking online and stuff like that.
You can quickly set up automatic payments from your checking account into your savings account out of each paycheque – it just has to be a predetermined small amount that you can afford and you also include this amount into your budget as a regular expense. The neat thing is as it does it in the background, you don’t even know it’s happening until you check your savings balance and find out that you’ve actually been putting money away and not even realizing it. It’s quite amazing actually, how such a small amount saved each month or each paycheque can add up over time.
Oh, wow. Absolutely. Okay, terrific. Number three is?
Rob Johnson 3:39
Number three is always try to have at least three months of expenses saved. This goes back to what you might have started off with – life rarely goes according to plan, right? Be prepared to weather any storms that come your way by always having some easy access cash available.
Money put away in an emergency fund can help you over some of the bumps in life, such as major unexpected expenses, such as repairs to your home or car, loss of income due to an illness or losing your job or the illness of a loved one. People forget about that, because sometimes that can make it hard for you to go to work. Of course an unexpected event can reduce your income or increase your expenses and throw your budget totally out of whack, unless you have those reserves to compensate for that.
Always aim to build an emergency fund that can cover up to three to six months of essential expenses. I know six months seems like quite a reach, even three months I would assume would be quite a reach for a lot of households these days, given the higher cost of living. But at least try to have something in there as a buffer and it also gives you a sense of security and control.
At least if you’re shooting for it, at least if you’ve got that in your mind – because to have three months saved for most Canadians, I think is pretty difficult. That’s a big number and having raised kids I always heard it. I always wanted it, but there was no chance that it was going to happen. The one thing that did really work, and we’re going to dive more into – the pay yourself first – where all the sudden you started building that little cushion there. That makes a big difference. What’s number four?
Rob Johnson 5:15
Number four is always review your risk protection plan. What I’m referring to here is insurance and things like that. An emergency fund can help you cover the expenses for a few months, if something happens. A risk protection plan aims more to cover you and your loved ones over the longer term. Insurance helps you to essentially minimize financial losses due to unexpected events. It helps protect your assets and financial investments. It reduces your need for more savings or taking on more debt, given an unexpected event, which could mean having to abandon or delay any financial goals, which is what you don’t want to do.
It’s also important to regularly review your insurance needs, as things change in your life, over time. Everybody’s life changes. Do you need to update your beneficiary or expand your life insurance protection, due to a new child in the house? Do you rent buildings and need to review? Maybe you’ve got more tenants in the suite, or car usage. Are you driving further to work for a new job? How those things affect you – they’re small things. Well, they’re not small things, they’re big things, but they’re things that go overlooked that have a huge impact if something goes wrong.
Like I was saying before, few things in life stay the same for long, but regularly reviewing your insurance needs make sure you’re always protected.
Number five – look to schedule an annual financial wellness check with an advisor. It’s just like going to the doctor for a regular health check. Reviewing your financial plan annually with that advisor helps you create goals and develop a financial plan and how to achieve them. It also may help identify gaps in your financial plan, such as insurance that isn’t meeting your needs. You can get into more complex topics such as investments – put it plans to pay debt down faster, including consolidating loans into one place. As well, a financial advisor can also provide recommendations for proper financial products that actually meet your needs versus buying some that provide you with no benefits.
You really need to look at insurance policies and other policies and things we can get into, financial instruments. Some are beneficial, and some we just have and they don’t really provide any benefit. So should we continue with those?
Yes. And the nice thing is when you have somebody that’s going to be looking over these finances, you’re going to maybe be a little bit better with it. Well, let’s dive into what financial habits should be avoided.
Rob Johnson 7:48
Okay, well, financial habits to avoid – I think I’ve identified five big ones.
The top one, of course, would be racking up credit card debt. That’s one of the most expensive bad money habits a person can have – because as we all know, high interest credit cards can cost you hundreds of 1,000s of dollars in interest costs annually. As well, having high balances on your credit card can also damage your credit score. So to avoid wasting money and interest, be sure you’re paying your balances in full every month, because this will help prevent debt and save on interest expenses. It also allows you, by not paying those interest costs, to divert some of your actual monthly income towards other savings or other other financial goals.
Try to avoid shopping when you’re bored. Back in the day, this was also called Home Shopping Network syndrome. Shopping late at night, when you’re half awake and bored. Picking up the phone and dialing in and ordering whatever it was the deal of the night on the TV. Fortunately, these days, it’s gotten even easier, thanks to online shopping. So it’s far easier to shop when you’re bored scrolling through on your tablet at home.
Shopping due to boredom is a terrible financial habit and unfortunately to rack up large amounts of debt without noticing it – because remember, it’s all going through electronically in the background until you get your bill at the end of the month. Sometimes you can easily lose track of what you spent online, through Amazon or through other mediums. Myself included. After Christmas shopping, looking at my statement was a bit of a shock – because it was so easy. It accumulates pretty quickly.
Yes I think that’s a major problem for many people too. They just start shopping and then there’s that silly let’s buy more so that we don’t have to pay any shipping. So I need to buy something for $12 and the shipping is $4, but if I spend $36 I get free shipping. So then I go spend $36 instead of the 12 bucks. In addition to that, mathematically, we just have to – we just have to get the free shipping so we end up spending way more money than we should have if we were just to pick up one item. So that’s a great one. What’s number three?
Rob Johnson 10:08
Impulse purchases. All those items displayed at the checkout line – they’re not there by mistake. They’re all purposely put there, especially at eye level of children. That’s essentially a retail trap, a retail tactic to get you to spend more money before you leave the store. Those types of purchases add up quickly, without even noticing. So for instance, let’s say your impulse purchases are averaging $100 a month. That’s up to $1,200 a year that can be put elsewhere. Most of the time, that stuff you buy at the display counter on the way out is non essential and quite disposable.
I don’t buy it just because it’s there and I know it’s a trap. That’s just pure, simple. I will not. I refuse to buy it. What’s number four?
Rob Johnson 10:53
Number four would be shopping for status. Some people buy things just to try to impress other people. Sometimes it’s easy to get caught up in celebrity fashion and a desire to impress people with things you have. However, shopping for status is not the way to find real friends, and leads to financial issues down the road. Always try to remember you don’t need to impress anybody with what you own. You are you and that’s all that should matter at the end of the day.
Yes, that’s a very important one. And the final one is?
Rob Johnson 11:24
Buy Now – Pay Later. These are the plans that everybody gets caught with, because you buy now and you get a 6, 12 or 18 month deferral and you totally forget about it. The other issue with these plans is they often encourage people to purchase more products than they can afford – because they tend to forget about, down the road when this bill comes due, that they have to satisfy it. So this could put consumers in a difficult financial situation.
And it’s always, always something to be aware of, and you can impair your credit scores, if you’re unable to pay on time. Or, essentially, if you were to have too many of these plans on the go at the same time, it does impact, it does get reported to the credit bureau and will have an impact on your credit score overall.
You know, a lot of the information you’re talking about – it goes against what real millionaires do in their financial habits. Because I read a lot of different books regarding millionaires. The Millionaire Next Door, etc. And they’re people you would never expect. They’re driving older cars and so it’s funny because, there’s no credit card debt, they don’t shop when they’re bored, they don’t like to spend money, they don’t like to impulse buy, it has nothing to do with status. Their status comes to what their retirement income is going to be really that’s the main focus. And they don’t fall into these traps. If they can’t afford it, they don’t buy it. Buy now, pay later.
Rob Johnson 12:49
The other thing that people have to consider is, how do bad financial habits affect a person? These financial habits all have an impact down the road on a person’s finances. The only way to essentially ensure a financially secure future is through proper financial planning. If the planning is inadequate, it could spell disaster.
Also setbacks are inevitable. You’re always going to come across that so try to prepare for those but it can be devastating if you don’t have adequate planning. The effects of bad financial habits typically include significant increases in debt. Debt is a big problem. Without a proper financial plan or budget, it’s very easy to spend beyond your means without being aware of it. Over time this can leave you with substantial debt as you head towards retirement.
That leads into another bad effect, or negative effect would be not having enough for retirement. In order to maintain a reasonable quality of life at retirement, you need to save and plan ahead for it. A financial planner can help you make sure you have the proper investments and spending plans so that you have more than enough to enjoy your retirement.
Another bad habit, or a bad effect would include living beyond your means – because poor financial management can easily lead to overspending. Preparing in advance for large expenses is critical. It’s much more rewarding to save for your next big purchase than running up your credit cards. If you’re not careful this can lead to further debt which can easily spiral out of control.
Yes and there is pride. There’s a pride that comes along with saving up to buy something as opposed to just going out and putting it on your credit card. It’s really just, it’s something different. There’s something about that when you save up, and then you’re able to go by it using your debit card or your cash or what have you. There’s something psychological to that, because you earned it. Yes you earned it. Yes, very important.
Okay, debt cycle. There’s a lot of people that get into something called a debt cycle where they buy stuff, increase the debt and then they work really hard to get out of the debt. Then they get out of it and they go back into debt and they just constantly are on this wheel.
Rob Johnson 15:06
Yes, a debt cycle is essentially a cycle where you get behind on your financial obligations and fall further and further into debt. Most people don’t even realize they’re trapped in the cycle until it’s too late.
Some of those signs include, living paycheque to paycheque, because all your income every month is coming in to pay your essentials, and the remaining port is going out to pay or satisfy your debt obligations. Another sign would be that you’re only able to make the minimum monthly payments on your debt. Your debt to income ratio is out of balance, that’s usually another sign. Credit card issues are increasing, with maxed out limits. And of course, at the end of the month, there’s nothing left for savings at the end of month, because essentially, all your disposable income is going to satisfy these monthly debt repayments.
Again, it’s just a cycle where once you find yourself in it, it can be very difficult and challenging to get out of. Debt cycles can be reversed by effectively budgeting for all your monthly expenses and increasing your debt payments to pay more of the principal each month, which would offset future interest costs, of course. Then really look at your budget and your habits. What non essential expenses can you cut out? Do you need to buy lunch every day? Do you need that Tim Hortons coffee?
Then there’s also the last one. Consider a second or a part time job to increase your income so that you can manage those debt repayments, and to get things back under control. And hopefully, you know, if somebody does lean towards a second or part time job, that’s just a temporary thing to get themselves back on track – because again at the end of the day, your mental health and your physical health is very important as well. You can’t neglect those either.
There’s a lot of stuff to juggle but a lot of it makes perfect sense. When we budget, pay ourselves first, save some of that money. Those key points that you were saying, that were the good financial habits, and then avoiding all those bad ones. If we can just get that under wrap, we’d be doing great.
Rob Johnson 17:08
That’s what it all is all about is trying to build and protect a quality of life that you’ll enjoy.
Yeah, absolutely. Any final words you’d like to share with us?
Rob Johnson 17:20
Again, budget, budget, budget. That can’t be stressed enough. Without budgeting, it’s like driving a car without a map.
Rob, thanks very much for all the information today.
Rob Johnson 17:31
Thank you. Thank you very much for inviting us.
You got it. My guest today Rob Johnson from Allan Marshall and Associates, Licensed Insolvency Trustees. You can’t get a free consultation if you have financial questions. You can contact them through their website, wecanhelp.ca
That’s it for today’s Debt Matters podcast. Just make sure you subscribe wherever you get your favorite podcasts from and of course for more information, you can always check out debtmatters.ca Thanks very much for listening.
About Robert Johnson
Rob Johnson joined Allan Marshall & Associates in April, 2010. Prior to joining the practice, he was a Vice President with Ernst & Young Inc.’s Corporate Restructuring Group. Rob holds a Bachelor of Business Administration, is a Chartered Accountant, and a Chartered Insolvency and Restructuring Professional.
Rob enjoys helping people restore balance and improve their quality of life by working together with the goal of solving their financial burdens.