Spend Your Spending Money In A Safe and Happy Way

Oh hey! So, this is my (Shannon Lee Simmons) first ever sponsored blog post on the website. As a fee-only, unbiased financial planner, I’m careful about what information I share or promote. I was always afraid that working with a financial institution could come across as biased, and as a financial planner, I knew I could only comfortably work with a company that shares my mantra of supporting people getting their finances on track.

But then, I was asked to work with Interac and got excited because I genuinely support using debit as the go-to spending method over credit or cash (It’s in my book again and again and again). So, if paying with debit is now easier for people, I think that’s great.

So, here we are!

In my book, Worry-Free Money, I talk about something called the Spending Vortex. It’s that moment when you feel like your paycheque comes in and it’s already spent before you even get to debate ordering a pizza. Poof! Usually, you’re left feeling broke, like you’ve overspent – and that makes most people feel frustrated.

A lot of times, this happens as a result of how you spend money. Sometimes you pay with debit, sometimes you pay with credit, sometimes cash. Maybe all your rent is due with one paycheque and then you feel like a baller on the next. But, with no spending strategy, you’re never really sure if you can actually afford something. This leads to a lot of money anxiety. But, it doesn’t need to be that way! Here’s how.

Step 1: Stop budgeting with 50+ spending categories.

Coffee shops, takeout, clothes, pet, housing, bills – the list goes on. Budgeting like this sets most people up for failure. You forecast your spending goals in these very restrictive categories than do you best to live within the confines of the rigid budget. It’s so unrealistic! What if one weekend your family comes over and you need to buy a lot of cheese? What if the next week you need to buy a new shirt for work? Enough already. There are only 4 types of money that you need in your budget: Fixed Expenses, Meaningful Savings, Short-Term Savings and Spending Money.

Fixed Expenses are expenses like bills, housing, insurance, minimum debt payments, etc. The bills you must pay each month whether you like it or not.

Meaningful Savings is money that is being put aside to improve your net worth by increasing your assets or decreasing your debts.

Short-Term Savings is money you should be stashing away for emergencies and spikes in spending.

Once you calculate this, everything left over is Spending Money. That’s the money that you have to blow to zero every pay period for your life – groceries, gas, takeout, clothes, fun, and entertainment – cheese (real and vegan)!

For example,

  • After-Tax Income: $3,000
  • Fixed Expenses: $1,700
  • Meaningful Savings: $400
  • Short-Term Savings: $200

Money You Cannot Spend = $2,300 ($1,700 + $400 + $200)

Money You Can Spend = $700 ($3,000 – $2,300)

Step 2: Calculate how much you have to spend each pay period.

Once you’ve calculated how much money you can spend each month, separate it by how often you get paid. For example, if you’re paid twice a month and your Spending Money is $700, each paycheque you can spend $350 ($700 divided by 2). You don’t have to budget this $350. It’s yours to spend each payday however you wish, as long as it’s within your limit!

Step 3: Separate the Spending Money from the rest of your money.

In the book, in my practice and to my friends and family, I always suggest having a separate chequing account for your Spending Money. It’s also good to stick one payment method. This helps you set an actual limit to your spending and keep tabs on it so you don’t have to worry about receiving a bill that you can’t pay off at the end of the month.

If you’ve separated your Spending Money into a separate chequing account, you can easily see if you can afford things. If it’s the day before payday and you have $50 left in there, the question “Can I afford takeout tonight?” is easy to answer. It becomes “Is there money in my spending account?” Yes? Great. And now you know to keep it under $50.

I also suggest spending out of this account using debit. Why? Because this way you’re actually spending your own money.  If you spend using debit, your bank balance will be an indication of how much money you actually have left to spend until the next pay period. In addition, it beats cash because there’s an electronic log of your transactions. You can see where you spent your money in case you ever need to go back and use that information.

If you like the convenience of contactless payments you can do that now with debit! When you think about paying with debit card, you’re likely used to using a PIN number to pay, but now there are options like Interac® Flash which gives you the convenience of contactless payment.  This means you can pay by just holding your Interac Flash-enabled debit card in front of the reader at checkout and you’re good to go – no PIN required. If you like to use your phone to pay, there’s also the option of using Interac® Debit on mobile so you can use your phone to pay with your own money. Since you’re using debit, you don’t have to worry about going over your budget because it’s all tracked in real-time, from your Spending Money account, and with a mobile banking app you can check your balances whenever you want.

Step 4: Spend safely and securely

A spending strategy is one thing, but you also need to know the payment method you use is safe. Contactless payment technologies make it easy to flash your debit card or mobile device quickly and securely to pay for everyday items like groceries, gas or your morning coffee using your own money.  Interac Flash is one of the safest forms of payment because your debit card number can’t be used to make a purchase on its own in store, and it has built-in spending limits that are set by your financial institution. For example, a transaction limit of around $100 means you can’t spend over that limit by flashing your card, as you’d have to insert your card and use your PIN to verify the payment.  There are also cumulative limits and once you reach that limit, you need your PIN to proceed. That’s great from a budgeting perspective but more importantly, it protects you if you lose your card. Also, the Interac Zero Liability Policy means you don’t have to worry about what happens if you lose your card because you are not responsible for losses beyond your reasonable control.

Take the stress out of your spending money! Once you know what you can safely spend to zero each pay period without jeopardizing your bills and savings, your work is done. I give you permission to spend your Spending Money without guilt, or a budget.

 

Leverage the budget – like a boss

THE 2015 BUDGET IS HERE… dun dun dunnnnn

So, like, what does that even mean and why should you care? The budget affects you in SO MANY WAYS but often people don’t even know about it!

The 2015 Federal Budget outlines your tax rates, tax breaks, changes to your savings and how much money is going back into your wallet each year. It’s a BFD.

Rob Carrick nailed it in his recent article by noting that this budget definitely favours seniors and that GenY/Millenials didn’t get much attention.

But, here are some things in the budget that will affect GenY/Millenials/GenX

1)   TFSA or Tax Free Savings Account Increased Contribution Limit

The TFSA is the bomb. It’s an amazing savings account for everyone and for both long and short-term savings. The money that grows inside the TFSA is NOT taxed when you pull it out.  I repeat – NOT TAXED. This is key. When you pull your money out of an RRSP account you must include it in that year’s income and be taxed on it (iccccky).

NEW BUDGET THANG: The TFSA contribution limit has been raised from $5,500 to $10,000 effective immediately. Hella yes. More room for tax-free savings? YES PLEASE!

2)   Benefits for Post-Secondary Students

The budget assists university students starting in 2016. Usually, to be eligible for Canada Student Loan Programs, it’s dependent on what your parents are forking over/their incomes. i.e. if you’re parents made a certain level, you wouldn’t qualify. In addition, for every dollar YOU earned in school over $100 a week, that amount was deducted from your loans.

NEW BUDGET THANG:  If the parental units are forking over for your education whether the total amount or in part, your parents aren’t expected to pony up as much as before to make you eligible for the Canada Student Loans Program. Also, you can now earn money while a student without the amount you earn effectively becoming a drag factor on your student loan. WOOT!

3) Help for Parents with the UCCB and Children’s Fitness Tax Credit

While you may be sleep-deprived, there is a small token of appreciation for your current condition in the budget. The UCCB or Universal Child Care Benefit has been increased from $100 per month up to $160 per month for each child in your family under the age of 6.

The UCCB is taxable money from the gov that parents get REGARDLESS OF THEIR INCOME.

NEW BUDGET THANG: Effective from the beginning of this year, the cheques are in the mail as of July 2015 – PARTY!! Also, the budget has doubled the children’s fitness tax credit to $1,000 starting in 2015. Kid’s activities are so friggen expensive, amirite? Now, at least you get back 15% up to $1000.  Little Billy can go to swimming – hurray!

4)   Tax Rate Decrease for Small Businesses

NEW BUDGET THANG: The tax rate for small businesses will be reduced from 11% to 9% in 2019. (Now why would you give someone a gift that is so far off in the future? Oh yeah – it’s election time again). Note that this is only for CORPORATIONS – not sole-props or freelancers.

If you are curious about any of the four points above or of finding out in plain language how any of this applies to you, it may be time to book a financial planning sesh to flush out how you can leverage this 2015 budget like a boss.

Net Worth

Calculate your net worth!
Watch here to see if you’re on track with your finances! Use the Link below

Net Worth Calculator

FORMULA:

[(current age – 27) X ANNUAL PRE-TAX INCOME]/5

Make Money From Your Home

4 ways for house to earn you money

Your home is a haven, but it can also be a cash cow if you know how to milk it. Today I’m going to give you the 4 best ways to make extra money from your house.

Method 1 – Use Air BnB

Who: Air bnb is a website that allows you to rent out your home like a hotel.

What you need: All you need room for someone to sleep in.
Risk: Letting someone unknown into your house.
Payout: Slightly below market rent. For a weekend in a major urban center, you could charge anywhere from $80 – $150/night! You don’t need to provide any amenities except a bathroom and a bed.
When to use: If you spend your weekends at the cottage or away, rent out your space to travelers and earn some money!

 

Method 2: Parking Spot

Who: You.
What you need: An unused parking space.
Risk: You probably have to shovel.
Payout: Glorious. Most parking spots go for $80 – $250/month in the GTA depending on location.
When to use: Year round if you are sans car.

 

3. Garden Rental

Who: You.
What you need: An unused garden space with optimal growing sunlight.
Risk: Someone comes into your backyard.
Payout: Renting garden space can go from $40 – $200/month depending on size and demand.
When to use: Spring/Summer.

 

4. Workshop Host

Who: You.
What you need: A big enough room that could seat 10 people at least.
Risk: People coming to your home for workshop.
Payout: Small businesses in the GTA are desperate for locations to host small workshops all the time. Most places in the GTA are expensive. If you’ve got a big living room/family room/kitchen, offer it up on craigslist. The average workshop would pay between $20 – $150 depending on how much they were charging guests to come. Alternatively, you could ask to take 20% of all the ticket sales for the use of your home.
When to use: Whenever you don’t need access to your space!

The Downpayment – how much do you need?

The Down Payment

Housing prices continue to soar in most urban-city centers. Wages are getting squeezed tighter and tighter and the cost of living keeps rising. It’s time to face facts. Many of us may not be able to afford to buy a house.

Have you heard of the 20% Rule?

To qualify for a conventional mortgage, you need to put down 20% of the market value of the house. You can put down less than 20% as a down payment, but if you do, you’ll be charged a very costly fee called mortgage insurance.

In Canada you can put down as low as 5%. The less money you put down, the more mortgage insurance you will be charged.

In Canada, if you purchase a $300,000 home and can only put down $15,000 (5%), you will be charged 2.75% of the total mortgage value, and in this case $7837. This $7837 will be rolled into your mortgage.

In addition to this, there are tons of other costs such as Home Inspection, Land Surveys, Legal Fees etc.

A good rule of thumb is to assume that you will also need to save 2.5% of the value of the home for these fees.

If you’re willing to take on the additional mortgage loan insurance, I advise to put no less than 10% to be sure you can actually afford the monthly payments.

Therefore, in a perfect world, you should have 22.5% of the value of your dream house in the bank before you can technically afford it and in a less-than-perfect world, no lower than 12.5%

WATCH MONEY AWESOMENESS BELOW

 

Avoid Being House Poor

Most people have hear the rule that your monthly housing costs shouldn’t be more than  32% of your gross monthly income, but I’m a bit more hardcore than that. This rule can still lead to House Poor Tragedy.

The reason? It’s calculated on your gross income, which means before tax. Well, 32% of your gross income can translate to between 45 – 55% of your after tax income, just for your house. No food, no debt payments, no toilet paper. Your after tax income is what really matters because that’s the money that hits your bank account. So, stop thinking about your income before tax, and only plan based on what your take home pay!

How?

GOLDEN RULE: Make sure that all of your monthly fixed costs are 50% of your household monthly AFTER TAX income. This means, all housing costs, utilities, debt payments, transportation costs and groceries are only 50% of what you actually take home every month.

If you are a first time homebuyer and this feels too tight, you can push it up, but under no circumstance should you be higher than 60% of your after tax monthly income.

This way, you’re ensuring that at least 40 – 50% of the money that hits your bank account is left over for you to actually save and spend!

Usually, when I see house poor, fixed monthly costs are as high as 80%. This is when there’s no money left over for saving and barely any for fun and consumer debt levels start to climb year after year!

WATCH MONEY AWESOMENESS HERE!

Pre-approval for a Mortgage

So, you’ve saved up a down payment, you know you’re not going to be house poor and now you want to start your house search. Before you begin, you should get pre-approved for a mortgage from your financial institution.

Here’s how to wow your financial institution before you buy a house.

1. A credit score of 700 or over will show your bank that you are able to handle making debt payments.

2. Your Total Debt Service Ratio should not be more than 40% of your monthly gross income to be a desirable candidate for a mortgage.

Your totally debt service ratio is your entire monthly housing costs plus all of your other debt payments divided by your monthly GROSS income.

Your monthly housing costs are (mortgage payment, property tax and heating costs). Other debt payments include car leases, credit card payments, student loans etc.

Example

My total housing costs $2000/month and my car payment and student loan payments are $500. I make $50,000/year (gross) so my monthly gross income is $4166.

In this example, my TDSR is 40% so I’m in the clear.

WATCH MONEY AWESOMENESS HERE

Moving In Together – Financial Implications

You’re in love. Nowadays there are 2 big questions to pop. 1. The age old: Will you marry me? And the newer “Want to move in together”.

Both questions have huge financial implications.

Moving In Together

So, you and your partner have decided to move in together. This is the start of a beautiful common-law relationship. This is a big deal. With new legislation, if you and your partner are legally considered a common law marriage, in the event of a break-up, you may be entitled to or have to pay spousal or child support payments. Yes, even without the vows, common law relationships have financial implications.

Keep in mind, some of these rules change depending on what province you live in, so please check with local advisors to confirm the rules.

There are a lot of misconceptions regarding common law relationships, and I’m going to debunk the 3 biggest myths today.

Myth 1: You are considered legally “common-law” after 1 year of living together.

False. In Canada, this is only true for tax purposes. After living together for a year, you should be claiming taxes together as a household, but that’s it. To be considered a legal common-law marriage and qualify to benefit from any financial support provisions if you break up, you need to be common law for 2-3 years depending on where you live. If you and your common-law partner broke up after 1 year of cohabitating, neither partner would be on the hook to pay anything to anyone.

Myth 2: You are responsible for debt if you share a bank account or move in together.

False. In Canada, married or common law, if you didn’t co-sign on a loan with your partner, it’s their debt, not yours. You are not responsible for paying back their debt.

Myth 3: Breaks ups are the same as Divorces.

False: Break-Ups may feel like a divorce, but financially and legally, they are very different. In a common law relationship, the property of each spouse is treated 100% separately. What is purchased by each partner, bank accounts, investments, even your house, belongs to the person that bought them. In a breakup, there is no legal requirement for assets to be split or shared. This is the biggest difference between a breakup and a divorce and one of the most important things to know for your own financial protection.

COMMON EXAMPLE: Let’s say you move into your partner’s house. They had the down payment and their name is on the deed. Even if you paid a portion of the mortgage and bills for 10 years, if you broke up, there is no legal requirement for your partner to pay you back or give you your fair share of that house, even though you’ve contributed. However, if you’ve lived together for over three years, you could take legal action and try to get a portion of money paid back to you as an equitable relief claim.

On the flip side, if you own the house, having someone move in with you for more than 3 years doesn’t legally bind you to pay them money if you break up, however, they are entitled to take legal action to try to get you to pay them a portion of the money they have contributed.

WATCH MONEY AWESOMENESS HERE

Break Up Vs. Divorce – Financial Implications

There’s an old saying, what’s mine is yours, what’s yours is mine. Well, in the case of a separation, this may be the best or worst thing that ever happened to you.

The laws governing common-law break ups are not even close to being similar as divorce. The ring matters…… big time.  I’m going to walk you through some of the major differences between common law and marriage in Canada if your love turns sour.

1. Division of Assets. Upon a marriage ending, there is an automatic right to equalize family property acquired during the marriage. So, the spouse with more money will have to pay the spouse with less money, no matter what. If you are in a common law relationship, however, you don’t have that right or obligation. After a break up, if you felt that you were owed assets from your partner, you have to take legal action and make an “unjust enrichment” claim. In other words, you have to hire lawyers and show that your common law partner was unjustly enriched at your financial expense over the years. This can be very costly and take a long time.

In common law, no matter how long you’ve lived together, you aren’t entitled to half the assets upon separation. In marriage, no matter how much harder you worked, you’ll have to pay out to the other partner.

2. Staying in Your House. Upon a marriage ending, there is an automatic right to stay in the matrimonial home, even if it is not in your name and the decision of who keeps the home remains with the partners. In a common law relationship, if your name is not on the deed, you could simply come home one day and find yourself locked out no matter how much you’ve financially contributed to the home.

3. Spousal Support. If you are married, you have an automatic right to receive or obligation to pay spousal support upon separation. If you are living in a common law relationship, you don’t have rights to spousal support until you have lived together for three years.

Furthermore, if you were married, you always have the right to apply for spousal support, no matter how long has passed since you separated. If you were in a common law relationship, you need to ensure that you apply for spousal support within 2 years of separation or you get nothing.

4. What happens without a Will? If you are married, and your partner passes away without a will, you automatically receive a share of your partner’s estate. If you were in a common law relationship in Canada, you have no right to get anything. Instead, you would have to go through the unjust enrichment claim against your partner’s estate.

There is one aspect where the rules of common law break ups and divorces are the same. Children.

When a couple, married or living together, has kids, the rules for child support, custody and adoption are the same.

WATCH MONEY AWESOMENESS HERE

 

Couples Banking Plan

Did you know that couples who bicker about money once a week are 30% more likely to end in divorce?
When it comes to matters of the heart… money definitely matters.

When couples fight about money, it’s never fun for anyone involved. Most times, it’s just a simple matter of banking.

WATCH BELOW