Oh hey! So, this is my (Shannon Lee Simmons) first ever sponsored blog post on the website. As an advice-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)!
- 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.
Tomorrow I give birth to a giant cyber baby – Canada’s First Personal Finance School. It’s the biggest thing I’ve ever done. (pees pants a bit).
Who knows what tomorrow will bring? Right now, on the eve of the launch, I can still be optimistic. The programs aren’t online yet and I can still believe that anything is possible and that this school will help more people than I’ve been able to reach before.
Once launched, I have to face reality. It’s possible that I was right. It’s also terrifyingly possible that I was wrong. Any entrepreneurs/budding entrepreneurs out there probably know all about this launch-fear.
But, if you don’t believe that what you’re doing is going to make waves or change your life in a HUGE way, why would you stay in Friday nights while all your friends are together, weekend after weekend? (#fomo) Why would you set alarms for 6am on Sunday mornings while everyone else is asleep? How could you end up crying, alone, at the office until 11pm a week before launch-day and only realize that you’re NOT OK when the wonderful maintenance staff offers you a Werthers Original, and tells you “it’s time to go home”.
When you push this hard, you have to naively believe… you have to be so stupidly optimistic or else, you’ll just give up.
I’ve cried almost every day over the past 6 months. Sometimes, from joy. Most times, sheer frustration and exhaustion.
So, I just want to sit and revel in this moment.
Everything is done. It’s all out of my control. There is literally nothing for me to do but take a deep breath in and wait to see if the world believes in this school as much as I do.
This is a rare, magical moment in life. It’s like being in free-fall. It’s silent, but loud. It’s peaceful, but manic. It’s terrifying, but exhilarating.
I know I’ve packed the parachute the best I can. I’ve done all the work. I’ve made the leap and now there’s nothing left to do as I fall but trust, and wait for the parachute to open at the right time.
I think this is why I became an entrepreneur. I’m addicted to the free-fall. This, to me, is living. I feel truly alive because of the entire spectrum of emotions that comes with building, planning, obsessing, and believing in something you’ve created from nothing. I am fully self-expressed and so f*cking appreciative for that.
I’m usually pretty light-hearted in my writing/videos, but I wanted to give this moment the earnestness it deserves. This is a big one for me and I wanted to write this post from a place of gratitude and to be a letter to my future self.
Dear Future Self,
You are about to launch the biggest project you’ve ever taken on. Good on ya.
If things don’t pan out the way that you planned, that’s okay – you are not a giant failure.
No matter what happens, you have so much to be proud of. Be proud of what you’ve created, it’s amazing. Be proud that you are not afraid to work your ass off for something you believe in. You have put your WHOLE SELF into something that you will put out there for anyone in the world to judge. Being vulnerable like this is a really scary thing, you are brave. Lastly, celebrate the fact that you are facing your fear of failure like a boss. Please don’t stop being stupidly optimistic…. Ever. It’s your special skill in life. Remember, that no matter what happens, it’s the journey that defines you in the end and this journey has been truly epic.
Thank you for being one of my fierce supporters. I couldn’t have done any of this without you. Stay tuned with me tomorrow as I continue to free-fall and we’ll find out if the chute opens.
Shannon Lee Simmons
Almost-Official Founder of The New School of Finance
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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
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
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
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!
So you want to start a business? The days of sticking with the same job for 30 years and getting a cushy pension are ending. Freelancers, entrepreneurs and small businesses are the future.
The first thing you may want to do is figure out what steps you need to do to make it official, and that’s determined by your ownership structure, which is jargon for are you a sole proprietor? Partnership or a corporation.
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%
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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!
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!
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.
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.
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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.
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