First and foremost: The importance of an emergency fund
An emergency fund is money – about three to six months’ worth of expenses – that you put in an easily accessible account and from which you’ll only withdraw if required. For example, if job hunting is taking longer than expected and employment insurance isn’t covering all your needs, this little financial cushion could help you out without going into debt.
If you’re financially stable but don’t have an emergency fund yet, don’t wait – start building one now. When it comes to personal finances, no one can predict what will happen in the next few years.
When should you review your budget?
During tax season
Tax season is a yearly reminder to review your budget. We recommend scheduling some time on the same date every year to review your finances, just to get an idea of how things are looking. Gather your account statements, your pay stubs, and your financial documents to figure out what your biggest expenses were the previous year. Take some time to think ahead to the upcoming year, too. What are your goals? Do you foresee a change in your income? Is there a major expense in your future – do you need to redo your roof, for example?
Go over your savings habits and RRSP contributions, too. That way, you’ll get a more accurate picture of your financial situation. You’ll be able to determine if your savings or debts have gone up or down. Ultimately, the goal is to optimize your savings or find ways to reduce your expenses and your debt.
When you’ve gone through a major life change
The second key opportunity for reviewing your budget is anytime you’ve gone through a change in your personal or professional life, whether it was planned or not. Thinking of buying a home? Is your family growing? Considering taking a sabbatical? Have you lost your job? Each of these situations should lead you to review your budget, no matter how many times such events occur within a year.
How do you lower your expenses?
Many events can impact your finances, whether your income has decreased or your expenses have increased. If you find yourself in such a situation, we recommend scaling down your budget to balance out your income and your expenses. But how do you do that?
Review your expenses
A decrease in income may last a short while, like if you’ve been temporarily laid off or if you’re on parental leave. It can also last longer, like if you’ve gone back to school or if you’re on disability leave. Regardless, your goal is to determine which expenses are mandatory and which are personal. Figure out what you can cut back on and what you can keep. Don’t stop paying your mortgage or your rent; rather, try reducing other expenses, like unnecessary or impulse purchases.
Reviewing your budget once a year and evaluating your expenses, your debt repayments and your savings allows you to quickly see where you can make adjustments. Make sure to keep a long-term view of your budget in mind. Your credit score and saving capacity shouldn’t be impacted by your adjustments, if you can help it.
How do you take advantage of an increase in income?
Reviewing your budget when something unexpected occurs may feel more natural, but we also recommend re-examining your budget if your income increases or if you inherit money.
For one-time increases in income, like if you’ve received an inheritance, you can take advantage of this opportunity to pay off your debts, or at least those with a high interest rate. Then, focus on your savings. It’s a great chance to max out your RRSP or TFSA for the year. If you’ve done all that and still have some money left over, investments that pay off in the long term may be a good idea to help you achieve goals like your retirement.
Did you get a raise? That’s great! Review your budget and increase your savings goals. For example, if you want to buy a home, set aside 80% of that extra cash and put it towards your down payment. If you let that money grow, you may be able to purchase property sooner.
Regardless of how your situation has changed, advice from an expert will help you see things clearer and make better decisions.
Want to get advice from an expert? We’re here to answer your questions.