Understanding your finances and knowing how to make your money work for you (instead of keeping you up all night) is crucial as you transition into the next stage of your life: the dreaded adulthood.
*Cue scary music*
Creating a budget and actually sticking to it, may seem like a daunting task, particularly for those who do not come from a financial background. Numbers? Math? Interest? What? That alone might be enough to bring on the stress sweats. But, take it from me, as someone with a background in marketing and media, who learned nothing about finances in school, budgeting can actually be an amazing thing. Knowing that you can financially support yourself, make all of your bill payments on time, and still have money left aside to do the things that bring your joy, is very empowering.
Let’s start with the basics. Before you can dive into creating your budget, you have to understand how you spend money and create debt. When you make a purchase, you are paying for it through essentially one of the following methods:
This can be physical cash, using your debit card, sending an e-transfer, or a direct deposit from your bank account to another account or bill. Cash is money that you currently have. You earn it, you spend it, and that’s the end of it. Simple, right?
You use your credit card to make a purchase, whether in person or online. When you tap your credit card, the money is not being taken out of your account instantly, but rather it is added to your bill, which you should aim to pay in full every month. This is a form of borrowing. You should note that credit card interest rates are notorious for being one of the highest. An average credit card interest rate is 19.99%. That is a lot.
Credit cards are great when you pay them in full (not the minimum balance, but rather the total amount due) on time. Many credit cards offer great perks such as cash back, points, and even discounts on certain products or services. Credit cards can be your best friend or your worst nightmare. It all depends on how you use them.
Credit Card Pro Tips:
- If self-control is not your strong suit, look into setting a lower limit on your credit card. However, you should note that when you spend more than 30% of your limit, it can have a negative impact on your credit score. For example, if your monthly limit is $1,000, you should try to keep your monthly spending under $300. If you do exceed this 30%, your credit score will not plummet, but as a general guideline to maintaining good credit, you should try to use less than 30% of your credit limit. Although you may not have full control over the credit limit offered to you, it can have a big impact on your credit score.
- If you can be forgetful, find out if your bank offers automatic payments to your credit card. This will allow you to always make your payments on time, without any effort. Note that both the credit card and the bank account will likely have to be from the same bank.
- If you don’t have a credit card, do your research to find out what free cards currently have sign up promotions. They will often give you welcome bonus points or cash back just for signing up — and as a student, you might even get a special rate!
- Your credit cards are tied to your credit score. This means that when opening a new credit card, a credit check will likely occur. This also means that when you close that credit card, all of the credit that you accumulated with it, may be lost. This in turn, will likely lower your credit score, so you should not have too many.
- When possible, try to treat your credit card like cash. If you don’t currently have the money in your account to pay for that designer purse, do you really need it? You can tap, tap, tap, all you want, but that bill will eventually come back to you – and it might come with a hefty amount of interest.
Borrowing from a Loan or Line of Credit
This is when you use a loan, either from a bank or financial aid from the government (OSAP, Student Aid, etc) to pay for something. It is money that you do not have. Interest rates vary depending on the type of loan. For example, car loans can be as low as under 1%, while a line of credit may be closer to 5% or 6%. Your credit score can impact the interest rate on your loan or line of credit (the better your score, the lower your rate).
You will often see interest rates advertised as being Prime Rate plus (or if you’re lucky, minus) a percentage. For example, a Student Line of Credit could have an interest rate as low as Prime Rate minus 0.25%. This is a great interest rate, but what exactly is the interest rate? What is prime? No, they are not referring to Amazon Prime. The Prime Rate, also known as the Prime Lending Rate, is the annual interest rate that Canadian financial institutions use to set interest rates for variable loans for clients. Currently, Canada’s Prime Rate is 2.45%. So, going back to our example, on that Student Line of Credit, your interest rate would be 2.20% (2.45% – 0.25% = 2.20%). An extra benefit of a Student Line of Credit is that while you are in school, you generally only have to pay off your monthly interest. This means that if you have $5,000 on your line of credit, your monthly payments can be as low as $10 a month, depending on interest rates.
See? Finances don’t have to be scary or stressful. They’re just misunderstood. Now that you understand the basics of how you spend and save money, you can start creating a budget that works for you. Stay tuned for Part 2 of this editorial where we’ll help you prepare your budget. In the meantime, more saving and less stressing!