Building Blocks is a special personal finance web series geared towards educating families on money-related topics. A collection of stories, videos and discussions, Building Blocks will run online until the end of December.
Heather McQueen and her husband will spend part of Christmas Day on an airplane. The Vancouver couple, who began hammering out their holiday budget back in September, knew travelling to visit family in Winnipeg and Kamloops would be one of their biggest expenses.
“We are flying out on the night of Dec. 25th because that is when the cheapest ticket was,” said Ms. McQueen, a 33-year-old project manager. “We didn’t cut anything out, but we hunted around for seat sales. We didn’t want to have that after-Christmas regret.”
Although setting up a family budget to oversee holiday spending and set other short and long-term financial goals seems like a no-brainer, few Canadians are as organized as Ms. McQueen.
“People might assume they will spend $1,000 or $2,000 for Christmas. But unless they started setting aside that money earlier in the year, it tends to go on the Visas or Mastercards,” said Daniel Collison, a regional director for Investors Group in Markham. “Because of interest rate charges, the reality is that people will be paying more for their holidays and presents than the original ticket price.”
You want to make sure that you are setting aside enough money to meet your financial goals and not just blowing it on general spending. — Financial planner Suzanne Schultz
Financial planners agree that year-round budgeting is key to weathering cash-flow calamities. A budget is the basis for a strong financial foundation that allows families to buy homes, save for retirement, and survive mishaps such as an unexpected job loss.
Flush from spending, bogged down with record debt and reeling from stock market turmoil, many Canadians will be entering 2010 with a stinging financial hangover. Historically-low borrowing costs have sent housing price through the roof and many people, particularly young families, are now shouldering staggering amounts of real estate debt. Which makes drawing up a family budget more critical than ever.
When interest rates rise from their current lows, anyone with debt – be it a mortgage, car loan or credit card – will be in for a rude wake-up call, Mr. Collison said. “It doesn’t take a significant increase in rates to cost you a few hundred dollars more in payments each month. Now is the time for people do a cash-flow analysis, so they can understand what kind of buffer they are playing with when interest rate changes kick in.”
A family budget should also take into account potential family emergencies, such as one spouse losing their job, says Suzanne Schultz, a chartered accountant and certified financial planner with RBC Dominion Securities Inc. “A budget is key because it gets a family thinking about their future financial goals and what you would do in case something unforeseen happens.”
She says the best way to get started is to go back and track all family spending for the last six months. Bank statements, credit card bills, and cash withdrawals should be accounted for and divided into mortgage, utilities, transportation, food, entertainment, clothing, debt repayment, savings and perhaps other special categories, such as childcare or charitable donations.
The next step is determining what is a fixed and what is a variable expense, which areas are being neglected and which need to be curbed. “You want to make sure that you are setting aside enough money to meet your financial goals and not just blowing it on general spending,” Ms. Schultz said. The introduction of the tax-free savings account, as well as the temporary Home Renovation Tax Credit, has given young couples more options to choose from.
