Financial Friday #125: Financial Mistakes to Avoid in Today's Economy
2022 has been nothing but bad news financially for most Canadians. Our stock portfolios are worth a lot less, everything we buy costs more, and interest rates are making our mortgages and other loans a lot more expensive. More than ever it is time to tread carefully and avoid any financial mistakes, so we gathered up the top 5 missteps you definitely want to steer clear of for the rest of this year and beyond!
1. Not understanding your loan agreements.
It is shocking to see how many people fail to understand the terms and conditions before entering into potentially life-changing contracts like a mortgage or student loan. Don’t assume your student loan will have a low interest rate and make sure to investigate the amount of your monthly payment post-graduation, and how many years you will be paying.
Mortgages can be complicated, but that’s no excuse and a good mortgage broker will take the time to answer all of your questions. Trigger rates have recently been in the news and are a good example of people not understanding what they signed.
2. Not having any system to track your expenses.
“I don’t know where my money goes” is a common refrain as prices continue to rise. However, given the number of mobile applications, web programs and other online tools available to simplify this task (or just use a pencil!), there isn’t any excuse. Regardless of how much income you have coming in, monitoring and controlling expenses is critical as plenty of high-earning-now-bankrupt athletes and actors have proven.
3. Investing before paying off debt.
The question of whether it’s better to invest any “extra” cash or pay down debt needs a re-think given recent economic changes. In 2021, mortgages and lines of credit could be had for around 2% and most stock indexes reported double-digit gains. Paying down debt with money you could have invested in the markets was not the best option.
A year later, borrowing rates have doubled in many cases (mortgages for example) and financial markets are wobbly at best, with many deep into the red year to date. These aren't the only factors to consider and you need to do the math for your situation, but the case for paying down debt is getting stronger by the day.
4. Not saving and investing.
As higher prices and interest rates suck up more of our disposable cash, something has to give, and putting a little bit of money away each month may be on the chopping block. If you need the money for essentials like food or rent then you have no choice, but be honest with yourself on what is essential! Once you break the saving habit it’s hard to get it back and saving is not really a discretionary expense, unless you have an alternative plan to fund your retirement? Catching up on savings might be possible when things get better, but that could be years and the earlier you start, the more your savings are going to grow.
5. Spending too much on a car.
You should be aiming for 15% of your take-home pay for total car costs including the loan payment, insurance and gas. This leaves you between $30K and $35K for a vehicle if you make $100k annually. That’s not a lot given new and used cars have been in short supply in 2022 and prices are through the roof. Although repairs aren’t cheap and you won’t get that new car smell, hanging on to your current ride may be the best option financially.
Financial knowledge is the best defense for avoiding financial mistakes and we hope you continue to learn with us.
Resources:
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10 genius things Warren Buffett says to do with your money
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"Fixed" payment variable mortgages hitting "trigger" as rates rise
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Inflation putting RRSP and TFSA contributions on chopping block
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How to tackle soaring interest rates & higher mortgage payments
Mortgage specialist and a guest on our weekly webinar series Angela Calla talked to global news about what you can do to in case your mortgage payment is ballooning beyond your means.