#6 Income Volatility - Borrowing Habits - Part 4 of 5

"The impact of income volatility on Canadians" survey was conducted by Ipsos for TD Bank in 2017.

In Part 1 we learned that income volatility affects 10 million Canadians. And the way to combat it is to either A. Spend only as much as the lowest income month or B. Spend the average of your income every month.

Option A is more conservative, easier to execute and better for your savings. But option B is better than going into debt to live.


In Part 2 we learned that 54% of Canadians are not savings at all, and 16% are actually going into debt. With the average credit card debt in Canada at $4,000, at 20% interest, these Canadians are paying $800 a year in interest payments.

The way to combat this debt spiral is to 1. Figure out how much all your necessities cost. Rent/Mortgage, utilities, gas, water, maintenance, insurance, transportation, food, internet/phone. 2. Until your debt is paid off, try to only spend what's on the necessity list. Eating out should be restricted. Choose social events that are free or very cheap. 3. Increase your luxury spending to bring your total spending up a little but no higher than the lowest income month you expect throughout the year. 

The most important step is to not go further into debt. The next most important step is to get out of debt. Don't let compound interest work against you, especially at 20% per year.


In Part 3 we learned that 24% of Canadians don't save. 39% try to save and 37% save regularly. And 30% of those surveyed have less than 1 months of emergency savings. 

There are a couple ways to go about life. 1. Live paycheque to paycheque or 2. Live below your means. Spend less than your income every month. Save the rest. Let that money earn interest in a savings account or invest it. This is preparing for the worst before it happens. Letting your money work for you instead of working for someone else. This is preparing for life before life comes flying in your face. 


In Part 4 we are going to talk about borrowing habits of Canadians.

Once you've gotten out of the debt spiral, you can start thinking about how to use debt as a tool rather than a crutch.

44% of Canadians pay their credit cards in full every month. 8% don't even use credit cards. This leaves 49% of Canadians, almost half of Canadians, carry super crazy high interest credit card debt. These are rates that can be as high as 26.99% per year for a "basic" rate with a "preferred" rate at 19.99%. 

The audacity to claim that 19.99% is a "preferred" rate is almost unthinkable. 

For the average Canadian with $4,000 of credit card debt, that means paying almost $800 a year in interest at the preferred rate, or nearly $1,100 a year at the basic rate.


The thing about borrowing is that you need to borrow so you can build up a good credit score.

A good credit score helps you get a lower interest rate from the bank when you take a car loan, a mortgage, or a line of credit.

When you have a lower interest rate from the bank, you have more options in how to manage your finances.

When you borrow and pay only the minimum, this doesn't help your credit score because the bank puts you into the "high risk" bucket.

To get into the "low risk" bucket you need to prove to the bank that you always pay in full. 

The best way to build up your credit score is to use credit cards. They are the only credit where you have an "interest-free grace period" which is usually 21 days. You can borrow money from the bank and pay your credit card statement in full every month and never pay a penny of interest. Meanwhile, your credit score becomes better and better with each fully paid month that passes.

The best credit utilization is 30% or less. This means if you have a credit limit of $500, you should spend no more than $150 per month on your credit card. If you have a $10,000 credit limit then you should spend no more than $3,000 a month on your credit card.

As your credit score improves, you should request a higher credit limit on your credit cards. This enables you to spend the same amount or slightly more, but at a lower credit utilization rate, which ultimately improves your credit score further.

It's an upward spiral of goodness.


When you have good credit you will be able to get a better rate on a mortgage, secured and unsecured lines of credit, and apply for premium credit cards which give very good welcome bonuses where the first year annual fee is waived, plus you get hundreds of dollars in reward points.

These are just some of the perks that come with good credit.


Save Money Retire Early is written by Jon Lo, a barely 30 something change optimist, and personal finance guy. I believe anyone can be rich or poor, it's what you save that makes the difference.

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