"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 are going to talk about Saving Habits of Canadians.
According to the survey, 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. That's terrifying. To not be prepared for any kind of disaster. Life hardly ever goes as planned. Even the most secure job can be lost.
The argument is that it is impossible to live in some of the major Canadian cities because of the cost of real estate. But I know people that have lived on less than $500 a month in Toronto. It's not impossible, it just takes a little bit of sacrifice, renting a single room and sharing common space with 6 other people. You don't have to go so far. Learning to share a little at the beginning of your journey can make a huge difference, especially just to build up a few months of savings.
You don't have to share forever, but you will find that it's the best way to cut 20% or more off of your living cost.
$2,000 to rent a 1 bedroom in downtown Toronto or $2,500 to rent a 2 bedroom in downtown Toronto split between two friends at $1,250 each.
It's not an arrangement you need forever, but even for 6 months, that's $750 saved every month just on rent or $4,500 after 6 months. If you can deal with this for a year that's $9,000 saved.
Sharing internet and electricity can save you another $750 after a year. That's nearly $10,000 in savings by getting a roommate. And you can still live in the convenience of the downtown core. Maybe you don't need a car since you live in the middle of the city. You can save another $5,000 to $10,000 a year.
There are a couple ways to go about life.
1. Live paycheque to paycheque. When disaster strikes, you find a way to deal with it. Usually, that means going into debt, lowering your standard of living, and struggle at your new lower standard of living as you attempt to pay off your disaster debt.
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 in a mutual fund, ETF, or directly in the stock of a public company like Apple.
This is preparing for the worst before it happens. This is letting your money work for you instead of working for someone else. Using money as a tool.
And when that disaster strikes, you'll be prepared to deal with it without changing your lifestyle. It might wipe out your savings, but your lifestyle is unaffected. And if that disaster doesn't strike, you're future becomes brighter and brighter with every interest/dividend payment paid to you (instead of paid "by" you")
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.