In general, Canadians feel rather confident in their ability to handle a ‘short-term’ emergency- the thing is, most peoples’ emergency plans involve a credit card.
In a recent survey by TNS Canadian Facts, Personal Risk Assessment and Risk Literacy, 52% of Canadians said they would tap into their designated emergency fund should the need arise. Twenty-eight percent of respondents said they would rely on their credit card to get them out of a jam, however, making Canadians the most plastic-dependent national group. By contrast, only 20% of Americans and Brits said they would use a card for emergencies.
That number should be a reality check for many of us. Rock-bottom interest rates mean one thing- in terms of our expenses, there’s nowhere to go but up. Having cash on hand for an emergency will reduce the chances of falling into the credit card debt spiral.
Here are a few tips to eliminate credit card dependence.
1. Tackle your lowest debt first.It’s difficult to get ahead of the game when you’re bogged down with credit card payments. Use the luxury of today’s low interest rates to pay down your credit cards. By paying down the lowest amount first you will gain the confidence and see real results fast. If you’re due for a mortgage refinance, you might want to consider rolling your high credit card balances into a lower interest mortgage.
2. Make a budget.Okay, budgeting isn’t fun. But it’s an integral part of financial health. Determine your regular expenses, variable expenses (like groceries and gas) and irregular expenses (like car maintenance). Be honest.
3. Create a few savings accounts.The most important step in the journey of credit card independence is establishing a substantial cash cushion. The first cash cushion should be for irregular expenses- or those things you would typically buy on credit. Think Christmas and birthday gifts, housing expenses, and clothing. Estimate what you would spend on these irregular expenses in a given year and divide by 12. Stash that amount away monthly in a high interest savings account.
The second cash cushion should be an emergency fund – something to access if you or your spouse lose your jobs. Calculate your monthly living expenses and aim to save at least three months’ worth. If your are commission or self employed ideally, you’d probably want to save about six months’ worth.
The third cushion should be for your goals- either your retirement, vacations, a wedding or your children’s education. Since these are longer-term savings, you might want to consider higher interest investment accounts, or government tools like RRSPs, investment savings accounts, etc.
Companies like ING Direct offer unique options for savings in that they allow you to create an automated savings plan. Every month, the bank will deduct money from your regular bank account. Because the bank is branchless, it’s a little more difficult to access the funds because they have to be transferred back into your regular bank account- so you’re less likely to tap into them on a whim.
4. Try the envelope method. While it doesn’t work for everyone, the envelope method is a way to better control your variable expenses- and thus limit your unplanned credit card spending. Every month, withdraw the appropriate amount of cash for your variable expenses that is laid out in your budget. Create different envelopes- labeled ‘groceries’, ‘gas’, ‘eating out’, etc – and pay for each of the corresponding items with the designated cash. If you’re constantly running out of cash before the end of the month, evaluate your spending habits- there may be areas you can trim, or you may have to revamp your budget. Call us anytime to receive your free Credit Boost program
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