The Decibel - Disaster-proof your finances for 2023

Episode Date: January 6, 2023

2022 was a pretty turbulent year financially, with sky-high inflation, interest rates and housing prices. So you might be looking at the coming year and thinking about how to protect your finances against whatever 2023 might bring.The Globe’s personal finance reporter, Erica Alini, recently wrote a MoneySmart Bootcamp newsletter to help people get a better handle on their money. Today, we talk to her about how to disaster-proof your finances and discuss budgeting, saving and debt.Questions? Comments? Ideas? Email us at [e-mail]

2022 was financially pretty rocky. We saw housing prices skyrocket, inflation hit record highs, and interest rates shot up. So now that we're in 2023, you might be thinking about what you can do this year to protect yourself against these types of financial disasters. Erica Alini is here to help. She's the Globe's personal finance reporter, and she's been writing a newsletter called Money Smart Boot Camp. She's also the author of Money Like You Mean It, a book of personal finance tactics for the real world. Today, Erica will walk us through three things you need to know about your money, budgeting, savings, and debt. I'm Maina Karaman-Wilms, and this is The Decibel from The Globe and Mail.

Erica, thank you so much for joining me today. Thank you for having me. So today we're going to start by talking about budgeting, savings, and then finally debt as well. And Erica, you did this Money Smart Boot Camp newsletter at The Globe recently that's all about how to manage your money. People can sign up online, and we've got the link in the podcast description too if they want to do that. But let's get to some of that advice today that you've got in these newsletters. So where should people start when they're looking to get better control over their finances? I'd say the foundation of all of personal finance is spend less than you make.

If you don't have that down, then you can't save consistently. If you're not saving, you can't invest. And there's no kind of financial planning that you can do. So that's the real, the basis. It sounds obvious. All of us know that you can do. So that's the real, the basis. It sounds obvious. All of us know that we need to spend less than we make, but actually doing it is far from obvious. So how do you do it?

And really the key is to find a way to keep track of your finances and prioritize what you're spending on and what you're saving for and find a method that works for you. So when I think of managing money, I think of something like a budget, which is a little tedious for me. And I think a lot of people find it kind of cumbersome because you've got to fill out the columns for everything that you buy. But are there any easier ways, I guess, to start by

managing your money? I think budgeting is kind of a mandatory first step. If you've never done it before, you kind of have to start with an old-fashioned budget. It can be something that you do with pen and paper. It doesn't have to be Excel sheets or anything complicated, but you do need that sort of initial exercise of tracking how much money is coming in and then tracking where your money is disappearing to in terms of what are you spending on. You do need that initial exercise of really collecting receipts and tracking and looking at your credit card statements.

You probably should do it for, I say, the classic advice is three months. But you need that initial exercise. Now, for a lot of people, it works very well sort of as an ongoing strategy. There are definitely a lot of people like my dad, for example, who thrive on the discipline of a budget and of really tracking every cent. However, you know, not everyone works like that. I certainly, I don't. You too, okay. I don't.

No, I don't budget the traditional way. And so there are other ways to do it. So what do you do if you don't like to budget yourself? So what I use is something that, you know, I didn't invent it. I have my own version of it. But I like to call it the money bucket system. And so what I do is I sort of keep track of my money by using a lot of accounts. I have many savings accounts. And so I use those savings accounts to set money aside for an emergency fund.

I have savings accounts for short-term savings goals, like if I'm saving up to buy a car or saving up for a vacation. And then I also use savings accounts for irregular expenses. So expenses that come out maybe once a year, or, you know, for example, I have a savings account for my kids' summer activities, summer camps. It's a substantial expense that we face every year. And so I kind of know when I need the money, I divide it up by the months that I have, the time that I have to save up for it. And I just populate that account. Okay, so you have different savings accounts or different buckets, money buckets here. And then essentially over the course of the year, you're constantly putting money into those to save up for whatever you need then.

Is that how it works? Yeah, that's how it works. And basically, it's an exercise in thinking ahead and constantly thinking about what are your savings goals? What is that going to cost? How much time do you have to save up for it? And it's sort of, it's really about a way of keeping track of your money based on the full year rather than month to month. So the thing with money buckets and with having so many accounts is it can get very expensive if you're paying a fee. So I would say if the money bucket is, you know, you find something that might work for you, make sure that you're using

no fee bank accounts. There are a lot of online only banks and credit unions that offer no fee bank accounts and savings accounts. sometimes with very attractive interest rates right now, and also make sure that you have unlimited free e-transfers. You said many buckets. How many buckets are we talking about here? Because I can imagine it could get kind of unwieldy if you have a lot of them. It can get unwieldy. And the thing is, too many categories with any method, even with budgeting, will probably send you off track. And so I really like the advice that one financial planner, Shanley Simmons, she has a very popular book called Worry-Free Money. And one of her main pieces of advice there is budget with very few categories. Basically, you just need to

make sure that you're covering your bills and your routine expenses, and you're carving out money for your goals. And then sort of what Shannon says is once you populated those categories, you've taken care of your routine expenses, your short-term savings, and your long-term savings. The money that's left, you can spend without worry. So that's the key. Okay, so we've talked a little bit about savings goals, but let's dive into this idea of saving here. Because I think we know it's important to save, a lot of us try to save, but it's not always possible, unfortunately. So I guess what are the common things that you see that might stop someone from saving?

I think there are definitely a few things that prevent people from saving. And of course, like the higher your living, your essential living expenses and the lower your income, the harder this is going to be. So let's just say that first and foremost. However, you do need to save if you want to have a healthy relationship with your money. You have to find a way to save. And so the first step, I would say the first priority when it comes to saving is making sure that you have some kind of emergency fund in cash, like some money that you can tap if expenses come up that you didn't foresee. There is no scenario in which you go through life without financial emergencies. I once calculated how often I would run into an unexpected expense. And over three months,

my average was three unexpected expenses per month. What kind of things came up, Erica? I'm just curious. What are the things that, you know, you didn't necessarily plan for that are those financial emergencies? I think back then, three examples was where a branch fell on our car. And then it was summer and our AC started spitting out icicles. You don't want that, no. summer and our AC started spitting out icicles. Okay. You don't want that, no. And so those were two sort of legit emergencies.

And then the third one was my son would no longer sleep in his toddler bed. And so we had to kind of rush to IKEAkea and buy him a proper big boy bed. Okay. Okay. Yeah. So these things do come up. We should plan for them. These things do come up all the time, right? So you need to have a little bit of a cash cushion.

So how much of a cash cushion? So the emergency fund kind of serves two purposes, which is why I prefer to have, I frankly have two separate emergency funds. I have an emergency fund for this run of the mill, small emergencies, unexpected expenses that I just described. And then I have a bigger emergency fund for what is the mother of all emergencies, which is a loss of income, like unemployment. Or if you're a freelancer, a dry spell. And so generally speaking, the classic personal finance rule is you should have between three and six months of living expenses set aside. That can seem daunting for a lot of people,

especially if you're not making that much money and if you have zero money set aside. So I would say to start, try to save for a month of rent. One month. One month of rent. Yeah. If you're starting out and you're a homeowner, again, a month of housing expenses. So that would be your mortgage payment plus your utilities plus property taxes. Okay. The really tricky part of saving is saving for retirement because that goal is so far ahead and also very difficult to figure out how much money you're going to need. So how should you approach saving for retirement?

Because it seems like something you should start saving for early, but with everything so expensive, how do you possibly do that when you're in your 20s or your 30s? Yeah. So the advice that I hear over and over from some of the best financial planners that I've talked to is just don't sweat too much the amount of money. Just make sure that you are putting some money aside and you're building the habit of saving for retirement in a very consistent manner. And then I would say it's important every time you get a pay raise, you know, your income, especially if you're young, your income will hopefully grow quite quickly over the years. So every time your income goes up, give yourself your retirement savings a raise as well. We'll be right back after this message.

We've talked about a lot of savings here, Erica, so there's a lot to save for. I guess I just wonder, does this leave any room for spending money on things that we want, right? Things that are fun and that we want to spend just to make us happy. Yes. So I say fun spending is really important, And I might be chastised by some listeners here. But no, my position is your budget has to have a little bit of space for fun spending, because not having any fun is not sustainable in the long run. Now, how much fun? Right? Like that's the key, right? And so the thing is, have fun, but you really need to be selective and mindful about what you're spending money on. So when you're looking at your fun spending, figure out what kind of expenses bring you the most joy and cut out the rest. So does a latte a day make you absolutely happy? Is that the highlight of your day right now? Have your latte. There's an avocado toast. Is that a great treat

for you? Have your avocado toast. But you can't have your latte and your avocado toast and your scented candle and craft beer. You can't have it all. So it's just a matter of being selective and mindful rather than about depriving yourself. All right. Another really important aspect of money is, of course, debt, which can frankly be really scary for a lot of people. Erica, should people avoid debt at all costs? So there is a strain of personal finance that preaches complete debt avoidance. I think that's kind of unrealistic for most people these days. So unless you come from a very privileged background, you are going to have to take on some debt just to pay for your education. And you will certainly have to take on a significant amount of debt if you want to buy a house. So people are going to need eventually to take on

some debt. So when they do that, I guess, what are the the main things that that people should understand about it? Yeah, so where I like to put the emphasis is not so much on avoid debt at all cost, but get to know your debt, like debt is not created equal. There's all kinds of ways of borrowing, you really need to be a debt connoisseur and borrow in a way that makes sense for you that will make it as easy as possible for you to repay your debt. So the first thing to look at is the interest rate. So the how much will it cost you to borrow? And most people know to look at the interest rate, but sometimes you need to go, it pays to go a little bit further than just looking at the number and that percentage. First of all, understand whether you're looking at a simple interest rate or compound interest rate. And compound interest rate is when you're paying interest not only on your principal, but on any unpaid portion of the interest.

So it's interest on interest. You're paying a little bit more there, yeah. And it can really add up. And the other thing is beware of what I like to call hidden interest. So I've come across this, especially this issue, especially with some of the online installment loans that a lot of people are gravitating to these days, especially people who maybe have a bruised credit score. And a lot of the time, these loans are advertised as being so much better than payday loans. But then when you look at the contract,

you'll see that there's a processing charge and then there's optional insurance for if you miss a payment. There's all kinds of other options that maybe you can opt out of if you know to do that. And some you can't. And that's also your cost of borrowing, right? It's not just what the lender is calling interest rate. So always look for something called the APR. The annual percentage

rate, which is a standardized way of showing you your overall cost of borrowing. The other thing I would say about debt is to think about your repayment timeline. So all else equal, the longer it takes you to pay off the debt, the more interest you're going to pay on that debt. Yeah. And when we talk about debt, too, I think a lot of people think about credit cards, lines of credit. What should people know about that kind of debt? So I would say one feature of those forms of debt that is very attractive for a lot of people is the flexibility. So I think almost everyone is familiar with how a credit card works, but lines of credit are very similar. So you only up to a certain limit, of course, you're allowed to borrow only as much as you want. And as you repay that amount, you free up room to borrow again. So very,

very similar in that respect. And the ability to borrow only what you need is attractive. Like it can come in very handy, whether you're a student or you're doing a home renovation, or you're not really sure what your living expenses are going to be or what your final costs are going to be for that renovation, that is very handy. But flexibility is a double-edged sword. So when it comes to repaying that debt, you also have a lot of flexibility. You can make minimum payments, both with credit cards and with lines of credit. And that for a lot of people is a psychological trap that leads them to kick the can down the road. They keep making minimum payments. They keep adding to their credit card a line of credit.

And lo and behold, they end up in a debt hole that they can't climb out of. So that flexibility can be both attractive and helpful, but also dangerous. Yes. Just before I let you go here, Erica, given the year we're looking at for 2023, difficult financial times potentially going into a recession even, what advice would you give to people to help them weather this turbulent financial time? So I would say if you're still struggling with the spend less than you make concept, find a budgeting method or a method of tracking your money that works for you and experiment a little bit. It may be budgeting. Lots of people thrive on the strict discipline of a budget. It may be the money bucket. And it may be one of the budgeting apps that sort of populate your budget on their own and take a lot of the legwork out

of budgeting. It really depends a lot on your lifestyle and your personality. So figure out something, a method that works for you. And I would say it's super important to really sort out your financial priority for 2023 once you've made sure that you have an emergency fund. Even if you have to stop your retirement savings for a little bit, do so and build up your emergency fund and then resume. And I would say whatever you do, do not cut out all the fun. Maybe you have to find ways to have fun that are cheaper, but put some thought into how are you going to have fun. So keep the fun as part of it. That's a great note to end on.

Erica, thank you so much for talking to me today. Thank you so much for having me. That's it for today. I'm Mainika Raman-Wilms. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show.

Kasia Mihailovic is our senior producer, and Angela Pichenza is our executive editor. Thanks so much for listening, and I'll talk to you next week.