Breaking the paycheque-to-paycheque cycle
[Almost 50 per cent of Canadians would be in trouble if their paycheque were delayed by a week.]
Half of Canadians are working with a pretty tight monthly budget according to recent figures released by the Canadian Payroll Association.
Of the 5,600 employees surveyed, 48 per cent say a week’s delay in their paycheque would strain their finances while 24 per cent says they’d be hard-pressed to come up with $2,000 within a month in the event of an emergency. And 39 per cent reported feeling anguish and overwhelmed surrounding their debt with 11 per cent say they think they’ll “never be debt-free.”
It’s understandable. When you’re struggling to keep your head above water, it’s hard to see forward to that point where you’re living beyond a paycheque-to-paycheque lifestyle but Leslie Gardner, a money coach and certified financial planner with Money Coaches Canada, has helped a number of Canadians get out of that cycle.
To her, a lot of it comes down to keeping track of the finer details of what’s coming in and what’s going out.
“A lot of people don’t understand how their paycheques work,” she says. Sure, many know what they make but when they’re budgeting they often don’t account for what is physically going in the bank account after CPP, EI and any other taxable benefits come off the paycheque.
“We’ve clients (making) around the $55,000 to $65,000 mark and they don’t realize their CPP and EI max out part way through the year,” she says. “They just notice their paycheque bumps up and they wonder why and then come January it goes down again.”
The key to breaking the cycle is tuning into the details and physically writing it down or putting it into a spreadsheet, starting with what your actual take-home pay is in the “Net Income” category. Next, you look at expenses, starting with the “Fixed” expenses category.
“What do you have to pay – rent, mortgage property taxes?” she says. “And we list those because those are the things that if you don’t pay them somebody is either going to take something away or cut something off.”
This also includes smaller monthly payments like bank fees, cell phone bills and insurance. After that, she recommends combing through spending using receipts or a tracking app like Mint and adding them up. This, she explains, is where the little expenses, the kind that pull you into that paycheque-to-paycheque territory, are often found.
For example, people forget about holidays and anniversaries, or the fees they pay to put their kids in hockey or buy sports equipment.
“Hockey season starts in September, parents have to pay the fee at the end of August, they’re not thinking about that in January but we’re saying, yeah, you need to,” says Gardner. “They really need to firm up on the numbers.”
Once you’ve got a holistic understanding of expenses, you subtract that number from your income. If the number puts you in the red, then it’s time to start carving off the “nice to haves.” Do you spend too much on food? Make a fixed cash budget. Do you have a couple of magazine subscriptions you could do without? Cut them off.
“It’s all about negotiations,” she says.
Gardner recommends opening a series of e-savings accounts with nicknames associated with a certain kind of expense like “fixed”, “car”, and “family activities.”
“Your paycheque goes into that fixed account, all your fixed bills go out of that and then you transfer a certain amount to what we call your monthly spending account (with) debit card access,” she says. “That’s the card you take into the grocery store or get gas on.”
The remaining money outside of fixed expenses and what you’ve budgeted for monthly spending goes into the nicknamed accounts to start building up those savings for when you need an oil change or to buy hockey gear.
“It makes you stop and think before you just go ‘I’ll put it through that account,” she says. “I know it sounds like a big job, it is overwhelming but once it’s up and running, its so much easier – and when you need (money) it’s sitting there waiting for you.”