4 Ways to Take Control of Your Finances in 2021
Lisa Manwaring • January 6, 2021
The beginning of a new year is an ideal time to review your finances. Hopefully, with the wild ride of 2020 behind us, 2021 is a time we can all move forward. Regardless of where you’re at financially or your financial goals, here are four areas to consider as you take control of your finances in 2021.
Take control of your spending.
If you really want to get ahead, you’ll want to take control of how you spend your money. You do this by getting clarity around how much money you have to spend (income), what you’re required to spend it on (expenses), and then everything else (discretionary spending).
Track your spending and come up with a budget using a spreadsheet. If that seems daunting, consider one of the many financial programs available online. If you’re looking for a little more direction, there are many independent Fee-Only Financial Planners in Canada who can provide you with personalized financial advice for a small fee. Any steps you take here will be better than not taking any steps at all.
Take control of your debt.
If you have debt, you’ll want a plan to get rid of that debt. Start by making a comprehensive list of all the money you owe, the amounts, interest rates, and payment schedules. The key to taking control of your debt is to know exactly how much debt you have.
Make the minimum payments on all your debts while focusing on zeroing the highest interest rate debt first. Once that has been paid off, don’t let up, roll all your payments into the next debt, and so on, until you’re debt-free. Once you’re debt-free, consider rolling all the payments you’ve been making to pay out your debt into your savings account!
Take control of your credit.
How you manage your existing credit determines the credit you’ll be extended in the future. If your goal is to purchase a property, you’ll want to make sure your credit score reflects a history of payments being made as agreed.
Now, even if you’ve made all your payments on time, your credit report might not reflect that, especially if you’ve deferred any payments due to COVID-19. Estimates show that at least 20% of credit reports contain errors. By regularly reviewing your Equifax and Transunion credit bureaus, you can ensure your credit reports don’t have any errors or contain information that might hinder you from getting credit in the future. It's always a good idea to get out ahead of problems before they become problems.
Take control of your mortgage.
If you’re like most Canadians, paying off your mortgage will be your single biggest expense in life, while at the same time, those payments will help build your greatest asset; home equity. Ensuring your mortgage is working for you (and not the bank) is a crucial part of your financial health.
Take control of your mortgage by working with an independent mortgage professional to review your current mortgage and compare it to what is available on the market. If there is money to be saved, it should be saved. The goal of any mortgage should be to lower the overall cost of borrowing over the life of the mortgage. Annual reviews help you accomplish this.
In fact, with all the economic uncertainty caused by COVID-19, mortgage interest rates are currently very low. Now might be a great time to renegotiate the terms of your mortgage, especially if you haven’t done that within the last year. There is no cost to review your mortgage. I would love to outline all your options!
If you’d like to discuss any of this, please don’t hesitate to contact me anytime.
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Credit. The ability of a customer to obtain goods or services before payment, based on the trust that you will make payments in the future. When you borrow money to buy a property, you’ll be required to prove that you have a good history of managing your credit. That is, making good on all your payments. But what exactly is a “good history of managing credit”? What are lenders looking at when they assess your credit report? If you’re new to managing your credit, an easy way to remember the minimum credit requirements for mortgage financing is the 2/2/2 rule. Two active trade lines established over a minimum period of two years, with a minimum limit of two thousand dollars, is what lenders are looking for. A trade line could be a credit card, an instalment loan, a car loan, or a line of credit; basically, anytime a lender extends credit to you. Your repayment history is kept on your credit report and generates a credit score. For a tradeline to be considered active, you must have used it for at least one month and then once every three months. To build a good credit history, both of your tradelines need to be used for at least two years. This history gives the lender confidence that you’ve established good credit habits over a decent length of time. Two thousand dollars is the bare minimum limit required on your trade lines. So if you have a credit card with a $1000 limit and a line of credit with a $2500 limit, you would be okay as your limit would be $3500. If you’re managing your credit well, chances are you will be offered a limit increase. It’s a good idea to take it. Mortgage Lenders want to know that you can handle borrowing money. Now, don’t confuse the limit with the balance. You don’t have to carry a balance on your trade lines for them to be considered active. To build credit, it’s best to use your tradelines but pay them off in full every month in the case of credit cards and make all your loan payments on time. A great way to use your credit is to pay your bills via direct withdrawal from your credit card, then set up a regular transfer from your bank account to pay off the credit card in full every month. Automation becomes your best friend. Just make sure you keep on top of your banking to ensure everything works as it should. Now, you might be thinking, what about my credit score, isn’t that important when talking about building a credit profile to secure a mortgage? Well, your credit score is important, but if you have two tradelines, reporting for two years, with a minimum limit of two thousand dollars, without missing any payments, your credit score will take care of itself, and you should have no worries. With that said, it never hurts to take a look at your credit every once and a while to ensure no errors are reported on your credit bureau. So, if you’re thinking about buying a property in the next couple of years and want to make sure that you have good enough credit to qualify, let’s talk. Connect anytime; it would be a pleasure to work with you and help you to understand better how your credit impacts mortgage qualification.
