Some are deeply concerned about the rising cost of living and are adapting quickly; others may choose to hide in denial until they face the worst. Why ? Firstly because, over the past 10 years, access to credit has been so easy, so “affordable”, some will say, that the debt ratio of Canadian households has increased to monopolize 186.2% of their disposable income in 2021. However, our relationship with money is also an emotional relationship. After working so hard to earn a living, who hasn’t said to themselves, “I deserve it”?
In the current context where everything is objectively more expensive, the worst would be to maintain this attitude. This could jeopardize your longer-term financial goals, forcing you, in a few years, to find that your savings have slowed or, worse, stagnated, or that your balance sheet has deteriorated with the increase in debt.
Savings first
First, let’s deconstruct the idea that saving rhymes with deprivation. Saving is giving money to yourself first. Investing is a privilege. And it is above all the best reward you can give yourself after having devoted so much time to generating your income. I think many people underestimate the peace of mind that a savings plan can provide compared to the artificial — and especially very brief — satisfaction that comes with consuming material goods.
For most people, the amount available for savings is the amount left over at the end of the year. Human nature being what it is, this strategy — especially in the context of a consumer society — is insufficient in most cases. However, your priority in a context of inflation will be to give capital importance to savings. All with a clear strategy.
Although universal formulas do not exist in personal finance, you should perhaps consider some reflection and, above all, complete planning if you are not saving 10% of your net income.
You read that right: 10%. This observation can hurt, but in times of economic uncertainty, saving will allow you to put yourself at the center of your priorities. Your short-term happiness or freedom may be affected, but it will be temporary. And the earlier you realize this, the less painful the adjustments will be.
Winning attitude: be proactive
You can’t control the rising cost of living or the impending recession, but you can certainly make some decisions before it’s too late.
First, review your budget. As the master of your finances, you always have the choice to analyze your current and past expenses in order to draw up a budget to follow and modify them. The budget is made up of fixed expenses on which rising inflation weighs directly. An analysis of actual expenditures made over the last 6 to 12 months is the first required step. It will allow you to accurately assess the categories of expenses that cost you the most. Discretionary expenses, on the other hand, are also subject to inflation, but they are not “necessary” and are the ones you can control, even if it is unpleasant.
Postpone certain expenses. Although not necessarily the most pleasant recommendation to hear, in the face of economic uncertainty in the coming months, and given the rising cost of living and borrowing rates, being cautiously optimistic will require, in my view, some difficult decisions. You should postpone or even cancel all your non-urgent projects and jobs, such as that new bathroom or patio set, your trip, etc.
Repay your consumer debts. Make the necessary choices in order to reduce your expenses as much as possible or to eliminate your debts with high or variable interest rates (rising!). If resorting to mortgage refinancing when rates were very low seemed like a good thing to you, the same choice in a context of rising rates quickly becomes financially insane.
As you will have understood, the budget exercise affects personal values. And when the cost of living increases, insofar as you want to maintain savings, setting your priorities quickly becomes essential. The idea is not to deprive yourself of everything and give up all immediate pleasure, but to find a balance.
This column is on hiatus until the end of August. In the meantime, I invite you to submit your case studies, questions and suggestions for topics to explore this fall at [email protected].