A recent BMO survey reveals that basic monthly living expenses have increased by almost $400 on average year over year in Canada. How can you cope with such an increase while avoiding reducing your savings and endangering your longer-term plans? Expert advice.
The budget
Of course, you probably guessed that, but it bears repeating. Before reducing your savings, and having to dip into them to make ends meet, first do an exhaustive review of your budget, suggests Annabelle Dumais, financial planner, member of the Dumais Sauvageau Garon firm, SFL Gestion de patrimoine. “Are there expenses that I could reduce, negotiate, eliminate? Could I consume more intelligently? ”, she asks. Reviewing your budget allows you to put things into perspective according to their importance, adds François Martel, regional vice-president, financial planning, at BMO. “This helps determine where cuts need to be made to maintain savings. »
Habits that are difficult to change
Make the right choices and reduce your expenses where necessary. Easy to say, and many Canadians neglected to do so last year. This is according to the BMO survey, which estimates that during the first six months of 2023, most people had not changed their spending habits despite the significant increase in inflation and rising rates. of interest, notes François Martel. He calls into question the financial literature which often suggested that everything would be better in 2024, when inflation would subside and interest rates would fall. Fortunately, some awareness of the situation finally seemed to have occurred during the second part of the year, according to him.
PHOTO PROVIDED BY BMO
François Martel, regional vice-president, financial planning, at BMO
Automate your savings
Because costs are increasing everywhere, it is probably illusory to believe that we will be able to randomly keep a certain amount that we will allocate to savings at the end of the year, or at any other time, believes Annabelle Corn. This is why it is necessary to have an automatic payment at a scheduled frequency into a savings account, which may well be the TFSA. “If we have to get into this habit, it’s because time is our best ally,” she says. Compound interest makes a huge difference to the return you’ll ultimately get on your savings. “To stop saving, even if only temporarily, would be to deprive yourself of this very powerful lever,” she believes.
Dealing with mortgage setbacks
For many, rising interest rates are a major factor among the many negative effects of inflation. And most have not yet suffered the repercussions of the rate increase, having not yet had to renew their mortgage. But that will come sooner or later, warns François Martel. How can we protect ourselves against this increase? By estimating what it will be and starting now to put money into the TFSA each month in order to get used to this increase in fixed expenses, he explains. If you’ve created this habit, you won’t have to reduce your savings when the payment increase takes effect. And if the increase turns out to be lower than expected, that will mean savings.
TFSA first, RRSP second
To gain flexibility in managing your cash, Annabelle Dumais suggests first using the TFSA rather than the RRSP. The idea is to first invest your savings during the year in the TFSA up to your contribution room, and then transfer the amount to your RRSP before the end of the contribution period. “This way, you will avoid losing RRSP contribution room in the event that you have to make a withdrawal from your RRSP for liquidity purposes. And for the TFSA, as you will recover your rights the following year, this will not be an issue,” she concludes.