Although we all come from different socioeconomic backgrounds, there are some financial decisions that only have one smart answer. Here are some common money matters about debt and investing, decoded.
Pay off debt or save?
The answer is a combination of the two, with emphasis on paying your debt. A main reason people save is for emergencies, so create a cushion by squirreling away about $500 in small installments while making minimum debt payments. If your debt is small and spread out, next focus on paying off achievable balances first, like that thousand bucks you have outstanding on your credit card. If you have few sources of large debt, lower balances with high interests first. Exceeding minimum debt payments is crucial to getting out of the red. Almost half of the monthly installments you pay for large debts such as student loans may in fact be interest charges alone.
Investment pieces or fast fashion?
We say quality over quantity—but only for the pieces that count. Budget a certain amount for fast fashion, and set aside what you don’t spend throughout the year for larger purchases. Seasonal purchases from Zara or H&M will keep your wardrobe fresh and on-point, and you can buy several more for the price of one designer piece. If you wear it gently, cheaper clothing can last as long as that with a name label. That said, there are some pieces you may only need one of every few years—staples such as coats and jeans. They’re worth saving for, because you don’t need more than one navy peacoat or black blazer depending on your lifestyle.
Rent or own?
Rent and invest the savings. Income plays a huge factor, but even if you can afford a house doesn’t mean you should bite down on a massive mortgage. Renting is increasing in popularity across North American cities, driving prices down as the market gets more competitive. Owning property, on the other hand, is only a good investment if you can pay off your mortgage quickly—start with 30 per cent down at minimum (way more than convention suggests). Also, strive to ensure your home isn’t your only investment and diversify your portfolio. Remember, owning property isn’t free, either. Maintenance, furniture, utilities and taxes can amount to what you pay for your utilities-included apartment.
Credit or debit?
It’s a matter of rewiring how you think of credit. If you clear your balance every time, credit can be used as a financial tool that helps you avoid late fees on bills without accruing a cent of interest. Credit isn’t some large allowance you can dip into every once in a while, then pay back over a long period of time in small installments—okay, it is, but that’s not how you should use it. Rather than a long-term loan, think of credit as a monthly balance that conveniently allows you to pay expenses you can afford now instead of later when you actually get paid.
Should you save or live for today?
Spend now, and forget you saved to begin with. One of the best ways to balance our natural tendencies to spend for cool new things now rather than save is by taking the decision out of it. Many banks can pre-commit you to saving part of your earnings so you don’t have to go through the draining motion of putting your potential new smartphone into the “don’t spend” column. Once you figure out a method that works for you, the money in your chequing account will have no bearing on your big expenses down the line. Just be sure to budget the money you do have available well.