Personal Finance For Canadians For Dummies excerpt: How to manage money and stop overspending

Many folks earn just enough to make ends meet. And some can’t even do that; they simply spend more than they make. The result of such spending habits is, of course, an accumulation of debt.

Most of the influences in society encourage you to spend. Think about it: More often than not, you’re referred to as a consumer in the media and in the hallowed halls of government. You’re not referred to as a person, a citizen, or a human being. This section looks at some of the adversaries you’re up against as you attempt to control your spending.

Having access to credit

As you probably already know, spending money is easy. Thanks to ATMs, credit cards, myriad smartphone apps, PayPal, Venmo and so on, your money is always available for you to spend, 24/7.

Sometimes it may seem as though lenders are trying to give away money by making credit so easily available. But this “free” money is a dangerous illusion. Credit is most perilous when you make consumption purchases you can’t afford in the first place. When it comes to consumer debt (credit cards, auto loans and the like), lenders aren’t giving away anything except the chance to get in over your head, rack up high interest charges, and delay your progress toward your financial and personal goals.

Misusing credit cards

The modern-day bank credit card was invented by Bank of America near the end of the baby boom. The credit industry has been generally growing ever since.

If you pay your bill in full every month, credit cards offer a convenient way to buy things with an interest-free, short-term loan. (You don’t have to actually pay for items you purchase on a credit card until your next bill is due, which can be several weeks later.) But if you carry your debt over from month to month at high interest rates, credit cards encourage you to live beyond your means. Credit cards make it easy and tempting to spend money that you don’t have.

You’ll never pay off your credit card debt if you keep charging on your card and make only the minimum monthly payments. Interest continues to pile up on your outstanding debt. Paying only the minimum monthly payment can lead to your carrying high-interest debt on your card for decades (not just months or years)!

Some credit cards sell cardholders “insurance” at a cost of 10% to 15%-plus annually to pay the minimum payments due on credit card balances for those months that the debtor is unable to pay because of some life transition event (such as a job layoff). With credit card interest rates around 18% on balances, when you add the insurance charges, the total annual interest rate is upward of around 30%!

If you have a knack for charging up a storm and spending more than you should with those little pieces of plastic, only one solution exists: Get rid of your credit cards. Get out the scissors and cut up that plastic. Go cold turkey. You can almost always function without them.

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Taking out car loans

Walking onto a car lot and going home with a new car that you couldn’t afford (or wouldn’t choose to afford if you had that cash) if you had to pay cash is easy. The dealer gets you thinking in terms of monthly payments that sound small when compared to what that four-wheeler is really gonna cost you. (You may not be as impervious to such obvious financial trickery as you think! Dealers and manufacturers now commonly advertise what your payments would be if made bi-weekly or even weekly. Their research must show that all the time, at least some people can be fooled. (And auto loans are easy for just about anyone to get.)

Suppose you’re tired of driving around in your old clunker. The car is battle-scarred and boring, and you don’t like being seen in it. Plus, the car is likely to need more repairs in the months ahead and perhaps doesn’t have all the safety features of newer models. So, off you go to your friendly local car dealer.

You start looking around at all the shiny, new cars, and then—like the feeling you experience when spotting a water fountain on a scorching hot day—there it is: your new car. It’s sleek and clean, and has air conditioning, an amazing audio system, a rearview camera, all the latest technology, and heated seats. Before you can read the fine print on the sticker page on the side window, the salesperson moseys on up next to you. They get you talking about how nice the car is, the weather, or anything but the sticker price of that car.

“How can this guy afford to spend time with me without knowing if I can afford this thing?” you think. After a test drive and more talk about the car, the weather and your love life (or lack thereof) comes your moment of truth. The salesperson, it seems, doesn’t care about how much money you have. What you do for a living and whether you have lots of money or very little doesn’t matter. The car is only $399 a month!

“That price isn’t bad,” you think. Heck, you were expecting to hear that the car would cost you at least 30 grand! Before you know it, the dealer runs a credit report on you and has you sign a few papers, and minutes later you’re driving home in your new car.

The dealer wants you to think in terms of monthly (or weekly!) payments because the cost sounds so cheap: $399 for a car. But, of course, that’s $399 per month for many, many months. You’re gonna be payin’ forever—after all, you just bought a car that cost a huge chunk of your yearly take-home income.

But it gets worse. What does the total sticker price come to when interest charges on borrowed money are added in? (Even if interest charges are low, you may still be buying a car with a sticker price you can’t afford.) And what about the cost of insurance, registration and maintenance over the seven or so years that you’ll probably own the car? Now you’re probably up to more than a year’s worth of your income. Ouch!

Bending to outside influences and agendas

You go out with some friends to dinner, a sporting event, or a show. Try to remember the last time one of you said, “Let’s go someplace (or do something) less costly. I can’t afford to spend this much.” On the one hand, you don’t want to be a stick in the mud. But on the other hand, some of your friends may have more money than you do—and the ones who don’t may be not saving money or running up debt fast.

Some people just have to see the latest megastar concert, wear the newest designer clothes, or get the latest smartphone or tablet. They don’t want to feel left out or behind the times.

When was the last time you heard someone say that they decided to forgo a purchase because they were saving for retirement or a home purchase? It doesn’t happen often, does it? Just dealing with the here-and-now and forgetting your long-term needs and goals is tempting. This mindset leads people to toil away for too many years in jobs they dislike.

Living for today has its virtues: Your tomorrow may not come. But odds are good that it will. Will you still feel the same way about today’s spending decisions tomorrow? Or will you feel guilty that you again failed to stick to your goals?

Your spending habits should be driven by your desires and plans, not those of others. If you haven’t set any goals yet, you may not know how much you should be saving.

Spending to feel good

Life is full of stress, obligations, and demands. “I work hard,” you may say, “and darn it, I deserve to indulge!” Especially after your boss took the credit for your most recent great idea or blamed you for their latest screwup. So you buy something expensive or go to a fancy restaurant. Feel better? You probably won’t once the bill arrives, and you’re confronted with the full cost, including taxes and tips. And the more you spend, the less you save, and the longer you’ll be stuck working for jerks like your boss!

Assessing your spending

As we explain in Chapter 2, most folks should be tracking their spending. The one category of people we would exempt from needing to monitor (or categorize) where their money goes are those who are satisfied with the portion of their income they’re able to save, and who are saving enough to accomplish their goals. In this section, we provide some guidelines and frameworks for tracking your spending.

Tracking spending the “low-tech” way

Analyzing your spending is a little bit like being a detective. Your goal is to reconstruct just where your money went. You probably have some major clues at your fingertips or somewhere on the desk or computer where you handle your finances.

Excerpted with permission from the publisher, Wiley, from Personal Finance For Canadians For Dummies, 7th Edition by Eric Tyson, Tony Martin, and Michael McCullough. Copyright © 2024 by Eric Tyson & Tony Martin. All rights reserved. This book is available wherever books and eBooks are sold.

Read our Michael McCullough’s My MoneySense profile: “Get to know and minimize the investing fees you pay”: Michael McCullough, MoneySense contributing editor.

Read more about borrowing money:

• How to buy a car in Canada and get the best loan rate
• Personal loan versus line of credit: Which should you choose?
• Find the best mortgage rates in Canada
• Borrowing from your HELOC to invest in equities

About Michael McCullough

Michael is a financial writer and editor in Duncan, B.C. He’s a former managing editor of Canadian Business and editorial director of Canada Wide Media. He also writes for The Globe and Mail and BCBusiness.

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