life

Tips for smarter spending and reducing debt

Finance expert Melissa Leong shares advice for common financial goals, from investing to paying bills.
January 6, 2022 1:17 p.m. EST

FInance resolutions are some of the most popular choices for people heading into the new year. But where to start, and how do we actually keep these tough goals?

To help us with reducing debt, saving more, or becoming a better investor, money expert Melissa Leong shared tips on how to achieve some of the most common resolutions. Check them out below, and watch the video above for more from Melissa!

Pick one debt and pay it off

Having multiple debts can definitely feel overwhelming, so Melissa recommends first listing them all and their respective interest rates.

Choose one debt and concentrate your repayment efforts there. While making the minimum payment on all of your debts, you attack one—either the smallest one or the one with the highest interest rate. Then when that one is paid off, any money that is freed up is used to attack the next.

We are motivated to continue good behaviour if we have rewards. If you pay down your debt, give yourself a reward—not a shopping trip, but get gratification by telling your friends and family!

Give your savings a purpose

Melissa recommends giving your savings a purpose. Name your savings accounts and have multiple no-fee accounts for various goals, as research has shown people are less likely to dip into savings that are earmarked for a meaningful purpose.

Changes don’t just happen – you need to create an accountability structure to keep yourself on track. Get peer support. You might even do something fun like set up an informal savings club with close family or friends.

Eliminate the decision to save. Just automate it. Set up a percentage of your income that will be automatically transferred into a separate account, maybe on pay day. If you already have one and you don’t notice the money missing, bump it up.

Pay down your mortgage

The longer you spend paying off your mortgage, the more interest you’ll pay. So paying down your mortgage sooner saves you money, and one way to do this is to make accelerated payments. That means going from one monthly payment to bi-weekly payments. Most mortgages allow you to increase the amount of your payments or make lump sum payments on top of your regular payments. The lender will call this a prepayment or a prepayment privilege. Just be mindful to read your mortgage contract regarding the rules around prepayment privileges. Find out what you are allowed to pay or you could face fees and penalties.

Look into investments

There are very approachable, even fun beginners videos out there to help with beginner investors. Your financial institution might have an Investing 101 series, for example. Bookmark them and when you have a moment, watch one. If you’re driving, listen to an investing podcast!

Finally, you might already have investments. Look more deeply into those. For example, if you have mutual funds, you might pull out your account statement and choose one mutual fund to learn about. Check out the fund facts, the fees, the holdings which are the various stocks, bonds, and other securities within the fund. Compare the fund’s performance against similar funds with a resource such as Morningstar. Looking into something for the first time can be extremely empowering. That language might not be as foreign as you feared.

Think about retirement

We think of our future self as strangers so saving for the future can seem like we’re just giving money to a stranger. You have to find ways to connect to your future self more concretely! Try imagining your future life, write down/vision boards for how you want to live. Write your future self a letter with a specific calendar date. We’re more likely to save money for January 15, 2042, than for a vague 20 years from now.

Also, don't get hung up on numbers or rules of thumb, such as needing a certain amount to retire. Many of these rules are outdated—focus on starting immediately and looking at the investment options that are designed to help your money grow, such as an RRSP or TFSA.

Finally, if you belong to a group RRSP at work where they match contributions, take advantage of the top-up or you’re leaving free money on the table.

Try these spending strategies

When deciding to buy something, you could try one of these three strategies. First, break down the cost-per-use (for example - this gown is $200 but you'll probably only wear it twice — that’s $100 a wear.) Or, try breaking down the number of hours you'd need to work to purchase something. 15 hours of work for those shoes—are they worth it? Finally, research shows that either/or questions help with money decisions. Rather than asking if you should pay for take-out, say, would you rather spend money on take-out or save it and put it towards my debt?

Find ways to achieve your financial dreams

If you’re dreaming of buying a home, you need an idea of how much you need to save for a down payment. In Canada, if your home is $500,000, the minimum down payment required is 5 percent. If your home costs more than that, you need to put down 5 percent on the first $500,000 and then 10 percent of the remaining amount. Homes above $1-million require a 20 percent down payment. The average home in Canada costs around $700,000 so the minimum down payment would be $45,000.

How do you save this intimidating amount? With any goal, it requires some focus and sacrifice. Can you access any cash windfalls — gifts from parents, workplace bonuses, tax refunds? Are there any big sacrifices to be made?  You might have to adjust your dream home, and compromise. Some people buy with family and friends, some people buy and rent parts of the home out. They’re finding alternative ways to achieve their dream.