Guest Post By: Enoch Omololu
How many times have you thought about the need to save more money, pay off your debt, and, perhaps, invest more in your retirement portfolio? Read on to find out the frugal living strategies I have used to save extra money and improve my finances.
Create a Budget
I have not always been a budgeter, but since I started accounting for my income and expenses, I have been able to unearth a wealth of information that has been invaluable to growing my bank account.
Budgeting does not need to be complicated. To start, you need to understand how money flows ‘into’ and ‘out’ of your bank account. When your monthly expenses exceed your income, you have nothing left to save and may even go into the red after drawing on your credit cards to cover excess spending.
Create a budget that highlights your needs (fixed expenses), income and wants. Cut out unnecessary spending and see what you have left for funds at the end of the month.
Income – expenses = excess funds (savings)
It may take some juggling here and there to arrive at a budget you can live with.
There are some very good free and paid budgeting apps like Mint and YNAB that can make budgeting a breeze. After creating your budget, you need to stick to it or else it becomes an exercise in futility.
Save Money on Food
As per Statistics Canada, the average Canadian household spent $8,527 on food in 2017. While food is a necessity, there are ways to cut your food budget and save some money.
Use cash back apps like Checkout 51 and Caddle that return money to your wallet on the everyday grocery items you buy at your favourite stores. These apps require you to scan and upload your purchase receipt and you can cash out when your account balance reaches $20 or more.
Invest in a freezer and stock up when there is a sale. Buy non-perishable items in bulk to take advantage of cheaper per-item costs.
Use a cash back credit card. If you are going to use a credit card at all, you should plan to maximize your rewards. Find a no-fee credit card that offers the best cash back rates for your main spending categories, such as groceries and gas.
Make your own coffee. Granted, I absolutely love my lattes. However, it is worth noting that even a modest $4 per day for a cup of fancy coffee will set you back by almost $1,500 per year.
Cook at home and pack your lunch. The last time I checked, my wife and I were saving over $2,500 per year by brown-bagging our lunch to work.
Save Money Around Your Home
Saving money at home starts with buying a house you can afford. The conventional wisdom is that your homeownership costs should not exceed 30% of your income. You can lower your monthly home expenses even further and:
- Use less water. Install low-flow fixtures, take shorter showers and run full loads in your dishwasher and clothes washer.
- Cut your energy bill. Install a programmable thermostat and dress for the season. In summer, wear light clothes indoors, and in winter, pile on the layers. Lower your water heater temperature to the lowest safe level possible. Switch out your energy-inefficient incandescent light bulbs for CFL or LED bulbs. Weatherproof your home and service your furnace and air conditioner regularly to avoid expensive breakdowns.
- Grow your own vegetables. You can be certain they are free of harmful pesticides and save some money along the way.
Use a High-Interest Savings Account
It is no secret that many of the savings rates offered by the Big Banks these days are too low to provide a positive return. After stripping out inflation and taxes, you could just as well have kept your funds under your pillow and not notice any difference.
Use one of the best high-interest savings accounts in Canada to grow your money in real terms.
Cut Your Investment Fees
Canadians pay some of the highest mutual funds in the world. Active mutual fund managers tell us that we need to pay for performance, however, the data tells us otherwise. In fact, in the longer term, over 90% of mutual funds will underperform their benchmark index.
To put this into perspective, let us look at the impact that the average mutual fund fee (2.23%) has on a $100,000 portfolio. On an annual basis, you will shell out $2,230 in fees, compared to $700 if we use an average of 0.70% in total fees for a robo-advisor utilizing a passive strategy. This is more than $1,500 in savings per year!
Since higher investment fees do not translate into higher returns, consider simplifying your investing by using low-cost index ETFs you can buy directly through an online brokerage service or use a robo-advisor.
Pay Off Debt Quickly
Plan to pay off high-interest debt as soon as possible. Ideally, if you carry credit card debt, set aside emergency savings of $1,000 to $3,000 and then focus aggressively on paying down your balance. There are two popular debt repayment strategies out there – debt snowball and debt avalanche. It does not really matter which strategy you choose, as long as you commit to it.
How do you save money by paying off debt? It’s all in the interest costs.
For example, if you carry a $7,500 balance on a 19.99% APR credit card and only make the minimum monthly payments of $225 (3%), it will take you more than 4 years to become debt free. You will also pay over $3,500 in interest charges.
On the other hand, if you increased your monthly payments to $695, you become debt free in 12 months and pay only $836 in interest – a good $2,841 in savings!
The same savings opportunity applies when you pay off personal loans, lines of credit and even your mortgage faster.
Avoid Lifestyle Inflation
This is one aspect of my personal finances I have found a bit challenging. As my income increased over the years, so did my spending.
You can supercharge your savings by setting aside your salary raises. When you receive a bonus or commission, funnel part or all of it into your savings and investment accounts.
You can also avoid lifestyle inflation by not keeping up with the Joneses or competing with your neighbours who seem to have everything bigger and better than yours. Echoing Dave Ramsey, they may be broke!
There are lots of opportunities to increase your savings rate if you are willing to put in the effort. Some of the strategies above help my family to save at least $5,000 more each year. When you are on a tight budget, there may be limited options for slashing your expenses. In that case, consider taking on a side hustle or find part-time work to increase your income.
Enoch Omololu is a veterinarian by day and a personal finance junkie by night at Savvy New Canadians. He has a master’s degree in finance and investment management and his writing has been featured in the Toronto Star, Financial Post, MSN Money, Rockstar Finance and many other personal finance publications.