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RBC Financial Planning - Tips on Budgeting and Borrowing

Budget & Manage Your Cash Flow


Do you spend more than you can afford?

If you want to accumulate wealth and achieve your financial goals, you have to spend less than you earn. Of course that is rather obvious but with credit so easy to get, many people spend more than they earn, and do it year after year.

Then one day they turn around and find themselves $50,000 in debt with nothing to show for it but a leased fancy car, stylish wardrobe and photos of all the great vacations. Worst of all, the debt is usually on credit cards, so the interest alone can cost $10,000 or more a year.

Why do people do this to themselves? Why do so many people spend more than they earn? Because in our society, it takes will power and discipline not to.

We are a consumer society, and are constantly exposed to a barrage of messages urging us to buy. We’re under pressure from all sides pushing us to indulge our desires. For example, one luxury carmaker says in a recent ad: “Stop torturing yourself. What you want is what you need.”

So what’s the solution?

If you spend more than you earn, you can solve the problem in one of two ways: either earn more or spend less. Generally, it’s a lot easier to spend less.

First thing to do – analyze your spending and eliminate what isn’t really, really necessary. Simple secret to spending less: Learn to love what you have instead of what you don’t have. Don’t fall prey to the messages of self-indulgence. What you want is not necessarily what you need.

And reduce your expensive credit card debt. Get a bank loan and pay off the cards – it could save you thousands of dollars. And avoid using consumer credit in the future. If you want the convenience of a credit card, no problem. Just pay the balance before the due date each month and you’ll pay no interest charges.

Like it or not, you may have to budget

No one likes the word, but making a budget – and sticking to it – is the best way to really take control of your spending. Not many businesses could survive without a budget. You have to start thinking like a business.

There are three steps to creating a budget:

  1. First you have to identify how your money is currently being spent. This will require going through your checkbook and credit card statements over the last year or so.
  2. Then you have to evaluate that spending and see how it fits or doesn’t fit into your long-term financial plan. This is where you’ll need to create some guidelines for future spending.
  3. Then you’ll have to track your ongoing spending to make sure it stays within your guidelines. You may find that your guidelines were too strict or too liberal and may need to be revised.

Tip: Tracking nickels and dimes won’t make much difference and will drive you crazy. However, if your out-of-pocket cash spending adds up to much more than 5% of your total spending, better take a closer look.

Here are two important steps to help reduce your spending:

  • Avoid impulse buying. Think before you reach for your wallet and your credit card. If you had to pay cash, would you still make this purchase?
  • Comparison shop as a matter of habit. Never buy anything – whether for cash of credit – before you compare costs and value. Expensive brands and designer labels are not necessarily any better quality.

There is no magic solution for everyone. Every person, every family, every household is different. If you want to reduce your spending, you’ll find ways to do it. And if you can’t, there are credit counseling services available you can turn to for help.

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 İRoyal Bank of Canada 1995-2017 Last modified: 09/24/2014 09:40:34