November 09, 2016 / Published 10:00 AM EST / Alyssa Charles
Financial literacy 101: Banking & budgeting
There’s a lot to wrap your head around when it comes to your finances, but a good understanding of some basic financial concepts can really take you a long way. November is financial literacy month in Canada and although Canadians received a high score when their financial knowledge was tested, many still lack confidence in their skills. A study from the Financial Planning Standards Council (FPSC) found that those who had a financial plan were better off than those without1. As part of a three-part series, we spoke with Manulife Retail Lending Specialist Tracy Kung to get answers to some of the most frequently asked questions about banking and budgeting.
What is credit and why do I need it?
Simply put, credit is borrowed money that you have to repay. Your credit score is a number that reflects your credit worthiness and is an indication of your ability to repay your debts2. Having good credit is necessary for things like buying a house or a car, taking out a loan or getting a credit card. “No credit doesn’t mean good credit,” says Tracy. It is important to build your credit because having no credit means that there is nothing to reflect that you are able to repay any debts that you incur. That makes it difficult for a lender to determine whether or not they should give you a loan.
Do I need a budget?
Short answer: Yes. Having a budget allows you keep track of how you are spending your money and it ensures you have enough money for things like paying rent, buying groceries or saving for retirement. Creating and following a budget may be an area of managing your finances where you have some difficulty, but if you have one, Tracy suggests revising it semi-annually. “You should update your budget every six months to make sure it aligns with your current lifestyle. This will allow you to adjust your spending if needed” she says. If you want to create a budget but you’re not sure where to start, you can use this printable worksheet as a starting point. Some people also find having a weekly or bi-weekly budget helpful for keeping track of day-today spending.
With competing savings goals, how do I budget for and prioritize needs vs. wants?
Between saving for retirement, kids’ education, homeownership and day-to-day spending, money can be tight. Tracy suggests using a goal-based strategy for budgeting needs vs. wants. A goal-based strategy focuses on your progress towards your short or long term life goals. Some of your short-term goals may include going on vacation or buying a new car, whereas your long-term goals may include purchasing a home or saving for retirement. Whatever your goals may be, using a goal-based strategy will help you prioritize.
How do I build an emergency fund?
If you want to factor an emergency fund into your budget, Tracy suggests setting up automatic transfers between your accounts. Typically, your emergency fund should be at least three months of net household income. You can figure out how much you can afford to save from each paycheque and have that amount automatically transferred into to your emergency fund account. If you’re thinking of setting up your emergency fund in a tax-free-savings account (TFSA), use this TFSA calculator to find out how much you can save. For more ideas read: Why you need an emergency fund and how to build one.