If a Piggy Bank Could Talk... A financial guide for Canadian families

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1 If a Piggy Bank Could Talk... A financial guide for Canadian families

2 If a Piggy Bank Could Talk A financial guide for Canadian families Your piggy bank is like a trusted friend. It holds your money safely and gives it back to you when you want or need it, no questions asked. But imagine if it could talk! Before simply handing over its contents, it decided to ask you some smart questions about your spending, such as: What do you really need this for?, If you spend this money, how quickly can you replace it? or Is this purchase really in line with your family s financial goals? It s easy for busy Canadian families to focus on the daily flow of money coming in and going out, and neglect long-term money management. But taking a hard look at spending, saving and borrowing behaviour is crucial to a family s financial success and everyone in the family both children and adults needs to be involved. Most Canadian families feel they re on top of managing their finances. In fact, a recent survey conducted by MasterCard Canada* showed that almost nine in 10 Canadians say they feel comfortable managing their family s day-to-day finances. Unfortunately, the facts tell a much different story. Recent Statistics Canada data indicates Canadians spending is increasingly outstepping saving. While 39 per cent of Canadians spent more than their pre-tax income in 1982, by 2001 that number had risen to 47 per cent. Much of the spending is financed through borrowing, either in the form of a mortgage or consumer debt. Since piggy banks can t talk, MasterCard Canada, in conjunction with the Credit Counselling Service of Toronto, has produced this financial guide for Canadian families as a way to educate Canadians about the basic rules of financial management and to offer advice on how to communicate about money management in their household.

3 Money Management Back to the basics Set goals Goal setting includes assessing your family s personal and financial wants and needs, and then working to make those wants and needs a reality. Identify and record all of your family s specific financial goals, such as saving for a house or car, taking a holiday, sending your children to university, paying off debt or planning for retirement. Figure out the goals you need to achieve versus the ones you simply want. This will help you prioritize your cash flow and realize what you can afford now versus what should be put on hold. Determine whether each goal is short-term (under a year), medium-term (within five years) or long-term (10 to 15 years or longer). Consider where you and your family want to be five, 10 and 20 years from now. Make a plan The largest financial challenge faced by most Canadians is buying a home. But there are many other goals and dreams to plan for. Once you, your spouse or partner, and your children decide what you want to achieve for your family, you need to develop a plan to see things through. Write down any major purchases you want to make and any other financial goals you have. Determine the specific steps you need to take in order to achieve your goals. Rank the steps that need to happen first, last and in-between. Start saving now. The sooner you save, the sooner you will reach your goal.

4 Money Management Back to the basics Develop a spending diary Knowing how your family spends money is key to healthy financial management. Once you know where the money is going, you can plan a budget that s right for you. Ask all adult family members to use a notebook to record spending for an entire month. Keep a record of all spending be it cash, credit card or cheque so you can see where your money is going. Create a category for every type of spending in your family, from major expenses such as housing to miscellaneous day-to-day purchases such as allowance. Be sure to include your savings as well as finance charges on any outstanding credit or loans. At the end of the month, add up all expenses in each category to determine your total expenses per month. What you see at the end of the month may be very revealing and surprising. It s a good idea to refresh your spending diary each year, as well as any time you have significant changes in your circumstances, such a shift in income, purchasing a new home or having a baby. Create a budget and stick to it Creating a budget is a central element in managing your family s finances. Identify where all your family s income is coming from, including work and other sources such as investment income. You should also track when your income comes in (e.g. date of month) as well as what form you receive it in (e.g. automatic deposits versus cheques). Use your spending diary to match your total monthly spending against your total monthly income. Monitor your spending diary and budget for two months to determine how closely your real life experience matches up to it. Create various expense categories that mirror your spending diary and include the monthly amounts you allocate toward short and long-term goals. If necessary, fine-tune your budget categories and reallocate your income to meet your needs. Remember to budget for unexpected expenditures such as car trouble, replacing a broken hot water heater or paying for a school trip.

5 Money Management Back to the basics Save, save, save! A penny saved is a penny earned. Simple, right? Actually, there s much more to it than that. Take a percentage of your income (five 10 per cent) and put it away in your savings account or another investment vehicle. You goal should be to not miss any monthly savings payments. If one of your spending priorities is a particular big ticket item, such as a new stereo or appliance, save extra money towards that on top of your monthly savings, but remember to curb spending on big-ticket items that aren t a priority right now. Talk to your bank about setting up automatic withdrawal payments so a portion of each pay cheque goes directly into your savings account, forcing you to automatically save money before you have a chance to spend it. This concept of paying yourself first ensures that your essential financial savings come before discretionary spending. Try curbing small expenditures such as expensive lattes or manicures and watch your savings add up. Pay your bills on time There are many ways to pay your bills each month: at your bank, by cheque, online or on a credit card. Choose a payment method you can maintain and manage. Open bills when you receive them and know your credit limit and due date for each account. Paying bills on time each month will help you maintain a good credit rating. If you have automatic bill payments coming off your credit card each month, make sure you consider those amounts when paying your monthly credit card bill. If you can t pay your bills on time, contact your creditors and explain your situation, and then work out a payment schedule with them.

6 Money Management Back to the basics Use credit wisely Few Canadian families can afford to purchase everything they need much less everything they want without borrowing from time to time. Whether you borrow through a personal loan, a line of credit or a credit card, credit should be used to enhance your personal financial management, not become an extension of your income. Choose the right credit card for your needs. Match the features you need (e.g. a low annual fee or a low interest rate) against the features you want (e.g. points toward travel, groceries or gas) and see which card is the best fit. Do not borrow from one creditor to pay another. Only make purchases you can afford to carry. A good rule of thumb is to ensure your total debt carrying costs on lines of credit, personal loans and credit cards (excluding mortgages) do not exceed 15 per cent of your net income. Say NO to any purchases beyond that amount. Pay as much debt as you can on any outstanding balances each month and always pay more than the minimum payment due. Be sure to pay down high interest debt first.

7 Talking to Your Family About Money What you need to know Canadian families talk about all sorts of things, but conversations about how to manage money often don t make it to the top of the list. Whether you have children in your family or not, having regular and open conversations about each family member s wants, needs, financial goals and means to attain those goals is important. These conversations are especially crucial as family members interests, priorities and spending power change throughout the years. Couples and money Communicating is key to your partnership The MasterCard survey showed that 65 per cent of Canadians say that one person in the household manages all the household finances on their own, while only 24 per cent say they and their spouse manage household finances equally. While it s generally smart for partners to maintain some financial independence in a relationship, they also need to have shared financial goals and plans, as well as knowledge of where their family money is coming and going. Keeping the communication lines open ensures family finances are fair to both parties and reduces stress around potential money issues. Here are some tips on how to communicate about money management with the adults in your family. Set aside a regular time to discuss money matters. Make sure you both have the time and energy to address each financial issue/scenario. If one person is tired or sick, find another day. Schedule a separate discussion if someone has a change in job or income status. Encourage each other to talk about any potential financial issues such as needing to borrow money. Be sure to remove all distractions, such as televisions, phones, pagers, etc. when discussing money matters. Keep each other regularly informed about all individual assets and expenses, as well as any changes in order to avoid surprises! Look closely at your financial situation, create a plan to stay healthy and commit to it. Be positive and constructive about solving any problems. Avoid blaming each other for financial differences or problems that arise.

8 Money and Children Talk early, talk often On average, Canadian parents think it s appropriate to discuss money management with their children at the age of 10. But they should start earlier. Many children have had considerable exposure to money before then, through gifts, allowance and more. In fact, the MasterCard survey showed that 55 per cent of Canadian parents give children between the ages of five and 17 an allowance at an average amount of $16 per week. That means Canadian children receive a combined amount of nearly $46 million in allowance each week, or close to $2.5 billion a year! Talking to children about various aspects of money management as they become developmentally ready to learn will encourage them to develop solid money management skills. Below are some guidelines of what to address with children of different ages. Pre School: (up to age five) Explain what money is and what it looks like; identify coins by their correct names. Explain where money comes from and that most of it is earned through work. Explain how we can buy things with money; play let s pretend games to learn to buy and sell things. Discuss the value of money; match small amounts of money with things that are affordable. Ensure children understand that money is limited; explain that when we spend money, it is gone, and that we can t buy everything, so we make choices. Junior Public School: (age six to 11) Give children a small allowance they can manage. The amount should be significant enough so children have leeway to make decisions about what to do with their money. Some counsellors recommend giving children a dollar per grade in school while others recommend giving a dollar per year in age. Help them divide their allowance between spending and saving. Teach children they can earn money by doing extra jobs around the home. Help them understand how to borrow money for an important purchase and then repay it. Open a savings account at the bank and start depositing money to save for something. Talk to them about peer pressure and how it can affect their spending decisions.

9 Money and Children Talk early, talk often Senior Public School: (age 12 to 13) Classify necessary versus discretionary expenses with tweens. Work with this group to devise and operate a two-week spending plan that covers necessary expenses such as lunches and transportation as well as discretionary expenses such as entertainment. Talk to your tween about adjusting discretionary expenses to help them stay within that plan. Make sure they re comfortable asking questions of sales staff at a store when considering a purchase. High School: (age 14 to 18) Work with teens to create a personal budget for themselves. Give teens a larger allowance that covers a broader range of expenses. This amount needs to be large enough so they can cover the necessary expenses expected of them (e.g. transportation) and still have enough left over to spend and save. Teach them about the costs you incur as parents to run and maintain your home including paying for rent or the mortgage, food, phone, gas, and car maintenance. Make sure they know how their own spending fits into those costs. Discuss how to manage any income they might make from babysitting or part-time jobs. Teach them about the different types of credit vehicles and borrowing rates that are available. University Students: (19 to early 20s) Help them to create an estimate of the annual expenses they will incur at school, and teach them how to match those expenses against their various money sources including money from parents, loans and part-time jobs. Discuss how to save money made from part-time or summer jobs, and how to allocate that money toward their student expenses throughout the year. Go over new costs they may be incurring for the first time, including all the monthly costs to run an apartment. Review the idea of sharing expenses with a roommate and the importance of being responsible to another person.

10 If a Piggy Bank Could Talk... Then money might grow on trees. But that s not reality. The reality is that simple, solid money management and open communication about finances in the family can lead to long-term financial stability and well-being. MasterCard is also offering a new Family Finance Reality Check that helps families assess their money management strategies and offers valuable financial guidance. To take the Reality Check, visit For more information, go to: (intro page to Flash module & PDF) and *About the MasterCard Canada survey. This national survey of 1,000 Canadians 18 years of age and over was carried out by telephone between August 11 and August 16, 2005, by Environics Research Group on behalf of MasterCard Canada. Results are considered accurate to within plus or minus 3.1 per cent, 19 times out of 20.