The Financial Transformation Checklist
We are all feeling the impact of inflation, rising costs, and rising interest rates. Millions of Canadian mortgage holders are concerned about how they will afford their mortgage payments when their upcoming renewal happens in the next 12-24 months at significantly higher interest rates. A recent Equifax survey found that 52% of people under the age of 35 have anxiety about their debt levels and rising interest rates. A recent Angus Reid survey found that 80 percent of Canadians say their household debt is a source of stress.
In my 30+ year business career, I have been faced multiple times with helping my business reinvent itself and transform the business financial model in order to survive. I want to help you transform your personal finances so you can survive and thrive in the challenging economy we are in. I have developed the below checklist to help you ask yourself some key questions that can help you transform your personal finances.
The worst thing you can do is ignore the upcoming challenge and hope it goes away. You have to be proactive and embrace the challenge head on. As you work through the below feel free to reach out to me with questions, and involve your trusted friends and advisors.
Here are the 6 Steps to Transformation:
Step 1 - Calculate your current monthly budget surplus (Income less expenses).
Use the average of the past 3 months. If you don’t know this number you need to immediately begin the process of developing a budget (see resources in thepathforward.ca)
Step 2 - Calculate your future monthly budget surplus with your estimated upcoming mortgage renewal monthly payment value
Use the mortgage calculator from your bank or mortgage broker to estimate the increase in your monthly mortgage payments. Factor in any other increases in your budget you are expecting in the next 12-24 months.
Step 3 - Calculate your future monthly budget shortfall (gap) that you need to address
Ideally you want your monthly surplus to be 15% or more of your gross income so that you have the funds you need for long term investing (debt reduction, retirement saving, etc.). Take 15% of your Gross monthly Income and deduct the surplus or deficit you calculate in #2 to identify your shortfall (budget gap) that you want to fix.
Example (assumes monthly family gross income of $8000):
Step 1 budget surplus = $1000 (Current monthly budget surplus before mortgage renewal)
Step 2 budget surplus = $500 (Future monthly budget surplus after mortgage renews at a higher interest)
Target Surplus of 15% of $8000 monthly Gross Income = $1200 (target surplus needed for long term investing)
Budget Shortfall (Gap) = ($1200 Surplus target less $500 Future Surplus ) = $700 Gap per month
Step 4 - Identify the Non-Essentials
We all have items in our monthly budget that are non-essential that can be reduced to transform our finances. Here are the common ones:
Memberships & Subscriptions - Gym, TV, Movie and Music Streaming, Fantasy Sports, News
Number of Vehicles - If you have more than one evaluate downsizing
Vehicle Payments - If you lease or have a car loan, evaluate downsizing to a cheaper vehicle and make it your goal to be payment free as soon as possible
Vacations - Out of Country vacations are a luxury, cut them if you have a budget gap to address
Eating Out - This is a non-essential that can be easily reduced to be less frequent
Clothing - Simple is the new “Cool”. Make your wardrobe smaller and last longer
Step 5 - Evaluate all Essential Budget Categories and look for savings
I do this at least every two years, and recently was able to reduce our annual costs for utilities, internet, cable, insurance by over $3000 a year for the next 3 years. That type of cost reduction goes a long way toward giving you the funds you need to resolve your budget gap due to rising costs and mortgage payments. Call each of the following providers and tell them you want their help to save money (be persistent). They would rather help you than lose you to their competition:
Electricity Provider
Home Heating Provider
Internet and Cable Provider
House and Car Insurance Provider
Life Insurance Provider (if you have a Whole Life policy, consider switching to Term since it is much cheaper)
In addition to the above, take a hard look at your grocery budget and look for potential cost savings. There are many tips out there about how to save money by buying in bulk, planning and preparing meals in advance, etc.
Step 6 - Recalculate your future monthly budget surplus using savings from steps 4 & 5
For most people steps 4 and 5 are sufficient to transform your finances and resolve your budget gap. If you still have work to do, then you need to take a hard look at two things:
1. Can you save money by downsizing your home?
2. Can you increase your income?
These are both harder to do than the prior steps and take longer to complete, but are often necessary to think and pray about.
Living in smaller homes is a reality facing many people in North America due to rising real estate prices. We should not hesitate to downsize if that is what it takes to keep our monthly budget surplus healthy.
Increasing our income often means working with our employer to identity what we can do to move up in the organization. This could require us to commit to further training and education, but the long term payback can be immense. If you are self employed than evaluate ways to improve to business profitabilty. Do you need more customers, do you need to reevaluate your pricing model, or is your cost structure too high? Nothing is as powerful as determining ways to increase our income while still staying in the vocational lane we feel called too.
Transforming our finances is hard work but is also extremely rewarding as we see improvements in our finances. We need to continuously seek God’s help through prayer and wise counsel as we move through this process, and remember that our finances ultimately belong to Him and we are His managers.
Todd Payne
Path Forward Financial Inc.