What's first to go when downsizing budget?
Downsizing your budget can be difficult, but it is necessary sometimes. Perhaps you're taking a new, lesser-paying job, trying to repay debt or build savings. Maybe you simply have some unexpected expenses come up.
No matter what the reason, you'll need to prioritize your expenses. How do you decide what goes first? The answer will vary depending on your circumstances, of course, but there are some common solutions, even if they aren't easy ones.
The first, and maybe most obvious, solution is to cut extraneous spending.
If you take an extravagant annual vacation each year, you might need to give it up for a while. Tom Feigs, a Calgary-based financial coach with Money Coaches Canada, notes that this is among one of the toughest sacrifices for some families to make. After all, you've worked hard all year, and you're surely entitled to some down time. However, it's an option many choose because it instantly frees up cash.
Similarly, try to cut discretionary spending on smaller luxuries such as morning lattes, cigarettes, after-work cocktails or expensive hobbies, such as marathons or snowboarding lessons. "You know it's a discretionary item when you can choose not to spend on it and it doesn't cause any issues in terms of obligations," Feigs says.
Another, more extreme option is scrapping your second (or third) vehicle. As long as breaking a lease or loan doesn't come with heavy penalties that cancel out the benefits, this can be a great way to free up the money you're putting toward car payments, insurance, gas and upkeep.
Alternatively, you can downgrade to a lower-end vehicle, or try getting a used car that isn't quite as pricey. Just lowering the costs by a couple hundred dollars might be enough.
You can also cut down on utilities such as Internet or cable packages, and excessive heating and cooling. Even re-evaluating home and car insurance plans to see if you can get a better price is worth the effort, Feigs says.
Finally, the most drastic option is downsizing your home. Your home is your biggest asset, but it's also your biggest expense. It's easy to become house-poor -- that is, able to pay for your home, but with no money left for anything else.
According to a June 2015 Manulife Bank of Canada report, more than one-third of Canadians said they'd have trouble making ends meet if interest rates climb by just 10 per cent; 15 per cent said they could not afford any increase at all in their mortgage costs.
However, experts say to think carefully before downsizing. "The biggest mistake people make is downsizing without looking fully at all the costs associated with it," says Scott Hannah, president of the national Credit Counselling Society. "After real estate fees, relocation costs and legal fees, your savings may not be that great."
Even if it's financially worthwhile to move, you may have trouble emotionally parting with your home. "Canadians try to hang onto and get attached to their homes even when the budget is tight," says Feigs.
to ask when prioritizing expenses
Feigs and Hannah suggest a handful of critical questions that could help you determine what to cut:
- Is it a necessity? You may not be able to sell your car if you need it to get to work. Even some discretionary expenses may be necessary for your mental health, but many can be replaced with lower cost or free substitutes.
- Is it feasible? A cheaper Internet plan might not be feasible if you work from home, or your kids are in university and require the Web to complete assignments. Make sure the tweaks you make aren't going to affect your basic needs in a major, negative way.
- Can I make it cheaper? Turn vacations into staycations, replace family nights out at the movies with Netflix and microwave popcorn, and trade monthly marathons for long-distance running clubs. Creative households find ways to cut corners, the experts say.
- Is it worth the cutback? Be wary of drastic measures such as downsizing a home or abandoning a car loan -- it's not as simple as walking away from a payment because there are costs incurred in breaking a contract. Crunch the numbers before deciding on whether this move will help or hurt.
- Is it a priority? Vacations may be important to some households, while education and retirement funds take precedent in others. Decipher what's most important to you and your family, then build your budget around those concerns.
- Can I come up with the extra cash? You might be able to make extra money instead of or in addition to cutting back. Rent out the basement suite, take on extra hours in the office or sell some of your untouched appliances.
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