by Elaine Hughesman, Hughesman Morris, Liversedge, CPA’s –
There’s no denying that the last year has been financially hard on most of us. We’re dealing with inflation levels that many people have never experienced in their lifetime, the cost of housing just keeps increasing, and interest rates are predicted to go up a few more times before levelling out. Last year I wrote about “financial literacy,” and this year the importance of the topic seems even greater. Becoming more fluent in financial literacy begins by understanding some of the basics.
Tax Brackets. Starting this list is the item I’m asked the most about. Since my days of working at McDonald’s, I’ve heard: “I don’t want to work any more hours as it’ll put me in a higher tax bracket.” My response is that working more hours will always make you more money. In Canada, we have graduated tax rates. It means that each tax rate only applies to income earned within that tax bracket. Once you move to a higher tax bracket, only the income earned in that higher tax bracket will be taxed at a higher rate. Income earned in the lower tax bracket will not be affected.
For hourly employees, sometimes when working an extraordinary number of hours in a pay period, you’ll notice your net pay hasn’t increased as much as expected. That’s because payroll software used by your employer likely assumed you would be earning a higher wage for the rest of the year, so it withheld more taxes than necessary. But rest assured, if too much tax has been withheld, it just means a refund come tax season. So go ahead and take those extra shifts at work or start a side hustle to bring in extra income.
Budgets. The biggest impact you can personally have on your finances is to create a budget and then measure your spending against it. What does it cost to live your lifestyle, and are you making enough to fund it? In these inflationary days you may be shocked to see how much you should reduce your spending. Drafting a monthly budget doesn’t have to be complex: break expenditures down into simple categories like housing, groceries, transportation, etc. And then, for at least a few months, track your spending. You can then measure those results against your draft budget to determine how realistic it is and finetune from there. I use the app Mint to track spending, but there are many options available.
Savings. There are many schools of thought about how much and where to save your money. The key is to get in the habit of saving some money and to actually build savings into your budget. My mom always says to put 10% of your gross income into savings and I think that’s a great start. Too many people live paycheque to paycheque, and when we then experience inflation and increasing interest rates, they find it very difficult to keep up with their monthly expenses. It’s also never too early to develop a relationship with a financial planner, to set yourself up for long-term financial success and eventually retirement.
Credit. Take care of your credit score and start building a good credit history. This will do you well when you want to buy a house, start a business, get a credit card etc. Banks and other lending institutions always pull your credit score to make sure you’re a good candidate to take on debt. To build credit, you can take simple steps like ensuring your bills are paid on time. At some point, you’ll want to get a credit card, but only after you’ve mastered budgeting as described above. To keep your credit score intact, always pay your minimum balance, but to keep your financial health in check, make sure to pay the full balance every month. You can monitor your credit score through Equifax, TransUnion or your bank, but try not to pull your credit report more than once a year – each time it’s pulled by a creditor or yourself it reduces your credit score (an exception is made where you’re rate shopping between different institutions).
Finally, CPA Canada has a number of great financial literacy worksheets. My favourite is the Financial Fitness Self-Assessment. It offers a great snapshot of how healthy your financial habits are. https://tinyurl.com/ysmr4269.