Case Study: RSP, Tax Time and Holiday Debt
What should Betty do? Her concerns are quite clear. What can she do to increase her confidence with respect to her finances?
The first step is to take a look at past patterns. How much does she make each month (after tax) and how does spend it? Does her income cover her expenses? This is a relatively quick exercise to complete because the information is available.
Tip: Use an average of several months spending (i.e. average spent on groceries each month is $200)
Once she has put it on a sheet (paper or spreadsheet) and done the calculation (monthly income – monthly expenses) she knows where she stands.
Tip: Note the expenses that are needs and those which are wants (discretionary)
If she starts with her needs and minimum amounts, totals them and subtracts them from her after tax monthly income, she will know how much she has leftover to start saving for her future and dealing with her credit card debt.
It doesn’t matter too much where Betty starts in terms of savings. If she starts with $100 per month, the best place to put it is in a Retirement Savings Plan (RSP) or Tax Free Savings Account (TFSA). With respect to dealing with debt, she can target a monthly amount to go to the card charging the highest rate of interest (while still paying the minimum payments on the others). Once the debt is repaid, increase the savings.
Deciding how much to save and repay to debt can be tough, especially when tempted by eating out, shopping and weekends away but by putting aside some wants to address future needs it is a very short term sacrifice that pays massive dividends. Simply by going through this process, Betty will feel 100 times more in control of her money.
Next post will be a case study on a family.
Posted: January 18th, 2012 under CEO of the House, Debt, Money & Lifestyle, Money Savvy Tips, Tips & Tricks.
Tags: Budget, Dear Piggy Bank, Financial Planning, Money & Stress
Comment from Masih
Time July 7, 2012 at 12:07 am
We are debt free except for our home which we are due to close on this month. We have been debt free for 10 years. My hubby & I are both self emeloypd & when our home caught fire & burned 2 years ago, we lost our only way of making a living (we both worked from home). We were homeless & income-less for 5 months. Had we had any payments to make outside of our groceries, etc. we could not have made it. It’s worth it, guys. It’s a pain to cut things back & not get the stuff you want when you want it. I make our laundry detergent from scratch, we use coupons (massive amounts of coupons), we combine trips to town to save gas, we barter services (I am a photographer & often barter for haircuts & even dentist work.) If you focus on away to make it happen, you’ll find a way. If you say Woe is me, I’ll never be able to get out of debt. then you won’t. Whether you think you can or whether you think you can’t, you’re usually right.